15 January 2013

Tanzania: BoT Suceeds to Tame Inflation

Photo: futuradosmil/Flickr
Tanzanian money.

THE fall of inflation rate has been one of the success stories that the Bank of Tanzania (BoT) has recorded largely due to the application of both fiscal and monetary policies.

There has been a general concern from the public over the fall of consumers' purchasing power largely due to higher prices of goods and services.

Food contributes about 60 per cent of the average change of prices has remained one of the variables to be addressed.

The BoT interventions through the monetary tightening stance contributed significantly to containing inflation that jumped to double digits to nearly 20 per cent in 2011. Headline inflation rate was for the eleventh consecutive month recorded a further decline to 12.1 per cent in November, from 12.9 per cent in October largely due to slow change of food prices.

According to the National Bureau of Statistics (NBS), the slowing down of food and energy costs, the major fundamentals which drive up the change of the country's inflation. The NBS recently said there were a number of variables for the slow descending rate of inflation compared to other East African countries including policy issues.

"Slow pace of the declining inflation rate can also be explained by other variables such as exchange rate, but mainly monetary policy issues," said the NBS. Tanzania's inflation rate is expected to ease in 2013, after having jumped well above its target in 2011/12 and into double digits as a result of higher food prices.

The Central Bank close follow-up made the economy to be resilient to shocks and is expected to remain buoyant, with its Gross Domestic Product (GDP) growing in 2012/13, well above the regional averages.

The BoT concerted efforts to contain the adverse effects of inflation have been commended by the International Monetary Fund (IMF) for the prudent management especially tightening monetary stance.

"The planned tightening of monetary policy is appropriate in view of the remaining inflationary pressures. The authorities are committed to taking additional measures if needed to attain the targeted decline in inflation," said the IMF Deputy Managing Director and Acting Chairman, Mr Naoyuki Shinohara.

The remarks came following the IMF Executive Board's discussion on Tanzania that completed the Fifth Policy Support Instrument (PSI) Review and First Review Under the Standby Credit Facility (SCF) for Tanzania.

However, BoT tight monetary stance was without negative effects as it led to the flow of credit to the private sector, which the engine of the economy. For example, according to the BoT monthly economic review for November last year shows that the annual growth of extended broad money dipped to 11.1 per cent compared to 21.1 per cent recorded in the corresponding period in 2011 largely due to tight liquidity in circulation.

"Deceleration in the growth of extended broad money supply contributed largely to the contraction of the net foreign assets of banks, slow down of net government borrowing from banking system as well as credit to private sector," stated the BoT report.

In completing the SCF review the Board made available for disbursement an additional 57 million US dollars (about 91.2bn/-), bringing total resources under the arrangement to 114 million US dollars (about 182.4bn/-). Mr Shinohara said the overall macroeconomic outlook remains favourable, with buoyant growth and declining inflation and that continued tight fiscal and monetary policies are crucial for securing sustainability.

"The budget for 2012/13 appropriately balances the country's development and social spending needs with the debt-stabilizing objective," he added. To preserve the fiscal consolidation path and avoid a build-up of arrears, any revenue shortfalls would be offset by cutbacks in recurrent and non-priority capital expenditures while safeguarding critical social spending.

An action plan is being finalized to address the financial challenges facing the power utility, preventing costly power outages and large quasi-fiscal losses. "Tanzania's large current account deficit and related vulnerabilities call for readiness to adjust policies in the event of external shocks, with a view to preserving macroeconomic stability and keeping the programme on track," he said.

"The floating exchange regime would continue to provide helpful flexibility in this regard," he added. The central bank monthly economic review for November last year shows that the current account recorded a deficit of 3,761.1 million US dollars compared with 3,602.2 million US dollars recorded in the corresponding period in 2011.

The widening of the current account deficit is mainly due to increase in imports that outweighed the impact of the increase in export of goods and services. The Board also approved the Tanzanian authorities' request for a waiver of non-observance of the continuous assessment criterion on the ceiling on external non-concessional debt contracted or guaranteed by the government.

The staff judged that the non-observance would not materially affect the country's debt sustainability. The Board further approved the precautionary 18-month SCF arrangement in July 2012 in an amount equivalent to 228 million US dollars (about 364.8bn/-).

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