Country Reports - Tanzania, United Republic Of

Country Reports - Tanzania, United Republic of

24 Feb 2015 IHS Economics and Country Risk

Our take

Key points

Tanzania is set to adopt a new constitution by 2015, after several false starts. Islamic radicalisation and calls for independence may increasingly threaten Zanzibar's stability ahead of the 2015 election. The offshore natural-gas sector provides economic hope. Claimed payment irregularities in the power sector have led to dismissal of ministers and suspension of foreign donor budgetary support.

Analysis Six-Factor Country Risk - Tanzania

Risk Score Description Political 3.00 SIGNIFICANT Economic 3.25 SIGNIFICANT Legal 3.50 HIGH Tax 3.50 HIGH Operational 3.75 HIGH Security 3.25 SIGNIFICANT Overall 3.32 SIGNIFICANT 12-Month Rating Trend Stable Trend

Note: 1 = minimum risk, 5 = maximum risk. Ratings form part of enhanced Country Analysis & Forecast suite of services.

Sovereign Risk Ratings - Tanzania Medium-Term 55(B+) High Payments Risk Sovereign Risk Outlook Stable

Note: 0 = minimum risk, 100 = maximum risk. Ratings form part of enhanced Economic and Sovereign Risk services.

Tanzania is set to adopt a new constitution in 2015, after several false starts. A referendum on the new constitution will be held on 30 April 2015, ahead of presidential and legislative elections in October 2015. The political opposition, grouped under the umbrella Coalition of Defenders of People's Constitution (Ukawa), boycotted a vote on the draft and has indicated plans to boycott and possibly disrupt the referendum. They claim the draft promotes segregation, discrimination of Zanzibaris, and bias in favour of the ruling Chama cha Mapinduzi (CCM) party.

Islamic radicalisation and calls for independence may increasingly threaten Zanzibar's stability ahead of the 2015 election. Zanzibar is led by a power-sharing Government of National Unity (GNU) formed in the wake of the 2010 elections, following a landmark political agreement designed to end widespread political instability. The GNU’s formation has, however, failed to address a number of fundamental concerns and some Zanzibaris have gravitated to a rising tide of radical Islamism that continues to fuel periodic unrest. There have been several bouts of violence throughout 2012, fuelling concerns of an escalation in the build-up to the 2015 election.

The offshore natural-gas sector provides economic hope. With the mining sector, especially gold production, running out of steam due to overrunning costs, recent natural-gas discoveries bode well for medium-term growth prospects. Reserves currently stand at around 53 trillion cubic feet (tcf), but the government expects this to rise to more than 100 tcf in coming years. Existing reserves are already justifying investment in natural-gas liquefaction plants and other infrastructure, paving the way for the commencement of exports.

Claimed payment irregularities in the power sector have led to dismissal of ministers and suspension of foreign donor budgetary support. President Kikwete has dismissed Lands Minister Anna Tibaijuka, and Attorney-General Eliakim Maswi resigned from his post in December 2014, following a recommendation by a parliamentary committee for their dismissal in connection with the controversial takeover of Independent Power Tanzania Ltd (IPTL) by

© 2015 IHS.. No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent, with the exception of any internal client distribution as may be © 2015IHS. permitted in the license agreement between client and IHS. Content reproduced or redistributed with IHS permission must display IHS legal notices and attributions of authorship. The information page 1 of 18 contained herein is from sources considered reliable but its accuracy and completeness are not warranted, nor are the opinions and analyses which are based upon it, and to the extent permitted by law, IHS shall not be liable for any errors or omissions or any loss,damage or expense incurred by reliance on information or any statement contained herein. Pan Africa Power Solutions Tanzania. Parliament has also alleged that the government had been making excessive payments to private offshore bank accounts amounting to USD120 million from an escrow account jointly held by IPTL and power utility TANESCO. The scandal has led to a group of 12 donor countries declaring the suspension of their assistance programmes to Tanzania, worth some USD490 million, pending an investigation.

Forecast summary

Strong domestic demand and foreign investment should support growth through 2015. IHS expects domestic demand to remain the main driver of growth in 2015, as falling food and energy prices have expanded disposable incomes. On the other hand, public investment into energy and transport infrastructure may weaken somewhat. We expect fiscal policy to remain accommodative over the medium term, although the authorities have tightened monetary policy to bring inflation back to single digits. We forecast the Tanzanian economy to grow 7.3% in 2015 and 7.2% in 2016—up an estimated expansion of 6.5% in 2014, but down slightly from previous projections. The revision of the national-accounts statistics—moving the base year from 2001 to 2007—announced in October 2014 lifted estimated nominal GDP in 2013 by 31% to USD44 billion.

