Macroeconomic Determinants of Private Sector Credit in Tanzania: 1991–2018

Abstract

Tanzania has undertaken significant changes that have altered the role of macroeconomic variables in the financial sector during the past three decades. These include deregulation of interest rates, combating inflation and improving macroeconomic performance, and increasing access to credit by the private sector. In this context, our study aims to analyse the impact of macroeconomic variables on bank credit to the private sector using annual data spanning from 1991 to 2018; the period after financial sector reforms. After performing unit root test and co-integration tests, the Vector Error Correction Model (VECM) was applied to establish the dynamic long– run relationship between macroeconomic variables, namely, GDP, the lending rate, inflation and private sector credit. From the results, it can be seen that all these three macroeconomic variables have contributed positively towards bank credit growth in the Tanzanian economy. The co-integration and the error correction model estimation results also suggest that the macroeconomic variables had a long-run relationship with bank credit. The study findings call for policy makers to observe the behaviour of lending rates, inflation and economic growth to enhance credit demand and stimulate investment and growth.

Keywords: inflation, financial intermediation, credit, vector error correction model