A new study by economists at the Bank of Tanzania(BoT) has revealed that fluctuations in the value of the Tanzanian shilling have a measurable impact on the country’s exports, although the overall effect remains relatively small.
The research highlights the importance of maintaining a stable exchange rate to support businesses that sell Tanzanian goods and services abroad.
The study, titled “Effects of Real Exchange Rate Volatility on Tanzania’s Exports,” was conducted by economists Wilfred E. Mbowe and Hossana P. Mpango. It examined how fluctuations in the real exchange rate influence Tanzania’s export performance over time.
Researchers analysed quarterly economic data covering more than two decades, from 1997 to 2023, using advanced economic models to assess how changes and instability in the exchange rate affect exports.
The study found that exchange rate movements affect export sectors in different ways. Manufacturing exports were found to respond strongly to changes in the value of the shilling, while horticulture and transport services were more sensitive to currency volatility.
According to the researchers, manufacturing exports showed a relatively strong response to exchange rate volatility against the US dollar.
“Manufacturing exports react to dollar real exchange rate volatility, with a relatively strong impact of about 0.822 percent,” the study notes.
At the same time, some traditional export sectors and transport services were found to experience small positive effects from fluctuations in the shilling against a basket of currencies used by Tanzania’s major trading partners.
“Traditional goods and transport services exports are affected positively by volatility of the shilling against the basket of currencies, resulting in a quarterly impact of 0.031 percent and 0.010 percent respectively,” the study explains.
Despite these sector differences, the study concludes that exchange rate volatility slightly reduces Tanzania’s overall export performance.
When the shilling fluctuates strongly against major currencies such as the US dollar, exporters may become cautious because unpredictable currency movements can reduce profits or increase business risks.
“he results indicate that real exchange rate volatility has a negative influence
on exports. Nevertheless, the effect is small in magnitude, probably mirroring trade benefits from BoT’s interventions to stabilize the value of the Shilling,” the study states.
Researchers say the limited negative impact may partly reflect the role played by the Bank of Tanzania in maintaining orderly foreign exchange markets and preventing excessive currency instability.
Exports play a vital role in Tanzania’s economy. The country sells minerals, agricultural products, manufactured goods and services such as tourism and transport to markets around the world.
When exchange rates change unpredictably, exporters may face uncertainty about how much income they will receive when foreign payments are converted into Tanzanian shillings.
This uncertainty can influence business decisions, including pricing, investment and the ability of companies to compete in international markets.
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The study suggests that maintaining long-term stability of the Tanzanian shilling can help reduce uncertainty for exporters and support economic growth.
Researchers also emphasise that exchange rate policy can be used carefully as a complementary tool to address imbalances in the country’s balance of payments.
“Due to asymmetric reactions to real exchange rate changes and volatility, it is important to consider this information when assessing the impact of monetary policy on the balance of payments,” the researchers note.
They also recommend expanding analysis beyond traditional currencies.
“This calls for the need to account for exchange rate signals beyond those of the traditional currencies (i.e.,US dollar and a basket of currencies of major trading partners). The basket of currencies could be decomposed further to allow tracking of separate influences of the major world currencies,” the study adds.
In addition, the researchers recommend strengthening Tanzania’s foreign exchange reserves and promoting diversification of exports.
