Tanzania's public and private sectors work to expand industrial activity

 

As part of a significant push by the government to sustain economic growth and inclusion, industrialisation is set to accelerate in Tanzania, on the back of increased manufacturing output and recent investment in labour-intensive industries. However, the sector faces notable challenges, including rising production costs, limited infrastructure and a higher tax burden, while manufactured exports dropped sharply between 2016 and 2017 against tightening credit conditions, prompting renewed calls for reform.

As is the case in many East African markets, manufacturing activities remain concentrated in a handful of sectors, such as food and beverage processing. Diversifying the country’s narrow production base and boosting exports of manufactured goods are critical priorities for Tanzania’s mid-term economic development strategy, and the government is moving to attract new investment in value-added manufacturing at export processing zones (EPZs) and special economic zones (SEZs), offering attractive tax incentives and a simplified regulatory regime. Although SEZ development remains constrained by limited infrastructure and high export costs, these measures should support long-term industrial growth, facilitated by rising domestic demand for products such as processed food, carbonated beverages and cement.

Development Mandate

The Ministry of Industry, Trade and Investment (MIT) oversees the sector’s development, with a mandate to develop a competitive industrial base supporting inclusive, sustainable economic growth. Charles John Poul Mwijage, the former deputy minister for energy and minerals, has served as minister since December 2015. A number of agencies with more specific mandates also sit under the MIT, including the Tanzania Investment Centre (TIC), which is responsible for supporting inbound foreign direct investment (FDI) and serving as a onestop shop for permit handling, land use issues and processing. Since 2001 the TIC has assisted with the issuance of permits by authorities including: the Business Registration and Licensing Agency; Tanzania Revenue Authority; the MIT; the Ministry of Labour and Employment; the Ministry of Lands, Housing and Human Settlements Development; and the Immigration Department. The Export Processing Zones Authority (EPZA) also operates under the MIT as an autonomous state agency governed by a board of directors. It is responsible for developing policy to promote investment in EPZs and SEZs, as well as issuing EPZ and SEZ licences.

Activity & Employment

Tanzania’s manufacturing sector is dominated by the food and beverage industry, which accounts for more than 40% of output, according to the Ministry of Finance and Planning (MoFP). Other significant production categories include furniture, rubber and plastics, and non-metallic mineral products.

In May 2017 the MIT reported that there are 49,243 factories in operation, of which 85% are considered very small industries – a figure in line with most sub-Saharan African markets. Small industries account for 14% of total factories, while medium- and large-scale factories comprise the remaining 1%. According to the MIT, this means that 96.5% of factories have a workforce of between one and nine staff, while just 3.5% employ more than 10 people. The MIT reported that the manufacturing sector employed 146,892 people in 2016, a 5.1% increase over 139,895 in 2015, with the sector growing by 7.8% in 2016, compared to 6.5% in 2015. Meanwhile, MoFP data shows that manufacturing accounted for 3.1% of total national employment in 2014, compared to 2.6% in 2010.

Performance

The Bank of Tanzania (BoT) reported that industry’s share of GDP has increased steadily since 2005, rising from 19.4% to hit 20.5% in 2010 and 22.2% in 2015. However, much of this is derived from extractive industries, such as energy and mining (see Energy & Mining chapter). Manufacturing’s share of growth, falling from 7.6% in 2011 to 6.4% in 2013, 5.6% in 2014, 5.2% in 2015 and 5.1% in 2016.

While its share of GDP has fallen in recent years, manufacturing’s total contribution to GDP at current prices has shown a steady increase since 2006, when it stood at TSh1.8trn ($818.7m), rising to hit TSh2.3trn ($1bn) in 2008, TSh4trn ($1.8bn) in 2011, TSh4.6trn ($2.1bn) in 2013 and TSh4.8trn ($2.2bn) in 2015, according to the National Bureau of Statistics.

Trade & Investment

Data from the BoT show total exports rose by 6.44% in the 12 months to November 2016 to hit $9.42bn, up from $8.85bn in 2015. Imports of goods and services fell by 15.8% to $10.3bn over the same period, and the country’s current account deficit, while shrinking, stood at $2bn in November 2016, with goods and service imports continuing to outweigh all exports, including tourism exports.

