The determination of export supply and import demand in Tanzania

This study addresses itself to the widening trade account deficits in Tanzania and, therefore, decline in the country's competitiveness in the world commodity markets. The study, accordingly, analyses factors determining export supply, import demand and the real exchange rate (which is a good proxy for a country's competitiveness in the world markets). The motivation for this study was the observation that Tanzania experienced poor macroeconomic performance and had persistent trade account deficits during 1967-93. The general objective of this study was to develop a framework for the analysis and management of the external sector. The main hypotheses of the study were: that export supply in Tanzania is more responsive to price (that is, the real exchange rate) than to nonprice factors (that is domestic capacity, imported inputs and lagged exports); that import demand in Tanzania is more responsive to price (that is, domestic relative price of imports) than to nonprice factors (that is, real incomes, foreign exchange earnings, international reserves and lagged imports); and that trade taxes and quantitative restrictions (that is, implicit taxation of exports and imports and import tightness) have a significant indirect negative impact on export supply and import demand through the real exchange rate and the domestic relative price of imports. These hypotheses were tested using econometric models for export supply, import demand and the real exchange rate. The aggregate export and import data were corrected for trade misinvoicing. The model results indicate that models using adjusted aggregate exports and imports yield better empirical results in the sense of passing the various model diagnostic and coefficient stability tests. The empirical results also show that nonprice variables are more important in determining export supply and import demand in Tanzania. Thus, in managing the trade account in Tanzania, the policy makers should rely more on nonprice than price variables in the sense of reducing government consumption of non traded goods, adopting none-expansionary macroeconomic policy, easing import tightness and reducing implicit and explicit trade notion. Such measures will increase the county's competitiveness in world commodity markets and reduce the incentive for trade misinvoicing and thus lay down the basis for efficient and effective management of the balance of payments in general and trade account in particular.