Public Debt and Economic Growth: Evidence from Tanzania

External debts can have either positive or negative effects on the economic growth of country’s
economy. If external debts are used for development expenditure then the country may benefit
because development expenditure like infrastructure may have a multiplier effect on boosting
economic growth. This paper examines the impact of public debt on economic growth in Tanzania for
the period 1970 to 2015. The study utilized co-integration and Vector Error Correction Mechanism
(VECM) Approach to test the relationship between public debt and economic growth and granger
causality test to examine the causal relationship between variable. The unit root tests showed that all
variables were integrated after taking the first difference, the Johansen co-integration result showed
that the variables were co-integrated. The VECM estimate showed that there is a negative
relationship between public debt and economic growth in Tanzania over the study period. In addition,
granger causality test revealed that there is no causal relationship between public debt and economic
growth. Based on these findings, this study recommended that Government and policy makers should
stop the accumulation of external debt stock overtime and prevent concealing of the motive behind
external debt; external debts should be used only for productive investment of highest priorities that
would help in yielding returns for economic reasons (productive purposes) and not for social or
political reasons.