Manufacturing’s share of total exports recorded positive growth from 2012 to 2015, rising from 17% to a high of 23% in 2014, before moderating to 19.1% during FY 2015/16. Growth was underpinned by domestic firms expanding into regional markets including the EAC and Southern African Development Community.

More recent statistics indicate a slowdown, however, and the value of manufactured exports decreased by 37.5% in the year to March 2017, according to the MIT, reaching $879.7m, compared to $1.4bn the previous year. This was the lowest level of manufacturing export receipts recorded since 2010. The import of capital goods used in industrial production also fell by 26% over the same period, from $3.84bn to $2.84bn.

The MoFP has reported that a number of key trade indicators have deteriorated in recent years. While the exports-to-GDP ratio rose from 28% in 2010 to reach 31% in 2011, it fell to 25% in 2013 and 18% in 2014, before recovering slightly to hit 20% in 2015. Trade openness, which measures import and export values to GDP, increased from 47.9% in 2010 to 56.8% in 2011, before dropping to 48.8% in 2015.

Manufacturers attributed the contraction in large part to tight liquidity conditions at commercial banks, with the BoT reporting that credit extended to the manufacturing sector rose by just 3.1% in the year ending March 2017, after growing 2.2% the previous year (see Banking chapter). By comparison, between March 2014 and March 2015, total credit to the sector rose by 20.6%.

While the country’s share in world trade increased from 0.02% in FY 2011/12 to 0.1% in FY 2015/16, the MoFP reported that industrialisation and trade expansion are challenged by a narrow production and export base dominated by low-value exports, and characterised by high trading costs, tariff and non-tariff barriers to intra-regional trade, and limited access to international markets. This has had a negative impact on investor appetite, and industrial investment growth has been lacklustre in recent years, even as Tanzania’s investment rate measured by gross capital formation as a ratio of GDP rose from 13% in the early 2000s to 28.5% in 2013, exceeding Kenya’s 21.4%. The MoFP also acknowledged that this is not sufficient to support realised economic transformation, emphasising that while FDI inflows increased from $936m in 2005 to $2.14bn in 2014, most of this targeted the services and extractive industries, which offer limited job creation and few links to the wider economy.

Reform Agenda

This has made the sector a central priority for the current government, and industrial development is a critical area of focus for the administration of President John Magufuli. President Magufuli was elected in 2015 after campaigning on a promise to end “business as usual,” including a crackdown on endemic corruption to improve the business environment and attract new investment.

In June 2016 the Magufuli administration launched the second in a series of five-year development plans (FYDPs) due to run until mid-2026 as part of the LongTerm Perspective Plan, which itself provides targeted objectives to help realise the country’s overarching economic strategy, Tanzania Development Vision 2025 (see Economy chapter). Titled “Nurturing Industrialisation for Economic and Human Development,” the current FYDP II covers the period from 2016/17-2020/21, and emphasises infrastructure development and private sector participation to support industrial transformation. The next five-year plan will be called “Realising Competitiveness-led Export Growth,” indicating the important long-term role industrialisation is set to play in the country’s economic development.

According to the MoFP, structural reform of the industrial production base necessitates a number of improvements, including intensifying production and trade of value-added manufacturing and establishing and improving national, regional and global value chains. As a result, the government hopes to build a base to support Tanzania’s transformation into a semi-industrialised country by 2025, fostering development of sustainable productive export capacities and promoting the availability of requisite industrial skills.

In the manufacturing sector the FYDP II has identified interventions including the establishment of new SEZs, EPZs, logistics centres and industrial parks to boost the segment’s share of GDP to 12.5% in 2020 and 18% in 2025. The push to establish new turnkey facilities and ease land acquisitions for industrial investors aligns with efforts by the government to support the development of production outside of the commercial capital of Dar es Salaam, with SEZs in Bagamoyo, Mtwara, Kigoma, Tanga, Ruvuma and the official capital of Dodoma.

