Joel's Research

i
IMPACT OF INFLATION ON AGRICULTURAL PRODUCTION: CASE OF
COFFEE PRODUCTION TANZANIA 1980-2010
By
Chilambo, Joel.
2610/T.2010
A dissertation Submitted in Partial Fulfillment of the Requirements for the Degree
of Bachelor of Arts in Economics of the University of Ardhi.
Ardhi University.
Ardhi University
School of urban and Regional Planning
P.O.Box 35176
Dar Es Salaam
June 2013

ii
CERTIFICATION
The undersigned certifies that he has read and hereby recommends for acceptance by the
University of Ardhi, a dissertation entitled: “Impact of Inflation on Agricultural
Production: Case Of Coffee Production Tanzania 1980-2010”, in Partial Fulfillment of
the Requirements for the Degree of Bachelor of Arts in Economics of the University of
Ardhi.
Signature
_____________________
Mr. Temu, D.
Date _________________________

iii
DECLARATION AND COPYRIGHT
I, Chilambo, Joel, declare that this dissertation is my own original work and that it has
not been presented to any other University for a similar or any other degree award.
Signature:______________________

iv
AKNOWLEDGEMENT
Gratefully, much thanks to Lord God who created the livings and non-livings for His
Mercy upon on strengthening my effort and provision of understanding throughout the
working on this task. Secondly I would like to express my gratitude to my supervisor Mr.
Temu D for his guidance, patience and encouragement on the way to accomplish this
task.
Also special thanks to my colleague of UWATA Mabibo hostel; Peter Mwandendi,
Patrick Saukiwa, Moses Mwalyolo, IsayaMkandawile, Ronald Wikence, Huruma
Michael, Adela Mafumiko, Diana stambuli to mention and all UWATA members for
their full support.
I would like to express my gratitude to my beloved mother AdelinaChilambo, without
forgetting Flora Chilambo, Joseph Chilambo and the whole Chilambo family for their
pleasing hearts in my education progress. Any mistake in this desertation, however,
remains entirely mine.

v
DEDICATION
This dissertation I dedicate to the following my Mother AdelinaChilambo, her sister
Flora Chilambo with their brother Joseph Chilambo for their endeavors, encouragement
and sacrifices they made to my achieving successes.
To Mr. and Mrs. Chieti, Mr. and Mrs. Gideon Mwangalika, Mr. and Mrs. Peter Mgao,
Mr. and Mrs. Michael Mwakasole, Miss Joyce Katanga, Miss Vumilia Kilave, Miss
FarajaChilambo and Veronica Chilambo for their full support.
To my grandfather Felix E Chilambo with my grandmother Filomena A Luoga who spare
their life and effort for my success.
To Jesus Christ and the whole Church of Christ.

vi
ABSTRACT
This study is empirically investigate the impact of inflation on crop production
specifically on coffee production in Tanzania from 1980-2010. The study uses time series
data, employing Co integration and Error Correction Mechanism (ECM). The empirical
results show that there is insignificant impact of inflation on crop production in Tanzania;
this indicates that inflation is either not good indicator to measure inflation in Tanzania.
The study concludes that though insignificant impact of inflation on crop production, the
government should assure long-term economic stability in the economy for effective
production in the economy.

vii
TABLE OF CONTENTS
CERTIFICATION........................................................................................................... II
DECLARATION AND COPYRIGHT .........................................................................III
AKNOWLEDGEMENT.................................................................................................IV
DEDICATION.................................................................................................................. V
ABSTRACT.....................................................................................................................VI
LIST OF TABLES ............................................................................................................X
CHAPTER ONE ............................................................................................................... 1
INTRODUCTION............................................................................................................. 1
1.0 Background................................................................................................................... 1
1.2 Statement of the Problem.............................................................................................. 7
1.3 Objectives of the Study................................................................................................. 7
1.3.1 Specific Objectives .................................................................................................... 8
1.4 Research Question(S).................................................................................................... 8
1.5 Significance of the study............................................................................................... 8
1.6 Organization of the Study............................................................................................. 8
CHAPTER TWO .............................................................................................................. 9
AN OVER VIEW OF INFLATION, AGRICULTURAL PRODUCTION AND
COFFEE PRODUCTION IN TANZANIA .................................................................... 9
2.0introduction.................................................................................................................... 9
2.1.0inflation Trend Before and After Economic Reforms of 1980s ............................... 10
2.1.1measures Taken by the Government to Control Inflation......................................... 11

viii
2.2 Agricultural Sector Performance Since Independence and Current Situation............ 12
2.3.0 Coffee Production Trend and Development Since Independence ........................... 14
2.3.1 Factors that Influence Coffee Production in Tanzania ............................................ 14
CHAPTER THREE........................................................................................................ 15
LITERATURE REVIEW .............................................................................................. 15
3.0 Introduction................................................................................................................. 15
3.1 Theoretical Literature Review .................................................................................... 15
3.2 Empirical Literature Review....................................................................................... 17
CHAPTER FOUR........................................................................................................... 20
METHODOLOGY ......................................................................................................... 20
4.0 Introduction................................................................................................................. 20
4.2 Model Specification.................................................................................................... 20
4.3 Measuring Inflation..................................................................................................... 21
4.4estimation Procedure.................................................................................................... 22
4.4.1 Unit Root Test.......................................................................................................... 22
4.4.2 Error Correction Model............................................................................................ 22
4.5 Data Type And Source................................................................................................ 23
CHAPTER FIVE ............................................................................................................ 24
EMPIRIC RESULTS AND THEIR INTERPRETATION......................................... 24
5.0 Introduction................................................................................................................. 24

ix
5.1 Statistical Properties Of Data...................................................................................... 24
5.1.1 CORRELATION ANALYSIS BETWEEN INFLATION AND COFFEE GROWTH RATE ..... 25
5.1.2 Test for unit Root (Stationary of Data).................................................................... 25
5.1.3 Test for Co Integration............................................................................................. 26
5.2.1 Error Correction Mechanism ................................................................................... 26
5.2.2 Empirics of study..................................................................................................... 27
5.3 Measures Taken by the Government to Control Inflation in Tanzania; ..................... 27
5.4 Other Factors than Inflation that Influence Coffee Production in Tanzania............... 28
CHAPTER SIX ............................................................................................................... 30
CONCLUSION, POLICY IMPLICATION AND RECOMMENDATIONS ........... 30
6.1 Main Findings ............................................................................................................. 30
6.2 Policy Implication and Recommendations ................................................................. 30
6.3 Limitation of the Study and Recommendation ........................................................... 31
REFERENCES: .............................................................................................................. 32
APPENDICES................................................................................................................. 35

