BY

Prof Handley Mpoki Mafwenga

PhD, MSc, MBA, PGDTM, ADTM

Macro-Fiscal Policy Analyst and Tax Expert (PFMO 1)

THE GOVERNMENT OF THE UNITED REPUBLIC OF TANZANIA

THE MACROECONOMIC PERFORMANCE

FOR THE PAST THREE YEARS(2008-2011)

finance

Abstract

This presentation provides an insight in Tanzania with specific

emphasis to the Key macro-economic indicators as reflected

in the Budget; it further, highlights the NSGRP and its

challenges in particular.

Tanzania has maintained strong economic performance over

the past decade, mainly reflecting the outcome of sustained

structural reforms coupled with prudent fiscal and monetary

policies. During the past three-year period up to 2010, the

economy grew at an average of 7,2 per cent, mainly driven

by growth in mining and quarrying, financial intermediation,

transport and communication, and manufacturing and trade

activities.

Abstract

Over the period, inflation remained at a single-digit level

until September 2008, when it rose to 11,6 per cent from

9,8 per cent in August and increased to 13,5 per cent in

December 2008 then it slowed down to 7% by year 2010.

Implementation of fiscal and monetary policies remained

prudent and focused on sustaining macroeconomic stability,

particularly real economic growth and price stability.

Table 1: KEY MACROECONOMIC INDICATORS

Economic

Indicators

2008/2009 2009/2010 2010/2011 (Data as

at December,

2010)

GDP (Real) 7.4% 6.0% 7.0%

Capital Formation as

percentage of GDP

29.7% 29.0% 32.0%

Growth of Money

Supply (M2)

22.0% 23.4% 21.8%

Growth of Money

Supply (M3)

17.7% 20.8% 25.4%

Interest rates

(Average Lending

rates by Commercial

Banks)

Decreased from

16.05% to14.38%

14.38% Decreased from

14.38% to 13.45%

Interest rates (Time

Deposits)

8.48% Increased to 8.99% Decreased to 7.09%

from 8,99%

Table 1: KEY MACROECONOMIC

INDICATORS

Economic

Indicators

2008/2009 2009/2010 2010/2011 (Data

as at December,

2010)

Exchange rate Depreciation of TZS

was 1,196.3 per

USD equivalent to

10.3%

Value of TZS

declined by 8.5% to

an average of TZS

1,329.3 TZS per

USD

Value of TZS was

1,453.5

Foreign Reserves USD 2,872.6 million

sufficient to cover

5.7 months of

imports of goods and

non-factor services

USD 3,551.3 million

equivalent to an

increase of 23.6%

USD 3,948.0 million

equivalent to 6.3

months of imports of

goods and non-factor

services

GDP(Real)

Real (constant price ) GDP reveal changes in economic

output after adjusting for inflation. The change in real GDP

plus the change in the deflator approximately equals the

change in nominal GDP.

In 2008/09 adverse impact of the global economic crisis

continued to hit our economy; however, GDP grew by 6.0%

in 2009 as attributed to increased growth in economic

activities of electricity and gas, education, and

communication services including the us of mobile phones

In 2009/10, the GDP grew to 7.0% being attributed by

agriculture and livestock; manufacturing; trade and repair;

transport and communication and financial intermediation.

Capital Formation

Increase in capital formation for the past three years was

attributed to increased investments in housing construction,

land developments, roads and bridges construction. Thus, the

GDP growth is direct proportional to capital formation.

There was an increase in capital formation both in public and

private sectors.

Growth of Money Supply

Money Supply is significant because it is an indicator of level

of transactions and perhaps inflation or output. The measure

of narrow money is called M1 i.e. currency in circulation

plus sight deposits. The main wider definitions of money is

called M2 and M3. M2 consists of M1plus savings deposits

and time deposits (i.e accounts where cash is available after a

notice period). M3 is M2 plus institutional money funds,

large time deposits, repurchase agreement etc

In the past three years, the growth of extended money supply

(M3) was largely due to increase in the rate of foreign

currency deposits as well as strengthening of USD against

other currencies

Interest rates Interest rate or Yield less the rate of inflation is significant because is the

determinant of investment behavior. The real interest rates are nominal

interest rates deflated by the rate of inflation. Implicitly, at least,

investment decisions are based on real interest rates.

