Macro-determinants of formal agricultural credit supply in Tanzania

Abstract

This study investigates the macroeconomic determinants of formal agricultural credit supply in
Tanzania, a nation where agriculture is a critical pillar of the economy. Using monthly data from
2006 to 2018 from the Bank of Tanzania, National Bureau of Statistics, and the World Bank, the
research applies a Markov Regime Switching (MS) model to analyze non-linear dynamics in credit
supply across distinct economic regimes. The findings show that interest rates, exchange rates,
government spending, and foreign direct investment positively influence agricultural credit supply, while the volume of credit supplied in the previous year and the government effectiveness index have negative effects. The analysis identifies two economic regimes-high-growth and low- growth periods-characterized by different levels of volatility, highlighting the cyclical and non-linear behavior of macroeconomic factors in shaping credit supply. The study recommends incentiveslike tax breaks, subsidies, and investment guarantees to promote agricultural.
Policymakers are encouraged to design longer-term loans aligned with the sector's production
cycles and to reduce bureaucratic inefficiencies hindering credit disbursement. Financial institutions, guided by the Bank of Tanzania, should develop tailored loan products that address
the specific needs of the agricultural sector.