x
LIST OF TABLES
Table 1Inflation trend …………………………………………………………...….7
Table 2 Coffee trend…………………………………………………………….....15
Table 3 Statistical properties of data ………………………………………….…..25
Table 4 Correlation table ………………………………………………….….......26
Table 5 Unit root test table ………………………………………………….….....26
Table 6 Unit root test in 1st
difference …………………………………..…….…..26
Table 7 Co integration table ……………………………………………………….27
Table 8 Error Correction Mechanism (ECM) table ………………………............27
Table 9 Regression results table ……………………………………………..……28

xi
LIST OF ABBREVIATIONS
A.D.B African Development Bank
AD Aggregate Demand
ADF Augmented Dickey Fuller Test
AFCP Annual Finance Credit Plan
AS Aggregate Supply
B.O.T Bank of Tanzania
BFIA Banking and Financial institution Act
CC Currency in Circulation
DD Demand Deposit
CPI Consumer Price Index
ECM Error Correction Mechanism
ECT Error Correction Term
FEP Foreign Exchange Plan
GDP Gross Domestic Product
I.M.F International Monetary Fund
M2 Broad Money Supply two
NBS National Bureau of Statistics
OMO Open Market Operation
PPI Producer Price Index
SUA Sokoine University of Agriculture
TCB Tanzania Coffee Board
URT United Republic of Tanzania

1
CHAPTER ONE
INTRODUCTION
1.0Background
Agriculture is the foundation of Tanzania’s economy: contributes almost half of national
income, ¾ of export, 80% of employment. Larger area is cultivated by hand hoe about
70% of cultivated area, 20% by ox plough and 10% by tractor (National website, 2012)
Tanzania is heavily dependency on agriculture account for 26% of GDP according to
2007/08 agriculture sample census compared to 34.8% as reported by 2003 census, this
tries to show declining trend of agricultural production.
Agriculture is not doing well due to low investment in the sector, this results to poor
functioning of the sector, banking sector provision of finance to the sector is to narrow,
from 1994-1998 only 7% (IMF, 1995) of total lending by commercial banks went to
agriculture.
Tanzania’s agriculture depend much on rainfall, small portion of area is under irrigation,
there is limited use of inorganic fertilizer than organic fertilizers this is according to
Tanzania agriculture sample census-2007/2008, This is then led to low productivity of the
sector compared to 2002/2003.
Cash crop production in Tanzania includes the following crops; coffee, cotton, cashew
nuts, sisal, pyrethrum, tea cloves, horticultural crops, oil seeds, spices and flowers. In
case of coffee there are two types of coffee which dominant in Tanzania, they are grown
in different areas such asMbinga-Ruvuma, Mbeya, Kagera, Moshi
Coffee production has a tendency of fluctuating, 1989/90 only 53,420 metric tons were
produced, 2000/01 0nly 58,240 metric tons of coffee were produced, 2000/03 only
50,000 metric tons of coffee were produced (Sokoine University of Agriculture). This
shows slight improvement of coffee production in comparison of effort inverted to it.

2
Coffee production contribution to cash crop production is averagely declining for almost
eleven years from 1997-2008 has declined to 6% (URT 2011/21) share on cash crop
production.
Coffee production is among major export crop, and it contribute income to about 400,000
small households who produce about 95% of total coffee while the rest 5% is produced
by estates, (SUA, 2005). Therefore coffee and cotton are major export cash crops in
Tanzania.
In exportation earning, coffee exportation has significant contribution to other crops in
most coffee exportation country, by 2010 it account about $16.5 billion in the global
economy, and Brazil and Vietnam lead the production of coffee in the world (URT,
2011/21).
Monetary policy and operation in Tanzania are under control of the Bank of Tanzania
which was established under the Bank of Tanzania act of 1965 to control all traditional
function of central banking function.
By 1967 through Arusha declaration the function of Bank of Tanzania become inactive
since all privately commercial banks were nationalized, this made all financial matters
and services to be under control of central planning such as the Annual Finance and
Credit Plan (AFCP) and the Foreign Exchange Plan (FEP) control monetary policy and
operation under government directives, this brought macroeconomic imbalances which
escalate inflation and pull down economic growth.
In 1978 the Bank of Tanzania act of 1965 was amended and Bank of Tanzania were
given its power back and was added with other task in which it was empowered to inspect
and supervise banks and financial institutions which were formerly not included in the
Bank of Tanzania act of 1965.

3
In the late 1980, the Tanzania government under take economic reforms following
macroeconomic instability of 1970s and 1980s. Reform aim to eliminate direct control by
the government over economy and introducing market economy. There was liberalization
of financial sector. Banking and Financial institution Act (BFIA) 1991 was introduced
which allowed private sector in financial sector in Tanzania.
Liberalization of financial sector in the economy followed with the enacting of Bank of
Tanzania Act of 1995 which unpin Bank of Tanzania from multiple objectives to single
objective of price stability where various indirect instrument were introduced such as
Open Market Operation, Repurchase Agreement, Discount Window and Lombard
Facility, Foreign Exchange Market Operation, Statutory Minimum Reserve Requirement
and Moral Sasuation.
Liberalization of financial sector and the use of monetary policy has significant important
role for the success of Tanzania economy whose inflation has declined from 30% in
1990s to lowest level, also economic growth shows successful achieves.
Despite these achievement by Bank of Tanzania, still it faces challenges such as external
shocks which influence its objective, shortcomings in land laws which limits banks to
extend credit to private sector, absence of credit reference system and delays to issue
national identity limit development of financial sector.
Economic, financial reforms and monetary policies in Tanzania has helped to reduce
inflation from over 30% prior 1990 to the current inflation rate, these reform and policies
helps Tanzania in achieving macro and micro economic goals such as economic growth,
real GDP growth for the last decade had increased by 7% (B.O.T, 2011) and this is
attributed by increase in commercial banks which liquidate capital in the economy which
accelerating economic growth and development in Tanzania.
For the sake of increasing coffee production and improving the quality of coffee
Tanzania has launched the Board of Coffee called “Tanzania Coffee Board (TCB)” to

