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THE UNITED REPUBLIC OF TANZANIA MACROECONOMIC POLICY FRAMEWORK FOR THE FIVE YEAR DEVELOPMENT PLAN/BUDGET 2011/12-2015/16 Produced by the Ministry of Finance May, 2011 Table of Content 1.0 OVERVIEW OF ECONOMIC PERFORMANCE ......................................................................................... 1 2.0 RECENT MACROECONOMIC DEVELOPMENTS .............................................................................. 5 2.1 GLOBAL OUTPUT GROWTH...................................................................................................................................... 5 2.2 GDP GROWTH................................................................................................................................................ 7 2.3 PRICE MOVEMENTS................................................................................................................................................. 9 2.4 EXTERNAL SECTOR DEVELOPMENTS ............................................................................................................... 12 Exports performance ......................................................................................................................................... 12 Import Performance .......................................................................................................................................... 16 2.5 GOVERNMENT FINANCE ................................................................................................................................. 18 Domestic Revenue ............................................................................................................................................. 19 Foreign Resources ............................................................................................................................................. 20 Expenditure ........................................................................................................................................................ 21 2.6 NATIONAL DEBT ................................................................................................................................................... 21 External Debt...................................................................................................................................................... 22 Domestic Debt .................................................................................................................................................... 22 Debt Services ..................................................................................................................................................... 22 Performance of key debt indicators ................................................................................................................ 23 2.7 MONEY AND CREDIT DEVELOPMENTS ..................................................................................................................... 24 Credit to Private Sector ..................................................................................................................................... 25 Interest Rates Development ............................................................................................................................ 25 Exchange rate movements ............................................................................................................................... 26 2.8 FINANCIAL SECTOR REFORMS ............................................................................................................................... 27 2.9 REGIONAL INTEGRATION..................................................................................................................................... 29 2.10 MKUKUTA I PERFORMANCE .............................................................................................................................. 31 2.11 MILLENNIUM DEVELOPMENT GOALS - MDGS....................................................................................................... 33 2.12 TANZANIA DEMOGRAPHIC AND HEALTH SURVEY 2010-TDHS ............................................................................. 35 2.13: REVIEW OF THE VISION 2025 ........................................................................................................................... 37 3.0: EMERGING MACROECONOMIC POLICY ISSUES, CHALLENGES AND STRATEGIES.......... 39 3.1 POWER SHORTAGES HURTING THE ECONOMY ........................................................................................................ 39 3.2 MKUKUTA II ...................................................................................................................................................... 40 3.3: THE FIVE YEAR DEVELOPMENT PLAN FORMULATION FRAMEWORK......................................................................... 43 3.4: FINANCIAL INCLUSION .................................................................................................................................. 46 Payment System ................................................................................................................................................ 46 Mobile Phone Payment ..................................................................................................................................... 47 3.5: PUBLIC-PRIVATE PARTNERSHIPS.......................................................................................................................... 49 3.6: ECONOMIC OUTLOOK FOR SUB-SAHARAN AFRICA................................................................................................. 50 3.7: HUMAN RESOURCE DEVELOPMENT ....................................................................................................................... 51 3.8: THE SOUTHERN AGRICULTURAL GROWTH CORRIDOR OF TANZANIA (SAGCOT ..................................................... 52 3.9 MEDIUM TERM STRATEGIC FOCUS ......................................................................................................................... 53 4.0 MEDIUM TERM ECONOMIC OUTLOOK: 2011/12-2015/16 ........................................................... 63 4.1 MACROECONOMIC ASSUMPTIONS .......................................................................................................................... 63 4.2 MEDIUM TERM MACROECONOMIC OUTLOOK AND TARGETS .................................................................................... 64 The World Economic Outlook .......................................................................................................................... 64 Tanzania’s Growth Outlook .............................................................................................................................. 65 SECTORAL ASSUMPTIONS AND THE MEDIUM TERM OUTLOOK (2011 – 2015) .............................................................. 67 Inflation ............................................................................................................................................................... 71 Government Finance ......................................................................................................................................... 71 Money and credit development ....................................................................................................................... 74 External Sector ................................................................................................................................................... 74 5.0 CONCLUSION ............................................................................................................................................. 75 ii Abbreviations and Acronym ASDS Agriculture Sector Development Strategy BEST Business Environment Strengthening for Tanzania BoT Bank of Tanzania CIF Cost, Insurance and Freight CPI Consumer Price Index DPs Development Partners DSA Debt Sustainability Analysis EAC East African Community EPZ Export Procesing Zone FoB Free on Board FDI Foreign Direct Investment FSAP Financial Sector Assessment Program GDPmp Gross Domestic Product, at market price GFC Global Financial Crisis HBS Household Budget Survey MDAs Ministries, Departments and Agencies MDG Millennium Development Goals MKUKUTA Mkakati wa Kukuza Uchumi na Kupunguza Umaskini Tanzania MTEF Medium Term Expenditure Framework NACSAP National Anti-Corruption Strategy and Action Plan NIR Net International Reserves NEEC National Economic Empowerment Council NSGRP National Strategy for Growth and Reduction of Poverty OECD Organization for Economic Co-operation and Development ODCS Other Depository Corporations PEDP Primary Education Development Programme PSDS Private Sector Development Strategy SACCOS Savings and Credit Cooperative Societies SADC Southern Africa Development Community SAGCOT Southern Agricultural Growth Corridor of Tanzania SEZs Special Economic Zones SMEs Small and Medium Enterprises THIS Tanzania HIV/AIDS Indicator Survey TIC Tanzania Investment Centre TRA Tanzania Revenue Authority USD United States Dollar VAT Value Added Tax WEO World Economic Outlook iii 1.0 OVERVIEW OF ECONOMIC PERFORMANCE 1. Tanzania’s macroeconomic performance has improved substantially over the past five years with sustained high rates of growth and relatively low inflation. The real GDP grew at an annual average of 7.3 percent between 2004 and 2008 before slowing down to 6.0 percent in 2009 following the effects of the Global Financial Crisis (GFC). In response, the Government took policy measures to stimulate economic activities, which helped the economy to bounce back, at a real growth rate of 7.0 percent in 2010. It is expected that, the economic growth will maintain an upward trend, reaching 8.5 percent by 2015. Improvement in the real growth of GDP is attributed by increase in agricultural production, improvements in the performance of trade (including tourism), communication and construction and the ongoing efforts by the Government, aiming at stabilizing the supply of electricity. In comparison, the average real GDP growth in the Sub-Saharan Africa was 5.0 percent in 2010. 2. The economy experienced inflationary pressures in 2009, primarily due to food supply shortages in some parts of the country and in the neighbouring countries and a rebound in world oil prices. However, following good weather and a bumper harvest in the 2009/10 crop season, food supply improved, leading to a downward trend in inflation from 12.2 percent in December 2009 to 5.6 percent in December 2010. Although inflation has remained a single digit, it has resumed an upward trend during the first quarter of 2011, reaching 8.6 percent in April 2011 owing to the increase in the general prices of electricity, food and gas. Inflation is expected to remain a single digit in the medium term as the government continues to pursue prudent fiscal and monetary policies, as well policy measures aimed at increasing food production and developing alternative power generation sources to hydro power. Government Finance 3. The budget performance for the fiscal year 2009/10 experienced a shortfall in domestic revenue collections against estimates by 8.8 percent. This lower performance was partly due to the impact of the global financial crisis that led to a slower growth in taxable production activities in the economy and postponement of implementation of some revenue measures that were announced in the budget. Total domestic revenue collection during 2009/10 was Tshs. 4,661,540 million equivalent 15.2 percent of GDP, 1 compared to Tshs 4,293,074 million, equivalent to 16.2 percent in 2008/09. On the other hand, total expenditure for 2009/10 was Tshs. 8,173.7 billion, equivalent to 92.0 percent of the estimates. The amount is equivalent to 26.7 percent of GDP in 2009/2010, compared to 25.7 percent of GDP in 2008/09. Grants amounted to 4.6 percent of GDP, resulting into a budget deficit after grants of 6.4 percent of GDP. 4. Total domestic revenue collections during the first half of the fiscal year 2010/11 was 10 percent below the budget estimate. Notwithstanding this underperformance, the gross collection for the period was 17.6 percent above the collection of the corresponding period in the year 2009/10. The impact of GFC has affected Government revenue collection, hence increased budget deficit. Thus, Government spending was realigned with resource availability without jeopardizing public service delivery. National Debt 5. The national debt stock as of end December 2010, stood at USD 11,380.2 million (of which USD 9,516.8 was public debt) compared to USD 10,725.92 million, at endDecember 2009, equivalent to 6.1 percent increase. Out of the public debt stock, external debt was USD 6,529.6 million, equivalent to 68.6 percent of the total national debt and domestic debt stood at USD 2,986.9 million. Total public debt as a percentage of GDP increased from 33.6 percent in 2008/09 to 42.4 percent recorded in 2009/10. Public external debt service as a percentage of domestic revenue, decreased significantly from double digit ratio in the early 2000 to single digit of 2.7 in 2009/10. The trend is attributed to measures taken by the Government in improving revenue collection and debt cancellation under the enhanced HIPC and MDRI. Money and Credit 6. The main thrust of government policy in 2009/10 was to make use of the collective force of fiscal and monetary policies to limit the severity of the global economic downturn on domestic economic activity, and set the economy on a firm footing for returning to its medium-term growth path, as the global economic and financial conditions normalize. Hence, the government put in place a countercyclical stimulus, with monetary policy providing ample liquidity to dampen possible slowdown in credit growth and economic activity. Consistent with the monetary policy stance, monetary 2 aggregates in 2009/10 recorded a sizeable increase as a result of substantial increase in net borrowing by the government from the banking system to cater for infrastructure development. Credit to private sector has continued to improve, from an annual growth rate of 9.6 percent recorded in 2009 to 20.0 percent in 2010, and further up to 23.3 percent in March 2011. External Sector Development 7. In 2010, Tanzania exported goods and services worth USD 5,828.0 million, which was 21.9 percent higher than USD 4,780 million recorded in 2009. The value of exports of goods grew by 27.7 percent in 2010 while services receipts were 12.8 percent higher than the amount recorded during the year earlier. As a ratio to GDP, exports of goods and services recovered by 3.2 percentage points to 27.6 percent in 2010 compared with 24.4 percent a year earlier. The improvement was largely due to increase in exports of gold, travel and manufactured goods. 8. In 2010, import of goods and services increased by 18.8 percent to USD 8,974.7 million from USD 7,543.1 million in 2009, largely due to a notable increase in the value of imported oil and consumer goods. Oil imports increased nearly by 50 percent to USD 1,983.8 million, mainly attributed to the increase in both volume and prices. In comparison, the volume of oil imports increased by 6.9 percent in the year ending December 2009 while the average oil prices (refined products) in the world market hiked by 24.9 percent to USD 691.9 per ton. 3 Table 1: Trends in Selected Macroeconomic Indicators, 2002 – 2010 2002 2003 2004 2005 2006 2007 2008 2009 2010 NATIONAL ACCOUNTS Real GDP growth at market price 7.2% 6.9% 7.8% 7.4% 6.7% 7.1% 7.4% 6.0% 7.0% Agriculture, Hunting and Forestry 4.9% 3.1% 5.9% 4.3% 3.8% 4.0% 4.6% 3.2% 4.2% Fishing 6.8% 6.0% 6.7% 6.0% 5.0% 4.5% 5.0% 2.7% 1.5% Industry and construction 9.4% 10.9% 10.9% 10.4% 8.5% 9.5% 8.6% 7.0% 8.2% 7.5% 9.0% 9.4% 9.6% 8.5% 8.7% 9.9% 8.0% 7.9% 11.9% 13.8% 13.0% 10.1% 9.5% 9.7% 10.5% 7.5% 10.2% 8.2% Manufacturing Construction Services 7.7% 7.8% 7.8% 8.0% 7.8% 8.1% 8.5% 7.2% Trade and repairs 8.3% 9.7% 5.8% 6.7% 9.5% 9.8% 10.0% 7.5% 8.2% Communications 10.4% 15.6% 17.4% 18.8% 19.2% 20.1% 20.5% 21.9% 22.1% Financial intermediation 10.1% 10.7% 8.3% 10.8% 11.4% 10.2% 11.9% 9.0% 10.1% 14.8% 15.9% 15.4% 14.3% 12.4% 16.8% 18.3% 13.8% 14.5% CPI inflation (period average) 4.5% 5.3% 4.7% 5.0% 7.3% 7.0% 10.3% 12.1% 5.5% GDP deflator inflation (market price) 7.1% 8.4% 7.0% 6.4% 5.3% 9.0% 10.1% 7.4% 4.9% Short-term lending rate 15.9% 15.6% 14.2% 15.7% 15.7% 15.0% 13.6% 14.0% 14.4% Long-term lending rate 13.2% 12.5% 12.6% 14.1% 14.9% 16.7% 16.5% 14.5% 14.6% 12 month deposit rate 5.7% 5.0% 5.8% 7.7% 8.8% 10.1% 8.3% 9.0% 7.1% Savings rate 2.7% 2.5% 2.6% 2.6% 2.6% 2.7% 2.7% 2.8% 2.4% M3 growth rate 25.6% 18.0% 13.5% 34.8% 21.5% 20.5% 19.8% 17.7% 25.4% M2 growth rate 21.6% 17.8% 19.8% 33.9% 16.7% 27.2% 24.4% 20.8% 21.8% Growth rate of credit to private sector 41.5% 42.8% 32.8% 29.3% 40.1% 43.1% 44.6% 9.6% 20.0% Nominal GDP growth at market price PRICES MONEY BALANCE OF PAYMENTS (Ratio to GDP) Exports of goods 9.1% 10.5% 11.5% 11.9% 12.2% 12.0% 15.0% 15.7% 18.4% Exports of goods and services 17.6% 18.6% 20.3% 20.9% 22.9% 23.1% 24.7% 24.4% 27.6% Imports of goods 14.0% 16.6% 19.3% 21.2% 27.1% 28.8% 33.8% 27.3% 30.4% Imports of goods and services 19.8% 22.8% 26.9% 29.8% 35.8% 37.1% 41.8% 35.3% 38.2% Reserves (months of imports) 8.8 9.3 7.7 6.0 5.0 4.8 4.3 5.6 6.3 GOVERNMENT BUDGETARY OPERATIONS (Ratio to GDP) 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 Revenue 10.7% 10.8% 11.2% 11.9% 12.4% 14.1% 15.9% 16.2% 15.2% Expenditure 21.9% 21.8% 26.6% 29.4% 31.9% 31.7% 22.8% 25.7% 26.9% 18.4% 18.9% 20.9% 22.2% 24.2% 24.8% 14.9% 17.7% 18.3% 3.5% 2.9% 5.7% 7.2% 7.7% 6.9% 7.9% 8.0% 8.6% Deficit (excl grants) -4.3% -5.3% -8.3% -9.7% -11.4% -9.9% -8.6% -9.3% -11.0% Deficit (incl grants) -0.4% -1.0% -2.9% -4.9% -5.5% -4.9% -1.7% -4.5% -6.4% Foreign borrowing 1.2% Source: Ministry of Finance and Bank of Tanzania 1.4% 3.3% 3.9% 3.3% 3.7% 3.2% 3.6% 4.5% Recurrent expenditure Development expenditure 4 2.0 RECENT MACROECONOMIC DEVELOPMENTS 2.1 Global Output Growth 9. According to the April 2011 World Economic Outlook (WEO), the world economy in 2010 started to recover from the impact of the financial crisis. The World economy grew by 5.0 percent in 2010 up from a contraction of 0.5 percent in 2009 owing to stronger-than-expected consumption in the United States and Japan. The recovery was also attributable to the stimulus measures pursued by various governments. More generally, signs are increasing that private consumption—which fell sharply during the GFC—is starting to gain a foothold in major advanced economies. Growth in emerging and developing economies remained robust, buoyed by well-entrenched private demand, accommodative policy stances, and resurgent capital inflows. 