Assessment Of The Effect Of Exchange Rate And Devaluation Policy On Tanzania's Balance Of Payment Accounts

ABSTRACT

Exchange rate policy in any economy aims at improving balance of payments, promoting level of export as well as achieving macroeconomics variables. This research aimed at assessing the impacts of exchange rate and devaluation policy on Tanzania's balance of payment accounts. The study intended to fulfil three objectives, namely; assessing the extent to which exchange rate policy objectives in Tanzania have been met, comparing the effects of exchange rate on BOPA before and after devaluation, and investigating on the challenges facing exchange rate policy with regards to BOPA. The study was approached using longitudinal strategy where secondary data on exchange rates and balance of payment accounts from 1966 to 2010 were obtained from BoT report of 2011. In addition, other information was obtained through interviews conducted to experts in the field. The study has found out that, Tanzania has met the objective of exchange rate by managing to control inflation rate to a tune of single digit. However, this study has confirmed linear relationship between exchange rate and BOPA. Findings have shown that, before introduction of devaluation policy in Tanzania, BOP Accounts experienced low deficits due to stable and fixed exchange rate regime giving out small divergence. However, after devaluation, exchange rate did not contribute to great percentage. Nonetheless, devaluation policy has resulted to positive balance of payments despite of deficits in other accounts. Furthermore, the study has reported several challenges which face exchange rate policy in Tanzania. It was mainly recommended that, the government should empower domestic currency by restricting the use of other currencies by gaining people’s confidence in our shilling as well as realizing revenues that would be accrued.