The efforts to expand industrial activity across a broader geographic area are already bearing some fruit. Speaking at the annual general meeting of the National Network of Farmers Groups Tanzania, Wilfred Kahwa, principal trade officer at the MIT, reported that the Coast, Kigoma, Lindi, Mtwara, Tanga, and Mwanza regions had benefitted from recent industrial investment, telling the audience that the majority of the projects being developed were medium and large-sized manufacturing and processing industries.

The government also seeks to revive its flagging pharmaceuticals manufacturing industry, after the share of locally produced pharmaceuticals products in the domestic market dropped from 35% in 2009 to less than 10% in 2015. Developing its petrochemicals and chemical manufacturing industries is another key aim as the energy sector moves forward. For FY 2017/18, a number of FYDP II priority projects have been flagged for execution. Among the initiatives included in the MIT’s FY 2017/18 budget include the establishment of an SEZ in the Kibaha Tamco Industrial Area, research projects for industrial expansion and increased funding for the National Entrepreneurship Development Fund.

Tax Structure

While the government has rolled out a range of new excise taxes and a broader value-added tax (VAT) in recent years, the current budget does include some targeted relief measures for specific segments (see Economy chapter). This includes a corporate income tax reduction for new vehicle, tractor and fishing boat assemblers, cutting rates to 10% for the first five years of operation, from 30% previously. It also includes VAT exemptions for imported capital goods used in manufacturing edible oils, textiles, leather and pharmaceuticals products, a measure expected to support small and medium-sized enterprises. The budget also eliminates or significantly reduces import duties for a range of industrial inputs including wheat grain, linear alkylbenzene, sulphonic acid, complete knockdown motorcycle kits and ship construction inputs.

According to the MoFP, the impact of these reforms and projects means manufacturing’s real growth rate is expected to hit 10.5% in 2020 and 12.2% in 2025, while its share of total employment is forecast to increase to 5.4% in 2020 and 12.8% in 2025.

More specifically, the FYDP II targets boosting the industrial sector’s real growth rate from 9.1% in 2015 to 10.6% in 2020 and 10.5% in 2025; increasing its contribution to GDP from 21.1% in 2015 to 23.7% in 2020 and 25% in 2025; raising its share of exports from 27.1% in 2015 to 27.5% in 2020 and 31.1% in 2025; and boosting its proportion of total employment from 8% in 2015 to 12.5% in 2020 and 20% in 2025. Realising these targets will require large capital injections. The country will require an estimated TSh107trn ($48.7bn) to reach its mid-term industrialisation targets, and in May 2017 the MIT requested its budget be doubled from FY 2016/17 levels to hit TSh122bn ($55m) in FY 2017/18, including TSh80bn ($36.4m) for development projects and TSh42bn ($19.1m) for recurrent expenditure.

Initial Results

At least on paper, industrial investment appears to have picked up since President Magufuli assumed office, and in December 2016 the MIT reported that 1423 new industrial projects had been announced between October 2015 and December 2016, out of which 19 projects were currently being implemented. More positive news came in May 2017 when the MIT reported that it had registered 393 large-scale industrial operations valued at $2.36bn since November 2015, which should create 38,862 new jobs when implemented. Industrial investment is accelerating, with the MIT reporting that between July 2016 and March 2017 the TIC registered 170 new large industrial projects expected to create 17,385 jobs, as well as 1843 small-scale industries.

Food & Beverage

Of all the major manufacturing subsegments in Tanzania’s industrial landscape, one of the largest is that of agro-processing and fast-moving consumer goods (FMCG). Long a mainstay of the sector, food and beverage production has been supported by rising domestic demand for rice, meat, bread and sugar products, while beer and carbonated beverage producers dominate its beverage market.

Non-alcoholic drink sales increased by 10% in 2016 to reach an estimated TSh287.6bn ($130.8m), while total alcohol consumption rose by 10.2% to 619.2m litres, according to BMI Research. The firm forecasts alcohol consumption in the country will hit 923.2m litres in 2020, with beer accounting for 889.2m litres, or 96.3% of the total. Non-alcoholic beverage sales, meanwhile, are forecast to record an 8.2% compound annual growth rate (CAGR) between 2015 and 2020 to reach TSh387.6bn ($176.3m), driven by a 12.3% CAGR in carbonated beverage sales to TSh231.7bn ($105.4m), up from TSh129.9bn ($59.1m) in 2015. Multinationals including PepsiCo and Coca-Cola have long had a presence in the country, and for good reason: rising demand for carbonated beverages has created profitable expansion opportunities.

