Countty
                                 Background
                                 Papers
        ":
        .                                              56873

                                          ..



                                     ••




Tanzania: Enterprise Sector in Changing Environment

        Center for International Business Research
    Helsinki School of Economics - Helsinki, Finland
                            muI
                       Karl Paakkari
         Africa Regional Program on Enterprise Development
                           The World Bank                 .




                           Tanzania
                       Country Ba~~round Paper




    Enterprise Sector in Changing Environment




Prepared by                                                Helsinki
Kari Paakkari                                    November 12, 1992
Tanzania


                              0   km         200             400
                                                              I


  ZAIRE              UGANDA   0   miles    100         200                  <II(
                                                                            ::
                                                                            <II(
                                                                            :I
                                                                            0
                                                                            en
                                            Mam roads
                                            Main ra,lINavs
                                            Inrer:1atlonal
                                            tloundarles
                                       ~    Main alTOOrTS




                                                   KENYA




                                                                   INDIAN
                                                                   OCEAN




          ZAMBIA




                                  MQZAMBIQUE



               MOZAMBIQUE
  RPEDlTanzania Country Background Paper
. Enterprise Sector in Changing Environment



 SUMMARY

 1)         During the first few years of independence, the economic development of
 Tanzania was primarily based on private investment. During the period of 1961-
 1967, average GOP growth surpassed 6 per cent a year and the number of new
 enterprises doubled from 220 in 1961. However. the inflow of foreign resources did·
 not pick up as the Government wanted. Kenya continued to interest European
 (British) investors more than Tanzania, which was often considered only a
 secondary market

 2)         After the Arusha Declaration in 1967, the govemment continued to
 establish parastatals at an increasing rate and to nationalize existing large scale
 industries, commerce and financial institutions. The number of parastatal
 organizations grew rapidly and the introduction of Basic Industry Strategy (BIS) in
 1975 led to establishment of heavy production like pulp· and paper, chemical, iron
 and steel industries.

3)         Until the mid-seventies economic growth was still 4.7 per cent a year, but
it involved already emerging structural imbalances in the economy, like excessive
external investment financing, deficits in the current account and the government
budget. During the latter part of the 1970s the growth started to decline and
contributed by the second oil crises, the war with Uganda and also the indifferent
and even hostile attitude of the govemment towards entrepreneurship and the
private sector. This policy hampered private investment and left enterprises without
conducive business environment with necessary support and incentives.

4)        The period of crises (1979-1985) included both virtual collapse of the
economy and the start-up of new thinking which was reflected in the Structural
Adjustment Programme (SAP) launched in 1982. Per capita income decreased in
1981-83, after which a slight improvement took place. The previous government
investment strategy (BIS) had left Tanzania with a great number of large-scale,
import-dependent and inefficient parastatals, which in the beginning of the 1980s
were often operating at about 30 % capacity or less.

5)         The 1984/85 budget included several adjustment measures. such as a 35
% devaluation, 40-60 % increase in agricultural producer prices and introduction of
forex retention accounts for exporters. At the same time, the country r~ached an
agreement with the IMF, which led to an infusion of badly needed foreign exchange
and gave a better ground for economy's reconstruction.

6)          The Economic Recovery Programme (ERP) was lauched in 1986 and it
succeeded to reverse the declining trend of the economy and to establish the initial
transition toward market economy in Tanzania. The GOP grew by 4.5 % a year in
1986-90. Other positive indicators were decreaSing inflation, increasing capacity
utilization and exports partially as a result of a removal of the Shilling overvaluation,
trade liberalization and gradual abolishment of price controls.

                                     Karl Poa/dcQri
RPEOITanzania Country Background Paper
Enterprise Sector in Changing Environment                                            ii



7)        In 1989 the government instituted a second phase of the economic
recovery plan, the Economic and Social Action Programme (ESAP). The ESAP is a
medium-term package up to 1992 focusing on detailed sectoral objectives and
economic policies. The ERP-period was already su~ssful in terms of economic
growth and this trend continues although at a lower level. High inflation and
unbalanced foreign trade are among the major negative features of the Tanzanian
economy.

8)          During the ERP the government was largely successful in meeting annual
fiscal targets. Cost savings were gained by freezing the employment levels in the
public service and by abolishing subsidies to parastatals. Budget deficits have been
increasingly financed from foreign resources with import support. adjustment lending.
project loans and grants. It has improved domestic credit availability by the private
sector.

9)          There are about 400 parastatal companies in Tanzania. Lack of
competitive pressure has led in many companies to inefficiencies in administration
and low productivity. The government is now implementing the parastatal
rehabilitation program with an objective to eliminate most of their budgetary support
by 1992193. Some 45 state owned enterprises are to be wholly or partially privatized.

10)         Tanzania's financial sector is undeveloped, there is no competition, and
the quality of services is generally low. National Bank of Commerce (NBC) has a
virtual monopoly on comm~rcial banking business. Other reasons for service
deterioriation are internal inefficiency. the government interference, foreign currency
loans and non-performing co-operatives and parastatals. To reverse the alarming
situation Financial Sector Reform Program was initiated by the Presidential
Commission in July 1990 and followed up by a new Banking Act in April 1991.

11)        The Tanzanian manufacturing sector is composed of small and medium
size private enterprises, large scale parastatals established in the 1960s and 1970s
and the informal sector. The manufacturing performance was generally favorable
until the mid-1970s, after which the sector declined almost continuously over the
next 10 years. Extensive public industrial investments had led to poorly deSigned
and high-cost production, and they did not match with the economy's ability to eam
foreign currency for operational purposes.

12)       The trade and industry policy reforms, undertaken since the mid-1980s
coupled with increased availability of external resources. have provided a markedly
improved environment for both large and small scale industries. Accordingly, the
manufacturing value added increased nearly 7 per cent a year during 1987-90.

13)       According to a survey in 1988, there were 711 establishments with more
than 10 persons, which employed a total of about 114,000 people. Of them, some 69
per cent were working for public and 31 per cent for private employers. As for small
manufacturing, some 17,800 such establishments have been identified in Tanzania.
They are primarily very small employing only 1-4 persons.

                                     Karl PtIiIkkJ1.rl
 RPEDlTanzania Country Background Paper
 Enterprise Sector in Changing Environment                                            iii


 14)        .In general. food and beverages together with textiles (including wearing
 apparel) are the biggest sub-sedors of Tanzanian manufacturing. Of the above 711
 industrial establishments, 162 are engaged in food processing and 135 in textile
 industries. Those subsedors covered in 1988 about 40 % of gross output and 63 %
 of manufaduring employment. Other significant manufaduring includes petroleum
 produds and chemicals, basic metals and metal produds, printing and publishing,
 and transport equipment.

 15)       Dar es Salaam has the largest concentration of industrial establishments,
 266 (37 %) of all the 711 employing more than 10 persons. Those establishments
 produced primarily food, beverage, textiles, paper produds and printing, fabricated
 metal products and transport equipment. Other important industrial centres are in
 Tanga, Arusha, and Kilimanjaro, Mwanza and Morogoro.

 16)         Among manufadured exports, textile and cement have been dominant,
 with their combined share f1uduating around 50 per cent in the 1980s. There are no
 adual export industries in Tanzania, because official policies have favored to supply
 the domestic market in the first place. Combined with the currency overvaluation and
 restridions on competing imports the chosen policy sealed Tanzanian manufaduring
 effedively out of the international competition, quality requirements and produd
 development.

 17)        Indigenous entrepreneurship is at an early stage of development and
 mainly limited to small scale businesses. The reason for weak development of
 African·owned businesses has been the lack of conducive enterprise environment
 rather than a lack of entrepreneurship itself. Along with liberalization, the number of
 small scale firms established in Dar es Salaam between 1986 and 1990 was about
 2,500, which is three times the total number of similar firms established in almost 20
 years from 1967 to 1985.

 18)        In spite of official harassment in earlier years, informal and small
 enterprise sector growth has been rapid. Based on the number of licenses issued to
 micro entrepreneurs, informal employment in Tanzania exceeded one million at the
 end of the 1980s. The respedive figure for 1978 is 570,000. The informal sectors
 size may be as high as 30 per cent of the GOP compared to only 7 per cent in 1975.

. 19)        In the first part of the 1980s and until 1987 the flow of foreign direct
  investments into Tanzania was insignificant. Since then, foreign investors have
  started to show at least some interest in the country. However, there have been a
  few "real" equity investors so far indicating that confidence in Tanzania as a country
  for profitable business has been low. The law still allows to expropriate private
  property, but it does not specify how the compensation is determined.

 20)       Only in the latter part of the 1980s, the Tanzanian official policy started to
 be more conducive to entrepreneurship and private business development. An
 Investment Promotion Center with a new Investment Promotion Code were
 introduced in 1990. Entrepreneurs exped now that the government will support it by
 removing remaining constraints to productive adivity.

                                      KtJri PtJOlcIcJui
RPEDlTanzania Country Background Paper.
Enterprise Sector in Changing Environment                                             Iv


21)        A real constraint for business development is the lack of viable investment
opportunities. Insufficient physical infrastructure like wom-out roads and railways
together with poor telecommunication system compose a severe barrier to business
development. When adding to this unreliable or non-existing supply of power and
water in many locations, and insufficient supply of serviced industrial sites, investors
require a high retum to balance the risk they undertake.

22)       With help of donors, the govemment has in recent years introduced new
instruments to improve foreign exchange availability. The main instruments are the
Open General License (OGL) system established in February 1988. Export
Retention Scheme and Own Funded Import Scheme. In spite of all the described
schemes, there were in 1991 considerable arrears of prOfits and extemal debt
service payments waiting for repatriation from Tanzania.

23)        Enterprise sector has suffered for years from non-availability of long term
loans for investment purposes and from poor services of commercial banks.
Financiers have often a passive attitude towards clients, because there is no
competition. The efficient crowding-out of the private sector with public sector
borrowing for the needs of administration. parastatals and other purposes has been
a long-lasting phenomenon.

24)        Tanzania's new investment promotion policy offers non-discriminatory
opportunities to both local and foreign investors. Fully owned foreign ventures are
possible. Investment priorities have been stated and the investment Code offers
generous investment incentives like duty exemptions, .tax holidays and onld fairly
free repatriation 'of capital gains.

25)         Business training opportunities in Tanzania are still quite heterogeniC, and
insufficient by their coverage. Availability is often limited by its cost or simply
because the demand exceeds the training supply. Other institutional support require
development as well and entrepreneurs have only recently started to organize
themselves into associations. An example of the sector oriented .organizations is the
Tanzania Forestry Industries Association. established in 1989, to support its
members with various services and to represent the interest 'of forest based
industries to authorities.                       .

26)        In spite of pertaining and numerous bottlenecks in the business
environment, the development outlook as seen by entrepreneurs is encouraging
regarding capacity utilization, exports and investment. If the govemment reform
policies continue uninterrupted, the overall economic outlook is prospective. The
World Bank scenarios on the GOP growth for 1991-1995 vary between 4-5 per cent
annually, Small enterprises including informal sector participants are expected to
contribute significantly to the economic growth.




