Tanzania - The challenge of reforms : growth, incomes and welfare (Vol. 3 of 3) : The economy and welfare in Zanzibar

Report No. 14982-TA Tanzania The Challenge of Reforms: Growth, Incomes and Welfare (In Three Volumnes} Volume III: The Economiy and VVelfare in Zanzibar May 31, 1996 Countrv Operations Division Eastern Africa Department Africa Re-,ion Document of the World Bank  ACRONYMS AND ABBREVIATIONS EPZ Export Processing Zone ERP Economic Recovery Program FERP First Economic Recovery Program GOZ Government of Zanzibar HRD Human Resource Development SERP Second Economic Recovery Program ZIPA Zanzibar Investment Promotion Agency ZSTC Zanzibar State Trading Corporation  TANZANIA THE ECONOMY AND WELFARE IN ZANZIBAR Contents A. OVERVIEW .................................................1 Background .................................................1 Summary: Recent Economic Status and Policies .......................................2 Summary: Income, Inequality and Poverty ................................................2 B. MACROECONOMIC PERFORMANCE .................................................4 Sectoral Issues .................................................6 External Balance .................................................9 Intra-State Balance (Balance of Trade with the Mainland) ....................... 11 Fiscal Balance ................................................ 12 Investment and Savings ................................................ 14 Prices ................................................ 14 C. INCOME, INEQUALITY AND POVERTY ................................................ 15 Expenditure Levels ................................................ 15 Inequality ................................................ 16 Poverty Measures ................................................ 16 Sources of Income ................................................ 17 Access to Safe Water and Facilities ................................................ 19 D. CHARACTERISTICS OF THE POOR IN ZANZIBAR ................................................ 20 Demographic Characteristics ................................................ 20 The Position of Women ................................................ 20 Distribution of Assets ................................................ 21 Land ................................................ 22 Livestock ................................................ 22 Health, Education and Literacy ................................................ 23 E. CONCLUSIONS ................................................ 24   Tables Table 1: Real GDP Growth by Period .......................................................6 Table 2: Ratios of Selected Macroeconomic Variables to GDP ........................... 11 Table 3: Fiscal Balance ...................................................... 13 Table 4: Zanzibar: Investment and Savings ....................................................... 14 Table 5: Inflation ....................................................... 14 Table 6: Expenditure Levels in Zanzibar and Mainland, 1993 ............................. 16 Table 7: Gini Coefficients for Zanzibar, 1993 ...................................................... 17 Table 8: Family Size and Poverty, 1993 ...................................................... 17 Table 9: Demographic Characteristics, 1993 ....................................................... 20 Table 10: Incidence of Female-headed Households, 1993 ................................... 20 Table 11: Expenditure in Shillings by Household Type, 1993 ............................. 21 Table 12: Percentage of Individuals over 14 Who Own Small Assets, 1993 ....... 21 Table 13: Availability of Land, 1993 ...................................................... 22 Table 14: Ownership of Livestock and Cattle, 1993 ............................................ 23 Figures Figure 1: Output Growth Trend GDP in 1976 Prices ............................................4 Figure 2: Real GDP Growth Rates Agriculture vs. Trade .....................................7 Figure 3: Zanzibar: Import and Export Volume ...................................................9 Figure 4: Zanzibar: External Balance, 1981-89 ....................................................9 Figure 5: Expenditure per Adult Equivalent ....................................................... 16 Figure 6: Household Economic Structure ...................................................... 18 Figure 7: Households less than 1 Km from a Health Facility or Primary School, 1991 ...................................................... 19 Figure 8: Literacy by Gender and Age Cohort .................................................... 23   THE ECONOMY AND WELFARE IN ZANZIBAR A. OVERVIEW Background 1. This separate economic overview and poverty assessment for Zanzibar is presented for various reasons. First, it was requested by the Zanzibar Government and supported by the Union Government. Second, the distinct history, social and economic structure of Zanzibar may generate policy issues different from those of the Mainland. The economic data available to us were extremely limited and often inaccurate. Thus, the following analysis on the macroeconomy should be read with caution. The data used in the household analysis were more reliable. The main source was the 1993 HRD Survey, which covered 231 households and 1,359 individuals in Zanzibar, although reference is also made to the published results of the 1991 Zanzibar Household Budget Survey.' 