Analysis of Tanzanias Economy - The Effects of the Global Financial Crisis in 2007-2009 - Example

INTERNATIONAL ECONOMICS Name Course Instructor Institution Location Date International Economics Analysis of Tanzania’s Economy The effects of the Global Financial Crisis in 2007-09 Introduction A United Republic of Tanzania is the largest country in East Africa and a member of the East African Community and her economy is the second largest and is in number twelfth in Africa. Tanzania mainly depends on agriculture and it provides the most significant percentage of employment to her people and takes about half of the workforce that is fully employed. The estimated percentage of Tanzania’s population currently living in poverty is 34 percent. Her economy has been changing from the command to the market economy since 1985. Though the total gross domestic product (GDP) rose at the time of the economic reforms, the per capita GDP reduced sharply in the first case and only moved past the pre-transitional amount by 2007. Tanzania falls into the category of the poor country with the per capita income of $290 (World Bank, 2004). The problem in addressing this problem of poverty has been significant in the development agenda from 19960s immediately after independence in 1961. According to Mwalimu Julius Nyerere, who was the first leader of the first independence government, he identified poverty to be among the three major problems in the development, others are diseases and ignorance. Hence, the development effort put earlier was to target these problems and eradicate it. In this paper, the initiative taken by Tanzania to address these issues is discussed. The strategy for development followed was immediately after the independence adopting the mixed economy where the private investors were allowed to take part in the development and including the direct foreign investments. The disappointment due to reduction in the inflow of the Foreign Direct Investment (FDI), together with the political economic concern made the five years post-independence by the time the economy was mostly owned by the foreigners and some Tanzanians of alien origin, brought some transformation in the strategies of development with the aim of facilitating the wider means for the ownership of the primary production and distributions. The concerns from this development strategy precipitated the Declaration of Arusha of 1967 in which Tanzania adopted the socialism and the self-reliance policies. The policies adopted by Tanzania made them to opt nationalization as the mean of putting in place the major way of production and distribution into the control of many people and consequently, the government opted for the development strategy that focuses on the human development investments consistently with the basic needs approach. In adopting these policies, Tanzania attained a number of achievements in human development at that time. However, there was interruption due to the economic crisis from the late 1970s to early 1980s where Tanzania responded by adopting the structural adjustment programs that were aimed at targeting “getting the prices right” so as to achieve the efficient gain and acceleration of economic growth. A financial crisis globally has been referred to as the worst from the time of a Great Depression of the 1930s. The crisis lead to the failure of many key businesses and the drop in consumers wealth that was estimated be in trillion US dollars and at the same time the fall in the level of economic activities and as a result it has pre-empted a substantial commitment by the government to improve their financial status. The primary factors for the crisis were mortgage extension to borrowers at the high terms of concession, insufficient oversight and inappropriate bank supervision and the financial institutions, and much relaxation of the basic requirements of the rules and regulations governing the financial institutions. As a result, there was the accumulation of the bad loans and losses in the business totalling to $ 2.3 trillion (or 17% of the US GDP). To regulate these, both the market-based and the regulatory measures were put in place while the significant risks were left for the world economy. Tanzania’s economy was estimated to increase by 8% in 2009 before the global financial crisis and due to the crisis; the economy is projected to be growing at 5% to 6% for 2009/10. In the early 2009, the signs of the crisis were indicated to have affected several sectors that include, tourism and agriculture, therefore, hindering the projections of the economic growth. The economic policies of Tanzania The development policies of Tanzania underwent through the three-policy episode to eradicate poverty and ignorance. From the time of Tanzania’s independence, it went through the different episodes that helped it to attain the strategy for development having distinct targets to eradicate poverty and achieve the economic