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The Impact of Foreign Debts on Economic Growth in Tanzania: Evidence from

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THE IMPACT OF FOREIGN DEBTS ON

ECONOMIC GROWTH IN TANZANIA:
EVIDENCE FROM 1988- 2020
James Daniel Chindengwike1*, Alex Reuben Kira2
1
Research Scholar, 2Lecturer
1
Department of Accounting and Finance
1
The University of Dodoma, Dodoma, Tanzania
1
Corresponding Author Email: chindengwikejames@gmail.com
________________________________________________________________________________________________________

Abstract: The general objective of this research paper is to examine the impact of foreign debts on economic growth in Tanzania:
Evidence from 1988 to 2020. A time series research design was used in which data of 32 years were used to evaluate the variables
relationship. The research takes on the annual data from financial year 1988/89 to 2019/20. The sample size for the study was 32
observations. The data collected from different reliable sources which included the International Monetary Fund (IMF) and
Ministry of Finance and Planning- Tanzania (MoFP). The analysis of the data obtained revealed that a total foreign debt stock has
a positive impact on economic growth. Evidence to validate this comes from the computed P-Value (0.002) which is small at all
levels of significance (5%). The long-term foreign debt stock does not have significant effect on economic growth with P- Value
of 0.719. In difference, a short-term foreign debt appears to have significant impact on economic growth with P- Value of 0.006.
However, the effect on the economy is minimal as evidenced by the dimension of coefficient. Usually, the research concludes
that, sustainability of the foreign debts was still below the required verge of sustainable foreign debts. Significantly foreign debts
have a positive impact on the economic growth: the long term foreign debts have insignificant impacts on economic growth while
the short term foreign debt appears to have a positive significant impact. The study recommended that, the responsible authority
to take flexible foreign loans and to assign on development projects which resemble appropriate repayment obligations. In
addition, Controller and Auditor General (CAG) should have full mandate to audit foreign debts and provide guidelines to the
Government in order to avoid foreign debts’ big burden and debt trap.

Keywords - Foreign Debt, Economic Growth, Tanzania

________________________________________________________________________________________________________

I. INTRODUCTION
Public borrowing is a focus aspect of sustainable development of financial system of a state because it is one of the most
important gears for resource mobilization and bedrock to direct the mobilization of resources, particularly in developing countries
[46]. Underlying this is the reality that economic growth is the foremost purpose of most developing countries thus resources are
mobilized from different sources including the foreign debt for investment into practicable projects for the growth hastening [67,
70, 28]. The Government of Tanzania is one example of the countries with multilateral debts services, which have increased from
29.4 million USD in 2007 to 168.8 million USD in 2018 [4, 7, 26] equally, a treasury bond as of June 2019 was TZS 9247.62
billion. The uptake of these debts in the country is fundamental and well calculated; notably, according to [3] indicated that
Tanzania has applies major socio economic project such as the North-South-Highway, inter region roads, railways, water,
electricity projects and health sector, to boost the economic growth and to improve the wellbeing of its people. Other projects,
which have undertaken the advantage of foreign debts, are such as Rufiji Hydro-Electricity Project, Standard Gauge Railway
(SGR) from Dar es Salaam to Kigoma (currently, the Dar es Salaam to Dodoama, Makutopora is in its final stages of completion)
and Education Programme for Children Support [72, 11].
Tanzania like other developing countries cannot advance its economy to the level deemed reasonable, neither has
enhanced infrastructure and delivery of quality services to its public using its own resources [37, 44, 65]. Under that background
situation, the government of Tanzania has been borrowing since its independence; the country has been borrowing from both the
developed economies and international financial organisations, predominantly the International Monetary Fund (IMF) and World
Bank (WB) to finance budget deficit. For example, in 1975 and 1985 government spending average above 30% of GDP, increase
government spending contributed to fiscal deficits which also trigger an increase of external debt [21. 25, 45, 58]