Political stability bolsters a positive economic outlook, but corruption is becoming an increasingly pertinent issue. Tanzania remains one of the most politically stable countries in the region; however, it is widely perceived that corruption has become more widespread in Tanzania in recent years and is often cited as one of the biggest hindrances to doing business in the country. To combat the worsening problem, the government has introduced measures aimed at empowering the various state anti-corruption agencies, including the Prevention of Corruption Bureau (PCB), amid growing calls to make the agency more independent from the government. Recent legislation includes the Prevention and Combating Corruption Bill and the Prevention of Corruption Act. High-level officials have been implicated in a spate of corruption scandals, with the former head of the central bank, Daudi Ballali, losing his job, and former Prime Minister Edward Lowassa stepping down after being implicated in a suspect energy deal in 2012. Another scandal in the energy sector is linked to Pan Africa Power Solutions’ allegedly illegal acquisition of Independent Power Tanzania Ltd (IPTL) and has prompted 12 donor countries to suspend budgetary support and prompted calls for Prime Minister Mizengo Pinda to step down. Power utility TANESCO reportedly established a joint escrow account with IPTL (the Tegeta account) in 2006. Senior officials within government and power utility TANESCO then allegedly facilitated USD120 million in payments from to offshore private accounts under the guise of supposed energy contracts. The country has once again slipped down the ranks of Transparency International’s Corruption Perception Index – it ranked 119 out of 175 countries in 2014, down from 127 in 2013.

The power sector remains in dire need of reform to attract investment. Tanzania's medium-to-long-term growth prospects hinge to a large extent on the development of the power sector. On the bright side are the plans to expand domestic gas production and construct a pipeline linking Dar-es-Salaam with Tanga in the north and the Kenyan port of Mombasa are moving forward, and the Export-Import Bank of China is providing USD1.2 billion in financing for the construction of a new gas pipeline linking Mtwara and Dar-es-Salaam. In addition, new discoveries during late 2011 and 2012 prompted the government to increase its estimate of Tanzania's natural gas reserves from 10 to 33 tcf in October 2012, with the vast majority of these located offshore. Further discoveries during 2013 and 2014 have brought this figure to in excess of 50 tcf. The prospect of large-scale investment into the offshore gas sector has raised the need for improved regulation of the natural gas sector. The adoption of a natural gas master plan legislative bill drafted by the Ministry of Energy and Minerals has been postponed, though, because of a review of previous contracts ordered by newly appointed Energy and Minerals Minister Sospeter Muhongo, who was given the portfolio following a government reshuffle in May 2012, and the formulation of a new gas policy bill presented in October 2013. However, significant details in the investment framework still need to be worked out. This is likely to delay final investment decisions in many projects until 2016.

Changes since last forecast February interim forecast versus January interim forecast

Nominal UP Rebased national-account statistics presented in December 2014 showed nominal GDP in 2013 31% higher than previously GDP estimated. As this was in line with our expectations, we have not altered our longer-term nominal GDP forecasts.

Real DOWN We reduced our 2014 real GDP growth estimate from 6.9% to 6.5% and increased our 2015 real GDP forecast from 7.1% to GDP g (2014) 7.3%, largely because of stronger private-consumption growth offsetting weaker public-expenditure growth and a lower drag rowth /UP from net exports. (2015)

Inflation DOWN We reduced our 2015 consumer price inflation forecast from 7.2% to 6.6%, largely owing to lower energy prices. Inflation should (2015) increase to 9.2% in 2016, up from 8.4% previously. /UP (2016)

Trade DOWN Our forecast for the trade deficit in 2015 is reduced to USD5.2 billion on expectations of lower oil/machinery imports and higher deficit gold exports.

Selected data and charts: Data (forecasts)

Presidential elections Next contest: 2015 October; Last contest: 31 October 2010 (Union and Zanzibar).

Legislative elections (Lower chamber) Next contest: 2015 October; Last contest: 31 October 2010.

President: Jakaya Mrisho Kikwete (since 21 December 2005)

Vice President: Mohammed Gharib Bilal (since 31 October 2010)

President of Zanzibar: Ali Mohamed Shein (since 3 November 2010)

Source: IHS and CIRCA People in Power

Key Macro-Economic Indicators

2011 2012 2013 2014 2015 2016 2017 2018 2019

Real GDP (% change) 7.9 5.1 7.3 6.5 7.3 7.2 7.5 7.4 7.3

Nominal GDP (US$ bil.) 33.3 39.0 44.3 46.4 51.1 58.4 67.5 78.5 90.9

Nominal GDP Per Capita (US$) 697 792 872 887 950 1,054 1,183 1,337 1,505

Consumer Price Index (% change) 12.7 16.0 7.9 6.1 6.6 9.2 7.1 7.1 6.9

Exchange Rate (LCU/US$, end of period) 1,571.73 1,571.62 1,578.57 1,731.82 1,756.00 1,787.61 1,816.21 1,842.54 1,866.50

Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated on the 15th of each month from monthly forecast update bank (GIIF). Written analysis may include references to data made available after the release of the GIIF bank.

