RESTR I CTED FILE CAPY Report. No. AE-26 This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION THE ECONOMIC DEVELOPMENT AND PROSPECTS OF TANZANIA (in four volumes) VOLUME I THE MAIN REPORT May 22, 1972 Eastern Africa Department CURRENCY E4UIVALENTS 1 Tanzanian Shilling U.S.$0.14 1 U.S. Dollar =h 7.14 This report is based on the findings of a mission which visited Tanzania during August/September 1971. The mission consisted of the following: Messrs. Iyle M. Hansen (aission Chief); Pieter Bottelier (general economics); John Cleave (agriculture); Andrew Hayman (tourism); Esref Erkmen (power); Raimundo Guarda (consultant on housing and urban development). TABLE OF CONTENTS VOLUME I THE MAIN REPORT THE ECONOMIC DEVELOPMENT AND PROSPECTS OF TANZANIA Page No. BASIC DATA SUMMARY AND CONCLUSIONS ....................... INTRODUCTION AND BACKGROUND ................... General .....................................1 Political Conditions and Socio-Economic Goals .1 Tanzania's Socialist Philosophy ..........2 Ujamaa Villages ...............................3 Relations with Zambia and East African Community Partners ..........................4 The Asian Community ...........................4 Private Investment ............................4 Capacity for Planning and the Decentralization of Government ...............................5 RECENT ECONOMIC DEVELOPMENT ...................7 Introduction .......................... . 7 Overall Growth of the Economy ............... 7 Investment ............................ 8 The Pattern of Investment ................ 9 Consumption and Saving ........... .. ........... 10 Government Capital Expenditure and Its Financing ....... ........................ 11 Parastatal Investments and Their Financing .... 13 Tan-Zam Railway ................ ............... 14 Recurrent Government Revenue and Tax Policies . 14 Government Recurrent Expenditure .............. 15 Balance of Payments ............ .. ............. 16 External Reserves ............... .............. 17 Exports and Their Composition ................. 17 Terms of Trade ................. ............... 18 Money and Credit ................ .............. 19 Prices, Cost of Living ........... .. ........... 20 Employment, Wages, Productivity ............... 21 Income Distribution ............ .. ............. 22 TABLE OF CONTENTS (Cont'd) Page No. III. SUMMARY REVIEW OF SELECTED SECTORS .... ......... 24 Agriculture .................................... 24 Industry ........ ............................... 26 Transport ................................... 28 Education ..................................... 29 Water and Sanitation ........................... 30 Urban/Regional Development and Urban Housing ... 31 Tourism . , ......... 32 Power ......... ................................. 33 Health ......... ................................ 34 IV. FUTURE PROSPECTS ............................... :35 The Rate of Investment ......................... 35 Investment, Savings and Growth .... ............. 36 Public and Private Investment .... .............. 36 Financing Public Investment .... ................ 37 External Assistance ............................ 37 Balance of Payments ............................ 38 Resource Gap Projections and the Need for Export Promotion and Diversification .... ..... 40 Creditworthiness ............................... 42 V. STATISTICAL APPENDIX ........................... 44 llap ANNEXES I-III (in VOLUME II) AN1JEX I Agriculture and Rural Development ANNEX II Tourism ANNiEX III Urban Development and Housing ANNEX IV (VOLUME III) Water Supply and Sewerage Sector VOLUME IV A PROGRAM OF PREINVESTMENT STUDIES Tourism; Power; Urban Development and Housing BASIC DATA A Areas 937,062 sq. kns. (including 53,L83 eq. kms. of water area) Population: (1971) 13.2 million Rate of Growth: 2.7 percent p.a. Population density: 15 persons per square km. (land area) Average life evpectancy at birth: 41 years Political Statuss Indeendent since December, 1961 Uhion with Zanzibar since April, 1964 Member of Commonwealth and East African Community National Income in current prices at factor cost (1970): Total ONP Sh 8205 million Total GDP Sh 8232 million Per capita GNP Sh 636 (=US$89) Contribution of subsistence sector to Nationsl Income about 29 percent Anmual rates of growth in real terms 1964-1970 trend 1969 1970 Total GDP 5.4% 1.4% 5.2% Monetary GDP 6.0% 3.5% 5.9% Monetary agriculture 3.6% 7.9% 3.4% Non-Monetary agriculture 2.7% -5.5% 3.6% Manufacturing 12.9% 10.8% 6.2% Construction 14.1% -6.2% 7.3% Per capita GDP 2.7% -1.3% 2.5% Per capita consumption 4.0% 1.4% 4.8% Private consumption 3.5% 0.5% 4.9% Relative sector contribution to GD? 1964 1970 Agriculture 49 ba Manufacturing 5% 8% Mining 2% 2% Construction 3% 5% Transport, storage and commanications 6% 8% Al1 other sectors 35% 37% Percentage of Monetary GDP at current market prices 1964 1970 Gross capital formation (monetary sector) 11.1% 22.2% Total consumption ( " " ) 80.3% 84.2% Private consumption ( " t ) 66.7% 68.3% Government consumption ( " " ) 13.6% 15.9% Exports of goods and services 39.7% 33.2% Imports of goods and services 35.0% 38.6% Tax revenue 13.3% 19.6% A1 After this Report was written the Government of Tanzania published a revised series of national accounts statistics covering the period 1964-70. Most revisions are minor and do not conflict with the conclusions of this Report. The revised statistics will be included in the next Bank Economic Report on Tanzania. Public Finance (St? million) 1963/64 1971/72 Central Government current revenue 718 1,823 current expenditure 709 1,725 Surplus on Current Budget 9 100 capital expenditure 145 768 Externally financed portion of central Government capital expenditure (excl. Tazara) 36% 49% Money and Credit (end of month) (Sh million) June June 1970 1971 Total money supply T1,49 1 Time and savings deposits 741 855 Domestic credit 1,134 1,712 Foreign exchange 505 517 Balance of Payments (Sh million) 1968 1969 1970 Merchandise exports 1,606 1,583 1,675 Merchandise imports 1,836 1,738 2,315 Net invisibles 21 65 60 of which net factor income -28 -21 -50 Balance on current account -132 -11 -503 Commodity concentration of exports Sisal 10% 10% 10% Cotton 18% 15% 14% Coffee 16% 16% 18% Diamonds 8% 11% 9% Cashew nuts 7% 7% 7% External Public Debt (US $ thousands) December December 1968 1969 Total debt outstanding T,nnzania debt 212.1 276.9 One-third of EACSO debt 70.2 72.1 Total debt service Tanzania debt 9.0 15.8 One-third EACSO debt 11.4 5.4 Debt service ratio 7.1% 6.9% External Reserves December December December 1969 1970 1971 Total value (including SDR's and IMF gold branche; in US $ million) 80.2 65.0 59.9 Months of commodity import 4.8 2.8 n.a. Selected Social Indicators 1960 1967 1970 Birth rate (per 1,000 population) 47 47 1) Death rate (per 1,000 population) 22 20 1) Infant mortality (per 1,000 live births) 225 165 Maternal mortality (in clinics, per 1,000 live births) 4.7 2.7 Population under 15 years old (percentage of total) 44 Population in towns of more than 10,000 inhabitants (percentage of total) 4.0 5.1 5.7 1) Population per hospital bed Dar es Salaam 265 252 2W4 Rest of country 935 896 810 Population per dispensary 10,000 9,670 9,250 Population per licensed doctor Dar es Salaam 1,400 1,550 Rest of country 43,000 34,000 Primary school enrolment (perceiitage of age group entering first grade) 47 Secondary school enrolment (percentage of age group enter- ing first year of high school) 2.5 Total enrolment adult education programs 750,000 Average annual cash income of male wage earners (US$) 45o 576 Percentage of senior and middle grade civil service posts held by nationals 27 73 86 1) estimate SUMMARY AND CONCLUSIONS 1. Tanzania has experienced a slowdown in economic growth in recent years in spite of an increase in investment. Production in nearly all sectors is behind the targets of the Second Five-Year Development Plan (1969-74). This is partly due to the pattern of investment which has shown a heavy concentration in social and economic infrastructure, including a number of large transportation projects serving neighboring landlocked Zambia, which needed an alternative outlet to the sea following Southern Rhodesia's unilateral declaration of independence. It is expected that these projects will eventually bring commensurate benefits for the Tanzanian economy but the gestation period is likely to be long. During the first two years of the Second Plan the economy grew slightly faster than half the target growth rate of 6.5 percent. It is expected that economic growth during the remainder of the Plan will continue to be below this target. 2. The slow growth of agricultural exports (representing about 80 per- cent of total exports) in combination with rapidly growing imports of capital equipment and intermediate goods has put the balance of payments under severe strain. By the end of 1971 external reserves had fallen to the equivalent of 8 weeks' imports in spite of the fact that net medium and long term capital inflows continued to exceed current account deficits. The fall in reserves was attributed to private capital flight, unrecorded imports and to a change- over from credit to cash payments for imports by the State Trading Corporation (STC). The Government has taken appropriate remedial measures. Reserves have improved during the first quarter of 1972. 3. The slow growth of production and the low profitability of many state enterprises led to a shortfall of national savings. The Government was quick to realize the need for a reduction in public sector spending. The development budget of most Ministries was cut during the second year of the Plan while credit restrictions had the same effect on parastatal in- vestment. 