Mediating Role of Exchange Rates in FDI-Growth Linkages: ARDL Evidence from Tanzania (1990–2023)

Abstract

In a quest to examine the interrelationship between macro-economic factors in shaping the country’s economic trajectory. This research explores how Foreign Direct Investment and exchange rate movements interact to influence economic growth in Tanzania over the period 1990–2023. Utilizing the Autoregressive Distributed Lag (ARDL) model, the research investigates effects on both short-run and the potential for long-run cointegration among the variables. The study utilizes time-series data sourced from the World Bank, with all variables transformed into natural logarithms to ensure linearity and normality of  the variables. The results reveal that exchange rate fluctuations significantly impact GDP in the short run, with immediate depreciation exerting a negative effect, while lagged depreciation contributes positively, suggesting a delayed competitiveness effect. Conversely, FDI does not exhibit a statistically significant short-run impact on GDP, and the ARDL bounds test indicates the absence of a robust long-run equilibrium relationship among the variables. These findings imply that while exchange rate management is crucial for short-term macroeconomic stability, the effectiveness of FDI in promoting growth depends on the country’s absorptive capacity and structural readiness. The study recommends targeted policies aimed at stabilizing exchange rates, improving institutional quality, and aligning FDI with national development priorities to fully harness its growth-enhancing potential.