How government tamed inflation

TANZANIA: DESPITE inflation being brought under control and kept within target levels, understanding its impact continues to elude many ordinary citizens.

Inflation, the rise in prices of goods and services over time, has been successfully managed to meet government targets. However, for the average person, comprehending its nuances remains a challenge.

“The current efforts have ensured inflation remains within acceptable limits,” stated an economic expert from the Central Bank, Marwa Patrick.

Mr Patrick, the Central Bank officer from the Directorate of Research and Policy, said achievement reflects meticulous fiscal and monetary policies and strategies employed by authorities to stabilise prices and maintain economic stability. Yet, the concept of inflation remains opaque to many.

It affects daily life, influencing everything from grocery bills to housing costs, yet its complexities often escape public awareness. “I don’t believe the authorities.

The price of sugar and fuel recently went up drastically. Still, they say inflation is dropping,” said Lilian Joseph, a mother of three.

Experts emphasise that maintaining moderate and stable inflation is essential for sustainable economic growth, social stability and overall prosperity.

The government prioritises keeping inflation within the National Vision 2020-2025 target of 3.3 to 4.4 per cent. The National Vision 2020- 2025 outlines several key interventions to manage and mitigate inflation.

These interventions aim to ensure economic stability, promote sustainable growth, and improve the overall wellbeing of Tanzanian citizens.

The key interventions include monetary policy framework, control of money supply, fiscal policy management, promotion of agricultural productivity and industrialisation and diversification.

Other key areas are foreign exchange, monitoring global economic conditions and improvement of infrastructure.

According to the Third Five-Year Development Plan (FYDP III), the annual rate of inflation has remained in a single digit range, averaging of 4.4 per cent over 2016 to 2020, slightly below the FYDP II projection of 5 per cent per annum.

Headline inflation declined from annual average of 5.2 per cent in 2016 to 3.3 per cent in 2020.

Generally, the moderation has been on account of improved food supply in the domestic market and neighbouring countries, stability of global oil prices, and prudent fiscal and monetary policies.

The IMF projected the CPI to average 3.3 per cent in 2020, rising to 4.0 per cent in 2021, 4.6 per cent in 2022, then dropping to 3.1 per cent in 2023, and 3.8 per cent in 2024, stabilising at 4.0 per cent through 2027.

Economists say understanding inflation can be confusing, especially when it seems contradictory to daily observations.

Also read: BoT raises key interest rate to control inflation

Inflation is typically measured by indices like the CPI, which tracks price changes over time for a basket of goods and services.

Bank of Tanzania (BoT) Economist from Directorate of Research and Policy, Marwa Patrick told ‘Daily News’ that when the CPI “slides down,” it means the rate at which prices are increasing, has slowed.

“A fall in price inflation does not mean prices are falling. Some prices fall, but overall, the cost of that basket is not rising as fast,” he said.

Also, inflation represents the overall consumption basket of the average Tanzanian household, with each consumed item weighted according to how households allocate resources to a particular item. Mr Imani Muhingo, Head of Research at Alpha Capital, noted that food is less than 28 per cent of the basket, although it has the largest weight.

“Looking at food prices alone to determine inflation can be misleading,” he said. “If we had high inflation in the near past and have not experienced deflation, general prices would still be elevated, but the speed at which they are rising, has stabilised.”

The BoT’s monetary policy each year aims to achieve inflation targets and support economic growth.

The goals include interest rate and exchange rate policies to be pursued consistent with the monetary policy framework. Interest rate and exchange rate policies are pursued to maintain a 3.0-5.0 per cent inflation range.

Mr Patrick said the central bank’s policies play a crucial role in managing money supply, interest rates, and exchange rates to keep inflation below 5.0 per cent.

The BoT adopted an interest rate-based policy framework to enhance monetary policy effectiveness, using the Central Bank Rate (CBR) to influence short-term money market rates.

“While it is challenging, it is possible for the country to maintain an inflation rate of less than 5.0 per cent if these factors are managed well,” Mr Patrick said.

The central bank in January adopted the interest rate-based monetary policy framework as a way of enhancing the effectiveness of monetary policy in the changing economic environment.

The forward-looking framework uses the Central Bank Rate (CBR) to influence the shortterm money market rates, which is then expected to impact longterm interest rates and ultimately affect inflation and output.

“The target range [of 3-5 per cent] is considered appropriate for sustainable economic growth,” Mr Patrick said.

Thus, the CBR is set consistent with the inflation forecast as the intermediate target, conducive to balanced and sustainable growth of the economy.

“BoT has already addressed risks associated with upcoming elections to ensure inflation stays within target.” Political stability is crucial for economic stability and low inflation.

Vertex International Securities Research and Analytics Manager, Beatus Mlingi, said political stability is a cornerstone for economic stability and low inflation. “Transparency, accountability and rule of law foster a conducive environment for economic activities,” said Mr Mlingi.

Under the interest ratebased monetary policy framework, the BoT steers the 7-day interbank cash market interest rate—the operating target variable—along the policy rate to achieve inflation and output objectives.

The 7-day interbank rate is considered stable and strongly related to the CBR. Normally, the inflation influences the setting of interest rates by the BoT, since, higher inflation typically leads to higher interest rates, affecting borrowing costs for businesses and consumers, and impacting economic growth.

High inflation can lead to social unrest by eroding the purchasing power of money, affecting low-income households disproportionately and increasing poverty.

Sustainable economic growth involves reducing dependency on a few sectors, promoting industrialisation and adding value in agriculture.

Investing in technology and innovation can increase productivity and reduce costs. Inflation impacts wage negotiations and salary adjustments and high inflation can lead to currency depreciation, affecting import and export prices.

Managing government spending and taxation is essential to avoid inflationary pressures. Global economic conditions also impact inflation.

“Stable supply chains are essential to control inflation, particularly for essential goods,” Mr Mlingi said.

Improving transportation and logistics infrastructure and encouraging domestic production can help reduce dependency on imports. Maintaining an inflation rate of less than 5.0 per cent is achievable if current initiatives continue.

Mr Muhingo said high inflation can lead to currency depreciation, affecting import and export prices, and overall trade balance.

“The government should also promote activities that cultivate foreign exchange such as tourism, mining and agriculture, while the central bank beefs up foreign reserves and intervene when necessary to sustain the value of the shilling,” Mr Muhingo said.

“While it is challenging,” Mr Patrick said, “it is possible for the country to maintain an inflation rate of less than 5.0 per cent if these factors are managed well.

Mr Mlingi seconded him saying “maintaining an inflation rate of less than 5.0 per cent in Tanzania through 2026 is achievable if the government continues its current initiatives.”

The Minister for Finance, Dr Mwigulu Nchemba, emphasised the government’s target to control inflation within the 3.0- 5.0 per cent range in the medium term.

Additionally, enhancing public understanding of inflation metrics and ensuring economic growth benefits all ‘wananchi’ are crucial for achieving these targets.