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UNITED REPUBLIC OF TANZANIA
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MINISTRY OF FINANCE AND ECONOMIC AFFAIRS

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AN OVERVIEW OF MACROECONOMIC PERFORMANCE OF
TANZANIA FOR THE PAST THREE YEARS
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PAPER PRESENTED AT THE SEMINAR ON POST BUDGET
CRITIQUE AND PRE-BUDGET PROPOSALS FOR THE YEAR
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2010/2011

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By
Prof Handley Mpoki Mafwenga
[PhD, MSc, PGDTM, ADTM]
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Principal Finance Management Officer

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JULY 2009
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 Table of Contents

INTRODUCTION 1

OVERVIEW OF MACROECONOMIC PERFORMANCE FOR THE PAST

THREE YEARS 2
2.1 GDP Growth 2
2.2 Inflation 3
Government Budget 4
Revenue 4
Expenditure 4
National Debt 6
2.4 External Sector 7
2.5 Money and Credit Developments 10
Money Supply 10
Credit Developments 10
Interest Rates 11
Exchange Rate 12
Foreign Reserves 12
Foreign Direct Investment 13

EMERGING MACROECONOMIC POLICY ISSUES AND CHALLENGES

14
3.1 Global Economic Crisis and the Economy 14
3.2 Fiscal Stimulus Initiatives in FY2009/10 15

MEDIUM-TERM MACROECONOMIC FRAMEWORK AND STRATEGIC

DIRECTIONS 16
4.1 Growth Prospects 16
4.2 Medium Term Outlook 17
CONCLUSION 18

ii
INTRODUCTION
Tanzanias macroeconomic performance continues to be strong in past three
years (2006, 2007 and 2008) despite major shocks caused by severe drought
experienced during 2005/06 rain season; high oil and fertilizer prices in 2007;
and the on-going financial and economic crisis, which has weakened
economic growth prospects for 2009 with the expected reduced demand for
our exports, lowering prices for primary commodities, tourism earnings and
contracting investment inflows. These developments have put pressure on
external balance of payments, exchange rate and official foreign exchange
reserves.

As a response to these challenges, the Government has taken several policy

measures to cushion the economy from further slide. Going forward, the
Government plan to further stimulate the economy through the budget for the
Financial Year 2009/10 to protect employment especially in sectors affected
with financial problems; taking precautions and mitigative measures due to
the global food shortage exacerbated by the crisis and bad weather; protect
basic social development programmes; and safeguard important investment
necessary for the countrys development. In line with mitigative measures,
the Government will remain focused on the raising long-term growth, expand
employment opportunities and empowerment programmes, reduce poverty
and promote regional development.

Notwithstanding these challenges, the Government remains committed to

attaining the goals of Tanzania National Development Vision 2025 and
National Strategy for Growth and Reduction of Poverty (MKUKUTA).
Tanzanias economic foundation remains stable and supportive of accelerated
growth rates in the medium-to long term due to bold economic reforms
implemented in the recent past.

1
OVERVIEW OF MACROECONOMIC PERFORMANCE FOR
THE PAST THREE YEARS
Tanzanias economic performance continues to be strong, despite the global
pressure on oil, food prices and economic recession. Economic growth has
been more resilient to shocks over three years with GDP growth averaging 7.0
percent between 2006 and 2008. This strong performance has been spurred
by sustained structural reforms coupled with prudent fiscal and monetary
policies and other interventions undertaken by the Government that have
focused on investment promotion, employment generation, export promotion,
infrastructure development, and human resource development.

2.1 GDP Growth

Tanzania continued to sustain good economic growth and macroeconomic
stability. During the year 2008, real GDP growth reached 7.4 percent
compared to actual growth rate of 7.1 percent and 6.7 percent in 2007 and
2006 respectively. The increase in economic growth rate was mainly
attributed to an increase in growth of agriculture; fishing and services
economic activities. The high growth rates were observed in communication
sub-activity; financial intermediation; and construction. However, industry
and construction contracted by 8.6 percent in 2008 compared with a growth
of 9.5 percent and 8.5 percent in 2007 and 2006 respectively. The share of
services to GDP increased by 43.7 percent in 2008 compared to 43.3 percent
in 2007 and 2006.

