Public debt is an important macroeconomic policy area of interest for governments, researchers and academia. This study investigates its impact on private sector financing in Tanzania. Firstly, it discusses the evolution of public debt since independence, focusing on the legal and policy framework for its management and the debt relief strategies adopted. Secondly, it looks at the trends, patterns and composition of public debt, going beyond the creditors and instruments of external and domestic debt to compare Tanzania’s debt situation with that of its neighbours.
Thirdly, the study analyses the impact of public debt on credit in the private sector and the lending rate during 1990 to 2020 using the Autoregressive Distributed Lag (ARDL) technique. The results show that in the long run, both external debt and domestic debt have a positive and statistically significant effect on lending rate while external debt has a significant negative impact on lending rate in the short run. On the other hand, the effect of external debt, domestic debt and total debt on domestic credit to private sector are negative and significant in the long run while their effect was vice versa in the short run.
This study recommends that the government must consider the effective (1) development of the capital market, (2) implementation of measures that maintain an efficient financial market via prudent fiscal policy and enhancement of banks’ lending capacity while adhering to the debt strategy thresholds, (3) development of the domestic bond market and diversification of the investor base in government securities to include institutional and private lenders, setting domestic financing limits in debt management strategies, and (4) further limiting of borrowing through widening the tax base by either generating new revenue sources or strictly enforcing tax regulations to mobilize more revenues.
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