STATE UNIVERSITY OF ZANZIBAR SCHOOL OF BUSINESS
STUDENT’S NAME: ALLY ABDALLAH ALLY
SUPERVISOR’S NAME: SALIM NASSOR
EDUCATION LEVEL:NTA 8
ABSTRACTThe effects of exchange rate on import have been the subjects of both theoretical and empirical investigations. Studies have provided ambiguous results on the relationship between exchange rate and import, some of those studies suggest a positive impact while others advocate the negative relationship between the two variables. By applying regression analysis based on Ordinary Least Square and correlation analysis on the data ranging from 1988 to 2017, the aim of the study is to examine the impact of exchange rate on import.
The first part is the introduction of the topic explains the objectives of the project that combine both specific and general objectives and background of Tanzania’s importation, Also in part two includes literatures of the different scholars about exchange rate and import, also meaning of terms associate with import, theories and brief explanation on variables. Part three represent approaches and tool that will be used to the analysis and interpretation of data.
ACKNOWLEDGEMENTThis study would have been an unsuccessful exercise, if it was not for the aid, guidance and protection of, first and foremost, The Omnipotent Lord of Hosts, Allah (s.a.w) the Almighty-indeed you are good all the time. And the persistent contribution of the following people, to whom I feel grateful:
Firstly, I am greatly indebted to my mentor and supervisor Mr. Salim for provides valuable advices, careful and talented research assistance.
Secondly I would also like to express my sincere gratitude to my lovely brother Mr. Suleiman A Khamis who always give me much support to my academic carrier
Thirdly, I also like to express my gratitude to all School of Business (SoB-SUZA) lectures, and my fellow students mostly Accounting students particularly Ibrahim Juma.
Last but not least I want to forward my humble and heartfelt gratitude towards my parents Mr. Abdalla A.Abdalla and my lovely mother Mrs. Asha O.fakih who together ensured that I get good educational foundation during my childhood. I am in debt if I will not mention in this paper my dear brothers and sisters; Ahmed, Arif, Adil, Abu-Bakr, Shuwena and Sheikha and my lovely aunty Sada and Maryam for their moral support, encouragement and prayers to make my studies successful.
DECLARATIONI, Ali Abdalla Ali, declare that this dissertation “Impact of exchange rate on import in Tanzania” is my own original work and that has not been presented and will not be presented to any other Institute, College or University for similar or any other degree award.
CERTIFICATIONThe observers certifies that has read and hereby recommends for acceptance by the School of Business (SoB-SUZA), this dissertation entitled on finding the impact of exchange rate on import in Tanzania. In partial fulfillment of the requirements for the reward of Bachelor Degree in Financial Administration of School of Business (SoB-SUZA).
MR. SALIM NASSOR
TOC o “1-3” h z u ABSTRACT PAGEREF _Toc513695483 h iACKNOWLEDGEMENT PAGEREF _Toc513695484 h iiDECLARATION PAGEREF _Toc513695485 h iiiCERTIFICATION PAGEREF _Toc513695486 h ivLIST OF ABBREVIATIONS PAGEREF _Toc513695487 h viiLIST OF TABLE AND GRAPH PAGEREF _Toc513695488 h viiCHAPTER ONE PAGEREF _Toc513695489 h 11.0 INTRODUCTION PAGEREF _Toc513695490 h 11.1 Overview of the Study PAGEREF _Toc513695491 h 11.2 Statement of the Problem PAGEREF _Toc513695492 h 11.3 Objective of the Study PAGEREF _Toc513695493 h 31.3.1 General Objective of the Study PAGEREF _Toc513695494 h 31.3.2 The specific Objective of the Study PAGEREF _Toc513695495 h 3To examine the effect of exchange rate on import. PAGEREF _Toc513695496 h 31.4 Research Questions PAGEREF _Toc513695497 h 31.5 Hypothesis PAGEREF _Toc513695498 h 31.6 Significance of the Study PAGEREF _Toc513695499 h 31.7 Scope of the Study PAGEREF _Toc513695500 h 41.8 Organization of the Study PAGEREF _Toc513695501 h 4CHAPTER TWO PAGEREF _Toc513695502 h 5LITERATURE REVIEW PAGEREF _Toc513695503 h 52.0 Introduction PAGEREF _Toc513695504 h 52.1 Theoretical Literature Review PAGEREF _Toc513695505 h 52.2 Empirical Literature Review PAGEREF _Toc513695506 h 6CHAPTER THREE PAGEREF _Toc513695507 h 13RESEARCH METHODOLOGY PAGEREF _Toc513695508 h 133.1 Introduction PAGEREF _Toc513695509 h 133.2 Research Design. PAGEREF _Toc513695510 h 133.3 Data Sources PAGEREF _Toc513695511 h 133.4 Data Analysis PAGEREF _Toc513695512 h 133.5 Variable Measurement PAGEREF _Toc513695513 h 143.6 Summary PAGEREF _Toc513695514 h 15REFERENCES PAGEREF _Toc513695515 h 16
LIST OF ABBREVIATIONSUNCTAD: United Nation Conference on Trade and Development
OLS: Ordinary Least Square.