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Tanzania has no exception when it comes to the use of external borrowings due to its deficit budget. However, Tanzania
foreign debts have consistently been growing from USD 4,696 million in 1986 to the peak level of USD 8,017 million in 1995
and start a slitter dropping [11]. According to [6] many developing countries depend on debts to finance budget deficit through
borrowing domestic or foreign debts. While the government tries its best to make the economy grow by ensuring its revenue
collection is continually maximised, investment in industrial based projects including construction of hydroelectric plant,
transport infrastructure, management of all corrupt practices, and building an accountable public service, it appears that its debt
keep growing annually [1,6]. However, the literature about the link between public debts and its effect on economic growth has
not been conclusively brought out in the literature. As such, debates on this relationship between public debt and economic
growth have continued to yield inconsistent results. Some studies by [6, 64, 75], present a negative effect of public debt on
economic growth while other studies by [2, 49, 59, 68] find a positive effect of public debt on economic growth. In Tanzania, [23,
42, 73] based on foreign debts and its servicing, [69, 71] on external debt while [12, 73] focus on domestic debt and economic
growth.(what was the results or recommendation); these studies conducted on external debt and economic growth have presented
related, conceptual and research methodological gaps. The findings from these studies are insufficient to attain an agreement on
the impacts of foreign debts on economic growth. While this has been the position in the technical aspect and the academia,
explanation made in recent years show that huge amount of foreign debts are flowing into promising states because of budget
deficit and demand for economic growth [5, 9, 55]. What inspires this kind of research is the general remark that the inflowing
debts are to strengthen the economy of the borrowing.
Tanzania as a country which engages on foreign borrowing, this study is intends to evaluate the impacts of its
involvement on foreign debt to the economic development. The study explores opportunity with an expectation to determine the
possible connection between external debt variable and economic growth; this ascertaining is imperative to inform the probable
contributions. The study intends to examine whether the economic growth (measures by Gross Domestic Product) can establish
an important relationships exist due to involvement on foreign debts. Generally, the results of this study are supposed to expand
the existing body of literature by providing more approaching to the impact of foreign debts on economic growth of Tanzania [35,
54]; being a suitable time to examine the relationship between foreign debts and economic growth in Tanzania.

II. LITERATURE REVIEW

According to [8] observed the impact of external debt and development spending by evaluating if any difference exists if the
lender is in a multilateral organization such as IMF or a Multilateral Development Bank; the results show that multilateral debts
have negative impacts on the development because international lenders are more likely to entail additional discipline on total
spending. [10, 43] study conducted in Tanzania on the impact of external debt on economic growth (1990 – 2010) to examine the
impact of external debt on economic growth results indicated that, there was no long run relationship between external debt and
economic growth.
According to [14, 66] studied the impact of external debt on economic growth of Tanzania using ARDL model utilizing
time series data from 1971-2011; found that in the long run external debt is positively related to economic growth while in short
run analysis revealed no directional causality between the variables. According to [53] studied the impact of external debt on
economic growth in Tanzania for the period of 1970 – 2010; the findings revealed that, external debt has a positive effect with the
positive coefficient of 0.369 and debt servicing has a negative effect about 28.5 on economic growth. According to [66]
conducted similar study on the impact of external debt on economic growth in Tanzania (1990 – 2010) to assess the impact of
external debt on economic growth; the results indicated that, there was no long run relationship between external debt and
economic growth.
[13, 32, 60] examined the relationship between public debt and economic growth in Afghanistan for the period of 2008 –
2012 and the outcome showed that government stock, advance from commercial banks and external debt has negative and
insignificant influence on the country’s economy. According to [56] conducted a study on the consequences of foreign debt in
economic growth investment in the Philippines for the period 1975 – 2010; the results show that public foreign debt had a
negative and significant impact on the economic growth and investment which confirmed the existence of a debt overhang
impact. Nevertheless the study might substantiate the subsistence of crowding out theory since debt servicing revealed
insignificant correlation with investment and economic growth [18, 27, 40, 57].
Previous evidence studies found that private consumption, export, import, tax revenue and investment control foreign
debt in order to stimulate economic growth of the nations [4, 10, 25]. The following Conceptual Framework explains the
relationship between variables. According to [24, 63] the conceptual framework assumes a operational definition of variables and
uses a diagram to create a dramatic and simple explanation of the relationship of a conceptual framework.

