The Impact of Macro-Economic Factors on Stock Market Development in Tanzania

Abstract

The study aimed at assessing the impact of macroeconomic factors on capital market development in Tanzania. The study consisted of three research objectives such as, to explore the influence of interest rate on stock market capitalization, examine the influence of money supply on stock market capitalization, and analyze the influence of inflation rate on stock market capitalization. Pooled time series and cross-sectional data were collected. Secondary data collected were obtained from the analysis is based on the secondary data that have been collected from the Bank of Tanzania (B.O.T), National Bureau of Standards (NBS), and Dar-es-salaam Stock Exchange (DSE) from 2011 to 2021. The data were econometrically analysed using the Multiple Linear Regression Model and Ordinary Least Square (OLS) method as an estimation technique. The study results revealed that inflation rate and money supply have a positive relationship on stock market development in Tanzania, but interest rate took the wrong sign (-ve) though it is statistically significant to predict stock market development in Tanzania. The interest rate was found to be of less influence on stock market development. Therefore, it establishes the basis for the reasons why this coefficient estimate has a negative influence on economic growth. The study recommended that Tanzania should focus more on stabilizing the rates of inflation in the economy as well as money supply movements to facilitate the fast-paced capital market development. Keen focus on the fiat money (TZS) will facilitate its stability against other international currencies and stabilize the country’s purchase level. A healthy rate of inflation is a key thematic component in the evolving capital market in Tanzania. On the other side, the public's demand for currency and bank deposits and commercial banks' supply of loans are consequently important determinants of money supply changes. As these decisions are influenced by central banks' monetary policy, not least their setting of interest rates, the money supply is ultimately determined by complex interactions between non-banks, commercial banks, and central banks. A key focus in regulating the money supply in Tanzania directly facilitates the growth and competitiveness of the country’s capital market.