Abstract
The existing high budget deficit in Tanzanian economy has created an immense concern among economic policy analysts. The study inspects whether budget deficits crowd out or crowd in private investment in Tanzania, using annual data for the period from 1970 to 2012. Using the Johansen cointegration test advocates there is at least one cointegration vector among these variables. Given such condition, the application vector error correction model (VEC) became inevitable as it presents additional and superior information in relation to other data production processes. The results indicate a close long–term connection between private investment, and other variables included in the study. Results suggest that budget deficits considerably crowds out private investment. The study advocates that government should readdress its fiscal policy that would support the private investors. The government should discourage high government expenditures and maintaining a low fiscal deficit also capital market should be used to finance budget deficit.
Highlights
Tanzania is among the world’s deprived countries in terms of gross national product in relation to population; it has recently attained high growth mainly on mining industry and tourist activities
The findings revealed that budget deficits forces interest rates to go up as a result discourages the levels of private investment
The significance of error correction term substantiates the presence of cointegration between the dependent variable and the explanatory variables
Summary
Tanzania is among the world’s deprived countries in terms of gross national product in relation to population; it has recently attained high growth mainly on mining industry and tourist activities. The country embarked on financial sector reforms which have assisted in fostering private-sector growth and investment in the country (Economic Survey, 2012). Persistent government budget deficits and swelling debt has become the foremost subject matter in both developed and developing countries. Among others includes Premchand (1984), who assert that funding the budget deficit by making use of loan from the public entails a boost up on the supply of government bonds. The rise in interest rates dampens the issue of private bonds, private investment, and private spending. The government option contributes to the financial crowding out of the private sector
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