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Making Sense of Economic Growth in Africa: The Case of Tanzania

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Economic growth has been a subject of public interest and discourse in a number of countries and contexts. This is the case in Africa in general and Tanzania in particular now as it has been in the past and as will be in the future. There are various issues around this broad theme of economic growth.

Issues include non-poverty reducing, non-jobs creating and non-inclusive growth. In what follows are some information on various economic-growth issues in Tanzanian context.

Economic growth concept

Economic growth is the increase of the real output of goods and services of an economy over time. It is usually measured in monetary terms over a period of one year or even quarter. Economic growth is supposed to contribute into general prosperity of the people by way of increasing quality of live. This quality of live can be measured by the quantity and quality of goods and services consumed in a given period of time. At times, economic growth in Africa in general and Tanzania in this case has not been translated into improved life for various reasons.

Growth in Tanzania

Growth in Tanzania has been among the best in Sub Sahara Africa in the recent past. The East African country has been posting growth to the tunes of about 7% consistently over years. In 2017 however there was a derailing from what has been impressive growth trend. Available information shows that Gross Domestic Product (GDP) grew by 5.7% in the first quarter of 2017 compared with 6.8% in the same period in 2016.

This is a drop by 1.1% in a year. There are several possible reasons for the observed decline. These included slowing in production and growth in the mining sector and businesses generally. It is to be noted that the country’s target is to post a 7% growth figure at the end of the 2017/18 fiscal year. It is likely to be a tall order to attain this figure from the observed 5.7%. It means we have to increase growth by a whole 1.3% in order to reach 7%. The key issue is to know the root cause of the slow growth and fix the same. For fiscal year 2017/18 Tanzania posted a comfortable growth of 7.1% and the policy goal for 2018/19 fiscal year is to touch the 7.2% economic-growth mark.

Distribution of the grown cake

It takes distribution and re-distribution for everyone to benefit from the national cake that is reported to increases as a result of increased economic growth. This is because various economic actors contribute differently in increasing the size of the national cake. Distribution and re-distribution of the national cake is normally done through fiscal policy and its various policy instruments especially taxation. A good tax system is supposed to distribute and re-distribute the wealth that accrues from economic growth. Tax revenue should be put in the government coffers for distribution and re-distribution to the general population by ways of providing public goods and services inter alia.

If and when the tax system is not efficient, it fails to collect adequate revenues. The implication is inability to distribute and re-distribute benefits of economic growth. Therefore one may see increased economic growth but if the results of that growth are not equally and equitably distributed and re-distributed the majority may not feel and enjoy the growth.

Population growth

For one to benefit from the increased size of the national cake, the mouths eating slices from it should be proportional to the increased growth. In countries where population grows faster than the extent to which the economy can support, one may fail to enjoy the results of the growth. If the cake grows at a smaller rate than its eaters then its growth may not be felt. It will be illogical therefore to expect reduced poverty and increased standards of living if the population grows faster than the national income.

Source of growth

Economic growth is a result of economic activities conducted by various actors in various sectors of the economy. These actors and sectors of the economy contribute in different proportions to the size of the national cake. Therefore there are many sources of economic growth. Some sectors and individuals may contribute more to the growth. If these are proportionally rewarded for contributing more they will feel and enjoy more the results of growth. In a Foreign Direct Investments (FDIs) led growth, the results of increased growth may not be well felt into the local economy. Other factors that may explain the paradox of poverty amidst increased growth include inflation which makes the monetary value of the national income look big but in real terms it is not.

Equitable Growth

On the 30th April and 2nd May 2018 economics and development stakeholders in Tanzania and beyond had a very rare opportunity to listen to and engage with some of the leading economists in the world. On the 30th, Professor Joseph Stiglitz from Columbia University and Nobel Laureate in Economics together with Professor Kaushik Basu from Cornel University delivered a public lecture at the University of Dar Es Salaam. On the 2nd May the duo were joined by Professor Sabina Alkire from Oxford University at the 7th annual conference of the Economic and Social Research Foundation (ESRF) in Dar Es Salaam.

