Macroeconomic Policy, Capital Inflows and Growth in Tanzania

Abstract

The paper makes an analysis of the link between macroeconomic policy, private capital inflows and growth in Tanzania by the use of quantitative analysis. The main hypothesis is that policy has both positive and negative influence on private capital inflows, and flows have influence on growth. Estimation results of the private capital inflows equation show no significance of GDP, deficit, inflation and openness coefficients. Despite being insignificant, the coefficients on inflation and interest rate have wrong signs from those expected. As hypothesized, the more a country services its debt, the more foreign capital flows in, and this is also so for the exchange rate and investment in infrastructure. The existence of a parallel market discourages foreign capital inflows as is the case with credit flow to the private sector. From the growth equation it is seen that private capital inflows have positively affected growth, while inflation has had a negative effect. Other variables, credit to the private sector, openness, and infrastructural investment have the right signs as hypothesized, and are significant at conventional significance levels of 5% and 10%