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Villains: Inflation, depreciation - 2

Friday October 23 2020

The ink had barely dried on my piece last Thursday (October 15, 2020) on ‘inflation’ and ‘depreciation’ when I received three responses from readers questioning the questions I raised in that article.

In responding to the readers’ responses… Sorry; I seem to jump the starter’s gun here!

In that article, I frankly admitted that whatever it is that contributes to the steep and relentless rise in living costs with the passage of time dumbfounds me.

I gave the example of how I was able to live comfortably on a monthly salary of Sh870 in early 1963 – something which I can no longer do today on a hundred times bigger salary!

I was able on that ‘peanuts’ pay to also pay rent (Sh187/50 a month) for a two-bedroom flat in Upanga West – a middle-income residential area second in luxury only to Oyster Bay in those halcyon days of yore. Also, I was able to comfortably save enough money with which I bought cash on the barrelhead a roadworthy Morris Minor open-hood saloon (registration number ‘DSR-500’) for Sh2,500 in late 1963!

Today, 57 years later, that measly sum can only pay for a half-litre of lager…!

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A colleague at the nearby workstation told me as I was penning the article that ‘inflation’ and ‘currency depreciation’ were the two villains of the piece!

The two hydra-headed economics monsters colluded, connived, complotted, collaborated and otherwise conspired to wreak havoc on, and play merry hell with, the value of the national currency vis-à-vis consumer prices.

Oh, really! How, prithee, does this explain the fact that a pound sterling exchanged for only Sh20 in those glorious days.

On October 21, 2020, the British pound commanded a formidable exchange rate of Sh3030.98: a 15,154.9 percent rise in 57 years!

The exchange rate for the Yankee (US) dollar had also risen from Sh7.20 in 1963 to Sh2,320 on October 21 this year: a 32,222 percent rise in 57 years…

This abominable abnormality, we’re told, is largely the result of currency depreciation, defined as ‘a fall in the value of a currency in a floating exchange rate system. This occurs due to factors such as weak economic fundamentals (chronic current account deficits, high inflation rates, etc.); interest rate differentials, political instability, “or risk aversion among investors.”

Could there also be acts of fraudulence and/or political machinations resulting in these two villains?

[But, oh! We are also told that currency depreciation is NOT always a bad thing – as it can, for example, improve a country’s export competitiveness, eventually improving its trade deficit… Boy!]

On the other hand, inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over time.

In the event, prices rise, thus making a unit of currency buy less that it did previously – in effect, a decrease in the purchasing power of a nation’s currency, and a rise in the cost of living.

Tanzania’s inflation rate was 36.15 percent in 1984 (under President Nyerere); 35.83 percent in 1990 (under President Mwinyi); 20.98 percent in 1996 (under President Mkapa), and 16 percent in 2012 (under President Kikwete).

[For more details, just Google ‘Tz Inflation rates historical data;’ /www.macrotrends.net/countries/TZA/tanzania/inflation-rate-cpi>]. This October, the inflation rate had fallen to 3.86 percent under President John Magufuli – a significant drop over the years. But, why hasn’t there been a corresponding drop in living costs vis-à-vis/in tandem with the arguably colossal drop in inflation, pray?

Why NOT, indeed? I ask you… Yes; YOU!

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Mr Lyimo is a socio-econo-politi-cal commentator based in Dar es salaam

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