2
 GDP TREND (at Constant 2001 Prices)

Tshs. Billion

Real GDPReal
Growth
GDPReal
Growth
GDPReal
Growth
GDPReal
Growth
GDPReal
Growth
GDPReal
Growth
Real
GDP
GDP
Growth
Growth
Rate, 2000,
Rate,
4.9%
2001,
Rate,
6.0%
2002,
Rate,
7.2%
2003,
Rate,
6.9%
2004,
Rate,
7.8%
2005,
Rate,
Rate,
7.4%
2006,
2007,
2008,
6.7%
7.1%
7.4%

Real GDP Real GDP Growth Rate

Source: National Bureau of Statistics

2.2 Inflation
Over the past decade, through reforms and stabilization measures,
Tanzania managed to subdue inflation to single digit levels. The recent upward
trend was however driven by pressures in the world oil and food prices leading
to double digit inflation level in 2008. The rate of inflation, as measured by the
Consumer Price Index (CPI), reached an annual average of 10.3% in 2008
compared to 7.0 percent and 7.3 percent recorded in 2007 and 2006
respectively. The high rate of inflation reflected rising power (electricity) tariffs
by a 21.7 percent as well as high world prices for oil and food stuffs. Annual
averaged food inflation was 12.7 percent while non-food inflation was 6.7
percent. Although world oil prices have fallen below their peak in 2008, the
local pump prices have not declined commensurately, thus triggering a
continued hike in food prices due high transport costs.

3
 Inflation Trend, 1998-2008
16.0

14.0

12.0
Percentage
10.0

8.0

6.0

4.0

2.0

0.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Nonfood inflation
Headline Inflation Food inflation

Source: National Bureau of Statistics

Government Budget

Revenue
In the past three years Government revenue continue to increase due to
broadening of the tax base by registering new tax payers and further
improvement of the business and investment climate; successful
implementation of TRA Third Five-Year Corporate Plan; strengthening the
capacity of the Customs and Excise Tax Department in the supervision and
collection of revenue; improving procedures for collection of non-tax revenue;
and improving the tax structure, fees, levies and other revenue measures.
Implementation of the FY 2008/09 budget in the first nine month of the
financial to March 2009 has generally been satisfactory, but with challenges.
Preliminary outturn indicates that revenues collections by June 2009 were
below target by Shs. 330,080 million. During the period between July 2008 to
March 2009, domestic revenue collected reached Shillings 3,199,134 million
(3.2 trillion), equivalent to 91 percent of the estimated of Shillings 3,529,214
million (3.5 trillion).

4
 Domestic Revenue as a Percent of GDP 1999/00 - 2009/10

18.0%

16.0%

14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%
1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10

Source: Ministry of Finance and Economic Affairs

Expenditure
The Government has continued to link expenditure policy and objectives as
identified in MKUKUTA. Due to this, the financing gap between domestic
revenue and total expenditure has continued to widen. The observed gap is
largely a result of the compelling demand for financing infrastructure
development and other priority sectors as identified in MKUKUTA. Cumulative
expenditure as at the end of March 2009 amounted to Shillings 4,657,893
million (4.7 trillion), equivalent to 87 percent of the estimated amount of
Shillings 5,364,868 million (5.4 trillion) for the period. Recurrent expenditure
was 3,142,301 million (3.1 trillion) and development expenditure was Shillings
1,515,592 million (1.5 trillion).

5
 Resource Gap, 1999/00-2009/10
10,000

9,000

8,000

TSh Millions
7,000

6,000

5,000
Resource Gap
4,000

3,000

2,000

1,000

0
1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10

Domestic revenue Total Expenditure (excl. Amortization)

Source: Ministry of Finance and Economic Affairs

National Debt
Despite the increase in the national debt, the trend shows that Tanzanian debt
is still sustainable. As at December, 2008, the National Debt was USD 6,329
million compared to USD 5,891.9 million in December 2007. This is equivalent
to 32.6 percent of GDP compared to 31.8 percent in 2007. Out of that amount,
external debt amounted to USD 4,822.0 million, while domestic debt was USD
1,507 million, equivalent to Shs. 1,929.3 billion. The external debt increased by
14.3 percent compared to USD 4,218.5 million in 2007. The increase in external
debt was largely due to accumulation of interest arrears, particularly for the
Non- Paris Club Member Countries, depreciation of the shilling and newly
contracted loans. Domestic debt for the period increased by Shs. 35 billion,
equivalent to an increase of 1.8 percent, compared to the period ending
December 2007.