                                     KIlri PfHllcJaJri
Table of Contents
                                                                                                          Page

1 Introduction .......................................................................................... 1

2 Overview of the Economic Development••••..•••.•••••..•••.•••.•••..••.•••.••.••• 2
         2.1 Post Independence Period ............................................................... 2
         2.2 Establishment of Socialism ............................................................... 2
         2.3 Economic Performance in the 1970s ................................................ 3
         2.4 Economic Crises ............................................................................... 4
         2.5 Structural Adjustment Period ............................................................ 6
         2.6 Current Economic Performance ....................................................... 7

3 Public Sector ................................•....................................................... 8
     3.1 The Government Finance ................................................................. 8
     3.2 Parastatals and Privatization ............................................................ 9

4 Financial Sector ................................................................................... 10

5 Manufacturing ...................................................................................... 13
     5.1 Development ................................................. ~ .................................. 13
     5.2 Size of Establishments ..................................................................... 14
     5.3 Sub-sectors ...................................................................................... 15
     5.4 Location ........... :................................................................................ 16
     5.5 Export Ttade ...................................................................................... 17
     5.6 Technology .....................................................:................................. 17
     5.7 Subsectors of the Study ................................................................... 18

6 Enterprise Initiative .............................................................................. 19
         6.1   African Entrepreneurship ..............•................................................... 19
         6.2   Informal Sector ................................................................................. 19
         6.3   Cooperatives .................................................................................... 20
         6.4   Women as Entrepreneurs................................................................. 21
         6.5   Foreign Investment. ......'.................................................................... 22

7 Enterprise Environment .iII ••••••••••••••••••••••••••••••••••••••••••••••••••• ~ •••••••••••••••• 22
        7.1 Changing Perception on Enterprise Sector ...................................... 22
        7.2 Infrastructure ......... :.......................................................................... 23
        7.3 Legal and Regulatory Framework ...............................................: .... 23
               - IPC and Enterprise Establishment.. ........................................... 23
               - Taxation ..................................................................................... 24
               - Property Rights and land Availability ........................................ 24
               - labor Market and Regulations .................................................. 25
               - Price Control and Trade Policies ............................................... 26
               - Foreign Exchange Availability ................................................... 26
        7.4 Credit Policies .................................................................................. 27
        7.5 Investment Policies and Incentives .................................................. 27
       7.6 Business Training Opportunities ...................................................... 28
       7.7 Institutional Support ................................................................... ....... 29
       7.8 Constraints for Enterprise Development. .......................................... 30

8 Enterprise Development Outlook ....................................................... 31
RPEDlTanzania Country Background Paper
Enter;erise Sector in Changing Environment                                        1



1 Introduction

Tanzania has been chosen as one of the eight target countries for the research
program of Regional Program on Enterprise Development (RPED) organized and
managed by the World Bank. RPED research will include in each country three
components, the first of which is an extensive survey on enterprises in four to five
major sub-sedors of manufaduring. The survey will. result in a country study
aiming at to provide better understanding on private enterprise sector and to
contribute to business enabling environment of that country. The two other
components are in depth case studies based on the survey data and similar
studies on business support arrangements in the country.

As regards the country study on Tanzania, the preparatory phase has
commenced including a Tanzania Country Background Paper, in the following.
The paper will help design the study and it will provide necessary country-specific
and sedor-oriented background information to the members of study groups who
will visit Tanzania during the RPED program.

The objectives of this paper are:

        a)    to review the development of Tanzania's economy. major
              policies and regulatory environment of the enterprise
              sector,
        b)    to describe the institutional framework that is related to
              manufacturing enterprises,
        c)    to analyze the status of manufaduring enterprises and
              their main features.
        d)    to gather information on studies, reports and other
              publications relevant to RPED and further work.

The paper has been prepared as a desk study in Finland utilizing available local
and international sources of information. Because no interviews were conducted
in Tanzania, the paper may lack up-to-date views and professional opinions on
the topic. A separate visit was. however, made to the World Bank in Washington,
D.C. for gathering further information on Tanzania.

The paper is strudured as follows: Chapter 2 presents an overview on the
economic development of Tanzania to provide background information. on the
changing policies and circumtances of the enterprise sedor during the past 30
years. Chapters 3 and 4 relate specifically to the public finance with parastatals
and the performance of the financial sedor. Chapter 5 reviews the development
and position of the manufaduring sedor in the Tanzanian economy. Chapter 6
focusses on the enterprise initiative in Tanzania, the driving force for business
development. Chapters 7 and 8 concentrade on the current operating
environment and development outlook of the enterprise sedor. The findings of the
paper are summarized under a separate chapter.


                                    KIlrl Paolduui
 RPEDlTanzania Country Background Paper
,Enterprise Sector in Chanping Environment                                                        2



2 Overview of the Economic Development

        2.1 Post Independence Period

At independence in 1961, Tanzania was largely dependent on subsistence
agriculture and the main export goods were sisal, coffee and cotton. Industrial
sector was nearly non-existent and the number of manufacturing employment in
1961 wa.s estimated to be about 22,000 out of a work force of some 5 million.
During the first few years, the economic development of Tanzania was primarily
based on private investment, although the government started to establish quite
soon state-owned enterprises. Otherwise, official economic policy was neutral; no
particular sector -private or public- was favored.

The available data shows that during the period of 1961-1967 the economic
development was favorable. Average GDP growth surpassed 6 per cent a year
and the number of new enterprises doubled from 220 in 1961. Many of them were
in the manufacturing sector, but instead of indigenous Africans, economic activity
was largely initiated by migrants from South Asia [1,3].

By mid-1960s, it turned out that the private sector investment and the inflow of
funds by foreign investors and donors had been overestimated. The pace of
development did not satisfy the government, and to improve the situation,
business incentives like accelerated depreciation, tariff protection, guarantees of
profit repatriation were introducted in the First Five Year Plan (1964-1969). Kenya
continued to interest European (British) investors much more than Tanzania,
which often was considered only a secondary market for Kenya-based operations.

        2.2 Establishment of Socialism

Along with increasing economic activity, the political and economic philosophy
called for economic independence, self-reliance and greater emphasis on lifting of
poverty, employment generation and rural-urban equinty. This philosophy was
spelled out in the Arusha Declaration in 1967. The declaration was based on
public ownership of important economic establishments, rural and agriculture1
development, national self-reliance and provision of social services like education
and health-care to the people.

The Declaration had far reaching economic and social implications in the late
1960s and the 1970s. The government continued to establish parastatals at an
increasing rate and to nationalize existing large scale industries, commerce and
financial institutions. The number of parastatal organizations grew to about 400 by
1981. In rural areas, the ujamaa village program was introduced. Villages were
first organized on a voluntary basis, but soon followed by compulsory relocation

1 In practice, agriculture did not receive as much attention in national planning as development of
industrial production [1].


                                        . KIln Paakk4n
RPEDfTanzania Country Background Paper
Enterprise Sector in Changing Environment                                      3

from 1973 onwards with some 13 million people having been moved by 1976.
Traditional cooperatives were brought under state control and land was taken into
public ownership. As regards the social sectors, the Declaration led to
considerable increase in the provision of educational, health and other social
services.

         2.3 Economic Perfonnance in the 1970s

The Tanzanian economic performance is characterized from the time of the
Arusha Declaration to the end 1970s with the following macroeconomic indicators:

         Tabl,e 1: Selected MacrO-indicators, 1966-1980.

            Annual °k.growth                        1966-75    1976·80
            Gross Domestic Product                       4.7     2.0
            GOY per capita                               1.5     -4.7

            Ex~orts                                     -6.9     -5.7
            Imports                                      0.6      2.1

            Terms of Trade,
            rate of change                               3.9    -S.7
            Inflation                                   12.1    16.5

            Gross Investment/GOP, %                     20.7    24.7
            Nat'l Savings/GOP, %                        15.5    15.6
         Source:World Bank: Tanzania Economic Report Towards Sustainable
         Development in the 1990s [S]

Until the mid-seventies economic growth was still 4.7 % a year on the average,
although the country suffered from the first oil shock in 1973 and two years'
severe drought. The growth involved, however, emerging structural imbalance~
and weaknesses in the economy. The worst imbalances could be seen in the
investment financing. current account and the government budget:

     •      Domestic savings. (private, parastatal, government) did not
            keep pace with increased investment, which led to excessive
            use of foreign aid for capital formation.
     •      Tanzania's widening current account deficit reflected not
            only the gap between investments and savings, but also
            declining exports and increasing imports.
     •      The amounting fiscal deficit of the government led to a triple
            of the national debt from 1973 to 1978 [4].

An important policy measure was the introduction of Basic Industry Strategy (BIS)



                                     /(Qri PaaIdaui .
RPEDlTanzania Country Background Paper
Enterprise Sector in Changing Environment                                          4

in 1975. BIS was to replace the country's dependeAce on foreign investment and
aiming at restructuring of industrial production, Africanizing of business
management . and establishment of heavy production like pulp and paper,
chemical, iron and steel industries. As it will be shown below, the outcome of the
donor supported strategy did not futfil the expectations, but led to large investment
of funds in inefficient public enterprises with low returns.

During the latter part of the 1970s the average GOP growth declined to 2.0 % a
year and the macroeconomic imbalances continued to worsen. Domestic
investments were increasingly financed with development aid, because
commercial lending was drying up. Soon also donors started to be concerned
about low returns of aid financed investments and by the early 1980s many of
them realized that excessive external support only allowed the government to
sustain inappropriate macroeconomic policies. Consequently, availability of aid
funding became more difficult resulting in production cuts and shortages of basic
consumer goods.

In addition to internal problems, the country was hit with external shocks in 1978.
The second oil price increase, successive droughts and the war with Uganda
contributed to the upcoming economic crises. Another reason to the declining
economy was the indifferent and even hostile attitude of the government towards
entrepreneurship and the private sector. This policy hampered private investment
and left enterprises without conducive business environment with necessary
support and incentives. ,

      2.4 Economic Crises

The period of crises (1979-1985) in the Tanzanian economic development
included both virtual collapse of the economy and the start-up of new thinking
which was reflected in the Structural Adjustment Programme (SAP) launched in
1982. However, the impact of policy changes on economy could only be seen
over a longer period of time. As shown in Table 2, per capita income continued to
decrease by 1.6 % a year in 1981-83, after which a slight improvement took place.




                                   Karl PQII/ctQri
  RPEOITanzania Country Background Paper
. Ente!:erise Sector in Changing Environment                                    5


       Table 2: Growth of Selected Macro-indicators, 1981-1985.

       Annual %-arowth                     1981-83     1984-85    1986-90
       Gross Domestic Product                    0.5       2.7         4.5
       GOY per capita                           -1.6       0.9         0.2

       Exports                                  -8.1      -2.4        10.2
       Imports                                  -7.0     -11.3         1.3

       Terms of Trade,
       rate of chang~                          -1.0       3.8         -7.9
       Inflation                               29.4      33.2         25.0

       Gross InvestmenUGDP, %                  18.4      15.5         21.1
       Nat'l Savinas/GDP, %                    11.4       8.6         -0.2


       Source: World Bank: Tanzania Economic Report Towards Sustainable
       Development in the 1990s [5].

 The compression of imports due to lack of foreign exchange continued the
 shortage of consumer goods as well as of industrial raw materials and spare
parts. Consequently, utilization of production capacity fell further while
 infrastructure, transport system and the capital stock of manufacturing
deteriorated. The previous government investment strategy (BIS) had left
Tanzania with a great number of large-scale, import-dependent and inefficient
parastatals, whid1 in the beginning of the 1980s were often operating at about 30
% capacity or less. The villagization process, in tum, had caused a drop in
agricultural production and a sharp increase in food imports. The downward spiral
in the economy was ready and it accumulated both extemal and fiscal imbalances
undermining the achievements gained in education, health and other social
services.

In addition to the extemal factors mentioned above, several weaknesses in the
govemment's own policy were identified. These included:

          •      inadequate incentives and resources for the
                 agricultural sector;
          •      a poorly implemented industrialization strategy;
          •      excessive administrative controls over economic
                 activity; and
          •      the continued growth in the size of the public sector
                 without due regard to the limited financial resources. [6]

During the early 1980s a number of "survival plans" were introduced but they



                                    Kari PaoIdt:ari
       RPEDlTanzania Country Background Paper
,~_.   Enterprise Sector in Changing Environment                                        6

       failed to address the key problems. Also, the govemment was resistant to many
       corrective measures such as devaluation and fiscal restraint, which the
       Intemational Monetary Fund (lMF) set as conditions for its support. As the crises
       deepened, the above mentioned SAP for 1983-1985 was launched:

                 1)   to achieve better macroeconomic balance,
                 2)   to provide better incentives to agriculture,
                 3)   to improve the efficiency of parastatals.

       The 1984/85 budget included several adjustment measures such as a 35 %
       devaluation, 40-60 % increase in agricultural producer prices and introduction of
       forex retention accounts for exporters. The SAP represented a partial tumaround
       in the official economic policies, but still stronger adjustments were required to
       reverse the deterioration of the Tanzanian economy [7].