The theme of the conference was Equitable Growth and Human Development in Resource Based Economy: Dialogue on Stockholm Statement for Tanzania. Key discussion issues revolved around the axis of equitable economic growth. Apart from the trio, there were other leading economists who have worked deeply on the theme of the conference.

They included Professor Robert Solow, a Nobel Laureate in economics and Professor Paul Krugman. Having participated in the debates of these great minds, I intend to interrogate the concept of equitable growth in Tanzanian context based on the Stockholm statement.

Stockholm statement

The Stockholm statement of November 2016 is based on the ideas of 13 world’s leading economists, including Professor Joseph Stiglitz and four former Chief economists of the World Bank. The statement has a set of principles to help frame country-level policies in a rapidly changing and globalizing world. The key issues in the statement in the context of this narration include the view that traditional economic thinking no longer applies.

Inequality within countries is threatening social cohesion and economic progress and development needs to be seen in a broader perspective in order to achieve more equitable and sustainable results. According to the statement, inclusive economic development is the only socially and economically sustainable form of development. It emphasizes the importance of policies that tackle inequalities. It sees trickle down growth policies where the state has a minimal role and the rest is left to the market as not being sustainable.

Inequality

The key aim of equitable growth is to address inequality with its many negative social, economic, political and even security implications. Extreme inequalities with very high Gini Coefficient are unhealthy and should not be tolerated. For example, a Gini Coefficient of one means that one person has total control over all the income or consumption of country or region.

One does not suggest a perfectly equal society economically where Gini Coefficient is one either. However, one suggests reduced inequalities where extremes tend to move towards the centre. Theoretically, this can be achieved by moving up those in the lowest economic ladder or moving down those at the top or both. Pareto optimality however, requires that no one should be made better off by making others worse off. Therefore moving those at the bottom up the ladder seems to be a better option.

Issues of discussion within the inequality space include the reasons of inequality. If it is due to those at the bottom being systematically left out by the way policies, laws, regulations and practices are designed and implemented, then it is bad. If they are at the bottom for their own mistakes such as not bothering to work has to make most out of existing opportunities, they may have themselves to thank for observed inequality. However, Mother Theresa reminds us to uplift them not necessarily because they deserve but because they need it.

Government interventions

Governments can and should intervene strategically and carefully in bringing about and sustaining equitable growth. They can do this through various policies. Among these include fiscal policies and their various instruments that ensure distribution and redistribution of the grown slice of the national cake.

Taxes and subsidies are among the fiscal policy instruments to distribute and re-distribute in pursuit of equity. No one expects distribution and re-distribution that gives a Gini-Coefficient of zero that implies total inequality. Issues of discussion include how much growth should a country experience before it starts to distribute and re-distribute and what rations of the national cake should go to various expenditure posts including recurrent and development and their many sub components.

 

  • Professor Honest Prosper Ngowi,

Pngowi@mzumbe.ac.tz

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Tanzania

Tanzania’s economy to grow by 6.8% in 2019

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The World Bank suggests Gross Domestic Product (GDP) growth in Tanzania to likely slowdown to 6.6% for the year 2018 from a 7.1 per cent expansion in 2017.

This year 2019, the Bank estimates that Tanzania’s economy will grow by 6.8 per cent and rise to 7.0 per cent in 2020.

But the government expects Tanzania’s economy to grow by 7.2 per cent in 2018 and accelerate to 7.3 per cent in 2019, despite a slowdown in credit to the private sector and rising bad loans in the country’s banking sector.

The state-run National Bureau of Statistics (NBS) said in December that Tanzania’s GDP grew by 7.0 per cent in the first half of 2018 from a 6.7 per cent rise in the same period a year-ago, while the country’s inflation rate dropped to a 10-year low in November, helped by slower rises in food prices.

National Bureau of Statistics – Tanzania

“In fast-growing countries, such as Rwanda and Tanzania, the (economic) expansion will be supported by public investment in infrastructure and strong agricultural growth,” said the World Bank in it 264-page report.

“Inflation is expected to pick up across the (Sub-Saharan Africa) region in 2019, reflecting the pass-through of currency depreciations during 2018 and domestic price pressures among metals exporters and non-resource-intensive countries … price pressures are likely to intensify in Kenya, Tanzania and Uganda.”

