SMEs a game changer in Tanzania's economy

TANZANIA'S economy is steadily moving away from agriculture in an evolution that is all too common throughout the history of global economies.

What is not very clear, however, is the course it is now charting.

Due to some very obvious factors the economy seems stuck in murky waters. The right direction would have been to move more towards the services domain.

But that is not exactly what is happening due inadequate infrastructure, both hard and soft. The current, well-connected road network has come somewhat too late. Its full potential has been curtailed by the dysfunctional inter-modal logistical chain as a result of unreliable railways service and inefficient ports. It will take years for the Standard Gauge Railways to become fully functional and for ports' efficiency to improve.

The digital economy has not picked up as it should have. This is because of little investments in the core infrastructure mostly in rural areas, shortage of well-trained IT human resources, slow adoption of digital technologies in the economy, low internet access and dismal spending power. The digital gap remains wide, making e-commerce quite a challenge. The major successful story — mobile money — faces constant disruptions by unpredictable fiscal policies.

While, Tanzania's northern neighbour, Kenya, has been able to move swiftly to the services economy driven mainly by the financial and telecommunications sectors, Tanzania hasn't. Its huge natural resource base seems to be a trap.

Even the decreasing contribution of agriculture in the past two decades was mainly due to its neglect and sudden policy shift into attracting foreign direct investments (FDI) into the mining and other sectors.

The economic linkages and the spillover effects from mining and other types of FDI into agriculture failed to materialise, leading to an increase in the rural-urban migration.

As an example, the growth of agriculture averaged 4% between 2010 and 2020 while that of manufacturing was above 5% and that of mining and quarrying and construction averaged 10% or more.

The Tanzanian economic corundum can very well be illustrated by the nature of its exports. Despite the proverbial move towards services it is the exports of goods that dominate foreign exchange inflows in the current account. The latest Bank of Tanzania reports show that the export value of goods was almost double that of services.

In the year ending September 2022 Tanzania exported goods worth US$7 billion compared to US$4,5 billion in the services sector. While the export basket might not show the whole picture it, however, indicates that Tanzania's services potential has not been fully tapped. But the issue is the export of goods is dominated by non-traditional goods (non-agricultural goods) with minerals (US$3,1 billion) and manufactured goods (US$1,5 billion) taking the lead, according to the Monthly Economic Review report of October, 2022.

In this conundrum the major way out for the Tanzanian economy seems to be small and medium enterprises (SMEs). The fact that SMEs cut across all sectors is an advantage.

SMEs could be very vital in jerking up agriculture and other sectors; can facilitate deeper linkages among various sectors with FDI while mopping up the millions of underemployed youth.

And when the current investments in infrastructure, energy and agriculture come full cycle they can have a lasting impact on the Tanzanian economy.

Tanzania does not have many locally grown large enterprises to speak of. This is because having adopted a centrally planned economy in the first three decades after independence, the government was at the driving seat.

The private sector is, therefore, young in many aspects. In that case it is only too natural that SMEs should be given due priority and enough room to grow.

The good thing is that the Tanzania Development Vision (Vision 2025) has already highlighted the importance of SMEs to the economy. Vision 2025 says SMEs are an important contributor to the country's long-term development.

It is estimated that Tanzania's SME sector consists of more than 3 million small and medium enterprises employing more than 5 million people.

In fact, about 90 or more of businesses in Tanzania are SMEs and contribute between 27 and 35% of the gross domestic product.

Most of the SMEs are in the agricultural sector, and more than half are owned by women. This gender factor has a lot of important economic benefits to poverty reduction because women are the main breadwinners in rural areas.