Following Implementation of Second Generation Financial Sector Reform

(SGFSR) and availability of long-term loans for development projects over

five years to December, 2009, the medium term lending rates decreased,

medium term savings deposit rate increased hence, motivating people to

put their savings in banks

The interest rate spread for the past three years continued to remain high

despite increased competitiveness in banking sector. This is largely due to

lack of not only credit reference data bank but also lack of Credit

Reference Bureaux in the country. Also, the absence of National Identity

Cards and high costs involved in doing business due to poor infrastructures

impacted on high interest lending rates

Inflation

Two important measures of inflation computed in Tanzania

1. The underlying inflation rate; this is the rate of inflation excluding changes in

food prices;

2. year to year headline inflation; this is the percentage change in the National

Consumer Price Index (NCPI)

Increase in inflation in year 2008 to year 2009 was mainly attributed to food

shortage in the country and neighboring countries which led to the increase in

prices of food items, prices of petroleum products in the domestic market

leading to an increase in transportation costs.

However, trend of food inflation which accounts for a large proportion in the

overall CPI started to decline to 9.8% in 2010; also in 2009/10 good rains

season increased food production thereby reducing headline inflation from

12.7% to 9.4% by April, 2010

NBS updated the NCPI market basket weights from 2001 to 2007 using results

of Household Budget Survey thereby recoding inflation as shown in figure 1

Table 2: EAC Comparative Inflation rate

Consumer Prices in 9months period

Inflation

Tanzania has recorded low inflation rate as compared to other

partner States;

However, increase in inflation in past three years was mainly

due to sustained pressures on domestic prices that emanated

from a protracted surge in oil and food prices coupled with

economic crisis mostly during the past three years through

recovery has been in place with some fluctuation trend.

However, non-food inflation which is influenced by monetary

policy, slowed down in past three years. This has been due to

the improvement in food supply, as well as sustained prudent

fiscal and monetary policies

Exchange Rates

This is the price of one currency in terms of another. They

are determined mainly by the supply and demand, which

reflect trade and other international payments, and much

more important, volatile capital flows which are constantly

shifting around the world in search of the best expected

returns. The prime indicator of market pressures on a

currency is the figure for total currency flows in the balance

of payments account. Other influences are relative interest

rates and yields.

Depreciation of the TZS in 2008/09 was caused by

speculators who hoarding forex following the outset of the

global economic crisis

Exchange Rates Cont…..

Depreciation of TZS against USD in 2009/10 was due to the

increase in demand of USD, in the country and also

appreciation of USD against other international currencies.

Foreign Reserves

In a strict sense are only the foreign currency deposits and

bonds held by central banks and monetary authorities.

Foreign exchange reserves are important indicators of ability

to repay foreign debt and for currency defense, and are used

to determine credit ratings of country.

high level of reserves at 3.8 billion is unprecedented in the

country’s history and apparently the best among the East

African Community (EAC) member states

This attributed increased reserves accumulation to more

proceeds from exports, particularly in 2010, where gold

alone brought in 1.4 billion US dollars, overtaking the

tourism sector which contributed 1.3 billion US dollars.

(NSGRP)MKUKUTA

Since 2005, Tanzania’s GDP annual growth rate averaged 7

percent, which was in line with MKUKUTA target of 6 – 8

percent per annum

In 2009 GDP growth was 6.0 percent, declining partly due

to the global financial crisis. Volume and prices of exports

fell, flows of capital and investment fluctuated, tourism and

demand for tourism products fell as well

Figure 1:Shares of Major Sectors in

GDP 2005 and 2009

27.6

20.8

42.5

25

20.8

45

0

5

10

15

20

25

30

35

40

45

50

Agriculture Industry and Construction Services

2005

2009

(NSGRP)MKUKUTA Cont….

The share of agriculture in GDP (Figure 2) declined relative

to services and industry and construction. Services constitute

the main sector of the economy, thus its growth will be

critical for sustaining higher economic

Sluggish growth of agriculture was a result of a combination

of many factors. These included poor infrastructures to

support agriculture, inadequate extension services, and poor

technology of production, low value addition, lack of

appropriate financing mechanisms for agriculture, unreliable

markets, unfair and uncompetitive farm gate prices, and

environmental degradation.

