Tanzania Diagnostic Trade Integration Study Update 2017
Boosting growth and prosperity through agribusiness, extractives, and tourism
The Tanzania Diagnostic Trade Integration Study (DTIS) 2017 identifies priority actions in support of the country’s strategy to deliver broad-based growth through trade integration. The study seeks to (a) take stock of the progress in implementing the action matrix adopted in the DTIS 2005; (b) provide an in-depth focus on agribusiness, mining, and tourism; (c) identify obstacles to the realization of the full development potential of agriculture and tourism in Zanzibar; and (d) prepare an updated action matrix. While the report focuses on agribusiness, mining, and tourism, it more broadly addresses the issues of regional integration, trade facilitation, small-scale trade, and gender. The report identifies a package of measures that will support Tanzania’s effective delivery of its Integrated Industrial Development Strategy 2025.
I. Further trade reforms are needed for diversification, job creation, and poverty reduction
a. Growth has been strong, but it needs to be higher and more broad-based to eradicate poverty
Growth has not been high enough to absorb the fast-growing labor force. Tanzania has achieved an annual real rate of growth of 6.4 percent over the past 15 years, which is forecast to continue through 2018. Tanzania’s high rate of growth – driven largely by the construction, transport, communications, and financial services – has outperformed growth in its East African Community (EAC) partners. And yet it has not been sufficient to absorb the 700,000 annual new entrants to the labor market, resulting in underemployment or employment in low-productivity jobs.
Poverty remains widespread. The poverty rate fell from 34 percent in early 2000s, but, at 28.2 percent in 2015 (or 12 million Tanzanians still living below the national poverty line), it remains high. Moreover, while the pace of reduction has been rapid in Dar es Salaam, driven by employment in nonfarm activities and by increased asset ownership, it has been much slower in rural areas and smaller cities.
b. Trade potential has not been fully utilized
• Trade has expanded, but export base has remained narrow
Trade has increased over the past decade. Tanzania’s world market shares of goods and services exports doubled from 0.02 percent to 0.04 percent between 2004 and 2014. Its trade openness rose from an average of 44 percent in fiscal 2005 to an average of 48.6 percent in fiscal 2015, making it the most open economy in the EAC (above Kenya at 47.9 percent, Uganda at 46.1 percent, Rwanda at 45.8 percent, and Burundi at 38.5 percent). However, Tanzania is still below the openness level consistent with its per capita income, and trade growth of 6.2 percent recorded in the past decade was slower than in some other EAC countries (9.5 percent in Uganda and 9.3 percent in Rwanda).
Despite the emergence of new products, trade is still largely dependent on mineral and traditional agricultural exports. These traditional products accounted for 80 percent of exports on average, between 2005 and 2015, with the five largest destinations – India, South Africa, China, Kenya, and the Democratic Republic of Congo – accounting for almost 60 percent of total exports. Mineral exports increased rapidly between 2005 and 2012 driven by higher gold prices, but have subsequently declined in line with fluctuations in international commodity prices. Agricultural exports are relatively diversified, including cereals, seeds, fruits, vegetables, and fish and – since 2000 reforms in agricultural marketing – tobacco, coffee and cashew. The diversity in agricultural exports is not matched by a range of manufactured products. Manufacturing exports are almost entirely accounted for by knitted apparel exports to the United States, which are duty-free under the African Growth and Opportunity Act and have more than doubled from US$17 million in 2014 to US$37 million in 2016.
• The regional trade potential has not been fully exploited
Trade with the EAC has remained relatively low for an economic union. In 2015, Tanzania sourced only 4 percent of its imports from within the EAC and exports accounted for 10.5 percent, growing slower compared to other regions (from 3 percent to 8 percent to the rest of Africa, between 2010 and 2015). There is therefore considerable potential for increasing exports to neighboring countries, but the relatively low degree of trade integration reflects the continued high trade costs.
• Trade costs have been a major impediment
Trade costs have been high and unpredictable. The costs of exporting products from Tanzania to its major markets remained high through 2005 to 2014, with average bilateral trade costs recording only a modest decline from 310 to 275 percent. Average trade costs exceeding 150 percent for agricultural commodities for the 10 largest export partners in 2013 result in trade being crowded out or diverted to informal channels.