TZS: Tanzanian Shilling.
USD: United States Dollar.
BOT: Bank of Tanzania
LIST OF TABLE AND GRAPHGRAPH NO 1. PRESENTATION OF INFLATION RATE
CRAPH NO 2.PRESENTATION OF EXCHANGE RATE
CHAPTER ONE1.0 INTRODUCTION
1.1 Overview of the Study
The research intended to examine the impact of exchange rate on import in Tanzania. This chapter presents an initial introduction of the study; it contains background to the problem, statement of the problem, objectives of the study, and significance of the study also the scope of the study.
Exchange rate can adversely affect a number of key macroeconomic variables such as private investment, GDP growth and the demand for money Valadkhani (2010). Tanzania has experienced the high fall in value of its currency, Tanzanian Shilling (Tshs) against the dollar and other major currencies since 1999 to date. According to the report of BOT (2008/2009) in 1999, one dollar was exchanged at 760 Tshs and now the currency is exchanged one dollar at 2270 Tshs. This shows that for the currency has fallen by large percent. The fall of currencies is not only in Tanzania but also shown in its neighboring countries of East African region. Uganda and Kenya have observed huge depreciations of their currencies against the dollar and also high inflation rates which have caused strikes and demonstrations of the people and civil society organizations blaming high costs of living.
Bhattarai (2011) have argued about free independent exchange rate movements which are not the result of central bank’ interventions as a monetary policy maker. When economic condition changes, exchange rates also substantially change. A decline in currency value is referred to as currency depreciation while increase in the same is known as appreciation. It is therefore easy to say the currency has depreciated or appreciated, but it is difficult to say the impact of exchange rate on import. People, specifically, politicians can use historical information or generally known information referred to as “the obvious” about the impact but empirically, these may not be true in certain countries depending on social, economic and political characteristics or differences. Therefore, this study examine the impact of change of exchange rates on import in Tanzania.
1.2 Statement of the Problem
There is no doubt that the fall of a currency has a lot of negative impacts on the society and the economy as a whole, though Imports may seem like term that have little bearing on everyday life for the average person, but it can, in fact, employ a profound influence on both the consumer and the economy of the nation that’s why we decide to investigate the factor which affect import in Tanzania.
Many researchers like Oloyede Oluyemi (2017) conducted a research about impact of exchange rate on trade balance in Nigeria and examine that impact on both import and export form 1996 to 2015, as he concluded that international trade plays major role on economic development but unlucky for most of developing countries are not achieving the benefits because of the exchange rate problem. Because Oloyede Oluyemi has already look the impact of exchange rate on trade balance we think there is a need to examine those impact on only import so as to know its effects.
According to Elif Guneren Genc (2014) which conducted a research about the effect of exchange rates on exports and imports of emerging countries concluded that exchange rate has greater effects on import rather than export. Also Osama D. Sweidan (2013) which conducted a research about the Effect of Exchange Rate on Exports and Imports concluded that there are other variable which affect much the performance of import compared to exchange rate.
Report from Bank of Tanzania (BOT Report, 2017), shows import in Tanzania averaged 833.75 USD million from 2006 until 2017, reaching an all-time high of 1399.30 USD million in December of 2011 and record low of 89.30 USD million in March of 2006. On other hand exchange rate has been dramatically increased as currently 1 USD can be exchanged by 2264 TZS thus we see import increased to 741 USD million in May from 672 USD million in April of 2017. Therefore to fill this gap of understanding the study whether exchange rate has positive or negative impact on import, this study will examine the impact of exchange rate on trade imports in Tanzania for the years 1988 to 2017.
1.3 Objective of the Study1.3.1 General Objective of the StudyThe general objective of the study is to examine the impact of exchange rate on imports in Tanzania for the years 1988 to 2017.
1.3.2 The specific Objective of the Study
To examine a relationship between exchange rate and import.
