Research On The Causes And Countermeasures Of Tanzania's "double Deficit

The trends in structural increase in government budget deficit and current account deficit attracted the attention of scholars and policy makers as increased spending financed by deficit reduces national savings.Deficit financing leads to more foreign borrowings which deepen the deficit and in turn raise the national debt level.This study investigates such trends and reasons for the concept called “twin deficit” in Tanzania.A more robust approach to study the impact of government budget shocks to multiple macroeconomic variables is used by applying a Structural Vector Autoregressive impulse-response function.Much of the literature had exhausted the use of causality tests and cointegration analysis to analyse the problem.In contribution to the knowledge and comprehension of this structural phenomenon the paper employs a Structural Vector Autoregressive(VAR)model using the impulse response analysis of VAR to Tanzanian data.The method allows to investigate one-time shock from a contemporaneous exogenous variable to have effect on multiple endogenous variables across time.Empirical results of the Impulse response function show fiscal shocks from government spending have a significant impulse on current account deficit,income and real interest rate.Exchange rate has a strong downward response to fiscal shocks suggesting an increase in current account deficit when there is a decline in real exchange rate as fiscal deficit grows.Policy options to counter twin deficit could focus more on design a strong monetary policy within an exchange rate transmission mechanism coupled with a good interest rate policy that can partly internalize the fiscal shocks.