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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

Tanzania’s economy to grow by 6.8% in 2019

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The World Bank suggests Gross Domestic Product (GDP) growth in Tanzania to likely slowdown to 6.6% for the year 2018 from a 7.1 per cent expansion in 2017.

This year 2019, the Bank estimates that Tanzania’s economy will grow by 6.8 per cent and rise to 7.0 per cent in 2020.

But the government expects Tanzania’s economy to grow by 7.2 per cent in 2018 and accelerate to 7.3 per cent in 2019, despite a slowdown in credit to the private sector and rising bad loans in the country’s banking sector.

The state-run National Bureau of Statistics (NBS) said in December that Tanzania’s GDP grew by 7.0 per cent in the first half of 2018 from a 6.7 per cent rise in the same period a year-ago, while the country’s inflation rate dropped to a 10-year low in November, helped by slower rises in food prices.

National Bureau of Statistics – Tanzania

“In fast-growing countries, such as Rwanda and Tanzania, the (economic) expansion will be supported by public investment in infrastructure and strong agricultural growth,” said the World Bank in it 264-page report.

“Inflation is expected to pick up across the (Sub-Saharan Africa) region in 2019, reflecting the pass-through of currency depreciations during 2018 and domestic price pressures among metals exporters and non-resource-intensive countries … price pressures are likely to intensify in Kenya, Tanzania and Uganda.”

Tanzania’s annual headline inflation rate rose marginally to 3.3 per cent in December from 3.0 per cent in November, the lowest inflation in a decade.

The International Monetary Fund (IMF) warned last month that a credit squeeze coupled with a slowdown in government spending could dampen prospects for faster economic growth in Tanzania.

The lender, which warned that nearly half of Tanzania’s 45 banks are vulnerable to adverse shocks and risk insolvency, forecast the economy by 6.8 per cent this year.

The government plans to raise spending by 2.4 per cent in the 2018/19 fiscal year with the fiscal deficit expected to increase on the back of higher infrastructure spending.

The fiscal deficit is seen reaching 3.2 per cent of GDP in 2018/19 fiscal year (July-June), up from around 2.1 per cent in 2017/2018, according to data from the Ministry of Finance and Planning.

Elsewhere, the growth of the global economy is expected to decelerate to 2.9 per cent this year compared with the three percent in 2018, the World Bank said in the report, citing elevated trade tensions and international trade moderation.

A slump in the global economy will continue in the coming year, with 2020 growth estimated at 2.8 per cent, according to the report.

“Risks to the regional outlook are tilted to the downside. On the external front, slower-than projected growth in China and Euro Area, which have strong trade and investment links with Sub-Saharan Africa, would adversely affect the region through lower export demand and investment,” the World Bank said.

“Moreover, Sub-Saharan African metals producers would likely be among the hardest hit by escalating trade tensions between China and the United States, as metals prices would fall faster than other commodity prices as a result of weakening demand from China.”

Sharp currency declines would make the servicing of foreign currency-denominated debt, already a rising concern in the sub-Saharan African region, more challenging, the Bank said.

Overall, real GDP growth is estimated 6.6% in 2018, down from 7.1% in 2017. The services sector was the main contributor to GDP (39.3%). Private investment was the main demand-side contributor (63.9%). The external sector stymied economic growth as the current account deficit increased (despite the real depreciation of the Tanzanian shilling), due to a higher volume of imports in 2018 than in 2017. The increase is due largely to increased imports of transport equipment, building and construction materials, industrial raw materials, and petroleum products for large public investment projects, such as the Standard Gauge Railway. The import bill also increased as a result of the rise in the price of key commodities, such as crude oil.

The fiscal deficit increased to an estimated 3.9% of GDP in 2018, due to increased capital spending on infrastructure projects. Public debt increased to an estimated 39.3% of GDP in 2018 from 38.2% in 2017. External debt accounted for about 74.9% of total public debt in 2018. The risk of debt distress remains low because public external debt, at 34.5% of GDP, is mostly concessional.

Monetary policy was more accommodative in 2018 than in 2017. This increased domestic liquidity and reduced lending rates, leading to greater private credit supply. Due to improved food supply, inflation eased to an estimated 3.5% in 2018.

Tailwinds and headwinds

The medium-term outlook is positive, with growth projected at 6.8% in both 2019 and 7.0 in 2020, supported by large infrastructure spending. Headline inflation is projected to marginally increase to 5.2% in 2019 and 5.1% in 2020 due to increased government spending.

But the positive outlook faces several downside risks: growing private sector concerns about economic policy uncertainty and increased domestic arrears that could derail the government’s fiscal consolidation and harm the private sector.

Key economic development challenges include slow progress towards inclusive growth, infrastructure bottlenecks, and vulnerability to climate change. Poverty and income inequality remain high despite high economic growth. Infrastructure bottlenecks are most notable in the transport and energy sectors. Reliance on rain-fed agriculture has exposed farmers to income shocks. And inefficient public enterprises present a fiscal risk. One of the development challenges on the social front is youth unemployment, which increased to 7.3% in 2016, compared with 5.7% in 2012.

Key opportunities include peace and political stability, abundant natural resources, a strategic geographic location, and immense development potential for tourism. The Export Zone Processing Agency established in 2008 to accelerate manufacturing exports and help the country achieve structural transformation has helped attract close to $1 billion in foreign direct investment and revive the manufacturing sector into one of the fastest growing in Africa.

 

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