This experienced short-run growth, but a long-run

This Chapter presents dynamics of inflation in Tanzania from 1967 to 2009 by using annual data. The chapter has the following subsections. Section 2.1 presents brief introduction on the dynamics of inflation in Tanzania. Section 2.2 concentrates on growth phase while section 2.3 analyzes the shock phase; section 2.4 will shade some lights on the adjustment stabilization phase and finally section 2.5 presents the conclusion.  2.1 Growth Phase 1961-1973 The economic history of Tanzania is usually divided into three phases, that is, growth phase, shocks phase and stabilization phase. The growth phase covers the period immediately from independence 1961 to 1973.   During the 1960’s and ’70’s, Tanzania implemented policies of self-reliance and protectionism, which entailed state taking the leading role in national development. With the Arusha declaration of January 1967, central planning and government control became the central economic approach with variety of strategies such as extensive compulsory villagization (ujamaa), nationalization, and price controls with the ultimate aspiration of achieving self-reliance for its people.  8  This strategy of centralized economic planning proved successful initially until the early 1970’s and the country experienced short-run growth, but a long-run economic downturn. Most of the problems were much related to poor policies and structural weaknesses (Wangwe S.M. and et al 1998).  During the growth phase, the growth rate was averaged at 4.4 percent. During this period inflation averaged 4.4 percent while the growth rate of broad money was fairly low at an average of 20 percent. For the whole period the currency remained strong with an official exchange rate standing at an average of 7.1 Tanzanian Shillings per unit of US $. As presented in table 2.1. Table 2.1: Performance of Selective Macroeconomic Indicators in Tanzania 1967-1973 Indicators 1967 1968 1969 1970 1971 1972 1973 Total Average Inflation (in percentage) 1.7 4.6 2.0 3.2 4.7 7.6 10.5 34.3 4.9 GDP growth rate (in percentage) 4.0 5.2 1.8 5.8 4.2 6.7 3.1 30.8 4.4 M1 growth rate (in Percentage) 1.8 1.8 21.3 19.9 21.6 12.1 17.2 95.7 13.7 M2 growth rate (in Percentage) 24.8 15.9 25.4 22.7 17.7 16.8 16.7 140.0 20.0 M0 growth rate (in Percentage) 3.3 3.3 14.5 35.3 20.5 21.8 -0.2 98.5 14.1 Nominal Exchange Rate (Tshs/US$) 7.14 7.14 7.14 7.14 7.14 7.14 7.02 49.9 7.1  Source: Own calculations based on Bank of Tanzania’s various issues of Economic and Operational Reports.  2.2 Shocks Phase 1974-1985 The Shocks Phase started from 1974 to 1985. In the economic history of Tanzania shock phase was marked by severe macro-economic imbalances from the first oil price shocks in 1973-1974, severe drought 1973-1974, followed by commodity boom 9  in 1976-1977, a second oil price shock in 1979, and the war with Uganda under Idd Amin in 1979. All these events led to economic chaos and uncertainties.  These problems acted as a signal for the country’s movement towards more marketoriented. In fact it is documented that in the attempt to block conditionality reforms prescribed by the World Bank and the IMF, Tanzania tried its own structural adjustment programs in early 1980s (the National Economic Survival Program (NESP) in 1981-1982 and the Structural Adjustment Program (SAP) in 1983-1985).  During the Shock phase period, Inflation rose from 19.2 percent in 1974 to 32.3 percent making an average of 22.1 percent higher than that during the growth phase. The economy continued to experience low rate of growth averaging to 2.4 percent. However the broad money (M2) and official exchange rate remained at the average of 22.1 percent and 9.7 Tanzanian Shillings per Unit of a US $ as presented in table 2.2. Table 2.2: Performance of selective Macroeconomic indicators in Tanzania 1974-1985 Indicators 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 Total 4AVG Inflation (%) 19.2 26.5 6.9 11.6 6.6 12.9 30.3 25.7 27.6 29.7 35.4 32.3 264.7 22.1 GDP growth rate (%) 2.5 5.7 6.6 0.4 2.1 2.4 3.0 -0.5 0.6 -2.4 3.4 4.6 28.4 2.4 M1 growth rate (%) 24.5 23.7 22.7 19.7 7.0 52.9 27.9 7.9 27.2 12.2 -0.1 23.0 248.6 20.7 M2 growth rate (%) 22.2 24.3 23.7 20.2 12.6 46.9 26.9 12.4 25.6 17.8 3.7 29.0 265.3 22.1 M0 growth rate (%) 26.6 15.7 18.0 14.9 22.5 39.1 29.3 7.1 42.2 2.6 27.8 21.5 267.3 22.3 NER (Tshs/US$) 7.13 7.37 8.38 8.29 7.71 8.22 8.20 8.28 9.28 11.14 15.29 17.47 116.8 9.7  Source: Own calculations based on Bank of Tanzania’s various issues of Economic and Operational Reports.                                                   4 AVG is the Average of each  of the indicator throughout the specified period of time 10   2.3 Adjustment-Stabilization Phase Adjustment-Stabilization Phase runs from 1985 to 2009. The reform period is notable for the economic recovery programmes supported by the International Monetary Fund (IMF), World Bank and the donors.   The key reforms that the government pursued vigorously with donor community support were the macroeconomic and structural reforms involving both fiscal and monetary reforms as well as sound exchange rate policy aiming at raising output growth, bringing down the rate of inflation, restoring external balance and improving social services.  One of the impacts of the reforms were exchange rate liberalization that gradually led to a rapid depreciation of the Tanzanian shilling to an average of 983.3 Tshs in the last phase of 2000-2005. Despite some improvement in the growth rate averaging 3.9 percent in 1985-1989, 4.2 percent in 1990-19994, 4.3 percent in 1995-1999, 5.9 percent in 2000-2005, and 6.5 in 2006-2009, the trend of rate of inflation in Tanzania shows a downturn in the period 1985-2009 from an average of 31.4 percent to an average of 8.9 percent. Broad Money supply continued to decline from growth rate average of 31 percent in 1985-1989 to 19.7 in 200-2005 and 19.9 in 2006-2009. The trend of major Macroeconomic variables in Tanzania can be clearly shown by the aid of table 2.3 and figure 2.1.   11   Table 2.3: Performance of selective Macroeconomic indicators in Tanzania 1985-2009 Indicators 1985-1989 1990-1994 1995-1999 2000-2005 2006-2009 Inflation (in percentage) 31.4 28.9 17.2 5 8.9 GDP growth rate (in percentage) 3.9 4.2 4.3 5.9 6.5 M2 growth rate (in Percentage) 31 33.2 15 19.7 19.9  Source: Own calculations based on Bank of Tanzania’s various issues of Economic and Operational Reports.   Figure 2.1: Growth rate of key determinants of Inflation in Tanzania 1967-2005    2.5  Conclusion The chapter has provided the glance of how inflation and other variables, that is Growth domestic product growth, broad money growth, narrow money growth, 12  reserve money growth and exchange rate have trended during the growth phase, shock phase and stabilization-adjustment phase. Analysis of the trend of inflation in Tanzania gives mixed results in different regimes. Rate of inflation in Tanzania was low during the growth phase with an average of 4.9 as shown in table 2.1, thereafter, inflation reached an average of double digits during the whole period of shock phase partly due to structural bottlenecks such as severe drought and oil price shocks of 1973-1974 and 1979, and later dropped to single digit in the last phase of adjustmentstabilization phase.   

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