             2.5 Structural Adjustment Period

       The following rescue operation was initiated in June 1986, when the govemment
       embarked on a three-year comprehensive and medium-term Economic Recovery
       Programme (ERP). At the same time, the country reached an agreement with the
       IMF, which led to an infusion of badly needed foreign exchange and gave a better
       ground for economy's reconstruction. ERP was a more definite deciSion by the
       govemment to break with the past policies in order to reverse the severe
       economic decline.

   The major objectives of the ERP were to "achieve a positive growth rate in per
   capita income, lower the inflation rate, and restore a sustainable· balance of
   payments position" [9]. The operational targets included

            1)    increased food and export crops output through price and
                  non-price incentives such as an improved crop marketing
                  system and foreign exchange availability; .
            2)    increased industrial capacity utilization through expanded
                  foreign exchange allocation to industry;
            3)    re-directing govemment investment expenditure from heavy
                  industrial expenditure towards rehabilitating infrastructure;
            4)    adoption of restrained fiscal and monetary poliCies.

   The new policies of the govemment were welcome by the intemational donor
   community and further resources were made available together with program
   support from IDA. External funding decre~sed the govemment's borrowing needs
   in the domestic market which improved the private sector's access to bank credits.
   Over the three years of the ERP, Tanzania's economy including agriculture
   improved and the GOP grew by 4.5 % a year in 1986-90, Table 2. Other positive
   indicators were decreasing inflation, increasing capacity utilization and exports
   partially as a result of a removal of the Shilling overvaluation, trade liberalization
   and gradual abolishment of price controls.


                                         K.ari PtlllkkJlri
RPEDlTanzania Country Background Paper
Enterprise Sector in Changing Environment                                         7


Although the country remained facing a number of obstacles (such as worn..out
infrastrudure, weak financial services and export earnings), the ERP succeeded
in its main objective, to establish the initial transition toward market economy.

      2.6 Current Economic Performance

In 1989 the government instituted a second phase of the economic recovery plan
which they called the Economic and Social Action Programme (ESAP). The ESAP
is a medium-term package up to 1992 focusing on detailed sectoral objectives and
economic policies. The ESAP complements the ERP with special attention given
to improving the quality of life of the low income groups. The financing of health,
education, housing and other social services had been cut in half from 1981 to
1986 or from 21 to 11 % of total government expenditure. Other measures
implemented under the ESAP include:

        1)    continued adjustment of the exchange rate;
        2)    continued industrial restructuring;
        3)    continued external trade policies liberalization and
        4)    infrastructural rehabilitation.

The government is on the way to make long-term public sedor expenditure
redudion through trimming of the civil service.

The recent economic development and outlook for 1993 is summarized in the
Table below:     .
 RPEDlTanzania Country Background Paper
 Enterprise Sector in Changing Environment                                        8



       Table' 3: Key Economic Indicators, 1990-1993

     % real change,                    1990             1991    1992    1993
     GOP at factor cost                  3.5             3.8     2.5     5.0
     of which
     - Agriculture                       6.6             4.6     2.0     6.0
     -Industry                              -            5.0     4.0     5.0
     - Services                             -            2.5     2.5     3.0
     Consumer price inflation          19.7             22.3    20.0    20.0
     Million USD
     Exports (fob)                     408               410     420      450
     Imports (cif)                   1,364             1,410   1440    1t SOO
     Current account balance          -425              -400    -400    -375

       Source: EIU: Tanzania, Mozambique. Country Report No 31992.

The ERP-period in 1966-1989 was successful in terms of economic growth and
the above figures indicate that this trend continues although at a lower level. The
severe drought in the agricultural sector. which accounts for some 55 per cent of
economic activity, is currently curtailing the growth. However, the GOP is
expected to increase to 5 per cent in 1993. High inflation, about 20% and
unbalanced foreign trade are among the major negative features of the Tanzanian
economy. In 1990191 Tanzania could cover only 30 per cent of the imports with
export income. Availability of foreign currency for foreign payments is secured as
long as donors cover the gap in foreign trade.


3 Public Sector

      3.1 The Government Finance'

The weakness of the existing data makes it difficult to analyze the government
finance. In general terms, however. the government was largely successful in
meeting annual fiscal targets during the ERP. Since the mid 1980s. the revenues
have recovered, principally due to a better performing economy,




                                   Kari PlIIlkJcJlri
 RPEDlTanzania Country Background Paper
 Enterprise Sector in Changing Environment                                        9



       Table 4: Government Budget and Financing as Percent of GOP

        Budget                           1985/6    1988/89     1989/90
        Total Revenue                      14.9      19.9         20.0
        Total EXDenditure,                 23.1      28.3         24.7
        of which
        - Recurrent EXPenditure            19.2       21.6        21.2
        - DeveloDment Expenditure           3.9        6.6         3.5
        Overall Deficit after Adj.         -5.9       -9.4        -5.3·
        Financina
        - Foreian                            1.6       7.1         4.3
        - Domestic                           4.4       2.2         1.0


       Source: World Bank: Tanzania Economic Report Towards
       Sustainable Development in the 1990s [51.

tax adjustment and increased collection effort. Recurrent expenditure rose during
the latter part of the 1980s primarily because of the increase in extemal debt
servicing due to devaluations. Cost savings were gained by freezing the
employment levels in the public service with a few exceptions and by abolishing
subsidies to parastatals.

Development expenditure showed an increase as well. but it also reflected
depreciation of the exchange rate because foreign exchange component of the
investment budget is relatively large.· The real development expenditure almost
halved in value and in relation to GOP in 1986-1990. When considering that the
same fall took also place in the early 1980s, the level of investment expenditure
was extremely low and could be seen in the deteriorating infrastructure and other
services in Tanzania.

In 1989/90 the total revenues composed about SO % of the total expenditures.
Recent budget deficits were increasingly financed from foreign resources with
import support, adjustment lending, project loans and grants. It is consistent with
the ERP policy that official domestic borrowing is reduced in order to improve
credit availability by the private sector. The long term debt of Tanzania in 1991
amounted to USD 4.9 billion (= 194 %/GDP). but its service of exports was only
16.5 per cent.

      3.2 Parastatals and Privatization

If excluding holding companies and non-active ones, there are about 400
parastatal companies in Tanzania. They have operated up to recent years both
commercially and finanCially in protected environment. Lack of competitive
pressure has led in many companies to inefficiencies in administration and low



                                  Karl PaQ/dcari
RPEDlTanzania Country Background Paper
Enterprise Sector in Changing Environment                                        10

productivity. According to a survey by the World Bank on the financial
performance of 364 parastatals in 1989, there were 189 enterprises making
losses amounting to TSh 32.9 billion (USD 144 million). On the other hand, the
remaining 175 companies reported a pre-tax profit totalling TSh 16.2 Billion (USD
71.7 million).

To reverse the 'economic malfunctioning of the parastatals and their increasing
burden to the economy, the govemment has considered various measures at
least since 1983. In 1983 the President appointed a special commission (the
Hamad Commission) to review the performance and to propose action for reform.
The recommendations led to certain cost savings through lay-off of workers,
administrative reforms and closing down or to divestment of some 20 parastatals.
However, financial support to parastatals increased throughout the 1980s and
was nearly 9 per cent of the govemment total expenditures in 1989/90. Parastatal
dividends paid to the budget were negligible. The government is now continuing
the parastatal rehabilitation with an objective to eliminate most of their budgetary
support by 1992193.

Because of the limited resources available, the govemment is also looking for
private investors to invest in parastatals. Some 45 state owned enterprises are to
be wholly or partially privatized and some of them have already been put up for
sale. The prime constraints of privatization are non-existent capital market, and
limited financial and managerial resources of indigenous private sector. To speed
up the process, the World Bank is helping the govemment in privatization
together with donors.

4 Financial Sector

Tanzania's financial sector is undeveloped and mainly owned and controlled by
the government. There is no competition, and the quality of services is generally
low. The capital market is non-existing and there are no stock exchange or
merchant banks to provide modem underwriting, brokerage and investment
management services.

Apart from the Bank of Tanzania, there are three commercial banks, National
Bank of Commerce (NBC), Co-operative and Rural Development Bank and the
People's Bank of Zanzibar. NBC has virtual monopoly on banking business. There
are two development banks, Tanzania Investment Bank and the Tanzania
Development Finance Limited, and' a few smaller financing institutions like Post
Office Savings Bank and Housing Bank. In addition, there are almost 400 savings
and credit organizations and more than 200 multipurpose cooperatives involved in
financial intermediation in rural areas. Informal financial market can also be found
serving non-indigenous entrepreneurs in the first place.

In the following, there is a brief description on the performance of the prinCipal
financial institutions as regards the support to the enterprise sector [15]:



                                   Kari Paa/ckQri
RPEOlTanzania Country Background Paper
Entererise Sector in Changing Environment                                       11

National Bank of Commerce (NBC)
      NBC is financing small enterprises through its Small Enterprise
      Department and Women Development Project Department. The
      branch network covers all districts and now the bank is expanding
      itself on village level. The maximum loan amount is 250,000 USD
      equivalent in Shillings with a maximum term of 10 years. The loan
      interest in 1991 was 21-23 per· cent per annum. A full collateral is
      required, either fixed assets, guarantee or a bank deposit. NBC has 7
      business development centers which provide free of charge services
      for project preparation. Loan decision power is decentralized to
      regions up to TSh 30 million. In addition to the govemment, NBC is
      funded among others by SIDA and KfW through the treasury.

      NBC has been criticized for its inefficiency, long loan processing time
      (112 - 1 year) and non-performing portfolio. Based on an interview in
      October 1991, the NBC management was of an opinion that there are
      also other reasons for poor services: Clients have often only a vague
      idea of a bankable project and their business standards may not fulfil
      the bank's requirements. Also, most of the portfolio (1,500 clients)
      come from the early eighties when there was poiitical pressure for
      financing non-viable projects.

Small Industries Development Organization (SIDO)
      5100 operates under the Ministry of Trade and Industry and it is
      responsible for promoting and offering techno-economic, marketing
      and management services and training to small industries. Its network
      consists of 20 regional offices, 17 industrial estates and 10 training
      and production centers. SIOO does not provide finance, only
      machinery and equipment on a hire purchase basis with SIDA's
      assistance. Collateral requirement is limited to the asset in question.
      Since 1989 the hire purchase program has been extended to informal
      sector with a maximum finance of 100,000 TSh on concessional
      terms.

      Another special program of 5100 is the Support to Women
      Entrepreneurs. Recipients get preferential treatment; only 10 per cent
      down payment is required (25 % normally) plus a low interest rate. It
      is also supported by SIOA. the latest allocation being SEK 2 million.
      SIOO has prepared a strategy-paper for the 1990s to decentralize. its
      operations and to improve efficiency through administrative reforms.

Ca-operative and Rural Development Bank (CRDS)
     CROB was established with an Ad of 1971 for financing of
     cooperative sedor. It is jointly owned by the govemment, BOT and the
     Cooperative Union of Tanzania. The share capital is TSh 1.4 billion.
     Major financiers are BOT, the govemment, multi- and bilateral donors
     and deposits. CROB has 11 branch offices in the country and it


                                  Kari PfllildcD.ri
     RPEDlTanzania Country Background Paper
__ _ Enterprise Sector in Changinp Environment                                     12

         employs some 1,200 people.

         CRDS's lending to enterprise sector in agro-industries and
         manufacturing has been quite limited. The mainstream of the
         financing has been extended as seasonal loans to cooperative
         unions. In 1987-89 sma" scale industries received only 10-15 per cent
         of the loans. eROS lending has also been directed to parastatals and
         ujamaa village authorities. Thegovemment has frequently intervened
         in CRDS's activities leading to finanCing of inviable projects and to a
         situation where most of the TSh 16 billion portfoliO is no~performing.
         CRDS's financial status is critical.

         The restructuring of eROS includes components for the portfolio
         assessment, operational and organizational refurbishment, search for
         new (private) shareholders and recapitalization. eROS is expected to
         operate as an independent commercial bank in the future.

