Uncertainty over government policies and a slowdown in the private sector cut Tanzania's gross domestic product growth to an estimated 6.9 per cent in 2016 from 7.2 per cent the previous year, the World Bank said on Tuesday.
Growth is still supported by substantial government investment in infrastructure, including a standard gauge railway, new roads and expanding the ports.
But investors have been unnerved by unpredictable policies from the government of President John Magufuli, nicknamed "The Bulldozer" for his pugnacious governing style.
A steep drop in money supply and a spike in non-performing loans have also hampered private sector credit growth.
"Policy adjustments, if they occur frequently, could cause uncertainty for the private sector, and this uncertainty could dampen private sector investment decisions," the World Bank said in its latest economic update for Tanzania.
"The government should pay more attention to, and be more explicit about, the potential unintended consequences of government policies on the private sector."
It said Tanzania's economic growth in 2016 probably slowed to 6.9 per cent, slightly below the government forecast of 7.2 per cent.
Government officials were not immediately available for a comment.
Tanzanian banks have tried to shield themselves against a steep rise in non-performing loans by creating a large buffer in the form of high interest rates, increasing the cost of borrowing, it said.
The World Bank said government cost-cutting measures, including restricting travel for officials, could hurt the private sector.
"Government meetings in tourist resorts have been banned - an example of how public administration reforms could also impact the private sector, which relies significantly on government demand," it said.
After coming into office in November 2015, Magufuli launched a crackdown on tax evasion targeting large companies.
Some foreign investors say they could now scale back operations or expansion plans because of tougher demands placed on firms, including higher tax bills.
"The negative business sentiment indicators point to the need for the government to promptly engage in public-private dialogue on investment climate," the bank said.