ECONOMICS COMMENTARY NUMBER TWO

Title of the extract:

Tanzania plans to invest $1.9 bln in year
in energy projects by 2025

Source of the extract: Reuters

Date of the extract: 25 May 2016
Date the commentary was written: 8 December 2016

Word count: 750 words

Sections of the syllabus to which the Section 2: Macroeconomics

commentary relates:

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Article

Tanzania plans to invest $1.9 bln in year in energy projects by 2025

May 25 Tanzania plans to invest $1.9 billion each year by 2025 in energy projects in a bid to end
power shortages and boost industrial growth in East Africa's second-biggest economy, its prime
minister said.

Tanzania aims to boost power generation capacity to 10,000 megawatts from around 1,500MW at
present, using natural gas and coal and reducing its dependence on hydro power sources.

"Tanzania's electricity sector faces another important challenge. As it is heavily dependent on

hydropower, energy provision cannot be ascertained in times of drought," Tanzania's prime minister,
Kassim Majaliwa, said in a statement late on Tuesday.

"Severe and recurrent droughts in the past few years triggered a devastating power crisis as
electricity generation in most of the hydropower stations have progressively been declining in recent
years, occasionally resulting in long hours of power black outs."

Majaliwa said the government wants to see more private capital investment in the energy sector.

"The projected power projects funding exceeds the existing government fiscal space," he said. "To
attract private capital, the government is improving institutional set up, legal and regulatory
frameworks."

Investors have long complained that lack of reliable power was one of the obstacles of doing
business in Tanzania.

Tanzania said last week Japan's Koyo Corporation plans to invest $1 billion in a gas-fired power plant
near big offshore natural gas fields off the African country's southern shore. (Reporting by Fumbuka
Ng'wanakilala, editing by George Obulutsa and Louise Heavens)

Reference
Tanzania plans to invest $1.9 bln in year in energy projects by 2025. (2016, May 25). Retrieved
December 08, 2016, from http://www.reuters.com/article/tanzania-electricity-idUSL5N18M1Y6
Note: Reporting by Fumbuka Ng'wanakilala, editing by George Obulutsa and Louise Heavens

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Commentary

This article discusses Tanzania’s plans to invest in energy projects, with the

aim of improving its industries. This will be achieved mainly through public expenditure,

which is the spending of the government (i.e. government spending). It is one of the four

components of aggregate demand (AD): consumption, government spending, investment

and net exports. AD refers to the total spending in an economy over a given period of time.

An increase in government spending on energy projects will initially lead to an increase in

AD, as illustrated by the rightward shift of the AD curve in Diagram 1:

The original equilibrium of the economy is at y1, PL1. As AD shifts right

(AD1àAD2), there is an extension along the aggregate supply curve (AS1), resulting in a rise

in prices (PL1àPL2) to satisfy the increased AD. It also leads to an increase in real Gross

Domestic Product (real GDP) (y1ày2), which indicates economic growth – one of the

government’s macroeconomic policies.

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 This aim of this plan is to “end power shortages and boost industrial growth”.

With less power shortages, there will be fewer blackouts in the country and economic welfare

will probably improve.

Almost all industries and firms the Tanzanian an economy use electricity to

produce goods/ services. It is a main factor of production – without it, production cannot

happen. Electricity is essential for machinery to operate, so if power shortages stopped

happening, industries are able to be maximise production, thus, the target of “[boosting]

industrial growth” will be reached. This results in a shift in the aggregate supply (AS) curve of

the economy, illustrated in the Diagram 2:

AD2

AS1 shifts right to AS2, causing the original equilibrium y1, PL1 to shift to y2, PL1.

The shift in the AD curves are also illustrated in Diagram 2, owing to the fact that government

spending must have occurred before the AS of an economy can increase. Nevertheless, the

diagram shows that the potential output of the economy has risen; it also shows that there is

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economic growth, as can be inferred from the new equilibrium which shows an increase in

real GDP from the original. Regardless, prices still remain unchanged, which means the

economy is relatively stable – this is good.

Despite this, “Tanzania aims to boost power generation… using natural gas

and coal”, which are both non-renewable sources of energy. They will run out in the long run

and thus production in the Tanzanian economy will be unsustainable. Besides, these energy

sources can cause air pollution. Though this investment plan may lead to a rise in real GDP,

it does not account for any environmental destruction done. Therefore, investing in coal may

not be the ideal situation.

On the other hand, hydropower does not pollute the air, although “energy

provision cannot be ascertained in times of drought”, according to Majaliwa. This suggests

that the Tanzanian economy is quite susceptible to supply shocks, especially since this

“occasionally [results] in long hours of power black outs”; in effect, this might cause sudden,

sharp rises in the average price level of the economy.

Moreover, Tanzania’s main exports include metal ores and cars ("Tanzania",

n.d.), all of which need electricity to be produced. If there is a reliable source of power,

Tanzania would consistently be able to export the same quantities of goods/ services, hence

the AD will not fluctuate as a consequence of the change in the net export component. In

contrast, just because the quantities of these exported goods/ services are stable, that does

not mean that the quantity demanded for them will be.

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 Additionally, electricity could be considered a merit good – it tends to be under-

consumed in Tanzania, and would likely be under-provided if left to a free market system.

However, there is limited “government fiscal space”, hence it is necessary for firms to help

out for this investment to work. Governments may try to incentivise firms to do so, possibly by

providing tax breaks. This might potentially mean that the government receives less revenue,

but in the long run, the economy will likely benefit. Another thing the government could do is

set up public sectors that invest in electricity, then privatise it. This could be beneficial

because Tanzania is a developing country, and developing countries often need the

government to kick-start the economy. Privatisation also often means that the firm’s

production becomes more efficient, thus this will probably increase the AS of an economy,

indicating economic growth.

In conclusion, this investment plan can be advantageous to the Tanzanian

economy, though it might come at a cost of environmental degradation. Should this project

be a success, people will presumably be better off in the short run, but as air pollution kicks

in in the long run, their happiness may not last.

Reference

Tanzania. (n.d.). Retrieved December 08, 2016, from http://atlas.media.mit.edu/en/profile/country/tza/

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