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May 22, 2012

CCM Take On Inflation In Tanzania: Some Comments

By Honest Ngowi
        Economics made simple , +255 754 653 740
The National Executive Committee (NEC) of the ruling party Chama Cha Mapinduzi (CCM) has issued a statement on the high inflation rate in Tanzania. Among other places, the NEC take on inflation have been reported in The Citizen on Wednesday. Generally, the ruling party directed the government - whose President is the party’s chairman - to undertake several actions to reduce inflation. April 2012 inflation stands at 18.7 per cent after marginally dropping from 19 per cent in March 2012. Some of the directives given to the government by NEC are commented on in this article.

Inflation-CCM popularity nexus
The NEC correctly diagnosed the direct and negative relationship between inflation and CCM popularity. Even without using the rather complicated scientific techniques as those in econometric branch of economics, it is clear that the higher the inflation rate the lower the CCM popularity. Inter alia (among other things) this is because in one of its slogans CCM government had promised good life for every Tanzanian.

By and large, good life is a function of cost of living. When cost of living as measured by inflation goes up then good life as measured by the quantity and quality of goods and services consumed becomes a distant dream. Therefore CCM’s NEC is correct in linking the party’s declining popularity to inflation.

However, inflation is just one of the many variables in the complicated non-linear equation of the determinants of the party’s popularity.

Fiscal measures
CCM directed the government to review income tax and VAT imposed on important food items like sugar. While this fiscal measure of reducing inflation is good, the core issue is addressing fundamentals that trigger high food prices. Tax is a cost driver component that becomes relevant when goods and services have been produced. Therefore there is a need to reduce production costs that will stimulate more production.

Subsidized agricultural inputs
NEC’s directive to the government to make sure that the subsidized agricultural inputs are benefiting majority of farmers is very relevant. The author of this article is accomplishing a research on issues related to smallholder farmers. Voices from the field indicate clearly that the subsidized agricultural inputs system (voucher system) is problematic and needs to be fixed. Inter alia, the inputs (seeds and fertilizer) have at times reached few targeted beneficiary too late, in inadequate quantity and at times at adulterated quality. In one researched village, it is less that 50 per cent of farmers who got the subsidized inputs in the 2011/12 season. The inputs are provided as one voucher per household even when that household has over one independent farmer. It is provided for just one acre of land even when the farmer is cultivating well over one acre of land.

The most troubling voices from the field in regards to subsidized inputs are delayed payment of agricultural inputs suppliers by the government. Some respondents indicated that they have not been paid up to billions of shillings after supplying the inputs in the 2011/12 season. They clearly indicated that they will not tender for supplying subsidized inputs this year because of the outstanding payments. Should this happen, food output will decline in the 2012/13 season thereby hiking inflation.

National Food Reserve System
NEC directed the government to improve the National Food Reserve System and warehouses. Whereas it is good to have food reserves and food warehouses, these are not the core and priority measures in addressing inflation due to food in Tanzania. Without adequate food production, the food warehouses will store nothing. By and large, the core problem that needs to be fixed in Tanzania’s food production is to increase production and productivity. Allocating more funds to build storage facilities and procure food for the national reserve is a lesser priority compared to enhancing food production and productivity.

Large scale farming
NEC’s directive for the government to increase its capacity in large scale farming especially through SAGCOT is somehow wrong. Most of large scale farming is likely to be for commercial/cash crops. Good as it is, large scale farming is likely to turn some of the agricultural labour that is currently producing food into casual labourers in commercial farms/plantations. If no proper balance is maintained, this poses a danger of reduced food production for domestic consumption. It has been argued that about 70 to 80 per cent of food production in Tanzania is done by smallholder farmers in general and women in particular.
If there is a group that needs support in the bid to increase food production to reduce inflation in Tanzania then it is the smallholder farmer rather than the large scale one. Among other things, the emerging trend for some large scale food producers is food production for export and production of food crops for biofuel. This implies that domestic production may increase but not necessarily contributing to more food availability in the local markets. By extension, this implies that food prices may not necessarily decline as a result of more large scale food production.

Missing structural issues
Whereas the CCM’s NEC move on taming inflation is commendable despite of the identified shortfalls above, it totally missed some of the key drivers, movers and shakers of inflation in Tanzania. Nothing was said on electricity which is among the major structural issues that define, move and shake inflation in Tanzania. At 24.9 per cent in April, energy inflation that is largely associated with unstable availability and rather high tariff is among the major variables in inflation equation that should not have been missed by CCM.

Another key structural issue driving inflation that was left out by the ruling party’s NEC is agricultural infrastructure in its broadest sense. This captures especially rural and feeder roads and bridges that transport farm inputs and outputs. Agro-infrastructure includes also irrigation infrastructure of all kinds as well as physical market infrastructure including communication and information technology (ICT) for market information in broadest sense possible.

A free piece of advice
Good politicians are not necessarily good experts in a number of areas such as economics. It is a free advice to political parties in general and their NECs in particular to solicit inputs of experts in key national issues so as to have better understanding of issues. .
The author is a senior lecturer, researcher and consultant in Economics and Business at Mzumbe University Dar es Salaam Business School.


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