Tanzania’s annual headline inflation rate rose marginally to 3.3 per cent in December from 3.0 per cent in November, the lowest inflation in a decade.

The International Monetary Fund (IMF) warned last month that a credit squeeze coupled with a slowdown in government spending could dampen prospects for faster economic growth in Tanzania.

The lender, which warned that nearly half of Tanzania’s 45 banks are vulnerable to adverse shocks and risk insolvency, forecast the economy by 6.8 per cent this year.

The government plans to raise spending by 2.4 per cent in the 2018/19 fiscal year with the fiscal deficit expected to increase on the back of higher infrastructure spending.

The fiscal deficit is seen reaching 3.2 per cent of GDP in 2018/19 fiscal year (July-June), up from around 2.1 per cent in 2017/2018, according to data from the Ministry of Finance and Planning.

Elsewhere, the growth of the global economy is expected to decelerate to 2.9 per cent this year compared with the three percent in 2018, the World Bank said in the report, citing elevated trade tensions and international trade moderation.

A slump in the global economy will continue in the coming year, with 2020 growth estimated at 2.8 per cent, according to the report.

“Risks to the regional outlook are tilted to the downside. On the external front, slower-than projected growth in China and Euro Area, which have strong trade and investment links with Sub-Saharan Africa, would adversely affect the region through lower export demand and investment,” the World Bank said.

“Moreover, Sub-Saharan African metals producers would likely be among the hardest hit by escalating trade tensions between China and the United States, as metals prices would fall faster than other commodity prices as a result of weakening demand from China.”

Sharp currency declines would make the servicing of foreign currency-denominated debt, already a rising concern in the sub-Saharan African region, more challenging, the Bank said.

Overall, real GDP growth is estimated 6.6% in 2018, down from 7.1% in 2017. The services sector was the main contributor to GDP (39.3%). Private investment was the main demand-side contributor (63.9%). The external sector stymied economic growth as the current account deficit increased (despite the real depreciation of the Tanzanian shilling), due to a higher volume of imports in 2018 than in 2017. The increase is due largely to increased imports of transport equipment, building and construction materials, industrial raw materials, and petroleum products for large public investment projects, such as the Standard Gauge Railway. The import bill also increased as a result of the rise in the price of key commodities, such as crude oil.

The fiscal deficit increased to an estimated 3.9% of GDP in 2018, due to increased capital spending on infrastructure projects. Public debt increased to an estimated 39.3% of GDP in 2018 from 38.2% in 2017. External debt accounted for about 74.9% of total public debt in 2018. The risk of debt distress remains low because public external debt, at 34.5% of GDP, is mostly concessional.

Monetary policy was more accommodative in 2018 than in 2017. This increased domestic liquidity and reduced lending rates, leading to greater private credit supply. Due to improved food supply, inflation eased to an estimated 3.5% in 2018.

Tailwinds and headwinds

The medium-term outlook is positive, with growth projected at 6.8% in both 2019 and 7.0 in 2020, supported by large infrastructure spending. Headline inflation is projected to marginally increase to 5.2% in 2019 and 5.1% in 2020 due to increased government spending.

But the positive outlook faces several downside risks: growing private sector concerns about economic policy uncertainty and increased domestic arrears that could derail the government’s fiscal consolidation and harm the private sector.

Key economic development challenges include slow progress towards inclusive growth, infrastructure bottlenecks, and vulnerability to climate change. Poverty and income inequality remain high despite high economic growth. Infrastructure bottlenecks are most notable in the transport and energy sectors. Reliance on rain-fed agriculture has exposed farmers to income shocks. And inefficient public enterprises present a fiscal risk. One of the development challenges on the social front is youth unemployment, which increased to 7.3% in 2016, compared with 5.7% in 2012.

Key opportunities include peace and political stability, abundant natural resources, a strategic geographic location, and immense development potential for tourism. The Export Zone Processing Agency established in 2008 to accelerate manufacturing exports and help the country achieve structural transformation has helped attract close to $1 billion in foreign direct investment and revive the manufacturing sector into one of the fastest growing in Africa.

 

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