Tanzania

Economic Overview: Performance and Outlook

Tanzania has experienced high and relatively stable growth rates over the past decade. Growth accelerated from 3.5% on average in the 1990s to seven percent on average in the 2000s and has been remarkably stable over the decade. Growth in gross domestic product (GDP) has been between five and seven percent in recent years. Tanzania has proved to be resilient to international shocks over the recent past, with effective demand-side measures both on the fiscal and monetary sides during the global financial crisis in 2009. After a year of economic rebound from the global crisis, growth decelerated again in 2011 due to a massive domestic power shortage. The economy has been in the recovery phase since early 2012. This positive trajectory appears to have accelerated in January-March 2012, the period captured by the latest official data available. Quarterly GDP growth reached 7.1% on an annual basis, up from 6.1% a year ago.

Sources of growth are rather concentrated in a few sectors. The drivers of growth over the past decade have been to a large extent the growth in the mining sector, telecommunications, tourism, and construction. There are some signs of economic diversification. For example, manufacturing value-added grew at around 8.8% from 2005 to 2010, with exports having grown by 45% annually during the same period, driven by regional exports to the East African Community (EAC) and Southern Africa Development Community (SADC) countries. However, the size of the sector remains small.  At the same time, agriculture faces stagnation in its productivity growth.

Growth has also become increasingly dependent on government spending rather than on private investment. The public sector grew from 15% of GDP to over 27% over the past 15 years. This is in contrast to the formal private sector, which remains small with private investment having grown only marginally from the level of 10% to 12% of GDP in the early 2000s to 14% to 18% over the past five years. The public sector expansion was facilitated by massive aid inflows, debt relief initiatives, and significant gains in tax collection.

The country has been fighting with high inflation since 2011. Double digit inflation occurred in the last quarter of 2011 in Tanzania, after a decade of relatively stable prices. These pressures are related to the higher food prices and fuel prices. After peaking in December 2011 to almost 20%, the headline inflation gradually started declining, but still remained high at 15.7% by July 2012. 

Fiscal and monetary policies were significantly transformed during 2011. After years of accommodating policies, the authorities adopted a policy of fiscal prudence. This policy was a response to growing inflation, an unstable exchange rate, and increasing fiscal pressures. These policies helped to achieve the stabilization of most financial variables, as shown by the fact that these have returned to a positive historical state from around the beginning of 2012. However, some threats to the economy remain. In particular, the fiscal balance remains fragile and the inflation rate has declined more slowly than expected.

Tanzania’s growth outlook remains positive. The Tanzanian economy is expected to continue to expand at the rate of approximately 6.5% to seven percent in the next few years, which is consistent with its performance over the past decade. Investments in mining, especially gold, and the emergence of private activities boosted by better infrastructure, regional growth, and policy reforms in the business environment. Tanzania has good prospects to become a major producer of natural gas in a decade. This could bring billions of dollars in foreign direct investment (FDI) to the country and contribute to correspondingly large export and budget revenue flows by around 2020. The positive medium-term outlook depends on timely investments to tackle infrastructure bottlenecks, including sound energy sector interventions in the longer term, and structural reforms, especially to improve the business climate, as well as prudent fiscal and monetary policies.

As in the recent past, fiscal policy is expected to be the main instrument to stimulate economic growth. The Tanzania government is allocating an increasingly large proportion of its expenditure to infrastructure spending if projects in the pipeline are included. At the same time, driven by projected economic growth and policy and administrative reforms, real domestic revenues should increase.

Despite Tanzania’s strong economic performance in the recent past and its good prospects in the near future, the economy remains vulnerable to the impact of external and domestic shocks and to deviations from appropriate fiscal and economic policies. Exogenous shocks have the potential to impact the fiscal balance. The fiscal framework is also vulnerable to endogenous risks embedded in the strategic choices adopted by the Tanzanian government. These include excessive use of non-concessionary financing for investment projects, unbalanced allocation of resources between infrastructure and social sectors, and internal pressures on wages.

Political context

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 multiparty democracy as part of wide-ranging political and economic reforms in 1992. Since then, the number of political 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.

Tanzania has most recently embarked on a Constitutional review process which will be finalized in 2015 ahead of the general elections in October. This review process currently forms a major part of public debate along with topics such as corruption and poor service delivery. 