4
make the sector better off, the board aim to increase production from 50,000 metric tons
annually to 80,000 tons annually by 2016, and reaching 100,000 metric tons by 2021,
also aim to improve coffee quality from 35% premium coffee to 70% of total production
(URT, 2012).
Africa produces 12% of global produced coffee, while Tanzania produces less than 1% of
total coffee produced globally; by 2011 it shares only 0.6% of total volume of global
production. In the global market there are two types of coffee, which dominate the
market; Arabica and Robusta (URT, 2011/21).
In Tanzania Arabica growing regions are Mbinga-Ruvuma, Mbeya, Arusha, Kilimanjaro
while the major Robusta producer is Kagera, other coffee producing region are Tanga,
Iringa, Morogoro, Manyara, Mwanza and Mara.
Mbeya region is considered as the first mild Arabica producing region with
approximately 12,000 to 15,000 tons annually, it is an expanding coffee growing region
with about 51,000 hectares of coffee, though this region lack improved varieties planting
materials.
Mainly Tanzania produces three types of coffee; washed mild Arabica which present
about 55% of total coffee produced, sundried Robusta 40% of total coffee and sundried
and natural Arabica only 5% of total produced coffee.
Inflation in Tanzania is termed as “The first enemy” by the bank of Tanzania; inflation in
the country is volatile, high rate inflation by December 2011, which went high to 19.8%
due to food and energy prices (ADB, 2011). By 2004 inflation rate was 4.6% and 6.2%
by 2000(Nathan, 2005 and Korindo, 1997)
Inflation rate in Tanzania tend to fluctuate over time even though it has declined by 30%
prior to 1990 currently situation. By 1985 inflation rate was 33.3%, 1990 it was 35.9%,

5
1995 it was 27.4%, by 2000 it was 5.9%, by 2005 it was 4.4% by 2010 it was 7.2%.
These all shows volatility of inflation in Tanzania (B.O.T, 2001)
To curb inflation in Tanzania to suit economic environment through central bank, uses
various approach and instruments, like financing government deficit through open market
operation, introduction of liquidity papers by the central bank as tool of withdrawing
liquidity in the economy to reduce inflation (B.O.T 2011).
Since independence government has passed various strategies and programs to boost up
agriculture sector which were integrated within five years development plans, after
Arusha declaration 1967 agricultural policy environment were characterized by the
government-led intervention (U.R.T)

6
objective of price stability and various indirect instrument were introduced such as Open
Market Operation, Repurchase Agreement, Discount Window and Lombard Facility,
Foreign Exchange Market Operation, Statutory Minimum Reserve Requirement and
Moral Sasuation.
Consider table 1 below;

7
1.2Statement of the problem
Given the fact that Tanzania promote agriculture through various programs, like
“KILIMO KWANZA” through subsidizing agricultural inputs like fertilizers, pesticides,
tractors and other chemicals, still crop production fluctuates.
1989/90 0nly 53,420 metric tons, 2000/01 only 58,240 metric tons of coffee, 2000/03
only 50,000 metric tons of were produced (Sokoine University of Agriculture, 2005).
This shows a slight improvement of coffee production compared to effort done.
Average contribution of coffee to cash crop production is declining, for eleven years
average contribution of coffee to cash crop production from 1997-2008 has declined to
6% share on cash crop production. Given inflation volatility in Tanzania which influence
cost of production there are possibilities for macroeconomic issues to have an influence
on coffee production
1.3Objectives of the study
Overall objective of the study is to investigate impact of inflation on cash crop production
with the following specific objectives

8
To examine the trend of coffee production fluctuation in relation to inflation trend from
1980-2010
To examine measures taken by the government to control inflation in Tanzania
To determine other factors than inflation that influence coffee production in Tanzania
1.3.1Specific Objectives
1. Examining the trend of coffee production fluctuation in relation to
inflation trend from 1980-200
2. Examining measures taken by the government to control inflation in
Tanzania
3. Determining factors influencing crop production in Tanzania.
1.4Research question(s)
1. What are the effects of inflation on agricultural production especiallyon
cash crop production?
2. Which measures taken to control inflation in Tanzania?
3. Which factors influencing crop production in Tanzania especially crop
production?
1.5Significance of the study
The study shall provide insight to policy makers on provision of agricultural policies that
sustain agricultural production even in inflationary environment, since inflation may be
of external influence than shock from within.
1.6Organization of the study
This study is organized into six chapter, in chapter one is an introduction, chapter two
presents an over view of inflation, agricultural production and coffee production in
Tanzania, chapter three literature review on both theoretical and empirical literature
review, chapter four present the methodology of the study, chapter five presents empiric
results and their interpretation and chapter six present conclusion, policy implication and
recommendation.

9
CHAPTER TWO
AN OVER VIEW OF INFLATION, AGRICULTURAL PRODUCTION AND
COFFEE PRODUCTION IN TANZANIA
2.0Introduction
objective of price stability and various indirect instrument were introduced such as Open
Market Operation, Repurchase Agreement, Discount Window and Lombard Facility,

10
Foreign Exchange Market Operation, Statutory Minimum Reserve Requirement and
Moral Sasuation.
Table of inflation
2.1.0Inflation trend before and after economic reforms of 1980s
Price stability were formerly in stable position, by 1970 it was in lowest level and single
digit about 2.4%, but as the time went on thong became unexpected where inflation by
1973 inflation mounted to double digit about 10.4% and reaching 27% by 1975 though it
then sharply declined by 1976 to 6.3%, the situation change by 1980 where inflation rose
to 30.8% and 36.1% percent by 1984. (BOT,2011)
Hope were shown in 1987 in which inflation rate dropped to 29.9% from 36.6% of 1984,
things went bad in 1990 were inflation rose to 35.9%, but hope mounted in 1996 were

