Factors for Economic Development in Tanzania Since Independence
Tanzania, located in East Africa, has been experiencing significant economic development in recent years. The country has implemented various policies and initiatives aimed at fostering economic growth, reducing poverty, and improving living standards. Here are some key aspects of Tanzania’s economic development:
The Growth Rate Has Decreased Globally
Growth has slowed in both emerging and established economies. Global GDP slowed down in 2019’s 2nd quarter (Q2) as trade tensions between China and the US grew worse and political unrest spread all over the globe. Only 2.6% worldwide economic growth is predicted for 2019, which is lower than the 3% growth seen in 2018, and the prediction may be revised lower. Since capital flows and commodity prices have decreased due to the worsening of global prospects, developing nations’ external sectors are under pressure from increasing current account deficits and depreciating currency rates.
Sub-Saharan Africa’s (SSA) economic growth has slowed. In the 1st half of 2019 (H1), real GDP is forecast to rise by just 2.6%, marginally up from 2.5% in 2018 but slower than anticipated across the area. The anticipated slowdown is a result of a number of domestic and international factors, including slow domestic reforms and a decline in domestic demand as a result of slow private investment, as well as declining global growth amidst trade tensions, falling prices of commodities, and policy uncertainties.
The gradual recovery in Sub-Saharan Africa conceals stark regional differences. Growth in nations endowed with resources was below expectations as investment fell as a result of dimming mining and industrial prospects. The three biggest economies in SSA—Nigeria, Angola, and South Africa—saw a slowdown in growth in Q2 of 2019. The economies of resource-intensive nations are also experiencing financial difficulties due to declining commodity tax receipts. However, fixed investment has recovered and development is still strong in nations that do not rely heavily on natural resources.
Downside Risks have increased. The recurrent increasing trade tensions between big economies and political unrest could generally deter investors even more, just like tighter worldwide financial circumstances, increased commodity price volatility, and slowed growth in SSA and globally as a result of decreased revenues and more significant current account deficits (CADs). A smaller budgetary space might increase the risk of debt, which are high already in the SSA—49% of SSA nations are either currently in debt difficulties or very likely to do so. Locally, bad weather and depressed investment are the major risk factors to this outlook: The SSA is weather-vulnerable, particularly drought, which reduces agricultural exports and income and encourages inflation.
The trade balance of Tanzania has improved, despite financial flows and commodity prices becoming more volatile. The country’s external sector is especially more susceptible to fluctuations in the world prices of gold and oil (16 % of exports and 20% of imports, respectively). Newer developments are generally favorable; the gold exports value rose by 23% in the past 12 months up to July 2019 as the price of gold recovered from a low of USD 1,511 to USD 1,511 between September 2018 and September 2019 – the highest level since 2013. The prices of Oil have recovered this year, despite still being below the average recorded last year; and the bill for oil imports shot up by only 9% in the past year up to July 2019. However, heightened volatility and higher uncertainties could continuously dent consumer and investor confidence, weakening worldwide growth further as the external demand declines, reducing the country’s earnings from gold exports.
Growth Has Been Steady for the 1st Half of 2019, While Inflation Rates Have Been Low
As per the official data, Tanzania’s real GDP rose by 6.9% in H1 of 2019, a slight rise from 6.8% in H1 of 2018. The growth in GDP was fueled by the remarkable growth in mining and construction, but the service and agricultural sectors slowed. The nonmanufacturing industry, constituting construction, quarrying and mining, electricity, and water, expanded by 15.3% in H1 of 2019, doubling the 7.5% recorded the year before. The growing construction industry was mainly driven by the recovery in the production of gold and a rise in the extraction of coal. In H1 2019, manufacturing rose by 5%, compared to the 4.4% recorded in 2018 H1 due to the increased production of Industrial commodities. In contrast, there was a decrease in agriculture growth from 6.3% in H1 2018 to 5.1% in H1 2019, mainly due to a deceleration in the fishing subsector as the lower fish catches. However, the production of beans, maize, millet, and sweet potato rose. In the past half a decade, the agricultural sector has experienced the least growth compared to other sectors, with quarterly growth of approximately 6%. With this growth came a noticeable jump in labor and land productivity and the emergence of medium-scale farms. On the other hand, services rose by 5.8%, a slight decrease from 6.1%, due to a slowdown of most of the sector’s components.
