III. ECONOMIC TRENDS AND OUTLOOK Major Trends and Outlook Recent aggregate economic performance in Tanzania remains encouraging despite the inevitable occasional disappointments. After positive economic growth averaging 4 to 5 percent per annum between 1986 and 1990, growth slowed down to 3.6 percent in 1992. These official statistics exclude a large but undetermined level of production and service through the informal sector. Inflation has remained stable over the past five years, but remains high at slightly above 20 percent. Although fiscal performance experienced considerable improvement in the past three years, the budget deficit increased recently to 6.5 percent of GDP (1992/93) with both revenue and expenditure off-target. External payments situation remains under strain (current account deficit in 1992 was 6.0 percent of GDP) despite improved export earnings, particularly of non-traditional commodities. Parastatal performance, both in terms of growth of value-added and profitability, remains poor. There are encouraging steps being taken in implementing the parastatal divestiture plan, which should result in improved performances by these businesses. Monetary management appears to be the area where Tanzania has made noticeable improvements particularly in the control of money supply, complete liberalization of the interest rates, and unification of the multiple exchange rates. Principal Growth Sectors For the next ten years, the principal growth sectors will remain services, mining, tourism and agriculture. Agriculture: Tanzania's economy continues to be dominated by agricultural production which accounted for approximately 50 to 55 percent of GDP in 1993. Output remained predominantly based on small holder production. Estate cultivation was centered on sisal, sugar, tea, and to a lesser extent coffee, rice and wheat. Traditional exports were coffee, cotton, cashewnuts, cloves, sisal, tea, and tobacco. Emphasis was placed on export diversification from traditional to non-traditional exports of flowers, fruits, vegetables and fish. A number of large scale irrigation farm projects are underway. These projects offer opportunities to U.S. firms for sales of agricultural machinery and equipment, irrigation equipment and technical services. During 1993, Tanzania experienced drought conditions in some of the major agricultural areas of Arusha, Kilimanjaro, Coast and Tanga regions. The Tanzania department of meteorology predicts drought conditions to continue into 1994. A shortage in the supply of cereals (wheat, maize and rice) may necessitate increased imports especially of maize. Current estimates put demand for short term extra food needs at 300,000 tons of cereals. Industry: Tanzania's industrial sector remains weak and posted small gains in production of corrugated iron sheeting, cement, soft drinks, and textiles. Industrial production increased 2.5% despite the disruptive nature of ongoing power shortages. Tanzanian industry is dominated by public and private textile mills which continue to experience production constraints due to a lack of spare parts, old machinery, lack of capital to import raw materials and stiff competition from imported clothing. In 1993 this industry produced well below capacity, many factories averaging between 20 and 40 percent of installed capacity. Diversification of the Tanzanian industrial sector is progressing slowly. Mining: Mining is emerging as an important sector in Tanzania's economy and is currently estimated to represent 13 percent of the country's GDP. Tanzania is endowed with an assortment of mineral deposits including gold, coal, uranium, nickel, cobalt, phosphates, tin, iron ore, salt, niobium, copper, natural gas, diamonds and a variety of other gemstones. Most of these resources remains exploited. Continued lack of capital and managerial skills hamper effective exploitation of these resources. The government has relaxed regulations in this sector, and Tanzanian-majority participation in mining ventures is no longer mandatory. Investor interest in exploiting Tanzania's mineral deposits was heavy in 1993 and several major projects are being pursued. Mining, which enjoys retention of 100 percent of earnings from exports, offers a unique area for investment and for potential sales of mining machinery. Tourism: Tanzania is endowed with a natural landscape conducive to a varied tourist market which remains largely unexploited. Investor interest in the tourism sector is increasing and emphasis is being placed on infrastructure development. Several major hotel projects are either underway or in the planning stages and existing facilities are increasingly becoming targets of joint venture arrangements. In keeping with the privatization of the tourist sector in 1993, the role and scope of the Tanzania Tourist Corporation (TTC) was changed to better reflect the emerging market oriented economy in Tanzania. Under the program, TTC planned to lease, sell or negotiate joint venture agreements for all of TTC's hotels and lodges. TTC has subsequently been changed to the tourist marketing board whose duties will include advertising and tourism promotion, leaving the development and management of hotels and lodges to private entrepreneurs. The tourist industry in Tanzania represents a significant potential market for U.S. goods and services and an attractive investment opportunity. The Government Role in the Economy Tanzania's socialist economic policies pursued between 1967 and 1985 effectively barred or strongly discouraged private sector growth. Credit rationing led to more than 80 percent of the loanable funds being allocated to public-sector firms. Equally damaging, was the GOT's rationing of foreign exchange in favor of public enterprises while maintaining an overvalued