Determinants of Imports Demand in Tanzania: A Dynamic Specification

Abstract

Imports play an important role to bridge the gap between domestic production and aggregate demand, to facilitate exports supply through imported inputs and overall economic growth.  Imports are important in providing consumers with a greater variety of consumer goods and services.  An analysis of BOT (various) reveals that total imports in real terms in Tanzania have generally been increasing in the 1967 – 2002 period with rapid increase after the liberalisation policies since the mid-1980s.  Total imports have been dominated by capital goods which constituted about 60% followed by imports of intermediate and of consumer goods which constituted 20% each.  The objective of this article is to estimate a dynamic imports demand model of Tanzania in order to use the estimates for policy analysis.  The regression results suggest that the only statistically significant variables that determine demand for imports (-0-198), gross domestic output (2.238), foreign reserves (-0.494) and foreign exchange earnings (0.544).  All variables have the expected signs.  The ECM is also statistically significant and has the expected negative sign suggesting that there is a long-run feedback mechanism to the demand for imports.  The large coefficient for GDP suggests that domestic income is the most important variable determining demand for imports in Tanzania.  As expected from theory, there is an inverse relationship between the domestic price of imports and demand for imports as well as between an increase in foreign reserves (which is “stored”) in the central bank) and the demand for imports.  Foreign exchange earnings or exports can readily be used to finance imports and hence are directly related to demand for imports.