  Tanzania Investment Bank (TIB)
       TIS has recently expanded its lending activities to small enterprises
       with two programs. Until now the lending minimum has been so high
       that it has excluded a large number of small entrepreneurs from the
       bank's financing. The Fund for SmalllMedium Scale Sector is one of
       the programs. Acceptable projed size under this program is from
       100,000 TSh to TSh 56 million. Using the 1991 exchange rate the
       lower project limit equals to 1,800 FIM. The second newly established
       program is' the Women Fund, TSh 55 million. The objective of this
       fund is to provide medium and long term loans, technical assistance .
       and advice to enable women to manage their investment projeds.

         In the case of TIS, the restructuring means to review the portfolio, to
         identify the areas of new activities and new sources of funding. The
         govemment has already increased TIS's share capital. One of the
         development areas of TIS is to establish a regional office network of 5
         offices. Shortage of funds is hampering the network establishment.

  In recent years, the entire Tanzanian banking system has seriously deteriorated
  and it has become insolvent. Major reasons indude intemal inefficiency and
  extemal factors such as govemment interference, foreign currency denominated
  loans and non-performing co-operatives and parastalals. The govemment has
  responded to the alarming situation with the Financial Sector Reform Program
  initiated by the Presidential Commission in July 1990 and followed up by a new
  Sanking Act in April 1991.

  The reform of the financial sector started with non-performing portfolio
  assessment and is to be followed by recapitalization. Restructuring of existing
  institutions is expected to last at least for two years. This means that an
  entrepreneur has to wait for some time for improvement in banking services. The


                                      Kari PaaIdctui
 RPEDlTanzania Country Background Paper
 Enterprise Sector in Changing Environment                                      13

 funds availability may gradually improve due to decreasing borrowing by the
 govemment.


 5 Manufacturing
       5.1 Development

The real manufacturing value added increased every year from independence
until the mid-1970s. This was first the result of some private investment and after
1967 almost exclusively public investment in manufacturing. In the late 1970s
there was a rapid expansion of large industrial investments within the parastatal
and almost 40 % of the total public investment went to those purposes. However,
the investments were not supported by domestic savings, but by a remarkable
build-up of extemal assistance to Tanzania in 1973-81. As described above,
those investments led to poorly designed and high-cost production, and they did
not match with the economy's ability to eam foreign currency for operational
purposes. The production stagnated in the latter part of 1970s and declined
rapidly until 1986 with accumulating losses.

Among the factors contributing to the declining economy in the 1970s was the
non-supporting attitude of the govemment towards the private sedor and
entrepreneurship. The private sector continued to account for a significant share
of economic activity, but 'it did not receive adequate attention or resources in
national planning .. ' Private sector development was also curtailed with the
Leadership Code, which did not allow civil servants and party leaders to
partiCipate in private businesses.

 By the early 1980s, the administrative allocation of foreign exchange resulted in
 substantial capacity underutilization and restridive import licensing isolated
,domestic industry from extemal competition. Domestic competition was curbed
 through price controls and other regulatory policies. Consequently, the share of
 manufacturing in GOP decreased markedly during 1976-1988, as shown below:




                                  Karl PQQ/ckari
RPEDlTanzania Country Background Paper
Enterprise Sector in Changing Environment                                    14

      Picture 1. Sectoral Division of GOP, %-Shares.




                  1976     1979        1982          1986   1988


      Source: World Bank: Tanzania Economic Report Towards Sustainable
      Development in the 1990s [5].

When agricultural production increased to more than 60 per cent of GOP by 1988.
the share of manufacturing declined from 13 in 1976 to only some 4 per cent
in1988. As for comparison. the respective share in Kenya is 11, in Malawi 14 and
in Zimbabwe 26 per cent of the GDP[11].

The informal sector was possibly the only booming sector during that time in
Tanzania. Its growth was feed by unemployment and' low earnings forcing people
to search for additional income. Although not included in official national
accounts, it has· been estimated that "the second economy' grew from almost 7
per cent in 1975 to 31 per cent in 1986 of the Tanzanian economy [81.

The trade and industry policy reforms, undertaken since the mid-19BOs coupled
with increased availability of external resources, have provided a markedly
changed environment for both large and small scale industries. The main reforms
initiated during the ERP were the exchange rate adjustment. the policy of own-
funded imports, ready access to foreign exchange through the creation of Open
General License (OGL) facility. tariff and sales tax reforms and finally the
provision of export incentives and internal trade liberalization. Enterprises
responded to these reforms accordingly and manufacturing value added
increased nearly 7 per cent a year during 1987-90 [12].

      5.2 Size of Establishments

Up-to-date information on the Tanzanian manufacturing has not been available.
Based on a Surevey on Industrial Production, 1988 [22]. the number of
manufacturing establishments, output and employment of the units employing
more than 10 persons,were:




                                  Karl PtIIIk/cari
 RPEDlTanzania Country Background Paper
 Enterprise Sector in Changins Environment                                          15

       Table 5: Manufacturing Establishments in Tanzania, 1988.

        Establishment                      Private       Public        Total
        Number of Establishments               502          209           711
        Value Added, TSh bn                    4.2          7.2          11.4
        Persons Engaged                    36,007        79,156       114,163

The 711 establishments employed about 114,DOO people, of whom 69 per cent
were working for public and 31 per cent for private employers. As a comparison
and according to the 1988 Census, there were about 700,000 wage and salary
eamers in Tanzania. The size of the labor force was estimated to be 9 million.

By their size (value added/establishment), public establishments are about 4
times larger and their efficiency (output/person) is slightly lower than in the private
sector. According to the same statistiCS, manufacturing industry by employment in
Tanzania is heavily biased towards larger enterprises; the share. of
establishments employing less than 50 persons in manufacturing is 55 per cent
but their employment share only 7 per cent. Annex 4.

Information on registrated small scale industrial establishments employing less
than 10 persons is in Annex 3. In 1989, some 17,800 such establishments were
identified in Tanzania. They are primarily (90 %) very small employing only 1-4
persons and their spatial distribution is more even around the country than that of
larger establishments.

       5.3 Subsedors

The earliest of the larger manufacturing enterprises were established in the
agricultural processing sector (cigarette manufacture, meat canning, brewing,
pyrethrum processing and cashewnut shelling) or provided agricultural inputs
such as fertilizer and implements. Import substitution followed. Textile capacity
was expanded in the 1970s and there are six large mills in operation.

Typical sub-sectprs of the private sector enterprises include household products,
plastiCS, paints, soaps, cosmetics, furniture and wood products, motor vehicle
bodies and electrical equipment assembly. They are also covering a number of
other product lines in small-scale manufacturing.

In general, food and beverages together with textiles (including wearing apparel)
are the biggest sub-sectors of Tanzanian manufacturing. Of the above 711
manufacturing establishments, 162 were engaged in food processing and
beverage, and 135 in textile industries.

By value added the main sub-sectors of manufacturing are the following:




                                    Kmi PaokJcari
RPEOITanzania Country Background Paper
Enterprise Sector in Changing Environment                                     16

       Picture 2: Manufacturing Production by Value Added in 1988, (%).

                                         Other Products
                 Paper & Printing
                                           21%
                           6%
              Metal 7%
              Products


                     20%
               Chemicals &          11%
               Fertilizers Textiles & Wearing


      Source: Survey of Industrial Production.

Food products and textiles covered in 1988 about 35 % of value added and 63 %
of manufacturing employment. Other significantsub·sectors include chemicals
including petroleum products, basic metals and metal 'products, printing and
publishing, and tobacco.

      5.4 Location

Dar es Salaam has the largest concentration of industrial establishments, 266 (37
%) of all the 711 employing more than 10 persons. Those establishments
produced primarily food, beverage, textiles, paper products and printing,
fabricated metal products and transport equipment. The Dar as Salaam region
also contains the largest concentration of private sedor establishments.



      Picture 3: Location of Industrial Establishments in 1988.


                                            147        Other Regions
                 Morogoro 48
              Mwanza 47
                     52
             Kilimanjaro


                      M                                                2~
                      Arusha        87   Tanga               Dar as Salaam

                   Total number of establishments 711


      Source: Bureau of Statistics: Industrial Survey 1988.

Following Dar es Salaam, other important industrial centres are Tanga, Arusha,



                                     . Karl PQQkIaui
  RPEDlTanzania Country Background Paper
. Enterprise Sector in Chaniini Environment                                       17

 Kilimanjaro, Mwanza and Morogoro. In all these centres, food, beverages,
 tobacco and textiles are important products. Tanga's main industries are the
 fertilizer plant and the steel-rolling mill. Food and beverage production is also
 concentrated in Mbeya and lringa. Areas where there is little industrial
 development include Kigoma, Mtwara, Rukwa, Ruvuma, Singida and Dodomo,
 each with less than 10 establishments.

 The government policy is aiming at a better spatial balance of industrial
 development and it has divided the country into six industrial growth zones.
 Efficient implementation of the policy will remain dependent on the private sector
 interest to move to less developed areas and the rehabilitation of transport and
 communication networks to link factories, consumers and suppliers.

        5.5 Export Trade

 The export of manufactured products did not play any particular role in the
 economic policies until mid-1980s. During the Third Five-Year Development Plan,
 1975-1981, when the Basic Industries Strategy was' adopted, export
 manufacturing was regarded only as a logical extension of the domestic demand.
 The primary objective was to utilize domestic resources to produce manufactured
 goods for the domestic market. The surplus over and above the domestic
 requirements would be sold abroad. As there was no deliberate policy set up for
 promotion of export manufacture, it never really picked up and fluctuated within
 15-23 per cent of the total exports. Combined with the currency overvaluation and
 restrictions on competing imports the chosen policy sealed Tanzanian
 manufacturing effeCtively out of the international competition, quality requirements
 and product development.

The value of international trade was only realized in 1984/85, when the export
retention scheme and later on export duty drawback system were introduced as
part of the new economic policies. The retention scheme was set up to promote
non-traditional exports meaning mainly manufactures. After it was reinforced with
devaluation, there started to be signs of improved export performance. Among
manufactured exports, textile and cement have been dominant, with their
combined share fluctuating around 50 per cent in the 1980s. Tanzania also
exports petroleum products in excess of domestic consumption of the oil refinery,
which uses imported crude oil as its main input. By and large, the share of
manufactures in total exports, USD 408 million in 1991, was USD 73 million or 18
percent.

       5.6 Technology

Recent study results [10} indicate that enterprises themselves do not regard
product or production technology as any major operational problem. It may be
assumed, however, that the technological capability of Tanzanian manufacturing
is generally inadeqate. First, most enterprises in Tanzania supply only the
domestic market without foreign competition and therefore the market pressure for


                                    Karl Patlldulrl
RPEDlTanzania Country Background Paper
Enterprise Sector in Changing Environment                                         18

technological development has been low. Second, direct foreign investment to
Tanzania has been nearly non-existing, which also means low technology transfer
particularly to the private sector. As regards parastatals, they have had a
privileged access to techinical assistance and production equipment through
donor funds, and benefitted from modem technology transfer. Even so, it is a well
known fact that the utilization level of that capacity has been generally poor.

The Tanzanian technology supporting system includes a number of institutions
[231, one of them being Tanzania Commission for Science and Technology
(COSTECH) established in 1986. The main functions of COSTECH are to
promote scientific research and technology development in the country and to act
the chief advisor to the government on science and technology policy. Another
institution is the Tanzania Bureau of Standards (TBS) for standardization and
quality control of commodities. While the efficient operations of those institutions
have been effected by shortage of funds, the technology development of
Tanzania is also hampered lack of risk financing to support innovative
entrepreneurs and suitable materials leading to poor product quality.

5.7 Subsectors of the Study

The Tanzania country study will focus on five manufacturing subsectors:

         Table 5: Subsectors of the Tanzania Study.

Sector                        ISIC           Gross      No. of       No. of
                              Category       Output     Persons      Estab-
                                             Million    Employed     lishments
                                             TSh
Food and Beverages              311-313        9,800     38,854          162
Textiles and Wearing            321-322       11,086     35,080          135
Leather Products, Shoes         323-324        1,031      4,786           28
Wood Products,                  331-332        1,185      5,312          122
Furniture
Fabric. Metal Products              381        1,686      3,849           49
Manufacturing                         3       51.759    114,163          711

         Source: Survey of Industrial Production.