Moreover, official high-frequency data show a small increase in growth in 2019; however, the aggregate rate is lower than the official GDP data suggests. Using the official high-frequency spending data, the staff of the World Bank predicts the real growth in GDP in 2019 to be 5.6%, rising from the 5.4% seen in 2018. Data recorded through 2019’s first three quarters show that fixed gross capital formation, exports, and public consumption have risen. Associated data includes higher development and recurrent spending in 2018–2019, more exports, and credit expansion to the private sector.
Even though inflation is still affected by local food prices, it remains low and stable. Increased food prices have seen it spike, but it remains below the 5% target. The past few months saw a slight rise in headline inflation, topping 3.6% in October, an increase from 3.2% recorded the previous year but below the 5% target. Increasing food prices caused food inflation to rise to 6.0% in 2019 October, in comparison to 2.5% the previous year- CPI’s baskets’ main crops have been rising since June. Maize prices increased by 140% in the year ending October of 2019 although rice prices increased by only 3%. Meanwhile, the energy inflation dropped to 3% in October 2019 from 19.5% in a year due to the falling oil prices globally. Worldwide oil prices fell from USD 76.70 to USD 57.30 between October 2018 and October 2019. However, these falling oil prices were compensated by the weight of fuels and energy being just 8.7% in the CPI basket in comparison to the 37.1% occupied by food.
Increased Domestic Borrowing as a consequence of the shortfalls in external financing and revenues
The financial deficit for 2018/2019 was estimated at 3% of the GDP, almost equal to the 3.1% budget target but over the 2% average in the previous two years. The discrepancy has increased largely due to revenue shortcomings; like the past two years, the spending took up 17% of the GDP. The 2019/2020 budget targets a 2.3% deficit in GDP- significantly lower than the 3.1% in the previous year and close to the 1.8% average in the previous three financial years.
Domestic debt has increased, worsening the pressure on commercial lending rates to the private sector. In 2018/2019, with an increasing dearth of external funding, domestic borrowing accounted for the majority of the government’s funding, but it amounted to 2.3% of the GDP, way more than the planned 0.9% and the past FY actual of 0.5%. More domestic borrowing has pressured treasury bill rates as the lending rates are still high, approximately 17% in FY2019/2020 H2. External borrowing stood at 0.9% of GDP, way below the targeted 2.3%. Delayed project preparation as well as reservations regarding government policies, particularly statistics regulation, were part of the reason why Tanzania received lesser concessional loans. It was projected that two-thirds of the 2019/2020 deficit would be funded by concessional loans, domestic and external, and the other third by concessional external loans.
Revenues have progressively fallen shy of the target, pointing to a glaring weakness in the forecasting of revenues. In 2018/2019, the domestic revenue was less than both the budget and the past outturns because of less tax revenue, particularly from income tax and VAT: it comprised 14% of the GDP in comparison to the 15.5% in the budget and past year’s actual 14.9%. These problems came about due to nontax overperformance and serious tax shortfalls. Tax revenue fell short of its target by 12.8%, with lower collections for income tax, VAT, and excise duties. Nontax’s overperformance of over 41% was partly supported by the Electonic Payment Gateway introduced by the government, which resulted in more land rent collection and more government agency charges. Despite the past year’s disappointing revenue performance, the government targets an ambitious revenue of 17.1% of the GDP.
Spending pressures are increasing with the nearing elections. Although generally budgeted for in 2018/2019, the recurrent spending this year is projected to increase due to election preparations. Recurrent spending was accounted for in the budget, although there was a significant variation by component. Spending on salaries and wages accounted for 10.4% of the GDP, lower than planned due to limited hiring, a lack of salary adjustments, and retiring public servants (mostly teachers). However, outlays for services and goods and interest payments were more due to preparation for the November 2019 minor elections and the October 2020 general elections. As the preparations for the elections carry on, 2019/2020 budget projects recurrent spending to increase to 11.5% of the GDP because of more allocation to salaries and wages and services and goods.