6
2.4 External Sector
Exports
The countrys balance on goods and services account has continued to worsen
due to an increase in imports over exports. Total export earnings (goods and
services) increased by 36.4 percent to USD 3,036.7 million from USD 2,226.6
million in 2007. The increase was mainly attributed to an increase in the export
of both traditional non-traditional goods. The value of traditional exports
including cotton, tea, tobacco, cashewnuts, coffee, sisal, and cloves increased
to USD 418.4 million in 2008, compared to USD 319.7 million in 2007. The
value of non - traditional exports was USD 2,270.6 million in 2008, compared
to USD 1,704.5 million in 2007, equivalent to an increase of 28.8 percent. The
increase was mainly attributed to the increase in exports of manufactured
goods, particularly cotton yarn and sisal products. The value of manufactured
exports increased by 113.8 percent, from USD 309.8 million in 2007 to USD
662.3 million in 2008. Likewise, receipts from service exports including tourism,
transport and others increased to USD 2,168.9 million, from USD 1,875.7
million in 2007, equivalent to an increase of 15.6 percent. In addition, during
2008, the value of exports to the European Union (EU) and Switzerland
increased by 26.1 percent; to the East African Community (EAC) by 82.6
percent; to SADC countries by 47.3 percent; and to other African countries by
56.4 percent. The value of goods exported to China, Japan, India, Hong Kong
and United Arab Emirates increased by 61.5 percent and to the Americas by
51.1 percent.

7
 Merchandise Exports 2005 -2008
900

800

700
US $ Million
600

500

400

300

200

100

0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2005 2006 2007 2008

Traditional goods exports Gold exports Other exports

Source: Bank of Tanzania

Imports
On the other side, the value of imported goods increased to USD 6,439.9
million in 2008 from USD 4,860.6 million in 2007. The increase was attributed
to rise in imports of capital goods for manufacturing, communication,
transportation, construction and mining. The value of imports of intermediate
goods, especially oil products, increased due to the persistent rise in oil prices
in the world market, particularly during the period between January to October
2008. However, imports of consumer goods, especially food, decreased from
USD 315.4 million in 2007, to USD 290.9 million in 2008, as a result of
increased food production in the country. Payments for services increased to
USD 1,598.0 million, from USD 1,415.4 million in 2007, equivalent to an
increase of 12.9 percent.

8
 Merchandise Imports, 2005 - 2008
1800

1600

1400
US $ Million
1200

1000

800

600

400

200

0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2005 2006 2007 2008

Intermediate goods Oil imports Consumer Food imports

Source: Bank of Tanzania

During 2008, the deficit in the balance of merchandise trade increased to USD
2,333.4 million, compared to a deficit of USD 2,041.6 million in 2007,
equivalent to an increase of 14.3 percent. The deficit was largely attributed to
increased imports of goods and services.

Exports and Imports, 2003 - 2008

10,000

8,000

6,000
USD Million

4,000

2,000

0
2003 2004 2005 2006 2007 2008
-2,000

-4,000
Export of goods and Services Import of Goods and Services
Balance of Goods and Services

Source: Bank of Tanzania

9
2.5 Money and Credit Developments

Money Supply
In the year ending December, 2008, broad money supply (M2)1 grew by 29.7
percent, compared to 27.0 percent and 24.5 percent in December 2007 and
2006 respectively. The broad extended money supply (M3) grew by 24.0
percent for the period ending December 2008, compared to 21.4 percent and
24.2 percent in December, 2007 and 2006 respectively. The increase in M2 was
attributed to the increase in commercial bank credit to the private sector as
well as an increase in special demand deposits.

Credit Developments
There has been substantial expansion of financial sector over the years and
currently 36 commercial banks and 18 insurance companies are operating in
the country. The expansion in the banking sector has led to expansion of credit
to private sector growing at a above 35 percent per annum. This mainly
reflects Government efforts to reduce domestic borrowing for financing the
budget and promotion of a conducive environment for private sector
participation in economic activities. Credit extended to the private sector
increased to Shs. 4,376.4 billion in the year ending December, 2008 compared
to Shs. 2,976.3 billion extended in December, 2007, equivalent to an increase
of 47.0 percent. The increase in credit is largely due to Government reduction
in domestic bank borrowing, increased compliance in repayment of loans,
increase in credit guarantee schemes as well as an increase in corporate
borrowing. Most of the credit was extended to trade (16.1 percent);
manufacturing (13.1 percent); transport and communication (8.7 percent);
agriculture (8.3 percent); and private credit by (19.6 percent).

