## _wp0535

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### I. Introduction — framing and approach
- Over the past 10 years Tanzania has made major strides in improving its economic performance.
- Paper approach:
  - Reviews main features of Tanzania’s strong growth performance since 1995 to assess impact of reform-oriented policies, pattern of sources of growth, and growth prospects.
  - Finds economic policies had a substantial positive impact on growth and enhanced the contribution of total factor productivity (TFP).
  - Concludes that a continuation of these policies should allow Tanzania to grow by 5 to 6 percent annually over the next decade.
  - Reviews evidence for the impact that growth has had on poverty.
  - Finds poverty reduction was broadly in line with growth of per capita income in urban and rural areas.
  - Concludes that continuation of recent growth in urban areas and a slight acceleration of growth in rural areas should allow Tanzania to achieve its objectives for reducing income poverty by 2015.
- Note: The paper does not address measures required to achieve the Millennium Development Goals other than reducing income poverty.

### II. Recent economic policies and growth performance (post-reform outcomes)
- Macroeconomic and structural outcomes:
  - Annual real growth since 1996 averaged about 5 percent (compared with less than 3 percent during 1990-95).
  - Inflation: Average 1990-95 = 29.9; Average 1996-2003 = 9.1; inflation declined to single digits in 1999 and to below 5 percent in 2002.
  - Broad money growth declined from an annual average of over 35 percent in 1990–95 to 16 percent over 1996–2003.
  - Revenue rose from 12.1 percent of GDP in 1999/2000 to 13.6 percent of GDP in 2003/04.
  - Program assistance stabilized at about 2.5 percent of GDP.
- Policy pillars since 1996:
  - Large-scale privatization (virtually all state-owned enterprises privatized since 1992).
  - Liberalization (current account transactions, exchange market, agricultural prices, marketing boards).
  - Macroeconomic stabilization (tight fiscal and monetary policies).
- Sectoral contributions and key sectoral averages (selected):
  - Real Growth: Average 1990-95 = 2.7; Average 1996-2003 = 4.8.
  - Agriculture: Average 1990-95 = 3.6; Contribution to Growth Performance = 1.8; Average 1996-2003 = 4.1; Contribution to Growth Performance = 1.8.
  - Industry: Average 1990-95 = 1.8; Contribution = 0.4; Average 1996-2003 = 7.0; Contribution = 1.5.
    - Mining: Average 1990-95 = 11.8; Contribution = 0.1; Average 1996-2003 = 15.3; Contribution = 0.3.
    - Manufacturing: Average 1990-95 = 0.7; Contribution = 0.1; Average 1996-2003 = 6.0; Contribution = 0.5.
    - Construction: Average 1990-95 = 0.7; Contribution = 0.2; Average 1996-2003 = 6.7; Contribution = 0.6.
  - Services: Average 1990-95 = 1.9; Contribution = 0.6; Average 1996-2003 = 5.1; Contribution = 1.6.
    - Trade, hotels, and restaurants: Average 1990-95 = 2.2; Contribution = 0.4; Average 1996-2003 = 5.7; Contribution = 0.9.
- Manufacturing and tourism:
  - Manufacturing rose sixfold compared with first half of the 1990s; production increases in sugar, beer, soft drinks, cement, steel post-privatization.
  - Tourism: arrivals increased from 153,000 in 1990 to 576,000 in 2003; tourism receipts rose from $65 million to $446 million.
- Foreign direct investment:
  - FDI flows increased sixfold in the second half of the 1990s to an annual average of over $300 million compared with the first half of the 1990s.
  - About 40 percent of the higher FDI was directed to the mining sector; remainder to manufacturing, tourism, and financial sectors.
- Financial sector and credit:
  - Financial services sector real growth during 1996-2003 ≈ 5 percent annually (vs 2 percent during 1990–95).
  - Credit to the private sector grown on average by 35-40 percent a year in recent years.
  - Loan concentration: top 5 systemwide borrowers account for 20 percent; top 200 borrowers account for virtually all loans.
  - Banking soundness indicators improved following privatization and stronger supervision.

### III. Growth decomposition, projections, and sensitivity
- Growth-accounting framework:
  - Cobb-Douglas production function: Y = A K^α L^(1-α)
  - Capital stock constructed using perpetual inventory with depreciation rate = 5 percent.
  - Employment proxied by population growth with adjustments.
  - Factor shares: capital 0.24 and labor 0.76 for 1991–2003; capital share rises to 0.27 through 2008 and remains flat thereafter.
- Empirical decomposition (Table 3; in percent):
  - 1991-96 | 1997-2003 | 2004-2013 (projected)
  - Real GDP growth: 2.4 | 4.9 | 5.2
  - Labor: 2.3 | 1.9 | 1.5
  - Capital: 0.8 | 0.8 | 1.0
  - Solow residual (TFP): -0.7 | 2.3 | 2.7
- Projection assumptions (2004–2013):
  - Growth rate of capital stock increases from about 4 percent (past 10 years) to 4.7 percent through 2008 and remains at 4.7 percent through 2013.
  - Population growth rate assumed at 2 percent (recent two to three years), down from prior decade’s 3 percent.
  - TFP assumed to grow by about 2.5 percent a year (average of previous 10 years).
- Projection outcome:
  - Under these assumptions growth would rise during 2004–13 to about 5.2 percent (table shows 5.2 for 2004-2013; narrative cites rise from 5 to 5.6 percent in a scenario driven by productivity improvements).
  - Both upside and downside potential exist around this baseline.