10. In advanced economies, activity has moderated less than expected, but growth remains subdued, unemployment is still high, and renewed stresses in the euro area periphery are contributing to downside risks. However, in many emerging economies, activity remains buoyant, inflation pressures are emerging, and there are now some signs of overheating, driven in part by strong capital inflows. Most developing countries, particularly in sub-Saharan Africa, are also growing strongly. 11. Despite the rejuvenated global activities, the downside risks to the recovery remain elevated. The most urgent requirements for robust recovery need comprehensive and rapid actions to overcome sovereign and financial troubles in the euro area. In general, this calls for policies to redress fiscal imbalances as well as to repair and reform financial systems in advanced economies. These need to be complemented with policies that keep overheating pressures in check and facilitate external rebalancing in key emerging economies. 12. Growth in emerging economies performed relatively well, which is an indication that these economies are picking up from the global downturn. Developing economies, particularly in sub-Saharan Africa, were less affected by the global downturn and are thus experiencing solid domestic demand growth. Output growth 5 in the region was 4.3 percent in 2010 compared to 1.6 percent recorded in 2009. The increase in growth is mainly associated with recovery in exports and commodity prices, as well as robust domestic demand in a number of economies. Foreign inflows to the region, including official flows, FDI, and remittances, were less affected by the global downturn than had earlier been feared, although the outlook remains uncertain. 13. South Africa, which is the largest economy in the region that was affected by the economic downturn mainly due to market links with advanced economies, is also recovering from the crisis. The recovery is mainly driven by demand of commodities from emerging Asia and from a recovery in demand for manufactures from its largest export market, the euro area. 14. Generally, the recovery in Sub Saharan region is relatively well. Growth in this region is expected to be driven mostly by domestic factors, despite differences in the level of exposure. Similarly, countries in the region are likely to face challenges in their budgets, particularly those depending much from foreign aid. The recent problem of budget deficits and associated measures to cut budgets in advanced economies is likely to reduce aid and private financial flows to the region. Table No. 2: World Output from 2005-2010 (Annual percentage change) World Output Developed Economies Emerging and Developing Economies Developing Asian Countries Africa Sub-Saharan Africa 2005 4.9 2.5 2006 5.0 3.0 2007 4.9 2.7 2008 3.0 0.5 2009 -0.5 -3.4 7.5 7.8 7.9 6.1 2.7 7.3 9.2 5.6 9.6 5.9 9.7 6.2 7.9 5.2 7.2 1.9 9.5 4.3 6.0 6.4 6.8 5.5 2.8 5.0 Source: International Monetary Fund (IMF), April 2011 6 2010 5.0 3.0 2.2 15. GDP Growth The Tanzanian economy is emerging from a slowdown associated with the 2008 global financial crisis. Prior to the GFC, real GDP was growing at an annual average of 7.3 percent (between 2004 and 2008). The macroeconomic policy response to the crisis, including temporary and targeted fiscal stimulus measures and supportive monetary policy, helped to mitigate the slowdown growth pattern. The real GDP growth which slowed down to 6.0 percent in 2009 from 7.4 percent in 2008 has bounced back to 7.0 in 2010. This growth was attributed to increase in agricultural activities (good harvest of major food crops namely: maize; paddy; millet/sorghum and cassava) following good weather in the 2009/10 agricultural season and government intervention on input subsidy program and irrigation schemes as well as the implementation of the rescue package. 16. Growth in agricultural and livestock economic activities increased to 4.2 percent in 2010 compared with 3.2 percent in 2009 due to good weather in the 2009/10 agricultural season; Government initiative on input subsidies and irrigation infrastructure; and the implementation of ASDP. In particular, crop sub activity grew by 4.4 percent in 2010 compared to 3.4 percent recorded in 2009 mainly on the account of increased crop production such as maize, paddy, sorghum and cassava. 17. The growth rate of industry and construction economic activities increased from 7.0 percent in 2009 to 8.2 percent in 2010, mainly on account of good performance in construction, water supply and electricity and gas sub-activities. The growth rate of construction sub-activities increased to 10.2 percent in 2010 up from 7.5 percent recorded in 2009. The good performance is attributed to the increase in the construction works as part of infrastructure development. Electricity and gas sub activity also indicated an up ward trend in terms of growth rate from 8.4 percent in 2009 to 10.2 percent in 2010. The growth is a result of increase in hydropower electricity generation as well as government efforts to enhance capcity of other sources of power including thermal and gas. Production increased to 5.3 bill.kwh in 2010 from 4.7 bill kwh in 2009, equivalent to increase of about 11.2 percent. It should be noted however that, GDP is measured on production approach and thus, 7 the growth rate of electricity and gas was measured using the same methodology of the quantity generated and not the quantity of electricity transmitted or distributed. On the other hand, the manufacturing sub- activity grew by 7.9 percent in 2010, compared to 8.0 percent in 2009, mainly on account of increase in the cost of production. 18. In 2010, services economic activities grew by 8.2 compared to 7.2 percent recorded in 2009. The increase in the growth rate was recorded in all economic sub activities such as hotel and restaurants; and trade and repairs; mainly on account of recovery of sub activities which have been affected by the GFC such as financial intermediation; tourism; transport; hotel and restaurants; and trade and repair. Consistent with rapid increase in mobile phone usage, the highest growth continued to be registered in communication sub activity, which grew at 22.1 percent in 2010, after having grown at an average annual rate of 20.1 percent in the preceding five years. Table 3: Real GDP Growth (Percentage Change) Economic Activity GDP at market prices Agriculture, Hunting and Forestry Fishing Industry and construction Services 2005 2006 2007 2008 2009 2010 Av (05-10) 7.4 6.7 7.1 7.4 6.0 7.0 7.0 4.3 3.8 4.0 4.6 3.2 4.2 4.0 6.0 5.0 4.5 5.0 2.7 1.5 4.1 10.4 8.5 9.5 8.6 7.0 8.2 8.7 8.0 7.8 8.1 8.5 7.2 8.2 8.0 Source: Ministry of Finance 19. The main contributors to growth in 2010 were Trade and repairs (16.7 percent); Agriculture (14.0 percent); Manufacturing (10.7 percent); Real estate and business services (10.2 percent); and financial intermediation 10.1 percent) as depicted in the figure below. 8 Figure 1: Real GDP Growth and Contribution to Growth by Activity (2010) 2.3 Price Movements 20. The National Bureau of Statistics has updated the NCPI market basket weights from 2001 to 2007 using results of the 2007 HBS. The new NCPI weights are based on monetary expenditures relating to consumption for all types of households in the 21 geographic regions of Tanzania Mainland, while the old index covered only urban households. The rebased NCPI follows the internationally recommended Classification of Individual Consumption by Purpose (COICOP). In addition, the new NCPI incorporates a number of methodological improvements such as the use of geometric means for compiling elementary index aggregates, and the use of an improved index compilation system among many others. The new NCPI has been compiled with a 12 month overlap in order to facilitate the calculation of 12 month index changes based on the same index market basket and weights and it has become the official Index starting in October 2010. 9 Table 4: NCPI linked index series NEW NCPI SNO. MAIN GROUP OLD NCPI WEIGHT Food and Non Alcoholic Beverages 2 Alcoholic and Tobacco 3.3 Drinks and Tobacco 6.9 3 6.7 Clothing and Footwear 6.4 9.2 Rent 1.4 5 Clothing and Footwear Housing, Water, Electricity, Gas and Other Fuel Furnishing, Housing Equipment and Routine Maintenance of the House 6.7 Fuel, Power and Water 8.5 6 Health 0.9 Personal Care and Health 2.1 7 Transport 9.5 9.7 8 Communication 2.1 Transportation Furniture and Household Equipment 9 Recreation and Culture 1.3 Recreation and Entertainment 0.8 10 Education 1.7 2.6 11 Restaurants and Hotels 6.4 100 12 Food WEIGH T 1 4 47.8 MAIN GROUP Miscellaneous Goods and Services 4.5 Education Household Operations and Maintenance Miscellaneous Goods and Services TOTAL – ALL ITEMS INDEX 100 TOTAL – ALL ITEMS INDEX 1. Other Selected Groups Food and Non-alcoholic Beverages - combining food consumed at home and food consumed in restaurants 2. Energy and Fuels - combining electricity and other fuels for use at home with petrol and diesel 55.9 2.1 2.1 1.5 NEW WEIGHT 51.0 5.7 3. All Items Less Food 49.0 4. All Items Less Food and Energy 43.3 Source: National Bureau of Statistics 21. This new system of using geometric mean started in October 2009, recording an inflation of 4.2 percent during that month compared with 4.5 percent recorded in September 2009 but using the old methodology of arithmetic mean. Had it the arithmetic mean was used, inflation would have been 4.1 percent in October 2009 compared with 4.2 percent for the same month using the geometric means. In general terms, when comparing the inflation results using the two methodologies, the difference is insignificant. 22. Although inflation has remained a single digit, it has resumed an upward trend during the first quarter of 2011. The annual headline inflation increased from 5.6 percent for the year ended December 2010 to 6.4 percent in January 2010 and continued upwards to 8.6 percent in the year ended April 2011, owing to the 10 increase in the general prices of electricity, food and gas. The headline Inflation rate measures inflation rates when all items in the fixed basket are included. Inflation is expected to remain a single digit in the medium term as the government continues to pursue prudent fiscal and monetary policies, as well policy measures aimed at increasing food production and developing alternative power generation sources to hydro power. Food and non alcoholic beverages inflation rate went down to 8.6 percent for the year ending March 2011 from 9.2 percent registered in February 2011. 23. The annual inflation rate which excludes food and energy for the year ended April 2011 using the rebased NCPI decreased to 5.7 percent from 6.3 percent in the year ended March 2011 while the annual inflation rate for food consumed at home and away from home increased to 9.2 percent in the year ended April 2011 as compared to 8.3 percent in the year ended March 2011. The annual inflation rate for energy increased to 22.1 percent in April 2011 from 17.2 percent registered in year ended March 2011.This type of CPI excludes food consumed at home and restaurants, non alcoholic beverages, petrol, diesel, gas, kerosene, charcoal and electricity. Excluding food and energy which are the most volatile components in the total NCPI could provide a more stable inflation figure for policy makers. 11 Figure 2: Monthly NCPI Movement and Inflation Rates (Jan – Dec 2010). 2.4 24. External Sector Developments In 2010, overall balance of payments remained positive at a surplus of USD 369.8 million, slightly above the surplus of USD 366.2 million recorded in 2009. The surplus was largely attributable to capital inflows in the form of grants and foreign borrowing. Exports performance 25. The value of exports of goods and services increased by 21.9 percent to USD 5,828.2 million during the year ending December 2010, compared to USD 4,780.4 million recorded in the corresponding period in 2009. The improvement was largely due to surge in exports of non traditional goods and service receipts. Goods Exports 26. During the year ending December 2010, the value of exports of goods grew by 27.7 percent to USD 3,736.7 million 1 compared to USD 2,925.8 million in the 1 These figures exclude unrecorded trade amounting to USD 560.4 in 2010 12 corresponding period in 2009. This was largely attributed to the increase of exports of non traditional goods especially gold and manufactured goods. Traditional Exports 27. The value of traditional exports went up by 16.5 percent to USD 558.9 million during the year ending December 2010 compared to USD 479.6 million in corresponding period in 2009. The increase was mainly attributed to an increase in export value of cashew nuts and tobacco. The performance of tobacco is explained by the increase in both export volumes and unit price. The increase in tobacco export unit prices is largely attributed to the improved quality of Tanzanian tobacco following proper farming practices coupled with accessibility and utilization of agriculture inputs. Meanwhile, the volume of other traditional exports declined during the year ending December 2010 compared to the corresponding period in 2009. Non-Traditional Exports 28. The value of non-traditional exports grew by 33.7 percent to USD 3,177.7 million during the year ending December 2010, compared to USD 2,376.1 million during the same period in 2009. The improved performance was mainly due to an increase in value of exports of minerals especially gold and manufactured goods. During the period, the value of gold exports went up by 23.4 percent to USD 1,516.6 million, largely due to a rise in prices of gold in the world market. The prices of gold increased to an average of USD 1,224.7 per troy ounce from USD 972.7 per troy ounce recorded in 2009. The value of manufactured goods also increased to USD 963.9 million, being 90.3 percent higher than the value recorded during the preceding year, largely associated with the increased demand in the world market following the global recovery from the financial crisis. 13 Figure 3: Share of Goods Export Earnings (2010) Service Receipts 29. During the period ending December 2010, service receipts grew by 12.8 percent to USD 2,091.5 million compared to USD 1,854.6 million in 2009. This was mainly caused by the increase in receipts from transportation services for transit goods to and from land locked neighbouring countries and travel (tourism) earnings following recovery of the global economy from financial crisis. Travel receipts increased by 12.3 percent to USD 1,302.6 million while transportation receipts rose by 33.2 percent to US Dollar 445.5 million following recovery of global economy. 14 Table 5: Exports by Type of Commodity Goods/Year 2006 2007 2008 2009r 2009-2010 (% Change) 2010p Traditional Exports Coffee -8.6% Value (USD Mil) 61.4 98.1 99.1 111.2 101.7 Volume (‘000 tons) 31.5 45.0 45.4 56.0 35.6 1953.1 2177.6 2185.7 1984.6 2852.4 111.0 84.0 -24.3% Value (USD Mil) 55.8 66.4 115.8 99.4 67.6 -32.0% Volume (‘000 tons) 55.0 59.1 87.9 1116.7 1241.8 11.2% 1014.2 1123.8 1317.6 0.0 0.0 - Value (USD Mil) 6.1 8.8 15.7 0.0 0.0 - Volume (‘000 tons) 8.0 9.5 13.8 0.0 0.0 - 766.7 928.4 1137.7 47.2 36.4 -22.8% Value (USD Mil) 31.0 28.7 42.5 30.6 18.7 -39.0% Volume (‘000 tons) 22.4 21.5 28.1 1538.7 1948.9 26.7% 1384.9 1334.8 1511.2 127.4 232.4 82.4% Value (USD Mil) 65.2 87.8 Volume (‘000 tons) 25.0 37.9 -36.4% 43.7% Unit Price (USD Per Ton) Cotton Unit Price (USD Per Ton) Sisal Unit Price (USD Per Ton) Tea Unit Price (USD Per Ton) Tobacco 176.4 Unit Price (USD Per Ton) Cashewnuts 55.2 33.8 53.5 58.2% 3194.6 3764.0 4339.3 15.3% 44.3 68.6 96.9 41.3% 52.7 95.5 125.0 30.9% 839.6 718.2 775.3 7.9% 13.5 14.4 7.6 -47.0% 3.7 4.8 2.2 -54.3% 3605.5 2977.9 3449.6 15.8% 2611.4 2318.1 Value (USD Mil) 39.4 25.6 Volume (‘000 tons) 66.3 41.3 594.4 621.1 Value (USD Mil) 8.2 4.2 Volume (‘000 tons) 2.4 1.4 3346.2 2968.3 Sub Total (Traditional) Non-traditional exports (USD Million) 267.1 319.7 488.3 479.6 558.9 Minerals 836.8 848.7 1186.7 1271.4 1560.1 Gold 786.4 788.2 1108.3 1229.5 1516.6 Diamond 22.2 26.0 20.3 15.5 10.1 Other Minerals 28.3 34.4 58.1 26.4 33.5 195.8 309.8 145.9 136.6 741.8 141.6 506.5 155.0 963.9 141.0 15.4 19.1 45.7 33.3 31.1 128.3 154.0 149.7 213.7 160.3 285.5 120.4 289.6 132.5 349.1 1,476.2 1,678.1 174.3 202.4 2,279.6 347.8 2,376.1 438.9 3,177.7 560.4 1917.6 2,199.6 3,115.7 3,294.9 4,297.2 Unit Price (USD Per Ton) Cloves Unit Price (USD Per Ton) 16.5% 22.7% 23.4% -34.8% 26.7% 90.3% Manufactured goods Fish and Fish products -9.0% -6.7% Horticultural Products Re-exports Other Exports Sub Total(NonTraditional) Unrecorded Trade Grand Total Source: Bank of Tanzania 15 10.1% 20.5% 33.7% 27.7 30.4 Import Performance 30. During the year ending December 2010, total value of imports of goods and services went up by 18.8 percent to USD 8,974.7 million compared to USD 7,543.2 million recorded in 2009. The increase is attributed to the surge in goods imports particularly intermediate and consumer goods whereas services payments recorded a decline during the review period. Goods Imports 31. The total value of imports of goods grew by 22.1 percent to USD 7,125.1 million during the year ending December 2010, compared to USD 5,834.1 million in the same period in 2009. This was mainly caused by an increase in value of imports of intermediate and consumer goods especially oil and food and food stuffs respectively. The value of imported oil increased by 49.9 percent to USD 1,983.8 million compared to USD 1,323.0 million in the same period preceding year following the increase in both volume and prices. The volume of oil imports rose to 3.1 million tons from 2.9 million tons during the period and the average oil prices (refined products) in the world market also increased by 25 percent to USD 691.9 per ton from USD 553.7 per ton. The increase in imports of food and food stuffs is largely on account of a rise in importation of wheat. Services Payments 32. During the year ending December 2010, service payments went down by 8.2 percent to USD 1,849.6 million, from USD 1,709.9 million recorded in the same period in 2009. The decline was largely attributed to decrease in payments from transportation of passengers, construction services, government services and other business services. On the other hand, freight payments went up by 21.7 percent to USD 680.7 million, in line with an increase in importation of goods. 