The business environment in Tanzania after socialism: challenges of reforming banks, parastatals, taxation and the civil service

Abstract

In the process of structural adjustment and economic liberalisation, former strong socialist sub-Saharan African countries are experiencing additional challenges in their efforts to develop the private sector, compared to those that had relatively market oriented economies. Tanzania is known for its past strong socialist orientation. This article assesses the country's effort to reform the banking system, state owned enterprises, taxation system and the public services sector, and the emergence of the private sector. Comparisons are made where relevant with the experiences from transition economies in Eastern Europe.

Major reforms have taken place in all the sub-sectors, and there is significant increase in the participation by the private sector in the economy with increased production. Private banks have increased from zero in 1994 to thirteen in 1998. Over 40 per cent of former state owned enterprises have been divested, 50 per cent of which were sold. Some are performing well, contributing to government income and reversing the drain through subsidy. The taxation system has improved. It now recognises the role played by the private sector and has introduced new mechanisms to collect taxes e.g., VAT, and plugging tax evasion loopholes. Private sector investment has increased and major developments are notable in mining and tourism.

Although the overall impact of liberalisation on the areas examined has been positive, significant weaknesses remain, especially in the regulatory frameworks required to prevent abuses of their position by private enterprises. Both corruption and an uncertain legal environment inhibit the realisation of benefits from reform. The ‘trickle down’ of welfare to poorer sections of society has been inadequate, as has the extension of financial services to small businesses and rural areas. Further public investment is required, especially in health, education and infrastructure.