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Are you saying there is Economic Growth in Tanzania? Show me the Money?

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Tanzania has consistently recorded some impressive economic growth over the past two decades. In fact, the Gross Domestic Product (GDP) growth has averaged 6% over the same period. To appreciate this level of growth, one needs to grasp the definition of sustained economic growth as provided by the likes of Arrighi (2012).

He argues that sustained economic growth is attained when a country experiences a consistent growth pattern ranging between 3.5% and 5% over a period of 10 years. Tanzania has more than achieved this milestone.

It is thus in order to congratulate the government of Tanzania for the ongoing growth. Nevertheless, the talk around streets and media in Tanzania is rather darker than the rosy picture painted above. Indeed, if there is one most common question posed by Tanzanians today is that; if we really have such an impressive economic growth, why is the situation among people not improving? Is the data about economic growth cooked? Just where is the money?

The government point of view on the matter has been straight forward. The growth is real, and the evidence is there to be seen by everyone. At times the argument goes to the level of accusing those complaining about the questioned growth as those who benefited from corrupt deals in previous governments.

To the government’s credit, international organizations such as the World Bank, International monetary Fund, African Development Bank, just to mention but a few, have all indicated that the growth in Tanzania is as impressive as the government claims.

But the question still lingers: just where is the money? Why is the considerable number of Tanzanians, by and large, still poor?

Well, the one fact that we all ought to understand is that while economic growth is a necessary condition for poverty reduction, it is never a sufficient condition for the same. Meaning you can have an economic growth but one that is not inclusive. There are many reasons that can make the growth non-inclusive. What are some of these reasons, one may ask:

Firstly: This situation is entrenched within the definition of the GDP itself. Indeed, by definition, GDP aggregates all outputs (incomes) produced in the economy regardless of who produces them (local or foreign).

The aggregation actually means that the growth of the economy as measured by GDP can be inflated by the wealthy few (local or otherwise) rather than by Tanzanians in their totality. It is not surprising then to see the haves enjoying the growth while the have-nots wonder if the growth exists in the first place.

The fact that the GDP measure disregards some important aspects of work e.g. housekeeping; and the general well-being of people e.g. access to quality health and education makes GDP a very misleading measure of economic growth especially when one considers the inclusivity of the said growth.

Secondly: This pertains to sectors that contribute to the growth itself. According to the data from the National Bureau of Statistics, the agricultural sector that accommodates the majority of Tanzanians (66.3%) contributes only 26% to the growth of GDP.

This implies that most people in Tanzania share a smaller cake of the nation as compared to the privileged few. The only way around this would be for the agricultural sector to undergo transformation in such a manner that more (agricultural products) is produced by fewer people thereby allowing the rest to move to other sectors in the economy preferably manufacturing sector which can accommodate the workforce with limited education qualification.

This would also entail raising education levels for people working in the agricultural sector as well as intensifying the establishment of manufacturing firms across the country.

Thirdly: Understanding the plight of the majority of Tanzanians failing to enjoy the fruits of the economic growth warrants an acknowledgment of income inequality problem in the country. Indeed, the data made available by the National Bureau of Statistics, shows that little to no progress has been made with regards to reducing inequality.

In fact, the data on inequality (Gini coefficients based on expenditure distribution) indicates that inequality in Tanzania has increased from 1991-92 to 2000-2001, remained at this slightly higher level from 2001 to 2007, and returned to the 1991-92 level in 2011-12. In other words, from 1991-92 until 2011-12 (a period of 20 long years), inequality has not decreased in Tanzania.

If authorities such as the Nobel Prize Winner in Economics, Amartya Sen, are to be believed when they argue that poverty reduction is impossible in the presence of deep income inequality, then Tanzania still has a long way to go before its impressive economic growth can be reflected in its people.

It is no wonder then that the data on poverty made available by the National Bureau of Statistics, shows that the percentage of Tanzanians who lived below the poverty line with regards to basic needs has been decreasing very sluggishly.

Specifically, 38.6 percent of the Tanzanian population lacked basic needs in 1991-92, the percentage declined to 35.7 in 2000-01, it declined further in 2007 and reached 28.2 percent of the population in 2011-12. That’s a 10 percent drop in 20 years; this happening at the time when the economic growth in Tanzania at times shot as high as 8% per annum. Surely, the problem of inequality needs to be tackled head-on if the situation has to improve in the country.