Country risk - overall statement

Overall

Tanzania, particularly its mainland, enjoys relative political stability, as underlined by successive elections that have been held without a hitch. However, the rise in political opposition to the ruling Chama Cha Mapinduzi (CCM) party means protests are likely to continue ahead of the 2015 election. CCM dominance is also likely to be undermined by internal divisions over succession. The process to adopt a new constitution has continued to be undermined by fundamental disagreements between the CCM and the opposition. Bribery and corruption remain a severe risk despite government reforms. The development of the natural resources sector will face delays related to the formulation of a coherent legislative framework and the high risk of violent protests by local communities. Meanwhile, the once-fractious political situation in Zanzibar has become relatively amiable following the signing of a power-sharing accord between the two main parties on the semi-autonomous island in the run-up to the 2010 general election. The emergence of radical Islamist secessionist groups will, however, raise risks of sectarian IED and arson attacks, and attacks on individuals on Zanzibar and in the main cities. Economically, Tanzania has been one of the fastest-growing economies in the region in recent years, despite its agriculture-based economy being one of the most underdeveloped. Most of the recent growth has been the direct result of the pro-investment policies put in place by the government. These policies have helped the country to continue attracting huge amounts of foreign direct investment (FDI), especially in the rapidly growing mining and tourism sectors, even though Tanzania's poor infrastructure, increasing corruption, and heavy bureaucracy present severe impediments to business. However, Tanzania's relative isolation within the five-member regional East African Community, with Kenya, Rwanda, and Uganda pushing for faster political and economic integration, may see it quit the regional bloc, which could discourage some businesses from investing in the country. Such concerns are likely to be offset by recent natural gas discoveries, which bode well for medium-term growth prospects, with existing reserves already justifying investment in natural gas liquefaction plants and other infrastructure and paving the way for the commencement of exports.

Economic: Country risk statement

Tanzania came to independence in the early 1960s with a severely underdeveloped economy and limited infrastructure compared with neighboring Kenya. In an effort to create socially equitable and rapid development, it became an early proponent of African socialism and a planned economic system, which stemmed economic activity in the first decades after independence. After abandoning these failed policies in the mid-1980s, Tanzania's government undertook far-reaching economic reforms aimed at increasing the importance of market outcomes in close cooperation with international lenders and development agencies. Tanzania's performance over the following decades moved from strength to strength. Prudent macroeconomic management, along with substantial donor assistance, has helped build comfortable reserve levels, strengthen budgetary spending, and fuel strong investment into the country. As a consequence, Tanzania has been given a boost to its economy from a significant increase in foreign aid, which has allowed the government to increase public spending substantially. The government has also put in place pro-investment policies as well as policies supporting the development of nontraditional sectors, such as mining and tourism, to lower the economy's dependence on agriculture. Agriculture is still dominated by small-scale farmers with little capital to invest in

© 2015IHS. page 3 of 18 machinery and irrigation Tanzania thus remains highly vulnerable to fluctuating weather conditions, especially drought, with recurrent power shortages a hindrance for manufacturing and mining, as evidenced in recent years. The rapid expansion of Tanzania’s offshore natural gas reserves over 2011–14 has allowed the Tanzanian authorities to secure external financing for a number of infrastructure projects, which should support real GDP growth over the medium term. However, the sharp drop in global oil prices during the second half of 2014 has brought into doubt the profitability of planned liquid natural gas projects in Mozambique and Tanzania.

Short-term outlook

Key points

Strong domestic demand and foreign investment should support growth through 2015. Political stability bolsters a positive economic outlook, but corruption is becoming an increasingly pertinent issue. The power sector remains in dire need of reform to attract investment.

Analysis

Assumptions

The government succeeds in reinstating good donor relations, and by extension aid commitments, over the medium term. Continued expansion of discovered reserves and a recovery in global energy prices support investment in the offshore natural gas sector. The government succeeds in improving domestic energy generation over the medium term. The government continues to implement regional policies of the East African Community, but at a slower pace than other members. Despite some tightening measures in Fiscal Year (FY) 2014/15 (July-June), fiscal policy remains accommodative over the medium term.

Changes since last forecast

Trade DOWN Our forecast for the trade deficit in 2015 is reduced to USD5.2 billion on expectations of lower oil/machinery imports and higher deficit gold exports.

Alternative scenarios

Foreign-aid inflows are significantly reduced due to corruption revelations and/or significant scaling back in aid budgets by key donors. The risk of this unfolding has increased as a result of the Independent Power Tanzania Limited affair uncovered in late 2014. Insufficient investment and/or a renewed drought put additional pressures on energy generation and further elevate consumer price inflation. Increased political violence on Zanzibar and/or in Dar-es-Salaam inhibits tourist arrivals. A sharp drop in projections for global energy prices and/or unattractive regulatory conditions offered by the Tanzanian government lead to lower-than-expected investment in the offshore natural gas sector, with knock-on effects on exports and economic growth over the medium to long term. The government undertakes a sharper political approach with the Southern African Development Community, putting its East African Community membership at risk.

