2009 Index of Economic Freedom

Quick Facts

Population:

• 39.5 million

GDP (PPP):

• $39.3 billion
• 6.7% growth
• 7.2% 5-year compound annual growth
• $995 per capita

Unemployment:

• 5.1%

Inflation (CPI):

• 7.0%

FDI Inflow:

• $377.0 million

Tanzania's economic freedom score is 58.3, making its economy the 93rd freest in the 2009 Index. Its score is 1.8 points higher than last year, reflecting improved scores in six of the 10 economic freedoms. Tanzania is ranked 11th out of 46 countries in the Sub-Saharan Africa region, and its overall score is slightly lower than the world average.

Continuing efforts to reform its economy have enabled Tanzania to make some progress in reducing poverty. The economy has achieved annual growth of approximately 7 percent over the past five years, yielding improvements in various social and human development indicators. Tanzania scores above the world average in fiscal freedom, investment freedom, and government size. Foreign and domestic investors receive equal treatment, although poor infrastructure, government control, and corruption remain deterrents. Government spending is moderate, and tax administration has been centralized and modernized.

Tanzania's trade freedom score improved because of tariff reductions, but inefficient customs services and other non-tariff barriers limit overall trade freedom. As in many other Sub-Saharan African nations, the judiciary is underdeveloped and subject to the political whims of the executive. Corruption is a pervasive problem throughout government despite attempts at reform over the past decade.

Background Back to the top

The United Republic of Tanzania was formed in 1964 by the union of Tanganyika and Zanzibar, each of which had recently achieved independence. Zanzibar retains considerable local autonomy, including its own legislature and president. Tanzania remains very poor. Agriculture employs over 80 percent of the population and accounts for over 40 percent of GDP. Tanzania's first president, Julius K. Nyerere, pursued socialist economic policies that severely constrained economic growth and development during his nearly 25 years in office. Under his successors, the historically state-led economy is becoming more market-based, but it remains hindered by poor infrastructure and HIV/AIDS.

Business Freedom 48.1 Back to the top

The overall freedom to conduct a business is seriously limited by Tanzania's regulatory environment. Starting a business takes an average of 29 days, compared to the world average of 38 days. Obtaining a business license takes more than the world average of 18 procedures and 225 days, and costs are high. Bankruptcy proceedings are fairly straightforward but relatively lengthy.

Trade Freedom 75.6 Back to the top

Tanzania's weighted average tariff rate was 7.2 percent in 2006. Import and export bans, restrictions, taxes, fees, registration and licensing processes, some prohibitive tariffs, inefficient and slow customs implementation, and weak enforcement of intellectual property rights add to the cost of trade. Ten points were deducted from Tanzania's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 80.6 Back to the top

Tanzania has moderate tax rates. Both the top income tax rate and the top corporate tax rate are 30 percent. Other taxes include a value-added tax (VAT), a property tax, and an excise tax on petroleum products. In the most recent year, overall tax revenue as a percentage of GDP was 12.0 percent.

Government Size 83.4 Back to the top

Total government expenditures, including consumption and transfer payments, are low. After five years of growth, government spending in the most recent year equaled 23.5 percent of GDP. Privatization and restructuring of state-owned enterprises have progressed.

Monetary Freedom73.4 Back to the top

Inflation is relatively high, averaging 6.8 percent between 2005 and 2007. The government influences prices through regulation, subsidies, and state-owned enterprises and utilities. Ten points were deducted from Tanzania's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom60.0 Back to the top

Foreign and domestic investors receive equal treatment under the law. There is no limit on foreign ownership in an enterprise, and investment is not screened. Burdensome bureaucracy, inadequate infrastructure, and corruption are ongoing deterrents to investment. Enforcement of commercial law through the courts is difficult. Foreign exchange and capital transactions are permitted through authorized banks and may be subject to some restrictions. Profits, dividends, and capital can be repatriated. The state owns all land, and investors may lease but not own land.

Financial Freedom50.0 Back to the top

Tanzania's financial system remains relatively small. Direct government influence has gradually diminished, and privatization is ongoing. Credit is allocated largely at market rates, and access to a range of commercial credit instruments is available to the private sector. However, the high cost of financing discourages more dynamic entrepreneurial activity. There are minimal restrictions on foreign banks, and international banks are expanding their operations. Twenty-three commercial banks are licensed and operating, of which over 50 percent are foreign-affiliated. A controlling stake in the National Commercial Bank was sold to a foreign bank in 2001, and the government sold a 49 percent stake in the National Microfinance Bank (NMB) to a consortium led by Rabobank of the Netherlands in 2005. Further sales of the state's remaining 51 percent share of the NMB have been planned. The insurance sector is small. The state-owned National Insurance Corporation is the largest insurer and controls 25 percent of premiums. Capital markets are rudimentary. The Dar es Salaam Stock Exchange is open to foreign investors, but foreign ownership of listed companies is restricted to 60 percent.

Property Rights30.0 Back to the top

The legal system is slow and subject to corruption. A commercial court has been established to improve the resolution of commercial disputes. Recent reforms have been aimed at establishing a reliable system of transferable property rights. Legislation conforms to international intellectual property rights conventions, but violations are not seriously investigated, and courts lack experience and training in IPR issues.

Freedom From Corruption32.0 Back to the top

Corruption is perceived as widespread. Tanzania ranks 94th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Despite improvements in the past decade, corruption remains pervasive throughout the government. The enforcement of laws, regulations, and penalties to combat corruption is largely ineffective. Areas where corruption persists include government procurement, privatization, taxation, ports, and customs clearance.

Labor Freedom49.9 Back to the top

Tanzania's restrictive labor regulations hinder overall employment and productivity growth. The non-salary cost of employing a worker is moderate, but the difficulty of firing a worker creates a disincentive for additional hiring.