Abstract This study investigated the relationship between external 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 the analysis employs the Johansen Cointergration test and the Vector Error Correction Model (VECM) to explore both the short run and long run dynamics between GDP and key macroeconomic variables including external debt, foreign direct investment (FDI), inflation, exchange rate and institutional quality. The Empirical results reveal the existence of a long run equilibrium relationship among the variables. Specifically, the external debt is found to have a statistically significant negative effect on GDP in the long run, supporting the debt overhang theory, which suggests that excessive debt discourages investment and impedes growth. In the short run, however, the 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.
Baus et al. (Tue,) studied this question.
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