Industrial development constraints and challenges

Marginal role: Tanzania’s manufacturing sector has not yet shown significant progress in their contribution to the economy growth of Tanzania. Agriculture is still by far and large dominating the Tanzanian economy. Between 1995 and 2005, the manufacturing share of value added to GDP remained quite unchanged around 7-8%, below the average of neighbouring East African countries.

Poor diversification: the manufacturing sector continues to be dominated by food, beverages and tobacco and textiles. Tanzania appears to have been strengthening its bias towards resource-based branches of manufacturing, with little diversification.

Low-value addition of products: compared to other neighbouring countries in the region, Tanzania’s MVA share in GDP in the past years (1995-2005) ranked at the bottom, further underscoring the very low level of industrialization in the country. More critically, more than 60 percent of manufactured exports were resource-based products, corroborating the low value addition in those years; however, during 2004-2006, the share of resource-based exports in manufactured exports dropped and stabilized at 50 percent, corroborating, also, the slight uptake of industry in more recent years.

Low capacity utilization: capacity in the industrial sector in Tanzania is still being used at below the installed capacity although large-scale industries tend to exhibit relatively greater capacity utilization. Low capacity utilization is associated with infrastructure constraints such as electricity (availability, reliability, and quality), inadequate water supply, poor technology, unsatisfactory transport and communication services. Recently, however, average capacity utilization increased from 36.6 percent in 2005 to 42.6 percent in 2006, a modest gain can be attributed to the implementation of SIDP Phase I (rehabilitation and consolidation of existing industrial capacities).

Inward-orientedness: the industrial sector is still inward oriented. Most industries produce consumer goods, which are mostly consumed within the country. In 2005, about 71.6 percent of total sales was accounted for by domestic sales while export sales accounted for 28.4 percent, suggesting that (i) the competitive ability of the industrial sector is limited and (ii) most (foreign) investors concentrate on consumer goods industries and favour domestic markets where they can make quick profits and apparently compete favourably.

Agro-processing and agribusiness still lagging behind: in the labour and export markets agriculture remains the pivotal sector, employing 85 percent of the work force and accounting for 85 percent of export revenue. It grew by 5.1 percent in 2005 compared to 5.8 percent in 2004, and accounts for more than 40 percent of the GDP. Tanzania is virtually at the bottom of the trade diversification index (103 out of 110), a reflection of the country’s continued heavy dependence on traditional exports crops, with cashew nuts, coffee, cotton, sisal, tea, and tobacco accounting for 21 percent of total agricultural exports This implies that the potential for increasing GDP growth through agro-processing and agribusiness in general is high.

With the incidence of poverty greater in rural areas (where most of the poor reside), accelerating agricultural growth can progressively reduce poverty. Sustained investment can promote growth in the sector and there is good progress in this direction. However, a recent review of the implementation status of the NSGRP/MKUKUTA indicates that while good progress has been made in all key sectors of the economy, progress has been slow in reducing poverty due largely to the decline in agricultural growth. The expected transformation of the agricultural sector from basic farming to large scale, mechanized production is yet to be realized and agro-industry is yet chronically underperforming.

Given Tanzania’s rich resource base and the fact that agriculture, with a rich array of commodities, is the backbone of the economy, the industrial development challenge for Tanzania is to engineer an industrial process that, taking advantage of the abundant commodities and resources, transforms them through sustainable productive activities into higher value, dynamic export ready products. In sum, agro-industry can potentially play a pivotal role in engineering the industrial process and ultimately in attaining the MKUKUTA vision for Tanzania's industrial development.

The need is urgent for diversification of traditional primary exports into technologically more dynamic manufactured exports enabled, of course, by a restructuring process that increasingly enhances the capacity to innovate. In the long run, the industrial process should establish a stronger and more balanced, broad-based economic structure driven by a technologically advanced industrial sector that is complemented by a viable agriculture sector.

In the past few years, new firms have tended to have higher productivity levels than older firms. This suggests that reforms, an improved investment climate and the competitive environment in which industry is now operating are beginning to promote a more effective production structure. This should provide the basis for improved growth potential in the future. However, further action is needed to facilitate progress towards competitiveness in manufacturing in Tanzania.