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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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Tanzania

Tanzania’s economic performance and rising issues on budget 2018/19

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Performance of Tanzania’s economy in the past five years (2012-2016) has remained buoyant with real GDP growing at an annual average rate of 6.7%. This is mainly attributed to improvement in transportation infrastructure, growth in communication, construction and financial services sectors.

In 2016, the Tanzanian economy grew by 7%, marginally missing the set target of 7.2% mainly on account of underperformance in the agriculture sector, which accounts for 28.9% of the GDP.

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, benefiting from increasing project funds from development partners. In the first three quarters of 2017, the last period for which data is available, the economy expanded almost 7 percent, a solid, albeit slower, pace from the previous year due to weaker domestic demand.

The value of Tanzanian Shilling against the US dollar remained broadly stable throughout 2016/17, consistent with liquidity conditions in the economy and the improvement in the current account balance. Throughout the first half of 2017, headline inflation continued to be in the single digits supported by contractionary fiscal policy and a general slowdown in global commodity prices; specifically stagnant oil prices and a slowed increase in domestic food prices. However, compared to a similar period in 2016, inflation increased marginally.

The 2018/19 budget speech, pointed out that the Tanzania economy continues to flourish as the government focuses on industrialization and infrastructure development. The budget focused on maintaining macroeconomic stability, promoting economic and social development and improving internal revenue collection.

The budget has been prepared in accordance with the Tanzania Development Vision 2025 which is eradicating poverty, transforming Tanzania into an industrial economy and endeavoring to be a middle income country by 2025.

The Finance minister, Philip Mpango, on June 14, 2018 presented the National Budget of Tanzania for the fiscal year 2018/19 to parliament. In his speech, the Minister highlighted the major challenges facing the country including the high level of poverty, narrow tax base, tax evasion, difficulties in collecting tax/ levy from the informal sector, unfriendly environment for tax payment and imposition of numerous taxes and levies, especially for services rendered by regulatory authorities, and underutilization of Electronic Fiscal Devices (EFD).

According to the budget framework, the Government domestic revenue estimated for 2018/19 amounts to TZS20.89 trillion of which TZS18 trillion is from tax revenue, TZS2.16 trillion represents non-tax revenue and TZS735.6  billion will be from the Local Government Authority (LGA).

Macroeconomic Policy Targets

Minister Mpango highlighted the macroeconomic targets for 2018/19 budget are as follows:

  • Attain real GDP growth of 7.2% in 2018 up from the growth of 7.1% in 2017;
  • Continue to contain inflation at single digit;
  • Domestic revenue including Local Government Authority (LGAs) own sources is projected at 15.8% of GDP in 2018/19 up from the likely outturn of 15.3% in 2017/18 and the actual outturn of 15.6% in 2016/17;
  • Tax revenue is estimated at 13.6% of GDP in 2018/19 up from the estimate of 13.0% in 2017/8 and the actual outturn of 13.3% in 2016/17;
  • Total Government expenditures are projected at 24.5% of GDP in 2018/19 from the estimate of 23.0% in 2017/18 and the actual performance of 22.2% in 2016/18;
  • Budget deficit to be 3.2% of GDP in 2018/19 compared to the likely outturn of 2.1% in 2017/18 and the actual deficit of 1.5% in 2016/17.

Priority Areas for 2018/19

In his speech, Minister Mpango stressed that the 2018/19 budget of TZS 32.4 trillion will put more emphasis on implementation of flagship projects, namely:

  • Agriculture: More funds will be allocated in improving irrigation infrastructure, warehouses and markets, strengthening the supply of agricultural inputs and implement, improving extension services, improving researches and dissemination of findings to the people and development of livestock and fisheries sub-sectors.
  • Industries: The Government will direct more efforts in the implementation of a Blueprint for Regulatory Reform to Improve Business Environment for Tanzania in order to attract private sector investments particularly in textiles, leather and meat, fish, edible oil, medicines and medical equipment, food and animal feeds and in the mining sector.
  • Social Services
  • Water: To increase availability and distribution of clean water particularly in villages and sewerage systems, drilling of boreholes in arid and semiarid areas and construction of strategic dams.
  • Education: The Government will continue to finance free basic education, increasing number of experts in rare and specialized skills in areas of minerals, oil and gas, specialist doctors (cardiologists and kidney specialists) as well as the provision of loans to higher education students.
  • Heath: Financial resources will be allocated to increase distribution of medicines, medical equipment and reagents in health centers, dispensaries and referral hospitals.
  • Infrastructure: Construction and rehabilitation of supportive infrastructure especially increasing electricity generation from different sources; to continue with the construction of new central line railway of the standard gauge; construction of roads connecting regions and rural roads; to improve air and marine transport;
  • Other priorities: Ease of land acquisition and ownership; to improve communication services; finance and tourism and to improve defense and security, good governance and justice.

Policy and Strategies to Increase Revenue

In order to increase and strengthen domestic resources mobilization, revenue policies for the year 2018/19 will focus on widening tax base; strengthen management of existing sources especially by intensifying the use of electronic collection systems and other administrative measures. In widening the tax base, there are two main measures that the Government will undertake, namely formalization of the informal sector and improve investment environment in order to foster new sources of revenue from such investments.

For this, Minister Mpango reminded that the Government prepared a Blueprint for Regulatory Reform to Improve Business Environment for Tanzania. The recommendations of the Blueprint which strongly proposed to be implemented in the financial year 2018/19 include simplification of payment of taxes, levies and different fees, and to shorten the time and bureaucratic procedures in the registration of businesses and companies.

In addition, the Government seeks to improve collaboration with Development Partners as grants and concessional loans have been declining from an average of 26.3% of the actual budget in 2010/11 to 10.4% in 2016/17. The 2018/19 Budget is in line with Tanzania’s 2017/18 Budget that revolved around the theme “Industrialization for Job Creation and Shared Prosperity”, which in turn represented a continuation of the 2016/17 theme “‘Industrial Growth for Job Creation.”

In relation to VAT, the Minister has proposed to amend VAT Act as follows:

  • To grant powers to the Minister for Finance to provide a VAT exemption on government projects funded by non-concessional loans or exemption where there is an agreement signed between the Government and a financial institution or bank that is representing another government and has been given powers of attorney by the said government to execute the agreement. The Act currently does not permit the Minister to grant an exemption to government projects funded by non-concessional loans or the financial institutions/banks. The amendment will enable smooth operation of the projects.
  • To provide a VAT exemption on packaging materials produced specifically for use by the local manufacturers of pharmaceutical products. The amendment aims to reduce production costs and to protect local pharmaceutical industries in Tanzania.
  • To provide a VAT exemption on imported animal and poultry feeds additives. The amendment is intended to reduce the costs incurred by livestock keepers.
  • To provide an exemption of VAT on sanitary pads (intended to make the product available and affordable to women and girls, particularly school girls and those in the village).

Tax Amnesty

The Minister has proposed to amend the Act by giving 100% amnesty on interest and penalties for six months starting from 1 July 2018 through 31 December 2018. The amnesty is expected to improve tax compliance.

The worries of the budget for other players include:

  • Gaming firms whose tax is supposed to increase from the current 6% of gross gaming revenue to 10%. Tax on slot machines will increase from Sh32, 000 to Sh100, 00 per machine per month.
  • Casinos for whom the income tax rate is proposed to increase from the current 15% to 18%
  • Oil importers as government proposes a customs duty rate of 25% on palm oil and an increase in customs duty on semi-refined edible oil from 25% to 35%
  • Mineral water importers in which the government proposed to increase customs duty from 25% to 60% to protect local industries.
  • Meat importers as the government proposed to increase customs duty on meat and edible meat offal from 25% to 35%. The measure aimed at encouraging local meat production and processing.

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