16 Table 6: Goods Imports by Category (USD Million) Item 2006 Capital goods 1,435.1 Transport equipment 374.8 Building and construction 338.0 Machinery 722.4 Intermediate goods 1,576.9 Oil imports 1,146.5 Fertilizers 53.9 Industrial raw materials 376.5 Consumer goods 852.1 Food and foodstuffs 249.2 All other consumer goods Imports goods(f.o.b.) Imports goods (c.i.f) 602.8 3,864.1 4,246.3 2007 2008 2009 1,765.0 2,932.5 2,539.2 477.8 2010 2,715.2 % Change 6.9% 847.5 748.5 901.1 20.4% 714.6 558.2 610.6 9.4% 870.5 1,370.3 1,232.5 1,203.4 -2.4% 1,970.7 2,667.4 1,890.3 2,700.8 42.9% 1,462.1 1,922.2 1,323.0 1,983.8 49.9% 171.5 95.2 115.0 20.8% 573.6 472.1 1,412.5 1,404.6 303.5 343.3 1,109.0 1,061.3 1,247.5 17.5% 4,860.6 7,012.3 5,834.1 5,341.4 7,705.8 6,411.2 7,125.1 7,829.8 22.1% 416.7 59.1 449.4 1,124.9 315.4 809.5 602.0 1,709.2 461.6 Source: Bank of Tanzania Figure 4: Contribution to Total Imports (2010) 17 27.5% 21.7% 34.5% 22.1% TABLE 7: TANZANIA CURRENT ACCOUNT BALANCE (Million of USD) 2006 2007 2008 2009 2010 %Change Goods Account (2,120.8) (2,836.5) (3,900.3) (2,908.4) (3,388.5) 16.5% Export2 Import 1,743.3 3,864.1 2,024.2 4,860.6 3,112.0 7,012.3 2,925.8 5,834.1 3,736.7 7,125.1 27.7% 22.1% Service Account net 278.7 462.1 145.6 253.4 66.1% 1,854.6 1,709.1 2,091.5 1,849.6 12.8% 8.2% (2,762.8) (3,146.5) 13.9% 5,828.2 8,974.7 21.9% 19.0% Receipts Payments 1,528.1 1,249.3 349.9 1,875.7 1,413.7 1,998.8 1,648.9 Goods and Services (Net) (1,842.1) (2,374.4) (3,550.4) Export of goods and services Import of goods and services 3,271.4 5,113.4 3,899.9 6,274.3 Income Account (net) (93.4) (123.1) (121.7) (71.2) (93.7) 31.5% Receipts Payments 80.3 173.7 107.3 230.4 122.7 44.3 161.1 232.4 164.6 258.3 2.1% 11.2% Current transfer (net) 589.3 651.5 609.5 696.9 823.9 18.2% Inflows 0/w General Government 655.2 560.3 724.0 626.9 689.0 588.5 765.4 658.4 902.9 798.1 18.0% 21.2% Outflows 65.9 72.5 79.6 68.4 9.0 Current Account Balance (1,346.1) (1,846.0) (3,062.6) (2,137.1) 15.5% 13.1% 5,110.8 8,661.2 4,780.4 7,543.2 (2,416.3) Source: Bank of Tanzania 2.5 33. Government Finance The budget performance for the fiscal year 2009/10 experienced a shortfall in domestic revenue collections against targets. Total domestic revenue collection during 2009/10 amounted to Tshs. 4,661,540 million, equivalent to 15.2 percent of GDP compared to Tshs 4,293,074 million (16.2 percent of GDP) in 2008/09. The slowness performance was partly due to the impact of the global financial crisis that led to a slower growth in taxable production activities in the economy and postponement of implementation of some revenue measures that were announced in the budget. Total expenditure during the year reached 26.7 percent of GDP, compared to 25.7 percent in 2008/09. Grants amounted to 4.6 percent of GDP, resulting into a budget deficit after grants of 6.4 percent of GDP. 2 This exports exclude unrecorded trade as indicated in table 5 above 18 Domestic Revenue 34. Total domestic revenue collection for 2009/10 was 8.8 percent below the budget estimates. The shortfall in revenue collection was primarily caused by continued impact of the Global Financial Crisis (GFC), which led to a slower growth in taxable production activities in the economy. In addition, non-tax revenue was further affected by postponement of implementation of some revenue measures that were announced in the budget, including new charges in residency permits, visas, immigration fees and fire service charges. The implementation of these measures was postponed to avoid adverse effects in tourism activities following the onset of the global financial and economic crisis. Nonetheless, domestic revenue collection increased in absolute terms from Tshs. 4,293.074 billion in 2008/09 to Tshs. 4,661.540 billion in 2009/10, equivalent to an increase of 8.2 percent. On monthly basis, revenue collection has doubled from an average of Tshs. 174.8 billion in 2005/06 to 388.5 billion in 2009/10. 35. During the first half of the fiscal year 2010/11, total domestic revenue collections (including collections from LGAs) amounted to Tshs. 2,778.9 billion, equivalent to 90 percent of estimated Tshs. 3,079.1 billion. The gross collection for the period was above the collection of the corresponding period in the year 2009/10 by Tshs. 487.7 billion, reflecting an increase of 17.6 percent. Total tax revenue collections amounted to Tshs. 2,558.5 billion, equivalent to 91 percent of estimated Tshs. 2,798.7 billion. Collections from taxes on imports were Tshs. 226.1 billion, reflecting the performance level of 97 percent of estimated Tshs. 234.2 billion. The decline in volumes of petroleum imports was one of the causes for the fall in tax collection of these taxes. On the other hand, non-tax revenue continued to perform below the estimates during this period. The actual revenue collection from this category was Tshs. 148.5 billion against the target of Tshs. 194.1 billion, equivalent to 77 percent. LGAs collections during the period under review amounted to Tshs. 71.9 billion, equivalent to 83 percent of the estimated Tsh. 86.3 billion. 19 Foreign Resources 36. The Government continues to use grants and concessional loans from Development Partners as major foreign sources of financing development programmes. During the fiscal year 2009/10, the total grants received were Tshs. 1,405.3 billion, of which programme grants amounted to Tshs 665.778 billion, projects grants amounted to Tshs 459.04 billion and basket grants amounted to Tshs 258.1 billion which is equivalent to 67 percent of the total estimate. The shortfall was caused by slow implementation of projects mainly on account of prolonged procurement procedures; failure of some MDAs, Regions and LGAs to account for D-funds; and failure to use the exchequer system by some development partners on project funds. Total grants for the year 2009/10 amounted to 4.6 percent of GDP. 37. During the year under review, total net financing was Tshs 1,948.1 billion equivalent to 6.4 percent of GDP, out of which net borrowing from external sources was Tshs 1,379.6 billion (4.5 percent of GDP) and net borrowing from domestic sources was Tshs 568.5 billion (1.9 percent of GDP). Domestic borrowing was higher than budgeted amount as the Government had to borrow 1.6 percent of GDP to compensate for the shortfall in programme grants in order to meet MKUKUTA expenditure requirements. 38. During the first half of the fiscal year 2010/11, total grants and loans to finance budget amounted to Tshs. 827.9 billion, equivalent to 101 percent of estimated Tshs. 821.7 billion. The increase is attributed to exchange rate fluctuation used to convert Tanzanian shillings against foreign currencies. This performance was higher than the corresponding period in the year 2009/10 by Tshs. 42.6 billion, reflecting an increase of 51.4 percent. On the other hand, grants and loans for development expenditure amounted to Tshs 469.6 billion, equivalent to 24 percent of estimated amount in fiscal year 2010/2011. This performance was less than the corresponding period in the year 2009/10 by Tshs. 378 billion, reflecting a decrease of 44.6 percent. 20 Expenditure 39. Total expenditure for the period under review was below the target, but higher than the amount of the corresponding period in 2008/09. Total expenditure for 2009/10 was Tshs. 8,173.7 billion, equivalent to 92.0 percent of the estimates. Development expenditure for 2009/10 was Tshs. 2,611.3 billion, which is equivalent to 92 percent of the total estimates. The shortfall in development expenditure was mainly due to delays in the implementation of projects in some MDAs and LGAs following failure to accomplish procurement procedures and delays in reporting on the use of the funds. Similarly, overall recurrent expenditure amounted to Tshs. 5,562.4 billion, which was below the budgeted level by 8 percentage points. Expenditure on wages and salaries was Tshs. 1,723.4 billion, equivalent to 98 percent of the budget. 40. Total expenditure for the first half of the fiscal year 2010/11 stood at Tshs 5,052.7 billion, equivalent to 83.4 percent of the period estimates of 6,058.0 billion. Actual development expenditure for the same period was Tshs. 1,255.8 billion which is equivalent to 81 percent of the period estimates of Tshs 1,550.3 billion, while overall recurrent expenditure amounted to Tshs 3,796.8 billion which was 84.2 percent of the period estimates of Tshs 4,507.7 billion. There was a relatively good performance in recurrent expenditure execution partly due to timely spending in goods and services related to the preparation for October 2010 General Election, examination expenses and other regular government operations. Slow execution in development spending was primarily due to delays in disbursement of foreign project funds. 2.6 National Debt 41. The national debt stock, comprising of external and domestic debt, as at the end of December 2010 stood at USD 11,380.2 million compared to USD 10,725.92 million, at end-December 2009, equivalent to 6.1 percent increase. Out of the national debt stock, public debt was USD 9,516.8 million and private debt stood at USD 1,863.4 million. Further, out of the total public debt, USD 6,529.6 was external debt, equivalent to 68.6 percent of the total public debt and the remaining was 21 domestic debt. The increase in the national debt was due to the accumulation of external interest arrears emanating from none-compliance of non Paris club members in granting debt relief as per the agreements; increase in new domestic and foreign borrowing to finance infrastructure projects; and depreciation of the shilling.The trend in the national debt stock indicators is as indicated in table 8 below. External Debt 42. As at end December 2010, total external debt stock stood at USD 8,363.3 million compared to USD 7,641.9 as at end-December 2009, equivalent to 9.0 percent increase. Further, as of end December 2010 public debt accounted for 77.8 percent of the total external debt and the rest was private debt amounting to USD 1,863.4 million. Out of the total external debt as of end December 2010, Disbursed Outstanding Debt (DOD) was USD 7,699.6 million, equivalent to 91.7 percent of the total external debt and interest arrears was USD 693.7 million. The increase in external debt stock was accounted for by new disbursements and unpaid interest arrears to Non Paris Club creditor’s countries which have not concluded debt rescheduling arrangements with the Government. Domestic Debt 43. Total public domestic debt stock as at end December 2010 stood at Tshs. 4,385.4 billion (equivalent to US Dollar 2,987.2 million), compared to Tshs 3,837.7 billion recorded at end December 2009. The increase is attributed to the rising need to finance development expenditure such as infrastructure, issuance of Treasury bills and bonds for monetary policy implementation and domestic debt market development. Out of the total domestic debt, Government bonds accounted for largest share of 62.0 percent of the total domestic debt; treasury bills were 37.8 percent and other debts accounted for 0.2 percent. Debt Services 44. During the period between July to December 2010, the Government spent Tsh 694.4 billion for debt servicing. External debt service in the first half of the fiscal 22 year 2010/2011 amounted to Tsh 62,800 million, out of which, Tsh 24,010 million was principal repayments and Tsh 38,790 million was interest payments. Domestic debt service in the first half of the fiscal year 2010/2011 amounted to Tsh 632.4 billion, of which, Tsh 424.7 billion was for rolling over maturing Government securities and Tsh 107.7 billion was for interest payment. Performance of key debt indicators 45. During the period between 2000/01 and 2009/10, key debt indicators improved significantly from very high ratios in the early 2000 as shown in table 8 and figure 5 below. These debt indicators exhibited a mixed pattern though, in 2009/10 they started to deteriorate following increase in Government borrowing to mitigate the impact of the GFC and to finance infrastructure projects. Exchange rate depreciation also accounted for the increase in national debt (hence deterioration of the performance of the indicators above). In implementing the National Debt Strategy, the Government continued to supervise the national debt effectively by borrowing from cheap sources to finance infrastructure projects and analyses critically the impact of new loans. The Government also undertook Debt Sustainability Analysis (DSA) in October 2010 and Medium Term Debt Sustainability (MTDS) in January 2011 and the results showed that the current ratios of debt indicators are sustainable and manageable. In other word, Tanzania is creditworthy subject to ability to service the loan and in adherence to the Loan, Guarantees and Grant Act of 1974 (amended in 2004) and its regulations. Table 8: Performance of Key Debt Indicators Indicators 2000/01 2001/02 2002/03 Public Debt as % of GDP 65.2 55.1 56.2 External Debt as % of GDP 55.6 45.1 45.9 Domestic Debt as % of GDP 10.3 10.1 10.7 Public Debt Service as Percentage of Revenue 18.2 14.6 11.5 Source: Ministry of Finance and Bank of Tanzania 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 57.6 53.9 52.1 34.0 32.3 33.6 42.4 47.4 42.9 38.5 17.3 18.0 20.9 22.5 10.5 11.3 14.5 16.6 14.2 12.5 20.5 11.9 10.8 6.0 3.6 2.8 1.7 2.7 23 Figure 5: Trend in Key Debt Indicators 2.7 Money and Credit developments 46. In 2010/11, monetary policy conducted by Bank of Tanzania is directed towards maintaining an appropriate level of liquidity in the economy to contain inflation and provide enough room for recovery of credit to the private sector. In addition, the Bank’s liquidity windows namely Intraday Loan Facility (ILF), Lombard and discount window will remain open for banks in need of liquidity to allow for greater flexibility in the provision of liquidity to the economy. 47. During the year ending December 2010, all the monetary aggregates recorded a substantial increase. Extended broad money supply (M3) recorded an annual growth rate of 25.4 percent above the target of 23.5 percent by end December 2010, and also above the growth rate of 25.1 percent recorded at end June 2010. Broad money (M2) grew by 21.8 percent, slightly higher than the target of 20.7 percent by end December 2010, but lower than 26.3 percent recorded at end June 24 2010. The recorded annual growth rate of money supply in the year ending December 2010 was driven by an increase in net domestic assets (NDA) of the banking system in connection to sizeable increase in net government borrowing from the banking system. The increase in net government borrowing from the banking system was partly necessitated by shortfalls in revenue collections and delays in the disbursements of donor funds experienced during the period. Credit to Private Sector 48. Consistency with the relaxed monetary policy stance pursued during the period, the growth of credit to the private sector improved gradually since March 2010. Credit to private sector grew by 20.0 percent in the year ending December 2010, slightly higher than the target of 19.2 percent and above 16.3 percent recorded at end June 2010. The recovery in the growth rate of credit to the private sector reflects the signs of growing banks’ confidence in lending to the private sector after the global financial crisis. 49. During the period under review, personal loans dominated in terms of share of total private sector credit, accounting for 21.4 percent, followed by trade activities which accounted for 17.5 percent, manufacturing 11.9 percent, agriculture 12.1 percent, and transport and communication 9.2 percent. Interest Rates Development 50. During the year ending December 2010, annual average interest rates on domestic currency denominated financial products exhibited a mixed trend. The overall Treasury bills yield decreased slightly to an annual average of 6.32 percent in December 2010, from 6.91 percent in the year ending December 2009. A same pattern was observed in the Treasury bond market, where average yields declined across all maturities. Overall inter-bank cash market rate increased to an average of 5.26 percent in the year ending December 2010, from 1.57 percent recorded in a similar period a year earlier. 51. Annual average interest rates offered and charged by banks, exhibited a declining trend. In particular, overall time deposit rate declined to an average of 25 5.11 percent in December 2010, from 6.36 percent recorded in December 2009. Similarly, negotiated deposit rate declined to 8.45 percent in December 2010, from 9.94 percent recorded in December 2009. Likewise, savings deposit rate declined slightly to an annual average of 2.41 percent, from 2.83 percent recorded in the year ending December 2009. 52. On the other hand, overall lending rate decreased to 13.45 percent in December 2010, from an annual average of 14.38 percent recorded in December 2009. A decreasing pattern was also observed in short-term lending rates that decreased to an annual average of 13.37 percent in December 2010, from 13.96 percent recorded in December 2009 and negotiated lending rate which decreased to an average of 11.88 percent, from an average of 13.18 percent recorded in the same period. As a result, the spread between short-term lending and deposit rates widened to 5.27 percentage points in the year under review, from 4.97 percentage points recorded a year earlier. Table 9: Domestic Weighted Average Interest Rates Structure Percent Dec-08 Dec-09 Overall Interbank cash market rate Overnight interbank cash market REPO Rate Discount Rate Overall Treasury bills rate 35 days 91 days 182 days 364 days Savings Deposit Rate Treasury Bonds Rates 2-years 5-years 7-years 10-years Overall Time Deposits Rate 12 month time deposit rate Negotiated Deposit Rate Overall Lending rate Short-term lending rate (up to 1year) Negotiated Lending Rate Margin between short-term lending and oneyear time deposit rates 2010 6.54 6.27 6.42 15.99 10.99 6.88 11.20 12.13 12.79 2.74 1.57 1.46 1.26 3.70 6.91 3.80 6.06 6.59 8.83 2.83 Jan 1.80 1.67 1.22 7.58 7.20 4.57 6.35 7.20 9.06 2.84 Feb 1.89 1.66 1.22 7.58 6.32 4.09 5.57 6.33 8.24 2.89 Mar 1.29 0.98 1.06 7.58 4.15 1.99 3.25 4.45 6.32 2.88 Apr 0.92 0.86 0.79 7.58 2.70 1.26 1.77 2.58 4.86 2.83 May 0.87 0.67 0.65 7.58 2.68 0.89 2.16 2.26 4.96 2.82 Jun 0.97 0.86 0.54 7.58 3.33 0.65 2.89 2.59 6.08 2.82 Jul 0.92 0.82 0.58 7.58 3.89 0.78 3.22 3.91 6.26 2.69 Aug 1.09 0.93 0.58 7.58 3.86 0.97 2.71 3.91 5.98 2.58 Sep 1.65 1.68 0.90 7.58 5.06 1.62 3.89 4.77 6.96 2.57 Oct 2.29 2.27 1.53 7.58 5.68 1.84 4.76 5.67 7.85 2.56 Nov 2.86 2.87 1.78 7.58 5.85 1.46 4.61 5.62 7.48 2.51 Dec 5.26 5.19 3.20 7.58 6.32 1.33 5.24 6.20 7.67 2.41 14.35 16.39 17.04 19.47 6.63 8.48 10.23 16.05 13.56 12.05 10.89 13.45 14.15 16.73 6.36 8.99 9.94 14.38 13.96 13.18 10.89 13.77 14.15 16.73 6.12 9.06 7.44 14.39 13.76 13.68 9.40 13.77 14.15 16.73 5.82 8.84 7.16 14.81 14.73 13.79 9.40 13.77 12.11 16.73 6.11 8.78 9.41 14.80 14.61 13.71 9.40 13.77 12.11 11.99 5.96 8.67 9.63 14.50 13.88 13.97 9.40 9.52 10.38 11.99 5.79 8.56 9.47 14.50 14.02 13.80 8.79 9.52 10.38 11.68 5.88 8.43 9.57 14.67 13.92 14.13 8.88 9.52 10.38 11.68 5.42 7.86 8.76 14.34 14.14 13.84 8.88 9.70 10.85 11.68 5.55 7.13 8.58 14.35 14.37 14.00 9.82 9.70 10.85 13.00 6.03 7.15 9.33 14.47 14.29 13.80 9.82 10.44 11.88 13.00 6.11 7.26 9.60 14.49 14.22 13.71 9.67 10.44 11.88 13.59 5.55 6.14 8.76 12.84 12.31 13.65 10.35 11.58 11.88 13.59 5.11 7.09 8.45 13.45 12.37 11.88 5.07 4.97 4.71 5.89 5.84 5.21 5.47 5.49 6.28 7.24 7.14 6.96 6.17 5.27 Exchange rate movements 53. In 2009 and 2010, exchange rate remained market determined. The Bank of Tanzania continued to participate in the Inter-bank Foreign exchange Market (IFEM), primarily to meet liquidity management objectives, while fostering orderly market developments. In the year ending October 2010, the Bank was the main supplier of 26 foreign exchange in the IFEM, selling USD 1,001.0 million out of total USD 1,167.7 million traded in the IFEM. This compares with the sale of USD 1,044.4 million out of total USD 1,582.1 million traded in the IFEM in the corresponding period 2009. 