The development budget was better executed in 2018/2019 but still fell short of the initial plans. Spending on programs and development projects was equal to 6.5% of the GDP against the 8.9% budgeted, a 73% execution rate, an improvement from the 67% in the past financial year. Foreign-funded programs and projects perfumed nicely, although the locally financed component was not well executed. This has resulted in delays in big capital projects and arrears accumulation. The 2019/2020 budget has slotted 9% of the GDP for spending on development, a slight increase from the past year’s 8.9%.
Non-transparent tracking of arrears. The latest confirmed arrears in government local payments are those accumulated through 2016/2018 when it amounted to Tsh 1.5 billion, equal to approximately 1.5% of the GDP. The government adopted the strategy to clear the existing backlog and avoid new arrears with little success. For instance, 2017/2018 arrears are yet to be verified and the verification status of 2018/2019 is unknown. Refund arrears of VAT are extremely high, approximately 70% have been verified and are awaiting funds availability. An electronic system was installed by the government to reduce the verification time of VAT refund requests, unfortunately, the system is still not functional.
Public debt is presently sustainable, with the country being at a low risk of debt distress. However, the increasing commercial debt share, mainly domestic, raises alarms about liquidity risks. The January 2019 update of the Debt Sustainable Analysis by the IMF and World Bank found Tanzania’s risk of debt to be low. At the end of 2018/2019, the debt to GDP ratio was approximated at 37%, way below the 70% threshold, with a slight increase from 36.6% in 2017/2018. However, the budget’s commercial financing rose to 19% in 2018/2019 from 4% in 2010/2011. Consequently, debt service in 2018/2019 consumed approximately 43% of domestic revenues and is expected to take up 34% in this financial year. In 2018/2019, the government borrowed about 2.3% of the GDP domestically.
Monetary Policy has Loosened and the Credit Growth is Recouping
The Bank of Tanzania continues to ease the monetary policy. In July 2019, the minimum statutory reserve requirement was dripped to 7% from 8%, after reducing the discount rate to 7% from 9% in August. M3 growth consequently reached 9.3% in September 2019, rising from 4.9% in September 2018 and 7.7% in June 2019. Total domestic credit to the central government and the private sector rose by 6.3% in September 2019, a slight decrease from the 7.2% growth in September 2018.
There is a recovery in the credit lent to the private sector. In 2019’s first nine months, the growth was an average of 8.8%, way beyond the 2.8% seen in 2018. Although household personal credit still holds the largest portion of the private sector credit (29.9% as at September 2019), credit to productive ventures was dynamic; in September 2019, credit growth of 68.5% to agriculture, 45.1% to quarrying and mining and 24% to households was recorded. However, both trade and restaurants and hotels experienced reduced credit in the year ending in September 2019. This increase in credit to the private sector shows an improvement in customer confidence, which coincides with measures to ease liquidity implemented by the BoT and a progressive decrease in nonperforming loans. (NPL)
Banks are lending to the private sector, although the interest rates are extremely high. In 2019’s first nine months, the commercial rates were at an average of 17%, a drop from the 17.5% seen in 2018. The main rate of the treasury bill was at an average of 8.3%, an increase from 5.9% in 2018, due to the government borrowing more domestically to fund the 2018/2019 budget.
The banking segment is sufficiently capitalized, although NPLs put financial stability at risk. By April 2019, the commercial bank’s ratio of core capital adequacy of 17%, way over the 10% limit, and a liquidity ratio of 33.6% which was also over the needed 20%. Additionally, the closing of failing banks by BoT in 2018 played a key part in preventing contamination of the entire sector and showcased BoT’s resolve to stabilize the financial sector. By closing the banks, BoT showed that it will not tolerate any bank that fails to meet the required operational indicators. However, by April 2019, only a slight improvement in the NPL ratio was noted from March 2018, from 11.5% to 11.1%, and way over the 5% target ceiling set by the bank.
Measures to control NPLs are partially contributing to the low profitability of banks. With higher NPLs, banks have to satisfy high provision requirements, therefore undermining profits. BoT supervises banks more intensely and requires all banks to specify their permanent loan recovery functions and their NPL strategies. After reviewing its guidelines and regulations, it added more staff to the bank supervision department. The bank of Tanzania also made credit bureau reports compulsory during the loan application and instructed banks as well as other financial bodies to incorporate strategies aimed at building up application processing, monitoring, management, as well as recovery measures.
