The post-pandemic era has led many countries to experience high levels of inflation. Except for China, which is currently in a deflationary, western power and emerging countries alike have been experiencing inflationary pressures that compelled central banks to apply specific monetary policies to monitor their economies in order to tame inflation.
Tanzania, which is the second regional power in East Africa after Kenya, has been experiencing low levels of inflation, unlike its neighboring countries. Indeed, in July 2023, the inflation rate was 3.3%, down from 4.4% in 2022. This is the lowest inflation rate in Tanzania since 2015.
The Bank of Tanzania (BOT) has been following a tight monetary policy in recent years, which has helped to keep inflation in check. The BOT has kept interest rates high and has limited the growth of the money supply. The BOT's monetary policy committee (MPC) meets every six weeks to review the economic situation and make decisions about interest rates. The MPC has been raising interest rates since 2021 in an effort to slow down economic growth and bring inflation under control.
The BOT has been also using other tools to implement its monetary policy, such as open market operations (OMOs) and reserve requirements. OMOs are the buying and selling of government bonds by the BOT in order to influence the amount of money in circulation. Reserve requirements are the amount of money that banks are required to keep in reserve with the BOT.
Another important factor to explain why inflation remains low in Tanzania is its foreign exchange reserves. Tanzania has a strong foreign exchange reserve position, which helps to stabilize the exchange rate and prevent imported inflation. As of March 2023, Tanzania’s foreign exchange reserves stood at $5.7 billion, which is equivalent to 5.5 months of imports.
Food security is another reason explaining why inflation remains fairly low in Tanzania. Tanzania is self-sufficient in food production, which helps to insulate the country from food price shocks. The country has a large agricultural sector and produces a variety of crops, including maize, rice, wheat, and beans.
The government of Tanzania has invested in agricultural infrastructure, such as irrigation systems, roads, and storage facilities. This has helped to improve the productivity of agriculture and reduce post-harvest losses. Furthermore, the Tanzanian government has also worked to improve access to markets for agricultural products. This has helped to increase the prices that farmers receive for their crops.
Lastly, low wage growth is another factor that contributed to a low inflation rate. Wage growth in Tanzania has been relatively low in recent years, which has helped to keep inflation in check. This is due to a number of factors, including the slow growth of the economy and the high unemployment rate. But it is also a problem because a slower growth of the economy puts downward pressure on wages, and a downward pressure on wages could lead to low productivity, which means that businesses are not able to afford to pay higher wages.
Inflation being low in Tanzania is a good economic problem to have because a low inflation rate indicates that consumers could afford more goods and services. But BOT shall avoid making the Tanzanian economy fall into deflation because deflation, although makes the price of everything more affordable, can still have serious negative effects over the long term.