growth. In the process of eliminating poverty, Tanzania identified three different policy episodes. The first episode was the trial by Tanzania to bring down poverty by putting much emphasis on the social system that was to be consistent with the approach of the basic needs during the period of 1967 to 1985. During the second policy episode, Tanzania adopted the need to emphasize the orthodox economic growth policy that was meant to be consistent with a first structural adjustment program that was generated, and this was during 1986 to 1995. Tanzania’s third episode of poverty reduction initiative was directed towards the combination of the social and economic growth policies resulting in the decline in the level of poverty by 2000 poverty reduction paper, which was revised in 2004. The social policy episode (1967 to 1985) Tanzania adopted the self-reliance and socialism policy from 1967, and this system was extended to the Arusha Declaration. Putting in place the Arusha Declaration gave the basic ways of production under the control of the state via the nationalization and in this way the portion of the investments took place in the public sector making the large proportion of the share to go to the social sector, that were sufficient to contribute to the development of the people within the short duration. The social development policy was in line with the strategy of the basic needs during that time. Most of the principal investments were directed towards the basic social services, for example, education, water, sanitation, and health and was achieved via the investment programs put by the central government that focused on the basic needs approach and as a result facilitated the a remarkable aids inflow specifically during the 1970s. Whereas, Tanzania attained the remarkable achievements of human development, the result was stretched to its limit toward the late 1970s. Efficiency and Growth Policy (1986 to 1995) Tanzania switched to the economic recovery program of the international monetary Fund (IMF) and the World Bank structural adjustment program that was sponsored in 1986 to respond to the crisis in the economy of a late 1970s and the early 1980s. In the recovery program of (1986 to 1989), Tanzania took on the measures for stabilization, the policy reforms of the macroeconomics, the change in the trade and the regime of the exchange rate. The result of these changes was the accessibility to the enhancement of the extra external supports and the drop in the economy was stopped by the growth of the output making Tanzania recover about 4 percent per year. At the late 1980s, the recovery process of the economy started to address the problems of poverty, and this was as the consequent of the structural changes at the end of 1980s. Combination of growth and social policy (1996 to 2004). In the middle of 1990s, it was noted that the adjustment and the stabilization policies culminated in the disappearance of the previous achievements attained in the social development. The country has begun to the solve poverty problems as the key policy concern. Poverty reduction initiative coincided with the introduction of the frame for the comprehensive development of the World Bank that was essentially recognizing the development, which was to be pursued in the comprehensive way bearing in mind the social, and the political processes. As Tanzania was struggling to eradicate poverty, the international financial institutions formulated the concept for reducing the poverty called poverty reduction strategy papers (PRSP0 that was aimed at helping the highly indebted poor nations. The government of Tanzania took a quick response and prepared the PRSP to have immediate access to this fund. Growth in the economy and reduction in poverty The growth in the economy and the reduction in the poverty level have the relationships that majorly lies in the heart of the economic growth and development and with the latest studies, it shows that growth in the economy is very vital in eradicating poverty. The distribution of the assets, income, and the opportunities has the considerable influence on the growth of the economy and reduction in the level of poverty because the majority of the population will have their disposable incomes increased. The level of poverty in Tanzania is perverse with 18% of the people living below the poverty level and 35.7% live below the basic need level. In Tanzania poverty is the majorly the rural phenomena as 87% of the people who are poor live in the rural places. The gross enrolment in the primary schools is 998.6% in 2002 better than 77.6% in 1990. The rate of illiteracy is quite high having 28.6%. There is an improvement in the access to health services with 70% access by the sick people. Growth of agriculture to reduce poverty The poverty rate is common among the rural dwellers. Hence, the government of Tanzania has embarked on the promotion of agriculture to increase the level of income