1
M0 is currency in circulation outside the banking system
M1 = M0 + Demand Deposits
M2 = M1 + Time and Savings Deposits
M3 = M2 + Foreign Currency Deposits

10
 Commercial Banks Credit to Private Sector - April, 2009
5,000 60%

4,500
50%
4,000
Tshs. Billion
3,500
40%
3,000

2,500 30%

2,000
20%
1,500

1,000
10%
500

0 0%
Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Apr-09

Credit to private sector (TShs) Growth of credit to private sector

Source: Bank of Tanzania

Interest Rates
There has been a notable narrowing in the spread between lending and deposit
rates of commercial banks between 2006/07 2008/09. This partly indicates
that commercial banks are gradually building confidence in their borrower and
it also reflects reduction of risk due to Government efforts to guarantee
commercial banks against risky borrowers, particularly for agricultural activities.
The average interest rate offered by various commercial banks continued to
exhibit wide interest rates spreads. The average lending rates by commercial
banks increased from 15.25 percent in December, 2007 to 16.05 percent in
December, 2008. Likewise, the interest rates on deposits increased from 2.65
in December, 2007 to 2.68 in December, 2008.

11
 Lending and Deposit Rates of Commercial Banks 2000/01 - 2008/09
25

20

Percentage
15

Spread between lending and deposit rates

10

0
2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09

Overall Lending Rates Overall Time Deposits rates

Source: Bank of Tanzania

Exchange Rate
The annual average exchange rate between the Tanzanian Shilling and the US
dollar has continued to increase while the rate of depreciation has been
fluctuating. The value of the Tanzanian shilling per USD was Shs. 1,280.30 as
at end of December, 2008 compared to Shs. 1,132.09 at end - December,
2007. The depreciation in the value of the Tanzanian shilling was largely
attributed to the increase in the demand for the US Dollar by importers and
individuals who hold money for speculative purposes. However, the annual
average exchange rate for the Tanzanian shilling against the US Dollar was
Shs. 1,196.3 in 2008, compared to Shs 1,244.1 per USD in 2007.

Foreign Reserves
In 2008, foreign reserves increased by 3.9 percent to USD 2,869.7 million, from
USD 2,761.9 million and USD 2,260.1 million in 2007 and 2006 respectively.
That amount of foreign reserves in 2008 was enough to cover 4.6 months of
imports of goods and services, compared to 5 and 5.3 months of imports in
2007.

12
Foreign Direct Investment
Tanzania has continued to receive more Foreign Direct Investment with an
annual average of USD 554.1 million over the last five years. The observed
increase was on account of continued improvement in the investment climate
in the country, coupled with enhanced investment promotion. The value of the
foreign direct investment increased to USD 695.5 million in 2008, compared to
USD 653.4 million in 2007, equivalent to an increase of 6.4 percent. The United
Kingdom continued to lead foreign countries with many investment projects in
the country with 96 followed with Kenya 72, China 50, India 39, the
Netherlands 27, USA 24 and South Africa 20 projects. Sectors that received
most investments are manufacturing, construction, commercial buildings and
transportation.

FDI Inflows to Tanzania 1996-2008

800

695.5
700
653.4
597.0
600
517.0
494.1
US$ Million
500 463.0 467.0

387.6
400
330.6
303.6
300

200 158.0 172.0

149.0

100

0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Bank of Tanzania

13
 Ten Leading Countries that Have Invested in Tanzania, 1990-2008
(US$ Million)

Germany Italy Swiss

105.9 71.3 UK
272.9
USA 1,478.9
645.3

S.Africa
516.1

Netherlands
804.4

Kenya India
1,284.7 China 1,217.6
527.5
Source: Tanzania Investment Centre

Source: Bank of Tanzania

EMERGING MACROECONOMIC POLICY ISSUES AND

CHALLENGES
3.1 Global Economic Crisis and the Economy
Most of the gains that had been painful achieved in the recent past are under
threat in the face of the on-going global recession that has reduced demand
for exports, lowering prices for primary commodities, tourism earnings and
contracting investment inflows. While the first round impact of the financial
crisis on our banking system was minimal, a protracted recession in advanced
countries could worsen growth and business performance, thus resulting in
the decline in the quantity of the credit portfolios in the banking system as
banks focus on consolidation and quality of loan portfolio. Overall the above
developments will, notwithstanding the decline in oil and fertilizer prices,
reduce growth prospects for this year and put pressure on our balance of
payments, exchange rate and official foreign exchange reserves in 2009. It is
therefore imperative for the Government to address these challenges to our
economy. The actions that have been taken aims at supporting economic
activities, contain unemployment and improve well-being of all Tanzanians.