### IV. Debt sustainability, fiscal stance, and macro risks
- Debt sustainability:
  - Various methodologies show Tanzania’s debt burden is sustainable.
  - NPV of debt-to-exports expected to remain well below the HIPC Initiative target of 150 percent over the projection period.
  - Prior to debt relief Tanzania’s NPV of debt-to-exports projected to average 230 percent over 2001/02–2010/11.
  - Debt relief (HIPC decision point March 2000; completion point November 2001) was critical for debt sustainability.
- Fiscal performance highlights:
  - Domestic financing declined to virtually zero from 1995 as program assistance stabilized at about 2.5 percent of GDP.
  - Overall balance after grants improved significantly in late 1990s.
  - Cash-management system and donor inflows virtually eliminated budget domestic financing requirements.
- External performance:
  - Gradual increase in exports since early 1990s allowed relaxation in foreign exchange constraint and facilitated import liberalization.

### V. Growth drivers and constraints: upside potential and downside risks
- Upside potential (examples of reforms that could raise TFP):
  - Recent privatizations and entry of new businesses into telecommunications.
  - Improvement in electricity and water sector operations.
  - Financial sector reforms and investments in transportation.
  - Technology potential: Tanzania ranks No. 81 on the World Economic Forum technology index (aggregate of innovation, information and communications and technology transfer subindices).
- Downside risks:
  - Dependence on agriculture: agriculture ≈ 50 percent of GDP and employs ≈ 80 percent of population; vulnerability to drought and shocks.
    - Example: 2003 drought led to localized food shortages for 2-3 million people; national agricultural production nonetheless grew by 4 percent and overall growth was 5.6 percent.
  - Shortage of skilled labor: could limit growth in tourism and manufacturing services despite planned vocational and training programs.
  - Business environment shortcomings: quality of governance, taxation, financial sector reform (bank lending framework), infrastructure and energy constraints.
  - Health and AIDS/HIV: about 15 percent of the adult population estimated to be infected with HIV; high incidence concentrated among urban and professional populations could reduce productivity unless medication is widely available.

### VI. Trade, agriculture, and nontraditional exports
- Trade and exports:
  - Exports of goods and nonfactor services contributed 2.2 percent of the 3.8 percent annual average growth during 1990–2003 (nearly 60 percent of GDP growth during the period came from exports).
  - Trade liberalization: maximum tariff lowered and number of tariffs reduced from six to three; trade restrictiveness index declined from 7 in 1996 to 5 in 2002.
  - March 2004 trade protocol foresees customs union among three East African countries with maximum external tariff of 25 percent.
- Agriculture and exports:
  - Nontraditional non-mineral exports increased threefold over the decade ending 2003.
  - Crop-specific outcomes: tea, tobacco, and cashew nuts improved; coffee, cotton, and maize declined.
  - Structural impediments: absence of stable input credit systems, crop board incentives, poor infrastructure.
  - Manufacturing exports highly responsive to REER movements: manufacturing exports increase 14 percent for each percent depreciation of REER; traditional exports decrease 4 percent for each percent depreciation of REER (study result cited).

### VII. Poverty, regional dynamics, and MDG outlook
- Poverty and survey snapshots:
  - 2001 Household Budget Survey (HBS): 36 percent below basic needs poverty line; 19 percent below food poverty line.
  - Change since 1991 HBS: slight improvement; decline in overall poverty and rural poverty rate not statistically significant.
  - Dar es Salaam: percent below basic needs declined from 28 percent in 1990 to 18 percent in 2000/01.
- Selected income and social indicators (Table 5; exact figures):
  - Percent of population below basic needs poverty line:
    - Dar es Salaam: 1991/92 = 28 | 2000/01 = 18
    - Rural: 1991/92 = 41 | 2000/01 = 39
    - Total: 1991/92 = 39 | 2000/01 = 36
  - Percent of adults with no education:
    - Dar es Salaam: 1991/92 = 9 | 2000/01 = 8
    - Rural: 1991/92 = 28 | 2000/01 = 29
    - Total: 1991/92 = 25 | 2000/01 = 25
  - Percent of children aged 7-13 in school:
    - Dar es Salaam: 1991/92 = 66 | 2000/01 = 76
    - Rural: 1991/92 = 56 | 2000/01 = 58
    - Total: 1991/92 = 57 | 2000/01 = 61
  - Real median per capita consumption expenditure (28 days, 2000/01 Tanzania shillings):
    - Dar es Salaam: 1991/92 = 14,896 | 2000/01 = 21,949
    - Rural: 1991/92 = 7,661 | 2000/01 = 8,538
    - Total: 1991/92 = 8,686 | 2000/01 = 10,120
- Per capita income and inequality dynamics:
  - Real per capita income growth over past decade = 0.6 percent annually.
  - Poverty elasticity of growth in Tanzania ≈ 1.3 (high in 43-country World Bank survey).
  - Per capita GDP (U.S. dollar): 265, 270 (entries shown in source table).
  - Income divergence: in Dar es Salaam a tertiary-educated person earns 10 times a person with no education; in rural areas ratio = 2.
  - Gini coefficient in Dar es Salaam increased by 20 percent over past decade; rural Gini remained constant.
- Regional growth and poverty:
  - Dar es Salaam experienced stronger growth in late 1990s; agricultural growth subdued nationally.
  - Table 7 (Average Annual Real Growth Rates, 1990-2000) shows:
    - Tanzania (noted in source as "Tanzania  31.84.2" — interpreted across period as combined entries leading to overall patterns cited).
    - Dar es Salaam (noted in source as "Dar es Salaam  2.6-0.46.2" — reflecting stronger late-1990s growth relative to early 1990s).
  - Interpretation: differing poverty reduction rates across regions stem from differing growth performance.
- Simulated poverty paths (Demombynes and Hoogeveen, 2003; Datt and Walker, 2002 method):
  - Estimated poverty rose from 38.6 percent in 1991 to 43 percent in 1994 due to negative per capita income growth.
  - Estimated decline from 43 percent in 1994 to 36 percent in 2000 as per capita income growth accelerated.
  - Simulations indicate a further drop of 4.5 percentage points to 31.1 percent during 2001 and 2002.
  - Urban/rural scenario: using nonagriculture growth for urban and agriculture growth for rural yields steeper urban volatility and flatter rural trajectory.
- MDG-target simulation (income poverty halving):
  - MDG target for income poverty = 19.3 percent (basic need) by 2015.
  - Required annual GDP growth (national, assuming no increase in inequality and unchanged population growth): 5.1 percent.
  - Required rural GDP growth = 4.8 percent (exceeds average agricultural growth since 1996 by about 1 percent).
  - Conclusion: urban poverty broadly on track; rural poverty trajectory above path necessary to meet MDG target without stronger rural growth.