generations among the people in the rural areas. After the selection of agriculture as a sector through which many poor people can attain the living, the government came up with strategy to develop agriculture as one of the macroeconomic reforms since agriculture employ the majority of the total population who are the rural dwellers. Agricultural modernization and increasing the productivity of the sector has been given the highest priority by the development vision 2025, as well the MKUKUTA (2004) the revised strategy for poverty reduction. Global financial crisis in Tanzania The first round effects Tanzania was among the survivors of the first round impact of a global financial crisis that was a result of abrupt credit crunch or failure by the financial market to operate. It was due to low levels of Tanzania’s integration with other external financial markets and worked under the regime of restricting the capital account. This tradition lowered the exposure of Tanzania to the crisis. In late 2008, banking sector began worrying about the increase in the risk in the trade financing because the prices of the commodities were losing value continuously, and the orders in the exports were reduced. One of the initial interventions of the government makes assurance to the public about the proper conditions for the local banking sector. The government began putting the effort to give support to the banks to enable them to avoid the decline in the trade financing as it could adversely affect the economy in terms of earnings from foreign exchange and creation of jobs. The second round effects In the past years, the drop in the purchasing power of the economies that were developed started showing up by the drop in the prices of the commodity, unemployment due to loss of jobs, the fall in revenues, and the decline in demand for the products in the world market. The sector that was most affected negatively was agriculture, tourism, industry, and mining. The further decline in the global economy into the depression led to further fall in the prices of the commodities that were the principal export. The demand by the consumer of the developed countries declined continually, and the incomes generated from tourism dropped since people reduced on holidays. There was an effort by the government to manage the conditions as it had promised to create more jobs by 2010 though it had the fears that this financial crisis would cause the setback in the process. The Tanzanian government thus, devoted to maximizing the benefits from the declining prices of the international crude oil to reducing her domestic price hence, decreasing the cost of transport and production. Trade Despite the fact that the banking sector had a positive performance, the area for trade had some difficulties leading to its drawback. There was a negative of exports from agriculture, minerals and gemstones, traditional and non-traditional crops. But trade in the industrial goods had the growth leading to the increase in the trade between Tanzania and its neighbours of the East African Community (BOT, 2009a). The table below shows Tanzania’s situation in June 2009 and the how some sectors that were prone to a global economic drawback performed taken from Bank of Tanzania (BOT) data Table 1: Agricultural, mining and industrial sector export growth, 2007/08-2008/09 (Source BOT data) 2007/08 (%) 2008/09 (%) Change (%) Non-traditional goods 27.0 22.8 -4.2 Traditional crops 15.8 15.6 -0.2 Minerals and gemstones 41.9 37.0 -3.9 Industrial goods 15.3 24.6 9.3 Growth in GDP 7.1 5.0 -2.1 Regional trade Tanzania trades with the members of the East African Community. In year 2000, the balance of trade between Tanzania and Kenya was negative as shown in the table below. But from 2008, the trade balance had started improving from 2006 to 2008 with marginal trade balance of $-63.9 million to $1.5 million respectively; there was increase in exportation to Kenya from $89.3 million to $115.2 million respectively. This trend gave the partial explanations of the increase in export especially of staple foods and improvement in the quality of the product targeting the Kenyan market. On the other hand, Tanzania remains the exporter to Uganda, Burundi, and Rwanda (BOT, 2009b). Table 2: Tanzania’s trade with members of EAC, 2000-2009 (US$ millions) Source: BOT (2009b). 