The twin deficits hypothesis in Tanzania: Exploring the effect of budget deficits on trade deficits

The Twin Deficit Theory has been researched extensively across multiple economic environments. Still, its relevance and real-world consequences can vary dramatically based on the particular economic condition of a country. Therefore, this study empirically analyzes the impact of the budget deficit on the trade deficit in Tanzania. Quarterly time series data is collected from 2005 to 2023. Autoregressive Distributed Lag (ARDL) Model estimation with a bound cointegration test establishes the short- and long-term relationship. The results show that the budget deficit increases the trade deficit in the long run. This implies that the theory exists in Tanzania. The results highlight the critical need for the country to reduce its budget deficit by improving revenue collection, expanding the tax base, fighting tax evasion, and improving expenditure efficiency for better public resource management.