### VIII. Constraints on private sector activity (investment climate)
- Percent of firms evaluating constraint as "major" or "very severe" (Table 4):
  - Tax rates: 72.1
  - Electricity: 57.6
  - Cost of financing: 56.2
  - Tax administration: 54.7
  - Corruption: 50.0
  - Access to financing: 47.1

### IX. Policy implications and recommendations (priorities)
- Continue structural reforms to sustain TFP improvements and attract private and foreign direct investment.
- Deepen the financial sector to mobilize savings for higher capital accumulation.
- Prioritize reforms and investments that raise productivity: telecommunications, electricity, water, transport, and financial sector.
- Strengthen business environment: governance, taxation, bank lending framework, infrastructure, and energy.
- Continue agricultural reforms (e.g., crop boards) to reduce vulnerability and enhance productivity.
- Expand vocational and higher education capacity to alleviate skilled labor shortages; anticipate medium-term rigidity in labor supply.
- Mobilize resources (including donor support) to contain spread of AIDS and increase availability of AIDS medication to protect productivity and human capital.
- Maintain engagement with donor community to secure sustained aid flows targeted to priority sectors (education, health, roads) and ensure effectiveness of spending.

*Source: Excerpted content from _wp0535 and from Section IV of IMF Country Report 03/2 and Section II of IMF Country Report 04/284 as provided in the source content.*

### References..............................................................................................................

### _wp0535 - References..............................................................................................................

### I. INTRODUCTION
- Over the past 10 years Tanzania has made major strides in improving its economic performance.
- Pursuing an ambitious program of economic reform and supported by substantial donor aid, Tanzania’s growth has increased noticeably, and macroeconomic stabilization and debt sustainability were reached.
- A recent Household Budget Survey shows only a modest decline in aggregate poverty over the past decade, raising the question of whether positive macroeconomic performance has had any significant effect on reducing poverty.
- Paper approach:
  - Reviews main features of Tanzania’s strong growth performance since 1995 to assess impact of reform-oriented policies, pattern of sources of growth, and growth prospects.
  - Finds economic policies had a substantial positive impact on growth and enhanced the contribution of total factor productivity (TFP).
  - Concludes that a continuation of these policies should allow Tanzania to grow by 5 to 6 percent annually over the next decade.
  - Reviews evidence for the impact that growth has had on poverty.
  - Finds poverty reduction was broadly in line with growth of per capita income in urban and rural areas.
  - Concludes that continuation of recent growth in urban areas and a slight acceleration of growth in rural areas should allow Tanzania to achieve its objectives for reducing income poverty by 2015.
- Note: “This paper does not address the question of which measures would be required to achieve the Millennium Development Goals, other than that of reducing income poverty, and, in particular, the question to which extent the available resource envelope would need to be expanded to achieve that objective.”

### II. TANZANIA’S RECENT ECONOMIC POLICIES AND GROWTH PERFORMANCE
- Background (late 1970s through early 1990s):
  - Tanzania was a highly state-controlled economy pursuing socialist objectives, resulting in an inflexible economic system with monopolistic and heavily regulated production structures.
  - The Kagera war with Uganda and external shocks during the late 1970s caused major macroeconomic imbalances, economic stagnation, and a decline in per capita income lasting over 15 years.
  - Shortages of basic consumer goods appeared, and agricultural exports collapsed.
- Market-oriented reforms:
  - In the early 1990s Tanzania gradually liberalized its economy and began pursuing market-oriented reforms.
  - Reforms were intensified in 1996, resulting in major progress in macroeconomic stabilization and an acceleration of growth.
  - Annual real growth since 1996 has averaged about 5 percent (compared with less than 3 percent during 1990-95).
  - Inflation declined to single digits in 1999 and to below 5 percent in 2002.
  - Macroeconomic stabilization and market-oriented structural reforms triggered large inflows of official donor assistance, which further supported growth and reform efforts.

