Dar es Salaam — Tanzania has been advised to sustain a tight monetary policy in 2012/13 to curb high inflation and bring it down to single-digit levels.
"In order to crackdown high inflation Tanzania should tighten monetary policy," the International Momentary Fund's deputy managing director, Mr. Naoyuki Shinohara said last week in a statement.
Tanzania's year-on-year inflation rate eased in May to 18.2%, from 18.7% in April this year. Neighboring Kenya and Uganda, inflation was driven up partly by high fuel and food costs. The Bank of Tanzania (BOT) intends to move to more active use of interest rates as a policy instrument. "The flexible exchange rate regime will ease the burden on monetary policy and help maintain adequate international reserves," Shinohara said.
Monetarist economists believe that monetary policy is a more powerful weapon than fiscal policy in controlling inflation. Monetary policy also involves changes in the value of the exchange rate since fluctuations in the currency also impact on macroeconomic activity such as incomes, output and prices.
EA's central bank governors agreed that inflation can only be contained if member states within the economic block can maintain a consistent level economic growth; with Rwanda acting as a bench mark for having been able to maintain its inflation at single digit levels. Rwanda's progress comes when most countries round the world, were facing significant levels of economic slowdown, the governors said recently, during the African Development Bank Policy dialogue, meant to discuss how to tame inflation in the region.
Tanzania's GDP growth in the first half of the 2011/12 fiscal year was 6.5%, unchanged from a year ago, the IMF's boss quoted by Reuters last week when approved the Standby Credit Facility (SCF) to Tanzania.
IMF last week approved $224.9 million SCF to Tanzania to help the country deal with any potential pressures on its balance of payments position from troubles facing the global economy. Tanzanian government cut its growth forecast for 2012 to 6.8%, from an estimate of 7%, due to a prolonged drought and chronic energy shortages.
The region could have to deal with the effects of any escalation of the debt crisis in the euro area from a position of weakness, after prices climbed sharply last year and its shilling currency weakened against the dollar, the IMF said.
However, the commercial bank report said the increased inflows of the greenback from agriculture exports, travel dividends and the central bank tight liquidity have strengthened the shilling against the dollar.