Effect of External Borrowing and Foreign Aid on Economic Growth: The Case of Tanzania Using ECM Approach

Abstract

The aim of this paper is to examine the effect of the external borrowing and foreign aid on economic growth in Tanzania over the period of 1992 to 2014 using ECM approach. The results reveal the presence of long-run co-integration among variables. The results shows that the foreign reserves, exchange rate and external borrowing have positive relationship and significant with economic growth while foreign aid has a negative and insignificant relationship with economic growth. The result also shows that the Foreign reserves, external borrowing, and exchange rate have a positive relationship and significant with economic growth while Foreign aid has negative relationship but insignificant with economic growth in the short-run.  The Tanzania government should look for another modality of foreign aid which can be more productivity to the economic development as well as to mobilize more domestic savings and revenue to reduce much dependence on foreign aid.

Keywords: External Borrowing, ECM, Foreign Aid, Economic Growth, Exchange rate, Tanzania