The Effect of Public Debt on Private Investment in Tanzania

Abstract

This study explores the effect of public debt on private investment in Tanzania. Secondary data for the period of 1970-2016 were collected from National Bureau of Statistics (Tanzania), Bank of Tanzania, World Bank, and scholarly journals. An Autoregressive Distributed Lag (ARDL) bound test to cointegration is used in this study. Results suggest a significant evidence of nonlinear long run and short run relationship between external debt and private investment. However, Granger causality test suggests that this relationship is rather a co-movement than causal. At 5% level of significance, there is no significant evidence of long run and short run relationship between domestic debt and debt service on one hand, and private investment on the other hand. However, the combined effect of domestic and external debt on private investment is statistically significant both in long run and short run. The study recommends the government to adopt strict policies on project implementations to ensure positive returns of borrowed funds and closely monitoring of public debt, particularly external debt on which private investment is more responsive than domestic debt and debt service, despite its sustainability at present.

Keywords: Public debt, ARDL, External debt, Domestic debt, Debt servicing, Investment, Tanzania