A number of local companies including Bakhresa Group, one of the largest conglomerates in East Africa, and the family-owned MeTL Group, Tanzania’s largest homegrown corporation, have expanded into the carbonated beverage market in recent years as a result, in part by targeting low-income consumers and undercutting the prices of larger multinationals.

The beer market is dominated by Tanzania Breweries Limited (TBL), a subsidiary of SABM iller, and the oldest and largest beer company in the country, with a market share of around 70% in 2016. Kenya-based East African Breweries Limited (EABL), had been in a regional joint venture with SABM iller until 2010, and today owns a 51% stake in Serengeti Breweries Limited (SBL), the second-largest beer company in Tanzania.

Fiscal Burden

Although its long-term consumption outlook is positive, the near-term beer market forecast is mixed, after the country’s draft FY 2017/18 budget included plans for another increase in excise taxes on alcohol. Excise taxes on beer had already risen in the FY 2016/17 budget, with the total tax levied per litre going from TSh694 ($0.32) prior to May 2016, to a proposed TSh765 ($0.35) under the new budget. Additional tax increases on wine, spirits, carbonated beverages and fuel have further dampened the growth outlook, contributing to inflationary pressures (see Economy chapter). The slowdown in discretionary spending is also taking a toll; SBL’s sales fell by 7% in the second half of 2016, while TBL saw revenues drop 7% in the six months to end-September 2016. As highlighted by TBL’s 2016 annual report, beer is expensive in Tanzania, given that the average Tanzanian earns just TSh5000 ($2.27) per day. Although TBL recorded positive results in 2016, with sales rising to hit TSh1.1trn ($500.3m) from TSh1.07trn ($486.7m) in 2015, conditions have deteriorated in recent months.

“Beer prices in Tanzania were already on the high side compared to other markets, judged by the average amount of time people have to work to be able to buy a 500-ml bottle of beer,” Hélène Weesie,  managing director of SBL, told OBG. “But then the latest price increase in 2016, to cover an excise increase of 5%, combined with the rapidly deteriorating economy and lack of cash in the market, led to a terrible year in terms of market development. Since July 2016 we’ve recorded an 8% to 9% decline in the beer market.”

Carbonated beverage manufacturers are also struggling with the dual challenges of a chronic shortage of domestic sugar, as well as significant delays in promised government reimbursements for import duties on sugar. “In East Africa, there’s a clearly defined treatment regulated by the East African Act: a maximum 10% duty on industrial sugar imports. Tanzania is the only country in the EAC with a 15% duty, which is meant to be refundable once we have used the sugar. But getting it back has proved challenging,” Basil Gadzios, managing director of Coca-Cola Beverages Africa-Tanzania, told OBG. “The soft drink industry is owed between $25m and $30m currently, with continuous accumulation, despite the industry having invested TSh800bn [$363.9m] in the country over the past four years.”

Tobacco

Cigarettes, another important FMCG segment, has also seen a rise in sales in recent years. A major tobacco producer, Tanzania also saw cigarette production increase steadily in recent years, growing by 18.3% between 2011 and 2015, from 6.6m to hit 7.8m cigarettes. Tobacco production has also expanded considerably since 2002, when output was 59,000 tonnes, rising to a high of 130,000 tonnes in 2010, before moderating to end 2015 at 87,737 tonnes.

The Tanzania Cigarette Company (TCC) is one of the largest cigarette manufacturers active in the segment, accounting for a 90% market share in 2011, followed by British American Tobacco with 5%. TCC is involved in manufacturing, distributing, marketing and sales for domestic and international brands. Its domestic brands include Embassy, Portsman, Sweet Menthol, Safari, Club, and Crescent & Star. International brands include Camel, Winston, Iceberg and L&M.