54. In the year ending December 2010, the shilling depreciated by 7.2 percent to Tshs 1,494.8 per US dollar from Tshs 1,394.7 per US dollar recorded in the year ending July 2010. The depreciation of the shilling against the US Dollar was on account of high demand for foreign currency, in connection of banks seeking to increase their net foreign assets, coupled with the general strengthening of the US Dollar against major currencies across the world. Foreign Reserves 55. Gross official reserves increased to US Dollar 3,948.0 million at the end of December 2010 from US Dollar 3,482.6 million recorded at the end of June 2010. The level of gross official foreign reserves at the end of December 2010 was sufficient to cover 6.3 months of import of goods and services against the target of 5.0 months of imports for 2010/11. The sustained high level of growth was largely attributed to the increase in capital inflows in the form of grants and foreign borrowing. 2.8 Financial Sector Reforms 56. Second Generation Financial Sector Reforms were initiated since 2006/2007. The main activities of the Reform Program included the following: improving the monetary policy framework and the legal and regulatory infrastructure, so as to enhance access to financial services; developing financial markets with vibrant primary and secondary market supported by appropriate and secure settlements systems as well as a stock exchange; to promote an efficient and competitive pension and insurance sectors; establishing and promoting a viable and sustainable microfinance industry. Significant achievements have been registered including building a robust banking sector. All banks are adequately capitalized, and have adequate liquidity for extending loans to the private sector and have persevered during the global financial crisis. The National payment system has been improved significantly, including enabling the government to collect domestic revenue and 27 effect some of its payments on real time through the introduction and development of the Inter-bank Settlement System (TISS). 57. During the review period, the government continued with the implementation of the Second Generation Financial Sector Reforms. The Regulations for the Credit Reference Databank (CRD) and Credit Reference Bureau were gazetted through Government Notices number 177 and 178 respectively and became effective in October 2010. The CRD is to be housed in the Bank of Tanzania. Under the auspices of the Second Generation Financial Sector Reform, a Consultant completed a feasibility study of establishing a market for municipal Bonds in Tanzania in November 2010, and the Final report which was completed is expected to be adopted as soon as it is approved by the Government. Furthermore, following enactment of the Social Security Regulatory Authority (SSRA) in 2008, the office of the SSRA was established in November 2010 and the CEO for the office has been appointed. The SSRA was tasked to promote an efficient and competitive pension sector supported by appropriate legal and regulatory structures. Also, the Government continues with the process of improving the systems through harmonization of the pensions and ensure sustainability of the pension funds. Work on the proposed transformation of the Credit Guarantee Scheme Department at the Bank of Tanzania into an independent, sustainable entity is at an advanced stage. The final report was produced in January 2011 and is being reviewed. 58. A consultant has started work on developing a comprehensive policy framework and legal infrastructure for long term development finance in Tanzania. The Government has established the Tanzania Mortgage Refinance Company (TMRC) under the supervision of the Bank of Tanzania with the aim of extending housing finance through commercial banks and hence to enable the public to access credits from the respective banks. In addition, the process of establishing the Agricultural Development Bank is in the final stages. The aim of establishing this Bank is to enable the public to access longer-term low interest bearing loans for their economic emancipation. While the bank is being established, the Government has opened agricultural financing window at the Tanzania Investment Bank (TIB) to 28 extend agricultural credits. The Government has transformed TIB to become an instrument of extending longer – term development loans and is in the process of procuring consultants who will transform TIB into a two tier group Development Finance Institution. 2.9 Regional Integration 59. In order to scale up efforts for regional integration, the EAC Member states have established a Custom Union and a Common Market. The EAC is already at a Common Market following conclusion of negotiation for the establishment of the EAC Common Market Protocol signed by the Heads of State on 20th November, 2009 in Arusha. Negotiations for the establishment of the Monetary Union are now on going. The EAC has also developed a number of regional projects and programmes in the area of Infrastructure which include projects on roads, railways, and energy, programmes in the social sector including education, culture employment and the environmental programmes under the Lake Victoria Basin Commission. During the period under review, trade in the EAC Customs Union has improved, as evidenced by increased Tanzania exports to the EAC market (including Rwanda and Burundi) from USD 263.8 million in 2009 to USD 450 million in 2010, while imports from EAC declined from USD 310.5 million to USD 285.2 million. It is worth noting that Tanzania was a net exporter to EAC in 2010. Meanwhile, SADC member states which have ratified the agreement on “Free Trade Area” continued to implement it and the target is to ensure that by the year 2012, all member states would have ratified the protocol. Countries which have not yet signed the protocol are DRC, Angola and Seychelles. Trade performance within SADC member states has also improved as shown in the table below. In general, trade performance in both EAC and SADC improved substantially whereby total exports to these regional blocks increased by USD 437.1 million in 2010, equivalent to 68.5 percent, while imports increased by USD 69.2 million, equivalent to 6.6 percent increase. 29 Table 10: Trade Performance in EAC and SADC member states (USD Million) EXPORTS COMMUNITY/COUNTRY 2006 2007 2008r 2009-2010 (% Change) 2009r 2010p 416.8 53.5 17.7 137.1 625.1 143.9 116.1 SOUTHERN AFRICA DEVELOPMENT COMMUNITY (SADC) South Africa 268.9 176.1 232.5 170.9 18.5 22.4 36.6 44.3 Swaziland 1.9 0.2 0.6 20.8 Zimbabwe 1.2 0.7 1.2 5.7 Mozambique 10.6 19.1 31.4 20.3 DRC 18.3 58.9 124 79.9 Other SADC Countries 21.7 23.7 17.1 32.3 341.1 300.8 443.4 374.2 Zambia TOTAL- SADC 20.8 -12.8 71.6 67 EAST AFRICA COMMUNITY (EAC) - 41.5 19.5 23.6 97.2 101.1 235 177.4 Rwanda - 11.2 20.6 15.1 Uganda 20.5 19.3 40.5 47.7 117.7 173.1 315.5 263.8 51 297.3 55 46.8 450 2008r 2009r 2010p 2009-2010 (% Change) Burundi Kenya TOTAL – EAC 67.6 264.2 -1.9 70.6 IMPORTS COMMUNITY/COUNTRY 2006 2007 SOUTHERN AFRICA DEVELOPMENT COMMUNITY (SADC) South Africa 569.6 585.8 791 672.8 745.5 10.8 1.3 1.8 27.6 0.6 1.1 83.3 Zambia 11.6 18.5 27.6 23.3 29.8 27.9 Mozambique DRC 17.2 16.9 18.2 9 18.5 105.6 0.2 0.6 19.6 1.2 1.1 -8.3 Swaziland 16.8 20.1 76.5 26.3 31.7 20.5 9.2 12.4 19.2 - - - 625.9 656.2 979.7 733.2 827.7 12.9 - 0.02 0.4 0.3 0.6 100 169.1 100.1 197.9 298.3 265.9 -10.9 Rwanda - 0.01 0.1 0.02 1.4 6900 Uganda 5.3 6.4 6.4 11.9 17.3 45.4 174.4 106.6 204.8 310.5 285.2 -8.2 Zimbabwe Other SADC Countries TOTAL –SADC EAST AFRICA COMMUNITY (EAC) Burundi Kenya TOTAL –EAC Source: Ministry of Finance and Bank of Tanzania 30 2.10 MKUKUTA I Performance 60. Good progress was made during implementation of MKUKUTA I since its commencement in 2005/06, with overall macroeconomic stability remaining on track. GDP performed relatively well with annual average growth reaching 6.9 percent during the five years period since 2005. However, with regards to cluster I, between 2000/01 and 2007 the incidence of income poverty did not appear to have changed significantly. Income poverty declined marginally with variations across strata and regions as indicated in Table 11. Table No.11: Incidence of Poverty in Tanzania (poverty headcount index) Incidence of poverty Year Dar es Other Urban Rural Areas Mainland Tanzania Salaam Areas Food 2000/01 7.5 13.2 20.4 18.7 2007 7.4 12.9 18.4 16.6 Basic Needs 2000/01 17.6 25.8 38.7 35.7 2007 16.4 24.1 37.6 33.6 Source: URT, NBS, Household Budget Survey 2000/01, and 2007. 61. Quality of Life and Social Well Being: The interventions put in place have recorded significant achievement on the delivery of social services, notably in education, health, water, sanitation and social protection. The investments in education and health in the recent past have enabled Tanzania to record improvement on the Human Development Index (HDI) ranking, from position 163 in the pre-MKUKUTA period to 151 in 2009. Water supply services have also improved, with the proportion of the population with access to clean and safe water in rural areas increasing from 53.1 percent in 2005 to 58.7 percent in 2009; and from 74 percent to 84 percent in the same timeframe in urban areas. 62. Good Governance and Accountability: Progress has also been made in this area. Efforts to curb corruption and instill a culture of integrity have been intensified under the National Anti-Corruption Strategy and Action Plan (NACSAP). Systems for public financial management, which include auditing, procurement and budgeting, are in place and functioning well. Compliance level to the Public Procurement Act by both public and other bodies procuring entities was 60 percent 31 in 2008/09. For central government, procuring entities was at an average level of 57 percent. However, compliance for LGAs is still unsatisfactory. Accountability for the use of public funds has also improved during the MKUKUTA period. Out of 105 ministries, departments and agencies (MDAs) audited, 88 percent received clean audit certificates in 2008/09, compared to 70 percent in 2007/08, whereas the share of LGAs that received clean audit certificates was 58 percent, compared to 72 percent in 2007/08. Also, significant improvements development in the effectiveness of the Parliamentary oversight function has been recorded; as well, the roles of the media, civil society, and other watchdogs have risen. MKUKUTA I Financing 63. Adequate financing continues to be crucial in the implementation of MKUKUTA, particularly in facilitating achievement of outcomes under the three clusters. MKUKUTA financing has continued to be the responsibility of the Government, private sector, NGOs, CSOs and development partners, and the communities. However, besides the contribution of development partners, it has been rather difficult to ascertain and/or gauge the actual amounts spent by the private sector, NGOs and CSO in implementing MKUKUTA. This is so because most of the financing by non-state actors is not easily captured in the Government budgeting framework. Nevertheless, the Government acknowledges their contribution in implementing MKUKUTA. 64. Since the commencement of implementation of MKUKUTA I in 2005/06, substantial resources have been allocated and utilized by the Government and other stakeholders. The share of financing MKUKUTA in the Government budget has been increasing every year from 54.1 percent of the total budget in 2005/06 to 71.2 percent in 2009/10 (Table 12 ). 65. Wages and transfers to LGAs, which in the first two years of MKUKUTA implementation were excluded, are now included as part of MKUKUTA budget. This inclusion is justified by the fact that these two budget components are essential for public service delivery and the attainment of MKUKUTA strategic objectives and 32 goals. Before this inclusion, allocation to MKUKUTA during the first two years averaged around 55 percent 66. The share of cluster II budget increased to above cluster I levels between 2007/08 and 2009/10 budgets, even though cluster I has also seen its share of budget allocations increasing in the last three years from 23.1 percent of the total budget in 2007/08 to 27.9 percent in 2009/10. The larger increase in the share of cluster II is attributed to increased transfers to LGAs for public service delivery in social services like education, health, and water (75 percent of transfers to LGAs finance education, health and water expenditures). Moreover, 50 percent of MDAs’ wages fall under cluster II. The share of Cluster III budget has remained relatively stable, at around 11 percent. Table 12: MKUKUTA Allocations (Incl. LGA3 transfers) 2005/06 2006/07 2007/08 2008/09 2009/10 % of MKUKUTA % of Overall % of MKUKUTA % of Overall % of MKUKUTA % of Overall % of MKUKUTA % of Overall % of MKUKUTA % of Overall Cluster I 47.6 25.8 45.8 26.0 33.1 23.4 34.1 24.1 39.2 27.9 Cluster II Cluster III Crosscutting Total MKUKUTA NonMKUKUTA OVERALL 44.1 8.2 100 23.9 4.5 35.8 18.5 100 20.4 10.5 56.9 45.0 16.5 5.4 100 31.8 11.7 3.8 70.6 45.5 16.0 4.4 100 32.2 11.3 3.1 70.8 42.7 15.0 3.1 100 30.4 10.7 2.2 71.2 54.1 45.9 43.1 29.4 29.2 28.8 100 100 100 100 100 2.11 Millennium Development Goals - MDGs 67. Tanzania is among few countries in Sub Saharan Africa that have achieved notable progress in implementing some of the MDG targets. These achievements are manifested in some social indicators, particularly primary education enrolment and reduction in infant and child mortality. As was noted during the MDG summit in New York in September 2010, Tanzania was awarded a certificate for good performance in the MDG enrolment target in education, which is on track and likely to be achieved in 2015. In 2010, drop-out rate in primary schools decreased and reached 2.6 percent from 3.7 percent in 2009 due to improved teaching and learning 3 Figures for 2005/06 and 2006/07 exclude transfers to LGA since they were treated separately 33 environments. Also, the teacher-student ratio improved from 1:54 in 2009 to 1:51 in 2010 compared to the target of 1:45. Table 13: Progress in the Implementation of Millennium Development Goals 2015 1990 MDG 2007 2010 (MDG Target) (MDG baseline) Actual Expected* Required* 39 33.4 25.7 23.4 22 16.5 14.5 Under-5 Underweight (%) 28.8 21.9 18.7 17.3 20.7 14.4 Under-5 Stunted (%) 46.6 21.9 30.7 27.9 35.4 23.3 Primary school net enrolment rate 54.2 97.3 85.4 90.8 95.4 100 191 112 104.6 89.4 81 64 115 68 62.6 53.4 51 38 529 578 259.7 212.2 454 133 43.9 62 75.5 80.8 51 90 52 55.7 67 69.6 58.7* 74 68 83 78.9 80.8 84* 84 Proportion of population below basic needs poverty line Proportion of population below food poverty line Under-five mortality rate (per 1,000 live births) Infant mortality rate (per 1,000 live births) Maternal Mortality Rate (per 100,000 live births) Births attended by skilled health personnel (%) Access to potable water :% of rural population Access to potable water :% of urban population 13.2 Actual - - 19.5 11 Note: * Computed as % of passage time from 1990 to 2015 (2007 = 68%; 2010 = 80%) , Data for water are up to December 2009 Source: URT 2008: MDG Progress Report and MAIR 2009/10 68. On the other hand, mortality rates need to be cut down further, since they are still high relative to the MDG targets. Similarly, income poverty is still at a high level owing to the global economic crisis which has slowed efforts in achieving the target. HIV/AIDS still remains to be a single most impoverishing force facing people and households in Tanzania. Nevertheless, achievements were realized in areas of voluntary testing and counseling, this was manifested in the number of people who 34 tested for HIV in 2009, after the launch of the National Campaign. Generally, the country is in a better position to achieve most of the MDGs by 2015. However, concrete efforts need to be directed towards addressing the HIV/AIDS pandemic, strengthening efforts to address maternal mortality, institutional strengthening, structural, policy and infrastructural capacity, improving efficiency in resource mobilization, and strengthening the strategy’s focus on MDGs as a strategic tool for meeting the 2015 target. 69. It should be noted that some of the MDG indicators miss other dimensions of the progress made so far. For example, the analysis of HBS 2007 shows that ownership of many consumer goods has continued to increase since the 1990s, while income poverty which is one of the MDG indicators measured as headcount ratio and/or poverty gap ratio has been marginally declining. Further, in some cases, the indicators are missing and their proxies are not adequate, such as environment. 70. There is also limited comparability of indicators over time, mainly due to changes or differences in methodologies used in data collection and analysis of survey data, which render it difficult to assess whether Tanzania is on track or not. For instance, overemphasis on the enrolment rate leaves aside important issues of changes in quality of education. Also, it is not enough to know the proportion of the population with access to clean water, without knowledge of the frequency of water availability. While it is reasonable to first focus on the quantity, (e.g. rapid expansion of enrolment at all education levels), measures are immediately needed to improve the supply of other inputs , maintain service quality or halt quality decline as a result of expansion. 2.12 Tanzania Demographic and Health Survey 2010-TDHS 71. The 2010 Tanzania Demographic and Health Survey (2010 TDHS) presents high quality data that provide trends for monitoring and evaluating health programmes and interventions that are being carried out in the country. The 2010 TDHS covers data and information on fertility levels and preferences, family planning use, reproductive, child and maternal health; nutritional status of young children and 35 women; childhood mortality levels; ownership and use of mosquito bed nets; prevalence and treatment of childhood illness; fistula, domestic violence, knowledge and behaviour regarding HIV/AIDS; maternal mortality and fertility. 