In its July 15, 2011, press release, the National Bureau of Statistics (NBS) released the annual headline inflation rate for Tanzania for the year ending June 2011. It indicated that based on the June 2011 Consumer Price Index (CPI), the inflation rate has reached a double digit figure of 10.9 per cent compared to the 9.7 per cent figure recorded in May 2011. The double digit inflation was not unexpected given the state of the economic variables that determine movements of general price level.
Causes of the new inflation rate
The 10.9 per cent inflation rate is a result of movements of prices of various goods and services whose average is the new cost of living rate. There are three main contributors into the increase in the general price level that is under discussion in this article.
Housing, water, electricity, gas and other fuel inflation is 18.8 per cent while inflation due to furnishing, housing equipment and routine house maintenance is 14 per cent. Food and none-alcoholic drinks inflation is 14 per cent. The double digit inflation will have many and far-reaching economic implications as partly outlined in what follows.
Eroding the weak currency
The shilling purchasing power will deteriorate more due to inflation. The Sh100 in September 2010 was worth Sh86.54 implying that fewer baskets of goods and services can now be bought with Sh100 compared to about a year ago. This weakening of the shilling makes its acceptability, credibility and quality more questioned. Its ability to perform the core functions of money will be reduced.
The functions include that of store of value – one cannot store value in a currency whose value is declining. Other functions of money include transaction and speculative functions. All these get frustrated with higher inflation rate.
Interest rates may increase
As outlined in the immediate last article in this column, inflation is among the bases for setting interest rates by captains and titans in the financial sector. The higher the inflation, the higher the interest other things remaining constant (ceteris paribus). Interest rates may not increase immediately due to the 10.9 per cent inflation rate. However, one should not expect to see them declining any time soon in a free market economy.
The inflation impact on interest rates will have many and far-reaching implications, including reduced access to capital, less investments, less production of goods and services, less employment, less incomes, less poverty reduction and by extension less economic growth.
Many groups will lose
A number of social-economic groups are vulnerable to movements of a number of economic magnitudes including inflation. Those with fixed incomes that are not inflation-adjusted as well as lenders with no inflation-adjusted interest rates – majority of them in the informal money lending markets – will suffer losses.
Higher wages
To cope with increasing cost of living due to inflation, there may be a call for higher pay in the world of works. Real, living wages may be demanded and correctly so by trade unions. These are wages needed in financing at least basics like shelter, food, clothing, education, health and transport inter alia.
Budget implementation
If the earlier pieces of advice in this column on the need of preparing radical budgets including factoring in inflation was not followed, the double digit inflation will frustrate budget implementation. All cost items that were budgeted for when the process began many months ago will be substantially high even before the budget funds for 2011/12 are released.
We are likely to see a mini-budget with rather huge request for extra funds after the first half of the 2011/12 financial year if we are lucky or before it if otherwise. The worst scenario will be one of having huge deficits thereby leaving many expenditure posts uncovered and the long list of electoral promises undelivered.
Challenge to the EAC monetary union
Inflation is among the macro-economic convergence criteria in the East African Community Monetary Union project. Inflation in all the five EAC partner states of Tanzania, Kenya, Uganda, Burundi and Rwanda has to converge around five per cent.
This is highly unlikely by the unrealistic and very ambitious magic date of 2012. In Kenya inflation is around 18 per cent, in Uganda it is about 14 per cent while in Rwanda and Burundi it is around eight per cent. Lowering these rates to the required convergence of five per cent by the pre-determined 2012 date is quite a tall order even if establishing a monetary union is a process rather than an event.
Some ways forward
In order to escape from the double digit inflation challenges, there is a need to address its causes where possible. Tanzania’s inflation is more structural rather than monetary. It is due to short supply of goods and services than due to too much in circulation. There are needs to fix the structural causes of inflation.
These include dependence on rain-fed agriculture, solving transport infrastructure, solving the electricity crisis and saving the depreciating shilling in relation to the dollar.The real solution to double digit inflation as is the case for many other challenges in Tanzania, including electricity is walking the talks and operationalizing the many beautiful documents full of solutions.
The author is a lecturer at Mzumbe University Business School |
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