The Impact of Foreign Aid on Economic Growth in Tanzania

ABSTRACT: The study analyzes the impact of foreign aid on Tanzania’s economic growth from 1988 to 2022, contributing to debates on external financial assistance in developing economies. Using augmented Dickey-Fuller (ADF) tests, autoregressive distributed lag (ARDL) bounds test, and vector autoregression (VAR), it examines the relationship between GDP growth, foreign aid, inflation, exchange rates, and external debt. The findings confirm cointegration and a long-term relationship among these variables. Regression analysis shows that all variables, including foreign aid, positively influence GDP and foster economic growth. However, the study reveals that while foreign aid supports short-term GDP growth, its long-term effectiveness depends on macroeconomic stability, especially managing exchange rates and inflation. It challenges simplistic views of foreign aid’s benefits and stresses the need for strategic policies for sustainable development in Tanzania. The research advocates for government measures to encourage foreign aid and foreign direct investment (FDI) while maintaining openness to international markets. These strategies can boost the economy, create jobs, reduce poverty, and control inflation. Although limited by historical data and its focus on Tanzania, the study opens pathways for further research, including comparative studies with similar economies. Overall, it highlights the constructive role of foreign aid and FDI in economic growth and the importance of supportive policies for sustained expansion.