To examine the effect of exchange rate on import.1.4 Research QuestionsThe following are the research questions of this study;
What is the relationship between exchange rate and import?
To what extent exchange rate effect import?
1.5 HypothesisThe hypothesis of this study will be
Null hypothesis, Ho: B1= 0
There is possible impact of exchange rate on trade imports in Tanzania for the years 1988 to 2017.
Alternative hypothesis, H1: B1 ? 0
There is no possible impact of exchange rate on trade imports in Tanzania for the years 1988 to 2017.
1.6 Significance of the StudyThis study will specifically bring the following benefits;
Generate knowledge for overcoming any bad effect associated with import on exchange rate in Tanzania hence create better or conducive business environment for international trade.
Provide suitable recommendation for improvement of foreign currency management through reduction of risk specifically on foreign exchange
Improve international trade through well management of exchange rate and provide quality services by importers.
1.7 Scope of the StudyThis study will examine the impact of Exchange rate on importation in Tanzania covering the exchange rate and imports from 1988 to 2017.
1.8 Organization of the StudyThe rest of this study is organized as follows: Chapter two gives literature review and concepts concern the study. Chapter three describes the methodology that will be used in this study. Chapter four presents and discusses empirical results from this study. Finally, chapter five provides concluding remarks, policy implications and offers recommendations based on empirical findings of this study. It also suggests areas for further study.
CHAPTER TWO LITERATURE REVIEW
This chapter reviews the literatures which are in relation to this study. It starts by explaining theories concern the study, then empirical studies which already done, also shows how the theories have been supported by empirical studies done and lastly it gives the summary of the reviews presented.
2.1 Theoretical Literature Review2.1.1 Concept of Import
The word import is derived from the word port, since goods are often shipped via boat to foreign countries. Countries are most likely to import goods that domestic industries cannot produce as efficiently or cheaply, but may also import raw materials or commodities that are not available within its borders. A country’s terms of trade improves if its exports prices rise at a greater rate than its imports prices. This results in higher revenue, which causes a higher demand for the country’s currency and an increase in its currency’s value. This results in an appreciation of exchange rate
Importation is the action of buying or acquiring products or services from another country or another market other than own. It’s a transactions in goods and services to a resident of a jurisdiction (such as a nation) from non-residents. (Lequiller, F; Blades, D. 2010)
2.1.2 The following are some theories of International Trade
A country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it, If two countries specialize in production of different products (in which each has an absolute advantage) and trade with each other, both countries will have more of both products available to them for consumption. (1776, Adam Smith.)
Even if one country has an absolute advantage in producing two products over another country, trading with that other country will still yield more output for both countries than if the more efficient producer did everything for themselves. The country with the absolute advantage in producing both products would still produce both products, but less of the one they would trade for, allowing them to essentially allocate more resources to producing the product that they’re comparatively most efficient at producing.( 1817, David Ricardo)
The Product Life-Cycle Theory
New products are introduced in the United States. Then, as demand grows in the U.S., it also appears in other developed nations, to which the U.S. exports. Then, other developed nations begin to produce the product as well, thus causing U.S. companies to set up production in those countries as well, and limiting exports from the U.S. Then, it all happens again, but this time production comes online in developed nations. Ultimately, the U.S. becomes an importer of the product that was initially introduced within its borders. (1960?s, Raymond Vernon)
2.2 Empirical Literature ReviewMany researches have been prepared to investigate the relationship between exchange rate and import trade, which show how those two variable affect each other. Below are some of empirical reviews which has been conducted:-
According to Curcuru et al (2009), the nominal exchange rate policy has no consequence in regard to determination of resource allocation. They further posit that real exchange rates and terms of trade can also selfadjust when there is a floating nominal exchange rate regime. Burstein& Jaimovich (2009) opine that Central Banks of different countries encounter diverse and significant implementation difficulties of their own when establishing exchange rate policies. For instance, setting a wrong exchange rate peg would significantly affect import activity of a country. Chit, Rizov & Willenbockel(2010) indicate that a country in South East Asia discovered that volatility of exchange rates depends on the policies that policy makers initiate. They argue that exchange rate policies have had a profound effect on the nature of international trade that countries have with other countries.
Xing (2010) and Choudhri& Hakura (2012) have found out that their prices do not react to the fluctuations of exchange rate policies for imports. To illustrate this,Choudhri & Hakura (2012) observe that between 2002 and 2008the US dollar depreciated in value significantly by approximately 35% vis a vis the abroad index of other countries’ currencies. In regard to pass through of exchange rates effects, Choudhr; Hakura (2012), In other words, when a 1% fluctuation in the exchange rate results in fluctuation of 1% change in the import price, then there is complete exchange rate pass through. Existence of this relationship indicates that there is a co-integration relationship between these two variables.