According to the recommendation of the Financial Sustainability Assessment Program (FSAP), the MoFP should promote broad-based intersectoral efforts to cater to NPLs. This is crucial as negative spillovers can influence the economy past the financial sector. The uncertainty and delays associated with court processes hinder the efforts of the bank to write off bad loans and liquidate collateral. The FSAP recommends creating a multi-shareholder private-public working group to pinpoint ways to make sure that tax and legal structures support the resolution of NPLs and dealing with firms that own a large percentage of NPLs; although this recommendation is yet to be fully implemented.
Exports Recovery is slower than import growth
The CAD is growing as import growth outpaces export recovery. The CAD increased to 3.7% of GDP in the year ended September 2019, a rise from 3.4% in September 2018, as the 7.3% rise in imports eclipsed the 5.2% growth in exports. The increased import bill was driven by capital goods and oil imported for public investment in the energy and transport sectors.
Exports of tourism, manufactured goods, and gold are recouping. Gold, accounting for 40% of nontraditional exports, increased by 26.1 % because of higher prices and volumes, and manufactured goods increased by 32.6 %. More tourists led to an increase of 9.9% in tourism earnings. Traditional exports decreased by 106%, mostly due to lower earnings, more so from cashews, which offset the higher earnings from tea and coffee.
Foreign exchange inflows remained low, and the official gross reserves were also down. In spite of the recent export recovery, inflows remain lower than the historical numbers. For instance, external concessional borrowing is at half the mean of the past half-decade, and the FDI between 2015 to 2018 was reduced by one-third, from US$1.5 to 0.1 billion dollars. Consequently, reserves have dropped from US$5.4 billion between 2018 and 2019 September to 5.3 billion US$ (5.4 US$ months’ worth of imports).
The shilling has maintained its stability. Between 2018 October and 2019 September, it depreciated by 5% against the Euro and about 2-3% against the Chinese Yuan and the Kenyan Shilling and maintained a consistent interbank foreign exchange market. The real rate increased by about 2% between 2018 October and 2019 September, the difference in inflation between Tanzania and its main trading counterparts offset the reduced nominal exchange rate to some extent. The recent rise in the effective real exchange rate is accompanied by increased exports of manufactured goods including steel iron, fertilizer, and glass.
Reforms to the business environment are progressing slowly
Even though there is some improvement, the country is still outranked by most regional neighbors in the ease of conducting business. As per the 2020 world Bank report, Tanzania is ranked 141 of 190 economies, an improvement from 144 the previous year. Tanzania’s performance still trails its neighbors such as Kenya (56), Uganda (116), Rwanda (38), and other sub-Saharan countries Malawi (109), Mozambique (138), and Zambia (85). Tanzania has major hurdles in trading across its borders registering property, resolving insolvency, paying taxes, and protecting minority investors. Though changes in the legislation protecting the minority investors improved the country’s ranking, the main concerns with these major indicators as paying taxes, trading across borders, and setting up a business. The speed of these reforms, however, is still slow.
The business environment remains a big concern to the private sector. The Tanzanian government is yet to execute major reforms, particularly cross-ministry actions and legislative changes. These reforms are aimed at enhancing the functioning of the Tanzania Bureau of Standards, measures, and weights Department as well as easing the process of getting residence and work permits. In recent times, the Tanzanian government has begun consultations regarding the drafting of an investment bill and Business facilitation. To alleviate tax measures considered predatory it also amended the 2019 Finance Act to institutionalize the Tax Ombudsman Office and MoFP Tax Dispute Desk at the Tanzania Revenue Authority. The private sector, however, still sees the business environment as volatile and demands faster reforms, especially in business regulation.