72. Preliminary findings indicate that notable progress has been achieved in this survey, compared to findings from the previous TDHS surveys. In comparison, there is significant reduction in both under-five mortality and maternal mortality. With regard to under-five mortality, rates have dropped by 40 percent, from 137 deaths per 1,000 births in the mid-1990s, to 81 per 1,000 births for the period 2006-2010. Similarly, the infant mortality rate decreased from 88 to 51 deaths per 1,000 births over the same period. These results indicate that the country is on truck in meeting goal Number 4 in the MDGs. Maternal mortality has also declined during the period under review. The maternal mortality ratio during the ten-year period before the survey is estimated at 454 maternal deaths per 100,000 live births. This ratio is lower than the ratio estimated for the 10-year period prior to the 2004-05 TDHS (578 maternal deaths per 100,000 births) and the 1996 TDHS (529 maternal deaths per 100,000 births). 73. With regard to total fertility, the survey reveals that the total fertility rate in Tanzania is now 5.4 births per woman. The TFR among rural women on the Mainland (6.1 births) is higher than among urban women (3.7 births). The TFR estimated in 1991-92 was 6.3 children per woman, which decreased to 5.4 as measured in the 2010 TDHS. Although there has been a downward trend in fertility since the early 1990s, the trend has not been steady. In addition, the survey noted an increase in birth attendant services. The survey indicates that half of births in Tanzania (51 percent) are delivered by a health professional and almost the same proportion (50 percent) are delivered in a health facility, a slight increase compared to 2004-05 (46 percent delivered by a health professional and 47 percent delivered in a health facility). Appropriate medical attention and hygienic conditions during delivery can reduce the risk of complications and infections that can cause the death or serious illness of the mother and/or the newborn. 36 74. Progress has been achieved in other areas such as ownership and use of mosquito bed nets; prevalence and treatment of childhood illness; fistula, domestic violence, and knowledge and behavior regarding HIV/AIDS. Despite notable progress in demographic health, there are still challenges in reducing the rates further down. Concrete efforts need to be strengthening to improve health related services in order to achieve the National Development Vision and international commitments including the MDGs 2.13: Review of the Vision 2025 75. The National Development Vision 2025 was officially launched on 2000. The Government undertook a detailed critical review on status of implementation of the Vision 2025 and its challenges. The broad objectives of the reviews were to: make an assessment of progress made in TDV 2025 goals; identify new challenges to be considered in planning for the remaining 15 years; and recommend on the best options to pursue. 76. The review of the implementation of Vision 2025 revealed that the thrust of the Vision is still valid and the goals are achievable. Also, the review noted the need for putting in place a framework for cross-comparison in preparing and implementing mid-term and longer-term plans. The review further revealed some challenges which the Government is determined to address. Those challenges includes the following: (i) Though there has been relatively high economic growth, this was below the trajectory necessary to meet Vision 2025 objectives; (ii) Sources of growth have been narrow and in most cases escaped the real poor in the rural and peri- urban areas; failing to generate adequate and decent jobs; (iii) There has been progress in poverty reduction but marginal particularly in rural and agricultural dependant households; (iv) Though for a long time, inflation remained low and single digit, the impact of vagaries of weather on agricultural production, coupled with persistent 37 rises in global fuel prices have led to a rise in inflation and cost of production; (v) The country has promising opportunities from its rich natural resources, advantageous geographical location and its active participation in regional and global economic integration schemes. However, those resources have not been exploited optimally to improve the economy. There is a need to improve transport infrastructure and transport facilities to enable the country to optimally exploit its geographic comparative location advantage as a regional trade gateway and transport logistical hub. In addition, availability and reliability of energy supply to accommodate the growing needs of the economy is critical. The areas of interventions are to improve energy infrastructure and increase power generation from different sources including hydropower, wind, solar power, gas, and coal. 38 3.0: EMERGING MACROECONOMIC POLICY ISSUES, CHALLENGES AND STRATEGIES 3.1 Power Shortages Hurting the Economy 77. The Tanzania Electric Supply Company Limited (TANESCO) officially announced a month long load shedding in all regions connected to the national grid on 22 December 2010. The recent countrywide power rationing was caused by a breakdown of one generator at the Songas plant, a faulty transformer at Kipawa sub-station, decrease of water level in hydro-power stations as a result of severe drought and lack of Heavy Fuel Oil (HFO) at the Independent Power Tanzania Limited (IPTL) in Tegeta. As the perennial electricity shortage continues to zoom, the question lingering in the public mind is when this serious national problem will end. Also, not only are the current power tariffs too high for the ordinary citizen, but also the supply is most erratic and inadequate. 78. Given the fact that the demand is very high, any interruption on supply will make this worse. Despite the fact that the country's installed capacity stands at 1300MW at the moment, it has proved too tough to meet the 850MW demand. New connections increased by 7.9 percent in 2010 compared to 5.6 percent in 2009, indicating an increase in demand. In situation like this, TANESCO is hardly left with enough reserve to fill the gap to steadily supply 850MW, because at any given time the system cannot generate power at 100 per cent. Despite power rationing towards the end of 2010, the quantity of electricity generated from local sources increased by 11.2 percent in 2010 to 5,268 mill.kwh compared to 4,738 million kwh generated in 2009. The increase was mainly emanated from gas and thermal – generation. 79. The load shedding is having disastrous consequences, such as badly disrupted production in most industries. Manufacturers both in the small enterprises and the heavy production have risen concerns on the hardest hit by the power supply crunch. A research conducted recently indicates that a single factory experiences an average of 63 outages of electricity annually. Manufacturers are making loss due to 39 unreliable power supply and it is estimated at TSh7.7 billion annually. This amount translates into government revenue loss of about TSh2.3 billion in corporate tax. 80. In response to power shortages, the Government managed to add 145MW in the national grid, following the completion of the Ubungo plant (100MW) in 2008 and Tegeta plant (45MW) in 2009. Had it not been the GFC which prevented the investment by Artumas in power generation project in Mnazi Bay and problems with the ownership of Kiwira Coal Mines, the plan was to add a total of 500MW in the national grid, out of which, 200MW from Kiwira and 300MW from Mnazi Bay. The government also enacted the Electricity Act 2008, which was meant to facilitate the participation of the private sector right from generation to transmission and distribution. But three years down the line, no credible investor has shown any interest in putting in money. Some private sector players talk of lack of incentives as one of the handicaps. The Government is determined to create conducive environment to enable greater private participation in the energy sector. Having more players in the sector will usher in competition, this is always good for consumers, as it will go a long way in improving power supply and related services. 3.2 MKUKUTA II 81. The second National Strategy for Growth and Reduction of Poverty (NSGRP II or MKUKUTA II) is a continuation of the Government and national commitments to accelerate economic growth and fighting poverty. Development of MKUKUTA II follows the end of implementation of MKUKUTA I. The strategy is still an organizing framework to rally national efforts for the next 5 years (2010/11 – 2014/15) in accelerating poverty-reducing growth, by pursuing pro-poor interventions and addressing implementation bottlenecks. It was approved in mid October 2010 after comprehensive consultation processes, which involved MKUKUTA I study reviews, consultation with involvement of different stakeholders at different levels and review of the second draft of MKUKUTA II. Spending plans for implementing MKUKUTA II were included in the 2010/11 budget and hence implementation is already underway. Social protection is also mainstreamed in MKUKUTA II and thus will be financed under the umbrella of MKUKUTA II financing framework. The new strategy 40 will ensure that there is appropriate prioritization and coordination of policies and also puts emphasis on harnessing PPP potentials. 82. MKUKUTA II will be a medium term strategy to achieve the aspirations of Tanzania’s Development Vision (Vision 2025) and MDGs. The Government is developing a Long Term Growth and Development Plan, as a long term implementation framework for the remaining 15 years of the Tanzania’s Development Vision 2025. MKUKUTA II translates the Vision 2025 aspirations and sector policies and strategies into measurable broad outcomes, and operational targets respectively. Comparably, the major shift of this strategy from its predecessor is the high drive and scaling up on the role and participation of private sector in economic growth and employment, through strengthening business climate for efficient use of factors of production, investing in people and infrastructure development, and sustaining achievements in socio-economic progress. 83. The structure of MKUKUTA II is not much different from its predecessor; it maintains the three organizing clusters to depict three interrelated development outcomes outlined below: 84. Cluster I: Growth and Reduction of Income Poverty, focusing on equitable and employment-generating growth, sustainable development principle, food security and affordable and reliable modern energy services and adequate infrastructures for production purposes; 85. Cluster II: Improvement of Quality of Life and Social Well-Being, focusing on quality of life of the poorest and most vulnerable groups, reduced inequalities in access to social services such as education, survival, health across geographic, income, age, gender and other groups, and provision and access to clean and safe water, sanitation, decent shelter and energy, and a safe and sustainable environment, access to social security and social protection, and thereby, reduced vulnerability from environmental risks: 41 86. Cluster III: Governance and Accountability - to ensure the poor have access to and control over natural resources for lawful productive purposes, checking waste and diversion of public financial resources, ensuring democratic participation in the monitoring of public resources, rule of law, human rights and in total, a conducive business environment for attracting investments. Financing Framework 87. Government revenue as a share of GDP is projected to increase steadily from 15.2 percent during 2009/10 to around 18 percent by 2014/15. Since the Government is currently operating on a cash budget system, the revenue estimates are taken as the ability of Government to finance levels of domestic expenditure. Some of the Government’s expenditures are already directed towards MKUKUTA II interventions, while other expenditures for essential operations are not directly linked to interventions included in MKUKUTA II. The latter group is known as nonMKUKUTA II expenditure, which includes (but not limited to) expenditure on Consolidated Fund Services (CFS) – debt and interest payments, pension payments and other contractual obligations. 88. The financing scenario assumes that an increasing share of government revenues will be allocated to MKUKUTA II activities in each fiscal year of implementation, building gradually from the projection of 60.7 percent of domestic revenue to 84.4 percent by 2014/15. The assumption reflects Government's commitment to accelerating economic growth and reducing poverty. However, the actual cost of implementing MKUKUTA II for the period of 2010/11 – 2014/15 will be established by costing key sectoral programs, which will also include grants and loans from development partners. Other financing mechanism will come from domestic borrowing and through the PPP arrangement. 42 3.3: The Five Year Development Plan Formulation Framework 89. The thrust of development agenda of Tanzania since independence has been on economic growth and poverty reduction, with the prime objective of ensuring the majority of Tanzanians have access to development opportunities to be able to enjoy the accruing benefits. In an effort to spearhead the pace of achieving the desired development agenda, the Government in 1999 launched the Tanzania Development Vision 2025. The gist of the Vision is that by 2025 Tanzania should have made unprecedented economic transformation and development to achieve middle income status characterised by high levels of industrialisation, competitiveness, quality livelihood, rule of law; and having in place a learned and pro-learning society. 90. The planning framework has undergone a number of fundamental changes over time to influence socio economic management policies and national development priorities from centrally prepared plans to indicative plans. In the absence of Five Year Medium Term Plans which were to facilitate the operationalization of the vision’s aspiration, MKUKUTA though designed as an implementation strategy took precedence as the medium term plan to implement Vision 2025. Therefore, there is a need to revive Five Year Medium Term Plans to implement the TDV 2025. 91. An independent study that was commissioned in 2009 to critically review implementation of the vision after 10 years of its launch revealed that progress towards implementation of Vision 2025 was a mixed one. Noticeable milestones have been recorded in propelling national development towards its desired path. There has been rapid progress towards the achievement of social development targets and visible improvement of business environment following implementation of policy and structural reforms. Consequently, Tanzania has managed to attract substantial amounts of Foreign Direct Investments (FDIs) mainly into primary production sectors and extractive industries, notably mining. However, the challenge remains of hastening the transformation of the country’s production and trade supply structures commensurate with the dynamics of global demand. Efforts taken to transform the country’s supply structure to enable Tanzania realise the benefit of globalisation 43 continue to be hampered by the existence of weak supportive infrastructure, notably, power and transport. Despite the existence of a numerous power generation resources, the country’s production has remained largely reliant on hydropower and therefore the wills of nature. Poor transport infrastructure has also failed the country to optimally exploit its strategic geographic location as a regional trade gateway and transport logistical hub. 92. To be able to achieve the target of becoming a middle income country by year 2025 entails the need to prepare medium term plan to implement TDV 2025. In preparing the planning framework, a number of changes are envisaged. First, effectively from July 2011, the plan horizon will be five years and the first five year plan will cover the period 2011/12 – 2015/16. Second, the new orientation calls for a paradigm shift from needs -based planning which is resource based, to the opportunity-based planning which requires thinking beyond the resource constrained box towards strategically positioning the country to maximize on every opportunity that presents itself thus making resources the means rather than the end. 93. Preparation of the Tanzania Five Fear Development Plan (FYDP _ 2011/12 – 2015/16) is going on under the coordination of the President’s Office, Planning Commission. The overall goal of FYDP is to unleash the country’s resource potentials in order to fast- track the provision of the basic conditions for broad- based and propoor growth. The main objectives of FYDP are to improve the physical infrastructural networks and human capital in order to hasten investment for transformation of the country’s production and trade supply structures (agriculture, manufacturing and services), and foster Tanzania’s competitiveness and improved human development. The specific objectives are: (i) To improve implementation through detailed prioritized and sequenced interventions; (ii) To improve synergistic and complementary growth; and (iii) Streamlining institutional framework for effective implementation 44 94. During the first five year plan, Tanzania will have to compete and benefit from the unfolding opportunities presented by increasingly integrating regional markets taking full advantage of its strategic geographical location that stand to be the regional competitive trade gateway to serve most of the hinterland and the surrounding land-locked countries. Tanzania is also endowed with natural resources (mineral, fertile land, tourist attraction sites) and energy sources (such as biomass and agricultural wastes, coal, hydro, natural gas, thermal, geothermal, solar and wind) all of which are potentially capable of spurring the growth to the desired development path. Therefore, the thrust of the first five year development plan 2011/12 – 2015/16 should reflect the whole issue of unlocking Tanzania’s growth potentials. It will however be necessary to prioritize a few key interventions and in orderly sequence in their implementation so that they can complement each other to enable effective and optimal resource allocation. 