Exchange rate movements and sectoral investment decisions in Tanzania

What the paper says

Purpose This study examines the influence of exchange rate movements, measured by both the level and first difference of the exchange rate, on sectoral investment decisions in Tanzania, using sectoral credit allocation as a proxy for investment across five key economic sectors: manufacturing, agriculture, tourism, construction, and transport and communication. Design/methodology/approach The study employs the Autoregressive Distributed Lag (ARDL) model using quarterly time-series data to estimate both short-run and long-run effects of exchange rate movements on sectoral credit, while controlling for foreign direct investment, gross domestic product growth, and lending interest rates. The ARDL framework allows for mixed orders of integration and captures dynamic adjustment processes across sectors. Findings The results indicate that exchange rate depreciation has a significant and positive long-run effect on credit allocation across all sectors, suggesting that a weaker Tanzanian shilling may stimulate investment by enhancing export competitiveness and encouraging lending. In the short run, however, exchange rate movements exert negative effects in some sectors, particularly transport and communication, highlighting the disruptive impact of sudden currency fluctuations on sectoral financing. Originality/value The study provides novel sector-level evidence on the heterogeneous short-run and long-run investment responses to exchange rate movements in Tanzania, an under-researched context. By combining ARDL dynamics with disaggregated sectoral credit data, the paper offers policy-relevant insights for designing sector-specific monetary and exchange rate interventions to support investment in volatile macroeconomic environments.