Impact of debt relief on fiscal allocation to social priority sectors and response of social indicators in the HIPCs : a case study of Tanzania

Abstract

External debt burden has been viewed as one of the key impediments to economic growth and a cause of widespread poverty in the Heavily lndebted Poor Countries (HIPCs). To join efforts of the HIPCs in ï¬ ghting poverty, the international donor community granted substantial debt relief through different initiatives including among others; unilateral bilateral agreements, the Paris Club Agreements, debt buyback schemes, the I-IIPC Initiative and its successor, the Multilateral Debt Relief Initiative (MDRI). All these initiatives were expected to increase public spending in social priority sectors and ultimately reduce poverty incidence in the HIPC-s. This study assesses, firstly whether the debt relief has helped to increase Government spending on education and health sectors in Tanzania and, secondly, whether increased ï¬ scal spending on the sectors has translated into improvement in the primary and secondary school enrollments and life expectancy. A system of structural equations is estimated within a Vector Autoregressive (VAR) framework. The ï¬ ndings suggest increases in Government expenditure on education and health through debt relief. Primary and secondary school enrolments improve with increased Government spending on education and health. Institutional quality is found to be signiï¬ cant in determining education spending and educational indicators. However, life expectancy was not found to respond to public Spending, possibly due to the inherent gestation period in health related indicators and quality of data used. Nevertheless, the ï¬ ndings, though based on short-run series, give an insight that in the long-run, the cumulative effects of debt relief can contribute towards successes in the ï¬ ght against poverty and ultimately attainment of the Millennium Development Goals (MDGS).