The five subsectors comprise 47 per cent of gross output, 70 per cent of
establishments and 75 per cent of employment in manufacturing industry. In
addition, it can be observed, .!hat

     •      out of the 49 establishments in manufacturing employing
            more than 500 persons 31 belong to the food and textile
            sectors,



                                     Kari paDlt:/ulri
RPEOfTanzania Country Background Paper
Enterprise Sector in Changing Environment                                        19

      •      that most establishments are small but most employment is
             in large ones,
      •      that small enterprises dominate wood-, leather- and metal-
             based production whereas in food and textiles the
             establisrlment size is more evenly distributed,
      •      that out of the five subsectors, textiles. leather and metal
             products in particular are concentrated in Dar es Salaam and
      •      that the private sector's highest coverage is in wood and
             metal products and that of the public sector in food, textiles
             and leather products.

Further statistical information on the subsectors is in Annex 4.

6 Enterprise Initiative

          6.1 African Entrepreneurship

 Due to historical reasons and Tanzania's own policies in the 1970s and early
1980s, the country is still relying to a large extent on entrepreneurs of Asian
origin. Some 90 per cent of private industry and trade outside the informal sector
are owned and managed by those entrepreneurs. Indigenous entrepreneurship is
at a much earlier stage of development and mainly limited to small scale
businesses. However, based on the findings of a World Bank sectoral survey on
furniture, construction and horticulture, there exists an abundant supply of
indigenous (African) entrepreneurs in Tanzania [5]. They appear to posses both
initiative and 'commitment to sustained business development. The reason for
weak development of African-owned businesses has been more the lack of
conducive enterprise environment than a lack of entrepreneurship itself. Along
with liberalization, the number of small scale firms established in Dar es Salaam
between 1986 and 1990 was about 2,500, which is three times the total number of
similar firms established in almost 20 years from 1967 to 1985. A major
shortcoming is still the low level of indigenous business skills and management
education.

          6.2 Informal Sector

In the 1970s and until mid-1980s the official policy and the Party (CCMlChama
Cha Mapinduzi) in Tanzania were openly against informal sector or micro
entrepreneurs. The government tried to curtail their businesses because the
operations did not constitute ·'productive work" and they lay outside the
authorities' control. Entrepreneurship also violated a party code against earning of
additional income.

In spite of official harassment, informal and small enterprise sector growth has
been rapid. Based on the number of licenses issued to micro entrepreneurs,
informal employment in Tanzania exceeded one million at the end of the 1980s.



                                     Kari PaolcIt:mi
RPEDlTanzania Country Background Paper
Enterprise Sector in Chansing Environment                                          20

The respective figure for 1978 is 570,000.

The basic reason to the employment growth is that for many people running an
own enterprise has been the only means for survival. During the last 15-20 years
the real income in Tanzania has declined drastically while consumer prices have
increased. Also inability of the formal sector to provide jobs, necessary products
and services has promoted micro businesses.

It was estimated that as much as 90 per cent of the urban household income in
Dar es Salaam is derived from informal sector activities by family members [16]. A
recent survey by International Labor Organization (ILO) in Zanzibar [17] revealed
that 53 per cent 'Of all households partiCipate in one way or other in informal
sector activities. In general, the informal (parallel) sector's size may be as high as
30 per cent of GOP compared to only 7 per cent in 1975. National accounting
does not include the transactions of the informal sector.

Since mid-1980s there has been a policy shift in Tanzania towards acceptance
and legalization of informal entrepreneurs. Their employment impact, .use of local
raw materials and supply of local markets with cheaper goods are now being
recognized. Hawking and street trading act was accepted in 1990. Also the
Leadership Code was recently revised so that a second job is again possible for
party members. The most severe constraint of the informal sedor has been
identified to be lack of access to capital. Nearly 80 per cent of the entrepreneurs
surveyed by ILO have relied on business profits to finance expansion [8].

      6.3 Cooperatives

In 1982 the Tanzanian Parliament approved the Cooperative Act aiming to create
self-reliance in rural areas with the help of cooperative societies. In upcoming
years, the number of societies increased rapidly with political backup. An
unfortunate feature of the program was that societies were ·usually established
without proper attention to economic viability. management quaJity and financial
control. The outcome by the end of the 1980s was that many societies had run
into operational disruptions and massive indebtedness.

The Tanzanian cooperative system is presently undergoing a major restructuring
along the following lines:

          •     The government direct control and interference will be
                removed and to be replaced by member-controlled
                cooperatives.
          •     Economic viability will be the sole objective of a
                cooperative instead of previous political and economic
                objectives.
          •     Membership through equity will be open to everybody
                and the members will select the management of a
                cooperative.


                                    Ko.ri PIIIIIdaJri
  RPEDlTanzania Country Background Paper
. Enterprise Sector in Changing Environment                                     21



The overall structure of cooperatives in Tanzania will contain primary and
secondary societies, Apex societies and the Federation. The secondary unions
will be owned and controlled by primaries through democratic procedures. The
main function of the government will remain to create and maintain conducive
environment to cooperative movement. Necessary legislative framework (Act) has
been accepted and action plans are being formulated to guide the restructuring of
the cooperative system.

The new cooperative formulation with economic viability criterium will bring a
society closer to a normal commercial enterprise. To improve operational
efficiency and profitability, societies may also establish joint businesses with
private sector if deemed necessary. The organizational and financial restructuring
of cooperatives will obviously be a long process requiring outside assistance and
business training.

       6.4 Women as Entrepreneurs

In the 1980s and early 1990s women have become increasingly involved in
income-generating activities in Tanzania. Based on a survey [16],65 per cent of
those who started small businesses between 1982-87 were women, while in the
previous five years women made up only 28 per cent of starting businesses.
Women are most actively engaged in petty trading, services like small
restaurants, tailoring shops and hair salons, and in small manufacturing (bakeries,
textiles) to some e~ent.

If the findings of a ILO survey [17] in Zanzibar are applied to mainland Tanzania,
women are equally represented if not more than men, in very small business
activities. Out of the nearly 90,000 informal sector operators in Zanzibar about 51
per cent were women. Most often they were as sole owners engaged in
manufacturing (making mats, fibre products, clothing and food processing), retail
sales (street vendors) and in restaurant businesses.

 Non-availability of credit from government-run lending institutions is an often
mentioned problem that women entrepreneurs are facing in Tanzania [18]. The
reason is usually the lack of collateral. In Tanzania women do not hold property
or land in their name and therefore they cannot usually obtain a credit, either. On
the other hand, specific lending programs have been set up to support women
who own and manage small enterprises. For example, eROS and NBC have
special credit schemes for women. The former has received grant funds for this
purpose from bilateral and international agencies (DANIDA, FAa, ILO) and the
latter has opened within its normal resources Women Development Project
Department. In the field of skills development, the Institute of Finance
Management carried out in 1990 a pilot program for women in collaboration of
ILO. The program was to train women to apply credits from banks and to improve
their record-keeping skills.



                                   Karl PaokkDri
  RPEDlTanzania Country Background Paper
. Enterprise Sector in Changing Environment                                      22

       6.5 Foreign Investment

In the first part of the 1980s and until 1987 the flow of foreign direct investments
into Tanzania was insignificant. Since then. foreign investors have started to show
at least some interest in the country. According to the data by the Bank of
Tanzania (BOT). the accumulated foreign investments in Tanzania were in 1990
only USD 9 million and divided as follows:

       Sector                              MUSD
       Agriculture and mining                5.4
       Manufacturing                         1.4
       §ervices                              2.2
       Total                                 9.0

About 90 per cent of the investments are in kind and only 10 per cent in cash.
There have been a few "rea'" equity investors so far indicating that confidence in
Tanzania as a country for profitable business has been low. At present. foreign
investors in Tanzania operate under the Foreign Investment Protection Act of
1963.

Both foreign and local investments seem to be picking up now. In October 1990 •
June 1991 the approved applications (projects) by the Investment Promotion
Center (IPC) amounted to TSh 57.6 billion or USD 255 million. Of the 144
approved projects 58 (40 %) are either joint·ventures or fully owned by foreigners.
On the average. the project cost is TSh 400 million (USD 1.8 million) and the
number of persons employed 137. IPC has received so far as many as 650
applications but many of them do not fulfil es.tablished requirements.

An example of ariSing commercial interest in Tanzania is a joint venture
agreement by the government with Portman Mining of Australia for the
development of the existing Pugu Kaolin Mines outside Dar es Salaam. The new
company will be known as East African Kaolin, with Portman owning 80 and the
government 20 per cent of the share capital. The company intends to expand
capacity to 240,000 tons per year from the current production level of only 3,000
tons.


7 Enterprise Environment

       7.1 Changing Perception on Enterprise Sector

Only in mid-eighties with major policy reforms towards market economy, the
Tanzanian official policy started to be more conducive to entrepreneurship and
private business ,development. After six years of adjustment, Tanzania may be
entering a period of sustained growth. Entrepreneurs' expectations are that the
govemment will continue to have a positive attitude towards private investment



                                   Kllrl PQQ/cJcQrl
RPEDlTanzania Country Background Paper
Enterprise Sector in Changing Environment                                          23

and will support it by removing remaining constraints to productive activity.

According to a survey conducted in 1991 [10]. over 90 % perceived that the
attitude of government officials was supportive. Furthermore, almost all producers
interviewed expected to expand not only production but capacity. and most had
concrete plans to enter into new lines of activity. Therefore, there are strong
indications on the private sector recovery and expansion.

       7.2 Infrastructure
In spite of positive expectations by entrepreneurs. the real constraint is the lack of
viable investment opportunities. Insufficient physical infrastructure like worn-out
roads and railways together with poor telecommunication system compose a
severe barrier to business development. When adding to this equipment
shortages and unreliable or non-exisling supply of power and water in many
locations, investors require a high return to balance the risk they undertake.

Several donor-aided rehabilitation programs to improve the infrastructure are
either in preparation or in implementation. The most extensive program is taking
place in the roads sector with the financing of the World Bank. Other programs
relate to improving the railway system, harbor facilities, telecommunications and
power supply.

       7.3 Legal and Regulatory Framework

       - IPC and Enterprise Establishment

To speed up the local and foreign investments an Investment Promotion Center
was established in 1990. IPC is deSigned to be a one-stop office to facilitate
speedy acquisition of necessary permits to establish a business enterprise.

Since IPC commenced its operations in October 1990 the administrative
procedure to establish an enterprise has clearly been spelled out for the first time.
The following steps are required:

     a) Company Registration
          The Ministry of Trade and Industry.

     b) Application to IPC
          IPC will submit the application to the relevant ministry for
          registration and comments. A feasibility study or respective
          information is required on the project.

     c) Bank of Tanzania approval
          BOT will make its own evaluation on the application before
          making a decision to release foreign exchange for


                                    Karl PaaIckilrl
RPEDlTanzania Country Background Paper
Enterprise Sector in Changing Environment                                         24


           importation purposes.

     d) Certificate of Status
          To ensure subsequent repatriation of funds and to get
          exemption from duties and taxes the foreign investor has to
          obtain a Certificate of Status from the Ministry of Finance.

     e) Other approvals and procedures
          These include land leasing. fulfilling safety and health
          regulations and acquiring labor permits.

The IPC system is fairly straight forward but there is no information on how
effectively IPC is fulfilling its mission. Anyhow, attention was already paid to
efficiency in its statue, that IPC must respond to applications for investment
license within 60 days. The main weaknesses that have been found, are the
unclear objectives and authority of IPC. The center needs to define its functions
and its relationship with other govemment authorities, prepare an investment
promotion strategy and plan its organization and staffing [8].

       - Taxation
Corporate income tax rate in Tanzania is 50 per cent. The taxation system is
troubled with arbitrary practices. [101 Tax assessment is often done without any
clear guidelines on acceptable deductions. Effective corporate tax rates are
thereby increased, and a climate of distrust is created between producers and tax
authorities.

During the ERP: there were a number of sales tax reforms, but until recently there
have been 18 different sales tax rates, ranging from 10 to 300 per cent. The
1990/91 budget reduced the number of sales tax categories to 4; namely 0,20,30
and 40 per cent. In addition to domestic goods, also imports are subject to sales
tax according to the local scale.