Data

2011 2012 2013 2014 2015 2016 2017 2018 2019

Real GDP (% change) 7.9 5.1 7.3 6.5 7.3 7.2 7.5 7.4 7.3

Nominal GDP (US$ bil.) 33.3 39.0 44.3 46.4 51.1 58.4 67.5 78.5 90.9

Nominal GDP Per Capita (US$) 697 792 872 887 950 1,054 1,183 1,337 1,505

Consumer Price Index (% change) 12.7 16.0 7.9 6.1 6.6 9.2 7.1 7.1 6.9

Policy Interest Rate (%) 12.00 12.00 12.25 12.50 12.58 12.54 12.46 12.39 12.33

Population (mil.) 47.78 49.25 50.76 52.29 53.85 55.44 57.06 58.70 60.39

Current Account Balance (% of GDP) -12.0 -9.7 -10.6 -10.3 -8.7 -7.8 -7.9 -8.6 -9.2

BOP Exports of Goods US$bn 5.1 5.9 5.3 5.5 6.1 6.6 7.3 7.8 8.4

BOP Imports of Goods US$bn 9.8 10.3 11.0 10.9 11.2 12.2 13.7 15.7 17.9

Exchange Rate (LCU/US$, end of period) 1,571.73 1,571.62 1,578.57 1,731.82 1,756.00 1,787.61 1,816.21 1,842.54 1,866.50

Medium- and long-term outlook

Key points

Tanzania's medium-term outlook remains bright, backed by rising foreign direct investment (FDI) and continued international support. Tanzania's economy is predicted to grow at a pace of 7.3% on average over the next five years, with the manufacturing, energy, and tourism sectors contributing strongly to headline growth.

Analysis

Tanzania's medium-term outlook remains bright, backed by rising foreign direct investment (FDI) and continued international support. Tanzania remains on a relatively strong footing in spite of a number of challenges it faces in maintaining annual GDP growth at 7.0–7.5%. These include a need to invest heavily in infrastructure in order to prevent bottlenecks in energy and transport networks that could reduce real GDP growth and spur consumer price inflation. While there have been positive developments in both of these areas, these could be foiled if the government fails to improve the regulatory environment that is still heavily influenced by strong vested interests such as state-owned power monopoly TANESCO. Other challenges include a widening current-account deficit as gold prices and output levels decrease and energy and capital goods imports rise. In the near team, IHS forecasts the current-account deficit to remain in double digits in terms of percentage of GDP, making Tanzania’s balance of payments highly vulnerable to disruptions in domestic power production, government transfers and FDI. The continuation of good relations with bilateral and multilateral development partners, and by extension foreign-aid inflows, will be dependent on the government’s ability to stamp down on graft and steer government expenditure toward capital investment and other priority spending areas. An emerging upside risk to medium-term growth is the rapid expansion of Tanzania’s natural gas reserves in recent years from 7.5–10.0 trillion cubic feet (tcf) to in excess of 50 tcf, which has brought the prospect of Tanzania becoming a major energy exporter over the medium to long term.

Tanzania's economy is predicted to grow at a pace of 7.3% on average over the next five years, with the manufacturing, energy, and tourism sectors contributing strongly to headline growth. The improved macroeconomic environment should continue to attract FDI, particularly into the energy sector. On the other hand, the growth prospects of the mining sector have been impaired by falling gold prices, which has hit Tanzania as it has become one of Africa’s major producers. Tanzania's agricultural sector also has the potential to boost growth through the medium term if the government steps up its reform efforts and succeeds in harnessing foreign interest in investing in the sector. The government is making a very strong push to encourage the development of the already fast-growing tourism industry, which has emerged as a major foreign-exchange earner in recent years. While regional economic integration has already yielded sizeable gains in facilitating cross-border trade, the East African Community members will need to further liberalize its regional legal and operational framework, and upgrade its infrastructure, in a bid to improve cross-border flows and regional integration. Indeed, infrastructural development led by the African Development Bank and the introduction of the East African Common Market Protocol in July 2010 is a significant step toward further regional integration. The successful resolution of the Economic Partnership Agreement negotiations with the European Union should also lead to an improvement of the operating environment of Tanzania's non-mineral exports. Overdependence on primary commodities will continue to expose the economy and external accounts to global price shocks and, in the case of farm products, to adverse weather conditions. In addition, tourism, which now accounts for around 25% of Tanzania's foreign-exchange earnings, is vulnerable to global economic cycles and heightened regional and domestic security concerns. Nevertheless, Tanzania has the international backing and political commitment to recover from the ongoing global economic downturn and push on to a rosy future.

GDP

Key points

National-account rebasing has showed that 2013 nominal GDP was 31% larger than previously estimated. IHS forecasts economic growth of 7.1% in 2015 and 7.2% in 2016. While recent natural gas discoveries boosted the medium-term growth outlook, IHS cautions that Tanzania faces challenges in maintaining its current growth rates over the longer term.

