Effects of Government Debt on Monetary Policy Strategy in Tanzania

Abstract

This paper examines the fscal dominance hypothesis in Tanzania by exploring the relationship between the monetary base and the government debt using monthly data from 2003:1 to 2019:12. Results from formal statistical tests indicate no evidence of a long-run relationship between the variables. Structural vector autoregressive model is thus estimated to analyse the short-run dynamics. The fndings point to a positive and statistically signifcant impact of government debt on monetary base. The fndings identifes political phenomenon that before the fourth phase government (2003-2005), monetary policy witnessed relatively intensive fscal dominance as compared to the fourth phase (2005- 2015) and ffth phase government (2015-2019). However, in comparison with the fourth phase government, fndings suggest that during the frst four years of the ffth phase government, monetary policy encountered a relatively high fscal influence, partly attributed to implementation of huge development projects and reduction in foreign fnancing in the government budget. The identifed fscal dominance for the sample period, implies a subordinated monetary policy, compromising on Bank of Tanzania’s primary objective of price stability.