Until the mid-1980s the Tanzanian customs tariff structure was overshadowed by
quantitative restrictions and centralized allocation of foreign exchange. Since that,
the role of tariff schedule has become more pronounced along with the
introduction of own-funded import scheme and with opening of the OGL facility. In
1991 the previous complex tariff structure was simplified by reducing the number
of tariff rates to 4 ad valorem rates: 20, 30, 40 and 60 per cent. Customs tariffs
are 30 per cent on most intermediate and capital goods and 60 per cent on most
consumer goods. Also, a number of inputs were given zero duty rates.

      - Property Rights and Land Availability

Legal protection of private property rights in Tanzania has been weak in the past.
In light of the previous nationalizations, the crucial issue is how well the private


                                   Karl PQQ/ckQri
 RPEDlTanzania Country Background Paper
 Entew"se Sector in Changing Environment                                            25

 property is legally protected against expropriations in the future. The Foreign
 Investment Protection Code of 1963 provided only limited guarantees of
 compensation for nationalization. According to the Constitution of Tanzania, it is
 prohibited to expropriate private property "without due process of law providing for
 payment of full and fair compensation". The law does not specify, however, how
 the compensation is determined and therefore it is likely to be a disincentive
 rather than an incentive to private entrepreneurship, and particularly to foreign
 investors. Furthermore, bankruptcy legislation is lacking, and it is unclear whether
 there is any patent legislation.

The new Investment Promotion Code of 1990 explicitly expresses the importance
of protection of private property, both foreign and domestic enterprises. However,
it remained unclear how much the legal protection of private property has
increased; the question of nationalization is not addressed in the code.

The new investment code states that land is owned by the government and can
only be leased. In addition, village land is not available for commercial activities of
outsiders. Private or public investors may lease land in other areas but in practice
the access to industrial sites is very limited [10]. Although many municipalities
have made considerable effort to provide industrial plots, the supply of serviced
sites is by far outstripped by current demand for adequate industrial location.
Those industrial plots which are more easily available, often lack electricity, water
and other facilities. Such costs constitute an additional entry barrier for new
entrepreneurs.

A presidential commission is currently working to revise the land policy, after
which allocation of title deeds also to private individuals may become possible.

         - Labor Market and Regulations

Labor hiring conditions are specified in The Regulation of Wages and Terms of
Employment Order, 1990. According to it the minimum pay (1991) is 2,500
TSh/month (11 USD) and employees are entitled to 28 days' leave annually with
full pay. Allowances and other compensations are

     •      rent allowance (300 TSh) if an employee is not occupying
            employer's accommodation,
     •      transport allowance (500 TSh) if transport is not provided by
            the employer and
     •      paid sick leave up to 3 months.

Other benefits like clothing, meals, medical services and insurance have been left
to the employer's discretion. The Order does not give any ruling to laying-off
conditions.

Tanzanian labor regulations can be desaibed liberal. For example, the meaning



                                    Karl PaaklclJri
     RPEDlTanzania Country Background Paper
____ Enterprise Sector in Changing Environment                                       26

   of the defined minimum pay rate may be questioned. Given the high inflation, the
   pay is so low that it is simply insufficient to make up a family's living without any
   further income and benefits. The basic salary of a skilled worker in 1991 was 15-
   20,000 TSh (66-88 USD) per month and that of a foreman's 25,000 TSh. The
   companies employing more than 10 permanent persons have to accept the
   presence of labor unions.

          - Price Control and Trade Policies

  . The government's price decontrol program, started already 1984, has proceeded
    well. For example, monopolized grain prices paid by cooperatives to farmers have
    been replaced by minimum and indicative prices. Actual prices are now
    dependent on market conditions.

   Internal trade and import liberalization have increased availability of consumer
   goods in rural areas. It has also improved motivation for increased efficier:-cy of
   farmers. By 1991 only fertilizers and petroleum products were regulated.

          - Foreign Exchange Availability

   The previous foreign exchange rate policy led to considerable overvaluation of the
   Shilling. It discouraged exporters and encouraged importers and manufacturers
   for capital intensive production. The black market rate of the dollar exceeded 7-8
   times the official rate. Since 1986 the effective exchange rate (= adjusted for
   consumer prices)-has considerably decreased. Enterprises may purchase foreign
   exchange at so called bureau rate, which was 395 TShiUSD in May 1992. For
   comparison, the official parity rate was 300 and the black market rate 425
   TShiUSD.

   As part of the Economic Recovery Program the government has in recent years
   introduced new instruments to improve foreign exchange availability. The main
   instruments are the Open General License (OGL) system established in February
   1988, Export Retention Scheme and Own Funded Import Scheme.

   OGL was established to provide industrialists a direct access to foreign exchange
   to import raw materials, intermediate and capital goods. Importation of some
   consumer goods is also possible under the system. An import license has to be
   applied from BOT. The process takes normally 4-5 days. It was
   reported,however,that the OGL funding falls short of demand. An importer may
   still have to wait for foreign exchange as long as 6 months. The system is fully
   dependent on the funding by the World Bank and bilateral donors. As presented
   in the Consultative Group Meeting in June 1991, the estimated OGL requirements
   were put at USD 360 million for 1991/92.

   The idea of the Export Retention Scheme is to promote non-traditional exports, in
   particular. When exporters must normally surrender all foreign exchange to the


                                      Kari PQQ/ck.ari
RPEDlTanzania Country Background Paper
Enterprise Sector in Changing Environment                                             27

central bank, authorized exporters may retain up to 50 per cent of their foreign
exchange earnings for the purpose of importing spare parts and other inputs of
produdion. The scheme is also applicable to the remittance of dividends and
profits. The retention scheme has been successful and the foreign trade statistics
show an upward trend of non-traditional exports.

Own Funded Import Scheme was established already in 1984. It is used for
importing classified goods by those importers who can finance the goods from
their own foreign currency resources. Advantages of this system is its flexibility
and that an importer does not need to apply for foreign currency.

In spite of all the described schemes, there were in 1991 considerable arrears of
profits and external debt service payments waiting for repatriation from Tanzania.
The available foreign currency resources are not large enough to settle these
payments. Therefore the government has established a debt to equity mechanism
as part of the new investment policies. External payment arrears will be treated as
foreign investment if invested in Tanzania.

       7.4 Credit Policies
Interest rates on loans as well as the credit allocation itself by financial institutions
have been stridly controlled by the government The situation is gradually
changing because of the ongoing banking sedor restruduring projed by the
World Bank. In any case, the enterprise sedor has suffered from non-availability
of long term loans for investment purposes and from poor services of commercial
banks. Financiers have often a passive attitude towards clients, because there is
no pressure for improvement due to lack of competition.

As for the cost of money, the'1991 rates on bank loans ranged from 20 to 31 per
cent and on deposits from 16 to 29 per cent per annum. Subsidized interest rates
are usually applied to special schemes. An example is a credit program for
women by eRDB charging 13 per cent on 3-years credits.

The efficient crowding-out of the private sedor with public sedor borrowing for the
needs of administration, parastatals, loss-making cooperatives and marketing
boards of Tanzania has been a long-lasting phenomenon. The private sector's
share of total credits was still 39 per cent in 1970 but declined to about 6 per cent
in 1980 and remained on that level or lower until 1987. Since then the share has
somewhat increased as economic reform policies have been implemented based
on support of external financial resources.

       7.5 Investment Policies and Incentives

The adoption of the Investment Promotion Code and establishment of the
Investment Promotion Center (IPC) in 1990 were Significant reforms of the
Tanzanian govemment for enterprise sedor development. With certain exceptions
local and foreign investors will have an equal access to investment opportunities.


                                     Karl PDDkkari
RPEDlTanzania Country Background Paper
Enterprise Sector in Chan2in2 Environment                                           28



The new code classifies investments sectorwise as follows:

     1)     Sectors that are controlled and nonnally reserved for public
            or joint investments with the private sector (airlines),
     2)     Sectors reserved exclusively for investment of the public
            sector (radio and television).
     3)     Sectors reserved exclusively for Tanzanian citizens (retail
            and wholesale trade).

Tanzania's investment promotion policy offers non-discriminatory opportunities to
both local and foreign investors. Fully owned foreign ventures are possible.

Investment projects which are given top priority are those that seek to increase
exports, reduce imports, improve managerial or technological capabilities, or
provide adequate safeguards against environmental degradation. The code offers
generous investment incentives like the following:

     •       All machinery, supplies and materials for production are
             exempt from import duties and from local sales tax.
     •       A tax holiday is available on the profits earned during the
            first 5 years after which 50 per cent is charged on taxable
             profits.
     •       No limitations are set for the amount of capital gains to be
           . repatriated but a withholding tax of 1()"20 per cent is applied
            for dividends, royalties and interest payments abroad.

In addition and as mentioned above, an exporter is allowed to retain up to 50 per
cent of foreign exchange earnings to settle overseas remittances in respect of
profits and other obligations.

         7.6 Business Training Opportunities
When excluding vocational training, major institutions arranging seminars and
courses on management and business adlTlinistration are the following [15]:

Name of Institute          Description ·of Activities
Institute of Finance       IFM is the leading and self-supporting institution, est. in
Management (IFM)           1972, for education of management and business
                           administration. Staff is 210 with 50 professionals and
                           the annual budget TSh 250 million. Training includes 3-
                           year diploma courses, weekend programs on business
                           topics and executive development programs.




                                     KariPfUIkktui
RPEDlTanzania Country Background Paper
Enterprise Sector in Changing Environment                                         29

University of Dar es     The Faculty of Commerce 'of the University has a
Salaam                   capacity of about 200 students per annum and it runs
                         courses in management, marketing, produdion and
                         accounting.


College of Business      This college provides pradical type of business training
Education                with a 2-year diploma course in English and a 1 year
                         course in Kiswahili.

Institute of             10M is focusing on the public sedor development
Development              (health administration, local government) but it also
Management (10M)         provides courses for private enterprises. Business
                         related subjeds leading to a diploma are business
                         administration, accounting and Quantitative methods.
National Institute of    In 1988 NIP offered 94 courses. each 1-2 weeks in
Productivity (NIP)       marketing, produdivity, projed management, etc.
                         Currently NIP is in financial difficulties and many of the
                         staff have resigned.

In addition, specialized' training opportunities can be found elsewhere. For
example, FINNIOA-supported Forest Industries Training Institute in Moshi,
Nseketa Bankers Academy in the field of banking and Small Industries
Consultancy and Training Assistance '(SICATA). SICATA is administered by SIOO
and it runs among others ILO's program "Improve Your Business" sponsored by
SIOA

As a summary, business training opportunities in Tanzania are still quite
heterogenic and insufficient by their coverage. Availability is often limited as
demand exceeds training supply. Also, smaller entrepreneurs may not participate
in training because of its cost. The operations of some institutions like IFM are
based on self-supportance and hence on training fees.

      7.7 Institutional Support

In the official sedor, the prime institutions for enterprise support are the earlier
mentioned SIOO and the Small Scale Industry Unit within the Ministry of Trade
and Industry. This unit advises the government on policy issues, disseminates
information on business opportunities, and coordinates among 'donors,
government and implementing agencies.

The enterprise sector in Tanzania has only recently started to organize itself into
associations. In many countries, businesses associations form a well fundioning
system which is needed to look after the interest of member enterprises and to
maintain contacts .with authorities and other relevant parties. An example of the
sector oriented organizations is the Tanzania Forestry Industries Association,


                                   Karl PQQ/dcarl
  RPEDlTanzania Country Background Paper
  Enterprise Sector in Changing Environment                                      30

  established in 1989, to support its members with various services and to
  represent the interest of the forest based industrialists to authorities.

 Tanzania Chamber of Commerce, Agriculture and Industry (TCCAI) was
 established in 1988. TCCAI has some 3,000 members and it serves primarily the
 interests of African entrepreneurs. There is another chamber for Asian business
 community. The main functions of TCCAI are to distribute business and trade
 information to members, to provide support for problem-solving and to constitute a
 forum for dialogue with the govemment and to organize trade fairs, seminars and
 business training. The annual budget of TCCAI is about TSh 5 million and it has a
 staff of 5 persons.

