Villains: Inflation, depreciation - 2

What you need to know:

  • 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.

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…!

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