Economic Overview: Performance and Outlook
In 2012 and into 2013, the Tanzanian economy expanded at an annualized rate of approximately 7%. A World Bank/KPMG survey in November 2013 showed that 55% of the business managers of the top 100 mid-sized companies in Tanzania feel that the economy is performing better in 2013 than in 2012, while 26% feel it is the same compared to 21% who said that it is now worse than in 2012.
The main drivers of Tanzania’s rapid economic growth continue to be a small number of fast growing, capital intensive sectors, particularly the communications, financial services, construction, manufacturing and retail trade sectors. The service sector, driven by the expansion of transport, communications, retail trade and financial services, recorded the highest rate of annual growth in 2012, at 8.0%. By contrast, labor intensive sectors, particularly the agricultural sector, in which approximately 80% of households are primarily engaged, recorded an average annual growth rate of only 4.2%. Similar trends, with higher rates of growth recorded by the less labor intensive sectors, were observed across the board during the first two quarters of 2013.
Over the past decade, Tanzania’s economy has become significantly more open. The trade-to-GDP ratio has increased from 13.5% in 2000 to more than 30% in 2011, the highest rate among the East African Community countries, with the value of Tanzania’s merchandise exports multiplying by a factor of five over this period. The largest contributors to the export basket continue to be primary commodities, particularly gold, coffee, tea, cashew nuts and cotton. At the same time, the volume of manufactured exports has surged in recent years, with the lion’s share of these exports going to markets within the region.
The inflation rate continued to decline in 2013, reaching a rate of 6.3% by October 2013. At the end of 2011, the inflation rate had reached almost 20%. This steady and significant decline has been the result of a combination of the implementation of stricter monetary policy and a decline in food and energy prices. As a result, Tanzania’s rate of inflation is now roughly equivalent to that of neighboring Uganda and Kenya. The decline has also contributed to the stabilization of the real exchange rate, which appreciated by almost 20% in 2011/12 as the result of the large inflation differential between Tanzania and its trade partners. This stabilization of the real exchange rate also has positive implications for exporters.
The Tanzanian Government has implemented a relatively tight monetary policy to reduce monetary expansion and has increased guiding interest rates. While this helped to reduce inflation, it resulted nevertheless in increases to the cost of credit, imposing increased burdens on borrowers and thereby negatively impacting the expansion of the real economy. However, the magnitude of this negative impact may not be dramatic, as the ratio of total credit to GDP was only 24.8% in 2012, compared to a figure of more than 130% in emerging counties such as Thailand and Malaysia.
The overall fiscal deficit for 2012/13 is estimated to reach a value equivalent to 6.8% of GDP. This represents a significant increase compared to 2011/12, when the deficit stood at a value equivalent to only 5% of GDP. The deterioration in the fiscal accounts during 2012/13 was the result of the Government’s overestimation of revenues and underestimation of expenditure.
The deteriorating financial situation of several parastatals and public agencies has continued to pose a major challenge for fiscal planning. In response to the deteriorating financial situation of the public electricity company TANESCO, Government at the beginning of 2014, raised power tariffs for both domestic and industrial users by an average of 40%. Despite the tariff increase, Tanesco will continue to be subsidized by the Government as the price of its electricity still doesn’t cover production costs until new investments in power to gas become gradually operational by 2015/16. The deterioration of the financial situation in several pension funds is also a source of concern.
An accelerated drive for the development of social and physical infrastructure is underway on the recently launched ‘Big Results, Now’ initiative (BRN). The BRN initiative is inspired by a similar Malaysian program with the stated aim of facilitating the achievement of Tanzania’s Development Vision 2025 through the identification of a series of priority areas for expenditure. However, the Government must tread the tight rope and find the balance between the use of public expenditure to promote economic growth and the need to maintain fiscal and debt sustainability over time.
