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The dissertation examines the factors affecting Exchange rate dynamics in Tanzania.
The study was conducted on some major factors affecting exchange rate dynamics in
Tanzania, and their relative importance. Annual data were employed for the period
1990-2013 collected from National Bureau of Statistics, Bank of Tanzania and World
data indicators. The variables for the study were Inflation, Imports and Exports, Foreign
currency reserve, and Government Debt Service on Exchange rate. Time series
multivariate regression model was used to analyse the results. Johansenn cointegration
test revealed that long run relationship exists among the variables and VECM results
revealed short-run and long-run causality exists among the variables. Tanzania currency
has depreciated a great since the year 1990, as a result of which Tanzania exports
become costly in the international market and lost the competitiveness and imports
became cheap due to which the balance of trade got affected. The study revealed that
Export is the main factor affecting exchange rate in Tanzania. The study further showed
that the second important variable which brought more dynamics in exchange rate was
foreign currency reserve, and then the third important variable which brought more
dynamics in exchange rate was inflation rate, while order imports and debt service lay
at the fourth and fifth positions. Central bank needs to insure that such factors are
controlled and there should be strict control over the foreign exchange market and
Banks. The dynamics of the exchange rates had an adverse effect on the economy.
Based on the findings of the study it was recommended to harmonise fiscal policies with
monetary policy first and then make effective link of both these policies with trade
policy.
Keywords: Johansen test, Vector Error Correction Model, Depreciate, Appreciation,
Inflation, Imports, Exports, Debt service and foreign currency reserve. |
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