Tanzania Business Cycle

Tanzania is one of the poorest countries in the world. According to the United Nations’ data, approximately 36% of the global population (43. 7 million people) live below the poverty line. This signifies that the per capita income of Tanzania is relatively low. The Tanzanian economy depends highly on agriculture, which makes up 40% of the Gross Domestic Product (GDP), provides 85% of exports, and employs about 80% of the labor force. The remaining 20% is employed either in tourism, construction, mining, or the service sector.

Although agriculture has boosted Tanzania’s economy, hurdles still exist due to the poor infrastructure of the country. However, the World Bank and International Monetary Fund (IMF), together with private foreign companies are adopting measures to develop the country in order to raise its GDP, and have a sustainable growth rate. (Roubini Global Economics 2012). The business cycle represents four phases that the economy of a country goes through over a period of time, moving away from its actual growth trend as suggested by Grant 2000. These include a) depression, b) recovery, c) boom and d) recession.

The graph (1) in Appendix A shows, how the economy moves through the four stages, moving away from the actual growth trend. At each stage, the economic activities and the total output produced by the economy fluctuate. In addition to that, at each stage, the macroeconomic variables, which include inflation and unemployment, also fluctuate. The wealth of the country also fluctuates at each stage signifying that at each phase of the business cycle the level of consumption, investment, government expenditure, exports, and imports fluctuate. (Gant 2000). Below the graph represents Tanzania’s business cycle from 1960 to 2011.

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The graph represents the four phases of the business cycle according to Tanzania’s economy, which also represents how the economy moves away from its actual growth trend. Graph 1: Bigsten and Danielsson(2011) This essay will firstly describe Tanzania’s progress through the four economic phases over the time frame of 1960-2011. Thereafter it will discuss how the various macroeconomic variables fluctuate during each stage. In particular, this essay will focus on the macroeconomic variables of unemployment, inflation, investment, output growth (including the components of aggregate demand and supply), and will also consider exports.

Depression is the period that falls between recession and recovery. This is the period when the economy faces a high rate of unemployment, negative net investment, low levels of exports, and falling demand for consumer goods and services, as well as capital goods. (Grant 2000) This is the period when the output level falls over a period of time and the economy of the country is at the lowest level of growth. This implies that the aggregate demand for commodities produced will be relatively low. At this stage the economy will experience a negative growth rate, thus the country will not experience economic development.

Instead, the country will experience poverty as the circular flow of income in the economy is at a minimum. (Grant 2000) As shown in the graph above, according to the Tanzania economic business cycle, it shows that during the period of independence in the 1960’s, the economy experienced a negative growth rate of -4. 2% and had a per capita income rate of 7. 1%. In addition to this, the inflation rate was relatively high at 7. 8% as stated by Bigsten and Danielsson (2011). The situation in which the rate of inflation is relatively high and the country’s growth rate is negative is known as hyperinflation.

Hyperinflation occurs when the economy highly depends on imports and the country’s currency has lost its value. (Investopedia 2012). This occurred because Tanzania had just been freed from the colonial British rule and, had been taken over by the father of the nation, J. K. Nyerere. The country, therefore, had to adopt various reform policies in order to boost the economy. (Bigsten and Daneelsson (2011)). By the early 1980s, Tanzania was heading to an economic crisis, due to the war between Uganda and Tanzania, which climaxed in1978. (EISA2010).

During this period of warfare, Tanzania faced a reduction in its exports. In addition to this, there were low levels of investment and low levels of production, which decreased the consumption level in the economy. All these factors led to a fall in the aggregate demand and supply in Tanzania. The negative growth also caused the Tanzanian Shilling to depreciate by 25% in 1984, where the wages level decline, thus implying there was a high rate of unemployment, together with that the inflation rate was at 40%, as can be seen on the graph (2) in appendix A. (EISA 2010).

According to Rutasitara 2004, the high rate of inflation occurred due to the depreciation of the Tanzanian Shilling, which was brought about by the situation of hyperinflation as the currency lost its value. The effect of this on the country was vast as there was a great dependency on imported products that included oil. Tanzania, therefore, fell into deep economic crises mainly due to the oil price shock, the war between Uganda and Tanzania; fall in exports, and the depreciation of the local currency. (Noni 2011) Recovery is the period between depression and boom.

This is the period in an economy when reforms occur which tends to boost consumption levels, increase production, increase net investment, increase inflation rates, and decrease the unemployment rate. Overall, during the recovery period, the government implements various reform policies, in order to boost the economy and have positive stable growth in terms of the GDP growth rate (Grant 2000). According to the Tanzanian growth cycle, Tanzania has adopted several reform policies, to allow the economy to have a stable growth rate that would eventually lead to its peak period.

