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Governor has good cause for cheer
2005-12-14 08:01:08
By mireny john
The Bank of Tanzania (BoT) governor, Dr. Daudi Ballali, must be smiling to himself, or maybe even doing a little victory dance.
All Ballali had to do last week was to revise his economic growth predictions from the conservative 6.2 percent to a hefty 8 percent per annum.
Ballali is upbeat that strong macroeconomic stability and stringent money supply policy will keep at bay any upward inflationary pressure. At any rate, he doesn’t want to see general prices moving up beyond 5 per cent at any time soon.
That means BoT, believing that it is truly autonomous as all central banks are supposed to be, shall continue to exercise restraint on unjustifiable printing of cash, as well as applying its legal levers to ensure deposits in commercial banks are not overexposed.
However, economic reality tells us that the growth effectiveness of this direction depends on other economic parameters which might not be within the immediate reach of BoT’s powers.
But, as the epicentre of national cash, controlling the supply of money into the national economy stabilizes prices.
From the late 1970s to the mid 1990s, over-printing of currency was responsible for fuelling inflation to almost hyper-levels (30 percent) in 1995.
The scenes of people stashing packs of notes into their socks were common, though the packs could buy very little in real terms.
Life became very difficult for business planners, for making predictions based on current prices became a nightmare. And, in a general scenario of rising prices, it is the poor people who suffer most, not the rich who can pay higher prices without feeling too much of the brunt.
Single digit and predictable inflation, also makes banks feel secure when it comes to determining interest rates and maturity periods for loans.
Under normal circumstances, low levels of inflation are set to stimulate both investment and encourage savings arising as balances from consumer demand.
From credit growth to retail sales, the trend would be one of moderation in consumer spending.
Definitely, the dividends of stringent monetary policy pursued since the mid 1990s are indisputable. The lesson here is that the power of the central bank shouldn’t be underestimated.
It’s hard work being a central banker. Credibility is everything, because you’re only as good as your word.
So far the Bank has done a stellar job. It has managed to keep inflation within the target band for ten consecutive years.
However, to suggest that monetary policy does not take other developments into consideration in projecting growth rates is to misunderstand the nature of the inflation-targeting framework.
This does not make sense — the Bank cannot target inflation for its own sake.
So, economic experts must ensure that both monetary and fiscal policies dovetail in a manner which creates synergies for more and more stability.
Since the main objective of any monetary policy is to ensure too much money doesn’t chase too few goods, it is equally important to tame deflation.
Prolonged deflation can easily lead to a slump, and for an import-dominated economy like ours, it might be difficult to devise home-grown policies able to provide a quick cure for sluggishness .
The imperative for policy convergence is historically a hard one to achieve because, institutionally, the mentors are separated technically. However, it can be done, and it has been done elsewhere.
One option for ensuring convergence is dynamically achieved, the deployment of think tanks is the common practice elsewhere.
This strategy complements other public efforts for ensuring convergence.
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