1971/72 budget appropriations for capital expenditure are about 10 percent below the actual level of the preceding year. Defence appropri- ation, however, increased siRnificantly. A shortage of savings is likely to remain a constraint on economic development for some years. Hence the need for increased savings, particularly in the public sector, which, following the nationalization of most important industrial and commercial companies, is chiefly responsible for the mobilization of savings and the allocation of investible resources. To increase public savings will require tighter control of non-development recurrent expenditure, and some increase in the profits of parastatal operations. Although the tax rate is already high, additional taxation may be necessary to maintain a stable investment rate of about 19 percent of monetary GNP (at market prices). 4. Since the Arusha declaration of 1967 which was an important de- claration of socialist principles, private sector investment has dropped sharply as was exnected. The Government now owns or controls nearly all the - ii - important industries, banks, insurance companies, transport companies, hotels, trading companies, and large scale farms, including the major sisal planta- tions. Take-over negotiations have been substantially completed; compensation payments are being made on schedule. The most recent addition to the series of nationalization acts since Arusha is the Acquisition of Buildings Act of April 1971. Under this Act the state may acquire rental properties over a certain value (Sh 100,000 = $14,000) and about 3000 properties, mostly be- longing to Asian residents, have been acquired under the Act so far. An important feature of the Act, distinguishing it from previous nationalizations, is that the formula for compensation is spelled out in the Act itself. The take-over of rental properties has significantly accelerated the emigration of Asian residents which also means a loss of skills and private investment. 5. Another important aspect of Tanzania's socialist development is the recently renewed emphasis on agriculture and rural development. A significant effort is being made to reduce the gap between rural and urban standards of living. The chief instrument for rural development is the promotion of co- operative or 'ujamaa' villages. There are no close parallels in Africa or elsewhere for this ujamaa movement and it is too early to assess its eco- nomic implications. In June 1971 an estimated 8 percent of the rural popu- lation lived in ujamaa villages at various stages of cooperative develop- ment. Most of these villages have been established in relatively poorer areas where resettlement could be expected to bring tangible benefits in the form of improved Government services. So far the movement has not met with much response in the richer areas with well established cash crops such as cotton and coffee. The ultimate aim is to transform ujamaa villages into credit-worthy multi-purpose cooperative societies practicing communal pro- duction methods. A recently announced decentralization of Government aimed at giving greater power and responsibility for project planning to regional authorities is part of the general rural development strategy. Another as- pect is the Government's intention to locate new industries in nine urban centers other than Dar es Salaam. 6. In the light of the overall resource constraint, particularly the shortfall of national savings, that forced the Government to put the brake on investment in the second year of the Plan, the authorities have undertaken a mid-Plan review aimed at reshaping development policies and priorities. It is expected that this review will establish guidelines for implementing an earlier announced policy to shift the emphasis of investment from infrastruc- ture to more directly productive operations in agriculture, industry and mining. This will be necessary in order to achieve the same or a higher growth rate with less investment. Since state enterprises are the largest actual and potential source of public savings, great emphasis has to be placed on increasing their efficiency and improving the quality of their new investments. 7. There is a premium upon improved economic coordination, including the use of appropriate prices for products and factors of production. The new policy of uniform national prices for selected commodities, although understandable from an equity viewpoint, may result in a misallocation of resources. The price of capital is too low relative to the price of labor - iii - to facilitate labor-intensive investments. There are problems of coordina- tion between agencies. For example, the import procedures of STC have caused some disruption of the market for products manufactured by state enterprises and hampered production through delayed supply of raw materials and spare parts. There continues to be uncertainty regarding investment criteria between the parastatals and the supervising ministries. The authorities are aware of these problems and expert advice has been sought. As many of these problems result from the speed and coverage of the socialization measures taken since 1967, a period of consolidation may provide the oppor- tunity to improve management and coordination. 8. Tanzania has been very successful in attracting external aid on concessionary terms. Supplier credits have been kept to a minimum. The debt service is modest in comparison with many other developing countries but could increase rapidly if the growth of exports continues to be as sluggish as in recent years. Export promotion is the most important priority along with increasing national savings. Projections indicate that Tanzania will continue to depend on external aid for at least 40 percent of public sector investment assuming that the investment rate will not fall below 19 percent of monetary G1NP. In view of the country's limited debt service capacity it is desirable for as much new aid as possible to be on conces- sionary terms. I. INTRODUCTION AND BACKGROUND General 1. Tanzania 1/ is situated just south of the equator on the Indian Ocean and has common borders with Kenya, Uganda, Rwanda, Burundi, Zaire, Zambia, Malawi, and Mozambique. Most of the country with the exception of a coastal belt is part of the central African plateau lying at altitudes be- tween 1,000 and 1,500 meters and enjoys subtropical to temperate climates. Most of the population, estimated at 13.2 million in 1971, is concentrated in a few areas that are geographically widely dispersed: the coastal belt around and north of Dar es Salaam, around Moshi and Arusha in the north, the areas west and south of Lake Victoria, the entreme west around Kigoma and the extreme south-west around Mbeya. It is estimated that two thirds of the people occupy only 10 percent of land areas. The rest of the population is widely scattered. The non-African population amounts to less than 1 per- cent of the total and is mostly of Asian origin. The average population density is only 15 per square kilometer which compares with 19 in Kenya and 51 in Uganda. 2. Tanzania is essentially a peasant society. Not more than 6 percent of the population lives in cities and towns. Ninety percent of the economi- cally active population is engaged in agricultural activities. Agriculture contributes about 40 percent of the country's GNP (1970) and 80 percent of commodity exports. The value of agricultural production is about equally divided between cash crops and subsistence crops. Smallholder farming is the dominant form of agriculture. The most important factor causing varia- tions from year to year in the income and well being of the majority of the population is the weather. In many parts of the country rainfall is irreg- ular and unreliable. There is still ample unused land that could be brought under cultivation. The occurrence of tsetse and scarcity of water in large parts of the sparsely populated southern and western bushland are principal obstacles to development in those areas. Political Conditions and Socio-Economic Goals 3. Since attaining independence in December 1961 Tanzania has made considerable progress on economic as well as social fronts. President Nyerere is the architect of the country's independence and founder of the only remaining political party TANU. A lingua franca (Swahili) and the ab- sence of important tribal conflicts has contributed to national unity and has given the country a clear identity and sense of purpose. Tanzania's leadership enjoys wide popular support in its commitment to development within the framework of a socialist economy. 4. Tanzania stands out as one of the few African states which emerged with a one-party system based upon a united nationalist movement developed during the struggle for independence. The system was consolidated after 1/ All references and statistics in this report refer to mainland'Tanzania and not to Zanzibar, except where explicitly stated. independence and the principle of a one-party state was incorporated in the constitution (1965) after the remaining minor opposition parties collapsed in the election of 1962. TANU embraces a wide spectrum of views. Elections continue to take place and the method used for the nomination of candidates was designed to ensure that politicians are responsive to popular opinion. TANU is actively engaged on a grass root level in the promotion of popular involvement in the national development effort. Other important interest groups such as the centralized trade union movement and the Cooperative Union of Tanzania are closely affiliated with the party. Tanzania's Socialist Philosophy 5. The practical meaning of Tanzania's socialist philosophy is grad- ually taking shape. The country aims at the simultaneous achievement of rapid economic growth and an egalitarian society without tribal privileges or economic exploitation. Since the Arusha Declaration of 1967 the Govern- ment has taken over or acquired a controlling interest in nearly all impor- tant industries, banks, insurance companies, transport companies, hotels, trading companies and the major sisal plantations. Take-over negotiations have now been substantially completed and compensation payments are being made on schedule. Most industries continue to be run under expatriate man- agement but Government's policy is to Africanize top positions as fast as reasonably possible. 