2. Zanzibar is made up of two islands-Unguja and Pemba-which lie adjacent to the North East coast of mainland Tanzania, in the Indian Ocean. Its population was estimated at about 770,000 in 1994. The territory has historic links to the Arab trading culture of the Indian Ocean, particularly the Omani Arabs. These are apparent in the form of Kiswahili spoken and in the Muslim religious heritage. Zanzibar is more urbanized than the Mainland, with 43 percent of all households residing in urban areas, compared to 31 percent in mainland Tanzania. Its population density, at 260 per sq km, was 10 times that of the Mainland in 1988. Despite declining world prices, sales of cloves still made up at least 70 percent of the value of exports in the years up to 1994.2 The Zanzibar clove plantations once made Zanzibar the leading producer in the world, but it now ranks fourth behind new competitors, such as Brazil. Zanzibar has a separate constitution of 1985, which was amended in 1992 to allow for multi-party politics. Under the constitution, Zanzibar, while represented in the National Assembly of the Union and its Government, has its own President, Cabinet, Assembly and Administration for non-union affairs. See "Zanzibar Revolutionary Government, Household Budget Survey", Volumes I-IV. Department of Statistics, Ministry of Planning, Zanzibar, 1991. Unless otherwise stated, all statistics presented in this section are drawn from the HRD Survey. 2 Economist Intelligence Unit, Country Profile of Tanzania and the Comoros, 1994.  2 The Economy and Welfare in Zanzibar Summary: Recent Economic Status and Policies 3. In the decade up to 1986, the economy contracted by a quarter in real terms. Policies of state control in all sectors of the economy contributed to the decline, but Zanzibar has also been beset by an extraordinary decline in the terms of trade for its main export crop, cloves, and a continuing fall in demand. This was the background to the First Economic Recovery Program (FERP), adopted in 1988, and the Second Economic Recovery Program, covering the years 1991-94. The immediate aims of both packages have been to reverse the decline in economic growth and to improve the fiscal and external deficits. The second program, however, places more emphasis on structural reforms to increase the role of the private sector in production and marketing. 4. Since the FERP, the average annual growth rate of GDP has been 3.5 percent, implying a 0.4 percent growth in per capita income. This aggregate figure masks large variations among sectors, with agriculture declining by an average of 3.5 percent a year over the period, and commerce growing by an average of 12.7 percent. Some of the poor performance in agriculture may be related to the continuing presence of monopoly purchasing agents in the market for major export crops. By contrast, the Government has worked to encourage new investment through the Zanzibar Investment Promotion Agency (ZIPA) and the creation of export processing zones. 5. Future investment in the economy will be limited unless the level of domestic savings can be increased. Zanzibar started out with a surplus on the recurrent budget in 1989, but a failure to maintain fiscal discipline in the face of declining real revenue flows and the granting of special emoluments in 1992 led to a large recurrent budget deficit in that year. Deficits continued in the next two years, although at a lower level. Given the failure to generate a surplus on the recurrent budget, external aid has been critical to supporting the current level of domestic investment, but this is not sustainable over the coming years. An attempt to improve domestic revenue mobilization and to expand the tax base is now vital. 6. Dissavings in the public sector have leaked into the current account, which has moved from a position of surplus in 1989 to large deficits. The rapid decline in export values has obviously left its mark on a worsening balance of trade, but an annual growth in the real value of imports of 23 percent a year from 1989 to 1994 is also to blame. Moderate real growth in receipts from services and transfers has not been sufficient to offset the deterioration in the trade balance. Summary: Income, Inequality and Poverty 7. In 1993, expenditure per capita was T Sh 168,324 or US$306 at an exchange rate of T Sh 550 to the dollar. This compares to a GNP per capita in low and middle-income economies in Sub-Saharan Africa of US$520.3 Comparison with the 1991 Household 3 World Bank, World Development Report, Washington D.C., 1995.  