Fiscal operations and treasury bonds: is Tanzania experiencing investment crowding out?

Abstract

This study examines how government domestic borrowing influences private sector credit in Tanzania, with a focus on potential crowding-out effects resulting from Treasury bond issuance. Using quarterly data from the Bank of Tanzania and the ARDL-ECM approach, this analysis examines both short- and long-run relationships between private credit and macroeconomic variables, including government debt, money supply, GDP growth, inflation, and interest rates. The results indicate a significant negative long-run relationship between government debt and private sector credit, suggesting that higher government borrowing through Treasury bonds constrains private investment by reducing the availability of loanable funds. Conversely, money supply and GDP growth positively drive credit expansion, while inflation and interest rates exert moderate effects. Diagnostic tests confirm model robustness and validity. The study concludes that excessive dependence on domestic borrowing can hinder private sector growth and recommends the implementation of coordinated fiscal and monetary policies, prudent debt management, and targeted private lending incentives to balance government financing needs with sustainable investment and economic growth.