6. The most recent addition to the series of nationalization Acts since the Arusha Declaration is the Acquisition of Buildings Act of April 1971. Under this Act, which is designed to eliminate landlordism, the State may acquire any rental property over a certain value ($14,000). An important feature of this Act, distinguishing it from all previous nation- alization Acts in Tanzania, is, that the formula for the calculation of the amount of compensation is spelled out in the Act itself. All previous Acts were based on the principle of a negotiated settlement between buyer and seller. Compensation for buildings taken over by the State will be equal to the original construction cost minus 10 percent for each year that the owner has owned the building. An Appeal Tribunal has been established to deal with problems over compensation and individual hardship cases. About 3,000 properties, mostly belonging to Asian residents, have been acquired under the Act so far. No estimate is available of their total value or the total amount of the compensation calculated according to the formula pre- scribed in the Act. 7. A plan for the expansion of Government's capacity for the mainte- nance of newly acquired properties is being worked out. It is not know whether the Government's financial position will show an immediate improvement as a result of the Acquisition of Buildings Act. The costs of compensating prev- ious owners, administration, maintenance, together with the costs of servicing outstanding mortgages are unknown as is the additional rental revenue accruing to the Treasury. 8. The Acquisition of Buildings Act is part of a series of measures aimed at the transformation of the Tanzanian economy into a socialist state - 3 - where all important means of production are collectively owned. In order to ensure consistency between socialist objectives and practice the Arusha Dec- laration of 1967 also prescribed a code of behavior for political leaders and senior public sector personnel which is strictly enforced. In 1966 the sal- aries of all civil servants and politicans above a certain income level were cut by up to 20 percent. Their salary scales have not been raised since. Meanwhile, taxes on luxury consumption have been significantly increased. Wages of low income earners have been allowed to increase about 5 percent or mDre per annum. The importation of motor cars for non-essential private use was restricted in November 1971. The latter decision was partly mo- tivated by the need to conserve external reserves which had dropped to a low level owing to a sharp deterioration of the trade balance in combina- tion with illegal private capital flight. Although exact calculations are difficult to make, the impression is that the various measures taken have reduced inequalities of income within the category of employed workers. This in itself is only a small minority of the total working population. It is much more hazardous to attempt to measure relative changes in the rural/urban gap. However, Tanzania is certainly making progress towards the improvement of incomes and living conditions in the rural areas. Large scale urban unemployment has so far been avoided but this could become a problem in later years because the urban population is growing at a higher rate than urban employment. Ujamaa Villages 9. Perhaps the most important aspect of the Government's socialist development policies is the increasing emphasis on agriculture and rural development. About 93 percent of the people live on the land and peasant agriculture is the backbone of the Tanzanian economy. In recent years the rural development strategy has focused on the establishment of cooperative or ujamaa 1/ villages throughout the country. Though most of these villages will be engaged in farming, there are also plans for the establishment of ujamaa villages specializing in fishing or small industry. There are no close parallels in Africa or elsewhere for this ujamaa movement and it is too early to assess its economic implications. It is estimated that about one million people or 8 percent of the rural population have so far settled in some 3,000 ujamaa villages. Most of these villages have been established in the relatively poorer areas where farmers traditionally lived on scattered homesteads and where resettlement could be expected to bring tangible benefits in the form of improved Government services. In more densely populated and relatively richer areas such as the main cotton and coffee growing belts, ujamaa has so far not met with much positive response. The Government em- phasizes that ujamaa is a voluntary movement based on a maximum of self-help and self-reliance. The ultimate aim is to transform ujamaa villages into production based multi-purpose cooperative societies practicing communal pro- duction methods. So far, the amount of government resources used in the pro- motion of ujamaa villages has been limited but the intention is to increase 1/ Literally ujamaa in Swahili means 'familyhood'. - 4 - the effort considerably, possibly with foreign assistance. (The ujamaa pro- gram is described in greater detail in Annex I (Volume II) to this report). Relations with Zambia and East African Community Partners 10. The unilateral declaration of independence by Southern Rhodesia in November 1965 has had major implications for Tanzania's pattern of in- vestment in subsequent years. It is estimated that more than half of the capital expenditure for economic infrastructure since 1966 has been allo- cated to projects creating and improving communication links with landlocked Zambia in order to enable that country to reduce its dependence on Southern Rhodesia and Mozambique. In the long term these investments are expected to entail commensurate benefits for Tanzania but this does not alter the fact that during the past 5-6 years Tanzania's investment pattern has been sig- nificantly affected in order to accommodate Zambia's difficult position. The viability of investments in the oil pipeline, the tarmac trunk road and the Tan-Zam railroad between Dar es Salaam and the Zambian Copperbelt as well as the planned expansion of Dar es Salaam harbor, depends heavily on Zambia's continued use of these facilities. 11. Tanzania continues to be committed to the promotion of the East African Community. However, the change of government in Uganda of January 1971 created a number of problerns and retarded the implementation of some important projects because of a dispute between Tanzania and Uganda. The dispute has led to a disruption of economic relations between the two coun- tries. Communication links that were cut after some shooting incidents across the common border have been restored and trading relations are now back to normal. The Asian Community 12. Various socialization measures in recent years, especially the building take-over, have had a particular impact on the Asian community which has traditionally supplied a high proportion of medium and top level skills in industry, trade, banking and professional services. Many Asians feel that they are being discriminated against and considerable numbers have left the country during the past year; estimates range between 15-20,000. The associated loss of skills and private investment is a significant cost to the economy. One important effect of the Buildings Acquisition Act is that many private businessmen have lost their main or only collateral for bank loans and overdrafts. Chis has inevitably caused a certain amount of dislocation in trade and industry. Private Investment 13. The role of private investment has been significantly reduced. Most new orivate investment takes the form of joint enterprises with the state or public corporations as majority sharelholders. The relative con- tribution of private investment to total capital formation has dropped from - 5 - about 60 percent in 1965 to 18 percent in 1970 and may fall further. 1/ The Second Five Year Development Plan (1969-1974) expected that 27 percent of total investment would be privately financed. It is unlikely that this tar- get will be achieved during the remainder of the Plan. The remaining areas suitable for purely private investment are virtually limited to small scale agriculture, small industries and workshops, retail trade, road transport, some hotel business and professional services. Even in these fields the local credit institutions give strong preference to cooperatives over indi- vidual entrepreneurs. Capacity for Planning and the Decentralization of Government 14. The socialization process in Tanzania means that the responsibility for the allocation of the nation's investable resources now rests predominant- ly with the Government. The establishment of national investment priorities and the formulation of economic policies that are consistent with the dual goals of social equality and economic growth is a complicated task in an open economy like Tanzania. The Government's capacity for planning the economy and implementing projects and policies compares favorably with most African countries and is steadily improving but much reliance is still placed on ex- patriates in key technical positions. 15. Early in 1972 the Government announced a decision to decentralize a number of important government activities. A major reorganization of the relationship between regional authorities and the central government in Dar es Salaam is being prepared with a view to increasing the effective power and responsibility of regional authorities for the formulation and execution of regional development plans. Under this decentralization scheme, the coun- try's 18 Regions and 64 Districts will be given substantial power to control budgets, personnel, programs and planning in their jurisdictions. The scheme complements and parallels the Government's priority for rural development and is designed to improve project preparation and implementation at the grass roots. 16. Implementation of the scheme is the responsibility of a special task force under the Prime Minister. A substantial number of experienced Tanzanian officials in Ministry headquarters and parastatals is being transferred to the Regions and Districts. An inevitable by-product of these transfers is that the staff of several Ministries in Dar es Salaam is seriously depleted which may cause a shortage of administrative capac- ity at the center over the short run. It is expected that the workload at the center will gradually decrease as Regional and District authorities will start functioning within the new system. 