Financial Sector Development and Industrialization in Tanzania

Abstract

This paper examines the causal relationship between financial sector development and industrialization in Tanzania from 1990 to 2020 using Granger causality and autoregressive distributed lag (ARDL) estimation. Granger causality results showed domestic credit to the private sector, and broad money Granger-caused industry value-added. The joint effect of financial sector development Granger-causes industry and manufacturing value-added. Moreover, industry value-added Granger-causes financial sector development. Therefore, a bidirectional causal relationship exists between domestic credit to the private sector, and industry value-added. On the other hand, there is a unidirectional causal relationship moving from financial sector development to manufacturing value-added. The causality results support the supply-leading hypothesis. The ARDL estimation results showed a significant negative short-run effect of broad money on manufacturing and industry value-added. Furthermore, domestic credit to the private sector significantly positively affected manufacturing value-added in the short-run. In the long-run, there is a significant positive effect of domestic credit to the private sector on industry value-added, and a significant negative effect of broad money on industry value-added. The results imply the need for the government and financial sector players to address financial sector challenges to enhance credit provision to the industry and manufacturing sector, and transform the economy through the industrial and manufacturing sub-sector of the economy.