Development Challenges

Despite the growth of the economy, poverty remains prevalent and stagnant. Tanzania remains today a poor and predominantly rural country. Approximate 30 million people, or about 75% of the total population, live in rural households. These households constitute 80% of the country’s poor. However, reducing rural poverty has proven to be an elusive goal, despite the country’s impressive macroeconomic performance and despite the attempts of the Government and donors to boost agricultural production over the past decades. Since 2001, the level of poverty in rural areas has remained stagnant at around 37% to 40%.

Tanzania's rank in the United Nations Development Programme’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.

Access to education has improved, but the quality of education has suffered and uneven spatial distribution of education and health expenditure persists. 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 also weak with slow growth in the number of qualified teachers and insufficient supply of textbooks and other inputs. The quality of secondary education has also been affected by low quality at the primary level. Progress in the health sector has been more uniform as shown in the Tanzania Demographic and Health Survey 2010, albeit starting from a very low level. Uneven spatial distribution of education and health expenditures among districts continues to be a serious issue, explaining the variations in access to and quality of education and health services observed in the country.

On the structural side of the economy, the country faces challenges for productivity growth, including infrastructure gaps and existing constraints in the business regulatory environment. Insufficient and unreliable power supply remains as a major impediment to growth. While progress has been made, the country still needs more improvements in the quality and access to electricity services. 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. While some progress has been made in regulatory environment reforms, the improvement has been too limited and uneven resulting, from the government’s perspective, in disappointing results in Doing Business and Africa Competitiveness Report rankings.

Tanzania needs competitive labor-intensive sectors to absorb the growing youthful labor force and regional integration will produce opportunities for building an export base for such sectors. 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.

Agricultural productivity needs to be increased to raise the poor above the poverty line and improve the competitiveness of commercial agro-processing. Despite its critical role for the majority of Tanzanians, the agriculture sector has not been performing to its potential. Problems include low adoption of improved technologies, high transport costs, and the lack of adequate market competition. A number of policy interventions, although some have been designed for other genuine reasons, still continue to constrain the growth of the sector. High rates of taxation and non-tariff trade barriers also undermine commercial growth in some sub-sectors. Recent government commitments under Kilimo Kwanza (Agriculture First) offer the promise of greater coordination of public and private commitment to make Tanzanian agriculture more competitive. The government is investing a growing share of its budget in agriculture and is encouraging broader commitments to agribusiness development such as the Southern Agricultural Growth Corridor of Tanzania (SAGCOT).

While Tanzania was for 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. 

Last updated September 2012

The commitment to accelerate economic growth and fight poverty has been implemented through a series of strategies and plans. In 2005, the government adopted a results and a Millenium Development Goals (MDG) based strategy commonly known as the National Strategy for Growth and Reduction of Poverty (NSGRP, or popularly known in Kiswahili as MKUKUTA). NSGRP was adopted to sustain and scale up achievements while addressing the challenges to growth and poverty reduction. A second MKUKUTA, covering FY11-15, is currently under implementation. Concurrently, the Revolutionary Government of Zanzibar finalized the Zanzibar Strategy for Growth and Reduction of Poverty (MKUZA II), covering the same period. MKUKUTA II and MKUZA II are the vehicles for realizing the Millennium Development Goals and Tanzania’s Development Vision 2025, which aim to transform Tanzania into a middle-income country. The strategies aim to accelerate economic growth and poverty-reduction efforts by pursuing pro-poor interventions and addressing implementation bottlenecks. The strategies scale up the role and participation of the private sector in economic growth and employment generation, and emphasize investment in people and infrastructure development. Tanzania’s Poverty Monitoring website provides a variety of resources on poverty reduction, and has the MKUKUTA II text and results matrix available for download.

World Bank Assistance/Engagement

The World Bank Group assists Tanzania’s development plans through a mix of investment projects, basket funds, and budget support. In addition, the Bank mobilizes financial and technical resources through trust funds, conducts economic analyses to ensure value for money in public spending, and works closely with the government and other development partners to strengthen aid coordination and harmonization. Since 1995 the Bank has provided more than US$5.5 billion to Tanzania in credits and grants. About 30% of the Bank's support has been provided through development policy operations during the last four years focusing on improving public expenditures, increasing growth, and improving the delivery of social services.

