Macroeconomic Policy Development in Tanzania
During the period between 1961, when Tanzania attained independence, and the mid-1980s, the country followed socialist macroeconomic policies. The result of implementing socialist policies was to slow socio-economic growth, double-digit inflation, negative real interest rates, large unsustainable fiscal deficits, an overvalued Tanzanian shilling and a thriving parallel foreign exchange market, which included the rationing of foreign exchange and sometimes consumable commodities. After the liberalisation of the economy in the mid-1980s, macroeconomic policies were market-determined and the government recognised the private sector as the engine of growth. As a consequence, macroeconomic policies combined with structural reforms began to translate into real gross domestic product growth above the 2.8% population growth level, inflation was brought down to below single digit levels, greater foreign and domestic private investment followed, and a progressive reduction in poverty over the past decade (before COVID-19) was achieved. This resulted in a sustained average real gross domestic product growth rate of 7% per annum between 2010 to 2019. The advent of the coronavirus pandemic, first detected in Tanzania in March 2020, disrupted the macroeconomic performance achieved over the past decade. Real GDP growth is expected to decline to 5.5% or more in 2020 and 2021, inflation is expected to remain at pre-COVID levels (below 5%), interest rates increased slightly in 2020 hurting businesses, the Tanzanian shilling has depreciated slightly against the US dollar, and the fiscal deficit, although low, continues to face high risks of worsening as international trade continues to be disrupted. The public debt, with its interest payment of nearly 40% of domestic revenue, threatens to increase the economy’s liquidity risks and divert resources, which are much needed to fund ongoing infrastructure investments to improve the country’s transport, electricity, water, education and health systems. Overall, however, Tanzania avoided a recession in 2020, partly due to sound macroeconomic measures undertaken, but the second wave of the pandemic is significantly impacting lives and livelihoods across the country. In order to counter the severe impact of the pandemic on the economy, the macroeconomic policies adopted by the Bank of Tanzania (central bank) and the government have been to shield the economy from further deterioration by injecting greater funding into the health sector to contain the spread of the pandemic, increasing social spending to save lives and livelihoods, employing accommodative monetary policy to steer the economy towards a sustainable monetary and fiscal stance, and ‘build back better’ to the pre-COVID period. Macroeconomic policies going forward should be to intensify and increase funding to prevent the risk of more than 11 million Tanzanians falling below the poverty line, adopt monetary policies that increase liquidity to the economy and to banks to reduce the country-wide liquidity crunch, and to enhance credit availability to the private sector – including micro, small and medium enterprises to facilitate investment expansion and help the economy bounce back.