Determinants of current account deficit in Tanzania

This study focuses on the analysis of the Determinants of the Current Account in Tanzania during the period 1980-2014 using Time Series Approach. Specifically this study focuses on the main causes of Current account deficit in Tanzania by analysing the impact of budget deficit, Exchange rate and Terms of Trade on Current Account deficit. During 1970’s, Tanzania had persistency Current Account deficit and thus, Time series data from 1980-2010 are analyzed in this study since the data for these variables were available. The ordinary least square (OLS) technique has been employed in the analysis in order to provide a deeper understanding of how exchange rate, budget deficit and terms of trade affects current account deficit. The study employed an Augmented Dickey-Fuller unit root test to test the stationarity of the variables. Basing on the variables and the sample size selected in this study, it has been established that, the Current Account Deficit is determined by budget deficit since other variables namely exchange rate and terms of trade found to be statistical insignificant. The empirical result depicts the positive impact of budget deficit on Current Account deficit. The study concludes that budget deficit has significant positive impact to Current Account deficit. The government should control budget deficit through widening revenue base by identifying new sources and strengthening administration of the current sources of revenue. This will be possible if government will control and reduce the magnitude of tax exemptions. Also the government should reduce further expenditure in areas such as seminars, unnecessary allowances, domestic and foreign travel. Furthermore it is argued that budget discipline is necessary for the achievement of external balance.