Tanzania Needs Export Diversification as Shilling Depreciation Fails to Improve Trade Balance, Central Bank Says

The Bank of Tanzania (BoT) said Tanzania needs to expand and diversify its export base as depreciation of the Tanzania shilling alone is not sufficient to improve the country’s trade balance, according to findings published in its April 2026 Research Newsletter.

The central bank said exchange rate adjustments should be supported by structural reforms to increase export supply capacity, particularly in higher-value sectors, in order to strengthen Tanzania’s external balance.

The findings are based on a BoT study assessing whether the Marshall-Lerner condition applies in Tanzania, a framework used to determine whether currency depreciation can improve a country’s trade balance through stronger exports and reduced imports.

The study analyzed quarterly data on trade volumes, real gross domestic product, and the real effective exchange rate. According to the research, the Marshall-Lerner condition does not hold in Tanzania.

The combined long-run export and import demand elasticities were estimated at 0.441 under low trade performance conditions and 0.417 under high trade performance conditions, both below the threshold of 1 required for currency depreciation to improve the trade balance.

In the short run, the elasticities were estimated at 0.212 and -0.516, also below the required level.

The report said this reflects limited export responsiveness due to supply-side constraints and continued dependence on essential imports such as fuel and machinery.

BoT said the findings indicate that exchange rate depreciation, in isolation, is not an effective instrument for restoring Tanzania’s external balance.

The study recommended complementary structural reforms to expand export production, diversify into manufactured goods and services, and reduce reliance on imported intermediate inputs used in domestic production.

The same newsletter included a separate study on exchange rate pass-through to inflation, which found that a 1% depreciation of the shilling raises inflation by around 0.046% on average.

However, the study identified a critical threshold of 7.32% annual depreciation, beyond which inflationary pressures increase more sharply.

The researchers said the findings underscore the importance of proactive exchange rate management to contain volatility, particularly during periods of rapid depreciation.

Another study in the publication found that a weaker shilling can support export performance in some sectors.

It estimated that a 1% depreciation increases exports by about 1.47% in the short run and 1.40% in the long run, with the largest gains recorded in manufactured goods and horticulture.

The same study said exchange rate volatility negatively affects exports, particularly in horticulture and transport services.

BoT said Tanzania should leverage exchange rate flexibility while supporting export diversification, market access, and investments in transport and information and communication technology infrastructure to strengthen competitiveness.

Tanzania has faced sustained pressure on the shilling in recent years amid strong import demand and foreign exchange shortages, prompting closer monitoring of exchange rate policy and its impact on inflation, trade, and broader macroeconomic stability.

The BoT Research Newsletter is an annual publication that presents studies conducted by the central bank’s staff and papers presented by external researchers on economic and financial issues affecting Tanzania.