#### Growth
- Sectoral contributions and patterns:
  - More than one-third of growth since 1996 has resulted from agricultural performance; another one-third reflected growth in services, notably trade and tourism-related services; followed by construction and manufacturing.
  - The mining sector exhibited high sectoral growth rates but did not contribute very significantly to higher growth.
- Foreign direct investment (FDI):
  - FDI flows to Tanzania increased sixfold in the second half of the 1990s to an annual average of over $300 million compared with the first half of the 1990s.
  - About 40 percent of the higher FDI was directed to the mining sector; the remainder went primarily into manufacturing, tourism, and financial sectors.
- Table 1 (excerpted indicators and exact figures):
  - Real Growth: Average 1990-95 = 2.7; Average 1996-2003 = 4.8.
  - Sectoral components of GDP (selected):
    - Agriculture: Average 1990-95 = 3.6; Contribution to Growth Performance = 1.8; Average 1996-2003 = 4.1; Contribution to Growth Performance = 1.8.
    - Industry: Average 1990-95 = 1.8; Contribution = 0.4; Average 1996-2003 = 7.0; Contribution = 1.5.
      - Mining: Average 1990-95 = 11.8; Contribution = 0.1; Average 1996-2003 = 15.3; Contribution = 0.3.
      - Manufacturing: Average 1990-95 = 0.7; Contribution = 0.1; Average 1996-2003 = 6.0; Contribution = 0.5.
      - Electricity and water: Average 1990-95 = 4.4; Contribution = 0.1; Average 1996-2003 = 4.9; Contribution = 0.1.
      - Construction: Average 1990-95 = 0.7; Contribution = 0.2; Average 1996-2003 = 6.7; Contribution = 0.6.
    - Services: Average 1990-95 = 1.9; Contribution = 0.6; Average 1996-2003 = 5.1; Contribution = 1.6.
      - Trade, hotels, and restaurants: Average 1990-95 = 2.2; Contribution = 0.4; Average 1996-2003 = 5.7; Contribution = 0.9.
      - Transport and communications: Average 1990-95 = 4.1; Contribution = 0.2; Average 1996-2003 = 5.2; Contribution = 0.3.
      - Financial and business services: Average 1990-95 = 2.0; Contribution = 0.1; Average 1996-2003 = 4.8; Contribution = 0.3.
      - Public administration and other services: Average 1990-95 = -1.5; Contribution = 0.0; Average 1996-2003 = 3.2; Contribution = 0.1.
  - Inflation: Average 1990-95 = 29.9; Average 1996-2003 = 9.1.
  - Source: Tanzanian authorities.
- Policy pillars since 1996 (listed as presented):
  - Large-scale privatization. Since 1992, virtually all state-owned enterprises have been privatized.
  - Liberalization. Since 1990, current account transactions, the exchange market, agricultural prices, and marketing boards have been gradually liberalized.
  - Macroeconomic stabilization. Tight fiscal and monetary policies have resulted in a rapid decline of inflation.
- Manufacturing and tourism:
  - Manufacturing sector rose sixfold compared with the first half of the decade; driven by increased output of sugar, beer, soft drinks, cement, and steel following privatization.
  - Tourism more than doubled relative to the first half of the 1990s: arrivals increased from 153,000 in 1990 to 576,000 in 2003; tourism receipts rose from $65 million to $446 million.
  - Private investment in tourism facilities increased significantly following privatization.
- Table 2 (selected exact production figures, Average 1990-95 vs Average 1996-2003):
  - Consumer goods:
    - Sugar Metric tons (thousands): 109.2 -> 154.8
    - Cigarettes Pieces (millions): 3.7 -> 3.8
    - Beer Liters (millions): 60.9 -> 167.5
    - Soft drinks Liters (millions): 83.2 -> 168.0
    - Textiles Square meters (millions): 52.8 -> 70.5
    - Shoes Pairs (millions): 0.4 -> ...
  - Intermediate goods:
    - Cement Tons (thousands): 766.4 -> 862.9
    - Rolled steel Tons (thousands): 8.9 -> 16.1
    - Iron sheets Tons (thousands): 22.1 -> 22.4
    - Aluminum Tons (thousands): 2.5 -> 0.2
    - Petroleum products Tons (thousands): 346.2 -> 273.1
    - Sisal ropes Tons (thousands): 20.9 -> 5.6
    - Paints Liters (millions): 2.4 -> 9.3
  - Source: Tanzanian authorities, and Fund staff estimates.
- Manufacturing exports:
  - Exports of manufactured goods have tripled since 1996, but manufacturing remains mostly oriented to the domestic market.
  - Further strengthening of export competitiveness is essential to enhance manufacturing’s contribution to growth.

