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Tanzania

Growth Expected to be Moderate but Several Problems Continue to Linger

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Tanzania’s economy grew around 7.1 per cent last year, beating the government’s own revised forecast, Prime Minister Kassim Majaliwa said. In November 2017, the country trimmed its gross domestic product (GDP) to 7.0 per cent from 7.1 per cent.

That forecast had also been revised from 7.4 per cent. But Majaliwa said East Africa’s third-largest economy grew faster than expected last year owing to an increase in mining activity. “Latest data … shows that the country’s gross domestic product grew 7.1 per cent in the period between January and December 2017, compared to a GDP growth of 7.0 per cent in 2016,” Majaliwa said in the parliamentary presentation obtained by Reuters.

The session in January was held behind closed doors. Full-year GDP growth in 2017 was driven by mining and quarrying (17.5 per cent), transport and storage (16.6 per cent) and construction (14.7 per cent) activities, he said.

The World Bank cut its forecast for Tanzania’s full-year GDP growth in November to 6.6 per cent due to slowdowns in public spending and growth of credit to the private sector. Tanzania has pledged to boost public investment in infrastructure projects, including a standard gauge railway, new roads and an expansion of ports.

But some investors have been unnerved by some policies from the government of President John Magufuli, who is nicknamed “The Bulldozer” for his governing style. “There appears to have been an overall deterioration in business sentiment due to the perceived risks resulting from the unpredictability of policy actions,” the World Bank said in its economic update on Tanzania in November.

However, President John Magufuli has defended the country’s economy, saying it’s among the five fastest growing economies on the African continent – and projected it to grow also by 7.1 per cent this year. Dr. Magufuli made the statement on April 29, in Ismani, Iringa region, during a brief ceremony to inaugurate a 189 kilometer-long road stretching from Iringa municipality to the Fufu administrative ward in Dodoma region.

The Sh207-billion road was constructed with funding from the African Development Bank (AfDB) and the government of Japan through the Japan International Cooperation Agency (JICA). Reports released afterwards show that AfDB contributed 65 per cent of the construction costs, while JICA and the Tanzania government disbursed 21 and 12 per cent of the total cost respectively.

Tanzania also forked out the money that was used to compensate the ‘victims’ of the project who had to surrender land and other property to give way to the project. Addressing the local residents who turned up for the ceremony, President Magufuli took the opportunity to dismiss criticism from political rivals that the much-lauded economic growth hasn’t been translated into improved living for ordinary Tanzanians.

Noting that the country has built great trust in its development partners, Dr. Magufuli argued that this was ample testimony that the economy was growing. “We couldn’t construct this road in 1961 because we had a poor economy.

But, today, we are able to attract donors, convincing them that the country’s ability to service the loans has increased– which is an indication that our economy has grown,” the president said. “AfDB has so far disbursed over $3.6 billion.

Last year alone, they released $1.9 billion for implementing road projects – which is equivalent to 52 per cent of all the money issued for road construction projects.” Image 2: President John Magufuli officially launched work on a 207 km standard gauge line between Dar es Salaam and Morogoro The head of State further said that there were some projects which are being implemented through domestic funding.

These include rehabilitation of the central railway, construction of marine vessels and increasing the Health ministry budget from Sh31 billion to Sh269 billion in the last three years! He named other projects that are being implemented by domestic funding as the provision of free education for the first 12 years, connecting the rural community with electricity, and purchasing aircraft for the national flag carrier.

According to the president, the government will continue to secure soft loans for implementing development projects -noting that it spends billions of shillings monthly to service the loans. “Tanzania has 35,000 kilometers of road networks, including regional and national roads that contribute to growing the economy across the country,” he said – adding: “that’s how the government works.

Loans that were secured during the country’s independence are still being serviced. Probably, loans secured by my government will continue to be serviced even after I have died!” The president also encouraged Tanzanians to increase food production in their respective areas – and tap the benefits of a functional roads infrastructure to transport their crops to market.

In fact, he said, the country’s economy was growing at 7 per cent – with a 4 per cent inflation – partly because of good crops production. The IMF has regularly reviewed the Tanzanian economy under its Policy Support Instrument (PSI) program that was approved on July 16, 2014.

The program was subsequently extended to January 15, 2018. Tanzania’s program under the PSI aims at maintaining macroeconomic stability and promoting a more inclusive growth. It supports the authorities’ objectives on reforms to strengthen public finance management, improve efficiency and transparency of public spending, and move to an interest rate-based monetary policy framework.

