Effects of Exchange Rate Variability on Coffee Export Growth in Tanzania

Abstract

Exchange rate movement is perceived as a very important factor in influencing the performance of the agriculture sector. When the currency of the exporting country depreciates against the trading partners’ currencies tends to stimulate demand and improve export earnings. An increase in value of the currency against the other trading partners’ currencies (e.g. USD) tend to affect the costs of production that may affect aggregate agricultural supply. However, the linkage of the exchange rate and agricultural export growth in particular traditional exports such as coffee has never been properly and intensively documented for appropriate decision-making in Tanzania. Therefore, this study was set to assess how exchange rate variability has affected coffee export growth in Tanzania. The study made use of time series data from 1991 to 2022 using the vector error collection model (VECM). Given the influences other than the real effective exchange rate on the export of coffee growth, we discriminately incorporated inflation rate, discount rate, and money supply, as the independent variables. Yearly data (1991-2022) obtained from the Bank of Tanzania and the International Coffee Organization were used for the analysis. The results from this study reveal that the real effective exchange rate has an enormous positive impact on coffee export growth in the long run. This implies that, the depreciation of the domestic currency against USD has advantage on coffee export growth when considering the demand side as it tends to stimulate coffee demand in the rest of the world, thus leading to an increase in export volume and revenue which helps to foster coffee export growth. However, in the supply side, this depreciation should be carefully monitored as excess depreciation may end up by rising inputs prices especially those inputs imported such as fertilizers, agrochemical, aggrotech and agro machineries that may intern affect the production level. The study ends by concluding, that it is imperative for the Central Bank to carefully observer exchange rate fluctuations and implement appropriate monetary policy strategies in favour of the agriculture sector in particular exportable crops such as coffee. This will help to manage the risks and opportunities that may arise in coffee export growth associated with currency movement.