11
inflation dropped to 21%, and the year 1998 was more hopeful were inflation declined to
12.9%(BOT, 2011).
1999 was the year of good hope in Tanzania’s economy since it regain the experience of
single digit inflation about 7.9%, which were not experienced since 1978 which it was
7.0%, it therefore assure the move to the compass of successful economy, it further
dropped to the lowest level to 4.6% by 2002(BOT, 2011).
The year 2008 shows signs of declining and poor functioning of macro
economicvariables where double digit inflation started persisting in which it was 10.3%
and rose to 12.2 by 2009 and was sharply declined by 2010 to 7.2%(BOT, 2011).
2.1.1Measures taken by the government to control inflation
Bank of Tanzania (BOT) has given authority and power to control over money supply
and all monetary issues in Tanzania, aim is to alleviate and controlling general price level
(inflation rate) in the economy which may economic growth and development relative to
other economies.
Tanzania through its central bank uses various deeds to control inflation among the deeds
includes; refinancing policy, minimum reserve requirements, open market policy, foreign
exchange intervention and other deeds (BOT, 2011).
To control inflation in the economy money supply is controlled to large extent especially
M2 that is broad money supply that include currency in circulation and demand deposit,
broad money supply two (M2) is used since it has direct relationship with inflation rate.
Indirect instruments are used by Bank of Tanzania to control inflation in the economy;
these include open market operation (OMO), standing facilities (Lombard and discount
window, repurchase agreement transaction, statutory reserve together with requirement
and moral sasuation.(BOT, 2011)

12
2.2 Agricultural sector performance since independence and current situation
Agriculture is the foundation of Tanzania’s economy: contributes almost half of national
income, ¾ of export, 80% of employment. Larger area is cultivated by hand hoe about
70% of cultivated area, 20% by ox plough and 10% by tractor (National website, 2012)
Tanzania is heavily dependency on agriculture account for 26% of GDP according to
2007/08 agriculture sample census compared to 34.8% as reported by 2003 census, this
tries to show declining trend of agricultural production.
Agriculture is not doing well due to low investment in the sector, this results to poor
functioning of the sector, banking sector provision of finance to the sector is to narrow,
from 1994-1998 only 7% (IMF, 1995) of total lending by commercial banks went to
agriculture.
Tanzania’s agriculture depend much on rainfall, small portion of area is under irrigation,
there is limited use of inorganic fertilizer than organic fertilizers this is according to
Tanzania agriculture sample census-2007/2008, This is then led to low productivity of the
sector compared to 2002/2003.
Cash crop production in Tanzania include the following crops; coffee, cotton, cashew
nuts, sisal, pyrethrum, tea cloves, horticultural crops, oil seeds, spices and flowers. In
case of coffee it is grown in the following areas Mbinga-Ruvuma, Mbeya, Kagera, Moshi
Basic data signifies in agricultural production, food crops has higher production trend
than other agricultural output, this has been the case since much efforts and priorities that
have been put forward toward food production than other non-food production.
In Tanzania, agricultural production is dominated by small holders who to the large
extent is comprising largely with women, though significance of their participation in
agriculture sector is poorly recognized, the government has provided much strategies to

13
improve agriculture to smoothly run agriculture by enacting various policies to boost
agriculture, suchas “Kilimo Kwanza” and as much as more agricultural priorities.
Tanzania government has set various development policies aiming at sustaining
agricultural sector, this is done through provision of conducive and feasible environment
for agriculture to run, in 1997 the livestock policy was introduced, cooperative policy
1998 and national investment policy, and national trade policy 1997. All these aim to
create viable environment for both local and foreign investors to invest in agriculture
sector, paving a way to international market for agricultural products with quality
improvement.
Cooperative development policy 1997, his policy aim at provision of economical
environment that people associate in resource exploitation, this aim at communally use
resources to promote competitive production in agriculture sector for social and
economic development in Tanzania community.
These policies shows significance and responsibility of the government to agriculture
sector as accelerator and facilitator of agriculture through provision of information,
training experts and empowering women on participation in agriculture sector, shows
implementation of specific strategies to boost up agriculture.
Agriculture sector has positive progress, it has significance position in the economy, and
it is among major contributor in Tanzania economythrough export of its products, from
2002-2005 it contributed about 60% of foreign exchange, it also accounts about 45% of
gross domestic product in Tanzania economy.
Despite huge effort by the government and agriculturalist still agriculture has low
productivity; this low productivity is attributed by erratic rainfall in different time and
places, sometime low rainfall experience leads to drought, high rainfall leads to

14
2.3.0 Coffee production trend and development since independence
Coffee production by 1980 was almost low about 761,000 bags of coffee were produced
and increasing sharply by 1981 to 1,060,000 bags of coffee. And it declined to 796,000
bags by 1985 and it rose to 962,000 bags by 1989. Production declined by 1991 to
763,000 bags and then rose up to 992,000 bags by 1993, it declined to 680,000 bags by
1995 and then it increased to 1,070,000 bags by 2005 and sharply declined by 2006 to
610,000 bags, it rose up to 1,150,000 bags by 2009 and was sharply decline by 2010 to
610,000 bags which marked the lowest production ever since 1980(Indexmundi,2013).
Consider coffee production trend from 1980-2010 in table 2 below;
2.3.1 Factors that influence coffee production in Tanzania
Production of coffee in Tanzania faces various difficulties (challenges); Poor
implementation, monitoring and evaluation of projects and activities in key programs
especially on agricultural programs and projects, repeated bad weather such as rain
vagaries together with technological backwardness.

15
CHAPTER THREE
LITERATURE REVIEW
3.0 Introduction
This chapter describeshow different literatures explain relationship that exists on inflation
and production especially agricultural production and how does inflation affect
production. The section comprises two sections in section one it presents theoretical
literature review and in section two of the chapter present empirical literature review.
3.1 Theoretical literature review
According to Tobin (1965), inflation is beneficial to output growth since it lower interest
rate, and therefore opportunity cost to invest, as this increase the capital-labor -ratio and
therefore increase output, therefore according to Tobin inflation is motivation to investors
through increasing profit to their business.
Inflation, since it lowers purchasing power of the currency it then have negative impact
and correlation to output growth, inflation ruin output growth, since as inflation increases
it decreases capital stock. In turn this leads lower capital stock power to investors
therefore reduces productivity in the economy. This is suggested by Stockman (1981)
Gylfason and Herbetsson (2001), they proposed inserting money balance into money
function, as proxy of the financial depth on production and they found negative
relationship between inflation and growth through the following; lowering of interest rate
and hence saving rate and level of saving, it reduces efficiency by driving wage between
the return to real and financial capital, and finally lower financial depth and in turn output
production in the economy.
Paal and Smith (2001), argued that, the relationship between money growth and real
growth is characterized by threshold, at low growth rate of money, banks perceive small
opportunity cost in detaining reserves instead of lending fund for investment and growth.

