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Tanzania - Economy Background

By the end of the Cold War, liberal Kenyans, disturbed by the social in equalities that had accompanied their country's prodigious economic growth, saw Tanzania as an enduring symbol of socialist egalitarianism, an epitome of the conviction that economic development should not be pursued at the cost of social misery. For economically pragmatic and centrist Tanzanians, Kenya was a constant reminder of the opportunity cost of two or more decades of failed socialist policies, a living national embodiment of the sacrifices imposed upon an entire generation by political leaders unable to acknowledge the inadequacy of their socioeconomic model.

Despite enthusiastic privatisation during the 1990s, and annual GDP growth of between 5% and 7%, the Tanzanian economy remains weak. The Government of former President Benjamin Mkapa saw through a vigorous program of economic reform, in line with IMF guidelines. President Kikwete pledged to continue these policies. Corruption is still endemic; Kikwete said that addressing this will be one of his major priorities. Parliament and the media are playing an increasingly prominent role in ensuring Government accountability.

Macroeconomic developments remain favorable. Economic growth was strong during the first half of 2014 and is expected to remain close to 7 percent. Inflation remains in mid-single digits, consistent with the authorities target of 5 percent by June 2015. New national accounts statistics show an upward revision of the 2007 GDP by 28 percent.

Real GDP grew by 7 percent in 2013, driven by services, construction and manufacturing. Growth remained strong in the first half of 2014. Headline CPI inflation stood at 5.9 percent (y-o-y) in October 2014, while core inflation (excluding food and energy) declined to about 3 percent. The external current account deficit in 2013/14 was lower than expected by almost 1 percent of GDP owing to higher nongold exports and lower oil imports. Gross international reserves stood at US$4.6 billion in June 2014, or 3.7 months of prospective imports. While the shilling has continued to depreciate gradually against the U.S. dollar, the real effective exchange rate appreciated by about 5 percent (y-o-y) in September 2014, reflecting an appreciation against the euro and a positive inflation differential relative to trade partners.

Agriculture is the mainstay of the economy, contributing close to 26 percent of GDP and employing 75 percent of the labor force, with women contributing more than 75 percent of the labor. Tanzania is a net importer of rice; however, with improved yields, it could fulfill growing domestic and regional demand. Furthermore, while Tanzania is largely self-sufficient in its main staple crop, maize, it still faces shortfalls in some years due to weather variability and low yields.

Limited financial resources, weak infrastructure, and poor policies have not provided incentives to develop the agricultural sector. Only 9 percent of the Tanzania population has access to formal financial services, and only 4 percent has received a personal loan from a bank. Further, the credit squeeze resulting from the global financial crisis was acute in Tanzanias agriculture sector.

The success of the agricultural enterprise in many villages, and therefore the supply of food, was highly related to climatic conditions, especially rainfall, in the cycle of the growing season. Grains were directly affected by drought and a lack of rain also made it more difficult to keep adequate water levels in fish ponds, caused grass used for grazing to dry, and reduced the milk production of cows and goats. The grain supply was for the short term (less than a year) because storage facilities were not adequate to keep it for longer periods without spoiling and would not protect it against insects and rodents.

Skills were widely held among rural Tanzanians. Many made bricks, both sun dried and kiln fired. Many also knew how to lay a brick wall and how to construct a wall with poles and branches filled and plastered with mud. The benefits of inter-planting of crops that support each other rather than compete, a form of sustainable agriculture that has been practiced in Tanzania for generations, was widely understood. People described the advantages of interplanting and used it in overwhelming proportions over monocropping in shambas.

In addition to farmers, other evident occupations in villages include shop keepers, grainmillers, lumber sawyers, furniture makers, a forester, medicalaides and midwives, primary school teachers, clerics (Christian and Muslim), government and political party officials, and brewers of alcoholic beverages. There were buses and trucks that made regular runs through the village and drivers and their assistants were seen. It was most commonfor those in these occupations to also have a shamba for the growing of food for their own consumption. But when ruralTanzanians entered the international market, they experienced a severe depreciation in the economic value of their work.