currency. High rates of inflation, large fiscal and trade deficits, and the unpredictability and insecurity of the policy environment discouraged many private investors from taking on financial risks inherent in long term investment. Most of the investors, especially small ones, preferred commercial activities which have high short-run returns. Changes in the foreign exchange system (including the introduction of foreign exchange shops and unification of the multiple exchange rates in August 1993), have been accompanied by equally radial reform of domestic monetary policy. Real interest rates, first turned over to market forces in 1992, have been positive, and are now almost completely set by the market. Funding the domestic budget deficit through monetary expansion by the central and commercial banks has been stopped. The Bank of Tanzania (BOT) has distanced itself from the day-to-day workings of the banking sector. There have also been substantial structural reforms made to the financial sector following the report of the presidential commission of inquiry into the monetary and banking system in July 1990. Banks can now be set up as private sector institutions, and two foreign companies, Meridian Biao from Zambia and Standard Chartered from England have already done so; First Adili, a local and newly formed banking institution, is due to open later this year. Taken together, the monetary and financial sector changes have created a fairly stable macroeconomic framework for private sector operators. The incentive structures which existed (Borrowers favored over savers, importers over exporters) have been reversed, and demand pressures have been contained. The two key indicators of short-term instability and excess demand -- the nominal exchange rate and domestic inflation rate -- are under control. The government has made a policy decision to get out of the productive sectors of the economy, by commercializing the remaining parastatals (i.e. not controlling their prices or subsidizing their losses) and by privatizing as many of them as possible. Balance of Payments Situation The balance of payment situation is as follows: 1990 1991 1992 1993 1994 Amount 6,136.2 7,149.4 8,092.3 9,264.2 16,001.3 Source: The Bank of Tanzania Ministry of Industry and Trade Figures for 1994 are projections. Trade and Investment Barriers (Identification and Brief Description) While the Embassy is not aware of any instituted trade and investment barriers, there have been increasing numbers of complaints that corruption and bureaucratic inertia have been serious hindrances to trade. The inability to own land (as opposed to leasing it) is also considered by some a barrier to investment. Labor Force While there is an abundant labor force, most of it is unskilled or semi-skilled. There is a dearth of middle-level and senior-level managers. Labor laws have, however, made it relatively easy to recruit from outside what is lacking. Major Local & Third Country Competitors in Specific Sectors The competition situation is as follows: Transportation Sector - for sedans and small cars, there is a near monopoly by Japan and South Korea. For buses and heavy duty trucks Japan (Canter, Mitsubishi and Hino) dominates. Great Britain (Bedford and Leyland) India (Tata and Ashok) and Sweden (Volvo and Scania) are also in the transportation sector. Agricultural Sector - Tractors are dominated by Great Britain (Ford and Messey Ferguson), Italy, Japan (Kubuto) and lately China. There are residual John Deer and International Harvester. Irrigation Equipment - Dominated mostly by U.S. and China. Construction - Construction equipment has remained and will continue to be dominated by U.S. and Japan especially on projects which Japan is undertaking. Communication - Japan dominates on radio, telephone, telex and fax equipment. Belgium and Germany have provided exchange equipment. U.S. is expected with the advent of privatization of mass media to do extremely well in radio, television and communication equipment. - Germany is leading in providing fax and telephone exchange equipment. - Belgium is leading on satellite and telephone exchange equipment. - U.S. is leading in information technology, computers (Wang, IBM, Apple, Machtech), mobile telephones, cellular phones and television and radio communication equipment. - Household and consumer goods are dominated by China, India, Taiwan, Japan and Singapore. Industrial Machinery - This area has largely been dominated by Great Britain, Germany and India. Serious competition is emerging from South Africa and, the U.S., especially for mining equipment. Infrastructure situation Re: Goods/Service Distribution Distribution of goods is largely by trucks and railways; Tanzania Railways Corporation (TRC) and Tanzania Zambia Railways Authority (TAZARA). These modes of transportation are slow, expensive and vulnerable to pilferage. Distribution of services is by Tanzania Telecommunication Company (fax, telephone, telex), Tanzania Posts Corporation (mail, cables, telegrams), Expedite Mail Service and DHL. Because of poor road conditions, road transportation tends to be slow, risky, expensive and during the rainy seasons impossible. For example, it takes anywhere from five to six days to travel by the major road from the sea port of Dar es Salaam to the western border, a distance of 1,002 kilometers. Major Infrastructure Projects Underway The following infrastructure projects are underway: The rehabilitation of Dar es Salaam to Tanga road. The rehabilitation of Chalinze-Segera road. The rehabilitation of Segera-Same road. The rehabilitation of Himo-Arusha road. Tarmacing Mwanza-Nzega road. Construction of Lindi-Kibiti road. Strengthening of TRC bridges on Central Line. The rehabilitation of TRC wagons. Procurement of rolling stock by TRC.