Trade Balance, Economic Growth, and Inclusive Development in Tanzania (1995–2023): An ARDL–ECM Approach with VECM Extensions

Abstract

This study examines the dynamic relationship between the balance of trade and economic growth in Tanzania using annual data for the period 1995–2023 and applying an ARDL–ECM approach with VECM extensions. Over the study period, Tanzania experienced persistent trade deficits while GDP increased from about USD 5.25 billion in 1995 to approximately USD 79.0 billion in 2023, with imports exceeding exports in most years. The results show that exports exert a positive and statistically significant effect on GDP growth in the short run, with the second lag contributing about 27.92 percent to output expansion, but this effect does not persist in the long run, reflecting the dominance of primary commodities and limited domestic value addition in the export structure. Imports are statistically insignificant in both the short and long run, indicating that the prevailing import composition has not consistently generated sustained productivity gains. An error-correction coefficient of −0.3038 indicates a marked strengthening of macroeconomic adjustment, with about 30.38 percent of short-run disequilibrium corrected annually and convergence to long-run equilibrium achieved within roughly 3.3 years, compared to only 2.77 percent per year in earlier periods. This acceleration reflects cumulative improvements in policy coordination, infrastructure development, external sector management, and institutional capacity across successive FYDP cycles, which have reduced structural rigidities and strengthened policy transmission mechanisms. However, VECM results show that exports absorb a large share of short-run shocks while GDP per capita adjusts only weakly, indicating limited transmission of trade-driven growth into improvements in living standards. Overall, Tanzania’s growth has been driven primarily by domestic absorption and investment- led dynamics rather than a stable trade-led growth mechanism, with limited industrial depth, low export diversification, and weak SME integration constraining long-run inclusiveness, despite the fact that ongoing industrialisation, port modernisation, and blue-economy initiatives are beginning to ease logistics bottlenecks, expand export processing capacity, and strengthen value chain linkages that can support more inclusive and trade responsive growth over time Key words: Balance of Trade; Exports; Imports; Economic Growth; ARDL; ECM; VECM; Tanzania.

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