1/ The share of private minority partners in investments by state enter- prises is statistically treated as public investment in the Tanzanian national accounts. - 6 - 17. The decentralized system of Government will be inaugurated on July 1, 1972,. Each Region will have its own budget, the implementation of which will be the responsibility of a Regional Commissioner (of Cabinet rank) and a Regional Development Director. The latter will supervise a technical staff who will be directly responsible to the Regional authorities and not to their various Ministries in Dar es Salaam as under the present system. This struc- tural pattern is repeated on the District level. 1972/73 will be a transi- tional year in the sense that Regional budgets are still drawn up by the Min- istries in Dar es Salaam. Thereafter Regions and Districts will prepare their own budget proposals within general guidelines to be laid down by the center. - 7 - II. RECENT ECONOMIC DEVELOPMENT Introduction 18. During the first two years of the Second Five Year Development Plan (July 1969 to June 1974) the growth of the economy in real terms was on average only about half the Plan target of 6.5 percent and substantially below the 1964-1970 trend growth rate of 5.4 percent. While the growth of production and exports lagged behind Plan targets, public sector investment continued to increase sharply and in the case of some important parastatal enterprises exceeded Plan expectations. Increased investment was not at the expense of consumption which grew more rapidly than production, but was fi- nanced partly with the aid of larger external capital inflows and partly by the use of external reserves. Monetary savings as a percentage of disposable monetary income have shown a tendency to decline slightly in recent years. 19. The development of a substantial external trade deficit and an upward pressure on prices, particularly strong in the building and construc- tion sector, was, in these circumstances, inevitable. The balance of payments problem was aggravated by illegal private capital flight and unrecorded im- ports from neighboring countries. Such unrecorded imports also lead to a re- duction in Tanzania's share of revenues collected by the East African Customs and Excise Bureau. The overall balance of payments in 1970 showed a substan- tial deficit for the first time since independence. 20. In the middle of 1970 the development of a severe financial con- straint became apparent and the Government promptly took corrective action in order to restore a balance between public sector investment and available resources. The first measure was the imposition of a ceiling on domestic credit expansion, in September 1970, followed by the introduction of addi- tional foreign exchange controls in March 1971 and a downward adjustment of central government capital expenditure in March. A major financial and for- eign exchange crisis was thus successfully averted. Overall Growth of the Economy 21. The overall growth of production in real terms has not been com- mensurate with increased investments and averaged only 3.3 percent of G.D.P. in the two-year period 1969-70. In the monetized economy the average over- all growth rate for these two years was 4.7 percent which compares with a Plan target growth rate for monetary G.D.P. of 7.6 percent. The growth of production in real term during the years 1964-1968 which cover most of the First Plan had been about 6.5 percent in the economy as a whole and 7.4 per- cent in the monetized sectors. These high overall growth rates during the First Plan were achieved while the investment ratio was lower than at present and in spite of a sharp drop in world market sisal prices from 1964 which led to production cutbacks in Tanzania. The lower growth in recent years is mainly due to a failure of the main agricultural crops to reach production targets. For some crops the weather is partly the cause but a more fundamental reason - 8 - seems to be that the Government has not so far provided the necessary condi- tions and incentives to which vast numbers of peasant farmers would respond by increasing their production. (For a comparison of actual and projected sectoral growth rates see Table 5 of the Statistical Appendix.) Investment 22. Total gross fixed capital formation in 1969 was slightly below the level achieved in 1968 both in absolute terms and as a proportion of G.D.P. This decline was mainly due to the completion in 1968 of a number of big projects such as the oil pipeline to Zambia and the Friendship Textile mill. 1970 witnessed a strong increase again and total investment in the monetized economy (including construction of the Tan-Zam railway) as a proportion of monetary G.D.P. at factor cost rose to a new record high of about 26 percent (21 percent excluding the Tan-Zam railway). The long-term objective is to raise the investment ratio to 27-28 percent of monetary G.D.P. at market prices which in Tanzania is the equivalent of about 31 percent of monetary G.D.P. at factor cost. This ratio is not expected to be reached until the Third Plan. The actual investment ratio achieved in 1970 (excluding the railway) is about halfway between the investment ratio at the beginning of the First Five-Year Development Plan (14.5 percent) and the ultimate target ratio. This ultimate target ratio is high by any standard and may have to be revised downward in view of the difficulty of increasing domestic savings. 23. Capital expenditure by the central government increased by 33 per- cent during the first year of the Second Plan and by a further 37 percent in the second year. A large part of these big expenditure increases took the form of increased central government transfers to the parastatal sector. The amounts of these transfers were much larger than what was anticipated in the Plan. Without these transfers central government capital expenditure was more or less in line with the Plan targets. Investments in Tanzania by the East African Community Corporations were slightly lower than expected but this is a reflection of a slowdown in project implementation rather than a change in plans. 24. There is some uncertainty with regard to the magnitude and phasing of capital formation actually achieved by the parastatal sector during the first two years of the Plan. Reports on their activities are incomplete. Some parastatals report investments only for the years in which their proj- ects are completed. An improvement in the reporting of parastatals is neces- sary for a more effective monitoring of progress made under the Plan. 25. Private investment was expected to contribute about 27 percent to total monetary investment during the Second Plan. Private investment has de- clined since 1968 both in absolute terms and as a proportion of the total. 1/ 1/ See footnote to paragraph 13. - 9 - In 1970 this proportion fell to 18 percent of total investment (including Tan-Zam railway construction). The prospects for a revival of private in- vestment seem slight and the Plan targets may have to be adjusted downwards especially in transport, building, and construction. 26. It is difficult to compare actual investment performance with Plan targets because the latter are expressed on a financial year basis (July- June) whereas the performance reporting for most actual investments is on a calendar year basis. The indications are that capital formation in financial terms during the first two years of the Plan lagged about 10-15 percent be- hind the Plan target. However, insufficient information is available on project implementation in physical terms. Tanzania's planning authorities are improving methods for the collection and processing of data necessary for a more accurate and up-to-date measurement of physical Plan implementa- tion. The impression is that with the important exception of the Tan-Zam railway, construction of which is ahead of schedule, Plan implementation in physical terms is lagging further behind Plan targets than is indicated by expenditure figures. A number of projects are known to be faced with sub- stantial cost overruns due to price increases and in some cases to insuffi- cient project preparation. The Pattern of Investment 27. The heavy concentration of Government's investment program in eco- nomic and social infrastructure is probably another important factor explain- ing the lack of immediate response in the directly productive sectors to the higher overall investment levels. Since the Rhodesian unilateral declaration of independence of November 1965, more than half of Tanzania's capital ex- penditures for economic infrastructure and a sizable proportion of the coun- try's total investments have been allocated to projects creating and improv- ing communication links with Zambia, enabling that country to reduce its dependence on the minority governments in Southern Africa. The oil pipeline was completed in 1968. The main road link is expected to be completed by 1974 while most of the Tan-Zam railroad construction in Tanzania is scheduled for completion in 1973. The expansion of Dar es Salaam harbor to accommodate the needs of Tanzania and Zambia as well as minor users (Eastern Zaire, Ruanda and Burundi) is a continuing process requiring heavy investments throughout the present decade. 