FISCAL ADJUSTMENT, ECONOMIC GROWTH AND INFLATION IN TANZANIA (1967-2011)

John Michael Mtui

Working Papers from African Economic Research Consortium

Abstract: The study analyses the effect of fiscal adjustment in promoting economic growth and the fight against inflation in Tanzania from 1967 to 2011. The study is underpinned by both descriptive and econometric analyses based on a dynamic autoregressive distributed lag error correction model. The study findings confirm that: public investment spending, public consumption spending, real exchange rate depreciation, private investments are growth enhancing. Economic and fiscal reforms of the mid 1980s and 1990s, respectively, augment economic growth in the long-run. Only lagged GDP, public consumption spending, real exchange rate and trade openness have significant effects on economic growth in the short-run. The long-run estimates of the inflation model indicate real GDP growth and nominal exchange rate have impact on inflation. Budget deficit is significant but seem to have a negative effect on price development. Thus, abstinence from cutting public investment spending and curtailing non-productive expenditures should be observed. Such measures as the adoption of Medium Term Expenditure Framework (MTEF) as a planning and strategy for reducing wasteful expenditure and the expenditure reprioritization and efficiency instituted through NSGRP should be sustained. Attainment of price stability in Tanzania hinges on stable economic growth and exchange rate. This requires a credible and sustained fiscal policy, supported by an appropriate exchange rate and monetary policies. Rationalization of public spending and expenditure efficiency are critical. To sustain GDP growth and thus price stability|| there is a need to improve productivity.

Date: 2015-10-22
Note: African Economic Research Consortium
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