An empirical analysis of the current derteminants of the current account balance in Tanzania 1970-1993.

This study attempts to examine empirically the influence of external and domestic factors on the evolution of the current account balance of Tanzania during the 1970 to 1993 period. This study was thought to be significant owing to the importance of the contribution of current account balance to the balance of payments of Tanzania. In the course of analysis, ordinary least square (OLS) technique was applied on Tanzanian time series data to determine the factors influencing the current account balance. The empirical results of this study show that both terms of trade and growth of real GNP in industrial countries were significant and positively affected the current account balance. It was also found that high debt service ratio and appreciation of real exchange rate led to the deterioration of the current account balance. Finally, the results show that there existed no relationship between fiscal position and current account balance. The results have important policy implications. In order to reduce the persistent current account deficits in Tanzania, improvement in terms of trade is necessary. This can be achieved through export diversification. The study also recommends improvement in the quality of Tanzania's primary exports since an increase in the growth rates of industrial countries increases the demand for Tanzania's merchandise exports. Furthermore, the study recommends reduction in debt service ratio. This can be achieved through increasing exports. This will increase the debt servicing capacity and reduce the debt burden. The study recommends the application of devaluation in order to prevent the appreciation of real exchange rate. This will stimulate exports and reduce imports. Finally, in view of the fact that there exist no relationship between fiscal position and current account balance of Tanzania, the study still recommends reduction in fiscal deficits since higher fiscal deficits may lead to rapid growth of external borrowing. Financing the fiscal deficits by money creation tends to create macroeconomic imbalances in the economy.