#### Financial sector and credit
- Banking liberalization and FDI in banking:
  - Liberalization of banking services in 1995; foreign direct investment in banking grew rapidly; banking industry now dominated by foreign banks.
  - Financial services sector grew by almost 5 percent annually in real terms during 1996-2003, up from 2 percent during 1990–95.
  - Privatization of the National Bank of Commerce (NBC) in 1997 was critical in attracting FDI to the banking sector.
- Credit to private sector:
  - Substantial increase in credit to the private sector: grown on average by 35-40 percent a year in recent years.
  - Increase generally broad-based across sectors; some concentration increase in agriculture (including for exports), manufacturing and mining (gold), and building and construction.
  - Loan concentration: top 5 systemwide borrowers account for 20 percent; top 200 borrowers account for virtually all loans.
  - Banking soundness indicators have continuously improved, reflecting better banking supervision.
- Factors driving higher lending:
  1. More lower-risk lending opportunities to international companies that increasingly borrow locally (including South African, Kenyan, and Ugandan firms).
  2. Lower perceived risks of lending to the private sector due to establishment in 2002 of a commercial court for foreclosure procedures, and direct paycheck deductions.
  3. Reduced lending opportunities to parastatals due to privatization.

#### Agriculture and exports
- Agricultural reforms:
  - Economic reforms since 1986 allowed market forces greater role; domestic food crop marketing liberalized; private traders took over role of cooperatives and crop authorities; marketing and export of traditional export crops decontrolled; the commercial role of parastatal crop authorities scaled back.
  - Market-determined producer prices of food were substantially higher in real terms than official procurement prices of the 1980s, increasing production in the first half of the 1990s.
  - Agricultural performance did not, however, improve significantly during the second half of the 1990s compared with the first half, partly due to decline in terms of trade for most traditional exports and appreciation of the real exchange rate through 2001.
- Crop-specific performance (qualitative and figure references):
  - Production and exports of tea, tobacco, and cashew nuts improved markedly due to export liberalization effects on producer prices and efficiency of private traders.
  - Production and exports of coffee, cotton, and maize have declined.
  - Structural factors adversely affecting agricultural performance: absence of stable system for providing inputs on credit, incentives for production by the crop boards, and limited access to markets due to poor infrastructure.
- Nontraditional exports:
  - Liberalization helped promote processed food, fish, and horticulture exports.
  - Over the decade ending 2003, nontraditional non-mineral exports increased threefold.
  - Despite appreciation of the real exchange rate from 1993 to 2001, increase in nontraditional exports suggests sharp decline in traditional exports resulted from crop-specific structural impediments and—to a lesser extent—the exchange rate appreciation and terms of trade shock.
  - IMF study cited: manufacturing sector very responsive to movements in the real equilibrium exchange rate (REER), while the traditional sector less responsive (study result: traditional exports decrease 4 percent for each percent depreciation in REER; manufacturing exports increase 14 percent for each percent depreciation of REER).

#### Trade policy and integration
- Exports of goods and nonfactor services contributed strongly:
  - Exports contributed 2.2 percent of the 3.8 percent annual average growth during 1990–2003 (nearly 60 percent of GDP growth during the period came from exports).
  - Sectors with highest growth overlapped significantly with those showing strongest export growth: tourism and manufacturing.
- Trade liberalization measures:
  - Trade regime liberalized by lowering maximum tariff and reducing number of tariffs from six to three.
  - Tanzania’s standing on the trade restrictiveness index declined from 7 in 1996 to 5 in 2002.
  - Regional integration within East African Community (EAC): import surcharges on imports from other East African countries imposed in 2001 were gradually reduced or eliminated.
  - In March 2004, a trade protocol was signed foreseeing establishment of a customs union among three East African countries with a maximum external tariff of 25 percent.

#### Macroeconomic stabilization
- Inflation and monetary aggregates:
  - Inflation brought down to single digits in 1999 and declined further to below 5 percent in 2002.
  - Growth of broad money declined from an annual average of over 35 percent in 1990–95 to 16 percent over 1996–2003.
  - Earlier high monetary expansion, partly from imprudent credit policies, was curtailed by tighter supervision of state-owned banks and privatization of the National Bank of Commerce.
  - Improved monetary management by the Bank of Tanzania supported by adoption of a cash-management system limiting expenditure to available revenue and steady inflow of donor support, which virtually eliminated the budget’s domestic financing requirements.
- Fiscal consolidation and revenues:
  - From 1995 domestic financing declined to virtually zero as program assistance stabilized at about 2.5 percent of GDP.
  - Overall balance after grants improved significantly over the second half of the 1990s.
  - Revenue in percent of GDP rose from 12.1 percent of GDP in 1999/2000 to 13.6 percent of GDP in 2003/04, reflecting clampdown on petroleum smuggling, broadening of tax base following expiry of certain tax exemptions, and adoption of comprehensive tax administration reform plan; tax rates remained unchanged.
- Debt relief and external position:
  - Sound macroeconomic policies helped Tanzania reach the decision point under the Heavily Indebted Poor Countries (HIPC) Initiative in March 2000 and the completion point in November 2001.
  - Debt relief under these initiatives was critical in achieving debt sustainability.
- Exports and foreign exchange constraint:
  - Gradual increase in exports since early 1990s allowed a steady relaxation in the foreign exchange constraint and facilitated import liberalization.

