What Tanzania should do to accelerate growth and deepen financial inclusion

Two Tanzanian entrepreneurs: Hadiya and Mzuzi. Hadiya built a successful micro-business taking advantage of mobile money services, including money transfers and savings products that are low cost and safe, as well as short term micro-loans.

Mzuzi, owner of a small 10-person enterprise, is facing a financial crisis despite huge personal drive and inventiveness, because of his inability to access credit to expand his business.

The stories of these two entrepreneurs embody the experiences of real-life Tanzanians seeking to extend opportunities for themselves and their families.

Their need for financial products and services opens the second section of the 9th Edition of the Tanzania Economic Update series which, in addition to providing the World Bank’s regular overview of the economy, puts a special focus on a selected issue of strategic significance to the country.

The broad story of Tanzania’s growth and poverty reduction over the past decade is now well known.

With strong and consistent growth rates of 6-7 per cent, Tanzania has performed very well by regional standards. While the poverty level in Tanzania has declined significantly, roughly 12 million Tanzanians still live on less than Sh1,300 per day, with many others living just above the poverty line and at risk of falling back into extreme poverty, in the event of an economic shock.

While those clustered just below the poverty line could move above it, given the right opportunities.

A key challenge for Tanzania’s economy is the estimated 800,000 young women and men who enter the job market annually, with only limited opportunities to find a productive job.

Higher levels of growth are badly needed to create a greater number of productive jobs and opportunities, and to significantly reduce poverty.

Maintaining and accelerating growth requires the right policies. Tanzania’s impressive growth path to date has been driven by the decisions of the past. Future growth will be driven by the decisions of today’s leaders.

The Government is clear that it is focused on achieving an annual 10 per cent rate of growth by 2020, but to build on the current growth momentum in a way that creates jobs and reduces poverty, it needs to pay attention to three key areas. These are the subject of this latest economic update.

Firstly, Government should maintain its prudent macroeconomic policy management, as this is the basis of stability and growth. Recent improvements in revenue mobilization and tighter anti-corruption controls will assist with the implementation of effective fiscal policy.

Measures to utilize natural gas for power generation will reduce the import bill and improve the external balance over the medium to long-term. And the continued implementation of a prudent monetary policy should provide the necessary support to maintain low inflation.

Secondly, there should be effective management of public investment. To achieve its ambitions, Tanzania needs to scale up investment in infrastructure and human capital.

The Government has increased its commitments to the development budget, but development expenditures in this fiscal year have not been as anticipated. Speeding up public investment is critical even just to maintain current growth rates.

Achieving higher growth may require an adaptation of the current approach. Public investment projects need to be prioritized according to their impact on growth and poverty reduction and they need to be fully funded.

The Government must sustain efforts to mobilize domestic revenue and control recurrent expenditures, whilst making additional efforts to secure external financing of the budget.

Borrowing should focus on the use of concessional resources and grants, and build further capacity to leverage private sector resources into key infrastructure investments, especially in energy and transport. Lessons need to be learned from past experiences, with the private sector being engaged in transparent public private partnerships that are a win-win for the public sector, private sector and most importantly, for citizens.

Thirdly, Tanzania needs to unlock the growth potential of the private sector. There is no alternative to private sector-led growth to reach the levels of investment, employment and poverty reduction that will fulfil the aspirations of the Tanzanian people. But reforms are needed in the following areas:

predictability of policy making, which is central to give private sector actors the confidence to invest, bring capital and create jobs; streamlining taxes and regulations, which will unleash the ability of businesses, especially small businesses, to grow; expanding access to reliable infrastructure (such as a reliable and affordable power supply and an efficient port, road and railway network); strengthening education and training to produce skilled workers; and access to affordable finance, which emerges consistently as a critical constraint to business growth, and is the special theme of this economic update.

As Tanzania enjoyed a decade of stable growth, the country also made very impressive progress towards creating an efficient, low-cost mobile money infrastructure.

This helped to extend financial inclusion for the benefit of many. However, the much larger formal financial system, which is critical for the growth of the business sector, continues to lag behind.

Additional steps are therefore needed to further improve the mobilization of savings, whilst providing access to affordable credit to the real economy. Interest rates remain high and access to credit very restricted, resulting in a lower ratio of credit to the private sector relative to Tanzania’s GDP, compared to regional and global comparators.

Three directions are suggested to secure the prospects of citizens like Hadiya and Mzuzi and many more like them.

Firstly, undertake measures to expand access to those still not participating in financial services: almost one out of three adults lacks access to financial services, with women and citizens in rural areas still strongly disadvantaged.

A complete and swift roll out of an efficient and inclusive National ID system, coupled with the shift towards electronic payments for government-related transactions, including for social transfers such as Tasaf, could greatly facilitate the expansion and deepening of financial inclusion.

This would be particularly beneficial for women and disadvantaged people. These measures should be accompanied by a stepping- up of efforts to increase financial and literacy skills, which would help people to take advantage of the new products.

Secondly, deepening inclusion by broadening the use of more advanced financial products and services could help Tanzania move towards a more formalized, transparent, and dynamic economy. This can be achieved through measures that foster competition between banks and other financial service providers (including facilitating the full-scale sharing of infrastructures amongst banks and other retail payment service providers).

Inclusion would be further extended by the enhancement of the overall consumer protection framework and extension of a deposit insurance mechanism to Mobile Financial Services (MFS), building on progress achieved to date.

Last but not least, Tanzanians’ access to affordable long-term credit needs to be improved. Reducing the pressure of public borrowing would reduce the disincentives for lending to the private sector, which would in turn improve the availability of long-term credit.

The cost of risk, another driver of the high cost of borrowing, can be lowered by improving information sharing by credit bureaus and redefining collateral requirements. High collateral requirements impact small and medium-sized enterprises as well as entrepreneurs with insufficient fixed assets, a constraint which is particularly relevant to women.

The gender gap in access to finance in rural areas needs to be addressed, as it limits the positive effects of increased access on the overall economy.

In conclusion, Tanzania holds great potential for accelerating its growth for the benefit of all citizens. Pursuing the right policies at the macro level will be essential to achieve this potential. Taking measures to bring money within reach of enterprising citizens will help to harness their latent talent, energy and drive.

This will not only contribute to growth of the economy, but widen opportunities for men and women, the Hadiyas and Mzuzi’s, to benefit and play their part. We hope that this Ninth Edition of the Tanzania Economic Update will contribute to the debate as Tanzania seeks to achieve these goals.

Bird is the World Bank Country Director for Tanzania, Malawi, Somalia and Burundi.