14
3.2 Fiscal Stimulus Initiatives in FY2009/10
In the face of unfavorable global economic environment and the need to
protect the livelihood of the poor and create employment, the Government
budget has outlined key actions to boost economic recovery to the growth
trajectory envisaged under the Vision 2025. This will be done through a fiscal
stimulus package that is more targeted, flexible and sufficient given the
magnitude of the likely impact of the crisis on our economy. Key element of the
proposed stimulus package includes:
To compensate the losses incurred by the buyers of crops during the
fiscal year 2008/09, including cooperatives and private companies which
sold cotton and coffee products at a loss;
Rescheduling of outstanding loans;
To provide working capital at concessional terms. Under the plan, the
Government will provide soft loan facilities for on-lending to businesses
whose operations have been adversely affected by the economic crisis;
To strengthen the Export Credit Guarantee Scheme (ECGS) and the
Small and Medium Enterprises (SMEs) Guarantee Scheme;
Import farm implement in order to improve production and productivity
in the agriculture sector;
Extending a loan to Artumas to enable the company to continue with
power generation project for Mtwara and Lindi regions to improve power
generation in those regions;
Seeking loans from multilateral and bilateral development partners to
finance operations of Tanzania Rail Limited (TRL); and
Establish special docks in the ports with required facilities for handling
cruise liners in order to encourage such vessels carrying tourists to make
stopovers in our country.

15
MEDIUM-TERM MACROECONOMIC FRAMEWORK AND
STRATEGIC DIRECTIONS
4.1 Growth Prospects
The on-going global economic recession is expected to reduce demands for
exports, receipts from tourism and remittance, and capital inflows. It will also
lead to a decline in world prices of key export commodities, hence worsening
Tanzanias terms of trade. While the Government has taken measures in
terms of the stimulus package to mitigate these challenges, growth prospects
in 2009 and the medium-term is likely to be reduced if the recovery in global
economy is protracted. In the midst of less favourable external environment,
real GDP growth is expected to slow down to 5.0 percent in 2009 from 7.4 in
2008. However, the impact of this crisis is assumed to be short-lived, and
thus, real GDP growth is expected to rebound thereafter. The
macroeconomic projections and policy targets for the period 2009/10
2011/12 are as follows:
(i) Attain a real GDP growth rate of 5.0 percent in 2009, 5.7 percent in
2010, 7.2 percent in 2011 and 7.5 percent by 2012;
(ii) Control Inflation at below 10.0 percent by end-June, 2010;
(iii) Increase domestic revenue collection to equivalent of 15.9 percent of
GDP expected in 2009/10, 16.4 percent in 2009/10, 17.2 percent in
2010/11 and 18.3 in 2011/12;
(iv) Contain the growth rate of money supply (M2) consistent with GDP
growth and inflation targets;
(v) Maintain adequate official foreign reserves sufficient to cover a minimum
of five months worth of imports of goods and non-factor service;
(vi) Maintain a market determined realistic exchange rate; and
(vii) Remove bottlenecks in the financial sector in order to facilitate credit
availability to the private sector.

16
4.2 Medium Term Outlook
Looking further ahead, it is expected that a global economic will recover
sooner than later with the on-going actions to stabilize the financial markets
and resuscitate growth in advanced countries. On the domestic fronts, in the
medium-term, key macroeconomic strategic directions will focus on:
(a) Accelerating and sustaining economic growth through
macroeconomic stability and strengthening the financial sector to
ensure low but stable interest rates, a low inflation and a stable
currency;
(b) To increase investments in areas which have sectoral linkages,
particularly agriculture, infrastructure, manufacturing and energy,
as well as enhancing participation of the private sector in those
areas;
(c) To increase availability of credit facilities particularly for the
agriculture sector by establishing an agricultural bank and a bank
for women;
(d) To improve collection of domestic revenue in order to meet a bigger
portion of government expenditure and enhance accountability in
the use and management of public funds;
(e) To improve economic empowerment programmes and increase
employment generation; and
(f) To finalize the survey of village lands.

17
CONCLUSION
The world economy is in a severe recession since World War II, following the
negative impact of the second and third wave of global financial crisis.
Despite the various policy measures including fiscal stimulus plans and
liquidity injections by advanced countries, financial strain remain acute,
impacting negatively on the real economy. The negative impact of global
recession will also be felt in Sub-Saharan Africa, Tanzania included. Looking
at the recent global developments, we note that economic foundation laid in
the past has not been eroded is still intact. What we need is to gather
courage, adopt a positive spirit, and commit ourselves to moving forward.
Above all, we should find strength, unity of purpose and resolve to urgently
and decisively confront the immediate challenges facing us, while at the
same time focusing on our long-term growth and development objectives in
line with Vision 2025. In order to reduce the suffering to the people from the
impact of the global economic recession, the Government will remain focused
on the raising long-term growth, expand employment opportunities and
empowerment programmes, reduce poverty and promote regional
development.

18