Public debt sustainability in Tanzania: a non-linear analysis of fiscal and monetary policy interactions

This study aims to evaluate the sustainability of Tanzania's public debt by analyzing its macroeconomic effects through a non-linear threshold analysis. Using quarterly time series data from 2000 to 2023, this study employs a Threshold Vector Autoregressive (TVAR) model to examine how the impact of debt on key macroeconomic indicators varies depending on whether debt levels remain below or exceed a specific threshold. The results show that when public debt is below this threshold, it positively contributes to economic growth without causing negative effects. However, once debt exceeds this critical threshold, it becomes a source of macroeconomic instability, marked by rising inflation, currency depreciation, higher interest rates and slower GDP growth. The findings highlight the importance of keeping debt within sustainable limits. Based on these findings, the study recommends setting a clear debt ceiling, improving fiscal discipline, enhancing monetary-fiscal coordination and strengthening buffers against external shocks to ensure long-term debt sustainability and economic resilience in Tanzania.