Nicita ; Tumurchudur-Klok (2011), Nicita, Ognivtsev;Shirotori (2013) andNicita (2013) indicate that the relation between US import prices and exchange rates has been observed to be very significant in determining US import flows. Additionally, it is significant in understanding consumer prices. For instance, Choudhri; Hakura (2012) have deduced in their study on the exchange rate pass through to import and export prices that policies touching on exchange rates closely affect international trade of a country. In the case of the US, Curcuruet al (2009) and Xing (2010) argue that a weaker dollar, through devaluation or otherwise helps increase the competitive advantage. This is especially important in respect to exports through the purchasing power parity as discussed in Curcuru et al (2009), Nicita ; Tumurchudur-Klok (2011), Nicita, Ognivtsev ; Shirotori (2013) and Xing (2010).
Morrison ; Labonte (2013) further argue that subsequent to a depreciation of an importer’s currency, thereby raising the cost of imports, the foreign exporter might reduce his local currency export price in order to stabilize the prices in the importing country. However, this policy is a long strategy that is aimed at maintaining market share. However, markup exchange rates are industry specific and rely on the demand curve that the exporter experiences in a given country. Similar to these findings and deductions, De-Paoli (2009) demonstrate exporters usually experience a very erratic and elastic demand curve. Clearly, there is a relationship between imports- exports and exchange rate policies. This is the subject of this study and hence the contributions of literature such as that of De-Paoli (2009), Obstfeld (2009), Nicita, Shirotori & Klok (2013), Nicita, Ognivtsev &Shirotori(2013) and Morrison& Labonte (2013) to this research is very significant. A detailed empirical approach is presented in the next section
Morrison & Labonte (2013) further argue that subsequent to a depreciation of an importer’s currency, thereby raising the cost of imports, the foreign exporter might reduce his local currency export price in order to stabilize the prices in the importing country. However, this policy is a long strategy that is aimed at maintaining market share. However, markup exchange rates are industry specific and rely on the demand curve that the exporter experiences in a given country. Similar to these findings and deductions. Clearly, there is a relationship between imports- exports and exchange rate policies. This is the subject of this study and hence the contributions of literature such as that of Nicita, Shirotori ; Klok (2013), Nicita, Ognivtsev ;Shirotori(2013) and Morrison; Labonte (2013) to this research is very significant.
2.3 Conceptual Framework
Independent variable dependent variable
Source: JUMA YAZID (2013)
2.3.1 Definition of terms
An import in the receiving country is an export from the sending country. Importation and exportation are the defining financial transactions of international trade. An import is a goods brought into a jurisdiction, especially across a national border, from an external source. The party bringing in the good is called an importer. (Lequiller, F; Blades, D. 2010)
In international trade, the importation and exportation of goods are limited by import quotas and tariff from the customs authority. The importing and exporting country may impose a tariff (tax) on the goods so as to discourage import or encourage export. In addition, the importation and exportation of goods are subject to trade agreements between the importing and exporting country.
As a general rule, a country with a consistently lower inflation rate exhibits a rising currency value, as its purchasing power increases relative to other currencies. During the last half of the twentieth century, the countries with low inflation included Japan, Germany and Switzerland, while the U.S. and Canada achieved low inflation only later. Changes in market inflation cause changes in currency exchange rates. A country with a lower inflation rate than another does will see an appreciation in the value of its currency. The prices of goods and services increase at a slower rate where the inflation is low. A country with a consistently lower inflation rate exhibits a rising currency value while a country with higher inflation typically sees depreciation in its currency and is usually accompanied by higher interest rates (mistri, M.2015)
Graph 1: Inflation Rate
Source: BOT Report, 2017
Exchange rate can be defined as the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency. On the other hand; exchange rate refers to the tendency by which a foreign currency appreciates or depreciates in value, thereby affecting the profitability of foreign exchange trades. A person needs to obtain the currency of the foreign country from which he/she wants to import goods. Many people use the United States Dollar which is believed to be the international currency when making their international transactions, a person needs to exchange his/her domestic currency to the currency of that particular country (e.g. Euro, Yen, Pound…etc) in order to buy goods and import them to his country. The process of exchanging the currencies plays a crucial role in determining the volume of trade in a country, the upwards and downwards of the value of currency affect the trade and economic growth of a country.
