A new study by the Bank of Tanzania (BoT) has found that volatility in the real exchange rate has a negative—though relatively small—impact on Tanzania’s
export performance, highlighting the importance of exchange rate stability in sustaining the country’s external trade growth.The research, titled “Effects of Real Exchange Rate Volatility on Tanzania’s Exports,” analyses quarterly data from 1997 to 2023 to examine how fluctuations in the value of the shilling influence export performance across different sectors.
Conducted by economists Wilfred E. Mbowe and Hossana P. Mpango, the study uses an autoregressive distributed lag model to assess both short-term and long-term impacts.
The findings reveal that increases in exchange rate volatility tend to reduce total exports.
Specifically, a one-percent increase in conditional positive volatility of the shilling against the US dollar leads to a short-run decline in exports of about 0.097 percent, it says.
In the long run, the total effect is even smaller—about negative 0.001 percent—when measured against a basket of currencies of Tanzania’s major trading partners.
Despite the negative impact, the study emphasizes that the magnitude of the effect is relatively modest, suggesting that Tanzanian exports have shown some resilience to exchange rate fluctuations over time.
However, the study notes that export sectors respond differently to exchange rate volatility as the negative impact is largely driven by declines in horticulture exports and transport services.
These sectors appear more vulnerable to currency instability due to their sensitivity to international price competitiveness and operational costs linked to foreign exchange movements.
In contrast, other export categories display more positive responses to exchange rate fluctuations. Manufactured exports, in particular, show a relatively strong positive reaction.
According to the study, a one-percent quarterly increase in exchange rate volatility could boost manufactured exports by about 0.822 percent.
Nevertheless, the researchers point out that the overall export performance still reflects a net negative effect because sectors that benefit from volatility represent smaller shares of the country’s export portfolio compared with those that experience declines.
Beyond volatility, the study also examined how changes in exchange rates—especially depreciation of the Tanzanian shilling—affect export performance. Here, the results suggest a more positive outlook.
However, depreciation of the shilling against the US dollar significantly boosts export growth.
The researchers estimate that a one-percent quarterly depreciation of the currency could increase exports by about 1.47 percent in the short run and roughly 1.40 percent in the long run.
Similarly, when measured against a basket of major trading partners’ currencies, a one-percent depreciation results in export growth of around 1.03 percent in the short term and 0.77 percent over the longer term.
These results indicate that while volatility may introduce uncertainty for exporters, gradual depreciation can improve Tanzania’s competitiveness in global markets by making its products cheaper for foreign buyers.
The researchers also found evidence of asymmetric responses in exports to exchange rate movements, meaning that the impact differs depending on whether the exchange rate is appreciating or depreciating.
Exporters tend to respond more strongly to depreciation than to appreciation, reflecting the stronger incentive created when domestic goods become more competitively priced abroad.
According to the study, this asymmetry highlights the importance of carefully managing exchange rate dynamics to avoid excessive volatility while maintaining competitiveness.
The findings come at a time when Tanzania is seeking to expand its export base and strengthen participation in regional and global trade. With initiatives such as the African Continental Free Trade Area gaining momentum, policymakers are increasingly focusing on strategies that enhance export competitiveness and diversification.
The researchers argue that maintaining macroeconomic stability—particularly in exchange rate management—should remain a priority for policymakers.
“Stable exchange rate conditions can help reduce uncertainty for exporters and encourage long-term investment in export-oriented industries,” the study suggests.
At the same time, the paper underscores the need for greater diversification of export sectors to reduce vulnerability to external shocks. Expanding higher-value manufacturing exports, for example, could help offset weaknesses in traditional sectors that are more sensitive to exchange rate swings.
Tanzania’s export structure has historically been dominated by commodities such as agricultural products, minerals and tourism-related services. While these sectors remain important sources of foreign exchange, their exposure to global price fluctuations and currency movements can create volatility in export earnings.
Strengthening manufacturing and value-added industries could therefore play a crucial role in stabilizing export performance and supporting broader economic growth.
Overall, the study concludes that while exchange rate volatility has a statistically significant negative effect on Tanzania’s exports, the impact is relatively small.
More importantly, currency depreciation tends to support export expansion, reinforcing the importance of balanced exchange rate management in promoting trade competitiveness.
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