 Association of Tanzanian Employers was established already in 1955 but
 activities were down for a long period. In recent years, membership has picked up
 again with more private enterprises. The association's activities are in labor
 relations but it is also running a small enterprise promotion program.
 Entrepreneurship Development Fund started in 1887 by a group of private
 businessmen to assist entrepreneurs with financing, business advice and
 feasibility studies. New associations have been recently established to support
 women as self-employed or entrepreneurs. An example of those is
 Businesswomen's Association of Tanzania, formed in 1990. It has particularly
 paid attention to women's difficulties to raise bank credits.

 It can be concluded that the enterprise sector and its own institutions are still
 emerging in Tanzania if compared, for example, with Kenya. Their possibilities to
 influence government policies affecting individual enterprises are limited. Small
 scale entrepreneurs are totally without a joint association to express their views.

          7.8 Constraints for Enterprise Development

 According to a World Bank sectoral survey and supported by other sources, a
 poor access to financing represents ·the most serious constraint to small and
 medium size enterprises in Tanzania. In 1988 only 6.6 per cent of the total credit
 was allocated to the private sector compared to 53 per cent in Kenya and 37 per
 cent in Malawi. Being a non-creditworthy country, Tanzanian enterprises have
 only a limited access to commercial loans from abroad. Even if they did, currency
 risk would certainly make foreign borrowing very expensive. Another financial
 restriction is that only a small portion of development aid has been allocated for
 the benefit of the private enterprise sector.

. Common reasons for not borrowing from banking sector are that

      •      banks usually require fixed property as collateral,
      •      their other requirements (feasibility study, financial
             statements) cannot be met and
      •      their loan processing is often extremely slow and arbitrary.



                                      Ktlri Ptltlkktlri
RPEOrranzania Country Background Paper
Enterprise Sector in Changing Environment                                         31

On the other hand, the faulty party may not always be the inefficient bank but a
client who has been unable/unwilling to fulfil the bank's data requirements.

According to the above survey, other constraints faced by small enterprises are

     •    lack of access to industrial sites,
     •    bureaucratic procedures of authorities (sales and income
          tax officers, licensing authorities, providers of public utilities,
          etc.) and
     •    corruption in a form of side payments.

The survey also pointed out other obvious obstacles like poor communication,
transport, electricity and water supply services.


8 Enterprise Development Outlook
The Economic Recovery Program in 1986-1989 affected positively on industrial
enterprises, in particular. Their performance has clearly improved in terms of
output, capacity utilization and exports when compared to earlier years. As for
investment expectations, the enterprise development outlook seems to be also
encouraging in spite of pertaining and numerous bottlenecks in the business
environment. According to an investment survey in late 1989, local enterprises in
the sample were planning to invest significantly, and many to raise the export
share of their sales... Information on real investment development since that is not
available.

The removal of restrictions and constraints has a direct impact on enterprise
performance. There are large investment programs going on in Tanzania to
remove physical constraints such as poor roads, transport and communication
services. In addition, the government is phasing out a number of administrative
restrictions and controls. During the next 1-2 years the liberalization of the
economy is expected to include the following measures:

     Credit and financial sector pOlicies. BOT is replacing direct
         interest control by a more liberalized system including a
         single maximum lending ·rate and free setting of deposit
         rates. By restructuring the existing banking system and by
         allowing foreign banks to enter the market, the objectives are
         increased competition and improved banking services.

     Exchange rate policy. The medium term (2-3 years) objective of
         the government is to achieve and to maintain an equilibrium
         exchange rate based on indicators like the parallel market
         rate.    .




                                    Kari PlJOlcJcari
RPEDlTanzania Country Background Paper
Enterprise Sector in Changing Environment                                          32

     Import policies. With the expansion of the OGL system,
         objectives are to shorten the negative list and to eliminate all
         quantitative restrictions on imports with certain exceptions
         (health, security).

     Industrial and trade policies. Some of the reforms affecting
         industries· include elimination of still existing controls on
         intemal trade and distribution.· Corporate laws and business
         regulations will be reviewed as well as licensing and
         industrial land zoning.

In the future, Tanzanian commercial and industrial development is planned to be
based more on private initiative and less on the public sectors intervention in
productive activities. The role of the govemment in the economy will remain
crucial, but its tasks are still required to be redefined. At the same time donors are
facing a new situation and they may have to reconsider how to allocate aid
between the private and public sectors.

If the govemment reform policies continue uninterrupted, the overall economic
outlook is prospective. The World Bank scenarios on the GOP growth for 1991-
1995 vary between 4-5 per cent annually. Small enterprises .including informal
sector participants are expected to contribute significantly to the economic growth.




                                    KIlrl PaaJdcarl
                                                                           Annex 1

 REFERENCES


   1. World Bank: Parastatal in Tanzania Towards a Reform Program, Report No.
            71Q()..TA, 1988. For official use only.
  2. World Bank: Tanzania, An Agenda for Industrial Recovery, Report No. 6357-
            TA, 1987. For official use only.
  3. Henley John S: The Regeneration of Tanzanian Industry, Liberalisation and
            Privatisation, Issues and Progress. UNIDO 1990.
  4. World Bank: World BanklTanzania Relations, 1961-1987, Report No. 8329,
            January 16, 1990, Vol I-II.                                 .
  5. World Bank: Tanzania Economic Report Towards Sustainable Development in
            the 1990s, Report No. 9352-TA, June 11,1991, Volumes I-II.
  6. I BRDIIDA: Country Briefs, June 6, 1992.
  7. World Bank: Tanzania, Status Report for Debt Initiative, February 16,1988.
  8. World Bank: Tanzania, Private Sector Assessment and Strategy Paper. April
          . 17. 1992, (Draft).
  9. World Bank: Tanzania, Industrial Rehabilitation and Trade Adjustment
            Program, Report No. P-4944-TA. November 22. 1988.
  10. Dutz Mark. Frischtak Claudio: -Industrial Adjustment and Restructuring.
            Reflections from Tanzania·. World Bank. April 1992 (draft).
  11. World Bank: World Development Report 1992.                         .
  12. Economist Intelligence Unit: Tanzania Country Profile 1991-92.
  13. MFEAP: Economic Survey 1987. Dar es Salaam, June 1988.
  14. Swantz Marja-Liisa 1989: Transfer of Technology as an Intercultural Process.
            Finnish Anthropological Society. Helsinki.
  15. Finnida 1992: Support to Entrepreneurship in Developing Countries, Phase 11:
           Requirements in Selected Developing Countries. January 1992.
  16. Tripp Aili Mari 1990: Deindustrialization and the Growth of Women's
           Economic Associations and Networks in Urban Tanzania, a draft paper
           for the UNUIWIDER project -Empowering Women in the Casualized
           Trades·, May 1990.                .
. 17. ILO 1991: Informal Sector Survey - Zanzibar. Technical Report.
  18. Case. University of Wisconsin-Madison.
  19. Maliyamkono T.L & Bagachwa M.S.D. 1990: The Second Economy in
           Tanzania. Eastem African Studies.
  20. Tanzania Investment Bank 1990: Annual Report. July 1989 - June 1990.
  21. National Bank of Commerce 1989: Annual Report and Accounts for the Year
           ended 30th of June 1989.
 22. Bureau of Statistics. Planning Commisssion: Survey of Industrial Production,
           1988. Dar es Salaam.
 23. Chambua S.E. 1990: History and Perfo~anoe ,of Major Technology
           Generating Intitutions in Tanzania. University of Dar as Salaam, January
           1990.
                                                                                                       Annex 2

                                STATISTICAL TABLES
                               on the Economy of Tanzania




                                    Year          Value

Population (million)                1990               24.5
Area   {1.000 km2>                  1990                945
GOP (MUSO)                          1990              2.060
GOP per capita (USO)                1990                110



Indicator                          1987       1988            1989            1990            1991
GOP at market prices. BTSh         227.5      331.2           406.5           495.9           630.0
Real GOP growth                      5.1        4.2              3.3             3.6             3.8
Consumer price inflation %          30.0       31.2            25.8            19.7            22.3
exPOrts. fob. million USD           353        380              415             408             410
Imports. cit, million USD          1.150      1192            1230            1364            1.410
Current account. million USD        -313       -387            -367            -425            -400
External debt. million USD         4885       5.132           5.072           5._                 ..
Ext. Debt Service Ratio. %          25.1       23.6            21.8            25.8               ..
Manufaduring Index. 1985=100         107        115             117             114               ..
Exchange Rate TSh/USD                64         99              143             195              219



Sector,                           1985-     1973-        1980-         1990            1991
                                  1973      1980         1991
Gross Domestic Produd                5.9       2.3          2.9          4.2'             4.5
Net Indired Taxes                      ..        ..             ..            ..            ..
Agriculture                          3.1       0.2            4.1         2.9             4.0
Industry                             7.0       1.8            O.S         9.2             6.7
(of which Manufadurina)              8.7       2.6            0.1         7.8             4.7
Services                            12.9       7.2            1.6         3.0             4.5

Exports                              6.3      -4.6             0.3       13.9            10.0
Imports                              7.7      -0.2            -0.4        0.0             5.2

Total Expenditures                   6.6       2.7            2.2         2.0             4.0
Total ConsumDtion                    5.S       2.3            2.4         2.0             3.7
Private ConsumPtion                    ..      4.9            2.0         2.2             3.8
General Government                     ..      4.3            6.0         0.0             6.9
Gross Domestic Investment            9.6       4.2            0-1         2.0             3.5
Gross Domestic Savina                1.5      -9.7            0.0        14.5             2.2



                                                                                                             i
Sector                          1965-1989       1980-1990
GOP                                 3.9             2.8
~riculture                          1.6             4.1
Industry                            4.2             0.0
Manufacturing                       5.6            -0.4
Services                           10.8             1.3



Sector                               1965             1990
GOP Million USO                       790             2,060
GOP %                                 100               100
Agriculture                            46                59
Industry                               14                12
Manufacturing                           8                10
Services                               40                29



Comoonent                   1_      1973   1180   1989   1990    1991
Gross Domestic Product       100.0   100.0  100.0  100.0  100.0   100.0
Net Indirect Taxes              7.6   12.3   11.1   13.1  14.11     2.6
Agriculture                    42.3   34.6   39.5   51.2      ..      ..
Industry                       13.0   16.1   15.1   10.4             ..      ..
(of which Manufacturing)        7.0    9.6    9.7    7.5      ..      ..
Services                     ' 37.1   37.0   34.4   25.2      ..      ..
Resource Balance               0.9     -6.1   -13.2     -33.1    -39.2    -38.4
Exports                       26.1     23.7    13.2      18.9     22.1     22.1
Imports                       25.1     29.8    26.3      52.0    61.3      60.5

Total ExPenditures            99.1    106.1   113.2     133.1    139.2    138.4

Total Consumption             83.1     85.1   90.2      108.4    115.5    114.5
Private ConsumDtion           72.6     70.5   77.1       95.4        ..      ..
General Govemment             10.5     14.6   13.0       13.0        ..      ..
Gross Domestic Investment     14.6     21.1    23.0      24.7     23.7     23.9
Gross DomestiC Savina         15.5     14.9     9.8      -8.4    -15.5    -14.5



Index                         1980     1986    1988      1989     1990     1991
Consumer Prices               15.6     n.o     131.2     167.9    208.7    248.1
GOP Deflator                  21.7     75.0    140.6     166.0    184.3    219.1




                                                                                   ii
Item                          1965-      1973·         1980-        1990       1991
                              1973       1980          1991
Consumer Prices                9.9       15.1          28.6         24.3       18.8
GOP Deflator                   2.9       15.5          23.4         11.0       18.9



Commodity                   1980         1983          1986           1989         1990
Aluminum                    148.5        112.2          48.1           55.1         93.9
Beer                        165.5        170.5         168.9          139.2        116.6
Cement                      161.5        140.3         270.1          332.8        375.1
Cigarettes                  182.2        147.8         105.7          109.5        144.0
Iron Sheets                  99.1        116.1          46.S          121.7         90.5
Petroleum                    90.2         73.4          73.5           90.2         66.2
Shoes                       196.8         92.8          66.7           26.0         15.0
Textiles                      2.1         91.0          69.0           70.5         99.9