*Source: Excerpted content from _wp0535 - References..............................................................................................................*

### Section IV of IMF Country Report 03/2 and Section II of IMF Country Report 04/284

### _wp0535 - Section IV of IMF Country Report 03/2 and Section II of IMF Country Report 04/284

### Debt sustainability and debt relief outcomes
- Various methodologies show Tanzania’s debt burden (domestic and external) is sustainable.
- The net present value (NPV) of the debt-to-exports ratio is expected to remain well below the HIPC Initiative target of 150 percent over the projection period.
- Projections at the time of the completion point benefited from:
  - higher exports of gold;
  - better performance of the tourism sector;
  - additional debt forgiveness by bilateral donors.
- Tanzania’s NPV of debt-to-exports ratio was projected to average 230 percent only over 2001/02–2010/11, significantly below the debt burden of many other HIPC-eligible countries, prior to the receipt of any debt relief.
- The current stance of fiscal policy would be consistent with debt sustainability, even if access to highly concessional financing deteriorated somewhat.

### Fiscal performance and inflation (1991/92–2001/02)
- Figure 3 (as described) covers:
  - Inflation (Annual percentage changes)
  - Overall balance after grants (In percent of GDP)
  - Domestic financing (In percent of GDP)
  - Program assistance (In percent of GDP)
- Fiscal year note: 1/ Fiscal year runs from July to June.
- Source: Tanzanian authorities.

### Sources of growth: methodology
- Growth accounting framework based on Cobb-Douglas production function:
  - Y = A K^α L^(1-α)
    - Y = real GDP
    - A = total factor productivity (TFP)
    - K = physical capital
    - L = labor
    - α = elasticity of output with respect to capital
- Capital stock constructed using perpetual inventory accumulation framework with authorities’ data on real investment and assuming a constant depreciation rate of 5 percent.
- Employment substituted for L; time series for yearly changes in employment unavailable, so population growth rate (with adjustments) used as proxy for employment changes.
- Contribution shares assumed in line with Senhadji (2000): capital 24 percent and labor 76 percent for 1991–2003; capital share rises to 0.27 through 2008 and remains flat thereafter.

### Empirical findings on growth decomposition
- Growth has been increasingly driven by improvements in TFP:
  - Early 1990s: contribution of TFP to growth was negative.
  - Since early 1990s: contribution of TFP has gradually increased, reflecting structural reforms and higher foreign direct and public investment.
- The improvement in TFP suggests potential for stronger future growth because higher capital inflows may be compounded by productivity improvements.
- Results correspond to Tahari and others (2004): pickup in growth during 1997–2002 driven primarily by improvement in TFP in countries with Fund programs judged to be on track.
- Large-scale external assistance impacted priority sector expenditures, which rose from 4.8 percent in 1998/99 to the 11.9 percent of GDP projected for 2004/05.
  - Priority sectors included education, health, and roads.
  - Education: higher enrollment in primary education; likely to increase literacy over time but unlikely to have already led to higher growth.
  - Health: higher expenditures have yet to result in improved health indicators and hence not yet resulted in higher growth.
  - Roads: rise in expenditure likely had strong positive effects on growth and factor productivity.
- Aid also boosted aggregate demand; without donor assistance government expenditure would have been significantly lower.
- Most important factors for higher growth: foreign direct investment in key export-oriented sectors responding to market-oriented reforms and political stability.
- Average expenditures in percent of GDP over 1996–2002 did not rise by more than 1 percent of GDP a year relative to the first half of the 1990s.

### Growth projections (2004–2013) and assumptions
- Assumptions for simulation:
  - Growth rate of capital stock gradually increases from average annual growth of about 4 percent (past 10 years) to 4.7 percent through 2008 and remains constant at that level through 2013.
  - Growth of capital stock financed by rising savings mobilized with a deepened financial sector.
  - Population growth rate assumed at 2 percent (past two to three years), below prior decade’s 3 percent, reflecting deterioration of health indicators largely from AIDS.
  - Share of capital rises from 24 to 27 percent through 2007 and subsequently remains constant.
  - Total factor productivity (TFP) assumed to grow by about 2.5 percent a year (average of previous 10 years—from its average level over the past 5 years).
- Table 3. Sources of Economic Growth (In percent)
  - 1991-96 | 1997-2003 | 2004-2013 (projected)
  - Real GDP growth: 2.4 | 4.9 | 5.2
  - Labor: 2.3 | 1.9 | 1.5
  - Capital: 0.8 | 0.8 | 1.0
  - Solow residual 2/ (interpreted as TFP): -0.7 | 2.3 | 2.7
  - Source: IMF staff estimates
  - Notes:
    1/ Accumulation of labor and capital, using factor shares of 0.76 and 0.24, respectively, from 1991 to 2003. Share of capital rises to 0.27 through 2008 and remains flat thereafter.
    2/ Residual from the growth accounting exercise. Interpreted as total factor productivity.
- Under this scenario growth would rise during 2004–13 from 5 to 5.6 percent, driven largely by improvements in factor productivity and a small increase in the contribution of capital to growth.
- There is both upside and downside potential to this estimate.

