Independence Day Special: Evolution of the Financial Sector

As Tanzania marks 61 years of independence, it is important to reminisce the critical milestones that have shaped the structure and growth of the economy we currently enjoy. The economy has come a long way, from a nominal GDP of $90mln in 1961 to $68bln as of the end of 2021, while the population has grown from 9.5 million to the current estimate of 61 million. Throughout this period, there has been a considerable evolution of the economy.

After independence, the government realized that, state control of capital was the only way to prompt meaningful independence and self-sufficiency. In that manner, the government adopted the Arusha Declaration in 1967 which was devoted to socialism and nationalization of means of production to advance national interest.

The move was seen necessary due to the weak local private sector at the time, therefore the government believed that by allowing private capital to be allocated by foreign capital owners, the country compromises its sovereignty. To avoid that and consistent externalization of output, the government nationalized private businesses and assets.

Mwalimu Nyerere explained the motivation behind nationalization in a speech at the Royal Commonwealth Society in the U.K in 1975. He said “…If any new investment was going to be made, that also was going to be foreign investment. Gradually we realized that under that system the government and people of Tanzania could not determine the direction of their own development. Any private foreign investment would be made in things which would bring a profit to the investor, regardless of our priorities and needs … We wanted to be independent, to govern ourselves. And you cannot be independent if your whole economy, the whole extent and direction of your development, is controlled from outside. So, in 1967 we decided to make our independence a little bit more meaningful “.

A series of economic hardships hit Tanzania in the 70s, including drought, the Kagera War and the breakup of the EAC. These predicaments made it very difficult to maintain a socialist ideology, especially with the growing influence of the capitalistic bloc of the west. The turning point for the economy was in 1984 when the government began implementing the Structural Adjustment Policies, and Mwalimu stepping down in 1985.

Among the challenges that President Mwinyi faced were dysfunctional state-owned enterprises which had accumulated non-performing loans. President Mwinyi thus formed a Presidential Commission of Enquiry in 1988, led by Mr. Charles Nyirabu, former governor of the Bank of Tanzania, hence dubbed the Nyirabu Commission. ?Among the recommendations brought forward by the committee was privatization of state-owned enterprises, liberalization of the financial sector and allow participation and growth of the private sector.

The Commission’s recommendations paved the way for a series of reformations in the financial sector between 1991 and 2000. Among all the reformations, there were five crucial milestones that defined the future of the Tanzanian financial sector as we know it.

The first was the enactment of the Banking and Financial Institutions Act in 1991 which paved the way for the entry of private domestic and foreign banks and financial institutions. The second was the Foreign Exchange Act 1992 which liberalized foreign exchange and led to the establishment of bureaux de change markets and the Interbank Foreign Exchange Market.

The third milestone was the Capital Markets and Securities Act 1994, paving the way for the establishment of the Dar es Salaam Stock Exchange in 1996 which enabled the privatization of seven state owned enterprises. Activities on the Exchange began in 1998 following the privatization and listing of Tanzania Oxygen Ltd (DSE: TOL) while the first bond was listed in 2002 following the introduction of a 5 years T-bond. Despite the liberalization of the economy, it wasn’t until 2003 when foreign investors were partially allowed to trade on the DSE, and fully allowed in 2014.

The fourth milestone was the amendment of the Bank of Tanzania Act in 1995 which gave the Bank the mandate on the formulation and implementation of the national monetary policy, with the main objective of price and financial stability. This differed with the Arusha Declaration where the Bank was responsible for the implementation of the Annual Finance and Credit Plan (AFCP) and the Foreign Exchange Plan (FEP), which were formulated by the ministry of finance.

The fifth major milestone was the establishment of the Tanzania Revenue Authority (TRA) in 1996 which enhanced tax collections and government revenues, enabling debt service, which was already crippling the economy. During the 70s and 80s, Tanzania accumulated significant national debt following the economic hardships discussed above.

Moreover, the implementation of the Structural Adjustment Policies was not cheap either. Between 1991 and 2000, the government had to issue bonds worth TZS 348bln to recapitalize SOEs and cover non-performing assets in commercial banks. The external debt to GDP ratio rose from an average of 45% in the 1980s to peak at 165% in 1994. Thus, the establishment of the TRA in 1996 was crucial for debt containment, along with other debt restructuring programs that took place between 2000 and 2005.

The financial sector has come a long way since then, from less than 10 to the current 62 banks and financial institutions operating in Tanzania, with more than TZS 45 trillion in assets. The central bank implements the monetary policy through various tools, and has maintained stable inflation, within target, for the better part of the last ten years. The external debt to GDP ratio is now less than 40%. The DSE has 29 listings, categorized as a frontier market and facilitated issuance of more than TZS 1.35 trillion in equity capital since inception. The current value of the bond market is more than TZS 16 trillion excluding all the matured papers. The sector is just taking off.

As we celebrate the 61st birthday of Tanzania, along with all the success of the financial sector and the economy in general, we must not discount the part played by the nationalization in the 1960s and the state economy thereafter. That enabled the localization of capital and eventually prioritized the local private sector to take up economic opportunities. Had the government allowed foreign capital all the way, we might have been in a situation similar to South Africa, where there is immense wealth controlled by foreign companies, and a significant wealth inequality where the richest 10% control 85% of household wealth.?