28. The Government has indicated its intention to shift the emphasis in its investment program to more directly productive projects, especially in the fields of agriculture and small industry. A major shift of this na- ture will not be possible until after the completion of a number of big con- struction projects that presently absorb a large proportion of resources available for investment. These projects include the main road connection between Dar es Salaam and Zambia, the Kidatu power project and a major sec- ondary school building program. The completion of most of these major in- frastructure projects in 1972 and 1973 should release significant amounts that could be used for investment in other sectors. The manpower constraint that was responsible for slow progress in the mounting of agricultural in- - 10 - vestment in recent years has somewhat eased. A number of important new agri- cultural projects in the fields of livestock, timber, cotton, vegetables, dairy, etc. are being prepared and in 1-1/2 to 2 years' time the Government should be able to allocate a larger proportion of its total resources to agricultural development than at present. The continued rapid expansion of tea and tobacco is part of this program. Barring adverse weather it may be expected that the growth of agricultural production will accelerate in re- sponse to the intended shift in emphasis in Government's investment programs towards the end of the Plan. In view of the slow start, agricultural output at the end of the Second Plan is, however, likely to remain below target. Consumption and Saving 29. Since the beginning of the socialization process in Tanzania, the relative contribution of the private sector to capital formation in the mone- tary sector has declined. One implication of this development is that the distribution of income between consumption and saving has become almost en- tirely the result of central government decision making. When the average level of income is very low, as in Tanzania, the need to improve consumption standards, is naturally a very pressing one. The achievement of rapid in- creases in total investment in recent years has not been at the expense of consumption. On the contrary, total as well as private per capita consump- tion have been increasing faster than per capita G.N.P. During 1969-70 per capita private consumption in real terms in the monetary sector of the econ- omy increased at an annual rate of about 3 percent which is below the Plan target rate of about 4 percent but far in excess of the real growth in per capita marketed output of 0.6 percent during those years. The simultaneous achievement of a higher investment rate and a real per capita consumption growth in excess of per capita G.N.P. growth was made possible by increasing external capital inflows and a reduction in external reserves. Inevitably this combination of investment and consumption growth rates will eventually require adjustments in the overall level of spending. 30. While the Second Plan aimed at a gradual increase in the overall savings ratio, total domestic savings as a proportion of disposable monetary income fell from an average of 11.9 percent during the period 1966-69 to 10 percent in 1970. Given the stagnation in savings, the rapid increases in to- tal investment and the limited foreign capital inflows, the emergence of a financial constraint on development was inevitable and this became apparent during the second year of the Second Plan. The squeeze was reflected in an unprecedented expansion of domestic credit, including large central bank ad- vances to the Government. A complication was the simultaneous drop in ex- ternal reserves due to illegal capital flight and unrecorded imports. It should be stressed that the fall in external reserves was not attributable to a widening of the external resource gap because net public capital in- flows in 1970, as in previous years, were more than adequate to cover the deficit on the current account of the balance of payments. 31. The development of a financial constraint had been expected from the third year of the Plan. In the event the constraint arose sooner and - 11 - was more severe than had been expected. Faced with this situation the Gov- ernment had to take corrective action by reducing overall spending in the economy. This was achieved through the prompt introduction of a credit ceiling followed by cuts in Government development spending. The foreign exchange problem was tackled through the imposition of more stringent ex- change controls limiting private capital outflows and curbing unrecorded imports. 32. It is perhaps not realistic to suggest that a downward adjustment of total spending could have been accomplished through a reduction in Govern- ment 'consumption' expenditure. Both private and public per capita consump- tion levels in Tanzania are still very low by any standard, whereas the over- all tax burden is already high. A reduction in development spending was the only realistic option open to Government under the circumstances. It would in fact be undesirable to cut Government consumption except when a reduction could be achieved through efficiency improvements in Government administra- tion and the provision of services or by reducing the increase in non-devel- opment recurrent expenditure. The distinction between Government consump- tion and Government capital expenditure is often misleading in so far as it suggests a difference between their effects on economic growth. Both types of expenditure are equally necessary for and conducive to development, de- pending on their nature and the balance between the two. Though a cut in Government consumption was not a realistic possibility a significant reduc- tion in the rate at which recurrent expenditure is growing was in fact achieved in the second year of the Plan. This rate fell from 28.8 percent in the first year to 6.7 percent in the second. (The high rate of increase during the first year of the Plan was partly due to a transfer of responsibility for certain types of recurrent expenditure from local authorities to the Central Govern- ment.) Government Capital Expenditure and Its Financing 33. During the first two years of the Second Plan recurrent budget surpluses financed 8 percent of Government capital expenditure, much less than the Plan target of 17 percent. Domestic borrowing and central bank advances together financed 62 percent and external loans and grants the re- mainder or 30 percent (compared to an average Plan target of 43 percent). Initially, the inflow of foreign capital was lower than expected partly be- cause of delays in the preparation and implementation of foreign-aided proj- ects and partly because of difficulties in finding suitable projects for the utilization of tied loans. The second year of the Plan showed an im- provement in this respect. The 1971-72 budget expects no less than 49 per- cent of capital expenditure to be externally financed. 34. Domestic borrowing by the central Government for the financing of capital expenditure has in recent years increasingly relied on medium-term loans from the commercial banks and direct advances from the central bank. During the first two years of the Plan about 40 percent of total capital expenditure was financed in this way. In his speech introducing the 1971- - 12 - 72 budget the Minister of Finance expressed concern about this development and indicated that future levels of capital expenditure would be determined by the availability of real resources. In the meantime, measures to restrict credit expansion had already been taken and in March 1971 when it became ap- parent that excessive credit expansion might jeopardize domestic monetary stability and external reserves it was decided to cut capital expenditure by a substantial margin. The 1971-72 budget was drawn up within the frame- work of a comprehensive macro-economic plan for the year including a credit plan and a foreign exchange plan. The credit plan allows a maximum credit expansion of about Sh 240 million for the year, Sh 150 million of this would be available for public sector financing of essential economic activities and Sh 90 million for the rest of the economy. This credit plan is expected to be neutral in its effect on domestic and external equilibrium. 35. The appropriation for capital expenditure by the central Govern- ment (including transfers to parastatals) in the 1971-72 budget is Sh 768 million which is 8.6 percent below the actual level of capital expenditure in 1970-71. In the light of the domestic savings constraint that developed during the first and second year of the Second Plan, the third year had to be a year of consolidation rather than further expansion. However, within that general framework Government expenditure for defense has been signifi- cantly increased both in absolute and in relative terms. The combination of an increased appropriation for defense projects and a reduced overall capital budget means that central Government capital appropriations for economic and social development have been cut by nearly 20 percent. 36. An analysis of the 1971-72 capital budget shows that the Govern- ment expects about 75 percent of the capital required for the financing of externally aided projects in that year to be supplied by foreign donors. Table 1: CENTRAL GOVERNMENT 1971/72 CAPITAL BUDGET (Shs million) A. Total capital expenditure appropriations (including direct transfers to parastatals) 768 B. Capltal expenditure on projects not attracting foreign aid (including defense, police stations, prisons, very small projects, etc.) 269 C. Total expenditure on externallv aided projects 499 D. Expected foreign aid contributions 374 D as a percentage of C 75 percent. Since the foreign exchange component of most externally aided projects will be appreciably lower than 75 percent, one implication of the 1971-72 budget is that external aid will have to finance a substantial portion of local - 13 - project costs. The indications are that many donors are prepared to do this and some require no local capital contribution at all. Parastatal Investments and Their Financing 37. Historical data on investments by the parastatal sector are incom- plete and subject to revision as explained in paragraph 24 above. The first comprehensive plan for parastatal investments was published in the Annual Plan for 1971-72. The total investment target of Sh 335 million for that year is expected to be financed as follows: Transfers from Treasury (local currency) 22% it to it (foreign loans) 29% National Bank of Commerce /1 8% Tanzania Investment Bank 10% Other local borrowing 4% Retained profits 18% Foreign private contributions 9% /1 Working capital only. 38. In spite of the fact that parastatal investments planned for 1971- 72 are much lower than originally envisaged in the Second Plan, the share of retained profits in the financing of these investments is expected to remain far below the average Second Plan target of 30 percent. Parastatal profits are significantly lower than Plan targets and pressures to raise selling prices may be expected to increase as a result of this. Compensation payments by parastatals to previous owners are expected to fall appreciably towards the end of the Second Plan. In view of the many organizational problems within the parastatal sector and the inevitable teething trouble experienced by new industries, it is probably not realistic to expect a significant increase in the level of parastatal savings before the end of the Second Plan. Pressures to increase prices of products sold by parastatals are generally resisted by the Government in order to keep consumer prices down and to avoid the use of price increases as a substitute for improved efficiency. 