Determinants of current account balance of the balance of payments in Tanzania 1967- 2006

This study presents an empirical investigation of the determinants of current account balance in Tanzania for the period 1967-2006. The analysis is based on a structural approach that highlights the roles of domestic and external factors in the determination of the current account balance in Tanzania. An Error Correction Model (ECM) was estimated by using time series data. The empirical findings showed that real income, terms of trade, real exchange rate, foreign exchange rate reserves, and degree of openness are important determinants of the current account balance in Tanzania. All these variables except real exchange rate, were positively related to the current account behavior in Tanzania. Foreign interest rate and fiscal deficit were found to be insignificant determinants of the current account balance in Tanzania. The results have important policy implications. They suggest that improvement in terms of trade is necessary as would help reduce current account deficit in Tanzania. This can be achieved through value addition to our primary products, so as to fetch higher prices in the world market. The findings of the study also confirm that the so called “Marshal Learner Condition” does not hold for a developing country like Tanzania. This calls for government to adopt an exchange rate regime that would make domestic currency relatively stable. Furthermore, the government should adopt policies which improve people’s income together with providing incentives that would motivate them to develop a saving habit. The findings also suggest that the government should maintain and improve or sustain openness of the economy as it has a significant positive impact on the current account balance. Furthermore, the government should maintain and improve or sustain openness of the economy as it has a significant positive impact on the current account balance. Furthermore, the government needs to accumulate foreign exchange reserves that are essential for financing exports and essential imports. Although this study reveals that there is no significant relationship between fiscal deficit and the current account balance, it still suggests that the government should make deliberate attempt to reduce the budget deficit, because always huge budget deficits are a major cause of the current account deficit and macroeconomic imbalances in the economy. The analysis in this study was not exhaustive. More research is called for on the link between the balance of payments behavior and economic growth. Other balances of the overall balance of payments could also be examined in relation to economic growth.