|By Al-amani Mutarubukwa|
The Citizen Reporter
Dar es Salaam. Economic growth will slow down to three per cent this year as the government adopts a conservative monetary policy to tame inflation, which would stifle financing to the private sector.But the minister for Finance and Economic Affairs, Mr Mustafa Mkulo, says the prediction is an overreaction to a situation the government has vowed to keep under control. The government had predicted economic growth of 7.2 per cent this year.
The Macroeconomic Country Forecast report, issued yesterday in Dar es Salaam by the Netherland-based Currency Exchange Fund (TCX), says the economic slowdown this year will also be caused by weak demand for commodities on the world market due to economic difficulties. But growth will be on the rebound in the next few years on the back of a mining industry expansion, according to the report.Mr Mkulo said the government was optimistic that Tanzania’s economy was on the right track and things could not worsen in a matter of months.
He told The Citizen in a telephone interview: “We wouldn’t want to believe such pessimistic projections…the growth for the 2011 third quarter was 6.4 per cent. This affirms that even this year we will see a real growth of 7.2 per cent as projected by IMF and World Bank.”
Presenting the report at a meeting attended by the business community and representatives of the banking and energy sectors in the city yesterday, TCX Senior Vice President Harad Hirschhofer said the slower growth would be due to the tight monetary policy the central bank adopted recently to curb the depreciation of the shilling and soaring inflation.“The central bank will continue taking policy measures that are aimed at reducing the amount of money in the economy this year,” Mr Hirschhofer said. “This will result in higher lending rates.”
In a key policy measure to save the free fall of the shilling, the central bank raised the cash reserve requirement on government deposits from 20 per cent to 30 per cent in October last year.
It also reduced the core capital of foreign exchange dealers from 20 per cent to 10 per cent to facilitate the release of more forex into the market.
The TCX, whose primary role is to absorb the currency risks of leading global financial institutions active in frontier markets, also invests in long-term emerging market currency and interest rate derivatives on an uncovered basis, managing its risks through diversification across all regions and countries of the developing world.
The fund has so far hedged a total of $45 million (Sh72 billion) in some 10 concluded deals with seven different investors mostly in microfinance projects in Tanzania.
It has also conducted the macroeconomic country outlooks for another 16 countries including Kenya, Rwanda, Uganda, Ethiopia and Nigeria.
It forecasts that Tanzania’s inflation will speed up, fuelled mainly by rising electricity tariffs.
“The monetary policy will need to remain tight in order to ease the depreciation pressures and bring inflation back to the single-digit target,” said Mr Hirschhofer. The statistics office said last week that Tanzania’s year-on-year inflation rate fell slightly to 19.7 per cent in January from 19.8 per cent a month before, driven lower by energy prices.
Last year’s drought hit hard the supply of hydroelectric power stations, forcing the government to resort to emergency power sources, which has in recent months raised oil imports and widened the current account deficit.
The state-run power utility, Tanesco, has since requested a 155 per cent power hike, but the Energy and Water Utility Regulatory Authority only approved a tariff increase of 40.25 per cent from January 15.
“The rising tariffs will affect inflation directly via their share in consumer price index and indirectly due to higher costs of mainly manufacturing production,” the report says.
The shilling, which is appreciating moderately, is likely to return to its depreciation trend, according to the report, depending on the inflationary pressures triggered by food and energy situations in the country.
Speaking at the meeting, the IMF Senior Resident Representative, Mr John Wakeman-Linn, said the country could see a stable exchange rate in a decade to come, when it starts exporting gas and earning most of its revenue through the industry.
Tanzania has of late become a beehive of oil and gas exploration activity, with firms making positive discoveries.
Encouraged by previous commercial gas discoveries in Songosongo and Mnazi Bay in the Ruvuma basin to the south, investors have poured massive amounts of money into exploration.
In recent years, Tanzania‘s economy has grown at rates higher than those in many countries in the sub-saharan region.The economy grew by seven per cent in 2010, up from the six per cent the previous year.
In 2010, the national GDP was Sh32.3 trillion. With the population of 41.9 million and taking into account the population growth rate in that year, the per capital income stood at Sh770,464 compared to Sh693,185 in 2009.