Participatory Forest Management (PFM) is a central strategy for governing decentralised forests in Tanzania, although its effectiveness depends on complex institutional dynamics that influence governance outcomes. This paper uses a political economy perspective on natural resource governance (PENRG) to analyse institutional dynamics that influence the effectiveness of PFM in the Angai Villages Land Forest Reserve (AVLFR) in Tanzania. The paper draws from a qualitative case study design utilising evidence from 12 Focus Group Discussions (FGDs), 7 semi-structured interviews, and a documentary review. The findings reveal that while PFM in AVLFR has made some progress in enhancing local ownership and community participation, its economic benefits have not been fully realised due to limited capacity among local communities, elite capture, and reliance on external actors. Therefore, the article recommends strengthening local governance structures, increasing community awareness of their rights, and redesigning community engagement strategies to achieve more equitable and sustainable forest management outcomes.