Soon after its independence from British rule, as suggested by Noni (2011), Tanzania established commercial banks in November 1970, with the main aim to facilitate investment by providing medium and long term loans, in order to boost up the economy of the country, through the industrial sector. Tanzania however, is said to have a growth rate of 4. 2% after 1986 through the reform policy on macro stability (Shanghai Poverty Conference). In addition to this, in order to reform the economy, the Tanzanian government adopted various policies to reduce the poverty level in the county.

Between 1994 and 2002, through the adaptation of the policy, the level of poverty reduced by 28%. The rate of inflation reduced from 30% during the 1980s and early 1990s to a single digit in the late 1990s, as seen in the graph (2) on Appendix A. As suggested by Shanghai Poverty Conference, the introduction of various policies by Tanzania boosted the economy, as it created new investment, both private and foreign direct. The policy also created employment began to expand the economy.

The reforms also improved the balance of payment, which stabled the exchange rate to allow the inflation rate to reduce to a single digit in 1999 being 7. 9%, as the economy was less dependent on the imported productions, and also because of the improvement in the balance of payment the shillings gained value, thus stabilizing the economy to a certain level (Rutasitara 2004). This implies that the overall production level to increase, which signifies that the aggregate demand for the products’ production would also increase, bring an overall increase in the consumption level.

Thus the country has experienced a steady rate of economic growth over the time frame of 1962 to 1976, 1984 to 1995, and finally from 1998 to 2011. The fact that the country’s overall economy has been growing signifies a steady flow of money circulation in the Tanzanian economy. Boom is the period in the economy that comes after recovery and before the recession. During this stage of the business cycle, goods and services are at high demand. Also, there is a high import and export rate, the inflation rate is relatively high and employment is at the peak.

This stage of the economy is when production is at its highest level and thus the expectation of profit is relatively high. (Grant 2000) Referring to the graph above, between the years 1960 and 2011, the Tanzanian economy has been recovering showing significant growth overall in the economy. Tanzania experienced a significant growth rate in 1966 when the growth rate peaked at 12. 8% (ESED International). Thereafter, the economy has also peaked from the year 2000 to 2011, with an average growth rate of 6. 6%, over a period of 11 years.

During this period the average inflation rate was 7. 25% (ESDE International). During this period Tanzania had found natural resources including gold and natural gases which has led to the development of its infrastructure. The industrial sector grew by 9. 2% in 2007 and was estimated to grow by 10% in the year 2008, as suggested by Campbell and Christie (2010). Tanzania also showed a great improvement in 2010, performing well in the foreign exchange reserves tourism sector. The country has collected $3. 7 billion reserves by September 2012 (The Citizen 2010).

Furthermore, the country has taken various measures to improve its growth, as stated by Business Development Gateway (2012). For example, in the year 2010, there had been more development under private sectors, which benefit the investors, and allow investment to occur in the country, which would bring about employment opportunities. Overall, since the beginning of the twenty-first century, Tanzania has experienced a great improvement in terms of the GDP growth rate. (Campbell and Christie 2010) Recession is the period between boom and depression.

This is the period when the economic growth slows down eventually attaining a constant level in the economy. This is the phase where the rate of unemployment would rise, while the rate of inflation rate would decrease. During the recession period, the economy is growing but at a low rate. (Grant 2000). According to the graph above, Tanzania’s economy faced a recession during the year 2008. This occurred due to the global financial crises of 2008 that originated from the United States of America caused a general fall in the level of output.

This affected Tanzania’s economy as this caused fuel prices to increase, which led to an increase in price in all the sectors of Tanzania’s economy, causing poverty to increase. According to Ngowi (2010), the crises mainly affected the low income earns countries (such as Tanzania) as they are highly financially dependent on the developed nations. Furthermore, due to the financial crises, according to Ngowi (2010), the growth rate predicted by Tanzania reduced from 7. 8% to 7. 5%, in 2008.

The investment level also decreased by 10%, together with the level of exports reduced by 44% in the cotton industry, 30% in the tourism industry, and 50% in the coffee industry. The reduction in all the main economic activities of the country caused the growth rate of the country to decrease. The average inflation rate over the period 2009 to 2011 was 8. 2% (ESDS International). Overall the consumption of the economy reduced considerably. The financial crises of 2008 did affect the economy of Tanzania, but not at a vast level, as stated by Ngowi (2010).

In conclusion, this essay has discussed the four phases of a business cycle, showing how the economy of a country (Tanzania) moves through the four stages over a period of time. Overall, Tanzania’s economy has been stable since the country redeemed its independence from British rule However according to president Kikwete (2011), the government has come up with a 5-year government plan in order to ameliorate the country’s economy to a middle-income country, with an average GDP growth rate of 8% for next 5 years and targeted growth rate of 10% from 2016 to 2025.

Appendix A:

• Graph 1: Google image, the business cycle.
• Graph 2: ESDS Data Change in the inflation rate on 27th July 2012.

References:

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