Graph SEQ Table * ARABIC 2: Exchange Rate
Source: BOT Report, 2017
2.3.2 The following are some theories about exchange rate
Interest Rate Parity and Interest Rates
The interest rate parity condition was developed by Keynes (1923), as what is called interest rate parity nowadays, to link the exchange rate, interest rate and inflation. The theory also has two forms: covered interest rate parity (CIRP) and uncovered interest rate parity (UCIRP). CIRP describes the relationship of the spot market and forward market exchange rates with interest rates on bonds in two economies.
Purchasing Power Parity and Inflation rates
The starting point of exchange rate theory is purchasing power parity (PPP), which is also called the inflation theory of exchange rates. Swedish economist Cassel (1918) was the first to name the theory PPP. Cassel once argued that without it, there would be no meaningful way to discuss over-or-under valuation of a currency.
Absolute PPP theory was first presented to deal with the price relationship of goods with the value of different currencies. The theory requires very strong preconditions. Generally, Absolute PPP holds in an integrated, competitive product market with the implicit assumption of a risk-neutral world, in which the goods can be traded freely without transportation costs, tariffs, export quotas, and so on.
Balance of Payments Theory
The Balance of Payments Theory is also named as ‘General equilibrium theory of exchange rate. According to this theory, the exchange rate of the currency of a country depends upon the demand for and supply of foreign exchange. If the demand foreign exchange is higher than its supply, the price of foreign currency will go up. In case, the demand of foreign exchange is lesser than its supply, the price of foreign exchange will decline (Kanamori ; Zhao, 2006).
When the exchange rate of a country falls below the equilibrium exchange rate, it is a case of adverse balance of payments. The exports increase and eventually the adverse balance of payment is eliminated. The equilibrium rate is restored. When the balance of payments of a country is favorable, the exchange rate rises above the equilibrium exchange rate resulting in the decline of exports (Kanamori ; Zhao, 2006).
CHAPTER THREERESEARCH METHODOLOGY3.1 IntroductionIn order the research method to produce accurate result must be designed in such a way it facilitate research operation which at the end reliable and accurate results are produced. This chapter tends to elaborate research methodology which is used to investigate main research question “How exchange rate affect import in Tanzania. In really sense this chapter explains research design, study area and data collection as well as data analysis.
3.2 Research Design.This research will adopt a descriptive study design in order to get true picture of the impact of exchange rate on import in Tanzania. A sample size of 30 years from 1988 to 2017 will be taken to analyze the impact that exchange rate has on import
3.3 Data Sources
Quantitative methods are employed to examine the relationships between the independent variables, the study will use secondary time series annual data for the period 1988 to 2017.
The data concerning dependent variable (import) will be obtained from United Nation Conference on Trade and Development (UNTACT) and for independent variable (exchange rate and inflation) data will be obtained from National accountancy of Tanzania published by the National Bureau of Statistics, Bank of Tanzania (BOT), economic bulletins and operation reports for various years.
3.4 Data Analysis
Data collected will be analyzed by using Eviews8 whereby imports becomes a dependent variable while exchange rate and inflation rate are independent variables. This study employs the Ordinary least square to examine the impact of exchange rates on import base on time series data cover the range of 30 years (1988-2017) for Tanzanian. Since this study employ the time series data the implication of unit root tests are necessary. In carrying out this study, the impact of other variables such as interest rate and inflation rate also examined.
The regression equation will be used for imports against exchange rate and inflation rate to find out the computed output for interpretation. Relationship between exchange rates and imports will be measured by Pearson Correlation coefficient, the correlation coefficients from the regression shows effect (Whether positive or negative) of the independent variables on the dependent variable.
There are two expected relationships namely, positive relationship where the factor increases and imports increased and secondly, the negative relationship whereby as the factor falls the value of imports increases.
3.5 Variable Measurement
By estimating a single equation model treating exchange rate and inflation as independent variables and imports as dependent variable, the equation shown below will be used to estimate the impact of exchange rate on trade imports.
Therefore the model is expressed as follows
? (I) = ?0 + ??1Exch + ??2InF
I: trade imports
Exch: the rate of exchange rate
Intr: inflation rate
?0: represents the intercept of the model
?1: is the coefficient of exchange rate
?2: represents the coefficient of the inflation rate,
?: the error term
3.6 SummaryThis chapter presented the theoretical and empirical methodology which was employed to answer a question addressed by this study. The model which is used has been described. Furthermore, the chapter highlighted data sources, variables definition, data analysis and different estimation techniques employed by this study.
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