After independence, Tanzania adopted socialist economic policies, resulting in severe economic decline. The state controlled the economy and owned all of the major enterprises. The exchange rate and pricing policies were based on non-market mechanisms, creating low export and real GDP growth, high inflation, and widespread shortages. Agricultural production, the mainstay of the economy, declined steadily.
In 1986, Tanzania began to liberalize its economy and make partial market-oriented economic reforms. Although the government liberalized the agricultural marketing system and domestic prices and initiated financial system reform, economic growth was slow between 1986 and 1995.
Since 1996, Tanzania has taken aggressive steps toward macroeconomic stabilization and structural reforms. The emergence of a strong Ministry of Finance, supported by the International Monetary Fund (IMF) and other development partners, was instrumental in accelerating fiscal reforms and fostering a turnaround in fiscal performance. Overall, real GDP growth has averaged about 6% a year over the past 7 years, which was higher than the annual average growth of less than 5% in the late 1990s. Total debt service payments for 2010 were $85 million. The IMF’s most recent Debt Sustainability Analysis indicates that debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative combined with sound macroeconomic policies place it at low risk of debt distress. Public external debt service was approximately 1% of GDP in 2009 and expected to remain so for 2010 and 2011.
However, economic growth has not translated to significantly improving the lives of average Tanzanians. The economy remains overwhelmingly donor-dependent; 30% of the budget is dependent upon donor assistance. The global financial crisis significantly affected the tourism industry, one of Tanzania's top foreign-exchange earners; however, Tanzania was able to maintain relatively strong growth in 2010. Continued high food prices since a spike in 2008 have contributed to a rise in inflation to over 10%, a substantial increase from more moderate inflation earlier in the decade.
Agriculture constitutes the most important sector of the economy, providing about 27% of GDP and 80% of employment. Cash crops--including coffee, tea, cotton, cashews, sisal, cloves, and pyrethrum--account for the vast majority of export earnings. While the volume of major crops--both cash and goods marketed through official channels--have increased in recent years, large amounts of produce never reach the market. Poor pricing and unreliable cash flow to farmers continue to frustrate the growth of the agricultural sector.
Accounting for about 22.6% of GDP, Tanzania's industrial sector is one of the smallest in Africa. The main industrial activities are dominated by small and medium sized enterprises (SMEs) specializing in food processing including dairy products, meat packing, preserving fruits and vegetables, production of textile and apparel, leather tanning, and plastics. A few larger factories manufacture cement, rolled steel, corrugated iron, aluminum sheets, cigarettes, beer and bottling beverages, fruit juices, and mineral water. Other factories produce raw materials, import substitutes, and processed agricultural products. Poor water and electricity infrastructure systems continue to hinder manufacturing. In general, Tanzania's manufacturing sector targets primarily the domestic market with limited exports of manufactured goods. Most of the industry is concentrated in Dar es Salaam.
Generally, Tanzania has a favorable attitude toward foreign direct investment (FDI) and has made efforts to encourage foreign investment. Government steps to improve the business climate include redrawing tax codes, floating the exchange rate, licensing foreign banks, and creating an investment promotion center to cut red tape. However, Tanzania still must overcome the legacy of socialism. The most common complaint of investors, foreign and domestic, is the hostile bureaucracy and the weak judiciary system.
Zanzibar's economy is based primarily on the production of cloves (90% grown on the island of Pemba), the principal foreign exchange earner. Exports have suffered with the downturn in the clove market. Tourism is a promising sector with a number of new hotels and resorts having been built in recent years. A prolonged electricity shortage from December 2009 to March 2010 delivered a blow to Zanzibar’s economy, severely affecting tourism and causing a rapid increase in commodity prices.
The island's manufacturing sector is limited mainly to import substitution industries, such as cigarettes, shoes, and processed agricultural products. In 1992, the government designated two export-producing zones and encouraged the development of offshore financial services. Zanzibar still imports much of its staple requirements, petroleum products, and manufactured articles.
Sources:CIA World Factbook (December 2011)
U.S. Dept. of State Country Background Notes ( December 2011)