Effects of exchange rate on export performance: A case study of Tanzania

This study analyses effects of exchange rate of Tanzanian shilling on the country's exports performance applying Vector Auto-Regressive (VAR) model covering the sample period from 1993Q1 to 2016Q4. The results show that; there is no long-run association between exchange rates and exports. Results of Granger Causality test shows that; exchange rate and foreign demand granger cause exports (each with unidirectional causality). The Impulse Response Function (IRF) shows that; a one-standard deviation positive shock to exchange rate (depreciation of local currency) increases the country's exports in nominal terms. And although the effect of shock is contemporaneous but it is not statistically significant at the 5% in the first four periods. Moreover, such effect of shocks is not permanent as it does not increase exports for all 10 periods. The same were observed when a one standard deviation positive shock to the foreign demand was applied. The variance decomposition shows that, the effects of exchange rates on Tanzania's exports are weak in the short run (less than 5%) but reaches 12.3% in the tenth period. And the variance brought by shocks in foreign demand remained weak (less than 5%) up to the tenth quarter. Hence, with these results, deliberate devaluation of shilling can do good towards boosting exports; this is in line with Marshall-Lerner Condition. Keywords: Exchange Rates, Exports, VAR, Granger Causality, IRF, Variance Decomposition.