Monetary Economics

Topics: Inflation, International economics, Foreign exchange market Pages: 8 (2184 words) Published: April 28, 2013
Factors influencing Tanzania devaluation policy in its international trade BY

Table of Contents
1.1.Background Information2
1.2.Statement of the Problem3
1.3.Justification of the Study3
1.4.Overall Objective4
1.5.Specific Objectives4
1.6.Research Questions4
1.7.Significance of the Study4
2.1Exchange rate analysis5
2.2The nominal effective exchange rate6
2.3The real effective exchange rate6
3.1Methods of Data Collection6
3.2Methods of Data Analysis6
3.2.1Factors affecting balance of payments6

1.1. Background Information
In most economies that are termed as small and open, the Central Bank targets the value of the nominal exchange rate by intervening in the foreign currency market. In developing countries it has been traumatic episodes and surrounded by political instability and upheaval (Edward S, 1989). It is convenient to devalue the domestic currency following the existence of price stickiness (Hevia C & Nicolini J,P 2009).Countries can devalue their currencies if they have no other way to correct past economic mistakes, whether their own or mistakes done by predecessors, sometimes they can be forced to devalue their currencies due to ominous trade deficits like Thailand, Mexico, Czech Republic where they devalued strongly, willingly or unwillingly after their trade deficits exceeded 8% of the GDP (Vaknin 2004). In Africa most of the countries undergo devaluation to make adjustments of their economy. According to Jain.CA, 2012 countries devalue their currency because of; Inflation, Strengthening of Dollars, Dollar Demand from Stock Markets, and Fiscal Deficit. With devaluation policy, Tanzanian with an open economy, had an international trade measured by the ratio of exports plus imports of goods and services to GDP which had been rising overtime from 37.0 percent in 1998 to 68.5 percent for the year ending December 2009 (BOT, 2010) Improving the policy on Currency devaluation will led to improvement of Tanzania’s gross domestic product following the declining of imports especially finished goods, growing of production of goods especially for exports. Finally, it will also lead to a shift of labor from domestic to export agriculture.

1.2. Statement of the Problem
Many developing country especial the sub-Saharan Africa were in serious economic difficulties by the end of 1970s such as high inflation, unmanageable balance of payments and fiscal deficits, GDP growth ratios below the rate of population increase which was a result of government intervention to regulate the economy (FAO 1999). This can be easily traced when Tanzania was in economic disturbance following Arusha declaration and the civil war with Uganda. This study will therefore focus on the analysis of better alternative approach which can be adopted to enable Tanzania be successive with her policy concerning devaluing her currency to achieve economic growth and development. 1.3. Justification of the Study

Currency devaluation problems facing developing countries are observed by different authors. Jain CA (2012) had tried to look the valuation of India’s rupees in terms of US $ and £ from 1947 to September 2011 and come out with the final results with Inflation, Strengthening of Dollars, Dollar Demand from Stock Markets, and Fiscal Deficit making the rupee to drop for all the series of years. Tanzania as a small open economy is facing the same problems such depending on export of primary produced traditional goods like crops (cotton, coffee and tea) and raw-minerals (Tanzanite, and Gold) the other one is Global Financial Crises in 2007-8 where Tanzanian exporters of the major traditional export crops in particular cotton and...
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