The Relationship Between Public Debt and Economic Growth in Tanzania

Abstract

This study examines the dynamic relationship between public debt and economic growth in Tanzania, focusing on causal links between the two variables and exploring potential debt thresholds. Using quarterly time series data from March 2005 to June 2022, we employ individual unit root and Johansen’s cointegration tests to establish long-term relationships. We estimate the Vector Error Correction Model and conduct the Granger causality test. The Threshold Model explores the debt threshold. Our findings reveal a significant positive long-term relationship between the two variables, with the direction of causality running from economic growth to domestic debt. Notably, the positive impact of domestic debt is pronounced when the domestic debt-to-GDP ratio falls between 31.3% and 35.2%. Beyond this threshold, the established relationship becomes statistically insignificant. The paper advocates leveraging debt financing to support productive investments for long-term economic growth. This recommendation holds significance for Tanzania and other countries across sub-Saharan Africa. However, it is crucial to undertake tailored country analyses that account for the distinct socioeconomic and political landscapes of the region's economies. These tailored analyses give valuable insights for domestic economies and global financing institutions, facilitating the formulation of context-specific debt management strategies that contribute to sustainable economic growth.