The Country Partnership Strategy (CPS) provides the framework for World Bank Group support from 2012 – 2015. The CPS is based on the Bank’s Africa Region Strategy and highlights partnerships as a means for implementation, building on the core partnership with the government; knowledge products to support reforms; as well as financing. The Bank, as a key development partner in Tanzania, will continue to support aid effectiveness through partnerships with the domestic and international private sector, civil society, and development agencies, including non-traditional donors.

The World Bank Group’s private sector financing arm, the International Finance Corporation (IFC), has mobilized over US$185 million in investments in Tanzania to date, and offers  a broad range of advisory services to support the private sector. The IFC's strategy in Tanzania focuses on supporting micro, small and medium enterprises through financial intermediaries, developing infrastructure by providing long-term finance for large projects, and investing in agribusiness, tourism and other key economic sectors.

The IFC’s recent transactions in Tanzania include a US$3 million investment in AccessBank Tanzania, a new microfinance institution; and US$12 million in loans to Bakhresa Group to support the Tanzania-based agribusiness company to expand in Malawi and Mozambique. IFC is also an investor and has an outstanding trade finance facility with Exim Bank, one of Tanzania’s most well established private banks. IFC’s financing has supported the bank’s successful expansion across Tanzania. IFC is also working with Exim Bank to boost its lending to women entrepreneurs and to promote trade through a trade finance facility.

Tanzania became a member of the Multilateral Investment Guarantee Agency (MIGA) in 1992. MIGA is the component of the World Bank Group that provides guarantees and political risk insurance for private investments.  At present, MIGA does not have any commitments in Tanzania.

The World Bank Institute (WBI) focuses on support to oversight institutions (media and parliament), economic competitiveness (public private partnership and financial sector management), and support to enhance service delivery (water and nutrition). The Global Development Learning Center was launched by WBI in 2000.

Partners

Tanzania is highly aid dependent. Official development assistance (ODA) to Tanzania increased from US$1.6 billion in 2000 to US$3 billion in 2010, which amounted to 14% of GDP. More than 40 development partners provide support to Tanzania, four of which account for approximately 43% of total ODA. Of the US$14.4 billion of ODA disbursed to Tanzania between 2005 and 2010, IDA is the largest financier, providing an average of 20%, followed by the United Kingdom providing 10%, the United States of America nine percent, Japan eight percent, and the European Union seven percent.

Tanzania has been at the forefront of efforts to improve the quality of aid through ownership, alignment and harmonization. The Bank is an active player in the General Budget Support framework, a multi-donor initiative that provides resources to support the poverty reduction strategy of the Tanzania government through the implementation of the national budget. Donor countries provide financing directly to the government, and it is spent according to the priorities set out the national budget. A joint monitoring mechanism known as the Performance Assessment Framework has been agreed between the government and development partners and it serves as an important tool that facilitates implementation of the General Budget Support framework. 

Last updated September 2012

Infant mortality in Tanzania has fallen by nearly 50%, from 99 deaths per 1,000 live births in 1999, to 51 in 2010. This suggests that Tanzania can achieve the Millenium Development Goals (MDG) target by 2015. The under-age-five mortality rate has also declined, from 146 deaths per 1,000 live births in 1999, to 81 in 2010, again bringing the MDG target within reach. The recently implemented Under-five bed net campaign -- to which the World Bank contributed 2.4 million nets -- plus the increased emphasis on immunization coverage, makes Tanzania's child health-related MDG targets increasingly attainable. Equitable access to health services relates to government's focus on improved primary health care and to the growing volume of health basket funds from numerous development partners, including the World Bank, financing frontline health services.

In the transport sector, the World Bank has channeled more than US$500 million since 2000. During this period, the percentage of major arteries and trunk roads in good and fair condition has increased along with regular funding provided for the maintenance of roads by local governments. As of 2010, the percentage of trunk and regional roads in good and fair condition had increased to 88%, up from 51% in 2000.

In education, net primary school enrollment is up more than 40%, from 59% in 2000/01 to 95.4% in 2009. Bank support to a series of education programs, combined with removal of school fees at the primary school level, has played a critical role in raising enrollment rates. Investments in education have focused on sustainable reforms to widen access to schooling while also improving quality of learning outcomes. Bank support has also included analytical work and expenditure reviews with recommendations for increasing efficiency and ensuring sustainability of education programs. 

In the health sector, efforts have been geared towards increasing access to and improving the quality of health services, with policy advice and knowledge transfers as well as financing. 

Last updated September 2012