Moreover, Tanzania’s business environment has been affected by delays in VAT refunds payment to export firms and arrears owed to domestic suppliers. Some of the supplier arrears and VAT refunds have been unpaid for over 3 years as a result of insufficient funds and a long verification process. The recent suggestion to amend the Budget Act to grant the Paymaster General the authority to increase the period of approving funds expenditure carried over from the past financial year to six months from three has been seen as delaying VAT funds even further. The progress in settling payment arrears to suppliers and contractors and accelerating the processing of applicants for VAT refunds would reduce NPLs and improve private sector liquidity
The participation of the private sector is crucial in speeding up reforms to the business environment. The blueprint for regulatory reforms, which was drafted after negotiations with the private sector and government endorsement in 2018 May, specifies steps to rationalize or abolish licensing requirements. Some of these have been implemented as seen by the removal of various levies, fees, and duplication of responsibility, such as those done by the Tanzania Food and Drugs Authority. The private sector, through the Tanzania National Business Council (TBNC), recommended the smoothing out of the functions of the Tanzania Bureau of Standards, measures, and Weight and streamlining the process of acquisition of residence and work permits. The TNBC itself needs structural reform to push reforms forward, especially those that require cross-ministerial actions or legislative changes.
The High Population Growth Rate is Curtailing the Effects to Tackle Poverty
Tanzania is continuously improving the living conditions of its citizens. However, the speed of poverty reduction has considerably slowed down since 2012 and the number of poor populations has increased. As per the recent survey data, poverty in the Mainland Tanzania reduced from 28.2% to 26.4% between 2012 and 2018. However, the population growth rate during this time was higher than the poverty reduction rate, culminating in an increased total number of poor people. By 2018, approximately 14 million Tanzanians dwelled in poverty, an increase from 12.3 to 13.2 million in 2007. Since 2012, low growth in the consumption of the poor has exacerbated inequality especially in urban regions. From 2012 t 2018, the Gini coefficient which is based on per capita consumption rose from 39% to 42%% in developed areas, mainly because Dar es Salaam Gini’s equality index rose from 36 to 43 between 2012 to 2018.
High population growth restricts the growth of per capita GDP and minimizes the welfare-improving effects of growth. From 2007 to 2017, the country recorded a mean yearly growth rate of 6.3%, which reduced to 3.3% if adjusted to population growth. More Importantly, the poverty growth elasticity was reduced by half, from a –1.02 low between 2007 and 2012 to a lower –0.45 between 2012 and 2018. This denotes a 10% rise in GDP growth per capita will only decrease poverty by a mere 4.5%. Elasticity for the other developing nations is often up to 4 times bigger, about –2.0.
The drivers of GDP growth were sectors with few workers and with even fewer poor workers. Fastest-growing sectors are ICT, construction nonmarket services, and real estate. Each sector employs an average of less than 6% of the population. However, all of them tend to hire a significantly wealthier and more educated workforce. Within agriculture, the sector that employs the majority of Tanzanians, especially the poorest, the livestock ad crop subsectors grew quite fast at approximately 5%, but the small-scale farms where most f the poor population work seem to have marginally benefited from this growth. Moreover, consumption and income increased way faster for well-educated Tanzanians than for the less educated and less endowed. Consequently, inequality has widened. This underlines the importance of emphasizing productive agricultural investments (access to funds, markets, improved technology, value chain development) as well as supporting diversification and developing non-farming skills.
Human development outcomes have marginally improved e.g education. The net secondary and primary schools, both urban and rural, slightly increased between 2012 to 2018, but the gross enrollment reduced. Although chronic malnutrition was reduced, the percentage of stunted children (too short for age) reduced from 42% to 35% between 2010 and 2015/16 – still over the SSA average.
Delivery of social services also improved, even though there are still gaps, particularly in rural areas. The availability of electricity has increased, but just 29% of Tanzanian households can access electricity way below the 45% SSA average. Only 10% of those living in rural areas and 7% of poor households have access to electricity. More people have access to clean drinking water, especially in urban regions, where the proportion of households drinking clean water has increased twofold. However, in 2018, the drinking water access of 34% of rural populations was unsafe and unimproved. Although access to limited and basic sanitation improved in urban regions, it is still problematic in rural regions. From 2012 to 2018, the proportion of urban people with improved sanitation increased from 36% to 51%, but in rural regions, it rose from just 4.7% to 11%, which is still low.
