“The Impact of Fiscal Policy, Monetary Policy, and Exchange Rate Policy on Real GDP In Tanzania

Abstract

The main objective of this study is to investigate the impact of fiscal policy, monetary policy and real exchange rate on the real GDP of Tanzania by econometric analysis using time series secondary data collected from Bank of Tanzania (BoT) and author’s estimations for the period of 52 years (1966 – 2017). In this study we formulated a simple growth econometrics model using Ordinary Least Square (OLS) technique by multiple regressions where real GDP growth rate as dependent variable and tax revenue, government expenditure, money supply, real exchange rate, interest rate, inflation rate, export, discount rate and foreign direct investment (FDI) as independent variables. The findings of this study show that all the variables in the model except discount rate are statistical significant at either 1 percent or 5 percent. The coefficient of tax revenue to real GDP ratio is negative and statistically significant at 1 percent, while the coefficients on both the ratios of recurrent and development expenditure-to-GDP are positive and statistically significant at 1 percent and 5 percent respectively. These results suggest that if the government applies contractionary fiscal policy by collecting more money through taxes than it spends it slows the pace of strong economic growth. However, if the government applies expansionary fiscal policy by spending more money than it collects through taxes it builds a foundation for strong economic growth. Monetary policy through money supply seems to be the most effective policy in determining real GDP growth in Tanzania. The coefficient of money supply-to-GDP ratio is approximately 0.57, that is positive and statistically significant at 1 percent, suggesting that a 1 percent increase in money supply will result into a 0.57 percent increase in real GDP. Thus, expansionary monetary policy through increase in the money supply in the economy will lead to an increase in real GDP. The fundamental argument here is that an increase in money supply leads to an increase in consumer expenditure, which in turn increases production in the long run. The effect of real interest rate and inflation, as expected, is negative. The coefficients on both real interest rate and inflation are negative and statistically significant at 1 percent suggesting that lower real interest rate is likely to increase real GDP while macroeconomic stability may also spur real GDP in Tanzania. Unsurprisingly, the coefficients on real exchange rate and foreign direct investment are positive and statistically significant at 1 percent.