The Economy and Welfare in Zanzibar 3 Budget Survey suggests that standards of living have increased over the period 1991- 1993.4 The spatial distribution of income shows that urban households have higher expenditure levels than rural households, and that households in the "coral" areas, in turn, have higher expenditures than those in "non-coral" areas.5 The Gini coefficient for Zanzibar is 0.3, implying that the islands have substantially lower inequality than the Mainland, probably because of their compact and homogenous land area. 8. It is difficult to deternine the incidence of poverty in Zanzibar in the absence of an official poverty line. The poverty line for the Mainland cannot be simply applied to Zanzibar, given that prices and the costs of household consumption are different. For a poverty line of T Sh 114,187 for the Mainland, the incidence of poverty is 41.6 percent. To get the same incidence of poverty in Zanzibar, the poverty line would have to be T Sh 180,000. This means the average price differential between the Mainland and Zanzibar would have to equal 57.6 percent for the incidence of poverty to be the same on the island as on the Mainland. The fact that households in Zanzibar spend lower shares of income on food suggests that the incidence of poverty is probably lower. A review of living conditions shows that although one-half of Zanzibar's households are within 1 km of a primary school, the percentage was much lower for households in non-coral areas. 9. Poverty is related to family size, and households of 9-10 people are six times as likely to be poor as families of 4-6 people. Reliance on crop production is also a determinant of poverty, and participation in the non-agricultural economy is a route to higher income. Farming households who also have a non-agricultural source of income are found to have significantly higher expenditures than farming households who do not. In addition, households in the coral economy gain from opportunities for fishing. 10. Although the Government has made progress in reaching its target for universal primary education within 5 km of all households, enrollment rates declined from 80 percent in 1970 to 68 percent in 1995. Literacy is low, with just 59 percent of men and 41 percent of women older than 14 able to read and write, compared to 83 percent and 64 percent respectively on the Mainland. 11. Given the recent trends in economic performance, the main reforms for future growth and poverty reduction would need to: (i) improve revenue mobilization and enforce fiscal discipline; (ii) liberalize marketing institutions for export crops; (iii) develop luxury tourism; (iv) direct public expenditures for health and education to non- coral areas to reduce inequality and poverty; and (v) adopt a goal of higher enrollment and completion rates in primary education. 4 However, precise comparisons of consumption levels are not possible because of differences in survey design. The term "coral" and "non-coral" derive from the ecology of the two distinct rural areas.  4 The Economy and Welfare in Zanzibar Figure 1: Output Growth Trend: GDP in 1976 Prices 1000 4 - - - - - - - - - - - 900- TotaIGDP - 400- 20-600-T----- ------T-- 100 - Manufacunng 0 - i i-.- a t rv-- r - - - - - - - - - (D X 0 N 'IT (D 0D 0 SN t N N CDOD CD co CD 0) a) 0) 0) 0x 0) 0) 0 0) 0> ) 0) 0) 0) --total --agriculture manufacturing trade B. MACROECONOMIC PERFORMANCE6 12. Figure 1 presents the historical trend of economic growth in Zanzibar. In the decade up to the mid-1980s, the Zanzibari economy contracted by a quarter in real terms. The policies of state planning and central control introduced by the Zanzibar Revolutionary Government from the 1960s contributed to the decline. Zanzibar has also been unfortunate in the degree to which the external terms of trade and international demand for the main export crop, cloves, has fallen. The Zanzibar Government took initial steps toward deregulation by adopting an import liberalization policy in 1984. In 1988, the Government launched the FERP. The immediate aims of the program were to arrest the decline in economic growth and address the worsening fiscal and external deficits. In 1992, the Government launched the successor to FERP, with the Second Economic Recovery Program (SERP) covering the years 1991-94. This provided for a continuation of the Economic Recovery Program (ERP) policies, with a progressively greater reliance on market mechanisms complementing the reforms of the Union Government. Not much reform of the public enterprise sector has been undertaken, although state subsidies to ailing public enterprises have ended. Efforts to lure additional private investment began with the Zanzibar Investment Act No. 2 in 1986. The Zanzibar Investment Promotion Agency was established in 1991 to implement the Act. 6 Most of the following section is drawn from Joseph Semboja, "The Zanzibar Study: A Report Preparedfor the World Bank", (1995) Economic Research Bureau, University of Dar es Salaam.  