Manufacturing yet to recover from financial crisis

Current outturn indicators show that the sector is still reeling in the shock of the worst economic crisis since the Great Depression of the 1930s.

Its troubles continue to be compounded by structural deficiencies in the economy such as frequent power outages and expensive imported raw materials and intermediate goods.

Manufacturing’s role in national output this decade has also been lower than the target set for its contribution to the gross domestic product.

Under the first Five Year Development Plan (FYDP I) and the 2nd National Strategy for Growth and Reduction of Poverty (Mkukuta II ), the government had set out to increase the sector’s contribution to GDP to 12.9 per cent by 2015/16, which has not been the case.

According to the chairman of the Confederation of Tanzania Industries (CTI), Dr Samuel Nyantahe, the industrial sector grew by an average of seven per cent a year, and its contribution to GDP averaged seven per cent during the past ten years.

“The GFC reversed the Tanzania’s GDP growth projection and had negative implications in terms of investments, employment and income to various actors in the economy.

The most negatively affected sectors were agriculture, industry, banking, tourism, trade finance, export trade and mining,” the Overseas Development Institute notes in a snapshot of the economic, financial and social effects of the downturn.

The country survived the first-round effects of the crisis, but by late 2008 the banking sector started sounding alarm after noting trade financing was becoming increasingly more risky.

When Tanzania was directly hit by the GFC in 2009, manufacturing grew by only 4.7 per cent compared to 11.4 per cent in 2008 and 8.9 per cent in 2010.

The overall wanting performance of industry in recent years has had far reaching implications in terms of leveraging its potential to create jobs, boost household incomes, generate foreign exchange earnings, yield tax revenue and help to dent abject poverty in the country.

However, experts and sectoral players foresee a new dawn for it in President John Magufuli thrust to revive industrial activities and make Tanzania an industrialised economy during his reign. Many expect the manufacturing sector to soon start blossoming and play a pivotal role in making Tanzania a middle income economy by 2025.

“In 2005, the sector was growing at 9.6 per cent per year and up to 11.5 per cent in 2007 and then down to 4.7 per cent in 2009, mainly due to global economic and financial crisis,” four economists at the University of Dar es Salaam note in a paper on how the government can realise its industrialisation dream.

“Since then, growth has gradually improved to 6.0 per cent in 2015 due to increased investment and production in textile, iron, cement, drinks, cigarettes, agro-processing and construction materials,” the Department of Economics experts - Prof Lucian Msambichaka, Dr John Mduma, Mr Onesmo Selejio and Dr Oswald Mashindano – explain.

“During this period (up to 2014), the industrial sector has been contributing about seven per cent of GDP. However, performance so far has not been impressive, at least from Government own assessment,” they add in the May 5, 2016, document titled: Fast tracking Industrialization in Tanzania - the Must “Do”.

Factors handicapping realisation of its full potential include lack of quality and reliable supply of power that costs manufacturers dearly and hugely dents their productivity and competitiveness.

A 2011 study by CTI estimated that losses due to power problems totalled around 31.7bn/- per year. Unreliability of electricity supply resulted in a loss of 9.5bn/- in corporate tax revenue. For the same reason, about 7,341 jobs were lost in formal manufacturing firms employing ten workers or more.

Poverty alleviation think tank Repoa says manufacturing firms are equally disadvantaged by value chain shortcomings, as raw materials and intermediate inputs are largely imported. Repoa also categorises other major hurdles as technical problems, administrative matters; financial barriers and policy issues.

Specifically, these include outdated machines and equipment, inadequate technical knowledge and skills, and lack of access to sophisticated information and communication technology. Manufacturing is also hindered by ineffective policies and, in particular, by poor enforcement of rules and regulations, and rent-seeking.

“With financial challenges, there are difficulties in accessing financial resources and the high cost of working capital...firms operate largely on borrowed capital acquired at high interest rates; raw material and other inputs are expensive; depreciation of the nominal exchange rate that adversely affects the cost of imported inputs; and unbearable cost of energy,” Repoa notes.

Policy impediments include tax laws, local government bylaws, and environmental legislation requirements to mention but a few. Manufacturers also say that they are over-regulated, due in part to the existence of a multiplicity of regulators noting that rules and regulations overlap, and compliance with all is costly.

Reforms to synchronize regulatory processes should be very useful in addressing this bottleneck, Repoa notes in a 2014 survey titled: The Performance of the Manufacturing Sector in Tanzania, Challenges and the Way Forward.

Addressing journalists on PMAYA 2015 in Dar es Salaam last week, CTI executive director Leodegar Tenga said performance in the last three years was impressive by regional and global standards.

The figures he gave show that industry grew by seven per cent in 2014, accounted for seven per cent of GDP, 11 per cent of all formal jobs and generated 23.3 per cent of the export earnings, which were about US$8.7 billion. Hussein Kamote, CTI director of Policy and Advocacy, who said they expect better indicators for 2015, put the 2013 outturn at 6.3 per cent, 10 per cent and 16.5 per cent respectively.

He said that despite the inherent challenges, the importance of the manufacturing sector to the national economy has varied across different periods since independence, but in the recent years its contribution to the national income and importance has been on the rise.

“We expect better results for 2015 since there were no big structural constraints to major operations during the year such as power rationing,” Kamote said at the press conference.

However, going by figures of the National Bureau of Statistics (NBS), the overall outturn may not be that better. In 2015, manufacturing activities recorded the worst quarterly growth rates in three years in the first nine months of the year, expanding by a mere 3.6 per cent during July-September.

NBS is yet to release data for the last quarter. During the period in 2014 and 2013, manufacturing activities posted small growth rates of 3.0 per cent and 4.9 per cent respectively. The stats agency says the sector grew by 6.8 per cent in 2014 and 6.7 per cent the previous year.

“The activity grew at the rate of 3.6 per cent in the third quarter of 2015 compared to 6.3 per cent in the third quarter of 2014,” in the Third Quarter GDP (July-September) 2015 report.

“For the period, there was slight decrease in the manufacturing activity compared to the corresponding quarter of 2014 due to a general decrease in the production of food, beverages and tobacco industries.

There was also less production of textile and wearing apparel; chemicals and pharmaceuticals and rubber and plastic products during the third quarter of 2015 compared to a similar quarter of 2014,” the report reads.