Independent Indicators Control Variables Dependent

Variable Variable

Revenue,
Multilateral debt
Foreign Debt Investment, GDP (%)
Foreign debt stock Private
Consumption,
Export, Import, Tax
and Subsides
Source: Constructed from Literature and Modified from Theories
Figure 1: Conceptual Framework

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III. METHODOLOGY OF THE RESEARCH

This study used time series research design while the approach of this research is predominantly quantitative. The study
opted a population of the annual data from 2000 – 2019; with sample size of 18 observations. Nevertheless, the researcher
ended with 17 observations due to data availability and proper source of collecting data. Secondary data were used in this
study in which time series data from 2000 to 2018 were gathered. Foreign debts and gross domestic products were
collected from various trusted sources.

A. Econometric Model Specification

(i). Model 1: High Breed Model

This model includes foreign debts. Proxies of foreign debts include multilateral and foreign debts stocks

𝐺𝐷𝑃 = 𝛼 + 𝛽1 𝑀𝑙𝑙 + 𝛽2 𝑃𝑃𝐺 + Ɛ … … … … … … … … … … … … … … … … … … … … … . . … . . (𝑖)

Whereby; βs = are the symbols of expected estimates of the regression model and Ɛ = is the error term which take into account
post estimation of other factors which are likely to influence GDP; GDP = Gross Domestic Product, indicator of economic
growth; Mll = Multilateral debts (are debts owed by developing countries to the World Bank and International Monetary Fund
(IMF) ) and PPG =External debt stocks, ( refers to the country’s debt that was borrowed from foreign lenders including
commercial banks, Governments or International Financial Institutions ) public and publicly guaranteed (PPG) which represent
foreign debts.

(ii). Model 2: GDP Vs Foreign debts and Control Variables

Foreign debt type 1 includes the proxies presented below. The antagonistic part of it is that this model assumes GDP is a function
of foreign debts and other control variables. Control variables included Government consumption expenditures, investment
expenditures, exports of the nation, Imports of the nation, Taxes and Subsidies

𝐺𝐷𝑃 = 𝛼 + 𝛽𝑗 г + 𝛽1 𝐺𝐶𝐸 + 𝛽2 𝐼𝑛𝐸 + 𝛽3 𝐸𝑥𝑝 + 𝛽3 𝐼𝑚𝑝𝑡 + 𝛽4 𝑇 + 𝛽4 𝑆 + 𝜀 … … … … … … … … … . . (𝑖𝑖)

Whereby; г =Multilateral Debts, Foreign Debts Stocks, GDP=Gross Domestic Product, GCE= Government Consumption
Expenditures, InE = Investment Expenditures, Exp = Exports of the Country, Impt = Imports of the Country, T=Taxes,
S=Subsidies.

IV. RESULTS AND DISCUSSION

Table 1 explained descriptive statistics on the variables used on the analysis. It consists of the summary statistics namely,
Observations, Mean, Standard Deviation, Minimum and maximum.

