The Bank of Tanzania (BOT) has released a comprehensive working paper analyzing the impact of real exchange rate volatility on Tanzania exports, covering a quarterly data series from 1997 to 2023.
The study finds that while the effect of real exchange rate volatility on total exports is statistically significant and negative, the actual magnitude of this impact remains small, ranging from a short-run negative effect of 0.097% to a long-run total effect of just negative 0.001%.
In contrast to the minor negative pressure from volatility, the research highlights that total exports are positively and significantly related to changes in exchange rates, particularly showing a stronger reaction to the depreciation of the Tanzanian Shilling (TZS) against the US Dollar (USD).
The report suggests that the impact of currency depreciation against the USD results in short- and long-run average export increases of 1.473% and 1.398% respectively for every 1% quarterly depreciation, compared to lower effects of 1.032% and 0.767% against a basket of major trading partner currencies.
The negative response observed in the aggregate data primarily emanates from the horticulture and transport services sectors, while other export categories, particularly manufactured goods, exhibited strong positive reactions to exchange rate dynamics.
Manufactured exports showed a robust response of 0.822% per 1% quarterly increase in exchange rate volatility, although this sectoral performance is moderated in the aggregate findings by the relative export shares of other product categories.
Furthermore, the study identifies an asymmetric reaction in the long run where positive real exchange rate changes, specifically currency depreciation, have a much greater impact on exports at 2.30% compared to only 0.47% for appreciation.
In the long-term horizon, all export categories except for horticulture respond positively to currency depreciation, with manufactured goods dominating the trend through an average total depreciation effect of 3.04%.
The authors of the working paper, Wilfred E. Mbowe and Hossana P. Mpango, noted that “policy makers may use the exchange rate policy as a complementary instrument to address short- and long-term imbalances in the balance of payments.”
They further emphasized that “policy interventions must however be conscious of possible asymmetric reactions across the major export categories, currencies, and exchange rate behaviour.”
The paper concludes that although real exchange volatility seems to have a small adverse effect on exports, there is a continuous need to intensify measures to instill long-term stability of the Tanzanian Shilling to counter potential harms if the currency exhibits instability.
The historical context of Tanzania’s exchange rate policy shows a transition from a rigid fixed regime post-independence to a market-determined floating exchange rate system adopted in 1993 following the Foreign Exchange Act of 1992.
Since 1994, the Inter-bank Foreign Exchange Market (IFEM) has served as the wholesale platform for determining official exchange rates, though the BOT occasionally intervenes as a buyer or seller of last resort to smoothen excess volatility.
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