Analysis

National-account rebasing has showed that 2013 nominal GDP was 31% larger than previously estimated. The rebasing of Tanzania’s national-account statistics that changed the base year from 2001 to 2007, published in December 2014, raised estimated GDP in 2013 by 32% to TZS70 trillion (USD41 billion). The agricultural sector remained the largest subsector, constituting around 25% of GDP, in spite of large increases in the estimated size of transport, financial intermediation, education, real estate and business services, and public administration. The United Nations Statistical Commission recommends that countries rebase their GDP statistics every five years. While Kenya, Tanzania, and Uganda were not as long overdue as Ghana and Nigeria in rebasing their national account statistics, the recent rebasing exercises of the three countries—and the improvement in data collections and statistical methodology—should improve the transparency of the economic accounts. With Kenya’s rebasing adding 25% to estimated 2013 GDP and Uganda’s adding 13% to GDP in fiscal year 2013/14 (July–June), the relative size of the main economies in the East African Community (which also includes Burundi and Rwanda) has not changed markedly.

IHS forecasts economic growth of 7.3% in 2015 and 7.2% in 2016. Tanzanian GDP growth slowed to 6.9% year on year (y/y) in the second quarter from 7.4% y/y in the first quarter and 7.6% a year earlier (revised up from 6.7% reported initially), according to a brief press release from the National Bureau of Statistics (NBS). The second-quarter deceleration was partly due to a slowdown in the secondary sector; mining and quarrying grew 7.0% y/y compared with 8.7% in the first quarter, despite a deeper contraction in the year-ago period (-6.2% versus -1.7% in the first quarter of 2013). Both manufacturing growth (7.0% versus 8.5%) and electricity generation and water supply of (7.7% versus 12.6%) slowed from the first quarter. Growth in the agricultural sector accelerated from 1.6% to 5.4% thanks to favorable weather. The growth rate in the wholesale and retail trade segment of the service sector contracted from 8.0% to 7.1%, while real estate and business services fell from 8.1% to 6.5%. Strong growth persisted in the transport and communication sector, up 16.8% versus 16.5% in the first quarter. Third-quarter GDP statistics were scheduled to be released on 31 December 2014, but this was not possible, according to the NBS, because of the GDP rebasing and improvement of national-account statistics that were taking place during that period.

While recent natural gas discoveries boosted the medium-term growth outlook, IHS cautions that Tanzania faces challenges in maintaining its current growth rates over the longer term. Specifically, Tanzania must remove the constraints on economic growth found in infrastructure, mainly power generation and distribution. Tanzania must also do more to raise its economic competitiveness through improving governance and the business environment. If these issues are not sufficiently addressed, which is our base-case scenario, economic growth will slow in the coming years. Nonetheless, in early 2013, IHS raised its forecast for GDP growth in 2013–20 from 6.4% to 6.9%, on the back of an increase in expected foreign direct investment; we could lift this figure higher if exploitable offshore natural gas resources were to rise further. However, the sharp drop in global energy prices in the second half of 2014 has brought into doubt the profitability of large offshore natural gas plays in Mozambique and Tanzania.

Data

2012 2013 2014 2015 2016 2017 2018 2019

Real GDP (% change) 5.1 7.3 6.5 7.3 7.2 7.5 7.4 7.3

Real Consumer Spending (% change) 3.1 8.3 5.8 5.9 5.7 6.0 6.1 6.2

Real Government Consumption (% change) 13.3 18.1 7.7 5.0 5.0 5.0 5.0 5.0

Real Fixed Capital Formation (% change) -5.9 10.8 9.4 10.5 10.0 9.5 9.0 8.6

Real Exports of Goods and Services (% change) 16.0 0.6 2.4 3.5 4.5 6.0 6.0 6.0

Real Imports of Goods and Services (% change) -0.8 11.0 6.5 5.0 5.0 5.0 5.0 5.0

Nominal GDP (US$ bil.) 39.0 44.3 46.4 51.1 58.4 67.5 78.5 90.9

Nominal GDP Per Capita (US$) 792 872 887 950 1,054 1,183 1,337 1,505

Inflation

Key points

Rebound in global oil price erodes expected disinflationary impact of falling fuel prices on Tanzanian inflation in the first quarter of 2015.