Table 1: Descriptive Statistic Results

Variable Observation Mean Std. Dev. Min Max

Economic Growth 32 23.4936 0.9220 22.172 24.8692

(GDP)
Total Foreign Debt Stock 26 219.8231 571.3857 0 2388.9

Inflation Rate 32 13.5234 10.3898 3.45 35.9

Source: STATA, 2021

Table 1 shows the summary statistics for independent and dependent variables. Where GDP observations are 32 and the
observations of total foreign debt stock are 26 and the observation of natural logarithm of inflation rate are 32 which were
annually ranging from the year 1988 to 2020. The natural logarithm of GDP records the percentage mean of 23.4936 with a
minimum of 22.172 and a maximum of 24.8692 while the total foreign debt stock shows the highest percentage mean of
219.8231 with a minimum of 0 and a maximum of 2388.9, and the natural logarithm of inflation rate show the highest
percentage mean of 13.5234 with a minimum of 3.45 and a maximum of 35.9.

Estimation Results: This section explains estimation results related to the impact of total foreign debt stock on economic
growth in Tanzania. The results are explains in six major steps; Lag length selection, unit root test, co-integration test, co-
integrating vectors, Autoregressive Distributive Lag Model.

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Unit Root Test: The ADF and PP tests results indicated in Table 2 and 3 reveal that all variables were not stationary at their
levels, as proof by their test statistics which are bigger to their equivalent critical values at 5% levels of significance.
Nevertheless, after taking their first differences GDP and r total foreign debt stock become stationary, as carried by their test
statistics which are now less than their corresponding critical values at 5% levels of significance. Consequently, the null
hypothesis of the unit root or non-stationary was rejected at 0.05 levels of significance; suggesting that all variables of
attention are included of order one 1(1).

Table 2: Show the Test for Stationarity for Augmented Dickey Fuller (ADF) Test

ADF Test
Order of
Variable Level First Difference Integration
Test Critical Critical
Test Statistics
Statistics Value Value
Ln GDP -0.487 -2.986 -3.653 -2.989** I(1)
Total foreign debt -2.501 -3.00 -3.739 -3.000** I(1)
stock
Inflation -1.687 -2.986 -5.555 -2.989 I(1)
Source: STATA, 2021

NOTE: GDP: the natural logarithm of GDP; total foreign debt stock: Inflation rate; and ** shows the “null hypothesis of non-
stationary “at 5% level of significance.

Table 3: Show the test for Stationarity for Phillips Person (PP) Test

The PP Test
Order of
Variable Level First Integration
Difference
Critical Critical
Test statistics Test statistics
value value
Ln GDP 0.122 -2.983 -4.561 -2.989** I(1)

Total foreign debt

stock -3.266 -3.750 -6.733 -3.00** I(1)
Inflation -1.653 -2.983 -5.314 -2.986 I(1)
Source: STATA, 2021

NOTE: GDP: the natural logarithm of GDP; total foreign debt stock: Inflation rate; and ** shows the “null hypothesis of non-
stationary “at 5% level of significance.
Lag Length Selection: The suitable number of lags was chosen basing on selection-order criteria and the results have been
informed in table 4. From the table 4 the suitable number of lags according to Akaike Information Criterion (AIC), Hannan-
Quin Information criterion (HIQC) and Schwarz Bayesian Information Criterion (SIBC) is four. Therefore lag 4 is favorite for
this choice due to the fact that the minimum value of all four criterions lies at lag 4.

Table 4: Show the Lag Length Selection for Economic Growth and total foreign debt stock
Lag LL LR Df P FPE AIC HQIC SBIC

0 -247.809 1.60E+06 22.8008 22.8359 22.9496

1 -196.31 103 9 0 34060.1 18.9372 19.0774 19.5324*
2 -191.192 10.236 9 0.332 51286.7 19.2902 19.5355 20.3316
3 -184.86 12.665 9 0.178 75680.4 19.5327 19.8832 21.0205
4 -162.9 43.919* 9 0 31883.1* 18.3545* 18.8102* 20.2887
Source: STATA, 2021

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*Shows the lag order chosen by the criterion