16
When interest grows beyond threshold level, then credit rationing badly affects lending,
reducing capital and accumulation. Due to reduced capital and low accumulation this
lowers productivity and production (growth). This suggests negative correlation between
inflation and growth of output.
According to Keynesian theory, which combine aggregate demand (AD) and aggregate
supply (AS), the theory has in details explain the relationship between inflation ad output
growth, the theory suggests negative short run relationship between inflation and output,
but not the case in the long run, meaning no permanent tradeoff this is according to
Keynesian theory, Dornbusch (1996).
This is due to the fact that, aggregate supply in the short run slope up ward than vertical
and hence any change of aggregate demand shall effect output and price in the economy,
this hold when any factor that drive inflation and output have short run effect and not
long run effect.
M Keynes argues that inflation fluctuates value of currency and hence distorts
relationship between creditors and debtors, this distortion accommodate low growth
through low investment to low production.
Milton Friedman the monetarist argue that inflation is monetary phenomenon resulting
from higher supply of money than the rate of economic growth (production), this pull up
price level through creating higher demand than supply in the economy. Therefore due to
Friedman’s explanation inflation and output production has negative relationship in the
economy.
Inflation hurts production (growth) in the economy since it increase cost of production
(inputs) such as wages, raw materials and hence may reduce capacity of production
(Atmand, 2007). Inflation may be caused by action of government to print too much
money which in turn is less to the economic level of the economy (Mankiw, 4th
edition)

17
Despite various proposed concerning inflation and growth relationship, but inflation has
negative and harmful to growth, except for low inflation rate has positive relationship,
even though literature theories cannot tell how much each influence the other.
3.2 Empirical literature review
P. S Saunders (1996) realized negative impact of inflation toward agricultural
productivity, higher inflation reduces productivity of agriculture and hence production.
High inflation rises up the cost of agro-equipment and agro-chemicals and hence reduces
productivity in the sector. The study employed VAR model for econometric analysis.
United states of America by 1973 experience fall in production of agricultural
production, this was attributed by high oil price, this suggest the contention that inflation
has adverse effect on agricultural production especially crop production in any economy
(D. G. Jonson, 1980). Therefore inflation such harmful thing to agricultural production, it
then therefore have to be controlled.
High inflation and more inflation uncertainty motivates low productivity hence output
growth, therefore according to Stilianos et al (2001) suggest measures that leads to stable
price level should be encouraged in order that output production is boosted up. When
inflation is increasing and there are uncertainty predictions on its trend then producers
become less confident on their production and hence they cut production to solve such
uncertainty.
According to Kim and Willet (2000), they found that inflation rate tend to harm
production hence higher production is characterized with low to moderate inflation while
higher inflation result to low production in the economy. Unlike developed countries
which less affected by inflation, developing countries should have strategic plans to
control inflation as they highly affected.

18
Bullad (1999) and Temple (2000) they found that inflation has no relation in the long run
but only in the short run. And they based on unit root testing. In short run increase in
inflation affect negatively but in long run an increase or decrease in inflation has no any
impact to output production. Therefore inflation control should be to reduce inflation to
steady state that motivate producer through increasing profit.
Gylfason and Herbertsson (2001) found no linear relationship between inflation and
growth in which they found inflation from 5% to 50% lead to declining in real growth
rate. They found this nonlinear relation hold that inflation below 10% has positive
relation with real growth rate but above 10% has negative relation with output.
Chari et al (1996), inflation and real growth has negative relation where an increase in
inflation rate from 10% to 20% lead to decrease in growth by 0.2% to 0.7%, hence
inflation should be controlled since it harm growth. Therefore single digit inflation is at
least suitable for output growth in the economy.
Arai et al, (2004) found no relation between inflation and growth through the use of panel
data for 115 countries over the period from 1960-1995 so they conclude inflation is not
harmful to growth in the economy, it is therefore no need to control inflation to protect
output production in the economy.
IMF staff papers 1960, experience no relationship between inflation and production it
specify Latin America by 1950s and 1960s their inflation rate were in double digit but
still growth was respectable, there fore inflation and growth has no relation in the
economy.
In 1993 Fischer found inverse relationship between inflation and growth in his study
“The role of macroeconomic factor in economic growth”. According to Fischer higher
inflation rate associates with low production and low inflation associates with increasing
growth.

19
A study by M. Bruno and W. Easterly in 1996, they found positive short run relationship
between inflation and growth, also they found long run inverse relationship between
inflation and growth. In short run increase in inflation motivate producers through
increasing profit, while in long run it is harmful to producers since it affect input price
hence rising cost of production.
Any policy that protect agriculture sector from effects of inflation in long run and short
run they should be encouraged as they will lead to sustainable increasing agricultural
production (Mesike et al 2010). There fore policies that defend agro-chemicals and agro-
equipments from higher price reduces agricultural cost of production and hence higher
agricultural production.
Inflation and output growth has weakly correlation while the change in output gap bears
significant bearing to the case of Fiji-Brazil, (Hanif, 2004). Inflation increase has
littleimpact to output growth.
In a study conducted in Iran shows that monetary policy reform has significant impact on
food prices and domestic agricultural production, the reason is that these policies has
implication on consumption pattern and have serious implication on agricultural
production (Shahnoush et al, 2009).
Despite various proposed concerning inflation and growth relationship, but inflation has
negative and is harmful to growth, except for low inflation rate has positive relation, even
though literature theories cannot tell to how much each influence the other. There is a
need to conduct an empirical study in case of Tanzania.

20
CHAPTER FOUR
METHODOLOGY
4.0Introduction
This study investigate impact of inflation on agricultural production especially crop
production specifically on coffee production Tanzania from 1980 – 2010. In this study
time series data is used.
Two variables are used in this study inflation (π) and coffee output (Y), they are analyzed
in terms of their percentage to come up with their relation in econometric modeling.4.1
Testable hypothesis
This study is going to test two variables; inflation rate and coffee output growth rate
using Co integration and Error Correction Model.
Hypothesis that are going to be tested;
Null Hypothesis (HO): Inflation has negative impact on coffee out put growth
Alternative Hypothesis (HI): Inflation no impact on inflation
4.2 Model specification
This study aim to find the influence (impact) of inflation on growth of agricultural output
especially in long run, the study shall employ co integration to examine long term
relationship between inflation and coffee production since 1980 to 2010, it is almost
thirty one years (31 years).
According to Engle-Glenger (1987) two stepused to examine co integration among
variables in time series data using the following co integration regression;
Yt= β1 + β2πt + εt ………………… (i)

21
This regression is known as co integrating regression showing long-term equilibrium or
relationship between the two variables and it can be expressed as;
εt = Yt – β1 – β2πt ………………………….(ii)
Where;
Yt– Output (Annual Coffee production)
β2– Co integrating parameter
β’s – Parameters
πt – Inflation at time t
ε – Error term.
4.3 Measuring inflation
Inflation can be measure in various ways, whose one way is through Consumer Price
Index (CPI), consumer price index measure changes of price of common basket goods
and services such as food, clothes, gasoline, building materials. In Tanzania these data
are compiled by the National Bureau of Statistics (NBS), they are compiled on basis of
monthly and annual data.
There also is Producer Price Index (PPI), measures the selling price change that producer
is able to get for a goods or services. National Bureau of Statistics (NBS) also compiles
this.

