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UNITED REPUBLIC OFTANZANIASELECTED ISSUESApprovedByThe AfricanDepartmentPrepared Melesse Tashu and Sebastian Acevedo (AFR)THE BUSINESS ENVIRONMENT AND PRODUCTIVITY IN TANZANIA— EVIDENCEFROM FIRM LEVEL DATA ___________________________________________________________3A. Context _____________________________________________________________________________3B. Business Environment Indicators in Tanzania________________________________________4C. Empirical Framework________________________________________________________________8D. Estimation results _________________________________________________________________10E. Concluding Remarks ______________________________________________________________14FIGURES1. Real GDP and TFP Growth___________________________________________________________42. The Business Environment Indicators, 2023 _________________________________________63. Domestic Credit to the Private Sector, 2023_________________________________________74. The Business Environment Indicators and Firm TFP in Tanzania ___________________11TABLE1. Pooled OLS Regression Results between TFP and Obstacles to the BusinessEnvironment _________________________________________________________________________13References __________________________________________________________________________15FOSTERING HUMAN CAPITAL IN TANZANIA’S RAPIDLY GROWINGPOPULATION _______________________________________________________________________16A. Background _______________________________________________________________________16CONTENTS 2INTERNATIONAL MONETARY FUNDB. Authorities’ Strategy _______________________________________________________________________18C. Challenges Ahead __________________________________________________________________________19D. Investing in Human Capital ________________________________________________________________20E. Policy Recommendations __________________________________________________________________22BOXES1. World Bank Recommendations to Improve Spending Efficiency ___________________________21FIGURES1. Education and Health Indicators ___________________________________________________________172. Priority Social Spending ____________________________________________________________________173. Composition and Evolution of Social Spending ____________________________________________184. Additional Public Spending Needed to Achieve SDGs by 2030_____________________________20References____________________________________________________________________________________23 INTERNATIONAL MONETARY FUND3THE BUSINESS ENVIRONMENT AND PRODUCTIVITY INTANZANIA— EVIDENCE FROM FIRM LEVEL DATA1Using the World Bank’s Enterprise Surveys (ES) data, this paper sheds light on the relationshipbetween firm-level total factor productivity (TFP) and the business environment in Tanzania. Itfinds statistically significant evidence that cumbersome tax administration, limited access tofinance, and limited access to transport are associated with lower firm TFP in the manufacturingsector. While regression coefficients are not statistically significant, negative associations betweenTFP and the regulatory burden, as well as power outage, are also evident in non-parametricrelationships. On the other hand, there is no clear evidence for the relationship between incidenceof corruption and TFP. These results underscore the importance of stepping up structural reformsto improve the efficiency of tax administration, ease the regulatory burden, and improve access tofinance and reliable infrastructure. In particular, these reform areas should be given priority in thecontext of theVision 2050andBlueprint for Regulatory Reforms IIstrategies.A.Context1.Tanzania enjoyed robust economic growth in the past two decades,driven largely bypublic sector investment. Real GDP grew at an annual average rate of about 6 percent during 2000-23, when the share of gross fixed capital formation to GDP more than doubled from about 19 to 43percent. While the private sector contributed more than half of the growth in total gross fixed capitalformation during 2000-11, the trend reversed during 2011-23 when private sector fixed capitalformation declined by 1 ppts of GDP.2In particular, FDI declined from about 5.7 percent of GDP in2010 to about 2 percent of GDP in 2023.2.However, economic growth has been characterized by declining productivity growthand slowing structural transformation:•The contribution of TFP growth to real GDP growth declined from 1.6 ppts in the 2000s to -0.1ppts in the 2010s and further to -2 during 2020-23 (Figure 1). While the slowdown in TFP growthsince the 2000s was a global phenomenon, Tanzania’s TFP growth lagged significantly that ofcountries in the Eastern Africa Community and Sub-Saharan Africa.•A recent study finds that the contribution of structural change3to total labor productivitydeclined from 72 percent during 2006-2014 to -5 percent during 2014-2021, implying that 105percent of labor productivity during 2014-2021