With Tanzania’s current rate of growth of GDP growth standing at approximately 7% per annum, no major changes are expected in the country’s growth trajectory over the next few years. The sectors which have driven Tanzania’s economic growth over recent years, particularly the capital intensive and rapidly expanding communications and financial services sectors, will continue to do so into the future. Economic growth will also be driven by increased activity within the construction sector, particularly with Tanzania’s rapid urbanization and the Government’s renewed focus on the development of public infrastructure.
The most significant transformative factor on the economy is the large natural gas reserves that were recently discovered. If managed well, these gas reserves have the potential to transform Tanzania’s economic future. While the most significant impacts of this discovery on the local economy will not be felt for at least seven to ten years, when exploitation will start at full scale, the discovery will nonetheless drive increased economic activity during the construction phase. In the long term, the magnitude and timing of the impact of the discovery remain uncertain. Careful management of the revenues derived from the newly discovered natural resources will be required to ensure the optimal use of these revenues and to achieve inclusiveness.
In the meantime, if Tanzania is to follow the example of successful emerging countries, it will need to improve policy aspects in the areas of human development (Tanzania is currently ranked 152nd out of 182 countries on the HDI index); its business environment (134th out of 185 countries); and government effectiveness (135th out of 212 countries). For the last two indicators, Tanzania’s ranking has deteriorated over recent years.
Tanzania attained Independence from colonial rule in 1961. The country was formed as a union between the mainland territory, Tanganyika, and the island of Zanzibar in 1964, although the latter still maintains a semi-autonomous government and legislature.
President Jakaya Kikwete is the fourth democratically elected president of Tanzania which continues to maintain a peaceful existence in an often turbulent post-independence period in the region. The President won his second and last term in 2010 with 61% of the vote. His party, Chama Cha Mapinduzi (CCM), has dominated the political landscape since 1961 when multi-party politics were abolished under the founding President Julius Nyerere.
The country returned to multi-party democracy as part of wide-ranging political and economic reforms in 1992. Since then, the number of parties participating in the political space has grown from 11 to 19, although only six of these have been able to achieve representation in Parliament where they are considerably vocal on issues such as transparency and accountability. While they have not been successful in dislodging CCM from power they have continued to encroach on its support base as seen from the 2010 elections and recent by-elections. The most prominent opposition party, CHADEMA, made significant strides in the last election, winning 44 seats in Parliament, from five seats in the 2005 election.
In 2012, Tanzania embarked on a process to review and rewrite the country’s Constitution (1977). A draft of the proposed new constitution is currently being debated by the 600-member Constituent Assembly (CA) which is expected to sit for 70 days; with a possible extension of 20 days if deemed necessary. The law requires that a new Constitution be adopted a year before the October 2015 elections.
In November 2013, the Government announced the new official poverty figures indicating that approximately 28.2% of the population lives below the poverty line – considerably lower than the corresponding figure of 33.6% in 2007. Caution must however be applied in assessing the magnitude of the apparent reduction, as the two figures are not directly comparable, due to changes in survey methodologies and tools. More measurements and analysis are required to determine whether these figures indicate a sustainable, ongoing trend.
Regardless of the significance in the decline of poverty over recent years, Tanzania remains a poor country. In 2012, its average per capita income stood at US$ 570, placing it in the 176th position out of 191 countries in the world. Even by the most optimistic poverty estimates, there are still approximately 12 million poor people living in Tanzania, which is approximately the same number as in 2001. Improving the socio-economic circumstances of this large group of citizens must therefore remain a top priority for Tanzanian policy makers.
Tanzania's rank in the United Nations Development Program’s (UNDP) Human Development Index has improved since 1995, but its progress toward the Millennium Development Goals (MDGs) has been uneven. The country is expected to reach only three out of seven MDGs by 2015. Tanzania is on track to meet the MDGs related to combating HIV/AIDS and reducing infant and under-five mortality but is lagging in primary school completion, maternal health, poverty eradication, malnutrition, and environmental sustainability.