Figure 2: Composition of Annual

Budget Allocation

48

62.7

70.8 71.2

52

37.3

29.3 28.8

0

10

20

30

40

50

60

70

80

2006/07 2007/08 2008/09 2009/10

MKUKUTA

NON-MKUKUTA

Major challenges to MKUKUTA

financing: 1. Insufficient resources for MKUKUTA implementation: Resources to fund;

MKUKUTA activities often fell short of the approved allocations.

This necessitated reallocation of resources and in some instances

phasing out some of the activities, despite of their levels of

priority;

2. Global financial and economic crisis: Tanzania was not spared by the

adverse; effects of global financial and economic crises, which

affected negatively the key sectors of economic growth, especially

trade flows, capital inflows, natural resource sectors and

agricultural exports;

3. Omission of important items: the exclusion of wages and salaries and

transfers; to LGAs in MKUKUTA budget led to understating the

magnitude of resources allocated to MKUKUTA clusters. Wages

and salaries to civil servants are the real cost of service delivery to

the public;

Major challenges to MKUKUTA

financing Cont…….

5. Delay in costing: the costing of MKUKUTA delayed and hence the

three-year; rolling MTEF was used as a proxy. This did not

give a comprehensive picture of what it took to fully

implement MKUKUTA and thus establish the resource

gap; and

6. Non-state actors’ financing: it was rather difficult to ascertain the

actual; amount spent by these bodies to implement

MKUKUTA.

The Household Budget Survey indicate that, impressive

economic growth achieved in past three years has not yet

sufficiently manifested itself in the reduction of income

poverty. This is attributed to slow growth of the agriculture

sector.

Trends and Targets of Income Poverty Reduction,

Urban-Rural, 1991-92 to 2010

28.7 25.8

24.1

12.9

40.8 38.7

37.6

24

0

5

10

15

20

25

30

35

40

45

1991-1992 2000-01 2007 MKUKUTA Target2010P

erc

en

tag

e o

f P

op

ula

tio

n b

elo

w t

he

bas

ic n

ee

ds

Po

ve

rty

Lin

e

Figure 3: Trends and Targets of Income Poverty Reduction, Urban-Rural, 1991-92 to 2010

Urban

Rural

Trends and Targets of Income Poverty Reduction,

Urban-Rural, 1991-92 to 2010

There was a decline in income poverty levels over the period

in all areas. The proportion of the population below the basic

needs poverty line declined slightly from 35.7% in 1991/92

to a lesser than 33.6%, and the incidence of food poverty

fell from 18.7% to a lesser than 16.6%. The fall in poverty

over the past three years was larger; basic needs and food

poverty levels both declined by approximately 3 percentage

points, and in Dar es Salaam basic needs poverty declined by

over approximately 11 percentage points.

Poverty rates remain highest in rural areas: 37.6% of rural

households live below the basic needs poverty line, compared

with 24% of households in other urban areas and 16.4% in

Dar es Salaam.

Government Budget

Revenue : Government Domestic Revenue increased by

18.1% in 2007/08 to TZS 4,293.074 billion and by 8.2% in

2009/10 to TZS 4,661,540 million.

Grants and Loans: External grants in 2009/10 amounted to

TZS 1,405.3 billion and External Loans amounted to TZS

1,379.6 billion. The period as at March, 2011 Government

received grants and loans TZS 845.7billion.

Expenditure: Government Expenditure in year 2008/09 was

TZS 6,811.8 billion below the target due to revenue

shortfalls during the period.

CONCLUSION During the past three years, the Government of the United

Republic of Tanzania continued to focus on achieving the

objectives of the National Strategy for Growth and Reduction of

Poverty (MKUKUTA).

The government policies were geared towards maintaining fiscal

control through strengthening tax administration and expenditure

efficiency, to cushion the impact of the global economic slowdown

on government operations. Priority was given to improving

domestic revenue mobilization by broadening the tax base,

curbing tax exemptions and enhancing revenue administration.

Monetary policy remained focused on achieving appropriate levels

of liquidity in the economy, consistent with the desirable low and

stable levels of inflation as well as to support the desired growth

momentum.