Analysis

Rebound in global oil price erodes expected disinflationary impact of falling fuel prices on Tanzanian inflation in the first quarter of 2015. The disinflationary impact on consumer price inflation in Tanzania from falling fuel prices was offset by a seasonal increase in food prices in January. Nonetheless, inflation dropped from 4.8% year on year (y/y) in December to 4.0% in January as prices in the transport category dropped 0.4% month on month (m/m), according to a data release from the National Bureau of Statistics. On a m/m basis, the consumer price index (CPI) still increased by 102%, compared with a 0.2% increase in December. This was largely due to a 1.7% rise in food and non-alcoholic beverages, with a 47.8% weighting in the CPI. This was largely a reversal of the weak seasonal momentum in December, with the y/y reading falling from 5.7% to a four-year low of 4.9%. The All Items Less Food and Energy category advanced by 0.4% m/m, slightly faster than the 0.2% pace in December, with the y/y rate falling back from 3.1% to 2.8%, another four-year low. With the global oil prices having rebounded in early February, it is now likely that the disinflationary pressure from fuel prices in the first quarter has abated in line

© 2015IHS. page 8 of 18 with our expectations (see 9 January 2015: Falling fuel prices to push down Tanzanian inflation in Q1). We believe consumer price inflation likely will bottom out in the first quarter of 2015 and head higher over the remainder of the year. We are now forecasting inflation to average 6.6% in 2015 and to accelerate to 9.2% in 2016.

Data

Inflation Indicators

2012 2013 2014 2015 2016 2017 2018 2019

Consumer Price Index (% change) 16.0 7.9 6.1 6.6 9.2 7.1 7.1 6.9

Exchange rates

Key points

We expect the Tanzanian shilling to continue slipping in 2015. Tanzania is relatively insulated from a global economic slowdown, but the planned opening of the capital account poses risks.

Analysis

We expect the Tanzanian shilling to continue slipping in 2015. The Tanzanian shilling slipped 4.0% in 2014, ending the year at TZS1,732/USD1. It slipped further in January 2015, to TZS1,754/USD1 by the end of the month, before strengthening somewhat in the first half of February. Nonetheless, we believe that increasing inflation and an easing of liquidity conditions will impair confidence in the currency in 2015, impeding a lasting stabilization in the foreign-exchange market. We are currently forecasting the Tanzanian shilling to end 2015 at TZS1,756/USD1. We are expecting Tanzania’s current-account deficit to only narrow marginally from an estimated 9.8% of GDP in 2014 to 8.7% in 2015, which will mean that the Tanzanian shilling will remain vulnerable to interruptions in aid and investment inflows—for instance, caused by uncertainty over governance and the business environment. In addition, while the government plans to reduce overspending in fiscal year 2014/15 (July–June), implementing this in an election year will be challenging. Investment into the mining and energy sectors should bolster the balance of payments and the shilling over the medium term, but deteriorating relations with development partners remains a risk.

Tanzania is relatively insulated from a global economic slowdown, but the planned opening of the capital account poses risks. Tanzania’s limited integration with international financial markets should help ease some concerns about the shilling. Nevertheless, the medium-term trend for the Tanzanian shilling will be determined by the maintenance of a positive outlook for the energy sector and the steady return of foreign direct investment and aid flows to emerging markets, as well as good performances in the tourism, mining, and agricultural sectors. However, concerns about the political environment and reform momentum ahead of the October 2015 parliamentary and presidential elections could exacerbate the volatility in financial flows connected to the pledged opening of the capital account by 2015. Tanzanian government officials have posited that the scheduled opening of the capital account to other

© 2015IHS. page 9 of 18 members of the East African Community would reduce interest rates on government bonds through financial inflows, primarily from Kenya and Uganda. While this should be the case, it is likely to be at least partly offset by outflows from the domestic financial sector, which has so far been captive investors in Tanzania’s relatively undeveloped capital markets and may thus seek to diversify the asset base by investing in regional markets.

Data

Exchange Rate Indicators

2012 2013 2014 2015 2016 2017 2018 2019

Exchange Rate (LCU/US$, end of period) 1,571.62 1,578.57 1,731.82 1,756.00 1,787.61 1,816.21 1,842.54 1,866.50

Exchange Rate (LCU/US$, period avg) 1,583.00 1,600.44 1,661.18 1,743.91 1,771.80 1,801.91 1,829.38 1,854.52

Exchange Rate (LCU/Euro, end of period) 2,073.65 2,177.04 2,102.49 1,861.35 2,019.99 2,270.26 2,432.15 2,497.39

Exchange Rate (LCU/Euro, period avg) 2,033.97 2,124.94 2,203.95 1,879.86 1,935.00 2,139.53 2,357.87 2,468.71

Policy

Monetary policy

Key points

The Bank of Tanzania reduces the deposit reserve ratio in December 2014. The disinflationary effect from the drop in fuel prices means that monetary policy has become more accommodative in fiscal year (FY) 2014/15. The East African Monetary Institute will harmonize regional monetary policy frameworks.

Analysis

The Bank of Tanzania (BoT) reduces the deposit reserve ratio in December 2014. The BoT presented a largely unchanged money targeting framework for the remainder of fiscal year (FY) 2014/15 (July–June) in the midyear Monetary Policy Statement (MPS) issued in February 2015, after cutting the statutory minimum reserves (SMR) ratio on private deposits from 10% to 8% on 29 December 2014. The targeted growth rates in monetary aggregates were largely achieved in the first half of the fiscal year, with M3 money growth reaching an average of 15.2% year on year (y/y) during July–December, compared with a target of 15.5%, and private-sector credit growth remaining around 20%, in line with the 19.5% target. The MPS stated that foreign-exchange reserves stood at USD4.39 billion at the end of December 2014, sufficient to cover 4.2 months of projected imports of goods and services, excluding imports related to foreign direct investment (FDI), in line with the objective of at least four months’ import cover.