The selection of the Education sector by the Government as one of its priority areas under the new initiative, the BRN was appropriate. While access to education has improved over the past decade, the quality of education has suffered. While enrollment has improved, reaching universal education in primary schools, the main problem in the education sector is poor outcomes at the primary and secondary levels. Service delivery is weak with slow growth in the number of qualified teachers and insufficient supply of textbooks and other inputs. The quality of secondary education has been affected by low quality at the primary level. The BRN approach involves the establishment of delivery laboratories in the six selected priority areas (education, water, energy, agriculture, resource mobilization and transport), with each generating results frameworks. The approach hinges on prioritization, monitoring and accountability in terms of performance.
Future economic growth will also depend on the ability of the Government to remove existing constraints on businesses. The most significant constraint on growth as reported by 80% of businesses operating in Tanzania, relates to the provision of electrical energy. On transport infrastructure, Tanzania has made notable progress in the rehabilitation and extension of the country’s road network. However, rural roads need more improvements as they raise production costs in the agriculture sector, and the rail systems are not effectively operated with poor infrastructure and equipment problems. Overall, Tanzania’s business environment remains unattractive, resulting in in disappointing rankings in Doing Business and Africa Competitiveness Reports.
Tanzania needs competitive labor-intensive sectors to absorb the growing youthful labor force, augmenting by approximately 800,000 every year. The current small market share of new, labor-absorbing export-oriented industries, together with inadequate human capital development (skill shortage), creates a medium-term risk of high youth unemployment. Growth in employment has so far largely come from domestically-oriented industries with the exception of tourism. There is a need to promote competitiveness gains in labor-intensive sectors such as manufacturing and services.
The agricultural sector contributes to approximately one quarter of GDP and provides employment to approximately three quarters of all Tanzanian workers and it remains an area where significant achievements can be made with even small undertakings. The Southern Agricultural Growth Corridor of Tanzania (SAGCOT) initiative may facilitate the establishment of linkages between small-holders and large commercial farms, thus promoting productivity gains, while the increased use of modern irrigation systems and modern inputs (seeds, fertilizers) may also result in increased productivity, at least in some specific areas.
On the other hand, the rapid development of the communications and financial services sectors may also contribute to an acceleration in overall economic growth. Not only does the growth of these sectors contribute directly to increases in GDP, it also has an indirect, positive impact on other sectors. For instance, there is a clear positive correlation between monetization and economic development. Advances in mobile technology and a dramatically increased rate of usage of this technology has driven the development of new business systems, enabling the establishment of linkages between entrepreneurs with their customers, suppliers, bankers, and government officials. Today, approximately half of all Tanzanian adults use mobile telephones, with around 80% of users having utilized mobile technology to send or receive money. Rates of penetration and usage are expected to continue to grow, particularly in rural areas and amongst low income households.
While Tanzania was for a long time on the forefront of public sector reforms, progress in recent years has been only marginal for the core public sector reforms. By 2007, Tanzania had completed the first two stages of public sector reforms, which included budget discipline through control of the wage bill, downsizing the civil service, improving taxation, and introducing performance management in the public sector. The third stage of reforms, which includes deepening of the reforms as well as ensuring their sustainability and linkages to service delivery, has been difficult and more challenging. Over the past few years, progress was marginal for the core public sector reforms. Disparities in social services-related spending, as reflected in allocation of human resources, remain among districts. Continued challenges exist in low levels of accountability in the event of low performance, less than adequate monitoring of results despite having the required tools, and the absence of incentives for improved performance.
The government needs to continue to fight corruption and strengthen transparency and accountability across sectors and at all levels. The government has made good progress in implementing the Extractive Industries Transparency Initiative, which will be increasingly important in the context of natural gas development. Strengthening public financial management in the country, both at the central and local government levels, is essential for high quality infrastructure investments, more effective service delivery, and attracting private investment. Another challenge is to address the so-called “quiet corruption,” such as teacher and health worker absenteeism, which is less visible than big-time corruption but occurs across a much wider set of transactions directly affecting a large number of beneficiaries.