The real reasons for rising inflation

Dar es Salaam. The debate on inflation in Tanzania could be informed by a lack of information on how the situation is elsewhere in Africa and beyond, analysis shows.

Being part of the global economy, Tanzania is not an island and whatever affects the world is bound to affect the country even more, experts contend.

As a matter of fact this is precisely what the Deputy Permanent Secretary in the Ministry of Finance and Planning, Mr Lawrence Mafuru, meant when he told editors in Dar es Salaam last month that: “Being a small economy, we need the world more than it needs us.” With rising inflation in Europe and America, major global economies were adopting tight monetary policies, making it difficult for Tanzania to acquire its development financing at affordable interest rates, he noted.

From a rise in demand amid a tightened supply that emanated from the global Covid-19 pandemic to the war in Ukraine, Tanzania and other developing economies cannot expect any mercy from what is happening to the global economy.

So, when Mr Mafuru spoke during an online Twitter Spaces discussion organized by Mwananchi Communications Limited (MCL) on Wednesday, he did not only highlight the steps that the government was taking to curb inflation but he also sought to remind the public on what was behind the somewhat high rate of increase in prices.

He reiterated that the rebounding demand for goods and services after the lifting of Covid-19 restrictions in 2021 amidst a sluggish supply surged up energy and food costs globally, not just in Tanzania.

“The world is also interdependent and connected…Tanzania is not an island and therefore, there are internal and external factors that are negatively impacting us. Unfortunately, we have no control over external factors such as Covid-19 and the Ukraine war,” he said.

The start of the Russia-Ukraine war at the end of February last year exacerbated the rising costs of energy and food. But that notwithstanding, the government has shown optimism about the potential to curb inflation through long-term economic plans and has already taken several measures to ensure that the country remains unscathed.

From strategic agriculture development plans to tax and monetary policy adjustments the government believes that in the coming few months Tanzanians will start to feel a huge relief on the cost of living. Some of the monetary policy measures taken by the government through the Bank of Tanzania (BoT) to cushion the economy against the effects of imported inflation include the gradual reduction of monetary policy accommodation.

The BoT adopted this during the second half of 2022 in an effort to tame inflationary pressures from the demand side. The government has also been injecting a Sh100 billion monthly subsidy for fuel in order to protect consumers from the effect of the international energy crisis.

The subsidy arrangement had a significant impact on relieving Tanzanians from high global fuel prices, and as a result, Tanzania remained a country with the cheapest fuel prices in the East African region. But according to Mr Mafuru, the measures were only taken as temporary solutions to address the existing problems.

“The only permanent measures are the long-term strategies whose results cannot be seen early. It is a process that takes a long time which includes influencing productivity in key sectors to boost the domestic economy,” he insisted.

Mr Mafuru’s views align with that of the Minister of Finance and Planning Dr Mwigulu Nchemba who also highlighted the strategic plans that the government was implementing to tackle the rising cost of living. “The fast-tracking of strategic projects has led to a surge in the capital goods’ import bill but as they come to completion they would contribute to the productivity in the local economy,” he said.

He added: “Our focus has been on reducing production costs. For instance in agriculture we are now distributing subsidized fertilizer and we believe prices of food commodities will fall in the coming months”.

He said the current rise of food commodities is partly based on the fact that most crops were produced in the 2021/22 season when prices of inputs like fertilizers were high. Things have also been made worse by drought in some parts of the country. “We believe that after about a month from now, we will be in a totally different situation,” said Dr Nchemba.

During last year’s (2022) Farmers’ Day celebrations – commonly known as Nane Nane - President Samia Suluhu Hassan launched Tanzania’s Fertiliser Subsidy Programme by committing Sh150 billion for fertilizer importation and distribution for use by small-scale farmers in the 2022/23 Financial Year. The support in reducing the cost of farm inputs is also complemented by government plans to reduce post-harvest losses and strategic infrastructure development, according to Agriculture minister Hussein Bashe.

“We are currently implementing irrigation schemes to 36 seed farms across the country, to increase the availability of quality seeds,” he said during the MCL’s Twitter Spaces discussion. “Our plan is to commercialize agriculture and improve returns to the farmer,” said Bashe.

While the National Food Reserve Agency (NFRA) provided relief food to communities that faced severe drought and shortages, Mr Bashe said the government was also targeting to raise its storage capacity to over 500,000 tonnes per season.

Bashe revealed that the government through the Tanzania Agriculture Development Bank (TADB) has been in talks with commercial banks to partner with the government through a credit guarantee scheme.

Lowest inflation rate

Even as Tanzania’s headline inflation rate rose slightly by 0.1 percent to reach 4.9 percent in January, 2023, the country remains with the lowest rate of price changes in the East and southern Africa region.

Figures from the National Bureau of Statistics (NBS) put the inflation rate for January 2023 in Kenya and Uganda at 9.0 percent and 10.4 percent respectively.

Available data shows that major central banks across Africa have been maintaining their tightening stance on borrowing costs, with others raising interest rates to tackle high inflation and support their currencies. A recent publication by Bird African Story Agency, says the Monetary Policy Committee of the South African Reserve Bank and the Central Bank of Lesotho both recently raised their interest rates by 25 basis points to 7.25 percent.

As smaller as it looks, it was still an indication that the central banks in the two countries were still working on ways of controlling inflation.

According to Bird, the Central Bank of Nigeria (CBN) also hiked its policy rate by a whooping margin of 100 bps - to 17.5 percent.

“Our immediate read on this is that the CBN is showing more anti-inflation resolve, and preparing the way – perhaps - for an eventual FX (foreign exchange) policy liberalisation that will require a reset to higher market rates,” Razia Khan, Standard Chartered managing director and chief Economist, Africa and Middle East told Reuters.

The Bank of Ghana also raised its policy rate by 100 basis points on January 30 to 28 percent.

The January move is the seventh hike since November 2021, an action meant to restrain inflationary pressure and support macroeconomic adjustments, Bird reported on its website.

Tunisian regulator held its policy rate at eight percent after a 75 bps rise in December 2022, while Tanzania’s, which has experienced the lowest inflation in the East African Community and the Southern African Development Community, sustained its benchmark interest rate at five percent- where it has been since the outbreak of Covid-19.

Egypt’s central bank kept interest rates unchanged, maintaining the deposit rate at 16.25 percent and the lending rate at 17.25 percent. Malawi also retained its policy rate at 18 percent, citing an improved economic outlook and moderating inflation.

“These signs of progress in reducing inflationary pressures amidst continued strength in labor markets have offered reason to believe that policymakers may have succeeded in taming inflation with little cost to economic growth, a so-called soft landing,” said the International Monetary Fund in its latest weekly analysis.