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Prepared by Mumtaz Hussain.
These factors were also present in Kenya, South Africa, and Uganda, albeit to a lesser extent. Nevertheless, the selection of 1990 as a base (i.e., equilibrium) period is a subjective choice that has implications for any conclusions about the level of competitiveness.
Based on average export shares for 1990-95, we have selected Germany, the United Kingdom. Japan, Italy, and the United States. The INS system also lists the same five countries as the largest trading partners, but with slightly different weights.
Owing to data limitations in the case of Tanzania, we concentrate on a few major economic fundamentals of the equilibrium exchange rate.
The ADF test is based on the “t” statistic on the distributed lag term (α) in the following equation:ΔRERt= αRERt-1+∑f=1kβΔRERt-1+εt. The null hypothesis of unit root is rejected if (a) is significant.
According to model 5, a 2 percentage point increase in openness (the trade-to-GDP ratio), which is roughly equal to the 10 percent increase in log(OPEN) used in other models, will depreciate the real exchange rate by about 16 percent.
Based on a similar model, Nyoni (1998) estimates that a 10 percent increase in foreign aid inflow in Tanzania caused the real exchange rate to depreciate by about 5.6 percent.
The same is true when we add the relative growth of real GDP per worker instead of the terms of trade.
This model of ERER has been applied to other countries (see Atingi-Ego and Sebudde (2000)).
The Hodrick and Prescott (HP) smoothing method is widely used to obtain a smooth estimate of the long-term trend component of a data series. However, like many other smoothing techniques, the HP filter’s estimate of the permanent component depends on the smoothing coefficient used.
Using model 3, we get estimates for overvaluation between 12 percent (for the CPI-based real exchange rate index) and 9 percent (for the WPI-based real exchange rate) for 2001.
The 1998 report contains 23 countries, of which 22 were included in the report for 2000/01. Overall performance is based on six sets of indicators: openness (trade and exchange rate policies); government (fiscal performance, tax structure, burden for businesses of government regulation, and government efficiency); finance (saving and investment rates, banking quality, and access to financing); infrastructure (level and adequacy of infrastructure, and costs of infrastructure), labor (skill, health, and work conditions), and institutions (antitrust policy, legal system, crime, and stability of the policy regime).
Based on data from the Bank of Tanzania, overall exports grew by 6.9 percent annually, while nongold exports grew by only 2.9 percent per year during thel991-2001 period.