22
Gross National Product (GNP) deflator, which measure the price changes of all final
goods and services produced in the economy.
Typically there are two types of inflation; Demand pull inflation, this occur when demand
of goods and services exceed the supply of goods and services and cost push inflation
occur when cost of production is rising leads to increase in general price in the economy.
4.4Estimation procedure
This study aim to investigate impact of inflation on crop production, specifically coffee
production in Tanzania. Study shall is using time series data
4.4.1 Unit root test
Time series data normally tend to have unit root problem that is they are not stationary.
Using data with unit root problem may bring spurious results in data analysis. To avoid
spurious results and inaccurate analysis we test for unit root using Augmented-Dickey
Fuller test.
When unit root is detected then we correct it so that data to become stationary and then
we run co integration among variables using Johansen Co integration to estimate long run
relationship among variables.
4.4.2 Error Correction model
Since co integration shows only long run relationship among variables but cannot show
short run relationship we may correct this di equilibrium using Error Correction
Mechanism.
Co integration shows only long-run relationship among variables but do not explain
short-run equilibrium since may appear.

23
Therefore error term from regression equation (i) as equilibrium errorand using such error
term to describe the short run behavior of output (Yt). Error Correction by Engle and
Glenger can correct this equilibrium when two variables are co integreted, this is shown
as;
ΔYt = βo + β1πt + β2μt-1 +εt……………(iii)
Where;
Δ- First difference operator
β2- I s a parameter that describe to what extent or how quickly shall output Yt restore to
the equilibrium
μt-1 = Yt – β1 – β2πt –One period lagged value of error term from the co integrating
regression equation (i)
Therefore this error correction mechanism (ECM) shows that output Yt depend on
inflation πt and dis equilibrium error term μt-1 = Yt – β1 – β2πt
4.5 Data type and source
This study use time series data in its analysis, it uses secondary data from various sources
such as Bank of Tanzania, websites such as www.indexmundi.comand other documents
from various sources.

24
CHAPTER FIVE
EMPIRIC RESULTS AND THEIR INTERPRETATION
5.0 Introduction
This chapter presents and discusses empirical findings and analysis of the study. The
chapter presents the following statistical properties of data, correlation analysis among
the variables, test for unit root, test for co integration, error correction mechanism
(ECM), empirics of study, comparison of the study with past studies, measures taken by
the government to control inflation in Tanzania, other factors than inflation that influence
coffee production in Tanzania.
5.1 Statistical properties of data
The statistical properties of data, the data follows normal distribution
Table 3 Statistical properties of data
COFFEE INFLATION
Mean 2.635161 19.53871
Median -5.580000 21.80000
Maximum 74.84000 36.10000
Minimum -47.83000 4.700000
Std. Dev. 28.67824 11.43170
Skewness 0.590960 -0.072499
Kurtosis 2.920823 1.382217
Jarque-Bera 1.812473 3.407733
Probability 0.404042 0.181979
Observations 31 31

25
5.1.1 Correlation analysis between inflation and coffee growth rate
Correlation analysis tends to look relationship among the variables, that is to how much
and to what direction does each variable influence the other. This study shows there is
negative association (correlation) between inflation and coffee production. Consider the
following
Table 4 Correlation table
Variable Inflation Coffee
Inflation 1.00000 -0.128219
Coffee -0.128219 1.0000
5.1.2 Test for unit root (Stationary of data)
Augmented-Dickefuller test for unit root shows that;
At level;
Table 5 Unit root test table
Variable ADF test No of lag State
Inflation -.0991895 0 Non stationary
Coffee -11.98026 0 Stationary
Statistics shows inflation is not stationary at level while coffee is stationary. To avoid
spurious results we should run the first difference for inflation to make it stationary.
In first difference
Table 6 Unit root test in 1st
difference
Variable ADF test No. of lags Difference State
Inflation -6.026872 1 I(0) Stationary
Inflation becomes stationary in first difference.

26
5.1.3 Test for cointegration
Co integration measures the long-run relationship among variables. The test shows there
is a long-run relationship show there is long-run relationship among variables. This
relationship has shown at 5% significance level.
Table 7 Co integration table
Likelihood 5 Percent 1 Percent Hypothesized
Eigenvalue Ratio Critical Value Critical Value No. of CE(s)
0.863690 82.10330 15.41 20.04 None **
0.567565 24.31138 3.76 6.65 At most 1 **
*(**) denotes rejection of the hypothesis at 5%(1%) significance level
L.R. test indicates 2 cointegrating equation(s) at 5% significance level
5.2.1Error Correction Mechanism
Error Correction Mechanism (ECM) shows short-run and long-run relationship among
variables since co integration shows only long-run relationship. Statistics shows that -
1.795% of coffee deviation from long-term equilibrium adjusted annually.
Statistics shows there is significant long-run relationship since Probability value for the
error correction (RESID01(-1)) term is less than 0.05, but there is insignificant
relationship in the short run since probability value for coffee is greater than 0.05.
Table 8 Correction mechanism table
Variable Coefficient Std. Error t-Statistic Prob.
C 2.355227 3.836146 0.613956 0.5444
D(INFLATION) 0.381716 0.842063 0.453310 0.6539
RESID01(-1) -1.795716 0.145633 -12.33041 0.0000