The economy likely kept up a healthy pace of growth in the first quarter, underpinned by rising commodity prices. However, data for Q1 2018 suggests several problems continue to linger. Credit to the private sector was extremely weak in the quarter, restrained by the bulky stock of non-performing loans held by banks.

Moreover, spending on public investment remained well below budgeted amounts. On the other hand, the 12-month rolling balance of payments surplus almost doubled in annual terms in March 2018, benefiting from increasing project funds from development partners.

Growth is expected to be moderate but remain robust this year. Industrial activity will be buoyed by rising investment in the hydrocarbon sector. Moreover, improved weather conditions should buttress agricultural output. However, downside risks persist as business sentiment could be hit by policy uncertainty. Infrastructure gaps and the business climate have also become increasingly challenging and require a response.

Inflation remains moderate, and international reserves have increased substantially. There are downside risks to economic growth in the short term stemming from slow budget implementation, a challenging business environment, and private sector concerns about authorities’ enforcement of rules.

This is why the IMF reiterates that the Tanzanian authorities should step up budget implementation, particularly in development spending, and macroeconomic policies will need to be closely coordinated. Addressing the high stock of NPLs is a priority to reduce financial sector vulnerabilities and revive credit growth.

The National Bureau of Statistics of Tanzania (NBS) indicates that the Annual Headline Inflation Rate for the month of April 2018 has decreased to 3.8% from 3.9% recorded in March 2018. The Consumer Price Index from March 2018 to April 2018 has changed by 0.4%, compared to a change of 1.2% recorded in March 2018 from February 2018.

The overall index has increased to 113.20 in April 2018 from 112.70 recorded in March 2018. The increase of the overall index is attributed to the price increase for both food and nonfood items. Some food items that contributed to such an increase include; rice by 1.2%, vegetables by 1.9%, dry peas by 1.4%, sweet potatoes by 2.6%, cocoyam by 1.7% and cooking bananas by 4.0%.

On the other hand, non-food items that contributed to such an increase include; kerosene by 4.9%, charcoal by 1.4%, diesel by 3.0% and petrol by1.9%. Food and Non-Alcoholic Beverages Inflation Rate for the month of April 2018 has decreased to 3.6% from 4.7% recorded in March 2018.

The 12-month index change for non-food products in April 2018 has increased to 3.9% from 3.5% recorded in March 2018. The Annual Inflation Rate which excludes food and energy for the month of April 2018 has decreased to 1.4% from 1.6% recorded in March 2018.

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Tanzania

Shilling Fluctuation, a seasonal phenomenon?  

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The debates about the depreciation of shilling against the US dollar are unprofessional, as the fluctuating dollar exchange rates are global and seasonal.

Contrary to what analysts and a section of the media argue or wish the public to believe, experts in economics and financial matters hint that there are well balanced reasons to that.

Having analyzed such baseless debates, I argue that this situation needs to be explained scientifically and economically rather than being blown up unnecessarily.

It should be noted that not only the Tanzanian shilling has slightly depreciated against the US dollar but also other currencies in the world.

Why? Did they fail to export cashew nut as some would argue here? Why the US dollar outperforms other currencies?

According to the ET Markets (2018), in this year (2019), the US dollar was forecasted to outperform many other currencies because of the interest hike.

The ET Markets report which is also supported by the Bank of Tanzania (BOT), states that last year, the US economy continued to strengthen.

This strength caused the US Federal Reserve to increase interest rate in December 2018. The US Fed increased 25 basis point hikes in December, so interest rate differential widened further to 2.65-2.90 per cent.

Euro and US inflation stabilized nearly 2 per cent, but there was a difference in GDP growth and unemployment rate.

GDP growth is higher in the US and unemployment rate is lower compared with the euro, which naturally makes the dollar stronger against the euro and other currencies in the world, including Tanzania.

Economically and financially, this development has contributed to rise in demand for the US dollar from investment side, consequently causing the US dollar to appreciate against most currencies, including the Tanzanian shilling.

The US Dollar is the benchmark pricing mechanism for most commodities which are global assets.

Base Metals that trade on the LME and precious metals such as gold, silver and energy including oil and natural gas use the dollar to price.

The rising dollar has significant consequences on commodities, as higher dollar tends to weigh on commodity prices.

Production cost of raw material in other countries, including Tanzania rise because of a strong dollar and weighs negative on demand.

In the stock market, a higher US dollar weighs on US multinational companies, as they have to compete globally with strong currency.

