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-CausalityTest 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.