TCC recorded a positive performance over the course of 2016: gross turnover rose by 1% in 2016 to reach TSh499.5bn ($227.2m), while profits for the year grew from TSh65.7bn ($29.9m) in 2015 to hit TSh68.7bn ($31.2m) in 2016. The tobacco industry generated some $113.2m of tax revenues in 2012, according to the World Health Organisation, with cigarette exports valued at $10.5m in 2011, compared to $106.6m for non-manufactured tobacco.

Pharmaceuticals

The FYDP II has placed special emphasis on reviving the domestic pharmaceuticals industry. Production of medical supplies has been declining in Tanzania, dropping from 35% in 2009 to under 20% in 2015. The Medical Stores Department, an autonomous agency under the Ministry of Health, has an annual budget of $600m and is tasked with purchasing drugs and medical supplies. In December 2016 the department’s director-general, Laurean Bwanakunu, told the local press that only two out of six pharmaceuticals factories were operating, but expressed confidence that a new government initiative to attract foreign investment and lower taxes could spur rapid growth.

Other Segments

Textiles has recorded moderate gains since the start of the decade, with output rising from 103,177 sq metres in 2010 to 119,458 sq metres in 2014 (see analysis). Production of batteries, meanwhile, regained its 2010 level of 93m units in 2014 after falling to a low of 68m in 2012. Paint production rose by 35.8%, from 28.2m litres in 2010 to 38.3m litres in 2014. In October 2014 Crown Paints, East Africa’s largest paint manufacturer, announced it was entering the Tanzanian market, with plans to invest $3.6m over the next 18 months in a bid to capitalise on construction industry growth trends. Annual aluminium production fell from 59 tonnes in 2010 to 27 tonnes in 2014.

In construction materials, iron and steel production was up by 70% to hit 56,752 tonnes. Cement production, which plays a fundamental role in supporting the manufacturing base, has seen annual production more than treble since the start of the decade. From 900,000 tonnes in 2001 output rose to 2.3m tonnes in 2010, 2.79m tonnes in 2014 and 3.3m tonnes in 2015. The entrance of Nigeria’s Dangote Cement into the Tanzanian marketplace in 2015 should continue to spur greater growth as it forces local producers to compete with one of the continent’s largest cement players. The MIT announced in December 2016 that three companies had plans to invest more than $9bn in new cement projects, which would double the current annual investment (see analysis).

In the Zone

Central to efforts to support growth in the industrial sector are initiatives that among other things seek to reduce one of the primary obstacles manufacturers face: land acquisition. The MoFP stated that core assets related to industry and land are underutilised, owing to low investment contract enforcement, a weak business environment and banks’ reluctance to accept land assets under traditional ownership schemes. The government has sought to alleviate this by allocating dedicated plots, to industrial investors under the EPZA’s EPZ and SEZ schemes, which also offer tax and other incentives.

The EPZ programme was established in 2002 under the Export Processing Zones Act, which provided for the creation of dedicated zones serving export-oriented investors. The scheme aims to improve competitiveness and productivity by attracting foreign investment, which will provide the local workforce with technology transfer, expand the country’s foreign exchange earnings and create a value chain from local producers to the international market.

SEZs were established in 2006 under an eponymous Act. In addition to EPZs, the SEZ scheme also extends to free ports, free trade zones, industrial parks, regional headquarters, science and technology parks, ICT parks, agricultural free zones and tourism development zones. SEZs offer a liberalised legal and tax regime, infrastructure and business support services, allowing for a broader range of allowable activities than in EPZs, with investors benefitting from a host of fiscal and non-fiscal incentives (see analysis).

Outlook

Recent years have been challenging for domestic manufacturers, as an increasing tax burden and a sagging macroeconomic outlook have weighed on growth. Despite these issues, the country holds enormous potential for future industrial expansion, particularly given its critical geographic position as a gateway to landlocked southern African markets and its rich range of natural resources.

Although the government faces a number of challenges in its industrialisation efforts, from limited infrastructure to land acquisition, Tanzania is well positioned to benefit from its abundant natural resources, a growing and young population, and strong projected domestic demand as it ramps up industrialisation efforts.

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The Report: Tanzania 2018

Industry and Retail chapter from The Report: Tanzania 2018

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