The findings from a newly released study by economists at the Bank of Tanzania have challenged the theoretical framework that currency depreciation leads to trade balance, popularly known as the Marshall–Lerner (M-L) condition.

The theory, long considered conventional wisdom among economists, has been used in setting up remedies for trade imbalances by institutions such as the IMF, with policies modeled on it in countries like Japan, India, Egypt, Ethiopia, and Tanzania. The study, titled Exchange Rate Movement and Trade Balance in Tanzania: Evidence from the Marshall–Lerner Condition, emphasizes that while the theory may hold in developed economies, evidence shows that in Tanzania and other developing economies, currency depreciation alone cannot guarantee a trade balance.

The theory posits that when a country’s currency depreciates, its locally produced goods become cheaper, hence more price-competitive externally, leading to higher exports.  At the same time, residents of that country are expected to reduce imports, as foreign goods become more expensive compared to domestic goods.

The two economists behind the study, Suleiman Missango and Lusajo Mwankemwa, analyzed trends between 2000 and 2024, testing the conditions across various periods, including during times of global shocks and high trade activity.

“The Tanzanian Shilling (TZS) underwent significant depreciation over the past two decades, falling from approximately TZS 800 per USD in 2000 to TZS 2,600 per USD in 2024. Contrary to theoretical expectations, however, Tanzania’s external balance has largely deteriorated during this period,” the study reads.

It continues: “The current account deficit widened from USD 689 million in 2000 to a peak of USD 4.7 billion in 2022, before moderating to USD 2.1 billion in 2023. The deterioration in the current account balance amidst depreciation of the currency raises questions about the extent to which the M-L condition applies in the Tanzanian context.”

The findings highlight structural and behavioral constraints that limit the applicability of the theory in Tanzania. Chief among these is the country’s heavy reliance on price-inelastic imports, such as fuel and capital goods. These are goods which must be purchased regardless of price changes and make up the majority of Tanzania’s imports.

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The study also noted that Tanzanians tend to purchase goods out of necessity rather than price fluctuations. In theory, a weaker shilling should discourage imports, but in practice, essential goods continue to be bought despite higher costs.

On exports, the study observed stagnation in manufacturing, which fell from 9.1% to 7.3% of GDP, thereby increasing dependence on imported intermediate goods. In principle, depreciation should boost exports by making localy proced good much cheaper abroad. However, Tanzania’s weak manufacturing base and reliance on imported inputs instead contribute to higher import bills, worsening the trade imbalance. The study further noted that exports are heavily reliant on primary commodities, particularly agricultural crops and mining, with gold dominating.

“The finding suggest that depreciation of currency will fail to improve the trade balance even during periods of robust trade activity. This outcome underscores persistent structural rigidities, such as limited export diversification, reliance on imported intermediate inputs, and market saturation in key export sectors, which constrain adaptive capacity despite favorable macroeconomic conditions,” the study reads.

It adds: “This finding suggests that depreciation of the shilling alone is insufficient to enhance the trade balance. The low responsiveness of exports to exchange rate changes suggests the existence of supply-side constraints, such as inadequate infrastructure, low productivity, or limited export diversification, which hinder the competitiveness of Tanzanian goods in global markets.”

On imports, the study observed mixed responsiveness: “Conversely, the results for imports exhibit mixed responsiveness, reflecting Tanzania’s reliance on essential goods—such as fuel and machinery—with relatively inelastic demand. The findings indicated that exchange rate management, while important, cannot singularly address Tanzania’s persistent trade imbalances.”

The study comes as Tanzania remains under an IMF program, one of whose objectives is to ensure greater flexibility in currency exchange to address trade imbalances, often visible through periodic dollar shortages.

Following the implementation of IMF requirements, Tanzania’s exchange rate arrangement was reclassified from “crawl-like” to “floating” in November 2024. This shift means that the Bank of Tanzania has reduced frequent interventions, allowing for more flexible exchange rate movements.

The study by Missango and Mwankemwa is expected to spark debate among economists about balancing policy interventions with market forces, and about the need for global institutions like the IMF and World Bank to acknowledge the structural realities of economies like Tanzania.

“To address such challenges, a shift from exchange rate-centric policies to targeted market-specific reforms that build structural economic resilience is inevitable,” the study reads.

Among the solution proposed by the two economists are enhancing export competitiveness, demanding precision in investments in high-value agro-processing clusters, tailored support to small-scale manufacturers and agro-processors, and strategic localization of critical goods like pharmaceuticals and construction materials through public-private partnerships (PPP).