Volume Index              1980      1987     1988       1989        1990      1991
Coffee                     103.1     100.0     91.8      108.2       116.2     116.4
Tea                        111.1     100.0     93.3       98.6       124.9     142.5
Cotton                      70.4     100.0    115.5      117.2        90.6     121.4
Tobacco                     42.7     100.0    119.2      112.3        97.1     112.4

Value at Current Prices
(millions US$)
Coffee                       144      109        108       100         89        86
Tea                           22       18         16        19         24        25
Cotton                       49        44         69           83      70        89
Tobacco                      13        12         13       12          10        12
Manufactures                 85        63         69       66          67        73
Residual                    270       101         98      126          132      123
Total ~rts FOB              583       347        373      406         392       408




                                                                                           iii
Value at Current Prices             1980     1987       1988       1989      1990     1991
(million USD)

Food                                 149       76         97        270       146      157
Fuel and enemy                       290      170        155        157       180      156
Other Consumer goods                 102      116        234        205       189      204
Other intermed goods                 172      177        273        331       344      378
capital goods                        506      811        50S        3SS       503      538
Totallmoorts CIF                   1.219    1,150      1,267      1.351     1,383    1,432
Totallmoorts CIF
Volume Index                       105.2    100.0      105.1       99.1      98.S    104.1



Index                            1980      1987       1988       1989     1990      1991
Merch. Exports                    111.9     1oo.D      106.0      103.9     89.4      S3.3
Merch. Imoorts                    101.4     100.0      102.0      115.6    116.9     116.5
Merch. Terms of Trade             110.3     100.0      103.0       89.8     76.4      71.5



            Creditor             1980        1987         1988            1989        1990     1991
Multilateral Creditors             518       1.347         1.408          1.481       1742     1.951
Bilateral Creditors              1.112       2.653         2.825          2,907       3,383    2.801
Private Creditors                  257         292           237            223         190      182
Private NOrHIuaranteed              84          15            13             13          12       10
Total Long Term Debt             1.970       4,307         4484           4.824       5,306    4.944



                                   1980        1987             1888         1989       1990    1991
Debt/Exports                     280.85       880.0            910.1      . 880.3      994.4   873.5
Debt/GOP                          3S.34       124.8            135.9        164.0      221.5   193.7
Debt ServicelExports              12.36       16.90            17.20        17.80      18.50   15.90

Sources:         IBRenDA Country Briefs (As of June 1992)
                 Tanzania: Draft F>rivate Sector Assessment and Strategy
                 Paper, Wand Bank, June, 1992.
                 EIU: Tanzania, Mozambique, Country Report No. 3/1992.




                                                                                                       iv
                                                                                      Annex 3.



Number of Small Scale Industrial Establishments of Tanzania, 1989.




   Region/Employees          ·~-4      '-%   .,5.-;9   ..
                                                            .....      %     Total               %1
   Dar es Salaam             3,035    18.9     359                   20.5    3,394          19.0
   Arusha                      800     5.0      39                    2.2      839           4.7
   Tabora                      72B     4.5      59                    3.4      787           4.41
I  Lindi                       298     1.9      52                    3.0      350           2.0
 !Coast                        225     1.4      22                    1.3      247           1.4  !
 : Tanga                       990     6.2     100                    5.7    1,090           6.1 I
 ~ Kilimanjaro               1.2B5     B.O     112                    6.4    1,397         . 7.B 1
 ; Mwanza                      949     5.9     104                    5.9    1.053           5.9
 iRuvuma
 I
                               520     3.2      87                    5.0      607           3.4
 jKagera
 ,                             479     3.0      61                    3.5      540           3.0
                                                                      7.1      399
 iRukwa                        274     1.7     125
                                                                                             2.21
.
!Mtwara                        357     2.2      36                    2.1      393           2.2
i Mara                         636     4.0      48                    2.7      684           3.B j
                                                                                                 I
; Kigoma                       3B3     2.4      14                    O.B      397           2.21
;Shinyanga                     601     3.7      51                    2.9      652           3.71
;Singida                       34B     2.2      60                    3.4      40B           2.3  i
: Iringa                      642      4.0      74                    4.2      716'          4.0\
; Dodoma                    1,114      6.9     210                   12.0    1,324           7.41
: Morogoro                    759      4.7      57                    3.3      816           4.6 I
: Mbe:ta                    1.673    ,10.4      B3                    4.7    1.756           9.B II
iTOTAL                     16.096    100.0   '.753                  100.0   17,849         100.0 i
Source: Central Statistical Office
                                                                                        Annex 4.



 STATISTICS ON SELEcrED MANUFAcrURING INDUSTRY OF TANZANIA - 1988
    Source: Survey oflndustrial Production


 Gross Output in manufacturing by Size, 1988 - Million TSh

     Sector/Size                             10-19   20-49   50-99   100-499    500+        Total
     Food and Beverage                         205     382   1.196     3.977    3.840       9.600
     -%ofTotal                                   2       4      12        41       40         100

     Textiles and Wearing                      108     194    253      5.998    4.533      11.086
     -%ofTotal                                   1       2      2        54        41         100

  Leather Prod., Shoes                          24     25      35       470      477        1.031 I
 1-% of Total                                    2      2       3        46       46          100,
 j
IWood Prod., Furniture                         147    246     251       541        0        1.185
t·%ofTotal                                      12     21      21        46        0          100
I
I

     Fabric. Metal Products                    42      159    537       651      277        1.666
     • % of Total                               3       10     32        39       17          100

    Total Manufacturing                       867    1.941   4.446    23.545   20.960      51.75~
    -%ofTotal                                   2        4       9        45       40         10

Sub-sectorsIManufacturing., %                  61      52      51        49       44          47

Penons Engaged in Manufacturing by Size, 1988

 Sector/Size                                 10-19   20-49   50-99   100-499    500+        Total
 Food and Beverage                             574   1.248   2.453     6.554   26.025      36.854
 Textiles and Wearing                          550     356   1.494    10.175   22.485      35.060
 Leather Prod., Shoes                         122      201     324     1.544    2.595       4.786
 Wood Prod., Furniture                        680    1.605     669     2.358        0       5.312
 Fabrie. Metal Products                       183      419     729     1.891      627       3.849
 Total Manufacturine                         3.031   5.290   8.539    31.792   65.511     114.163 .

Sub-sectorslManufacturing, %                   70      72      66        71       79           75

Number of Establishments in Manufacturing by Size, 1988

Sector/Size                                  10-19   20-49   50-99   100-499    5OP+        Total
Food and Beverage                               45      36      33        32      16          162
Textiles and Wearing                            41      13      19        47      15          135
Leather Prod., Shoes                             8      8        4         7       1           28
Wood Prod., Furniture                           50     50       10        12       0          122
Jiabric. Metal Products                         15     15       10         8        1          49
Tota) Manufacturine                            225    168      118       151      49          711

Sub-sectorsIManufacturing, %                   71      73      64'        70       67          70
                                                                         page 2




Sector Contribution in Manufacturing by Ownership, 1988



I
                                          Number of Persons Engaged
 Sector                    Public    %       Private        %       Total
 Food and Beverage         27.871    76        8.983        24     36.854         100
 Textiles and Wearing      26.152    75        8.908        25     35.060         100
 Leather Prod.• Shoes       4.133    86           653       14      4.786         100
 Wood Prod.• Furniture      2.517    47        2.795        53      5.312         100
 Fabric. Meta) Products     1.853    48        1. 996       52      3.849         100,
ITotal Manufacturing       79.156    69       35.007        31    114.163



n
                                       Number of Establishments
  Sector                   Public    %    Private        ./8        Total          OJ.
  Food and Beverage           67    41         95        59          162          100
  Textiles and Wearing        S3    39         82        61          135          100
  Leather Prod" Shoes         10    36         18        64           28          100
  Wood Prod.• Furniture       24    20         98        80          122          100
  Fabric. Metal Products       9    18         40        82           49          100
i Total Manufacturin~        209    29        502        71          711          100



m
                                          Value Added - Million TSh                      I
                                                                                         I

Sector                     Public    %        Private      %         Total         %
Food and Beverage           1.419   65            759      35        2.178        100
Textiles and Wearing        1.184   64            668      36        1.852        100
Leather Prod.• Shoes          187   92             16        8         203        100
Wood Prod., Furniture         189   S3            171      48          360        100
Fabric. Metal Products        189   36            340      64          529        100
Total Manufacturin~         7.175   63          4.183      37       11.358        100
('I)
 (I)
 CD
 CO
 Q.

       Spatial Distribution of Manufacturing, 1988•
                 .~~~."'''== -.             Dar es                          KJliman-   Moro-                                 Other                 %' ofl
       Se£~~~_. ____.___          . __.__. Salaam      Tanga       Amaha        jaro    pro     Mwanza    Mbey.    lringa   Regions      Total    Manul·1
       Food and Beverage
       • N~: ~JP.crs .. !;~                 ..1.079 ___ 2.206..
                                                       u            1.721      1.600   13.139      740      760    3.090      6.519     36.854      32,3.
       • No. of Establishments                    38        16        17         13        IS       10       10       10         33        162      22,8
       • Value Added, MTSh                 --415--         45        187        272       396       49      185      261        368      2.178      19,2
       •    Vai~c Added.~-·------'                19          2        9         12        18        2        8       12         17        100
       Textiles and Wearing
       • !'JQ. Qfpers. J;ngaged              13.631     2.007       4.009      1.582    3.511     5.612     710      239      3.759     35.060      307
       • No. of Establisbments                    53        18          5          7       13        16       5         I        17       135       190
       • y,ih;C-Added, MTSh                     495       267        139         42                 727                                  1.852      163
       ;. No:·Of·Pcrs. E'ng., % - - - 3 9 -                   6        II         5        10        16       2         1        11        100
       Leather Prod., Shoes
       •J'I!!.:..~ per~ Engaged               3.009         87       154        486      699       321       10       20         0       4.786       4,2 •
       • No. of ESlablishments                      8         2        4          5         ]        4        1        I         0          28·      3,9
       -*yalue Added, MTSh                       III          3         8        12       56        12        0         1        0         203       1.8
       • Value Added, %                           55                    4         6       28         6        0        0         0         100
       Wood Prod., Furniture
        • ~~~~f.pers. Engaged                  1.294    1.096        209        676      400        84      193      345      1.015      5.312       4:71
        ... No. of Establishmenls                 33        18         6         12       11         5        8        I         28        122      172
        •vallie    Addcd,-MTSb--                  76        62        26         42       10         6        6       82         49        359       32
        • ViiiiieAdded,-% - -                     21---17              7         12        3         2        2       23         14        100        •
        Fabric. Metal Products
        ·J~~~:!lf P~rs. Engaged _             2.925          to       284         39        0       196     271       34         90      3.849       3.4
        • !'J~:~ Es!..ablishm~nls                 24           I        9          3        0        4        2         2         4         49       6.9
        ·Y!!lue ~dded, MTSh                      435 _ _ _ I           49          8        0       24        6         I         5        529       4.7·
         • Value Added. %                          82         0         9          2        0         S       1         0         I        100
        Total Manufacturing
        ~ NQ: oCpers. Engaged                41.481     9.192       8.795      6.029   20.738     7.288    2.774    4.659    13.207    114.163     100,0
         • No. of ESlablishments                 266        87         64         52       48        47       31       21        95        711     100.0
        ·-Y~iue_Added. MTSh
         • c¥alue A~ %
                                               4.905
                                                   43
                                                         1.655
                                                             IS
                                                                      717
                                                                        6
                                                                                 662
                                                                                   6
                                                                                          884
                                                                                            8
                                                                                                    833
                                                                                                      7
                                                                                                             182
                                                                                                               2
                                                                                                                      783
                                                                                                                        7
                                                                                                                                7 3 6 . 11.]57
                                                                                                                                  6        100
                                                                                                                                                   100,0
                                                                                                                                                           1