The Economy and We/fare in Zanzibar 5 13. As indicated in Figure 1, steady recovery of the Zanzibari economy began in 1984. In the early period of the recovery (1984-88), a growth rate of about 3 percent per annum was generated by agriculture and trade sectors. During this period, the agricultural sector remained dominant, accounting for 58 percent of GDP, and exports of cloves represented the most important source of cash income. The traditional dominance of agriculture began to erode in the late 1980s as the sector declined by an average of 3.5 percent per annum. As a result, the agricultural sector's share of GDP decreased to 44.8 percent between 1989 and 1994. The decline was mainly due to decreasing prices and decreasing demand for cloves in the world market.7 14. In contrast to the decline in agriculture, the trade (commerce, hotel and restaurant) sector grew at an accelerated rate of 12.7 percent per year between 1989 and 1994. The share of the trade sector in GDP increased from 17.3 percent in 1984-88 to 26.5 percent in 1989-94. In other minor sectors, the growth of manufacturing has been stagnant over time, with GDP share slowly declining from 5 percent in 1984-88 to 2 percent in 1989- 94. The poor performance of manufacturing has been attributed to the shortage of foreign exchange to import raw materials and other inputs, the lack of trained labor, and the limited domestic market. The decline also reflects the quality of the data, which need to be updated to cover emerging activities, such as garment exports. With import liberalization, competition from imported products also hampered the growth of manufacturing. Output from construction has been erratic from year to year, but since the FERP, the sector has been growing by an average of 35 percent per year, now constituting over 8 percent of the economy. This represents construction of roads, bridges and buildings, due in part to tourism. Table 1 summarized the changes in the sectoral composition. 15. What is interesting about the change in the sectoral composition of GDP since the mid-I 980s is the counterbalancing nature of the growth patterns between agriculture and trade/commerce, which together account for more than two-thirds of GDP. Figure 2 shows the historical trend of growth rates for the two sectors. As the wide swings in growth rates indicate, the aggregate figures mask considerable variation in outcomes between sectors. The graph also reveals a counterbalancing pattern of growth between the two sectors, suggesting that fast growth in trade may reflect the efforts to compensate bad years in agriculture. The trade-off between the two sectors in growth became a pattern since the mid- 1980s, while the growth rates of the two sectors moved in the same direction in the earlier period. Thus, it seems that the liberalization policy allowed the trade sector to become an alternative, rather than a complement, to agriculture. At the moment, the trade sector appears to be growing at the cost of agriculture or to safeguard the economy from deteriorating from agricultural slumps. Whether such a growth pattern is temporary is yet to be seen. Further studies are necessary to improve the quality of the data and to understand the sectoral interactions and implications for overall growth. 7 From a peak of $8.89/kg in 1983, Zanzibari clove exports realized only $1.10/kg in 1992. See Economist Intelligence Unit, EIU Cotntry Profile: Tanzania and the Comoros, 1994-95.  6 The Economy and Welfare in Zanzibar Table 1: Real GDP Growth by Period 1978-83 1984-88 1989-94 Average Average Average year year to year year to year to year growth rate growth rate growth rate In 1976 Prices GDP (T Sh million) 689 (-5.4 %) 743 ( 3.9%) 865 ( 3.5 %) GDPpercapita(T Sh) 1,348 (-8.2 %) 1,212 ( 1.0%) 1,211 ( 0.4%) Sector Share (percent) Agriculture 48.8 (-6.2) 58.4 ( 7.9) 44.7 (-3.5 ) Manufacturing 3.5 (30.6) 5.0 (-8.6) 2.3 (-6.1 ) Trade 18.0 ( 0.5) 17.3 ( 3.1) 26.5 (12.7) Public administration 17.2 ( 1.5 ) 14.5 (-1.0) 12.5 ( 2.0) Construction 4.2 (-5.4 ) 2.8 ( 9.3) 8.4 (35.0) Source: Government ofZanzibar. 16. The average annual growth rate in GDP at factor cost since the implementation of ERP was 3.5 percent. With the rapidly growing population in Zanzibar, this implies only a 0.4 percent growth in GDP per capita. Thus, the level of real per capita GDP was virtually unchanged from the pre-reform period. Table I reports that the level of real per capita GDP averaged T Sh 1,212 during 1984-88, while it declined slightly to an average of T Sh 1,211 during 1989-94. Thus, despite a decade marked by the steady economic growth, real output per capita has not yet recovered to the 1970 level (over T Sh 2,000). On the one hand, this performance is below ERP expectations. On the other hand, it can be said that ERP has stabilized the growth trend and guided the structural shift towards the fast-growing commercial sectors through liberalization policies. Sectoral Issues 17. Agriculture. The poor performance of agriculture reflects both the declining world price of cloves and the marketing system that operates for major export crops. While the cloves industry is not a dying industry, there must be serious doubt, based on recent developments, about its role as a leading source of growth and development. There is no indication that the decline in the prices of cloves will reverse. Cloves have limited use as spices, and there are no emerging by-products that could lift demand. Zanzibar's plantations are quite mature, and would have to compete with new ones coming from Asia and South America, as well as with those that may be developed on the Mainland. With regard to export marketing, deconfinement in the export sector has not been extended to the major export crops. The Zanzibar State Trading Corporation (ZSTC) still has a monopoly over cloves, copra and chilies. Although the corporation receives no public subsidies, any inefficiency in marketing represents a tax on the sector which is embodied