45 3.4: 95. Financial Inclusion The financial sector in Tanzania is comprised of mainly banks, pension funds, insurance companies, and other financial intermediaries. However, the sector is dominated by banking institutions which account for about 75 percent of the total assets of the financial system, followed by pension funds whose assets account for about 21 percent and the insurance sector with 2.0 percent of the total assets, while the remaining financial intermediaries hold about 2 percent. Currently there are 32 commercial banks and 10 non-bank financial institutions operating in the country, and access to the more modern payment systems infrastructure remains limited to a few commercial banks. Traditionally, Tanzania is cash based society whose proportion of population with access to banking system is limited to around 35 percent of the urban population and less than 5 percent of the rural population. It should be noted that the percentage of population living in the rural areas is about 72 percent of the total population. . 96. In 2010, there have been increasing financial inclusion services for wider outreach to the un-banked community i.e access to utilities facility through the use of mobile payment, which has mushroomed and signal acceptance by many Tanzanians. The Government has strived to create enabling environment by developing effective regulatory framework for mobile payments, since this is a proper tool for financial inclusion to the majority including those in the rural areas. Payment System 97. Payment systems play a fundamental role in the economy by their basic function of enabling the circulation of money. An efficient and safe payment system is a vital tool for the economic growth and financial stability. Given its importance, the government embarked on the modernisation of the National Payment Systems aiming at developing and maintaining strong and efficient financial market infrastructure, safe and efficient payments, clearing and settlement systems. 46 98. The government has joined TISS (Tanzania Inter-bank Settlement System) for the transfer of its high value and time sensitive payments to minimise expenditure float and cheque usage pruned to errors, omission and fraudulent activities. The Draft National Payment System Act has also been developed that will further enforce compliance to ensure safety and efficiency of the payment systems. The Government has been progressively undertaking initiatives both in the country as well as in the region to enhance accessibility, availability, convenience and safety of payment services to the end users. Mobile Phone Payment 99. Tanzania is experiencing strong growth in number of mobile subscribers. According to provisional data as of June 30, 2010, the number of mobile phone subscribers reached 18.5 million, while that of registered users of mobile payments services stood at 9.2 million by end July 2010. The strong increase in the number of subscribers to the mobile payments is mainly attributed to limited access to formal banking services especially in the rural areas. In this regard, the mobile payment provides an avenue for linking bank account holders to the unbanked population. In addition the service provides convenience in making payments for specified utilities and other consumer services. Specifically, mobile phone payment services are mainly used to facilitate top-up of mobile phones credit, airtime transfers between mobiles, funds transfer and corporate bill payment services. 100. Just a few years ago people used to travel with huge sums of money to make payments. Some used to send money using buses which were costly and risky. This was mainly because access to formal financial system was limited and expensive. Recently, the mobile phone technology has revolutionalised the financial sector pushing the boundaries of access to finance to include other market actors such as mobile phone operators’ and technology companies to offer financial services outside the traditional bank premises using delivery channels like mobile phones, internet and retail agents. Mobile Phone Payment services which comprise all aspect of financial services initiated using mobile phone have even successfully 47 brought financial services in the interior parts of the country where initially the traditional banking could not offer its services. 101. The entrance of such players in the sector has increased efficiency of financial services in terms of speed, convenience, affordability, and accessibility. The services offered can be divided into two parts: Bank led model and non –bank led model. The Bank Led Model is the one which is applicable when a financial institution on its own initiative implements its own systems to offer mobile payments services. Through the usage of mobile devices, the users of this model are given access to their bank accounts to view statements, balance inquiry, and limited money transfer services. The Non-Bank led model is where a mobile payment service provider collaborates with a financial institution to offer a mobile payment services. This model involves the usage of virtual money to access financial services through mobile devices and the use of agents for the purposes of issuing electronic money. Agents act as access point in time the virtual money circulating in the economy should be equal to funds deposited in a Trust Account maintained at the partners commercial bank. 102. The technology, embedded with procedures allows a registered customer to access mobile payment services from any place in the country. Services offered include funds transfers from Person to Person (P2P), Customer to Business (C2B), Business to Customer (B2C), and Cash in and Cash out services at agents outlets. These services have made it easy to send money to relatives in the villages, pay for utility bills such as TANESCO (LUKU), DAWASCO, DSTV, insurance premiums and loan disbursement and repayments. 103. The schemes which offer these services are M-Pesa which offered by Vodacom in collaboration with NBC Ltd; ZAP offered by Zain in collaboration with Citibank; and Z Pesa offered by Zantel and E Fulusi in collaboration with FBME Bank. The mobile payment services launched in Tanzania in 2007 have already registered about 6 million subscribers as at 31st May 2010. The number of customers is bound to increase as more services continue to be offered through these schemes. 48 104. However, the provision of mobile payment services in the country provide a regulatory challenge to the Bank of Tanzania, as this is a new phenomenon where financial services providers who are traditionally not financial institutions could now offer financial services. The legal and regulatory requirements of the mobile phone payment system require partnership of service providers with commercial banks. The existing arrangement creates gaps in the regulatory framework because the mobile phone payments services are regulated by two regulators, each with a limited scope of coverage. The Bank of Tanzania focuses on the financial transactions, while Tanzania Communication Regulatory Authority (TCRA) regulates the communication infrastructure. In recognition of the importance of developing a rigorous supervisory oversight for this fast developing mobile banking industry, the Bank of Tanzania has signed an MOU with TCRA which provides a mechanism for regulatory and supervisory coordination between the two regulators. The Bank has embarked on the development of a regulatory framework, which is coherent and flexible. The purpose of the regulatory framework is to promote new innovations that creates access to financial services that are convenient to customers and minimise the usage of cash. 3.5: Public-Private Partnerships 105. Governments throughout the world have historically financed infrastructure projects through budgetary arrangement. However, as the demand for infrastructure grows and access to resources has become limited, the public sector has increasingly looked to the private sector to provide financial resources, innovation, managerial skills and technical expertise. Though the working relations between the public and the private sectors are not new, public-private partnerships (PPP) are relatively a recent arrangement to an ever-evolving relationship. PPPs are a cooperative venture between the public and private sectors, built on the expertise of each partner that best meets clearly defined public needs through the appropriate allocation of resources, risks, and rewards. 106. In November 2009 the Government issued the National Public-Private Partnership Policy. Subsequently, in August 2010 Parliament enacted the Public49 Private Partnership Act No. 19 of 2010, and the related Regulations are expected to be issued within the first six months of 2011. The TIC and MoFEA are required by the legislation to establish PPP units within their jurisdictions. In the financial year 2011/2012, implementation of the National PPP Program is expected to commence by developing an implementation strategy and operational guidelines. As part of the medium term (2011/12 – 2015/16) plan, MDAs, LGAs, and public bodies are expected to come up with initial proposals giving details of identification of the opportunities for partnerships and the initial studies to substantiate the potentiality of the opportunities. This will be in line with the Medium-term Plan and Budget Framework (2011/12 – 2013/14) which assumes, among other assumptions, that the private sector will participate effectively in public investment including in Kilimo Kwanza. 3.6: Economic Outlook for Sub-Saharan Africa 107. Most countries in sub-Saharan Africa have recovered quickly from the global financial crisis, with the region projected to grow by 5.5 percent in 2011. But the pace of the recovery has varied within the region. The recovery in South Africa and its neighbors, however, has been more subdued, reflecting the more severe impact of the collapse in world trade and elevated unemployment levels that are proving difficult to reduce. 108. Prior to the recent global crisis, sub-Saharan Africa enjoyed a period of strong growth. Growth in the region’s 29 low-income countries (LICs) was particularly impressive at more than 6 percent during 2004–08. This reflected the improved political environment, favorable external conditions, and sound macroeconomic management. These strong initial conditions helped most countries in the region weather the worst effects of the food and fuel price hikes of 2007–08 and the subsequent global financial crisis. Many countries supported output by injecting fiscal stimulus and lowering interest rates. As a result, LICs in the region continued to grow at nearly 5 percent in 2009, although output fell in the region’s middle-income countries—a group dominated by South Africa. 50 109. Most countries in the region have now returned to pre-crisis growth rates. In 2011, LICs are projected to grow by 6½ percent. Domestic demand is being supported by automatic stabilizers, expansion in public investment and social support programs, and continued monetary accommodation. Growing trade ties with Asia are also playing a role in the region’s recovery, primarily through commodity markets. Output growth has rebounded in South Africa, but high unemployment and subdued confidence are expected to continue to dampen the pace of recovery, restricting growth to about 3½ percent in 2011. 110. The continent is not free of the downside risks. The pace of recovery in Europe, the dominant trade partner for most countries in sub-Saharan Africa, is modest and uncertain. More immediately, the sharp pickup in fuel and food prices stands to make a significant impact on many of those countries. Rising food prices are likely to affect the urban poor in particular, given the high share of food in their consumption baskets. In response, governments will need to consider targeted social safety nets, with attendant fiscal costs. Managing these pressures, particularly against the backdrop of elevated fiscal deficits and narrowing output gaps, will be an important challenge for the region in 2011—a year with a busy political calendar, including perhaps 17 national elections. 3.7: Human Resource Development 111. Successful implementation of a focused development agenda requires a supply of skilled human resources that meet the demands of the market. Without a wellfunctioning skilled labour force, productivity will remain low. The building of human resource capacity underpins the transformational process in any society. It is important therefore that there is a strong linkage between the provision of basic education and the development of capabilities for growth and transformation. This linkage can only be achieved where states set high standards for quality in education. As countries strive to provide universal primary education, it is crucial to raise the quality of primary, secondary and technical education, to appropriately equip students for subsequent employment and, for those who continue academically, for tertiary education. The ongoing discussion about focusing 51 government-sponsored student loans towards strategic training at the tertiary level is a move in the right direction. This move is important because it will provide the right signals to service providers of technical and higher education, both public and private, on where to focus their training. It may also raise competition among training institutions to attract students and state loans, thus raising the standard of the education provided. In this way, the Government encourages private-public partnerships to produce the skilled labour force required to realize the national vision. There also need to focus specifically on areas such as human resource management, performance management systems, human resource planning and capacity building, payment systems and rewards. Furthermore, the Government is in the process of engaging Diasporas to participate and contribute in the economic development. 3.8: The Southern Agricultural Growth Corridor of Tanzania (SAGCOT 112. The Southern Agricultural Growth Corridor of Tanzania (SAGCOT) is key to opening the door for Tanzania in social and economic development. This is one of the collaborative efforts in improving agricultural development, focusing more on marketing; investment in agricultural; and availability of capital. It has come at a time when Tanzania is looking for a viable and practical means of implementing Kilimo Kwanza. SAGCOT provides one way of moving “Kilimo Kwanza” from theoretical perspective into practice. SAGCOT complements existing policies and is built on what existing organization and institutions are already doing in both private and public sector. Implementation of this plan under the vision of Kilimo Kwanza is expected to create employment opportunities and transform small farmers in to commercial farmers. This will also enable Tanzania to be food self sufficient and net exporters of food. However this cannot happen overnight, it needs concerted effort in changing the mindset and let everyone (Public and private sector) plays his role. 113. Tanzania has a total of 44 million hectors of arable land but only about 23 percent of it is being used. Out of the arable land, 29 million hectors is suitable for irrigation but only one percent of that land is being used for irrigation. Most of the agricultural products are sold unprocessed or semi processed (i.e with very little value addition) and contributes less than 20 percent of total goods export earnings 52 and about a Quarter of GDP. Food crop is basically for subsistence and can meet 95 percent of domestic demand annually. Livestock is also not used commercially to the extent possible and contribute very little to GDP. Tanzania has about 223,000 square kilometer of Exclusive Economic Zone along the Indian Ocean as well as 62,000 square kilometer of rivers and lakes, all of which are suitable for fishing among other economic activities. However, fishing activities is done at very minimal level. Looking on those facts, it is clear that there are many gaps or opportunities that need to be filled up and Kilimo Kwanza initiative and SAGCOT are basically meant to address this 114. The SAGCOT covers some 320,000km2 within Tanzania and runs through the Southern Highlands of Tanzania which is one of the areas of greatest agricultural potential in the country. It also has infrastructure and trade links to Malawi, Zambia and DRC. The corridor conversely links the south and west, to the main market of Dar es Salaam with its port opening up to global trade. SAGCOT aims to boost agricultural productivity and competitiveness in the Southern corridor of Tanzania. 115. Some of the challenges facing the agricultural sector include food preservation; graduates not work in the field; inputs (fertilizer and seeds); financial support (capital); infrastructure particularly road and railway; and marketing (quality, packaging). SAGCOT is aiming at addressing all those challenges and others not mentioned. Specifically, SAGCOT will strive to ensure proper coordination of activities in the corridor and availability of requisite environment for investment including reliable power supply, a bank branch, storage facilities for fertilizer as well as for agricultural products, tractor garage, tarmac road, among others. 3.9 Medium term strategic Focus 116. In order to have sustainable economic growth under the framework of the five year plan, there is a need to prioritize and sequence interventions which depend on each other. The Government will focus on selected national priority areas of high impact which will bring quick results and accelerate economic growth. The priority areas are divided into four pillars follows: 53 (i) Sustaining macroeconomic stability: Need to improve macroeconomic fundamentals including food supply, inflation, GDP growth, and money supply all of which will bring peace and harmony. Further, good governance will be emphasized in all sectors in order to speed-up and sustain the economy at large. While sustaining macroeconomic stability, the achievements recorded in the social sector will be sustained. In this regards, more emphasis will be put on quality of education, health, and water services as well as social welfare at all levels; (ii) Optimal use of the Natural resources: Tanzania is endowed with various natural resources such as land, water, minerals and natural gas. Medium term interventions will also focus on the optimal exploitation of these resources to foster growth. Emphasis will be on the implementation of Kilimo Kwanza to ensure food security and exporting the surplus especially to the Great Lakes Countries; (iii) Geographical advantage in the region: The strategic location of Tanzania within the region provides opportunities to become a business center and transport hub for the great lake countries. The five year development Plan will put emphasis on improving the ports, solve railway problems and improve trunk roads, improving energy infrastructure, national fibre optic and increase efficiency in the provision of services in these areas and those of Tanzania Revenue Authority; and (iv) Technology and skills development: Intervention will focus on improving technology to facilitate value addition particularly on agro processing and minerals. Further, skills development and improving science, technology and use of ICT will be emphasized. 