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.
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
Source: The Daily News, www.dailynews.co.tz, reported by Abduel Elinaza in Dar es Salaam
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