THEO MUSHI
ONE of the achievements of the Third Phase Government was to contain the
inflation rate from 36 per cent in 1995 to 4.5 per cent in 2004. This was
due to fight monetary policy through which the Bank of Tanzania controlled
the supply of money to the economy in consistent with projected economic
growth rates. Low and stable prices improve the standard of living of the
people because with the same amount of money they will purchase more goods
and services as the general level of prices fall.
Predictable prices as reflected by low inflation rate makes business
planning predictable and hence creates a good climate for attracting local
and foreign investment.
This is also the case with a stable exchange rate and recently the Tanzania
shilling has plummeted to Tsh1,300 to one US dollar, and is projected to
reach Tsh1,500 to a dollar in the next three months.
The budget and external deficits are also increasing. This means the
country has unfovourable balance of trade as its import are about US$4
billion on the average and exports are estimated at $2.8 billion. Since
grants and loans from industrialized countries are expected to decline due
to the financial crunch in donor countries then its likely the balance of
payments will continue to be unfavourable and register it deficit.
Since Tanzania exports of commodities like cotton, coffee, cashew nuts, and
horticulture have declined it means less is expected to be realised in
foreign exchange earnings and there will therefore depletion of
international reserves in the bank of Tanzania.
The problem is further compounded by decline in earnings from tourism as
tourist arrivals are expected to decline due to erosion of disposable
incomes in industrialised countries and increasing unemployment. Potential
tourists will have little to spend in travel abroad and they will opt to
stay at hence for their holidays.
Investors are comfortable with a small deficit in the external account and
reasonable foreign reserves because investors will be able to repatriate
profits and dividends realized from invested capital.
The budget deficit is estimated to be 3.5 per cent of Gross Domestic
Product since the 2009/10 budget targets to borrow from the banking system
to finance the deficit and this may be inflationary as money supply targets
to the economy may be exceeded.
Furthermore, Government borrowing from banks by using the Treasury bonds
will have an effect of ‘crowding out’ loans to the private sector which will
be unable to borrow and invest in various sectors of the economy. The cause
of the current double digit inflation is high food prices as there is a
scarily in the world and even imported food is highly priced and my lead to
‘imported inflation.’
High fuel costs lead to high transportation costs and this leads to high
food prices as most of the food consumed in large cities is transported form
upcountry. Food items carry a lot of weight in the consumer price index and
hence a big rise in price of food leads to a major increase in the average
inflation rate.
In the absence of macro economic stability there will not be large Foreign
Direct Investment flows to various sectors and thus will slow down the GDP
growth rate.
This is why the minister for financial Mustafa Mkulo has noted that the
growth rate will fall from 7.4 per cent (2008) to 5.6 next year but
estimates by International Monetary Fund put the projected growth rate at
merely three per cent.
With decline in exports and increasing import bill as a result of
depreciation of the shilling which will push high the prices of fuel,
inflation rate may rise and we may be leading for economic stagnation or
stagflation (low economic growth with high inflation rates).
The challenge of stimulating investment and economic growth is to restore
macro-economic stability. High rate of 8-10 per cent growth rte is needed
for growth and poverty reduction.
Therefore, the precondition of attaining high growth rate is not only the
economic stimulus of Tsh1.7 trillion announced by President Jakaya Kikwete
but ensuring sound macro-economic management. There is a need to contain
inflation to a level close or equal to that of major trading partners by
pursuing prudent fiscal and monetary policies.
Economic managers and policy makers should strive to reduce deficit in the
current account of the balance of payments and to increase exports
substantially in relation to imports with a view of reducing aid dependency
and debt.
Among the strategies to revamp the economy is the need to encourage public –
private sector partnership to invest in infrastructure, business training,
export and domestic marketing. There in a need to invest in quality
assurance training and establish modern quality testing centres and
laboratories.
Last but not least in the need to deeper financial sector reforms in order
to attain deposit rates that encourage savings and lending rates which lower
the cost of borrowing and narrowing the spread and hence encouraging
investments.
– Business Times