39. The parastatal investment target of Sh 335 million (excluding Tan- Zam railway construction) for 1971-72 is much lower than the estimated amount achieved in 1970-71. This decline is partly due to the bunching of a number of large parastatal projects in 1970-71 and partly to the need to cut public sector investments in the light of the overall resource constraint. The re- duction in total public sector investments planned for 1971-72 amounts to 23 percent of the estimated amount achieved in 1970-71. The capital allocation to Ministries (excluding transfers to parastatals and also excluding defense - 14 - projects) has been cut by 12 percent compared with a 44 percent cut for the parastatal sector. 40. Two new financial intermediaries have been created to assist in the financing of medium and long-term investments by parastatals and coopera- tives. These are the Tanzanian Investment Bank (TIB) to provide loan finance to industrial, transport, tourist and large agricultural projects and the Tanzanian Rural Development Bank (TRDB) for the financing of agricultural inputs and rural development in general, including ujamaa villages. TIB was established in November 1970. It has an authorized capital of Sh 100 million and it took over a number of outstanding medium and long-term loans from the National Bank of Commerce (NBC) totalling Sh 114 million. TIB is owned by the Government (60 percent), NBC (30 percent) and the National Insurance Corporation (10 percent). NBC now confines its lending operations to short-term credit and working capital. It is intended that inter-company lending within groups of parastatal enterprises be discontinued after the establishment of TIB and all credit transactions are expected to be effected through the banking institutions. In considering loan applications and ap- praising projects TIB consults with the relevant Ministries and the central planning authorities in order to ensure that its lending operations are in line with national objectives and priorities. TIB has requested foreign technical assistance to strengthen its staff and is at the same time seeking financial assistance from various external sources. TRDB was officially es- tablished on 1st May, 1971 and took over most of the assets and liabilities of the former National Credit Development Agency. Tan-Zam Railway 41. A substantial portion of capital formation in recent years (about 20 percent) was accounted for by the construction of the Tan-Zam railway. Implementation of the project is reported to be ahead of schedule. The first 502 kilometers of the line were opened for limited use in November 1971. The entire project, employing an estimated labor force of over 40,000 including some 13,000 Chinese, is now expected to reach completion before the end of 1974. The sale of Chinese goods in Tanzania for the financing of local cost expenditure is gaining momentum. An estimated 20 percent of current consumer goods imports is supplied by China. The goods are selected in China by Tanzanian trade officials and cover a wide range of items, mostly consumer goods. The Chinese prices are reported to be competitive but trade circles have expressed fears that some of these imports compete with other sources of supply in East Africa, including in some cases local industries in Tan- zania. If there is no delay in the construction of the Tan-Zam railway, the completion on schedule of the planned expansion of Dar es Salaam harbor is a matter of high priority. Recurrent Government Revenue and Tax Policies 42. Although the Government has been successful in raising additional revenue through taxation, revenue and budget savings are still lagging be- hind Plan targets. This has caused delays in the implementation of some - 15 - development projects. Total recurrent revenue as a proportion of monetary G.D.P. at market prices increased from 20.2 percent in 1966 to nearly 25 per cent in 1970. This compares favorably with other developing countries. Revenue from taxation contributes about 85 percent of total recurrent reve- nue. The share of indirect taxes in total tax revenue is about 69 percent. Recurrent revenue (excluding incidental transfers) increased by 13.4 percent in 1969/70 and by 14.7 percent in 1970171. Revenue from the Sales Tax, in- troduced mid-1969, more than compensated for losses in import duties asso- ciated with import substitution. Owing to improved efficiency in the as- sessment and collection of the Personal Tax and a change-over from lagged to current assessment of company income taxes, direct tax revenue was higher than might otherwise have been expected. During the past 5 years the elas- ticity of tax revenue with respect to monetary G.D.P. has been very high (over 2). 1/ This applies to direct taxes and indirect taxes alike. The overall tax burden on the monetized economy is now relatively high and a fall in this elasticity ratio must be anticipated. 43. The Economic Affairs Secretariat of the East African Community is undertaking a study of the effect on trade flows and industrialization in Tanzania of Transfer Taxes that were imposed on certain imports from Kenya and Uganda following the signing of the Treaty for East African Cooperation in 1967. About 50 commodities produced by 174 companies in Tanzania enjoy Transfer Tax protection. The level of Transfer Tax revenue has continued to be relatively high. An 'impressionistic' conclusion is that the Trans- fer Tax mechanism has not materially affected intra-East African trade pat- terns and that the system has been rendered partially ineffective by admin- istrative trade barriers and procurement policies of parastatal organiza- tions in the three member countries. The Transfer Tax system is due to be reviewed at the end of 1972 in accordance with the provisions of the 1967 Treaty. 44. The Economic Affairs Secretariat has also undertaken a study on the harmonization of fiscal incentives between the three member countries. Action on the recommendations of this study will probably not he taken until the respective Governments have clarified their position on the future of their national income tax legislation on which the IMF has been asked to ad- vise the three Covernments. 45. A few minor changes in the tax system were introduced with the 1971-72 budget. The most important of these is the imposition of withhold- ing taxes on income payments to non-residents. Government Recurrent Expenditure 46. Since the early sixties recurrent expenditure has been growing at roughly the same rate as recurrent revenue and as a result budget sav- 1/ Some taxation experts prefer the term 'buoyancy' in this context as the tax system and the rates have changed during the period under consider- ation. - 16 - ings have more or less stagnated. There has not been a recurrent budget deficit but the surplus has never exceeded a few percent. The possibili- ties for increasing recurrent budget savings are limited. Tax revenue is likely to grow at a slower pace than in the past for reasons explained in paragraph 42. The need for increasing recurrent expenditure for health, education, agriculture, communications, etc., is pressing. The functional distribution of Government recurrent expenditure in recent years has shown a relative increase in the share of debt service at the expense of economic and social services (see Table 22 of the Statistical Appendix). The share of general administrative expenditure (excluding defense) after a big in- crease in 1969-70, has slightly fallen. 47. Of the total accumulated additional recurrent revenue during the period 1966-71, 24 percent was used for economic services, 30 percent for social services, 27 percent for general administration (including defense), 16 percent for other recurrent expenditure and only 3 percent was trans- ferred to the capital budget. During the last two years of this period the share of incremental revenue used for economic and social services as well as general administration increased at a faster rate than the average for the period as a whole while the incremental transfer to the capital budget was negative in both years. Balance of Payments 48. The balance of external payments clearly mirrors the various domestic economic developments discussed above. Exports in 1969 and 1970 have lagged behind Plan targets as a result of the failure to achieve production targets for the main export crops. Imports of consumer goods have been more or less stable, slightly below Plan target. The level of intermediate goods imports reflected a rather low production growth rate in 1969 and a better performance of the economy in 1970. Imports of trans- port equipment and other capital goods fell slightly in 1969, reflecting a slowdown in fixed capital formation, and rose in 1970 as a result of in- creased investment and the construction of the Tan-Zam railway. Total im- ports (including imports for the Tam-Zam railway) fell slightly in 1969 but increased by no less than 33 percent in 1970. This entire increase took place in the categories of capital goods and intermediate goods. The sharp rise in total investment in 1970 was reflected in a 67 percent in- crease in imports of machinery and transport equipment during that year. The external trade balance reached a record deficit of Sh 640 million in 1970, compared to Sh 155 million in 1969. 