27
Note: RESID01(-1) is Error Correction Term (ECT)
5.2.2 Empirics of study
The study shows that inflation has negative impact to coffee production, rise of inflation
reduce coffee production, though this the study shows this impact is insignificant which
shows that inflation is either not good indicator to influence coffee production in
Tanzania.
Table 9 Regression results table
C 8.919932 6.138455 1.453123 0.1569
INFLATION -0.321657 0.241665 -1.331006 0.1936
The results shows inflation is insignificant, this true and shows inflation only cannot
explain inflation on its own there are other variables that explain coffee production which
are discussed in section 5.4.
Though the truth is that inflation affect coffee production in the long run but in short run
significant impact of inflation to coffee output this is just because of the reason that once
coffee is grown and on harvest stage inflation cannot affect yield since it has already
grew. But in the long run inflation has an ability to reduce coffee production as it
influence cost of agro equips, agrochemicals, cost of transport, cost of labor and other
costs relating to coffee production.
5.3 Measures taken by the government to control inflation in Tanzania;
The Bank of Tanzania has termed inflation as nation’s “Economic enemy number one”.
To control inflation the bank managesthe growth of money supply especially broad
money supply two (M2) which comprise currency in circulation (CC) and demand
deposit (DD) since they have direct relationship with money supply.

28
Bank of Tanzania uses monetary policy to influence economic behavior in the economy;
Open market operation, foreign market operation (FEMO), Standing facilities (Lombard
and discount window), Repurchase agreement transaction, statutory reserve, requirement
and moral sasuation.
Also Bank of Tanzania does the following to fight against inflation; Refinancing policy,
minimum reserve policy, open market policy. And at the beginning of each fiscal year the
Bank of Tanzania set the annual monetary policy to direct the economy toward
prosperous economy. Economic and financial reforms from 1980s in Tanzania were also
aiming at reducing inflation for prosperous economy.
5.4 Other factors than inflation that influence coffee production in Tanzania
Poor implementation, monitoring and evaluation of projects and activities in the key
programs make coffee production having less progress, and climatic vagaries such as
long drought or very high rainfall distort certainty of coffee production.
Technological backwardness, example drying technology of the coffee, since poor drying
results to less quality coffee which in turn has adverse effect in the coffee market.
Inputs of production, combination of inputs such as fertilizers, agro equips have great
influence in coffee production, insufficient use of these inputs such as chemicals and
fertilizers together with poor quality inputs are adversely affect production of coffee in
Tanzania.
Intensity of intercropping, most of coffee farms have been intercropped with banana
trees, banana trees reduce the process of photosynthesis which help much in food
generating to coffee trees, banana trees shadow the coffee leaves from trapping sunrise
for photosynthesis, hence poor coffee production due to less food generated for coffee,
most of coffee trees are old hence provide out low yield hence due to these features
coffee production become less productive.

29
Replanting of trees since most trees are old ones by, replanting of trees reduces
production for a given period of time, example study by world bank (2003) shows there
were about 1348 trees were planted, since replanting involve uprooting therefore till time
to harvest take some times hence fluctuates coffee output.
Age of coffee trees, economically coffee tree is unprofitable when it passes 20-25 years
but in Tanzania most of trees has passed this age, according to Friedrich Erbert Stiftung
(2004) shows most of 240 million trees have passed this age limit therefore coffee age
influence productivity of coffee in Tanzania.
Price of coffee, in Tanzania coffee farmers may receive less than 50%(Mhandoetal, 2010)
of auction this makes coffee production unprofitable to farmers, this influence farmers to
opt much effort to other economic activities than coffee production.
These factors have greater influence on coffee production than inflation rate in the
economy; this is why regression results shows inflation is insignificant to explain coffee
production in Tanzania.

30
CHAPTER SIX
CONCLUSION, POLICY IMPLICATION AND RECOMMENDATIONS
6.1 Main findings
Main objective of the study is to investigate impact of inflation on agricultural production
specifically on coffee production in Tanzania. From observation and analysis the study
found that there is negative relationship between inflation and agricultural production.
The study shows there is long run relationship between inflation and agricultural
production, but there is no short run relationship between the two variables.
But this relationship between inflation and agricultural production is insignificant
indicating that inflation is either not good indicator to influence crop production in
Tanzania.
In this study the study found that inflation only is weak to affect agricultural production,
there other factor which are strongly impact agricultural production especially coffee
production than inflation, these factors may either include age of coffee tree, technology
employed in production, replanting of coffee trees to replace the older ones and intensity
of intercropping.
6.2 Policy implication and recommendations
From the study, since there is long run negative relationship between inflation and
agricultural production though is insignificant but the government should concentrate on
ensuring long run economic stability in the economy especially through monetary policy.
The government should also educate farmers on modern techniques of coffee production.
All projects should be effectively evaluated and implemented timely so that all activities
are conducted in sequential order for the development of agriculture and Tanzania’s
economy, since agriculture employ majority of Tanzania.

31
6.3Limitation of the study and recommendation
The study has undergone much limitation especially on quality and consistent data
collection; in this study only one variable that is inflation has involved in estimation of
the data leaving other variables untested such as; age of coffee trees, climatic change,
price of coffee in local international market which other study in future may incorporate
them in studies.

32
REFERENCES
Andrea Veona. (2011). “Inflation and growth in the long run: A new Keynesian theory
and further semi parametric evidence.” University of Verona and Institute for the world
economy.
Bank of Tanzania. (2011). “Tanzania mainland’s 50 years of independence: A review of
the role and function of Bank of Tanzania.”
P. J. Saunders. (1996). “A time series analysis of the relationship between inflation and
productivity growth in the U.S agricultural sector.”
C.S. Mwsike, R.N. Onike and O. E Inoni.(2010). “Impact of inflation and government
agricultural policies on relative price variability of cash crops in Nigeria.”
United Republic Of Tanzania. (2008). “Agricultural sector review and public sector
review 2008/2009.” Ministry of Agriculture, Food security and cooperatives.
United Republic of Tanzania.(2012). “National Sample Census of Agriculture small
holder agriculture.” Volume II: Crop sector-National report.
United Republic of Tanzania.(2012). “Tanzania coffee industry.Development strategy
2011/2021.”Amended version.
United Republic of Tanzania.“Creating enabling agricultural policy environment.”
Sokoine University of Agriculture.(2005). “Coffee base line report.”Tanzania coffee
research institute.
A.A.L. Kilindo. (1997). “Fiscal operations, money supply and inflation
Tanzania.”African research consortium.