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Trade with Kenya Exports to Kenya 32.1 38.1 35.3 78.2 83.7 76.3 89.3 101.1 115.2 78.5 Imports from Kenya 93.1 203.4 95.2 115.8 130.2 155.3 153.2 100.2 113.7 76.2 Trade balance -61.0 -165.3 -59.9 -37.6 -46.5 -79.0 -63.9 0.9 1.5 2.3 Trade with Rwanda Exports to Rwanda 1.8 2.8 3.9 2.6 2.9 3.0 2.7 11.2 13.5 7.5 Imports from Rwanda 0.1 0.1 0.0 0.1 0.1 0.0 0.2 0.0 0.3 0.1 Trade balance 1.7 2.7 3.9 2.8 2.8 3.0 2.5 11.2 13.2 7.4 Trade with Uganda Exports to Uganda 8.5 5.5 5.5 10.3 11.7 20.1 19.6 19.3 21.2 13.4 Imports from Uganda 5.6 11.4 2.7 8.2 7.7 5.1 3.8 6.4 7.5 8.1 Trade balance 2.9 -5.9 2.8 2.1 4.0 15.0 15.8 12.9 13.7 5.3 Trade with Burundi Exports to Burundi 4.2 6.1 7.0 4.7 7.5 7.3 3.5 41.5 44.8 27.3 Imports from Burundi 0.0 0.2 0.0 0.3 0.3 0.0 0.0 0.4 0.2 Trade balance 4.2 5.9 7.0 4.4 7.5 7.0 3.5 41.5 44.4 27.1 Total to the EAC member states Export to EAC state 46.6 52.0 51.7 95.8 105.8 106.7 115.1 173.1 175.2 98.6 Import from EAC state 98.8 215.1 97.9 125.1 138.0 160.7 157.2 106.6 116.6 76.3 Trade balance -52.2 -163.1 -46.2 -29.3 -32.2 -54.0 -42.1 66.5 58.6 22.3 Outside development of the sector The performance of the external trade had been satisfactory (Mkulu 2009). Exportation of commodities raised by 3.2% in the period of September 2009 and the importation of products reduced by 4.4% in that same time. A latest account deficit is $2060.7 million from the balance of $2950.4 million noted in 2008. Imports In the first six months of 2009/20010 the importation of commodities totalled to $6425 million, the rise of 11.6% as compared to the previous year, more of it comes from the importation of goods. The total amount of imports increased by 10.9% to $5024.6 million in the period of 2009/20010 and importation of consumer and capital goods increased by 29.0% respectively and the level of imputation of intermediate goods reduced by 3.4%. Tourism The tourism in Tanzania is one of the fastest growing industries, contributes 16 percent of the GDP, and contributes about 25 percent of earning from foreign exchange. A lot of income got from the 15 national parks, which are expected to get 500881 tourists in the period of July and December 2008 but due to this crisis it received only 425137 visitors. There was a fall by 15% and attributed to latest fall in the number of external visitors to Tanzania. The tourism industry generated Tsh41.6 billion in year 2008, and it was less than the expected revenue of Tsh49.9 billion. Details are shown in the table below Table 3: International tourism arrivals in Tanzania, Jan-Apr 2006-2009 (Source: Ministry of Tourism and Natural Resources data) 2006 2007 2008 2009 Jan 59673 59572 65760 62020 Feb 49223 51563 65426 61713 Mar 52110 52932 64979 48752 Apr 39719 52690 58950 58763 Table 4: International tourism arrivals in Zanzibar, Jan-Mar 2007-2009 (Source: Zanzibar Tourist Commission data) 2007 2008 2009 Difference 2008-2007 2009-2008 Jan 14942 16228 13226 1286 -3002 Feb 13289 14323 14884 1034 561 Mar 11580 12045 10577 465 -1468 Apr 6323 4542 -1781 May 4076 4275 199 Jul 6990 6429 -561 Aug 13640 13283 -357 Sep 19870 13907 -5963 Oct 11727 10398 -1329 Nov 13408 7790 -5618 Dec 16064 15835 -229 Total 143283 128440 -14843 The preliminary observation indicates that there is the reduction in the number of tourist from the two markets hubs of Tanzania namely Europe and United States that contributed 80% of the visitors to Tanzania. In response to this, the government works closely with the Tanzania tourism board and the private to promote tourism. It included the attraction of tourist from the western world through improvement of her service delivery. The result of this led to increasing in the number of tourists from 536,341 within 2007 to 2008 to 637,749 within 2008 20009, receiving the revenue of TSh1.8 billion from 468 firms in the period of 11 months. The number of tourists visiting Tanzania and Zanzibar has been reducing from 2006 to 2009 with a reduction in the revenue earned as shown in the figures above. Conclusion Basing on the economic analysis of Tanzania’s economy it was found that the economy was not entirely gated by the financial crisis because it survived the first round of economic crisis though it was affected by the second round. Tanzania is one of the most stable economies in East Africa following the analysis of their economy in the past 50 years. Tanzania developed the characteristics of the socialist state, and that is Germany since Germany colonized it and this enable it to escape 2007 to 2009 economic crisis. From the analysis, it was found that there were changes especially in agriculture, tourism, and trade due to the economic crisis. In future, there is the need for adequate strengthening of the economy internally i.e. promoting self-reliance as seen by the first round effects of economic crisis survival of Tanzania. References Chuo Kikuu Cha dar es Salaam, & Tanzania., 1988. Tanzanian economic trends. Dar es Salaam, Tanzania, Economic Research Bureau, University of Dar es Salaam, Ministry of Finance, Economic Affairs, and Planning. Jerven, M., 2014. Economic growth and measurement reconsidered in Botswana, Kenya, Tanzania, and Zambia, 1965-1995. Oxford, Oxford Scholarship Online. Kahama, C. G.,1986. The challenge for Tanzania's economy. London, J. Currey. Mwakikagile, G., 2009. Africa 1960-1970: chronicle and analysis. Dar es Salaam, Tanzania, New Africa Press. Ndulu, B. J.,2008. The political economy of economic growth in Africa, 1960-2000. Cambridge, Cambridge University Press. Read More