49. The overall current account deficit in recent years was smaller than the trade deficit because of a net inflow of transfers and payments for services. The services balance showed a surplus for the first time in 1968 and continued to improve thereafter owing to increasing transit traffic to and from Zambia, and tourism. Net medium- and long-term capital inflows (almost exclusively on public sector account) exceeded current account def- icits in all years for which reliable balance of payments statistics are available, including 1969 and 1970. A large part of the foreign loans for - 17 - equipment and construction projects are long-term and on concessionary terms. The servicing of loans and credits used for the financing of communication links with Zambia (including the oil pipeline, the road and the railroad) should not present special problems as the main user of these links, Zambia, is paying for transit services in hard currency. However, currently a sizable proportion of the road services between Zambia and Dar es Salaam is provided by Kenyan transport companies. External Reserves 50. While net medium- and long-term public capital inflows in 1970 exceeded the current account deficit, external reserves nevertheless fell sharply. This was mainly due to the illegal export of private capital, un- recorded imports (especially from Kenya) and a temporary shift from credit to spot external payments by the State Trading Corporation. Domestic mone- tary expansion contributed to the drain of reserves (see paragraphs 53 and 54). Early in 1971, exchange control was introduced to limit private cap- ital exports and to stop unrecorded imports. Unrecorded imports from neighboring countries had assumed rather serious proportions after the in- troduction of certain tax changes in Tanzania in 1969. This was facilita- ted by the free movement of currency between the partners of the East African Community until Tanzanian exchange control was introduced in March 1971. The external reserve position improved again during the first nine months of 1971 but another sharD drop took place during the last quarter. By the end of De- cember 1971, official Tanzanian reserves stood at about Sh 432 million (in- cluding SDR's and IMF gold tranche), compared to Sh 573 million two years earlier. The December 1971 reserve level represents about two months of cur- rent commodity imports excluding imports for the construction of the Tan-Zam railway which are fully financed by a Chinese credit. Reserves improved mo- destly during the first quarter of 1972. Exports and Their Composition 51. The growth of Tanzania's exports has been sluggish and uneven since 1966 mainly because cotton, coffee and cashew failed to reach produc- tion targets. Another factor has been the growing volume of unrecorded ex- ports to neighboring countries. Table 2: VALUE OF MAINLAND EXPORTS IN '000 SHILLINGS 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1,036 1,099 1,356 1,520 1,440 1,692 1,638 1,616 1,619 1,727 It should be borne in mind that 1966 was a year of unusually favorable weather for most crops, which tends to distort the perspective. Minor agricultural exports such as meat and meat preparations, oilseeds, nuts and kernels, have shown a tendency to decline in recent years partly as a result of domestic pricing policies and increased local consumption. Ex- port prices for most of these products were not unfavorable. Pyrethrum ex- - 18 - ports fell sharply after 1967 in response to falling world market prices. The price rallied again in 1970 and farmers are encouraged to increase their production. Thanks to the growing importance of tobacco, tea and some other products including manufacturers, Tanzania's export pattern is gradually becoming more diversified. This is a welcome development providing better protection against the vagaries of the weather and price fluctuations for individual products. The share of sisal in total mainland exports which used to be between 25-30 percent until the severe price decline of the middle 1960's is now down to about 10 percent. Partly as a result of the fall in sisal prices, the share of the three main agricultural exports together (coffee, cotton, sisal) fell from an average of 54 percent during the period 1961-66 to 41 percent thereafter. Terms of Trade 52. There can be little doubt that an adverse change of Tanzania's terms of trade between 1965 and 1969 has contributed to the deteriorating trade balance. Despite the paucity of data, an attempt has been made to calculate the approximate export unit value index since 1965 on the basis of about 60 percent of commodity exports for which export prices have been published. The results of this exercise are shown in Table 3 below. The figures shown probably exaggerate the decline of export unit prices and hence of the terms of trade between 1965-69 because of the heavy weight of sisal in the 60 percent export sample. 1970 showed a significant improve- ment in the export unit price index mainly because of a sharp increase in the price of coffee. In spite of this important improvement in 1970, it is estimated that Tanzania's terms of trade during the period 1965-70 have de- teriorated by on average somewhere between 1 and 2 percent per annum. Tan- zania is one of the few countries that have suffered a decline during this period. Nearly all developing countries in Africa and elsewhere saw their terms of trade improving since the middle 1960's. Table 3: ESTIMATED EXPORT AND IMPORT VALUE AND VOLUME INDICES, TERMS OF TRADE (1970 = 100) 1965-67 Average 1968 1969 1970 Export Volume Index 90 99 102 100 Export Unit Value Index 102 95 92 100 Export Value Index 92 94 94 100 Import Volume Index 74 86 79 100 Import Unit Value Index /1 94 94 96 100 Import Value Index 70 81 76 100 Terms of Trade Index 109 101 96 100 /1 Based on I1F data for group of less developed countries. - 19 - Money and Credit *) 53. The first two years of the Second Plan witnessed a very strong monetary and credit expansion. Money supply (currency in circulation plus demand deposits) increased by 15 percent in the first year and by nearly 32 percent in the second. Credit to others than the central Government expanded by respectively 18 and 28 percent. Total domestic credit expand- ed by respectively 15 and 51 percent. During the second year (1970-71) a large part of the additional credit was used for the financing of surplus rice production and stocks of imported consumer goods. Credit expansion in 1970 was so strong that the National Bank of Commerce was unable to in- crease its lending to the central Government. As a result, the Government had to rely heavily on the sale of Treasury Bills to and direct advances from the central bank. Total central bank claims on the Government in- creased from Sh 148 million in December 1969 to Sh 416 million in December 1970 and Sh 632 million in December 1971. 54. The rapid monetary expansion was leading to inflationary pressure and a diversion of resources into the financing of stocks held by the State Trading Corporation (STC) and others. The fact that price inflation in 1969 and 1970 was less serious than might have been expected on the basis of the strong monetary expansion is probably partly due to official price control and partly to an increased liquidity preference in certain segments of the economy. As this latter phenomenon may well be temporary, the monetary au- thorities should be prepared for increased pressure on prices from the de- mand side later on. 55. Measures to restrict credit to others than the central Government were first taken by the central bank in September 1970. It was soon recog- nized, however, that domestic credit policy had to be comprehensive - em- bracing also the central Government - in order to be effective. This led to a rather drastic cut in Government development expenditure from March 1971. The credit Dlan forming part of the Annual Plan for FY71-72 allows for a total monetary expansion during the year of about Sh 240 million or roughly 10 percent of the total money supply (including quasi money) in June 1971. This increase was estimated to be sufficient for the financing of a 7.5 percent increase of monetized G.D.P. and a 2.5 percent rise of the general price level, and ceteris paribus, to be neutral in its effect on internal and external equilibrium. 56. While total bank deposits in 1971-72 are expected to increase by Sh 162 million, credit expansion to others than the central Government (i.e., parastatals, private companies, cooperatives, and individuals) is to be restricted to only Sh 90 million, considerably less than the Sh 300 million available to these sectors in FY70-71. Net claims of the banking system on the central Government are estimated to increase by Sh 150 mil- lion in 1971-72 (Sh 473 million in 1970-17). The credit restriction im- posed on non-government sectors is particularly severe and may be expected *) Money supply and credit statistics include 7anzibar. - 20 - to lead to considerable tension between the supply of and demand for credit in these sectors. The responsibility for the implementation of a selective credit program rests primarily with NBC. Prices, Cost of Living 57. Price inflation has so far not been a serious problem in Tanzania but the upward pressure on prices has become markedly stronger in recent years. The average annual deflator for monetary GDP excluding agriculture for the period 1964-70 is 1.6 percent, reflecting a remarkable degree of price stability. The deflator for monetary G.D.P. including agriculture for the same period is only 1.2 percent which indicates that agricultural prices have been rising more slowly than prices of manufactured goods and services. In some sectors, particularly building and construction and to a lesser ex- tent manufacturing, price rises have become more pronounced in recent years and have led to significant cost increases for new projects. In the building sector a reduction in the number of private contracting firms has led to re- duced competition and higher prices. An excess of wage increases over pro- ductivity increases is another factor behind the upward pressure on prices (see paragraph 62). Rapid price increases for imported transport, building and construction materials and equipment provide another important part of the explanation. The cost of building increased by an estimated 4.3 percent in 1969 and by 13 percent in 1970. 