Exchange rate fluctuations and trade balance performance in Tanzania

Tanzania has been pursuing an active exchange rate policy basically to maintain a viable external account position, and competitiveness of its products in the world market. The estimated results demonstrate that exchange rate has a significant positive and negative impact on trade balance in the short-run. Thus, currency depreciation has been a significant stimulus for country's exports growth and improvement in current account position only for short run. The study found that the short-run behavior of the trade balance in response to real exchange rate shocks show an S-pattern rather than the J-curve pattern. Therefore, there is a need for government to implement the policy that focuses on the production of imported-substituted goods.