© 2015IHS. page 10 of 18 The disinflationary effect from the drop in fuel prices means that monetary policy has become more accommodative in fiscal year (FY) 2014/15. The midyear MPS indicates that the BoT is satisfied with the current monetary policy stance and will not make any major changes because of the disinflationary effect from the sharp drop in global oil prices during the first half of FY 2014/15. The latter has been instrumental in pushing consumer price inflation down to a 10-year low of 4.0% y/y in January. This means the real growth rates in the targeted monetary aggregates will be higher than targeted at the beginning of the year, and by extension, monetary policy will be more accommodative than anticipated. The reduction in the SMR indicates that the BoT has maintained an accommodative bias in its monetary policymaking, and is likely to continue to do so in FY 2015/16.

The East African Monetary Institute will harmonize regional monetary policy frameworks. The East African Community (Burundi, Kenya Rwanda, Tanzania, and Uganda) has, with the signing of the East African Monetary Union Protocol (EAMUP) in November 2013, committed to setting up the East African Monetary Institute (EAMI) in 2015, which is to undertake the preparatory work for further stages toward establishing a monetary union by 2024. The EAMUP introduced several targets for monetary and fiscal policy that are to be implemented in the member countries’ macroeconomic policy frameworks during the coming years.

Data

Monetary Policy Indicators

2012 2013 2014 2015 2016 2017 2018 2019

Policy Interest Rate (%, end of period) 12.00 12.25 12.50 12.58 12.54 12.46 12.39 12.33

Fiscal policy

Key points

The government has struggled to rein in its expansive fiscal policy in 2014–15.

Analysis

The government has struggled to rein in its expansive fiscal policy in 2014–15. An estimated 7% shortfall in revenue performance saw the fiscal year (FY) 2013/14 fiscal deficit (including grants) rise TZS1.8 trillion, exceeding the budget target of 5% of GDP. Tanzanian parliamentarians have blamed extensive tax exemptions, worth TZS1.5 trillion, as the main reason for the widened deficit, with the funding shortfall prompting some ministers to complain they had not received their budget allocations in FY 2013/14. The gap in the FY 2013/14 budget was reportedly filled by foreign loans and capital gains tax revenue from transactions involving foreign companies divesting Tanzanian holdings. Following criticism about the revenue shortfalls in FY 2013/14, the government agreed to reduce tax exemptions from over 2.5% of GDP to less than 1%, partly through a new value-added tax (VAT) bill; the Parliamentary Public Accounts Committee asked the Minister for Finance to gazette this bill in late January 2015, with July 2015 as its starting date. Underperforming VAT was the main driver of the revenue underperformance in FY 2013/14. The government aimed to increase domestic revenue from an estimated 18.2% in FY 2013/14 to 18.9% of GDP in FY 2014/15, or TZS12.0 trillion, through, among other things, increased excise duties on alcoholic beverages and cigarettes. Grants and general budget support loans from development partners were estimated at TZS0.9 billion, with a further TZS1.7 billion in funds for development projects. In addition to

© 2015IHS. page 11 of 18 this, the government projected domestic borrowing at TZS3.0 trillion and foreign non-concessional borrowing at TZS1.32 trillion, or approximately USD800 million. Total government expenditure is projected at TZS19.6 trillion, or 31.4% of GDP, in FY 2014/15, with recurrent expenditure set at TZS13.2 trillion and development expenditure at TZS6.4 trillion. Although higher than the likely 30.8% of GDP of government spending in FY 2013/14, compared with the budgeted 33%, it would, if implemented, constitute a pullback in government spending from an estimated 31.8% of GDP in FY 2012/13, the peak of a rapid run-up in public spending, driven by rising domestic borrowing and non-concessional external borrowing. While the FY 2014/15 budget represents a break from expansive fiscal policy, implementing belt-tightening measures in an election year will be challenging. The national-account statistics were rebased in late 2014, which lifted estimated nominal GDP in 2013 by 31%; thus, the GDP ratios are likely to be lower in FY 2015/16.

Data

External sector

Key points

We expect Tanzania’s trade and current-account deficits to continue to narrow in 2015. President Jakaya Kikwete has pledged to open up the Tanzanian capital account in 2015.