According to the latest forecasts from Barclays (2019), the dollar will remain the dominant force in the currency market this year and the pound sterling will succumb to another dose of ‘Brexit uncertainty’ while the euro will reach new lows.

Barclays says in its 2019 outlook that as the Fed drives the dollar to new levels of overvaluation and political factors keep Sterling and the Euro on the proverbial back foot, the Fed will go on raising its interest rate in a sustained manner this year, contrary to what other forecasters have begun to anticipate.

The strength of the US dollar against others as said above, the interest hike by FED has depreciated other currencies in the world, including the Tanzanian shilling.

The Bank of Tanzania (BoT) report indicates that from 22nd February 2018 to 21st February 2019 (one year period), the value of the shilling against the US dollar declined by 3.8 percent.

The BOT reports that the value of the US dollar on Developed Market currencies was also put in pressure in the same period.

The British Pound against the US dollar declined by 6.7 percent, the euro by 8.1 percent, the Australian dollar by 9.6 percent and the Chinese Yuan by 6.4 percent.

Moreover, the emerging markets (EM) have been badly affected by the strength of the US dollar. the Brazilian Real is down 18.4 percent, the Russian Ruble is down 14.75 percent, the Pakistan Rupee is 9.7 percent and the Indian Rupee by 8.9 percent year-to-date (YTD) against the dollar.

The Turkish Lira and Argentinian Peso have been the biggest losers, both down close to 40 percent since the beginning of the year.

Comparative analysis in the African region also provides a gloomy picture. Are measures taken by BOT commendable?

Despite the FED factor, I agree with BoT report (2019) indicating that the current movement in the exchange rate in Tanzania is a seasonal phenomenon related to low foreign exchange earnings from tourism and export crops.

This is true because currency hike may be mitigated by a number of facts. “Customarily, from January to May each year, it is a low tourist season and export crops where the country receives low exchange earnings. This is a common trend that usually normalizes in the second half of the year when earnings from tourism and exports pick-up,” states the report.

I commend BOT, for among other things, implementing monetary policy aimed at maintaining price stability and ensures that inflation remains within the target of single digit intended at stabilizing the value of the shilling.

This can be achieved through maintaining the appropriate level of liquidity in the economy. I understand that BOT is also participating in the interbank foreign exchange market (IFEM), in order to smoothen excessive volatility of the exchange rate.

In doing that, the Bank of Tanzania sold USD 528.6 million in 2018, which is more than double the amount sold in 2017.

In 2019, the Bank of Tanzania continued to sell the foreign exchange in order to reduce its shortage in the economy.

Moreover, the BOT must monitor foreign exchange business in order to ensure that rules and regulations are adhered to, including maintaining foreign currency Net Open Position of commercial banks equivalent to 7.5 percent of core capital.

Factors that could lead the dollar to collapse/depreciate more so to what BoT is mitigating, two conditions must be in place before the dollar could collapse.

First, there must be an underlying weakness. Between 2002 and 2018, the dollar has declined 6 percent according to the U.S. Dollar Index.

This is because the U.S. debt almost more than tripled during that period, from $6 trillion to $22 trillion.

The debt-to-GDP ratio is now more than 100 percent. That increases the chance the United States will let the dollar’s value slide as it would be easier to repay its debt with cheaper money.

Second, there must be a currency alternative for everyone to buy. The dollar’s strength is based on its use as the world’s reserve currency.

The dollar became the reserve currency in 1973 when President Nixon abandoned the gold standard.

As a global currency, the dollar is used for half of all cross-border transactions. That means central banks must hold the dollar in their reserves to pay for these transactions.

As a result, 61 percent of these foreign currency reserves are in dollars. The two situations above make a collapse possible.

But, it won’t occur without a third condition. That’s a huge economic triggering event that destroys confidence in the dollar.

Altogether, foreign countries own more than $6 trillion in U.S. debt. If China, Japan or other major holders started dumping these holdings of Treasury notes on the secondary market, this could cause a panic leading to collapse.

China owns $1 trillion in U.S. Treasury’s. That’s because China pegs the Yuan to the dollar.

This keeps the prices of its exports to the United States relatively cheap. Japan also owns more than $1 trillion in Treasury’s.

It also wants to keep the yen low to stimulate exports to the United States. These facts considered, I reiterate the possibility of a conspiracy theory on the dollar-shilling debate in Tanzania.

The hikes are normal and seasonal, but you still find some people raising unnecessary alarm into markets.

 

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