High costs divert trade to informal channels. A substantial portion of Tanzania’s trade goes unrecorded. Comparing mirror trade data (that is, the value of Tanzania’s exports to EAC partner countries’ import data for the same products) reveals substantial gaps, indicating that informal exports from Tanzania to partner EAC countries could account for as much as US$262 million. Other estimates show that approximately 500,000 tons of maize were informally exported to Kenya in 2014, amounting to more than US$150 million in value. This is in addition to the dozens of thousands of metric tons of other crops, such as rice, dry beans, coffee, and cloves that are regularly exported to neighboring countries through informal channels.
This ‘missing trade’ has a disproportionately negative impact on small farmers and traders, and women in particular. Women play a key role in small-scale, informal agricultural trade. Estimates indicate that they may represent up to 70-80 percent of the total population of cross-border traders in East Africa, including in Tanzania. They typically reside in remote border locations, often live below the poverty line, can be single mothers or heads of households, and cross-border trade may be their main or unique source of livelihoods. Women also tend to be less educated than their male counterparts, experience lower access to finance, skills, machinery, logistics, and distribution networks, and face gender-specific cultural biases and harassment. As a result, they are disproportionately affected by formal restrictions and informal trade hurdles.
c. Diversification through exploiting links from traditional sectors is key to higher and more broad-based growth
Agriculture provides the main source of income for approximately 80 percent of the population. However, investment and growth in this strategic sector, which remains vital to reduce rural poverty, continue to be held back by unnecessary trade regulations. Tanzania has numerous regulatory agencies and complex trade rules that increase the costs of doing business, slow down farmers’ access to new and improved inputs, and prevent smallholders from competing on a level playing field with larger firms. Virtually all the regulatory agencies target 100 percent physical inspection, testing, and certification, rather than adopting a risk-based approach. Limitations on marketing, the use of consignment-based export permits for maize, and the risk of a sudden policy change all serve to discourage investment.
Tanzania is endowed with large mineral and fossil fuel deposits, but the recent decline in commodity prices has delayed new investments, including in downstream processing. Tanzania is known for its high-grade gold reserves and a wide range of precious minerals including Tanzanite. The sector consists of large-scale mining, gas projects, and artisanal and small-scale mining. A significant provider of jobs, in particular, artisanal mining employs almost 700,000 people, with 27 percent being women. Deepening the links from the mining and extractive sector through encouraging downstream processing has a potential to increase value added from mineral and fossil fuel deposits. But the decline in commodity prices has resulted in the postponement of new investments, including the further development of offshore gas deposits.
Tourism is the sector with the highest job creation potential, but to date, this is not being realized. Tourism accounts for 60 percent of the trade in services receipts and provides jobs for over 450,000 people. With world-class wildlife and landscapes, Tanzania has a natural comparative advantage to grow the sector and develop much stronger links to agriculture, and other sectors. Recent studies have identified tourism’s potential to generate additional jobs by developing a range of products in beach, adventure, conference, and cultural heritage tourism. By diversifying its product range, Tanzania can reach beyond the existing low volume, high-value strategy that channels tourists to the northern circuit. Tourism is also an important source of livelihood and employment for women in Tanzania, yet they face an array of gender-specific constraints ranging from occupational segregation to salary gaps and harassment in the workplace. In addition, sector-wide constraints generally experienced by small-scale operators such as poor access to finance, limited and/or inadequate skills, and difficulties in coping with a complex fiscal and regulatory environment tend to be particularly burdensome for women.
II. Key elements of the enhanced strategy to reduce trade costs
Driving trade costs down is key to promoting international competitiveness and export diversification. Lowering Tanzania’s trade costs requires three key steps aimed at broadening the economies competitiveness and expanding trade in goods and services:
Reduce the trade barriers limiting access to markets for exporters, and reform regulations that increase the price of imported inputs. Removing the barriers to regional trade in the EAC and Southern Africa Development Community (SADC) will disproportionately benefit the poor.
Improve the quality and transparency of trade-related regulations by eliminating redundant regulations that no longer address public safety and welfare concerns, simplify and streamline procedures that remain, and improve administrative efficiency through strengthening capacity and targeting resources through applying risk management.
Address logistics bottlenecks that increase supply-chain costs and prevent many poor people in rural areas to participate and benefit from trade. This requires investment in both physical infrastructure and regulatory reform to remove the existing policy hurdles.
This work is a product of the World Bank Group, the Enhanced Integrated Framework, and the Government of Tanzania.