The monetary approach to the balance of payments: the case of Tanzania (1966-1982)

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University of Dar es Salaam
The period of the 1970's has been described as the crisis period for the Tanzanian economy. The crisis has been experienced in several ways ranging from falling output; persistent balance of payment deficit; inflationary pressures; growing budgetary deficits; shortage of food, consumerables, and producer goods; declining savings rates; and growing debt burden. Causes of the crisis have been described as those internally and externally generated and their interaction. The major objective of this study is analysing the balance of payment crisis. The available literature in Tanzania concentrates on structuralist approach to the balance of payments. In view of the growing monetary expansion in Tanzania since 1970 the policy of the government to control balance of payments via the Finance and Credit Plan and the Foreign Exchange Plans, and the growing strength of the monetary approach to the balance of payments theory. The current study aimed at analysing the monetary effects of the balance of payments in Tanzania since 1966. The major hypothesis of the study has been that monetary expansion specifically that arising from government credits and private sector credits particularly parastatals, increases import demand via expansion of domestic expenditure.The analysis of money supply inflation, and balance of payments for Tanzania (1966-82) has revealed two important features. First, that past growth in money supply resulted from government and private sector borrowing from the banking systems, while the role of net foreign assets was declining. Since, this was a deficit situation, the declining role of foreign assets reflects a one way sterilization. In view of the fact that a big proportion of private sector credits goes to parastatals, then the public sector can be said to have caused excessive monetary expansion. Secondly as the efforts of monetary expansion were more on inflation and balance of payments than on output growth.. Money supply was seen to affect the balance of payments via government and private sector expenditures. On the basic of theoretical and empirical evidence, an econometric model was set to test empirically the validity of our major hypothesis.The models, though monetary, is not a 'monetarist' approach since it employs both Keynesian and monetarist central assumptions. Results obtained by applying our model to Tanzanian data (1966-81) revealed that in Tanzania monetary expansion had balance of payments purcussions. It was revealed that money affects the balance of payments via private domestic expenditures which together with government expenditures increase the level of imports. It was further revealed by empirical evidence that budgetary deficits influence positively the balance of payments. Money supply is influenced by budgetary deficits private expenditures and foreign trade balance. Thus for the balance of payment policies, efforts should be directed at controlling the government and private expenditures. Policy targets thus should be reducing budgetary deficits foreign trade repurcussion on money supply, and private sector spending specifically the parastatal sector.
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Balance of payments, Mathematical models, Monetary policy, Economic policy, 1970-1980, Tanzania
Shumbusho, M.R (1985) The monetary approach to the balance of payments: the case of Tanzania (1966-1982), masters dissertation, University of Dar es Salaam. Available at (