Exchange Rate and Trade Performance in Tanzania

Abstract

This study examines the relationship between exchange rate movements and trade performance in Tanzania using annual time-series data from 1976 to 2019. Trade performance is measured by the ratio of total exports and imports to gross domestic product. The analysis applies the augmented Dickey–Fuller unit-root test, Johansen cointegration procedure, vector error correction model, Granger causality test, impulse response function, and variance decomposition analysis. The results indicate that the variables are integrated of order one and share a long-run equilibrium relationship. In the long run, the exchange rate, gross domestic product, foreign direct investment, and labour force are positively associated with trade performance, whereas inflation is negatively associated with it. The error-correction term is negative and statistically significant, indicating adjustment towards long-run equilibrium following short-run disturbances. The causality results suggest a unidirectional relationship from the exchange rate to trade performance and bidirectional relationships between trade performance and gross domestic product, inflation, and labour force. No causal relationship is identified between foreign direct investment and trade performance. The impulse response and variance decomposition results further indicate that exchange-rate shocks account for a substantial proportion of changes in trade performance over the forecast horizon. The findings suggest that Tanzania’s trade performance is associated with exchange-rate conditions and broader macroeconomic factors. Policies should therefore emphasise exchange-rate stability and competitiveness, price stability, productive investment, labour productivity, and export-oriented productive capacity.