Effect of external public debt on unemployment in Tanzania (1991-2021)

Abstract

The relationship between external public debt and unemployment is a matter of substantial concern for both developed and developing economies. Unemployment is often explained by macroeconomic factors. However external public debt has not been much considered among the factors affecting the unemployment level of the country. This study examined the effect of external public debt on unemployment in Tanzania using the annual time series data from 1991-2021 which was obtained from World Development Indicators (WDI). ARDL Model, Error correction Mechanism (ECM) and Granger causality test were adapted to achieve the objective of the study. The results demonstrate that high levels of external debt in the long run are associated with decreasing unemployment levels in Tanzania with fiscal policy and economic conditions playing pivotal roles in shaping this relationship. The results revealed that in the long run a 1 unit increase in external public debt (EPD) on average, will lead to about a 0.07 unit decrease in the unemployment rate (UR). The study did not find a short-run relationship between external public debt and unemployment. This study contributes to the ongoing debate on the economic consequences of external public debt and offers insights for policymakers navigating the challenges of debt management and unemployment reduction. It is recommended to invest externally borrowed funds in job creation initiatives: With the negative relationship identified, governments can focus on utilizing external debt to invest in projects and policies that directly create job opportunities. This could include infrastructure development, skill training programs, and support for small and medium-sized enterprises (SMEs) that are labor-intensive.