Significant measures have been taken to liberalize the Tanzanian economy along market lines and encourage both foreign and domestic private investment. Beginning in 1986, the Government of Tanzania embarked on an adjustment program to dismantle state economic controls and encourage more active participation of the private sector in the economy. The program included a comprehensive package of policies which reduced the budget deficit and improved monetary control, substantially depreciated the overvalued exchange rate, liberalized the trade regime, removed most price controls, eased restrictions on the marketing of food crops, freed interest rates, and initiated a restructuring of the financial sector.
In February 2007 the International Monetary Fund (IMF) completed the final review of Tanzania's second Poverty Reduction and Growth Facility (PRGF) arrangement and approved a three-year Policy Support Instrument (PSI) as a successor to the PRGF. Tanzania had implemented a second three-year PRGF in August 2003. From April 2000 to June 2003, the Tanzanian Government successfully completed a previous three-year PRGF. The PRGF was the successor program to the Enhanced Structural Adjustment Facility (ESAF) Tanzania had from 1996-1999. Tanzania also embarked on a major restructuring of state-owned enterprises.
Overall, real GDP growth has averaged about 6% a year over the past seven years, higher than the annual average growth of less than 5% in the late 1990s, but not enough to significantly improve the lives of average Tanzanians. The economy remains overwhelmingly donor-dependent. Total debt service payments for 2008 were $65 million. Although the global financial crisis significantly affected the tourism industry, one of Tanzania's top foreign-exchange earners, 2009 saw economic growth of nearly 5%. High food prices since a spike in 2008 have contributed to a rise in inflation to over 10%, a substantial increase from more moderate inflation earlier in the decade.
Agriculture constitutes the most important sector of the economy, providing about 27% of GDP and 80% of employment. Cash crops, including coffee, tea, cotton, cashews, sisal, cloves, and pyrethrum, account for the vast majority of export earnings. While the volume of major crops--both cash and goods marketed through official channels--have increased in recent years, large amounts of produce never reach the market. Poor pricing and unreliable cash flow to farmers continue to frustrate the growth of the agricultural sector.
Accounting for about 22.6% of GDP, Tanzania's industrial sector is one of the smallest in Africa. The main industrial activities are dominated by small and medium sized enterprises (SMEs) specializing in food processing including dairy products, meat packing, preserving fruits and vegetables, production of textile and apparel, leather tanning, and plastics. A few larger factories manufacture cement, rolled steel, corrugated iron, aluminum sheets, cigarettes, beer and bottling beverages, fruit juices, and mineral water. Other factories produce raw materials, import substitutes, and processed agricultural products. Poor infrastructure in water and electricity supply systems continues to hinder factory production. In general, Tanzania's manufacturing sector targets primarily the domestic market with limited exports of manufactured goods. Most of the industry is concentrated in Dar es Salaam.
Despite Tanzania's unbroken record of political stability, an unattractive investment climate has discouraged foreign investment. Government steps to improve the business climate include redrawing tax codes, floating the exchange rate, licensing foreign banks, and creating an investment promotion center to cut red tape. The most common complaint of investors, both foreign and domestic, is arbitrary courts’ inability to enforce contracts and a hostile bureaucracy.
Zanzibar's economy is based primarily on the production of cloves (90% grown on the island of Pemba), the principal foreign exchange earner. Exports have suffered with the downturn in the clove market. Tourism is a promising sector with a number of new hotels and resorts having been built in recent years. A prolonged electricity shortage from December 2009 to March 2010 delivered a blow to Zanzibar’s economy, severely affecting tourism and causing a rapid increase in commodity prices.
The Government of Zanzibar legalized foreign exchange bureaus on the islands before mainland Tanzania moved to do so. The effect was to increase the availability of consumer commodities. The government has also established a free port area, which provides the following benefits: contribution to economic diversification by providing a window for free trade as well as stimulating the establishment of support services; administration of a regime that imports, exports, and warehouses general merchandise; adequate storage facilities and other infrastructure to cater for effective operation of trade; and creation of an efficient management system for effective re-exportation of goods.
The island's manufacturing sector is limited mainly to import substitution industries, such as cigarettes, shoes, and processed agricultural products. In 1992, the government designated two export-producing zones and encouraged the development of offshore financial services. Zanzibar still imports much of its staple requirements, petroleum products, and manufactured articles.
Information by U.S. Department of State