The impact of exchange rate volatility on bilateral trade flows The case of Tanzania-China Exports

This study analyses the impact of exchange rate volatility on Tanzanian exports performance based on Tanzania-China exports covering the period from 1986 to 2010. The exchange rate volatility measure is the time varying measure of volatility that is the moving average standard deviation. The OLS regression technique was employed and Stata10 was used in data analysis. The findings show that volatility has a positive and significant effect on Tanzanian exports to China. The exchange rate volatility proves to be one among many variables that influence bilateral export performance of the Tanzanian economy and the argument that real exchange rate volatility has adversely effects on exports is not strongly supported by the analysis in the bilateral trade flows. Furthermore, the trade between Tanzania and China has recently increased significantly, however, the trade balances has been worsening (Tanzania is the net importer) as the trade between the two countries increased. However, to maintain a stable currency and minimize the degree of volatility remains to be essential, specific institutional reforms are necessary to ensure a sufficient degree of macroeconomic stability. Moreover, the current objective of Tanzania in ensuring sustainable economic growth through increased exports should be substantiated by a stable and competitive exchange rate, viable fiscal and monetary policies as well as structural reforms that contribute to the improvement in international competitiveness of Tanzanian exporters.