54 Sector specific interventions 117. During the five year plan framework, resources will need to be allocated to few but key interventions for sustained growth and desired poverty reduction results. The aim is to promote sustainable broad based growth in the economy through investment in the much needed physical infrastructure and social service delivery. Strategic intervention areas in the pilot year of the plan (2011/12) will be on electricity, ports, railway, water and food reserve. The areas of focus in the five year plan framework and their strategic relevancy will include the following: (i) Education 118. Education sector is constituted mainly by the Ministry of Education and Vocation Training and the Local Government Authorities. The sector coordinates and promotes the development of human resources through education, training, research, science, technology and innovation. The sector is strategically important in two fronts: (i) as the main pillar of the socio-economic development strategy and in particular with respect to the attainment of Cluster II goal of universal education and literacy; (ii) as the main determinant of the human capital formation, which is essential for intensifying growth and ensuring that growth translates into quality employment and therefore poverty reduction. a) Improving the quality of education at all levels; b) Reviewing policy and strategies to sustain provision of loans to higher education students; c) Continue with the construction of the national ICT infrastructure backbone (optical fibre); and d) Improvement of access and equity by providing conducive teaching and learning environment; constructing and rehabilitating infrastructure (classrooms, libraries, lecture rooms, laboratories, hostels, latrines, etc.) (ii) Agriculture 119. Agriculture is the mainstay of the Tanzanian economy in terms of production, employment, income and foreign exchange generation. The agricultural sector is not growing at significant rates to meet national targets, especially in the production of sufficient food surplus and cash crops for export. The sector’s productivity is 55 generally very low and uncompetitive with other countries, in both food and cash crops production. Low productivity in the sector calls for more research, extension services and technology such as mechanization. The importance of agriculture in economic growth and poverty reduction makes it a priority for investment and development. Given the fact that about 80 percent of the population depends on agriculture and agriculture related activities for their livelihoods, any intervention to bring about higher and sustainable economic growth and improvement in living standards, need to focus on the agricultural sector. Irrigation and water infrastructure are important in supporting Kilimo Kwanza, and among the main activities in this area should include developing and supporting national irrigation schemes. In order to ensure smooth implementation of the agricultural transformation, proposed priority areas in agriculture should include: a) Developing and improving irrigation infrastructure; b) Increasing availability and utilization of agriculture and livestock inputs and mechanization; c) Strengthening agriculture and livestock research, training and extension services; and d) Improving market access and agro-processing 120. Agriculture remains a key pillar of the Tanzania’s economy in many aspects. Apart from enhancing diversification of the economy given its enormous potential, it stands a better chance of spurring economic growth to new levels; it also provides the much needed employment, food production and rural development thereby contributing towards poverty reduction. Recent statistics indicates that the sector accounts for about 24 percent of GDP, 17 percent of export, and contributes significantly to employment. About 80 percent of the poor in Tanzania lives in rural areas and earn a large proportion of their livelihood from agricultural activities. For these reasons, there is no doubt that the sector constitutes the foundation of poverty reduction and rural development. (iii) Infrastructure Development 121. The competitiveness of Tanzania to produce is undermined by costly and inadequate infrastructure services, such as poor roads and railways that increase 56 maintenance costs, high port charges and slow and outdated communication systems that impede the flow of market information. To this end, investment in physical infrastructure is the only way that will reduce transport costs and attract more private investments needed to transform the agricultural sector from subsistence to a commercial and profitable business enterprise. In this regard, priority areas in infrastructure development should include: a) Construction, rehabilitation of roads, bridges and ferries and addressing the problems of traffic congestion in Dar Es Salaam and other urban areas; b) Construction and rehabilitation of Government quarters; c) Rehabilitation and upgrading of railway lines and airports; d) Construction of new ports, rehabilitation and upgrading of existing ports; e) Strengthening of meteorological services; and f) Increasing the capacity of TEMESA to service Government owned machines, vehicles and other equipment. (iv) 122. Land Management and settlement Land is wealth and a powerful economic asset as it provides a foundation for economic activity in various sectors such as agriculture, industries, housing, and tourism. Expanding human requirements and economic activities are placing everincreasing pressures on land resources, creating competition, and conflicts and resulting in sub optimal use of both land and land resources. In order to reduce land-use conflicts, conserve critical ecosystems, and protect and manage environment, priority areas in land management should include: a) Improving accessibility to affordable housing in rural and urban areas and public awareness on housing finance facilities; b) Establishment of National Network Control points and satellite receiving station to facilitate surveying and mapping. c) Strengthening and expansion of the national land information system to improve land administration and simplifying the National Addressing and Postcode System; 57 d) Implementation of National Land Use Framework Plans to include preparation of integrated District Land Use Framework Plans and other programmes; and e) Preparation of Urban Plans for managing urban growth challenges; (v) Energy 123. Energy is a critical prerequisite for all sectors of the economy. It is an essential service whose availability and quality can determine the success or failure of development endeavours. The importance of energy as a sector in the national economy cannot therefore be overemphasized. Hydro-power generation accounts for about two third of the sources of power in the National Grid. In other words, as agriculture depends very much on rain, so is power generation in the country. 124. Adequate energy supply is essential for transforming a country from a traditional economy characterized by production of traditional and unprocessed commodities to a modern society in which the manufacturing sector becomes dominant. Of recent, shortage in power supply, unreliability and high costs of energy have caused major disruptions in economic activities, thus reducing economic growth as well as the competitiveness of the economy. There is no doubt that problems facing the energy sector have detrimental effects not only to the attainment of sector performance and the rapid resolution of energy problems, but also to the prospects of rapid progress in economic transformation and accelerated growth. This is why the Government is making concerted efforts to stabilize, boost capacities, and increase energy supply to accommodate the growing needs of the economy. Government efforts in the medium term are geared towards increasing power generation, transmission and distribution as well as increasing availability of energy in rural areas. 125. In order to ensure a reliable and efficient energy production, procurement, transportation, and distribution; priority areas in energy sector should include: a) Developing and improving infrastructure for generation, transmission and distribution of electricity to meet the growing demand; 58 b) Supporting Rural Electrification projects through Rural Energy Agency (REA); and c) Continue with efforts of exploration of natural gas and oil and expansion of infrastructure for production and distribution of natural gas and oil. (vi) 126. Manufacturing Industrial transformation is an important tool and vehicle for realization of the green revolution (Kilimo Kwanza). A characteristic feature of Tanzania’s agriculture is the dominance of primary production or subsistence economy. There is very little processing of agricultural produce, which translates to low income for farmers and less jobs for Tanzanians. There are compelling reasons therefore for encouraging agro-processing. Nevertheless, manufacturing activities in Tanzania are relatively small and at an infancy stage, with most activities concentrated on manufacture of simple consumer goods. To this end, priority areas in manufacturing should include the following: a) Developing conducive environment for trade, industrial development and investments; b) Facilitating and promoting SMEs technologies by expanding and deepening of value addition through agro-processing, development of incubator sites and industrial and trade premises; c) Intensifying the promotion and development of designated industrial parks, export processing zones (EPZs) and special economic zones (SEZs), including pro-identification and provision of prior serviced industrial plots; and d) Developing basic industries and promoting industries that use domestic raw material. (vii) Health 127. Just like the education sector, the health sector is also key to strengthening human capital and thus in the efforts to solidify the foundations for medium and long term economic growth. It is one of the sectors whose aim is to achieve 59 objectives of MKUKUTA Cluster II (improvement of quality of life and social wellbeing). Strategic areas of focus in the Five year plan include the following: a) Enhancing quality of curative, preventive and rehabilitative services; b) Improving human resources capacity and ensure availability of medical and social welfare personnel at all levels; c) Constructions, rehabilitation and equipping health facilities with basic and high tech equipment of appropriate technology and medicines; and d) Improving maternal health and family planning services; (viii) Water 128. Adequate supply of safe and clean water is essential for development of the nation as it is an important element of social well being, useful domestically and industrially in urban areas. In that respect the Government continues to devote a sustained attention to the development of water resources and improvement of access to safe and clean water. In the Five year development plan framework, key areas of intervention will include: a) Strengthen water resources management to cater for socio economic activities such as irrigation, hydropower generation, industrial , and domestic uses and water for ecosystem; b) Implement rural water supply and sanitation programs in 10 villages in each district council; c) Implement a special program for improving water supply and sewerage services in Dar es Salaam City; d) Continue to implement ongoing water projects to increase access to clean and safe water; and e) Extend Lake Victoria – Shinyanga – Kahama Water Project to Nzega, Igunga and Tabora. (ix) Regional Integration 129. Regional Integration development continues to create Social and Economic opportunities including trade, industries, employment and investments. The custom 60 union has created opportunities in terms of trade, investment and industrial development. Furthermore, the Common Market opens opportunities in trade in goods, trade in services through free movement of services, employment opportunities through free movement of labor and opportunities in capital market through free movement of capital. Nevertheless, a number of studies indicate that the ability to utilize EAC opportunities and capacity to raise the awareness thereof is still limited. Therefore, more efforts are required to this end for Tanzania to benefit from Regional Integration as envisaged. 130. In this regard, priority areas in the area of regional Integration should include:a) Development of the requisite capacities and skill to enable Tanzania utilize existing and emerging regional integration opportunities; b) Regional infrastructure development including roads , railways, ports, ICT and energy sectors; c) Finalization of the Common Market Implementation Strategy; d) Finalization of the implementation of information, communication and awareness strategy covering a wide spectrum of stakeholders. (x) Regional Administration and Local Government 131. Regional Administration and Local Government are instrumental in translating the various sectoral plans into actual action at the regional and local government levels. During the five year plan, RSs and LGAs will be facilitated to execute their functions and responsibilities in adherence to the following interventions: (i) Continue embedding Decentralization by Devolution across Government; (ii) Undertaking construction and rehabilitation of infrastructural projects and provision of physical incentives that will serve to attract and retain trained and qualified staff in local government service and especially in the underserved parts of the country; (iii) Widening revenue base and improve tax administration; (iv) Improving public financial management and accountability both at higher and lower levels; 61 (v) Construction of headquarters/offices for the newly established LGAs, Regions and District; and (vi) (i) Strengthening monitoring, evaluation and timely reporting; (xi) Financial Sector Strengthening TIB and Women Development Bank (ii) Facilitating establishment of Tanzania Agricultural Development Bank; (iii) Increase financial services and education specifically to the rural un-banked community; (iv) (v) Establishing Credit Reference Bureau and Credit Reference Databank; and Promoting an efficient and competitive pension and insurance sectors; 62 4.0 MEDIUM TERM ECONOMIC OUTLOOK: 2011/12-2015/16 4.1 Macroeconomic Assumptions 132. The underlined assumptions and targets are aimed at addressing infrastructure bottlenecks with a view to accelerating economic growth and reducing poverty. This can be achieved through the implementation of Vision 2025; the Ruling party election manifesto of 2010; the President’s inaugural speech to the 10th Parliament; MKUKUTA II; Sector policies and other Government policy directives, including implementation of KILIMO KWANZA. In the medium term (2011/12-2015/16) key macroeconomic assumptions underlying macroeconomic projections and policy targets are as follows: (i) Macroeconomic stability will continue to be sustained and socio-economic development will continue to improve; (ii) Domestic revenue collection will be expanded to facilitate implementation of the five year plan; (iii) Increased impetus in the implementation of MKUKUTA II and allocation of adequate resources in areas that have higher multiplier effect in the economy; (iv) SAGCOT and Kilimo Kwanza initiative will be implemented as planned; (v) Increased progress in private sector development, including further improvements in the business environment; (vi) (vii) Continued good relationship with development partners; A supportive monetary policy, reflected in low inflation consistent with the major trading partners, a narrowing interest rate spread, and increased credit to the private sector; and (viii) Political stability will be sustained. 63 4.2 Medium Term Macroeconomic Outlook and Targets The World Economic Outlook 133. Global activity is expected to expand by 4.4 percent in 2011 – down from a contraction of 5.0 percent in 2010. This indicates that economic activities are recovering stronger but at a slower pace than anticipated. The forecasted recovery carries some vulnerability because policies to foster rebalancing of demand from public to private and from external deficit to surplus are not in place. Activity in the advanced economies is projected to expand by 2.4 percent in 2011, which is still sluggish considering the depth of the 2009 recession and insufficient to make a significant dent in high unemployment rates. The 2011 growth projection is an downward revision of 0.1 percentage point relative to the January 2010 WEO, mostly due to expected impact of the Japanese earthquake to the world economy. The Japanese earthquake is also expected to affect disbursement of foreign assistant. 134. In both 2011 and 2012, growth in emerging and developing economies is expected to remain buoyant at 6.5 percent, a modest slowdown from the 7.3 percent growth achieved in 2010. Developing Asia continues to grow most rapidly, but other emerging regions are also expected to continue their strong rebound. Notably, growth in sub-Saharan Africa is projected at 5.5 percent in 2011 and 5.9 percent in 2012 is expected to exceed growth in all other regions except developing Asia. This reflects sustained strength in domestic demand in many of the region’s economies as well as rising global demand for commodities. 64 Table 14: World Economic Growth –Actual Outturn and Projections (Percent) April 2011 WEO projections Difference from January 2010 WEO Projections World Advanced economies 2009 2010 2011 2012 2010 -0.5 5.0 4.4 4.5 0.0 2011 0.0 -3.4 3.0 2.4 2.6 -0.1 0.1 United States -2.6 2.8 2.8 2.9 -0.2 0.2 Euro area -4.1 1.7 1.6 1.8 0.1 0.1 Japan -6.3 3.9 1.4 2.1 -0.2 0.3 Emerging & developing economies 2.7 7.3 6.5 6.5 0.0 0.0 -1.7 2.8 3.4 3.8 -0.1 -0.1 2.8 5.0 5.5 5.9 0.0 0.1 Central and eastern Europe -3.6 4.2 3.7 4.0 0.1 0.0 Developing Asia 7.2 9.5 8.4 8.4 0.0 0.0 China 9.2 10.3 9.6 9.5 0.0 0.0 India 6.8 10.4 8.2 7.8 -0.2 -0.2 1.8 3.8 4.1 4.2 -0.5 -0.5 South Africa Sub-Sahara Middle East and North Africa Source: WEO – IMF (April 2010 projections) Tanzania’s Growth Outlook 135. The inadequate short rains in 2010/11 season have caused substantial reduction in hydro power generation in the third quarter (January _ March, 2011) and this may affect production in manufacturing, trade and repair and Small and Medium-Sized Enterprises (SMEs) in the first quarter of 2011. As indicated in the figure below, a similar decline in power generation in 2006, led to reduction of GDP growth to 6.7 percent from 7.4 in the preceding year. Agricultural production may also be affected negatively. In addition, the soaring oil prices exacerbated by the growing instability in the Arab World are expected to have a negative effect on economic performance. In line with these developments growth is likely to slow down to 6.8 percent in 2011. This calls for measures to address the dependence of hydro power generation and rain fed agriculture. 