in lower producer prices. It is estimated that producer prices over the period 1989-93 constituted 34-63 percent of export proceeds, implying both pressure to  The Economy and Welfare in Zanzibar 7 Figure 2: Real GDP Growth Rates Agriculture vs. Trade 50 - tg30 ----- ---A ---- ---- ---------t ---- --- C, 20 - - - 1 --1 -- N - --- -- oO 0) 0) 0, 0) 0) 0 ) ) 0) 0) 0) - - - total - ---agriculture trade generate revenue and inefficient parastatal institutions. Although the secular decline in the terms of trade for cloves (which has not been fully offset by devaluation) suggests that real agricultural earnings will fall, reform of marketing institutions would contribute to mitigating the trend. In the medium and longer term, the ongoing search for other sources of growth, such as tourism, is important. 18. Industry. Up to 1995, 198 projects had been approved by ZIPA and US$55 million had actually been invested. Fifty-one percent of invested funds are in the area of tourism. It is estimated that the projects will create 2,376 permanent jobs. In addition, since 1992, the Government has allowed the creation of export processing zones (EPZs) for industries which are export oriented, along the model of Mauritius. The first EPZ has been established at what was a small-scale industrial complex, with private operators leasing out existing under-utilized facilities. Eight firms are now involved in the production of garments for export. 19. Tourism. Zanzibar's tourist resource base is in its beaches and marine habitat as well as its cultural heritage and historical sights. Both Unguja and Pemba Island have extensive beaches with "creamy surf' which are largely unused. Zanzibar is described as "a coral island of incandescent green" rising out of a "sapphire sea", with attractive islets and coral reefs. Pemba Channel has a rich marine habitat, which is well known for From i. Semboja, "The Zanzibar Study: A eport Prepared for the World Bank", Economic Research Bureau, University of Dar es Salaam, 1995.  8 The Economy and Welfare in Zanzibar fishing and sport diving. The cultural sights date back centuries and relate to Zanzibar's cross-cultural links and its position as a trading post. Stonetown's distinctive architecture, for example, has attracted attention among tourists. For its proven tourist resources, Zanzibar fits into the Southern zone of the overall potential tourist zones of Tanzania. However, Zanzibar needs tourist services and related facilities. Based on recent surveys, Zanzibar has close to 70 hotels, lodges and guest houses, about 15 restaurants outside hotels, about 30 seaport operators, an airport and two airstrips, as well as facilities for inland transport operators. The current level and quality of facilities is inadequate, though there are plans to change this. Investments in tourism account for 59 percent of total recent private investments. The sector has also benefited from liberalization policies, including exchange rate reforms, trade liberalization and access to inputs from abroad, price decontrol and reduction in bureaucratic procedures. Other efforts to develop the sector include the Zanzibar Integrated Land Use Plan, which has demarcated zones for tourist development; the Zanzibar Commission for Tourism, charged with responsibility for promoting the tourist industry; and Zanzibar Stone Town Conservation and Development Authority, which is responsible for conserving Stonetown. 20. The number of tourists per annum grew more than seven-fold from 8,967 in 1984 to 68,597 in 1994. Tourism has benefited from devaluation, foreign exchange deregulation and trade liberalization. However, the official estimates of income from tourism have not been rising as fast as visitor numbers. This is partly because the number of bednights sold has not increased as much, and visitors tend to be on low budgets. Recently, foreign firms started mass tourism, but the payments are often made outside Zanzibar. 21. The challenge in the next decade will be to market Zanzibar's natural potential in a way that recoups more income. Among the major issues that need to receive attention in developing the tourist sector are: (i) marketing of services; (ii) improvement in infrastructure, including roads, telecommunications, ports and airports, sanitary services and water supply;9 and (iii) information and interpretative services. Also, because of the high content of marine habitat, marine life and cultural sites, Zanzibar's tourist resource base is fragile and susceptible to environmental factors. Recent workshops show the awareness of the authorities about factors that will help gain the most benefit and acquire a sustainable tourist industry. These include (i) managing the flow of users to contain pressure on resources (ii) involving local communities in planing to resolve competition for resources between foreign and local users, and (iii) ensuring training for service providers and maintaining high quality of facilities and services to attract fewer, but higher paying, tourists. United Republic of Tanzania: Zanzibar Tourism Infrastructure Project, 1996.  Volume Index (1981=100) US$ million (in current prices) mi O o o 0o o o o m C C) C C) C) CI C) ' -o c) 1981 = 11981 1982 .. .1.2_- - VQ < n 1982 1982 . - --~~~ I _ o