Economy - Tanzania inflation rate is higher compared to other East African Community (EAC) member states, leading to debate among experts on its relation to economic growth.
Economists argue that the difference in the structure of the economies explains lack of similarity on levels of inflation in each country over the past year. In 2011, Tanzania, Kenya and Uganda walked through similar economic shocks that sent inflation rates to the ceiling. The inflation for the country peaked 19.8 per cent, Kenya 19.7 per cent and Uganda 30.5 per cent by the end of the said year.
However, by the end of last December the rates dropped to 12.1 per cent, 3.2 per cent and 5.4 per cent for Tanzania, Kenya and Uganda respectively. The main issues prevailing is how did Kenya and Uganda manage to handle the inflation to drive it quickly to single-digit rates from such high rates in less than 12 months while Tanzania failed.
There are two schools of thought -- one you either forgo growth in favour of inflation or the other way round that the data were manipulated to bring down the rates. The first school of thought have it that two factors have played a good role in lowering the inflation rate.
One is the fact that the difference in policy responses to inflationary shocks and two is the difference in the structure of the three economies. All three countries initially, said Mr Phumelele Mbiyo, Stanbic Bank's Regional Head of Macroeconomic Research for East Africa based in Nairobi, is to tighten monetary policy which caused the Treasury Bills rates to rise and prove insufficient.
"The Bank of Uganda altered the policy framework, adopting what they call inflation targeting lite, and introduce a central ban rate (CBR)," said Mr Mbiyo in his article 'How EA states handled inflation' published last week. Mr Mbiyo, who is based in Nairobi, said in the response to inflation pressure BoU raised CBR rate to 23 per cent.
Kenya did not change its policy but raised its CBR to 18 per cent from 6.25 per cent. Tanzania took a different path and did not raise CBR but tightened further monetary policy by also increasing percentage of cash reserves that commercial banks are required to hold against deposits.
The tightening of the monetary policy as adopted by all three central banks intended to discourage lending to private sector, thus slowing down economic activities and inflationary pressure. "By raising Treasury bill and Bond yields, monetary tightening makes it more appealing for commercial banks to buy government securities rather than lending to the private sector," Mr Mbiyo said.
This almost pushed up three month T-bill rate by over 18 per cent in Kenya and Uganda. In Tanzania the impact was not that severe as the rate jumped to 13 per cent. In simple terms, Kenya and Uganda sacrificed economic growth in a bid to lower inflation, while Tanzania did the opposite.
"A comparison of economic performance in the three countries also suggests that Tanzanian policy makers preferred to sustain robust economic growth whereas their Kenyan and Ugandan counterparts were willing to sacrifice near term economic growth to stabilise inflation quickly," Mr Mbiyo said.
GDP growth in Kenya slowed down from an average of 4.4 per cent in 2011 to 3.4 per cent, Uganda from 5.2 per cent to 3.3 per cent while Tanzania GDP grew from 6.4 per cent to 7.0 per cent on year-to-year ending June 2012. The University of Dar es Salaam Senior Lecturer (Economics), Dr Jehovanness Aikael, said Tanzania declining rate of less than one per cent per month in the last 12 month was bonafide since the figure was very high at 19.7 at the beginning of last year to end at 12.1 per cent.
"The dropping rate has no concern at all. It is actually authentic, it could be of concern if the rate dropped like Kenya and Uganda that is too fast to be realistic," Dr Aikael told the 'Daily News' recently. According to him, given the current falling rate, Tanzania would achieve a very remarkable single-digit rate in the next two to three months. At the end of January the rate reaches 10.9 per cent.
The Mzumbe University's Dar es Salaam Business School Senior Lecturer (Economics), Dr Honest Ngowi, said: "The decline is good but rather at a snail's pace." Dr Ngowi said the problem of the country's inflation is structural issues blended by monetary matters that hinder the fast curbing pace of bringing to equilibrium the Consumer Price Index. "Much has to be done to address the structural issues as well as monetary issues that are responsible for the rather disturbing inflation movements in Tanzania," Dr Ngowi said.
Tanzania Daily News/05/03/2013