Understanding how public debt affects private sector financing is important because it can either limit or boost private investment. This relationship is key for sustainable economic growth, helping policymakers balance public spending and private sector involvement. This study therefore, examines the impact of public debt on private-sector financing in Tanzania from 1990 to 2023. The results based on two specifications were estimated using the Autoregressive Distributed Lag (ARDL) approach. The estimated results indicate there is a strong inverted-U relationship between public debt and private sector financing in Tanzania over the long run period. Therefore, the result supports the hypothesis that public debt contributes positively to private sector credit up to 62.5% of GDP. Beyond that, public debt limits the credit available to the private sector. Therefore, it is essential for the government to maintain public debt at manageable levels. This approach will create room for countercyclical fiscal policies and support the achievement of development objectives by funding productive investments. Consequently, it is crucial for the government of Tanzania to adhere to borrowing limits, as this will enhance access to financing for the private sector.

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Keywords

public debt, private sector financing, Inverted U, ARDL, Tanzania