65 Figure 6: Actual and Projected GDP (2004-2015) Total GDP at current market prices GDP by activity at constant 2001 prices 8.5% 7.4% 7.1% 7.5% 7.4% 7.0% 6.7% 7.0% 6.8% 1.0% 32,293 28,213 24,782 20,948 17,941 2.0% 15,965 3.0% 36,965 5.0% 42,073 6.0% 47,575 6.0% 4.0% 8.1% 53,876 8.0% 7.8% 61,355 9.0% 70,000 60,000 50,000 T s h s . 40,000 30,000 20,000 10,000 0.0% B i l l i o n 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Year 136. The Government will continue to take initiatives to stimulate economic growth with measures in “Kilimo Kwanza” initiative and ASDP, whose implementation are expected to boost the overall performance of the economy in the medium term. Furthermore, as the global economy recovers gradually, and demand for exports improves, economic activities are expected to pick up, leading to improved performance of the economy. Against this background and on the assumption of successful implementation of economic policies; availability of favorable weather; stability in the power supply sector; and the fact that GDP has been growing at the rate of above 7 percent for the past five years (excluding the 2006 power shortage and 2009 crisis year), economic activities are expected to pick up in the medium term, with growth projected to pick up in the medium term to: 7.5 percent in 2012 and continue to grow, reaching 8.5 percent in 2015. Among strategies/policies to be implemented to support the growth in the medium term include the Five Year Development Plan framework, Kilimo Kwanza, ASDP, MKUKUTA II, and infrastructure development (DARTS, roads, railway, energy, and ports). 66 Sectoral Assumptions and the Medium Term Outlook (2011 – 2015) Agricultural Economic Activities 137. In the medium term, growth of the agricultural activity is expected to pick up to an average of 5.0 percent, mainly on the assumption that agricultural production will be motivated by the recovery of the world economy. Moreover, implementation of SAGCOT and Kilimo Kwanza programmes (such as road construction, agro processing, markets improvement and irrigation), initiatives to establish the Agricultural Development Bank and the current agricultural lending window at TIB are expected to boost agriculture performance in the medium term. Fishing activities 138. Following Government’s efforts to modernize fishing activities, increased demand for fish and fish products in both domestic and foreign markets, implementation of supply-enhancing sector policies, as well as curbing illegal fishing practices, domestic fish production is expected to rise substantially in the medium term. Fishing activities are projected to pick up and maintain growth rate of around 2.5 percent in the medium term. Industry and construction 139. These activities are poised for higher growth, projected to maintain an annual average growth rate of 9.6 percent in the medium term. Growth of the activity is expected to accrue from all its sub-activities, namely mining and quarrying, manufacturing, electricity and gas, water supply and construction. 140. Manufacturing: The sub-activity is expected to grow by 7.4 percent in 2011, down from 7.9 percent in 2010, mainly on account of power shortage which occurred between January and March 2011. In the medium term, growth of the subactivity is projected to pick up emanating from improved power supply, implementation of the Special Economic Zone programme, the expected increase in demand for manufactured export owing to the ongoing recovery from the global financial crisis, implementation of the SME policy including agro processing and the Tanzania Trade Integrated Strategy (TTIS) and other supportive trade policies. 67 141. Construction: The sub-activity is expected to maintain an annual average growth of 12.2 percent in the medium term, largely due to increased infrastructure developments, including roads and bridges, water supply projects, construction of power plants, shopping malls, commercial and residential dwellings as well as land development. Services 142. The services economic activity is projected to grow at an average of 8.7 percent in the medium term. This growth is expected to be driven by increased export promotion initiatives, improvement of standards and capacity of hotels, improvements and scaling-up of investments in transport and communication infrastructure. The activity will also be bolstered by expansion of education and health services, increased demand for financial intermediation in response to growth of other economic activities in the country, and sustained implementation of public service reforms. 143. Trade and Repairs: The sub-activity is projected to grow at 8.4 percent in 2011, from 8.2 percent in the previous year, and it is expected to grow at an average of 9.6 percent in the medium term. The projected growth rate will be largely attributed to increased export promotion initiatives, including SEZ, EPZ and concessional regional trading arrangements such as EAC and SADC; promotion of exports through the Export Credit Guarantee Scheme; improved business environment (facilitated through the BEST programme) and construction of new shopping centers. 144. Hotels and Restaurants: In the medium term, the activity is expected to grow at an average rate of 7.7 percent. This growth is attributed to an increase in the number of international tourists following recovery from the global financial crisis and government initiatives to promote domestic tourism and construction of new hotels. Tables below, summarize performance of economic activities and the projected outlook in the medium term. 68 Table 15: Real GDP Growth (Percentage) Projection4 Actual 2015 ECONOMIC ACTIVITY 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Agriculture, Hunting and Forestry 4.3 4.4 4.4 3.6 6.0 10.4 16.1 9.6 9.4 4.3 10.1 8.0 6.7 5.6 6.7 18.8 10.8 7.5 11.4 4.0 8.1 2.6 3.8 4.0 2.4 4.6 5.0 8.5 15.6 8.5 -1.9 6.2 9.5 7.8 9.5 4.3 5.3 19.2 11.4 7.3 6.5 5.0 8.5 3.7 4.0 4.5 2.4 2.9 4.5 9.5 10.7 8.7 10.9 6.5 9.7 8.1 9.8 4.4 6.5 20.1 10.2 7.0 6.7 5.5 8.8 3.2 4.6 5.1 2.6 3.4 5.0 8.6 2.5 9.9 5.4 6.6 10.5 8.5 10.0 4.5 6.9 20.5 11.9 7.1 7.0 6.9 9.0 3.1 3.2 3.4 2.3 3.5 2.7 7.0 1.2 8.0 8.4 5.6 7.5 7.2 7.5 4.4 6.0 21.9 9.0 6.8 4.4 7.1 6.7 3.2 4.2 4.4 3.4 4.1 1.5 8.2 2.7 7.9 10.2 6.3 10.2 8.2 8.2 6.1 7.0 22.1 10.1 7.0 6.5 7.3 6.9 3.5 4.1 4.2 3.6 4.1 2.6 8.0 2.9 7.4 7.1 5.3 10.8 7.9 8.4 6.1 6.8 18.8 10.3 6.8 5.4 6.7 6.7 3.4 4.3 4.4 3.5 4.9 2.3 9.2 3.8 8.9 8.0 4.8 11.8 8.5 9.5 7.2 7.5 19.0 9.9 7.1 5.6 7.4 7.5 3.7 5.0 4.9 5.1 5.5 2.0 9.5 4.4 9.4 6.7 5.4 12.2 8.6 9.6 8.0 7.9 19.0 10.0 7.4 4.0 7.5 7.9 3.8 5.4 5.4 5.1 5.8 2.4 9.8 5.2 9.6 6.1 5.5 12.4 9.0 10.0 8.4 8.2 19.2 10.7 7.5 4.3 7.6 8.0 3.8 5.8 5.6 6.5 6.6 3.3 10.3 5.3 9.8 4.9 8.3 13.7 9.4 10.4 8.7 8.6 19.2 12.3 7.9 3.8 7.7 8.4 4.0 7.4 11.8 6.8 14.9 7.3 15.3 7.5 11.0 6.1 8.7 7.1 9.1 6.9 8.6 7.6 9.6 7.9 9.8 8.3 10.0 8.8 10.2 7.4 7.4 6.7 6.8 7.2 6.9 7.4 7.8 6.0 5.8 7.1 6.7 6.9 5.8 7.6 6.1 7.9 6.0 8.3 5.7 8.8 5.4 7.4 6.7 7.1 7.4 6.0 7.0 6.8 7.5 7.8 8.1 8.5 Crops Livestock Hunting and Forestry Fishing Industry and construction Mining and quarrying Manufacturing Electricity, gas Water supply Construction Services Trade and repairs Hotels and restaurants Transport Communications Financial intermediation Real estate and business services Public administration Education Health Other social and personal services Gross value added before adjustments less FISIM Gross value added at constant basic prices add Taxes on products GDP at Constant 2001 market prices Source: Ministry of Finance 4 Projections as per FP and MACMOD exercise 69 Table 16: Share to Overall GDP (Percentage) Actual Projection ECONOMIC ACTIVITY 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Agriculture, Hunting and Forestry 26.2 19.2 4.8 2.2 1.3 20.8 3.2 7.8 1.5 0.4 7.8 43.3 11.4 2.6 4.3 2.1 1.7 9.6 8.0 1.5 1.5 0.7 25.8 19.0 4.7 2.1 1.3 21.2 3.5 7.8 1.6 0.4 7.8 43.3 11.5 2.7 4.2 2.3 1.6 9.5 7.9 1.4 1.6 0.6 25.7 19.0 4.7 2.0 1.2 21.0 3.4 7.8 1.7 0.4 7.7 43.8 11.6 2.6 4.2 2.5 1.6 9.6 8.2 1.3 1.5 0.6 24.6 18.4 4.0 2.2 1.4 22.0 3.3 8.6 1.7 0.4 7.9 43.6 11.8 2.3 5.0 2.1 1.7 9.0 8.1 1.4 1.6 0.6 24.1 17.8 3.8 2.4 1.4 22.3 3.3 9.0 1.8 0.4 7.9 43.9 12.1 2.3 5.1 2.1 1.8 8.8 8.0 1.4 1.6 0.6 21.4 16.3 3.3 1.8 1.3 21.1 2.2 9.4 2.1 0.4 7.1 47.7 14.2 2.2 4.9 3.3 2.0 9.9 7.4 1.8 1.4 0.6 20.7 15.8 3.2 1.7 1.2 21.3 2.1 9.4 2.1 0.4 7.3 47.9 14.4 2.2 4.9 3.6 2.0 9.8 7.3 1.7 1.4 0.6 20.1 15.3 3.1 1.7 1.2 21.6 2.1 9.5 2.0 0.4 7.6 48.0 14.6 2.2 4.9 4.0 2.1 9.7 7.0 1.7 1.4 0.5 19.5 14.8 3.0 1.6 1.1 21.8 2.0 9.6 2.0 0.4 7.8 48.2 14.8 2.1 4.8 4.4 2.1 9.6 6.7 1.7 1.4 0.5 18.9 14.4 2.9 1.6 1.0 22.0 1.9 9.7 1.9 0.4 8.1 48.3 14.9 2.1 4.8 4.8 2.2 9.5 6.4 1.7 1.3 0.5 91.7 -0.9 91.6 -1.0 91.6 -1.0 91.6 -1.2 91.7 -1.1 91.5 -1.2 91.2 -1.2 90.8 -1.3 90.6 -1.3 90.2 -1.3 90.7 9.3 90.7 9.3 90.6 9.4 90.4 9.6 90.6 9.4 90.3 9.7 89.9 10.1 89.6 10.4 89.3 10.7 88.9 11.1 100 100 100 100 100 100 100 100 100 100 Crops Livestock Hunting and Forestry Fishing Industry and construction Mining and quarrying Manufacturing Electricity, gas Water supply Construction Services Trade and repairs Hotels and restaurants Transport Communications Financial intermediation Real estate and business services Public administration Education Health Other social and personal services Gross value added before adjustments less FISIM Gross value added at constant basic prices add Taxes on products GDP at Constant 2001 market prices Source: Ministry of Finance 70 Table 17: Nominal and Real GDP (Actual and Projection) Tshs. Million Actual Calendar Year Projections 2008 2009 2010 2011 2012 2013 2014 2015 GDP at Constant 2001 market prices 14,828,345 15,721,301 16,828,563 17,975,951 19,319,775 20,819,133 22,502,626 24,425,317 GDP at Current market prices 24,781,679 28,212,646 32,293,479 36,965,263 42,072,696 47,575,115 53,876,448 61,355,430 Fiscal Year GDP at Constant 2001 market prices GDP at Current market prices Source: Ministry of Finance 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 14,315,097 15,274,823 16,274,932 17,402,257 18,647,863 20,069,454 21,660,880 23,463,971 22,865,041 26,497,163 30,253,063 34,629,371 39,518,980 44,823,905 50,725,781 57,615,939 Inflation 145. The food stocks from the 2009/10 crop season may keep food inflation on check in the coming months. However, going forward, food supply is expected to remain tight due to late and inadequate rains which are likely to result in lower than normal crop production. In addition, fuel prices have taken an upward trend in the recent past and likely to continue on account of instability mode in the Arab oil producing countries. Power rationing which started in late December 2010 is also expected to increase the cost of production in manufacturing and thus exert pressure on inflation. It is on this background that inflation is projected to increase by around 8.0 percent in June 2011. In the medium term, it should be possible to contain inflation in single digit on the assumption that monetary and fiscal policies will remain prudent and global commodity prices (especially oil prices) and exchange rates will stabilize. Other assumptions include prevalence of favourable weather conditions and improved transport infrastructure. Government Finance 146. The budget for 2010/11 includes plans to scale up spending on infrastructure projects and maintaining social gains in education and health etc. However, the current level of revenue collection is low, compared to the total resource needs for the country. This call for more efforts to increase efficiency in the tax system as well as reducing tax exemptions and looking for other sources of revenue (enlarging the tax base) such as reinforcing effort to collect the property tax. The ongoing tax 71 policy reforms, modern tax administration, National Identity Project, MKURABITA implementation, enforcement in non-tax collection measures are expected to increase efficiency and thus boost revenue. Increasing infrastructure investment in a sustainable manner will require not only mobilizing more resources, but also improving expenditure management to enhance efficiency. 147. In projecting fiscal data, (i.e. revenues, expenditures and financing), it was assumed that the current prudent macroeconomic policies pursued by the Government will continue to be implemented and that there will be a rebound in domestic economic activities, benefiting from the projected recovery in the global economy. It is also assumed that development partners will continue to support Government efforts. Revenues 148. In the medium term, emphasis will be placed on strengthening domestic resource mobilization by widening the tax base and bringing the informal sector into the tax net. Given the above assumptions, revenue is projected to edge upwards from the current level of 15.2 percent of GDP in 2009/10 to 18.0 percent in 2015/16. In the medium term (between 2011/12 and 2015/16), revenue collection will average 17.5 percent of GDP. Expenditure 149. Development spending will target and seek to significantly remove infrastructural bottlenecks, especially through improving supportive transport and communication infrastructure (roads, railway, ports/harbours and telecommunication); irrigational infrastructure; and reliable and affordable power supply, consistent with the Five Year Development Plan Framework, as well as the attainment of targets of Vision 2025. 150. The 5-Year plan has taken into account the declining trend in overall resource envelope and recognizes the need to refocus expenditure on few key priority areas. Thus, the overall expenditure is projected at 28.1 percent of GDP in 2011/12. Wages 72 and salaries are projected at about 6.0 percent of GDP consistent with the need to expand public services, particularly social services. Expenditure on goods and services will focus only on priority activities needed to facilitate delivery of adequate public services. More resources will be allocated to locally financed development expenditure, from 4.2 percent of GDP in 2011/12 to 5.5 percent by 2015/16. Financing 151. In the medium term, the government will continue to rely primarily on concessional borrowing to finance the scaling up of spending to address critical infrastructure gaps. Borrowing decisions will be made within the framework of a sound debt management strategy and a public investment management process to help maximize returns on investments. The government will cautiously evaluate and use non-concessional borrowing for key infrastructure projects designed to ensure efficiency gains. The projects to be implemented include those aimed at increasing capacity for energy generation, and construction and rehabilitation of roads and railways that are critical for improving the integration of transportation networks within the country and in the region. It is also expected that in the medium term, more infrastructure projects will be developed through the Public Private Partnership (PPP) arrangements. 152. Deficit (excluding grants) is projected in the range of 10-12 percent of GDP in the medium term. With grants being estimated to cover between 5 and 6 percent of GDP and domestic financing 1 percent of GDP, the government will need to borrow between 4 and 6 percent of GDP from foreign sources (including non-concessional sources) each year for the medium term. This is deemed to leave debt levels within sustainable levels. 153. It worth noting however that the country’s dependence on donor resources poses a risk to the budget. The large amount of contingent liabilities, both outstanding and those in the pipeline, represent a significant risk to the government budget. There is a risk associated with increasing borrowing without scaling up investment particularly in infrastructure development. In overcoming these risks, the 73 government will diversify the financing sources and will increase market capacity to help absorb such shocks. Furthermore, the government will continue to strengthen the overall public financial management in order to control the scale of explicit contingent liabilities. Money and credit development 154. Consistent with the projected GDP growth and inflation targets, M3 is projected to grow annually at 19.0 percent in 2011/12; 18.6 percent in 2012/13; and 18.1 percent in 2013/14. The ongoing second generation financial sector reform is expected to improve further financial intermediation and accessibility to financial services. 155. Growth of credit to private sector is expected to continue increase gradually consistent with the expected increase in demand for money to meet the ongoing expansion of economic activities. In this respect, annual growth of credit to the private sector is projected at 22.2 percent by the end of June 2011 from 16.3 percent recorded in June 2010. The credit is expected to continue picking up in the medium term. External Sector 156. In the year 2010/11, the current account balance (excluding official transfers) is estimated to record a deficit of 11.5 percent of GDP, slightly higher compared to 11.2 percent of GDP in 2009/10 largely due to anticipated increase in imports of goods and services that will outweigh the effect of the increase in exports. However, the ratio is projected to stabilize at an annual average of about 10 percent of GDP in the medium term, largely due to higher projected growth of exports relative to imports. 157. The ratio of export of goods and services to GDP in 2010/11 is projected at 29.5 percent. In the medium term, the ratio of exports of goods and services to GDP is projected to remain high at an average of 35.1 percent. 74 158. The ratio of import of goods and services to GDP in 2010/11 is estimated to increase to 40.8 percent from 36.6 percent in the preceding year largely due to rebound of prices particularly of oil in the world market. In the medium-term, the ratio is projected to stabilize at an average of 45.5 percent, consistent with the anticipated GDP growth and price movements in major sources of Tanzania’s imports. 5.0 CONCLUSION 159. The Government is determined to ensure that all what has been said above will be implemented successful in collaboration with the private sector and development partners in order to achieve the desired targets of MDGs, Vision 2025 and MKUKUTA II. If all parties play their roles effectively and efficiently, it is possible to achieve the desired short, medium and long term goals as prescribed under the Five Year Development Plan. 75