Assessing the Pass-Through Effects of Global Oil Price Shocks on Exchange Rate Fluctuations in Tanzania
This study utilizes ARDL and NARDL models on Tanzanian data from 1990 to 2024 to demonstrate that global oil price shocks significantly drive the depreciation of the Tanzanian shilling with strong asymmetric effects, prompting recommendations for enhanced foreign exchange reserves, energy diversification, and improved monetary policy frameworks to bolster macroeconomic stability.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
Money moves through the world like water through a network of pipes, flowing from where it is abundant to where it is needed. In this vast system, the price of crude oil acts as a powerful valve. When the price of oil rises, it squeezes the flow of money for countries that must buy it, often forcing their local currencies to lose value against the dollar. This happens because those nations need to spend more of their own money to buy the same amount of fuel, draining their savings and weakening their economic position. For a country like Tanzania, which relies heavily on imported oil to power its homes and transport its goods, understanding exactly how these price swings affect the value of its currency is a matter of daily stability. It is not just about abstract numbers on a screen; it is about whether the money in a citizen's pocket can still buy the same amount of bread or fuel the next day.
Researchers at the University of Dar es Salaam set out to map this relationship with precision, looking at thirty-four years of history from 1990 to 2024. They wanted to know if the Tanzanian shilling reacts in the same way when oil prices go up as it does when they go down. Imagine a door that swings wide open when pushed from one side but only creaks slightly when pushed from the other; the researchers asked if the currency behaves like that door. By examining annual data on oil prices, inflation, trade balances, and the amount of foreign money the country holds in reserve, they built a detailed picture of how external shocks travel through Tanzania's economy. They also paid close attention to major global events that shook the world, such as the financial crisis of 2008, the sudden drop in oil prices in 2014, the pandemic in 2020, and the war between Russia and Ukraine in 2022, to see if these moments changed how the system worked.
The study confirmed that there is a strong, lasting connection between the price of oil and the value of the Tanzanian shilling. When global oil prices rise, the local currency consistently loses value, both in the immediate aftermath and over the long term. This happens because the country must spend more foreign currency to pay for its fuel imports, creating a shortage of dollars that drives the exchange rate up. However, the researchers discovered that the reaction is not a simple mirror image. When oil prices fall, the Tanzanian shilling does gain strength, but the boost is much weaker and less certain than the damage caused by a price hike. It is as if the economy absorbs the bad news quickly and deeply, but the good news trickles in slowly and with less force. This imbalance suggests that the market reacts with more urgency to rising costs than it does to falling ones, a pattern that can leave the economy vulnerable even when oil prices drop.
The analysis also revealed that the relationship between oil and the currency is not static; it shifts during times of global turmoil. The study found that major crises act as structural breaks, altering the way the economy responds to price changes. For instance, the pandemic and the war in Ukraine intensified the pressure on the currency, making the depreciation sharper than in calmer times. These events disrupted trade, scared off investors, and strained the country's ability to manage its money, proving that external shocks do not just change the price of fuel but can fundamentally reshape the path of the currency itself. The researchers also noted that holding a larger buffer of foreign reserves helps stabilize the situation, acting as a shield that slows down the rate at which the currency loses value when oil prices spike.
Based on these findings, the study suggests that Tanzania needs to build a more resilient economy that does not rely so heavily on imported oil. The author recommends diversifying energy sources by investing in renewable power and domestic production to reduce the need for foreign fuel. They also advise strengthening the country's foreign currency reserves and improving how the central bank manages the exchange rate to better absorb these shocks. Furthermore, expanding what the country exports beyond raw materials would help balance the books, ensuring that more money comes in than goes out. By addressing these structural weaknesses, Tanzania can better protect its citizens from the unpredictable swings of the global oil market, ensuring that the value of their money remains steady even when the world around them is in flux.
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