The impact of government policy on macroeconomic variables: A case study of private investment in Tanzania

Government policies are critical in determining the rate of economic growth, the levels of private investment and the magnitude of credit to the private sector. Since the adoption of the economic recovery programmes (ERPs) in 1986, Tanzania has embarked on policies that aim to rebalance the role of public and private sector in the economy and thus emphasize private sector development. This is a major departure from the socialist policies of the pre-ERP period that relied heavily on public sector institutions. The major hypothesis of the paper is that private sector investment is necessary if economic growth is to be accelerated. However, in order to stimulate such investments appropriate monetory, fiscal and exchange rate policies have to be formulated and implemented, along with provision of socioeconomic infrastructure. In studying private investment in Tanzania it is thus assumed that certain variables will be the major determinants. These are government expenditure on investment, the exchange rate, GDP growth and capital inflows. These variables were incorporated in modelling private investment and their linear and non-linear relationships were analysed. The results obtained lead to the conclusions that public investment-especially on inf’rastructure-exerts a positive and significant effect on private investment. Further, foreign exchange availability positively affects private investment. It is found that the policies adopted by the Government of Tanzania since 1986 have enhanced private investment in the economy.