Effect of External Debt and External Debt Servicing on Current Account Balance in Tanzania.

Mhenwa,, Rehema Ramadhan (2021) Effect of External Debt and External Debt Servicing on Current Account Balance in Tanzania. Masters thesis, The Open University of Tanzania.

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Abstract

The central objective of the study was to explore the effect of External debt and External debt servicing on Current account balance in Tanzania. The specific objectives were to examine the effect of external debt on current account balance, identify the effect of external debt servicing on current account balance and to determine the effect of selected macroeconomic determinants on current account balance. Time series data of Tanzania for the period of 1988 to 2018 obtained from the World Bank and the Bank of Tanzania (BOT) were utilized. The study used Vector error correction model (VECM) for estimation. The findings show that in the long-run external debt servicing and Nominal exchange rate have a negative effect on Current account balance while External debt, Lending interest rate, and net FDI have a positive effect on Current account balance in Tanzania on average ceteris paribus. It was revealed that External debt; Lending interest rates as well as Net FDI are statistically significant at 5%, External debt servicing takes 10 % while Nominal exchange rate is statistical insignificant affecting Current account balance. The study concluded presence of equilibrium correlation binding all the variables of the study, existence of a unidirectional causal relationship between both External debt and External debt servicing with Current account balance. Taking the consideration of both fiscal and monetary policy goals the study recommends debt managers to inform budget administrators’ possible costs and risks associated with different forms of financing particularly external debt. This will ensure existence of best possible borrowing blend between domestic debt and external debt which will put off external debt risks, crowding out effect and private sector expansion for better economic prosperity. Keywords: External Debt, External Debt, Current Account, Tanzania.

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