An important point to make at this juncture is that as pretty as economic growth numbers have looked over the two decades, we ought to keep in mind that development is about people. While impressive, an average of 6 percent growth means little if a pregnant mother dies on the way to the health centre located 10 miles from her home; if a kid has to walk 10 kilometers to get to a school with no books, enough teachers and other necessary amenities; if there are no efforts to improve productivity in agriculture; if basic necessities such as water and electricity are still a luxury to the majority of Tanzanians etc.

Put differently, efforts to make lives and not things better are where the real jackpot is. So, yes, we need planes, fly-overs, bridges, standard gauge railways, tarmac roads etc. However, in the midst of all these, the basic needs of human beings have to be given their due priority.

The late Mwalimu Nyerere gave us necessary priorities in ensuring inclusive growth when he talked about ‘the three enemies of development’; so we need not to re-invent the wheel. These include ignorance (improve the access and quality of education), diseases (improve the access and quality of health services) and poverty (pursue inclusive growth by fighting inequality).

Although Tanzania has recorded some impressive economic growth over the last two decades, it should be noted that the said growth has not been inclusive. It is therefore not surprising to find that most Tanzanians question the authenticity of the growth being proclaimed time and again.

While there is no question whatsoever about the growth numbers in Tanzania, the government ought to realize that economic growth is never a sufficient condition for growth to be translated to development at the micro level. It is in this context that propositions for transformation of the agricultural sector and curtailing of income inequality have been made.

Prioritizing quality service delivery such as that in education and health would also go a long way to ensure that people get to ‘feel the growth in their pockets’. Indeed, that’s where the money is, and the core responsibility of the government is to show it to the people that put government in power in the first place.

 

About the author

Dr. Abel Kiyondo is a Principal Research Fellow at REPOA,
an independent institution based in Tanzania.

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1 Comment
  • You don’t need a complicated answer …. Growth does not create wealth , production does , so if you consume more than you produce you will create poverty. The only cure is ” produce more than you consume ” …. Get back to basics and make at home rather than import

Tanzania

Shilling Fluctuation, a seasonal phenomenon?  

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The debates about the depreciation of shilling against the US dollar are unprofessional, as the fluctuating dollar exchange rates are global and seasonal.

Contrary to what analysts and a section of the media argue or wish the public to believe, experts in economics and financial matters hint that there are well balanced reasons to that.

Having analyzed such baseless debates, I argue that this situation needs to be explained scientifically and economically rather than being blown up unnecessarily.

It should be noted that not only the Tanzanian shilling has slightly depreciated against the US dollar but also other currencies in the world.

Why? Did they fail to export cashew nut as some would argue here? Why the US dollar outperforms other currencies?

According to the ET Markets (2018), in this year (2019), the US dollar was forecasted to outperform many other currencies because of the interest hike.

The ET Markets report which is also supported by the Bank of Tanzania (BOT), states that last year, the US economy continued to strengthen.

This strength caused the US Federal Reserve to increase interest rate in December 2018. The US Fed increased 25 basis point hikes in December, so interest rate differential widened further to 2.65-2.90 per cent.

Euro and US inflation stabilized nearly 2 per cent, but there was a difference in GDP growth and unemployment rate.

GDP growth is higher in the US and unemployment rate is lower compared with the euro, which naturally makes the dollar stronger against the euro and other currencies in the world, including Tanzania.

Economically and financially, this development has contributed to rise in demand for the US dollar from investment side, consequently causing the US dollar to appreciate against most currencies, including the Tanzanian shilling.

The US Dollar is the benchmark pricing mechanism for most commodities which are global assets.

Base Metals that trade on the LME and precious metals such as gold, silver and energy including oil and natural gas use the dollar to price.

The rising dollar has significant consequences on commodities, as higher dollar tends to weigh on commodity prices.

Production cost of raw material in other countries, including Tanzania rise because of a strong dollar and weighs negative on demand.

In the stock market, a higher US dollar weighs on US multinational companies, as they have to compete globally with strong currency.

According to the latest forecasts from Barclays (2019), the dollar will remain the dominant force in the currency market this year and the pound sterling will succumb to another dose of ‘Brexit uncertainty’ while the euro will reach new lows.

