The impact of fiscal and monetary policy on economic growth and structural transformation in Tanzania

Abstract

Economic growth and structural transformation represent critical development goals among developing countries. The strength of these depends on the effectiveness of fiscal and monetary policies, which have been unstable in most developing nations due to external shocks and inconsistent policy frameworks. To address these, and enhance growth and structural transformation, this study uses World Bank data from 1966 to 2022 to explore the short-run and long-run effects of fiscal and monetary policies on economic growth and structural transformation in Tanzania, employing the Autoregressive Distributed Lag (ARDL) model. The results show that, in the long run, government expenditure negatively impacts economic growth, while monetary variables such as money supply and exchange rates influence growth differently—money supply stimulating growth in the short term, and exchange rate fluctuations having significant long-term effects. On the other hand, the results reveal that both fiscal policy (government expenditure and taxation) and monetary policy (money supply) play a significant role in structural transformation, promoting global integration and improving income distribution. The Error Correction Term (ECT) is negative and statistically significant, indicating that deviations from the long-run equilibrium are corrected swiftly, suggesting a strong adjustment mechanism. These findings suggest that policymakers should focus on maintaining price stability, implementing tax regulations that do not hinder business and investments, and instead adopting a strategic tax approach that balances economic growth with social equity, improving the efficiency of public spending, managing interest rates carefully, and promoting foreign direct investment to foster sustainable growth and inclusive development.