While the war in Ukraine and covid-19 might be blamed for triggering inflation in many parts of the world, in Tanzania, the way forward is to go beyond interest rate increase. To those who might have forgotten, the current interest of 4.5% as per NBS recorded data is believed to be the highest since November 2017.
For Tanzania, it is important to closely monitor soaring inflation because inflation affects growth by changing the labour supply and demand, and consequently reducing aggregate employment in the sectors that are subject to increasing returns.
From an economic point of view, the reduction in the level of employment reduces the marginal productivity of capital. Thus, as a government led by President Samia Suluhu Hassan continues to steer this nation in the right direction internationally it is important not only to closely examine the relationship between inflation and long-term growth but inspect the reality of a threshold level for inflation current at hand and how any such level can affect the growth of Tanzania economy.
Economists and investment analysts architecting the way forward as inflation rises must consider all necessary measures that could be taken by our central bank because in my opinion inflation not only decreases the level of business investment, but also the effectiveness and productivity with which productive factors are used.
History reminds us that, globally, ever since 1984, price increase control has become the unquestioned mantra of economic policymakers globally. Even a whisper of the I-word by Alan Greenspan in the financial press, signalled that this created turmoil in global stock markets.
Bits of knowledge from historical familiar data show that in many nations from 1973 to 1984, gestured a period of macroeconomic distress that was experienced many nations forcing monetary policymakers to devise faster mechanisms to overcome such rising because at any measure and from an economic point of view sustainable growth can only transpire in an environment where the inflation monster is restrained.
Inflation is not neutral, and in no case does it favour rapid economic growth. Higher inflation never leads to higher levels of income in the medium and long run instead has significant and permanent reductions in per capita income. Price increases not only reduce the level of business investment but as well the efficiency with which productive factors are used.
The gains of lowering inflation in my view are good, but this is also dependent on the rate of inflation level. The lower the inflation rate, the greater the productive effects of a reduction. Efforts to keep inflation under control are important because its repercussion in terms of better long-run performance and higher per capita income is worthwhile.
Thus, according to the bureau of statistics (NBS) when I examine the annual headline inflation rate for July 2022 to have increased to 4.5% from 4.4% recorded in June 2022, might sound like a small increase from an economic point of view matters a lot. One thing to remember is that July recorded inflation rate is the highest since November 2017.
Although this speed has prompted the monetary policy committee (MPC) that has recently signalled a monetary policy aimed at reducing liquidity in the remainder of 2022 to tame inflationary pressure from the demand side while safeguarding the growth of the economy it is very important to remember that Tanzania to succeed in this venture needs to reduce taxes on some imports and take long-term supply-side measures as working along liquidity or interest rates alone will no longer be able of controlling inflation no matter how insignificant increase might be.
Unquestionably, price change for goods and services for the year ended July 2022 has swollen relatively compared to the prices recorded for the year ended June 2022. We all know numbers don’t lie. A Price survey in major markets examined to make a case on issues raised here speaks for itself. In some areas, a 20kg sack of maize which used to retail between TZS8,000 and 9,000 a year ago, now goes for TZS14,000 to TZS15,000. In some areas in Tanzania, a 20kg sack of rice now goes for TZS38,000 or TZS42,000 from an average of TZS25,000 to TZS35,000 a year ago. A list of commodities can go on and on.
I might differ strongly with experts in this field, but I am of the view that given existing facts in place, the monetary policy rate may appear not to be efficient in lessening the inflationary pressure we are experiencing. That does not mean it is wrong to reduce liquidity, as the situation would otherwise be worse, but recognises that certain monetary measures taken might usually work when inflation is caused by demand, whereas a larger part of the problem we are facing now comes from the supply side.
According to Moody, international prices for agricultural commodities such as wheat, sunflower oil and corn grew by 30%, 67% and 21% respectively between January and March 2022. It is widely accepted that Russia and Ukraine’s ongoing war and Belarus are amongst the largest exporters of fertilizers, and sanctions against them are likely to weigh on 2023 worldwide agricultural production, triggering further food price inflation.
In my view, Tanzania like other nations needs to take further steps outside the central bank’s monetary policy remit. For instance, a temporary reduction in import duties on certain products in addition to the relief granted on imported fuel can help. This could lead to increased imports and so reduce food and other commodities inflation.
While unquestionably the government revenue would take a short-term hit, lower inflation would mean interest rates, making it cheaper for the government to service its debt and on the other hand, the social benefits to Tanzanians will far outweigh the potential costs to the government.
The subsidy given to fertilizer in my view is a strong step in the right direction. But aware that food and commodities are leading contributors, inflation is now well entrenched across Tanzania’s consumer basket. Lack to use of the right monetary measures and relevant short-term measures situation on the ground may when examined at the bigger picture stimulate interest in buying bonds and so help shore up the currency.
Even if the war in Russia-Ukraine were to end today, my view is that global supply chain logistics would still need an extended period to recover just like what was caused by the covid-19 pandemic. Thus, longer-term solutions are needed. Tanzania can mitigate the impact of rising fertiliser prices by speeding up projects on the grounds aimed at producing fertilisers for its use and export or view commercial farming for example for wheat.
The fertiliser used in Tanzania is currently imported. The result is continuous dependence on the rest of the world. We need to take another look. Such a move could be very useful in raising truly commercial farm yields. Also, the government should consider a waiver on import taxes for commodity inputs, which would mean higher tax revenue and job creation in the long term.
Tanzania serves direct five landlocked nations namely Zambia, Malawi, Rwanda, Burundi, and Uganda. Forward-thinking ought to see the need to go beyond monetary policy designed to reduce liquidity and or rise or decrease interest-rate increase to curb inflation.
