Impact Of Foreign Aid On Economic Growth In Tanzania

ABSTRACT

The study analyzed the impact of foreign aid on economic growth in Tanzania. The study questioned the contribution of foreign aid on the development and recurrent expenditure as one of the source of funds, apart from net external finance and Government revenue; which most prior empirical works did not mention. The study filled this gap in literature by analyzing official development assistance, development expenditure financed by foreign aid and recurrent expenditure financed by foreign aid. The study used time series data drawn from Bank of Tanzania (BOT), and The Organization for Economic Co-operation and Development (OECD). After the preliminary tests for unit root test, the Johansen test for co integration was used to determine co-integrating vectors. Thereafter, Autoregressive distributive lag model (ARDL) was performed to obtain results. The study revealed that, ODA has a positive relationship with GDP in the long run, and it‟s highly significant, while on the short run it has a negative impact on economic growth. On the other hand, FDI influence economic growth both in the short run and in the long-run. Apart from that, Development expenditure financed by foreign aid has positive relationship with economic growth and is statistically significant in the long-run, as well as tax rate influence economic growth only in the long-run. Furthermore the result reveals that, current expenditure financed by foreign aid influence economic growth, while inflation rate seems to be insignificant. To promote economic growth, Government should continue to enhance a good diplomatic relation with countries providing official development assistants, as well as ensuring that development programs are consistent with assistant programs. Furthermore, the study foresee the need for establishing good policies that will support and enhance good cooperation with Donor countries and invest more in physical investment and consumption spending to speed up the level of production as which will result into spur growth