Does Debt Hamper Economic Growth? A Time Series Analysis for Tanzania (1990 – 2023)

Abstract

Mariam Baus Abubakar and Fulgence Dominic Warioba

This study investigated relationship between debt and economic growth in Tanzania, with a specific focus on whether debt hampers the country’s long run economic growth. Using annual time series data from 1992 to 2023. Analysis employs Johansen Cointergration test and Vector Error Correction Model (VECM) to explore both short run and long run dynamics between GDP and macroeconomic variables including debt, (FDI), inflation, exchange rate and institutional quality. Empirical results reveal existence of long run equilibrium relationship among variables. Specifically, debt is found to have a statistically significant negative effect on GDP in long run, supporting debt overhang theory, which suggests that excessive debt discourages investment and impedes growth. In short run, however, effect of external debt on economic growth is statistically insignificant likely due to implementation lags and inefficiencies in public investment. Other variables such as exchange rate volatility, poor institutional quality and unproductive FDI flows also show negative long run impacts on growth, while moderate inflation appears to support growth mildly. Based on these findings, the study recommends improved debt management policies, stronger public investment efficiency and institutional reforms to ensure that borrowing contributes effectively to sustainable economic growth in Tanzania.

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