The good life - "maisha mazuri" - meant having nice, clean clothes, shoes, a decent house with furniture, a family, and secondary education for their children. A life of dignity did not require extravagant purchases or conspicuous consumption. Having ashamba, together with cows or goats, could provide for most of their food if growing conditions were favorable. Residents expected to be able to provide a house without any major expense. Clay suitable for making bricks or for plastering walls woven with poles and branches could be dug in the village, rafters could be cut from nearby trees, and thatch could be cut and dried for covering a roof.

After independence, Tanzania adopted socialist economic policies, resulting in severe economic decline. The state controlled the economy and owned all of the major enterprises. The exchange rate and pricing policies were based on non-market mechanisms, creating low export and real GDP growth, high inflation, and widespread shortages. Agricultural production, the mainstay of the economy, declined steadily.

In 1986, Tanzania began to liberalize its economy and make partial market-oriented economic reforms. Although the government liberalized the agricultural marketing system and domestic prices and initiated financial system reform, economic growth was slow between 1986 and 1995.

Since 1996, Tanzania has taken aggressive steps toward macroeconomic stabilization and structural reforms. The emergence of a strong Ministry of Finance, supported by the International Monetary Fund (IMF) and other development partners, was instrumental in accelerating fiscal reforms and fostering a turnaround in fiscal performance. Overall, real GDP growth has averaged about 6% a year over the past 7 years, which was higher than the annual average growth of less than 5% in the late 1990s. Total debt service payments for 2010 were $85 million. The IMFs Debt Sustainability Analysis indicated that debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative combined with sound macroeconomic policies place it at low risk of debt distress. Public external debt service was approximately 1% of GDP in 2009 and expected to remain so for 2010 and 2011.

However, economic growth has not translated to significantly improving the lives of average Tanzanians. The economy remains overwhelmingly donor-dependent; 30% of the budget is dependent upon donor assistance. The global financial crisis significantly affected the tourism industry, one of Tanzania's top foreign-exchange earners; however, Tanzania was able to maintain relatively strong growth in 2010. Continued high food prices since a spike in 2008 have contributed to a rise in inflation to over 10%, a substantial increase from more moderate inflation earlier in the decade.

Agriculture constitutes the most important sector of the economy, providing about 27% of GDP and 80% of employment. Cash crops--including coffee, tea, cotton, cashews, sisal, cloves, and pyrethrum--account for the vast majority of export earnings. While the volume of major crops--both cash and goods marketed through official channels--have increased in recent years, large amounts of produce never reach the market. Poor pricing and unreliable cash flow to farmers continue to frustrate the growth of the agricultural sector.

Accounting for about 22.6% of GDP, Tanzania's industrial sector is one of the smallest in Africa. The main industrial activities are dominated by small and medium sized enterprises (SMEs) specializing in food processing including dairy products, meat packing, preserving fruits and vegetables, production of textile and apparel, leather tanning, and plastics. A few larger factories manufacture cement, rolled steel, corrugated iron, aluminum sheets, cigarettes, beer and bottling beverages, fruit juices, and mineral water. Other factories produce raw materials, import substitutes, and processed agricultural products. Poor water and electricity infrastructure systems continue to hinder manufacturing. In general, Tanzania's manufacturing sector targets primarily the domestic market with limited exports of manufactured goods. Most of the industry is concentrated in Dar es Salaam.

Generally, Tanzania has a favorable attitude toward foreign direct investment (FDI) and has made efforts to encourage foreign investment. Government steps to improve the business climate include redrawing tax codes, floating the exchange rate, licensing foreign banks, and creating an investment promotion center to cut red tape. However, Tanzania still must overcome the legacy of socialism. The most common complaint of investors, foreign and domestic, is the hostile bureaucracy and the weak judiciary system.

Zanzibar's economy is based primarily on the production of cloves (90% grown on the island of Pemba), the principal foreign exchange earner. Exports have suffered with the downturn in the clove market. Tourism is a promising sector with a number of new hotels and resorts having been built in recent years. A prolonged electricity shortage from December 2009 to March 2010 delivered a blow to Zanzibars economy, severely affecting tourism and causing a rapid increase in commodity prices.

The island's manufacturing sector is limited mainly to import substitution industries, such as cigarettes, shoes, and processed agricultural products. In 1992, the government designated two export-producing zones and encouraged the development of offshore financial services. Zanzibar still imports much of its staple requirements, petroleum products, and manufactured articles.

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Page last modified: 03-06-2017 18:14:13 ZULU