### Upside potential for growth
- Reforms in the pipeline that may increase momentum for factor productivity growth include:
  - recent privatizations and the entry of new businesses into the telecommunications sector;
  - improvement in operations of the electricity and water sectors;
  - financial sector reforms;
  - investments in the transportation area.
- Tanzania’s technology ranking and potential:
  - Tanzania currently ranks No. 81 on the technology index compiled by the World Economic Forum (aggregate of innovation, information and communications and technology transfer subindices).
  - Ranking is significantly lower than Kenya’s, Uganda’s, and South Africa’s, reflecting low access to information and communications technology.
  - As initiatives to improve technology take hold, relatively large improvements in TFP should be expected.

### Downside risks to growth
- Dependence on agriculture:
  - Agriculture accounts for about 50 percent of GDP and employs some 80 percent of the population. Drought and other shocks can adversely affect growth.
  - Mitigant: disparity of climatic zones limits risk of countrywide drought; example—2003 drought led to localized food shortages for 2-3 million people, but agricultural production grew by 4 percent and overall growth remained resilient at 5.6 percent.
  - Prospective agricultural reforms (e.g., organization of crop boards) could unleash productivity-enhancing effects.
- Shortage of skilled labor:
  - Scarcity of skilled labor noted by international and local business communities.
  - Vocational and other training programs planned, but rigidity in supply of well-educated labor likely over medium term.
  - Could limit growth potential in tourism and manufacturing services.
- Business environment shortcomings:
  - Remaining issues include (i) the quality of governance; (ii) taxation; (iii) financial sector reform, in particular the framework for bank lending; and (iv) the availability and quality of infrastructure and energy resources.
  - Investors’ surveys show awareness of government efforts and increasing confidence, but numerous shortcomings remain.
  - Investors’ Roundtable consultations have resulted in agreements including amendment of the Land Act to facilitate bank lending, simplification of business licensing requirements, and elimination of nuisance taxes.
- Health and AIDS/HIV:
  - High prevalence of AIDS/HIV could reduce productivity. Currently, about 15 percent of the adult population is estimated to be infected with HIV.
  - Unless medication is made widely available (which would be very costly and require substantial donor resources), high incidence could substantially affect productivity, particularly as infection tends to concentrate among urban and professional populations.

### Constraints on private sector activities (Table 4)
- Percent of firms evaluating constraint as "major" or "very severe":
  - Tax rates: 72.1
  - Electricity: 57.6
  - Cost of financing: 56.2
  - Tax administration: 54.7
  - Corruption: 50.0
  - Access to financing: 47.1
- Source: RPED Tanzania Investment Climate Assessment, 2003.

### Growth and poverty reduction: past performance and MDG outlook
- If the economy continues to grow at 5-6 percent over the next decade, question: would Tanzania achieve its poverty reduction objectives?
- Social and poverty indicators have not improved substantially over the past decade (Table 5).
- 2001 Household Budget Survey (HBS) results:
  - Some 36 percent of Tanzanians fell below the basic needs poverty line and 19 percent fell below the food poverty line.
  - Results slightly better than 1991 HBS, but decline in overall poverty and rural poverty rate not statistically significant.
  - Dar es Salaam exception: percent below basic needs declined from 28 percent in 1990 to 18 percent in 2000/01.
  - Poverty remains primarily a rural phenomenon and appears to have changed only marginally over the past decade.
- Table 5. Selected Income Poverty and Social Indicators in 1991/92 and 2000/01
  - Dar es Salaam | Rural | Total
  - 1991/92 | 2000/01 | 1991/92 | 2001/01 | 1991/92 | 2000/01
  - Percent of population below basic needs poverty line: 28 | 18 | 41 | 39 | 39 | 36
  - Percent of adults with no education: 9 | 8 | 28 | 29 | 25 | 25
  - Percent of children aged 7-13 in school: 66 | 76 | 56 | 58 | 57 | 61
  - Percent of households with piped water: 93 | 86 | 25 | 28 | 36 | 39
  - Real median per capita consumption expenditure (28 days, 2000/01 Tanzania shillings): 14,896 | 21,949 | 7,661 | 8,538 | 8,686 | 10,120
  - Source: Household Budget Survey 2000/01.
- Millennium Development Goals indicators (Table 6) for 1990 and 1999/00 with MDG targets for 2015:
  - I. Halve the proportion of people living below the national poverty line (% of population)
    - 1990 Actual: 38.6 Basic need | 21.6 Food
    - 1999/00 Actual: 35.7 Basic need | 18.7 Food
    - MDG Target 2015: 19.3 Basic need | 10.8 Food
  - II. Achieve universal primary education (% of relevant age group)
    - 1990 Actual: 54.2
    - 1999/00 Actual: 59.5
    - MDG Target 2015: 100
  - III. Halve the proportion of people without access to safe drinking water (% of population) 1/
    - 1990 Actual: 58.3
    - 1999/00 Actual: 45.0
    - MDG Target 2015: 27.0 Urban

### Policy implications and priorities
- Continue structural reforms to sustain improvements in TFP and to attract private and foreign direct investment.
- Deepen financial sector to mobilize savings to finance higher capital accumulation.
- Prioritize reforms and investments that raise productivity: telecommunications, electricity, water, transport, and financial sector.
- Strengthen business environment addressing governance, taxation, bank lending framework, infrastructure, and energy constraints.
- Continue agricultural reforms (e.g., crop boards) to reduce vulnerability to agricultural shocks and enhance productivity.
- Expand vocational and higher education capacity to alleviate skilled labor shortages, while anticipating medium-term rigidity in labor supply.
- Mobilize resources (including donor support) to contain the spread of AIDS and increase availability of AIDS medication to protect productivity and human capital.
- Maintain engagement with donor community to secure sustained aid flows targeted to priority sectors (education, health, roads) while ensuring effectiveness of spending.

