Experts: How government can keep inflation in check

What you need to know:

  • Economists say although the Monetary Policy Committee’s advice to BoT on liquidity is timely and in line with the government’s macroeconomic targets, an important step would be to address the source, namely rising import costs

Dar es Salaam. While awaiting coordinated monetary and fiscal efforts from the Bank of Tanzania (BoT) to tame inflationary pressure in the country, policies dedicated to improving domestic production can also help to curb rising inflation, economists say.

This comes as the country’s inflation rate reached a five-year high at 4.5 percent, compelling the Monetary Policy Committee (MPC) – which is chaired by the BoT governor – to advise the central bank to curb liquidity expansion in the remainder of 2022 in order to tame inflationary pressures from the demand side.

This inflationary pressure, according to the MPC, was a result of rising prices of imports, which will eventually affect the rate of annual economic growth.

Economists who spoke to The Citizen said although the decision could be timely and in line with the government’s macroeconomic targets, one significant measure would be to address the source which, in this case, is rising imports costs.

Rising import costs have been worsened by the ongoing war in Ukraine, which has affected the supply chain of commodities such as fertiliser, wheat, cooking oil and petroleum products.

Prof Haji Semboja of Zanzibar State University said focus can be on incentivising local production and industrialisation.

“By incentivising domestic investment and local industrialisation, we will be able to slash import costs and increase domestic supply, and thus put downward pressure on prices,” he said.

A professor of economics at the University of Dar es Salaam, Humphrey Moshi, shared similar sentiments.

He said there is an urgent need to reduce the level of imports to curb inflationary pressure.

“Boosting local production of products like sunflower, palm oil and wheat will shield us from global price shocks because we can be self-reliant, and reduce the enormous costs that we incur getting these commodities from abroad,” he said.

Official data shows that Tanzania’s fuel and lubricant imports are projected to rise by about 65 percent to $2.551 billion during the 2021/22 financial year from $1.547 billion in 2020/21.

Specifically, the BoT says in its Monthly Economic Review for July, 2022 that imports of white petroleum products surged to $2.447 billion during the year ending June 2022. This represented a 67.8 percent rise from $1.459 billion during the preceding fiscal year.

This was on account of both volume and price effects.

“The war in Ukraine has been a driving factor – adding on to the already rising energy prices which also led to higher prices of other commodities including edible oil, wheat grain and fertilisers,” the BoT says.

Similarly, the sum spent on wheat imports is projected to have risen by 90 percent to reach $291 million in 2021/22 from $153.1 million the preceding fiscal year.

The country is projected to have spent $236.6 million on fertiliser imports during the year ending June 2022, being a 53.6 percent rise from $154.1 million previously.

The challenges notwithstanding, Prof Semboja was of the view that should the BoT decide to deal with inflationary pressures by tweaking its monetary policy in a manner that would compel banks to raise their lending rates, the outcomes would be “catastrophic”.

“Should that be the option, the cost of borrowing will increase and reduce demand for money. The accepted logic is that this will lead to a reduction in consumption and investment, thereby cooling off the overheated economy,” he said.

Similarly, he said adding more costs to the public in terms of raising the cost of borrowing and any other form of taxation will not be effective as it may dampen economic activities.

“Considering the status of our economy, adding taxes or any costs would make the cost of living even more unbearable. Thus, an effective action plan would be to devise long term domestic production plans,” Prof Semboja said.

And according to Prof Moshi, cutting unnecessary spending in administration and government activities would also be a worthwhile decision to take.

“That way, it will help to reduce costs, and thus the saved money can be used to support key economic activities,” he said.