Co-integration Analysis: Johansen test for the long-run relationship was achieved and the results are informed in the Table 5.
The Table 5 explains test statistics and their critical values of the null hypothesis of no co integration. Following the
researcher’s calculation of the Johansen test for co integration, the outline statistics is superior to the critical value at 5%
significant level, thus the null hypothesis of 0 co integrating vectors can be rejected in support of > 0. Therefore the null
hypothesis of no co integration is powerfully rejected in acceptance of the alternative hypothesis of survival of co integration
to entail that there exists long run relationship between the variables. Separately from that, the Johansen co-integration
method established the continuation co- integrating vectors (relationships) in the regression equation. Both the 𝜆𝑡𝑟𝑎𝑐𝑒 and
𝜆𝑚𝑎𝑥 Test statistics accepted the null hypothesis that there are at most one r ≤ 1 co- integrating vectors (relationships). This
outcome is powerfully substantiated by the test statistics which are smaller than their corresponding critical values at 5%
significance levels.

Table 5: Show the Johansen’s Co integration Test Results

Null Trace Critical Max Critical

Hypothesis Statistic Value Statistic Value

30.0090 29.68 21.8424 20.97

6.1667 15.41 5.1832 14.07

4.5740 3.76 0.9835 3.76

Source: STATA, 2021

NOTE: r: represents co-integrating vectors or relationships; when 𝜆𝑡𝑟𝑎𝑐𝑒 and 𝜆𝑚𝑎𝑥 tests are in conflict decision is made
based on 𝜆t𝑟𝑎𝑐𝑒 statistics; ** shows the rejection of the null hypotheses at 5% levels of significance.

From the results in Table 6 shows that, on the long run GDP and total foreign debt stock has a positive relationship which is
statistically significant. The coefficient of total foreign debt stock indicates that, under ceteris paribus, other thing remain
constant, one percent increase total foreign debt stock will cause economic growth to increase by 64.8494 %. On the short run,
total foreign debt stock has a negative relationship indicating that, under ceteris paribus, other factors remain constant, and
one percent increase in total foreign debt stock will cause a decrease in economic growth by 0.0049 %.

Table 6: Showing the Results of the Effects of Total Foreign Debt Stock Economic Growth
D.lngdp Coef. Std. Err. T P>t

ADJ
Ln gdp
L1. -0.1334 0.0334 -3.994 0.002

LR
lnr foreigndebt 64.8494 29.3436 2.21 0.006
Inflantion_rate 0.4837 1.3114 0.37 0.719

SR
lnr foreigndebt
D1. -0.0049 0.0049 -2.10 0.005
Inflantion_rate
D1. -0.0079 0.0048 -1.63 0.12
LD. -0.0055 0.0045 -1.13 0.272

_cons -0.6618 1.1630 -0.57 0.58

Source: STATA, 2021

NOTE: GDP: the natural logarithm of GDP; in total foreign debt stock: natural logarithm of total foreign debt stock; Inflation

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rate: and P > t show the “significance level “at 5% level of significance: LR: Show long-run and SR: shows the short-run:
ADJ: Shows the coefficient of error correction, the adjustment speed toward equilibrium.

According to [16] found that there is a positive and statistically significant relationship between the share of government
expenditure in GDP and the share of net payment of overseas total foreign debt stock. The results revealed that government
uses foreign debt stock to finance its national budget. According to [2] revealed that total foreign debt stock promote
economic growth hence supported by Keynesian hypothesis. Total foreign debt stock seems to have influence on economic
growth due to the fact that it is used to pay salaries and wages, that goes straight on the consumption direct and therefore
affect the economy directly. Also it improves human capital such as technical-know how, education system and health sector.
Achievement of economic growth depends on the contribution of knowledge, skills and health of its people. Human Capital
Wealth Data and World Bank’s Human Capital Index (HIC) recommends ways in which the nation could invest in its citizen
for quickly poverty reduction. The emphasis was based on the human capital.

