Connect with us

Tanzania

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

Published

on

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

Continue Reading
Advertisement
Click to comment

Tanzania

Shilling Fluctuation, a seasonal phenomenon?  

Published

on

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.

 

Continue Reading
Advertisement
Advertisement

Trending