*Italic: Source—Section IV of IMF Country Report 03/2 and Section II of IMF Country Report 04/284 (from provided content).*

### 47.0 Rural

### 47.0 Rural

### Poverty trends and income dynamics
- Household Budget Survey provides two snapshots nine years apart; cannot represent full evolution of poverty over the intervening period.
- Real per capita income growth over the past decade: 0.6 percent annually.
- Poverty elasticity of growth in Tanzania: approximately 1.3 (among highest group in a 43-country World Bank survey).
- Per capita GDP (in U.S. dollar) entries shown in source table: 265, 270.
- Average monthly income divergence in Dar es Salaam: a person with tertiary (or university) education now earns 10 times the amount earned by a person with no education; in rural areas this ratio is 2 times.
- Gini coefficient in Dar es Salaam increased by 20 percent over the past decade; for rural areas it has remained constant.
- Per capita income evolution: per capita income declined in the first half of the 1990s; accelerated growth after mid-1990s, reaching 4.2 percent over 1996–2000; because of the earlier contraction, per capita income in 2000 was broadly the same as in 1990.

### Regional growth performance and poverty reduction differences
- Dar es Salaam experienced stronger growth than the country as a whole during the second half of the 1990s; agricultural growth remained subdued.
- Table 7: Average Annual Real Growth Rates, 1990-2000
  - Tanzania: 3 1.8 4.2  (note: values shown in source table as "Tanzania  31.84.2")
  - Dar es Salaam: 2.6 -0.4 6.2  (note: values shown in source table as "Dar es Salaam  2.6-0.46.2")
- Interpretation: different rates of poverty reduction between capital and country as a whole are the result of differences in growth performance, not evidence of a rural poverty trap.

### Simulated poverty paths (Demombynes and Hoogeveen, 2003)
- Simulation approach: Datt and Walker (2002) method; mean household consumption moves proportionally with per capita GDP from national accounts; per capita GDP growth applied to HBS data to simulate household per capita consumption and annual poverty incidence.
- Simulation results (percent of population below poverty line):
  - Estimated increase in poverty from 38.6 percent in 1991 to 43 percent in 1994 due to negative per capita income growth.
  - Estimated decline of overall poverty from 43 to 36 percent between 1994 and 2000 as per capita income growth accelerated.
  - Simulations indicate poverty may have dropped a further 4.5 percentage points to 31.1 percent during 2001 and 2002.
- Scenario using nonagriculture growth for urban and agriculture growth for rural:
  - Shows a much steeper rise and fall for poverty in Dar es Salaam and a flatter trajectory in rural areas and the nation as a whole.
- MDG-target simulation:
  - MDG target for income poverty: reduce poverty to 19.3 percent by 2015.
  - Based on single national growth rate simulation, required annual GDP growth for the country as a whole: 5.1 percent (assuming no increase in inequality and no change in current population growth rate).
  - Required rural GDP growth rate to achieve MDG target: 4.8 percent (this rate exceeds the average growth rate of agriculture recorded since 1996 by about 1 percent).
  - Conclusion from simulations: urban poverty trajectory broadly on track to meet MDG goal; rural poverty trajectory substantially above the path necessary to achieve the MDG target.

### Role of sectoral growth in poverty reduction
- Evidence and literature:
  - Ravallion and Datt (1996): approximately 85 percent of poverty reduction in India during their period studied was due to growth in agriculture.
  - Timmer (1997): agricultural growth has a stronger and more robust elasticity with respect to poverty reduction than manufacturing growth.
- Mechanisms: most poor people in developing countries live in rural areas; improvements in agricultural productivity increase demand for labor (higher wage earnings) and lower food prices, directly impacting poverty.

### Policy priorities and recommendations
- Two main priorities to accelerate poverty reduction:
  - Improving the business environment to attract investment.
  - Fostering the rural economy, including reforms to accelerate agricultural growth.
- Rationale:
  - Overall annual growth of about 5 percent would be required to reach the MDG target of halving poverty by 2015.
  - Rural economy needs a sustained focus because its average growth since 1996 falls short of the 4.8 percent required to meet rural MDG targets.
  - Measures to boost supply response and address shortcomings in the business environment and agricultural vulnerability are important to maintain and improve past growth performance.

### Conclusions
- Over the past 10 years, supported by substantial donor assistance, Tanzania has made impressive progress in economic reform; reform-oriented policies have boosted growth prospects and had a noticeable impact on poverty.
- Tanzania appears to be on the right track to meet the MDG targets for reducing income poverty, provided:
  - Reform-oriented policies are continued.
  - Efforts to reform and intensify support for the rural economy are strengthened.
  - Further reforms of the business environment are pursued to attract investment.

*Source: Utz (2003); Datt and Walker (2002); Demombynes and Hoogeveen (2003); Tanzanian authorities (as presented in the source content).*

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