Appendix I: Summary of Three REER Methodologies
Appendix II: Derivation of NFA Stabilizing Current Account Level
Appendix III: Main Assumptions on Trade Elasticities
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The author is grateful to Andrew Berg, Corinne Delechat, David Dunn, Roger Nord, Yuri Sobolev, and seminar participants at the Bank of Tanzania for their insightful comments.
The paper also estimates a specification with heterogeneous country specific trends, but for Tanzania none of these trends were found to be statistically significant.
Panel estimates used in Chudik and Mongardini can circumvent the limitations of single-country estimates used in Li and Rowe, particularly those related to the short-span of the data sample, and thus tend to be more robust. At the same time, however, country-specific idiosyncrasies may be lost in panel estimates.
Tanzania’s NFA of -43 percent of GDP, comprises total NFA of BOT and commercial banks of 22 percent of GDP, external debt of 26 percent of GDP, and net FDI position of -39 percent of GDP.
As can be seen from Figure 1, while the REER appreciated briefly during last few months of 20007, as of end- March 2008 (the latest data available) the REER was broadly unchanged from its mid-2007 level.
The ambiguous results of the macroeconomic balance approach are not listed here, given that such results are based on imported coefficients from studies in which neither Tanzania nor any other SSA country is included.
The difference between capital inflows of about 15 percent of GDP and a current account deficit of about 13 of GDP projected over the medium term represents the accumulation of BOT’s reserves to maintain their coverage relative to the projected level of imports.
External borrowing of such magnitude would keep the NPV of public external debt just under the indicative 50 percent threshold applicable to Tanzania by 2026—the end of the forecast period in the latest Debt Sustainability Analysis for Tanzania (IMF 2007).
The IMF’s CGER methodology, for example uses elasticities of -0.71 for exports and 0.92 for imports. See IMF 2006b for a summary of studies on this subject.
The above share of GNFS exports excludes exports of gold and traditional commodities, which are not considered to be very sensitive to exchange rate movements.
See Appendix III for the assumptions on trade elasticities and the direct import content of BOP inflows used in these calculations.
Whereas the results of the MB approach are ambiguous, these results are based on imported coefficient estimates from studies that do not include SSA countries, and should thus be treated with caution.