ECONOMIC RECOVERY – THE PROSPECTS

The Economic Recovery Programme (ERP) came to an end on 30th June 1989. On balance it has been a successful programme, though formidable problems remain. Between 1978 and 1985 overall growth reached an average of only 1.5% per annum and, since the population was growing at an average rate of 2.8% per annum, this represented a decline in living standards. In 1986, however, this situation was reversed with an economic growth rate exceeding that of the population at 3.6% and in 1987 at 3.9% while in 1988 the growth rate reached a level of 4.1% Export income grew and the contribution of non-traditional exports, though small, showed particular promise. Employment, except in minerals, rose. Many consumer goods again became available in the shops though generally at a high price and, following a reasonable series of harvests, food was generally available, though special measures had to be taken to deal with local shortages caused by flood damage earlier this year. The improvement in the economy was sufficiently visible and pervasive to bring about an atmosphere of hope and expectation, leading to an improved state of morale and a spirit of enterprise.

While the importance of these gains must not be underrated, they fell short in certain important respects of the targets set out in the ERP. Overall growth at 4.1% in 1988 failed to reach the planned growth figure of 4.5%, while official export revenues were substantially less than planned expectations. Inflation, which was expected to have fallen to 20% in 1988, in fact remained stubbornly at 28.2% These outcomes do not invalidate the policies implicit in the ERP, but expose the unreliabilty of some statistics and the difficulty of forecasting in present circumstances. For example, in respect of export revenues, the true situation may be considerably better than the official figures suggest. Total exports in 1988 are estimated to have been nearer to US. 686 million than the official figure of US$ 362 million in view of the substantial volume of exports that are at present going unrecorded. Notwithstanding these shortfalls in performance, the trends set up by the ERP were promising.

INFLATION AND THE TRADE GAP
But great difficulties lie ahead. The two most critical problems are reduction of the rate of inflation and narrowing the gap between export earnings and import requirements. High rates of inflation present a constant threat to standards of living and, in the absence of indexing, wage adjustments always lag behind price increases. Inflation creates incessant cost problems for industry and places serious impediments in the way of economic forecasting. As to the trade gap, exports pay for no more than a third of imports, the shortfall being made up chiefly by external aid in the form of loans and grants. This degree of economic dependence is highly undesirable and explains the great importance rightly placed by the Government on a vigorous programme of export promotion.

THE MONEY SUPPLY AND THE EXPANSION OF CREDIT
But neither of these tasks is easily accomplished. The main engine driving inflation is the excessive growth of the money supply and the expansion of credit. By addressing these problems the Government hopes to bring down inflation to 20% by the middle of 1990. Part of the difficulty lies in the financing of the recurrent budget, inevitably made more difficult by the increase in wages and salaries in the public service announced in the budget speech, increases essential to morale not only in government, but also throughout industry and the parastatals where equivalent rises are expected. Nevertheless the budget for 1989-90, as in 1987-88, relies on borrowing from the banking system to fill the gap between revenue and expenditure, though only to the modest extent of Shs 600 million, amounting to 0.4% of total revenue.

The most serious problem lies in the expansion of credit to the marketing boards and cooperatives. The ERP aimed to contain the increase in credit to 15-20%, but in the event it rose by 23% in 1985-87 and 55% in 1987-88. The aim in 1988-89 is to limit the growth of credit to 30% Much has been said about the inherent inefficiency of the marketing boards, but there are also practical reasons for their insatiable need of funds. The dilapidated state of the roads and the obsolescence and inadequacy of transport vehicles have caused great difficulty in the movement of crops, leading to increased costs both in the transport sector and for the financing of stocks. These problems have been exacerbated by a substantial growth in production, especially of maize and cotton, and the inadequate capacity of processing factories, particularly in the case of cotton, tobacco, sisal and coffee. Between June 1986 and March 1989, credits to the National Milling Corporation grew from Shs 2,465 million to Shs 6,249 million while advances to the cooperatives increased almost sixfold. During this period the National Bank of Commerce was obliged to resort to the Central Bank to finance the needs of the economy including the crop parastatals and the cooperatives, and Central Bank advances to the National Bank of Commerce rose from Shs 418 million to Shs 40,595 million. The control of these inflationary influences lies not only in an improvement of financial management within the marketing parastatals themselves, but in the rehabiltation of Tanzania’s entire transport system and the rebuilding and expansion of processing capacity. Vigorous steps are in train with the help of external aid to rehabilitate transport and crop processing establishments, but, especially in the case of transport, it will be a long haul.

