2012

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Working Paper 163 - Food Prices and Inflation in Tanzania
26/12/2012 18:53
Working Paper 163 - Food Prices and Inflation in Tanzania
This paper presents an econometric model of headline Tanzanian inflation and its principal components for the period since 2000.  Inflation is modeled in terms of deviations from a set of ‘anchors’ reflecting long-run demand-side and monetary determinants, on the one hand, and supply-side and open economy factors on the other.  Five main conclusions derive from our analysis. In the last five years Tanzania, along with the other major economies of East Africa, has experienced a period of high and volatile inflation.  In mid-2008, year-on-year headline inflation edged above 10 percent per annum for the first time since the early 1990s, and while it dropped back to low single digits in 2009 it rose again sharply towards the end of 2010, reaching close to 20 percent per annum in the final quarter of 2011. Much of this rise in inflation and inflation volatility reflects developments in the global economy, most obviously the sharp rises in global food and fuels prices in 2008 and again in 2011. With food accounting for 51% of the consumption basket in Tanzania and energy and transport costs accounting for a further 9 percent each, these global developments may be expected to have a powerful impact on overall inflation, both directly and, in the case of energy prices, indirectly through the high share of transport and distribution costs in retail prices. First, money growth and hence the stance of monetary policy matters for inflation both in the long run and in the short run.  The transmission from the monetary stance, through aggregate demand, to headline inflation is principally through core inflation but not exclusively so; monetary or demand-side effects also feed food and fuel price inflation, particularly in the short run.  Second, however, the principal component of overall inflation -- food price inflation -- is predominantly driven by supply-side factors including both domestic agricultural output shocks and by the pass-through from world prices for food and fuel.  The inflation transmission from world food prices is, however, relatively weak and attenuated, and is much stronger when world prices rise than when they fall.  This is consistent with an environment in which retailers and distributions enjoy significant market power and are able to pass on price rises to consumers but to cushion their own margins when world prices fall. Third, the effect of domestic supply conditions on food price inflation points to the asymmetric effects of trade policy in Tanzania; while food imports appear to respond reasonably rapidly to domestic production short-falls, the capacity to export surplus food production is much more muted so that market adjustment in this case occurs through falling prices, other things equal.  This result has important implications for trade policy and production incentives in agriculture although, as noted below, a much closer analysis of cross-border prices is required before firm policy conclusions can be drawn. Fourth, headline inflation exhibits strong seasonality, consistent with weak price-stabilizing effects of trade and incomplete storage.  Non-food inflation is, by contrast, broadly non-seasonal.  Finally, prices in Tanzania in general are flexible, more so for the food and energy sub-components but even in the traditionally sticky-price domain of core inflation there is little evidence of inflation persistence overall.  Some channels of price adjustment are take time – notably the effects of monetary disequilibrium -- but in general inflationary shocks dissipate rapidly with half-live being little more than one month. The analysis points to three priority areas for further research.  First, a better understanding of the supply-side (cost-push) determinants of core inflation is required.  Second, and related, the role of movements in the nominal exchange rate remains poorly understood.  Once the effects operating through the pass-through from world food and fuel prices – and the role it plays in determining the equilibrium demand for money – there appears to be only a surprisingly weak independent short-run role for the nominal exchange on any of the principal components of inflation.  Finally, the concept of ‘world food prices’ used throughout this analysis needs to be revisited to reflect the impact of cross-border food prices, particularly in Kenya to the North and Zambia and Malawi in the South West of the country. At present, our models include measures of the deviation of domestic food and fuel prices from world price indices derived from the World Bank global commodities database.Read more
Working Paper 146 - Bank Financing to Small and Medium Enterprises in East Africa: Findings of a Survey in Kenya, Tanzania, Uganda and Zambia
26/03/2012 13:56
Working Paper 146 - Bank Financing to Small and Medium Enterprises in East Africa: Findings of a Survey in Kenya, Tanzania, Uganda and Zambia
Various studies have shown the contributions of SMEs to exceed 60 percent of total formal employment in the manufacturing sector in both advanced and developing economies. In Africa, the contribution of the SME sector to job opportunities is even more important with SMEs accounting for about three-quarters of the total employment in manufacturing (including the informal sector). In spite of the importance of the topic, relatively little research exists on the role of bank finance in SMEs around the world. This is partly due to the absence of comprehensive data on SME finance. Nonetheless, existing studies show that, contrary to the conventional perception that financial institutions shun SMEs, banks consider the SME segment strategically important. This paper contributes to the growing literature on SME finance. Its purpose is to shed light on current trends and practices in bank financing of SMEs in four East African countries, i.e. Kenya, Tanzania, Uganda and Zambia. The comparison among these countries is interesting because they are neighbours, they are all growing, emerging economies and they have implemented a number of financial reforms in recent years, with their banking systems becoming increasingly integrated. In particular, this paper forms part of a broader African Development Bank regional project on this topic, whose objective is to identify best practices in SME lending as well as constraints that impede growth in the SME finance market so as to draw relevant policy implications. The study uses tabulated questionnaires followed by on-site interviews with banks’ senior management. The format and the questions of the questionnaire were drawn from previous surveys developed for analysis in different markets and slightly adapted to cover topics not included in the previous surveys but which may have an impact on SME bank financing in East Africa such as micro-prudential regulation. The questionnaire solicits response to 90 questions divided in three broad analytical areas, which are described in detail in this paper. The first area deals with banks’ involvement in SME lending. The second area focuses on the determinants of banks’ involvement with SMEs such as corporate strategy, market structure, government policy and regulation. The third area attempts to understand how banks engage in lending to SMEs, with a special emphasis on the nature of their business models and risk management systems.   The study found SME segment to be of strategic priority to banks in the region. SMEs are considered a profitable business prospect and provide an important opportunity for cross-selling. Banks consider that the SME lending market is large, not saturated and with a very positive outlook. A number of obstacles are, however, constraining further engagement with the SME segment, including SME-related factors such as the lack of adequate information and collateral as well as their largely family-owned structures. Macroeconomic factors, business regulation, the legal and contractual environment, the lack of a more proactive government attitude towards the segment, some areas of prudential regulation and some bank-specific factors are also perceived to negatively affect the SME lending market in the sample countries. Even so, the study shows, banks have adapted to the environment and developed mechanisms to cope with it through innovation and differentiation. Most banks have dedicated units serving SMEs, to which they offer largely standardized products though the degree of personalization is growing. And albeit advanced transaction technologies based on scoring and risk-rating systems remain relatively underdeveloped, banks are gradually automating their risk management frameworks to achieve efficiency gains. On the whole, the findings are broadly consistent with similar studies in other geographical contexts and those suggesting that the strategic interest of East African banks in the SME segment can make an important contribution to closing the “SME financing gap” in the region compared to other developing countries. The growing engagement of formal finance institutions and SMEs should be encouraged through reforms to soften the negative impact of obstacles hindering the involvement of banks SME financing.Read more
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