The game-changing role of SMEs in Tanzania’s economy

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 of 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 resources 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 (FDIs) into the mining and other sectors.

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

As an example, the growth of agriculture averaged 4 per cent between 2010 and 2020 while that of manufacturing was above 5 per cent and that of mining & quarrying and construction averaged 10 per cent 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 $7 billion compared to $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 taped. But the issue is the exports of goods is dominated by non-traditional goods (non-agriculture goods) with minerals ($3.1 billion) and manufactured goods ($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 SMEs. The fact that SMEs cut across all sectors is an advantage.

Small and medium enterprises could be very vital in jerking up agriculture and other sectors; can facilitate deeper linkages among various sectors with FDIs 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 in 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 given enough room to grow.

The good thing is that the Tanzania Development Vision (Vision 2025) has already highlighted the importance of SMEs in 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 to between 27 and 35 per cent of the Gross Domestic Product (GDP). 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.

Since most SMEs operate in the agricultural sector and are predominantly owned by women makes them both mighty crucial in the arduous endeavour to uplift Tanzania’s economy and the conducive vehicle to drive poverty out of Tanzania.

The Small and Medium Enterprise Development Policy (2003) categories SMEs as follows: Micro Enterprises with up to 4 employees or up to Sh5 million investments in machinery; Small enterprises engaging between 5 and 49 employees or with capital investment from Sh5 million to Sh200 million; Medium enterprises that employ between 50 and 99 people or use capital investment from Sh200 million to Sh800 million; relatively large enterprises employing at least 100 people or have machinery investment above Sh800 million.