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Country focus: Tanzania: Bright outlook for further growth, poverty reduction

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
August 2005
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IMF Survey:The IMF’s projections for Tanzania indicate that a continuation of recent policies would allow the economy to grow at 5 percent a year over the medium term. What policies and other factors are driving Tanzania’s substantially improved growth performance since the mid-1990s?

Treichel:Tanzania’s strong growth record over the past decade has largely been the result of three pillars of domestic policy. The first pillar is macroeconomic stabilization—appropriate fiscal and monetary policies—which has produced a rapid decline in inflation. The second pillar is broad-based liberalization, including liberalization of external current account transactions, the foreign exchange market, and agricultural prices. The third pillar is large-scale privatization.

All of these pillars of policy have had direct, positive effects on economic activity and have, in addition, contributed to higher foreign direct investment [FDI]. And higher FDI has translated into growth in sectors such as mining, tourism, construction, and services in general, and also manufacturing, which has been growing fast, albeit from a very low base (see table). Over the medium term, Tanzania must intensify these policies in certain areas—notably, the agricultural sector and the business environment—to yield more broad-based growth that benefits other sectors of the economy.

IMF Survey:Why has poverty declined more in urban than in rural areas since 1995?

Treichel:The main reason is that economic growth has been much higher in urban than in rural areas because the three pillars of policy have had larger effects on sectors of the economy predominant in urban areas. For example, the services, construction, and manufacturing sectors are all based in Dares-Salaam, in particular, and have a strong presence in some other cities. Although there are no separate national accounts for the urban versus the rural economy, my colleagues and I estimate that real GDP growth over the past five years was more than 6 percent annually for Dar-es-Salaam, compared with only 4 percent annually for Tanzania overall. The difference reflects very low growth in the rural economy. The bottom line is that the pattern of poverty reduction that we have observed is broadly consistent with the pattern of growth. If growth continues at recent rates in urban areas and slightly accelerated rates in rural areas, however, prospects are favorable for Tanzania to attain its goal of halving income poverty by 2015.

IMFSurvey:Given the large numbers of the Tanzanian population living in rural areas and employed in agriculture, poverty reduction hinges largely on an effective rural development strategy. What are the main elements of that strategy?

Treichel:Agricultural performance has varied significantly by crop. Since the mid-1990s, tea, tobacco, and cashew nut yields have improved quite a bit, but cotton and coffee, which employ very large segments of the economy, have grown more sluggishly. So, there is no “silver bullet” that will stimulate accelerated growth across the agricultural sector. It is important to carefully examine the sectoral pattern of economic activity—crop by crop—and assess the obstacles that must be overcome to improve production. One key measure would be to restructure the crop boards to strengthen producer incentives. Important preliminary work in this area has already been done by the Tanzanian government in collaboration with the World Bank.

Rising growth and declining inflation

Effective fiscal and monetary policies, liberalization, privatization, and higher investment have helped spur growth.

1990-951996-2004
ContributionContribution
Annualto growthAnnualto growth
averageperformanceaverageperformance
(percent)(percentage points)(percent)(percentage points)
Real growth2.75.0
Sectoral components of GDP
Agriculture3.61.74.02.0
Industry1.50.28.11.4
Mining11.80.115.50.3
Manufacturing0.70.16.30.5
Electricity and water4.40.14.90.1
Construction0.30.09.40.4
Services1.90.65.21.6
Trade, hotels, and restaurants2.20.46.01.0
Transport and communications4.10.25.30.3
Financial and business services2.00.14.60.3
Public administration and
other services-1.5-0.12.10.0
Inflation29.98.2
Data: Tanzanian authorities.
Data: Tanzanian authorities.

IMF Survey:What are the main downside risks to these relatively optimistic growth and poverty reduction scenarios?

Treichel: Clearly, a main downside risk is the impact of the HIV/AIDS crisis, which has hit large segments of the rural as well as urban population. Human capital has also been negatively affected by the lack of appropriate education opportunities for the Tanzanian population. Education policies need to improve, especially at the secondary level. This has been a constant concern of the business community—on that has been continually raised at the Investors’ Round Table and various other forums designed to improve the country’ business and investment climate. Intensified efforts in this area might be able to counteract somewhat the negative impact on human capital of the HIV/AIDS crisis—in spite of the enormous dimensions of that crisis.

A second main downside risk is sluggish private sector development. Tanzania will need to remove impediments to private sector development and to improve its business environment, specifically by strengthening tax policy and administration, and improving infrastructure and governance.

Many policy reforms are now under way that could boost economic growth above 5 percent a year if these efforts are sustained.

—Volker Treichel

Policy implementation is the key to addressing these downside risks. Many policy reforms are now under way that could boost economic growth above 5 percent a year if these efforts are sustained. In the tax area, for example, Tanzania has made great progress over the past few years in streamlining tax administration, broadening the tax base, and improving tax collection. There also have been various reforms in recent years to improve the efficiency of import clearance procedures at the port of Dares-Salaam.

IMF Survey:Your paper mentions the effectiveness of financial sector reform, which has substantially increased the credit available to the private sector in the past several years. Nevertheless, critical segments of the private sector—particularly in rural areas—continue to lack access to financing. What can be done to address this?

Treichel:The joint IMF-World Bank Financial Sector Assessment for Tanzania in 2003 provides a road map for addressing this. Important initiatives include changes to the institutional and regulatory environment for the financial sector, including the opening of a credit reference bureau, which serves as a source of information to banks about prospective borrowers’ credit histories. The privatization of the National Microfinance Bank, currently under way, will be another step forward. The bank’s huge branch network could significantly improve access to credit by small enterprises. Now the challenge will be to implement these and other recent financial sector reforms—a process that unfortunately is impeded by weak capacity.

IMF Survey:Many economists, such as William Easterly, Ross Levine, and Dani Rodrik, stress the importance of sound institutions for sustainable economic growth. How is Tanzania faring in this regard?

Treichel: The quality of institutions is critical. In a sense, the weaknesses in Tanzania’s business environment point to a lack of sound institutions. Better institutions would help address the private sector’s complaints about tax and customs administration. Similarly, weaknesses in governance are effectively weaknesses in the quality of institutions. Weaknesses in the legal system, including poorly enforced contracts, are a similar issue of the quality of institutions.

Even poor infrastructure is linked to poor institutions. The execution of road construction/maintenance and power generation projects, for example, can be impeded by a lack of adequate institutional and human resources capacity.

Copies of IMF Working Paper No. 05/35, Tanzania’s Growth Process and Success in Reducing Poverty, are available for $15.00 each from IMF Publication Services. Please see page 232 for ordering details. The full text is also available on the IMF’s website (www.imf.org).

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