Relationship between Foreign Exchange Reserves and Economic Growth in Tanzania: Application of Wald Granger-Causality Test

Abstract

The study investigates the causal relationship between foreign exchange reserves and economic growth in Tanzania from 1990-2021. The study employed the Wald Granger-Causality Test to examine the causal relationship between variables. The results from the Wald Granger-Causality- Test revealed the unidirectional causal effect of economic growth on foreign exchange reserves. This implies that the value of economic growth can be used to predict the future value of foreign exchange reserves in Tanzania in the short and long run. In contrast, foreign exchange reserves cannot be used to predict the economic growth movement. Furthermore, findings indicated that foreign exchange reserves positively affect economic growth in the long run, implying that increasing foreign exchange reserves increases financial growth. Due to these findings, it can be concluded that foreign exchange reserves act as an integral catalyst for sustainable development in a country. Improving monetary policies and reserve management strategies would strike a balance between holding reserves and managing external debt. While reserves can be used to service debt and enhance creditworthiness, excessive reliance on reserves for debt servicing may deplete the buffer needed for crisis management. Policymakers must consider the country's specific circumstances and continually assess and adapt strategies to promote sustainable economic growth.