Barclays says in its 2019 outlook that as the Fed drives the dollar to new levels of overvaluation and political factors keep Sterling and the Euro on the proverbial back foot, the Fed will go on raising its interest rate in a sustained manner this year, contrary to what other forecasters have begun to anticipate.

The strength of the US dollar against others as said above, the interest hike by FED has depreciated other currencies in the world, including the Tanzanian shilling.

The Bank of Tanzania (BoT) report indicates that from 22nd February 2018 to 21st February 2019 (one year period), the value of the shilling against the US dollar declined by 3.8 percent.

The BOT reports that the value of the US dollar on Developed Market currencies was also put in pressure in the same period.

The British Pound against the US dollar declined by 6.7 percent, the euro by 8.1 percent, the Australian dollar by 9.6 percent and the Chinese Yuan by 6.4 percent.

Moreover, the emerging markets (EM) have been badly affected by the strength of the US dollar. the Brazilian Real is down 18.4 percent, the Russian Ruble is down 14.75 percent, the Pakistan Rupee is 9.7 percent and the Indian Rupee by 8.9 percent year-to-date (YTD) against the dollar.

The Turkish Lira and Argentinian Peso have been the biggest losers, both down close to 40 percent since the beginning of the year.

Comparative analysis in the African region also provides a gloomy picture. Are measures taken by BOT commendable?

Despite the FED factor, I agree with BoT report (2019) indicating that the current movement in the exchange rate in Tanzania is a seasonal phenomenon related to low foreign exchange earnings from tourism and export crops.

This is true because currency hike may be mitigated by a number of facts. “Customarily, from January to May each year, it is a low tourist season and export crops where the country receives low exchange earnings. This is a common trend that usually normalizes in the second half of the year when earnings from tourism and exports pick-up,” states the report.

I commend BOT, for among other things, implementing monetary policy aimed at maintaining price stability and ensures that inflation remains within the target of single digit intended at stabilizing the value of the shilling.

This can be achieved through maintaining the appropriate level of liquidity in the economy. I understand that BOT is also participating in the interbank foreign exchange market (IFEM), in order to smoothen excessive volatility of the exchange rate.

In doing that, the Bank of Tanzania sold USD 528.6 million in 2018, which is more than double the amount sold in 2017.

In 2019, the Bank of Tanzania continued to sell the foreign exchange in order to reduce its shortage in the economy.

Moreover, the BOT must monitor foreign exchange business in order to ensure that rules and regulations are adhered to, including maintaining foreign currency Net Open Position of commercial banks equivalent to 7.5 percent of core capital.

Factors that could lead the dollar to collapse/depreciate more so to what BoT is mitigating, two conditions must be in place before the dollar could collapse.

First, there must be an underlying weakness. Between 2002 and 2018, the dollar has declined 6 percent according to the U.S. Dollar Index.

This is because the U.S. debt almost more than tripled during that period, from $6 trillion to $22 trillion.

The debt-to-GDP ratio is now more than 100 percent. That increases the chance the United States will let the dollar’s value slide as it would be easier to repay its debt with cheaper money.

Second, there must be a currency alternative for everyone to buy. The dollar’s strength is based on its use as the world’s reserve currency.

The dollar became the reserve currency in 1973 when President Nixon abandoned the gold standard.

As a global currency, the dollar is used for half of all cross-border transactions. That means central banks must hold the dollar in their reserves to pay for these transactions.

As a result, 61 percent of these foreign currency reserves are in dollars. The two situations above make a collapse possible.

But, it won’t occur without a third condition. That’s a huge economic triggering event that destroys confidence in the dollar.

Altogether, foreign countries own more than $6 trillion in U.S. debt. If China, Japan or other major holders started dumping these holdings of Treasury notes on the secondary market, this could cause a panic leading to collapse.

China owns $1 trillion in U.S. Treasury’s. That’s because China pegs the Yuan to the dollar.

This keeps the prices of its exports to the United States relatively cheap. Japan also owns more than $1 trillion in Treasury’s.

It also wants to keep the yen low to stimulate exports to the United States. These facts considered, I reiterate the possibility of a conspiracy theory on the dollar-shilling debate in Tanzania.

The hikes are normal and seasonal, but you still find some people raising unnecessary alarm into markets.

 

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