Drivers of poverty reduction were improved access to basic infrastructure and services and increased human capital, however, the growth returns on such endowments have dropped hence poverty declined slower than anticipated. Due to continuous changes in the labor market requirements, even with increased access to education in the general population, schooling rewards below a certain level have reduced, and the increased consumption and income associated with primary schooling are not large anymore. Mobile phones positively affect the livelihoods of poor people, although the marginal advantages have narrowed since 2012, particularly in moderately poor houses and in urban regions, where their ownership has massively improved but the opportunities where they can be productively used have not.
Poor households are massively disadvantaged. For example, less access to community services and infrastructure reduces the available opportunities. Most of them are exposed to insecurity and food stress. Market access is limited, especially in the southeast and northwest areas, where the levels of poverty are worse. Many rely on the Tanzania Social Action Fund (TASAF) to meet basic essential needs. However, the coverage of this fund is limited to 10% of the households and it often doesn’t benefit those who require it the most.
Macroeconomic Risks and Outlook
Growth prospects rely on the speed of reforms
Real growth in GDP is predicted to gradually increase in the medium term if minor but steady reforms are made in fiscal management and the business environment. Recently, Tanzania has adopted new policies to reduce the cost of regulatory compliance to businesses, reduce the domestic payment debt of the government and mitigate new arrears. These reforms, when completed, could catapult economic growth by mobilizing private investment. This outlook assumes that in the next 2-3 years only part of the reform’s agenda will be achieved – the progress so far has been quite slow, and public investment continues to be among the major drivers of GDP growth. Consequentially, yearly growth will slowly increase, with modest positive changes to the business environment and in FDI as well as other private investments. Due to the prevailing financial constraints, the implementation of the development budget might not improve a lot. In the medium term, the financial deficit is projected to broaden to approximately 3-4% of the GDP, and increased imports to support the capital projects will probably increase the CAD to 6-7% of GDP.
Challenges Facing Economic Development in Tanzania
Tanzania, like any other country, faces various challenges in its pursuit of economic development. Here are some key challenges that Tanzania has been dealing with:
1. Infrastructure Deficit: Tanzania’s infrastructure, including roads, railways, ports, and energy systems, requires significant investment and improvement. Inadequate infrastructure hampers the movement of goods, services, and people, limiting trade and economic growth.
2. Poverty and Income Inequality: Despite recent economic growth, Tanzania still grapples with high poverty rates and income inequality. A significant portion of the population remains below the poverty line, with limited access to basic services, healthcare, and education.
3. Limited Industrialization: Tanzania’s economy is primarily agrarian, relying heavily on agriculture. The country faces the challenge of diversifying its economy and promoting industrialization to create jobs, boost productivity, and increase exports. This requires supporting the growth of manufacturing, technology, and other non-agricultural sectors.
4. Access to Finance: Many Tanzanian businesses, especially small and medium-sized enterprises (SMEs), struggle to access affordable financing. Limited access to credit and financial services impedes entrepreneurship, innovation, and investment, hindering economic development.
5. Corruption: Corruption poses a significant challenge to economic development in Tanzania. It undermines public trust, discourages foreign investment, distorts the allocation of resources, and hampers efficient governance and service delivery.
6. Quality Education and Skills Gap: Tanzania faces challenges in providing quality education and developing a skilled workforce. There is a need for investment in education, vocational training, and technical skills development to meet the demands of a rapidly evolving economy and enhance productivity.
7. Agriculture Productivity and Climate Change: Agriculture plays a crucial role in Tanzania’s economy, but it faces productivity challenges, including low mechanization, limited access to inputs and technology, and vulnerability to climate change impacts such as droughts and floods. Climate change adaptation and mitigation measures are necessary to safeguard agricultural productivity and enhance food security.
8. Access to Basic Services: Despite progress, access to basic services such as clean water, electricity, healthcare, and sanitation remains limited in many parts of Tanzania. Expanding and improving these services is vital for social development and economic productivity.
9. Regional Disparities: There are regional disparities in economic development within Tanzania, with some areas benefiting more from infrastructure, services, and investment than others. Addressing these disparities and promoting inclusive growth is crucial for overall economic development.
Tackling these challenges requires coordinated efforts from the government, private sector, civil society, and international partners to promote sustainable and inclusive economic development in Tanzania.
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