58. For wholesale trade, there is official price control in Tanzania for a limited number of items but these controls are not strictly enforced in all areas. There is a National Price Control Advisory Board responsible for advising the Price Controller. On the retail level STC operates a sys- tem of "suggested" retail prices but owing to administrative difficulties and manpower constraints retail prices are not effectively controlled. In 1970, the Government introduced a new pricing system whereby selected items are sold at uniform prices throughout the country, irrespective of differ- ences in transport costs. It is intended to extend this new pricing system gradually to all basic consuniption goods, essential agricultural inputs such as fertilizers and insecticides as well as corrugated iron sheets. This new pricing system is part of Government's policy to reduce social inequalities between the various urban and rural areas. The effectiveness of price control and price fixing on the wholesale level as instruments of social and economic policy is reduced by the virtual absence of effective controls over distribution margins and retail prices. The bulk of retail trade in Tanzania is still in private hands whereas most wholesale trade has been socialized. 59. Cost of living statistics in Tanzania are incomplete and the weights used in their calculation need to be revised. They probably under- state the real increases in the cost of living. According to published statistics, the retail price index of goods consumed by minimum wage earners in Dar es Salaam increased by 1 percent in 1969 and by 3.5 percent in 1970. Food items increased faster in price. The overall cost of living index for middle-grade civil servants in Dar es Salaam increased by only 1.1 percent in 1969, 1.8 percent in 1970 and by 1.6 percent during the first quarter of 1971. The cost of living index for upper income groups has no doubt been rising faster in view of the heavy incidence of indirect taxation on luxury - 21 - consumption. The Bureau of Statistics has recently completed a national household budget survey. On the strength of this survey and new data collec- tion methods the Bureau expects to be able to publish more complete and more accurate cost of living indices in future. Employment, Wages, Productivity 60. The Second Plan target for employment was the creation of 98,000 additional jobs by the end of the period or about 20,000 jobs each year. No additional wage employment was foreseen in agriculture. Production on the sisal plantations was expected to decline slowly while increased pro- duction of other crops was expected to be achieved by smallholders and ujamaa villages. It is the policy of the Government to promote communal production methods in the agricultural sector in line with the socialist principle that wherever possible farmers should work together in coopera- tive organizations. In certain areas where farmers are generally not in favor of cooperative production methods, there may be a conflict between the need for increased labor specialization to improve productivity and the social-political objective of keeping down wage employment on private farms. Sukumaland cotton farming which has traditionally relied on mi- gratory labor from Kigoma Region provides an illustration of an area where this conflict may arise. 61. The Plan employment target, representing a 7 percent annual in- crease in wage employment, was not an over-ambitious one in the light of the Plan's non-agricultural sector target growth rates. Furthermore, it was the intention of the Government to give priority to the growth of em- ployment over a further increase in wages for those already employed. Actual wage employment during 1969 and 1970 increased by 4.6 and 1.8 per- cent respectively. Part of the explanation for this substantial shortfall below Plan targets is, of course, that production targets were not achieved. In addition, contrary to Plan intentions, the average wage level increased by about 7.4 percent over the two-year period 1969-70. This is partly the result of an increase in 1969 of the statutory minimum wage levels by Sh 20 per month, excluding plantation agriculture. 62. Real productivity in the non-agricultural sectors is estimated to have increased by only 2.5 percent during the same period, about one-third of the wage increases. The excess of wage increases over productivity in- creases has inevitably exerted upward pressure on prices. The failure to achieve Plan target levels for employment creation is a serious matter, par- ticularly in the urban areas. The urban population is expected to grow about 7 percent per annum and the urban population within the working age at an even higher rate. Employment creation has to keep pace with increases in labor supply if urban misery is to be avoided. There is ample evidence in other developing countries in Africa and elsewhere of the overwhelming social, economic and political problems created by large-scale urban unemployment. 63. In many developing countries it has proved well nigh impossible to stop the drift to the towns by appealing to the people to stay on the land without simultaneously improving their living conditions there. The Tanzanian Government is keenly aware of this and the increasing emphasis on rural development is at least partly inspired by the need to contain - 22 - the drift to the towns. Tanzania's urban population is still very small, about 750,000, nearly half of whom live in Dar es Salaam. Mass urban un- employment has so far been avoided but unemployment has been on the rise. Wage increases must be kept in line with real productivity increases. 64. The single most important source of wage employment creation since October 1970 has been the construction of the Tan-Zam railway. It is estimated that by the end of 1971 over 27,000 Tanzanians (about 10 per- cent of non-agricultural employment) were working on this project. This may present adjustment problems after its completion as the railway will then provide permanent employment for only a few thousand workers. Income Distribution 65. One of Tanzania's most important social objectives is to reduce inequalities in the distribution of income and wealth between individuals and between rural and urban areas. The information available on income distribution in Tanzania is meagre, but a few general observations can be made. The great inequality within the category of employed workers between members of different races inherited from the colonial days initially set a pattern for a similar inequality after the process of Africanization got under way. However, the Government has made a considerable effort to reduce these inherited inequalities. The salaries of all politicians and civil servants above a certain income level were cut by up to 20 percent in 1966, and salary scales have not been raised since. Meanwhile, taxes on luxury consumption has been significantly increased. Wages of low income earners have been allowed to increase about 5-8 percent per annum. Although exact calculations are difficult, the impression is that the various measures have reduced inequalities within the category of employed workers. This in it- self is, of course, only a small minority of the total working population. 66. More important for the country as a whole are changes in the dis- tribution of income between the relatively small group of employed workers and the vast majority of self-employed workers. In Tanzania this division more or less corresponds with the division between the urban population and the rural population or between the agricultural sector and the rest of the economy. Table 4 below attempts to measure in a very crude way changes in the income distribution between agricultural workers and persons engaged in non-agricultural activities. Although the quality of these data is probably not sufficiently reliable for precise quantitative conclusions, it is never- theless of interest to note that the available information does not suggest that there has been a significant shift in the relative distribution of in- come between rural and urban areas since 1966. Whatever the precise magnitude of changes in the distribution between rural and urban incomes, it is clear from personal observation over a number of years that real in- comes in rural areas and the quality of rural life have improved a great deal, partly as a result of improved Government services and greater se- curity. - 23 - Table 4: DISTRIBUTION OF VALUE ADDED PER ACTIVELY ENGAGED PERSON IN AGRICULTURE AND OTHER SECTORS 1966 1967 1968 1969 1970 Estimated number of persons actively engaged (1,000 pers.): in agriculture 4956 5078 5205 5335 5468 in other sectors 466 499 534 571 611 Value added by sector at current prices (Sh million) agriculture 2952 2855 2973 3074 3300 other sectors 3640 4028 4425 4557 4932 Value added by sector at con- stant 1966 prices (Sh million) in agriculture 2952 2954 3062 3080 3188 other sectors 3640 3981 4264 4346 4622 Value added per worker at current prices (Shillings) in agriculture 596 562 571 576 604 in other sectors 7811 8072 8286 7980 8072 Value added per worker at con- stant 1T66 prices (Shillings) in agriculture 596 582 588 577 583 in other sectors 7811 7978 7985 7611 7564 uurr. pr. v.a./worker o. sect.. 13.1 14.4 14.6 13.
Группа Всемирного банка · Pre-2003 Economic or Sector Report
Tanzania - Economic development and prospects (Vol. 1 of 4) : The main report
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Pre-2003 Economic or Sector Report
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