33
J.B. Mwakalikamo. (2011). “Public budget deficit.Factors for it and its impact on
macroeconomic variables (Inflation, trade deficit and exchange rate).
N. Shahnoush, S. Hennebery and H. Mansori. (2009). “An examination of the
relationship between food prices and government monetary policies in Iran.”
Araij, Mahmood, Mats Kinnwall and Thoursie, Peter, Skogman.(2004). “Cyclic and
causal pattern of inflation and GDP growth.”Applied economics.
Bullard, James. (1999). “Testing long-run monetary neutrality propositions: Lesson from
recent research.”Federal bank of St. Louis review.
Gylfson, Thorvaldul and Tryggvi T. Herbertsson.(2001). “Does inflation matter for
growth? Japan and the world economy.”
Kim, Sung and D. Willet.(2001). “Threshold effect in the relationship between inflation
and growth.”IMF staff papers.
Paal, Beatrix and Bruce Smith.(2001). The sub optimality of the Fieldman Rule and
optimum quantinty of money.” IEHAS discussion paper 0113, Institute of economics,
Hungarian Academy of Sciences, Budapest.
Stockman, Alan C. (1981).Anticipated inflation and the capital stock in cash-in-advance
economy.”Journal of Monetary Economics 8.
Temple, Jonathan. (2000). “Inflation and growth: Stories short and tall”. Journal of
Economics survey 14.
Tobin, James. (1965). “Money and Economic growth.”Econometrica 33.

34
Atmanand.(2007). “Managerial Economics.” Excel books private limited, New Delhi.
MBA first year, paper No. 2.
D.N. Gujarat. (2004). “Basic Econometrics.”Fourth edition, The McGraw-Hill
Companies.
N.G. Mankiw. “Principles of microeconomics.”4th
Edition.
R. Dornbusch, S. Fischer and Kearney. (1996). “Macro Economics.”The Mc-Grow-Hill
Companies, Inc. Sydney.
W.H. Greene. (2002). “Econometric analysis”.5th
Edition.
African Development Bank. (2011). “Inflation dynamics in selected East African
countries:” Ethiopia, Kenya, Tanzania and Uganda.
V. Gokal and S. Hanif. (2004). “Relationship between inflation and economic growth.”
Reserve bank of Fiji,Working paper 2004/04.
Stilianos et al (2001).“Inflation and output growth uncertainty and their relationship with
output growth.”Revised 2001.
Http://explorable .“com/null-hypothesis.html”. 7th
January, 2013.

35
APPENDICES
Appendix 1 Regression results
Dependent Variable: COFFEE
Method: Least Squares
Date: 05/22/13 Time: 13:01
Sample: 1980 2010
Included observations: 31
Newey-West HAC Standard Errors & Covariance (lag truncation=3)
C 8.919932 6.138455 1.453123 0.1569
INFLATION -0.321657 0.241665 -1.331006 0.1936
R-squared 0.016440 Mean dependent var 2.635161
Adjusted R-squared -0.017476 S.D. dependent var 28.67824
S.E. of regression 28.92774 Akaike info criterion 9.629820
Sum squared resid 24267.62 Schwarz criterion 9.722335
Log likelihood-147.2622 F-statistic 0.484731
Durbin-Watson stat 3.208000 Prob(F-statistic) 0.491830

36
Appendix 2 at level Unit root test
ADF Test Statistic -0.991895
1% Critical Value* -3.6661
5% Critical Value -2.9627
*MacKinnon critical values for rejection of hypothesis of a unit root.
Augmented Dickey-Fuller Test Equation
Dependent Variable: D(INFLATION)
Date: 05/21/13 Time: 19:25
Sample(adjusted): 1981 2010
Included observations: 30 after adjusting endpoints
INFLATION(-1) -0.075843 0.076463 -0.991895 0.3297
C 0.715598 1.750129 0.408883 0.6857
R-squared 0.033945 Mean dependent var -0.800000
Adjusted R-squared -0.000557 S.D. dependent var 4.672738
Coffee
ADF Test Statistic -11.98026 1% Critical Value* -3.6661

37
Dependent Variable: D(COFFEE)
Date: 05/21/13 Time: 19:40
COFFEE(-1) -1.727141 0.144166 -11.98026 0.0000
C 6.228976 3.956970 1.574178 0.1267
Adjusted R-squared 0.830930 S.D. dependent var 52.05352
Appendix unit root test at first difference

38
Dependent Variable: D(INFLATION,2)
Date: 05/21/13 Time: 19:48
D(INFLATION(-1)) -1.157648 0.192081 -6.026872 0.0000
C -0.770808 0.886412 -0.869582 0.3922

39
Granger causality test
Appendix 3Co integration test
Date: 05/22/13 Time: 07:52
Sample: 1980 2010
Included observations: 29
Test assumption: Linear deterministic trend in the data
Series: COFFEE DINFLATION
Lags interval: No lags
Likelihood 5 Percent 1 Percent Hypothesized
Eigenvalue Ratio Critical Value Critical Value No. of CE(s)
0.863690 82.10330 15.41 20.04 None **
0.567565 24.31138 3.76 6.65 At most 1 **
*(**) denotes rejection of the hypothesis at 5%(1%) significance level
L.R. test indicates 2 co-integrating equation(s) at 5% significance level
Unnormalized Co-integrating Coefficients:
COFFEE DINFLATION
0.006760 -0.000443
0.001273 0.041243
Normalized Co-integrating Coefficients: 1 Co-integrating Equation(s)
COFFEE DINFLATION C
1.000000 -0.065592 -4.886456
(0.45101)

40
Log likelihood-223.6198
Appendix4 Engle-granger co-integration test results.
Using the two steps AEG unit root test on residual the following results on the co-
integration among variables were obtained.
Dependent Variable: D(RESID01)
Date: 05/22/13 Time: 12:21
Variable Coefficient Std. Error t-Statistic Prob
RESID01(-1) -2.363139 0.388545 -6.082024 0.0000
D(RESID01(-1)) 0.246178 0.207085 1.188780 0.2453

41
Appendix 5 Error correction mechanism (ecm)
Dependent Variable: D(COFFEE)
Date: 05/22/13 Time: 13:16
C 2.355227 3.836146 0.613956 0.5444
D(INFLATION) 0.381716 0.842063 0.453310 0.6539
RESID01(-1) -1.795716 0.145633 -12.33041 0.0000

Joel's Research

Recommended

Recommended

More Related Content

Similar to Joel's Research

Similar to Joel's Research (20)

Joel's Research