The impact of external debt on exchange rate in Tanzania: the 1970-1997 experience.

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University of Dar es Salaam
Despite the publicity revolving around the external debt of Tanzania, its effect on the exchange rate has not received much attention in the literature. In addition, previous researchers on exchange rate in Tanzania have largely focused on determination of exchange rates using models that are devoid of external debt. This study examines the impact of external debt on the exchange rate in Tanzania by using a structural model that synthesizes assets (portfolio) and monetary model of exchange rate along the modified specification of Ajay et al (1993). External debt in this study is proxied by cumulative current account deficit. The study uses error correction model and time series data for the 1970-1997 period. Estimation of the synthesized model by using ordinary least square (OLS) shows that external debt in addition to conventional variables such as money supply, real income and interest rates exerts significant and negative impact on the exchange rate of Tanzania. The major conclusion that emerges from empirical findings suggest that a co-ordinated management of external debt and exchange rate policies holds greater promise of success than independent management of these variables. The conclusion furthermore emphasizes the continued efforts by authorities in Tanzania to pursue external debt reduction measures as a panacea to lessening the exchange rate depreciation and lastly, the findings emanating from this study discourages strongly uses of net foreign assets as advocated by IMF and World Bank to finance the external debt.
Available in print form, East Africana Collection, Dr. Wilbert Chagula Library, Class mark (THS EAF HJ8899.T34K3)
Foreign exchange, External debt, Tanzania
Kazungu, K. (1999). The impact of external debt on exchange rate in Tanzania: the 1970-1997 experience. Master dissertation, University of Dar es Salaam.