Separately from that, inflation rate has a positive relationship in the long run and a negative relationship in the short run which
is insignificant. Inflation rate has no effect on economic growth. On the other hand, the inflation rate is being influenced
negatively by the previous inflation rate. This means that, other things remains constant, for every increase in one unit of the
previous inflation rate leads to decrease in current inflation rate by 0.0055 %. The coefficient of error correction is -0.13
implying that 13 % the adjustment speed towards the equilibrium following a shock is about 33 % after a single period. The
negative sign and the significant probability signify the existence of co integration among the variables in the long run.

Diagnostic Test of the Model

Table 7: Show the Breusch-Godfrey LM Test for Autocorrelation

Chi- Square Prob> chi2

0.436 0.5092

Source: STATA, 2021

Table 7 show that the model does not suffer from the serial autocorrelation since the p-value is greater than 0.05 and further
from the Durbin-Watson d-statistic (6, 26) = 2.2299 which is approximate to two this also recommend the same that model do
not suffer with serial autocorrelation.

Table 8 : Cameron& Trivedi's Decomposition of IM-Test

Source Chi- Square Df P

Heteroskedasticity 17.34 18 0.5001

Skewness 5.15 5 0.3984

Kurtosis 1.35 1 0.245

Total 23.83 24 0.4712

Source: STATA, 2021

Table 8 show that the residual are normally distributed since the p-value for skewness and Kurtosis is greater than 0.05 and
not only that Table 7 above show that the model do not suffer with heteroscedasticity since the P-Value for heteroscedasticity
is greater than 0.05 this result is same as from the white’s test for homoskedasticity always the null hypothesis there is
homoskedasticity is rejected when P-value is less than 0.05.So from the white‟s test for homoskedasticity the p- value (Prob>
chi2 = 0.5001) was greater than 0.05 hence the null hypothesis was accepted. Jarque - Bera (JB) test results in Table 9 indicate
that residuals are normally distributed; as supported by p-values which are greater than 5% level of significance. This implies
that the data used for analysis followed normal evolution over the sample period.

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Test for Normality

Table 9: Show the Test for Normality

Variable Ch- Square (2) Prob>chi2

Residual 3.863 0.1450

Source: STATA, 2021

The normality test shows the chi- square is positive figure (3.863) these means that the data was fitted and statistical
significance and probability is greater than chi-square so it support this data. This scenario supported by different scholars
who said that when the chi-square is positive is suitable in time series [1, 10, 18, 19].

Figure 2 shows the time series plot for GDP and total foreign debt stock. Before estimating the time series data is suggested
to draw the time series plot of the time series data in purpose to arrest different characteristics of time series data such as ,
trend , seasonality, stationary and so on [4]. From Figure 1 portray that both variables were non stationary since the as the
time goes the variation increase in GDP and total foreign debt stocks.

Figure 2: Show the Time Series Plot of Total Foreign Debt Stock, Inflation Rate and Economic Growth

V. CONCLUSION
The general objective of this research was to examine the impacts of foreign debts on economic growth in Tanzania. In exacting,
foreign debts were examined to analyse their effect on gross domestic product which is extensively used as an indicator for
economic growth. The results show external debt has a positive impacts on economic growth is reliable with the observation
earlier made [20, 29] who found a significant correlation in a long run and short run between external debt and economic growth.
In addition, [28] attained similar findings which reveal that a long run association exists between external debt and economic
growth. The researchers made additional analysis of both long term foreign debts and short term debt to check the impacts of each
on the GDP. The results show long term impacts has an insignificant impacts on the economic growth. This is in agreement with
[15, 33] who established that the high level of external debt are negatively correlated with economic growth mostly when public
debt is below 90%. This is supported by [30, 36, 52] who established a lack of long run relationship between external debt and
economic growth. In difference, short term appears to have positive significant impact on the economic growth as said by[38, 47])
who revealed that external debt has a significant positive relationship to economic growth. MoFP and CAG are recommended to
take easy loans, to distribute on development projects and to make appropriate payment, there is need to conduct a study on the
effect of domestic debts on economic growth in Tanzania.

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