The improvement of transport and communications will also boost exports. Furthermore, the Government plans to extend the ‘retention scheme’ under which exporters may retain up to 35% of their export earnings in foreign exchange to finance machinery spares and designated imports of consumer goods. This arrangement acts as a strong incentive to traders seeking to enter export markets. Banking facilities in foreign currency are to be established at the National Bank of Commerce to accommodate traders’ export earnings. These arrangements will help to avoid the bureaucratic delays and uncertainties associated with applications to the Central Bank for foreign exchange and will greatly simplify the satisfaction of exporters’ requirements obtainable only in foreign currency. A further devaluation of the shilling from Shs 137 to 145 to the $US will also increase exporters’ profit margins in local currency terms.

Closing the trade gap will call for unremitting effort over a number of years. Apart from traditional exports, Tanzania has no great experience of exporting and a learning process will have to accompany the efforts of entrepreneurs, who, in increasing numbers, are attracted by the idea of entering the export field. Active consideration is now being given to the creation of advisory and information services for the benefit of traders entering foreign markets for the first time. The exploration of new commodities and new markets is all the more important both because of the stagnation in the world prices of traditional products and also because of the greater security to be obtained from a wider spread of export commodities. Competition among primary producers desperate to solve their foreign currency problems seems likely, in t he absence of natural calamities, to depress the prices of many traditional products in the near future.

Although, in common with previous budgets, much attention has been given to increases in government revenue to meet expenditure needs and reduce the impact of bank borrowing, the importance of psychological influences has not been overlooked. Thus the budget provides for an increase in the minimum wage in response to inflation, while the income tax threshold has been raised. At the same time income tax liability has been reduced. The psychological effects of budget changes are of considerable importance at all income levels for the successful prosecution of policies for economic recovery.

Nevertheless, the fact has to be faced that, in the words of the Minister of Finance in his budget speech to Parliament “development is a long journey and there are many pit falls along the way”. One such impediment is the growing obligation in respect of the payment of interest and capital on external debts, which are a prior charge on the country’s foreign exchange resources. In 1970 Tanzania’s external debt service was equivalent to 5.3% of export earnings but by 1987 obligations had risen to 18.5%. Discussions with the World Bank, the IMF and bilateral donors are continuing with a view to a reduction of the debt burden by extending the repayment period in certain cases. The recent decision by Belgium, France and the United States to convert loans into gifts follows similar previous action in the same sense by Britain, France, West Germany and some other countries.
J. Roger Carter

MANY CHANGES IN BUDGET
– Income tax down by 5% to between 10 and 50 per cent; taxable income level raised from 1,500/- to 1,900/- per month;

– the shilling devalued again to 145/- to the dollar instead of 137/-;

– minimum wage increased from 1,645/- to 2,075/- per month; a new four-category civil service salary structure (Operational Service 2,075/ to 7,285/- per month; General Scales 3,095/- to 12,075/-; Rare Professions such as pilots 5,980/- to 16,400/-; Super Scales for senior executives 12,785/- to 19,035/-);

– secondary school fees up to 2000/- instead of 1500/- per annum for day schools and 4000/- instead of 3000/- for boarding schools;

– airport service charges up from 510 to 520 for non-residents;

– taxes on cars, videos, refrigerators, cookers and other luxury goods increased;

– beer (a Safari Lager will now cost 152/- in grocers and 176/- in tourist hotels) soft drinks, cigarettes and petrol taxes up;

– land rent up by 50%;

– Tanzanian nationals working abroad can now open foreign accounts with the National Bank of Commerce or Bank of Tanzania.

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