Analysis

We expect Tanzania’s trade and current-account deficits to continue to narrow in 2015. Tanzania’s current-account deficit widened by 1.3% to an estimated USD4.76 billion in 2014, according to the January edition of the Bank of Tanzania’s Monthly Economic Review (MER). This widening was primarily due to offsetting trends in the subcategories, with the trade deficit narrowing by 5.2% to USD5.47 billion, largely on the back of a 15% drop in oil, while the service-account surplus contracted by 7.6% to USD0.66 billion. Government transfer inflows dropped sharply, by 63% to USD0.18 billion, owing to the freezing of budget support by development partners (see 20 October 2014: Tanzanian officials say suspension of budgetary support may increase government borrowing). While the budget-support suspension has hit the Tanzanian current-account deficit, it has been overshadowed by the sharp contraction in the trade deficit on the back reduced oil and machinery imports. In addition, the strong export growth in November (58.6%) and December (69.1%) and the increase in the gold price from a trough close to USD1,140/ounce in early November to the level of close to USD1,300/ounce in mid-February indicates that the trade deficit will continue to contract in the near term. Consequently, we have reduced our forecasts for the trade and current-account deficits for 2015, to USD 5.1 billion and USD4.5 billion, respectively, corresponding to 10.1% and 8.7% of GDP. While the completion of a Policy Support Instrument program review by the International Monetary Fund (IMF) in January did not involve the disbursement of funds like other IMF programs, it is normally conducive to aid and loan disbursement by other bi- and multilateral development partners. Foreign aid will likely remain suspended in the short term, though, pending the full resolution of the IPTL scandal.

President Jakaya Kikwete has pledged to open up the Tanzanian capital account in 2015. While Tanzania has repeatedly vowed to open its capital account, which would be supportive of receiving a much-sought-after sovereign credit rating, its commitment to this pledge has proved weak. However, the sharp rise in planned domestic borrowing in fiscal year 2014/15 indicates the government is prepared to open up the capital account to EAC members in 2015 as pledged.

Data

2012 2013 2014 2015 2016 2017 2018 2019

Exports of Goods (US$ bil.) 5.9 5.3 5.5 6.1 6.6 7.3 7.8 8.4

Imports of Goods (US$ bil.) 10.3 11.0 10.9 11.2 12.2 13.7 15.7 17.9

Trade Balance (US$ bil.) -4.4 -5.8 -5.4 -5.2 -5.5 -6.4 -7.9 -9.5

Trade Balance (% of GDP) -11.4 -13.0 -11.6 -10.1 -9.4 -9.5 -10.0 -10.4

Current Account Balance (US$ bil.) -3.8 -4.7 -4.8 -4.5 -4.5 -5.3 -6.7 -8.4

Current Account Balance (% of GDP) -9.7 -10.6 -10.3 -8.7 -7.8 -7.9 -8.6 -9.2

Key indicators and forecasts

Data (forecasts)

2011 2012 2013 2014 2015 2016 2017 2018 2019

Real GDP (% change) 7.9 5.1 7.3 6.5 7.3 7.2 7.5 7.4 7.3

Nominal GDP (US$ bil.) 33.3 39.0 44.3 46.4 51.1 58.4 67.5 78.5 90.9

Nominal GDP Per Capita (US$) 697 792 872 887 950 1,054 1,183 1,337 1,505

Nominal GDP Per Capita (PPP$) 1,427 1,493 1,587 1,575 1,723 1,824 1,943 2,072 2,207

Real Consumer Spending (% change) 8.0 3.1 8.3 5.8 5.9 5.7 6.0 6.1 6.2

Real Fixed Capital Formation (% change) 29.7 -5.9 10.8 9.4 10.5 10.0 9.5 9.0 8.6

Real Government Consumption (% change) 5.3 13.3 18.1 7.7 5.0 5.0 5.0 5.0 5.0 Real Imports of Goods and Services (% 25.9 -0.8 11.0 6.5 5.0 5.0 5.0 5.0 5.0 change) Real Exports of Goods and Services (% 10.1 16.0 0.6 2.4 3.5 4.5 6.0 6.0 6.0 change)

Consumer Price Index (% change) 12.7 16.0 7.9 6.1 6.6 9.2 7.1 7.1 6.9

Policy Interest Rate (%) 12.00 12.00 12.25 12.50 12.58 12.54 12.46 12.39 12.33

Population (mil.) 47.78 49.25 50.76 52.29 53.85 55.44 57.06 58.70 60.39

Population (% change) 3.1 3.1 3.1 3.0 3.0 2.9 2.9 2.9 2.9

Current Account Balance (US$ bil.) -4.0 -3.8 -4.7 -4.8 -4.5 -4.5 -5.3 -6.7 -8.4

Current Account Balance (% of GDP) -12.0 -9.7 -10.6 -10.3 -8.7 -7.8 -7.9 -8.6 -9.2

Trade Balance (US$ bil.) -4.7 -4.4 -5.8 -5.4 -5.2 -5.5 -6.4 -7.9 -9.5

Trade Balance (% of GDP) -14.2 -11.4 -13.0 -11.6 -10.1 -9.4 -9.5 -10.0 -10.4

BOP Exports of Goods US$bn 5.1 5.9 5.3 5.5 6.1 6.6 7.3 7.8 8.4

BOP Imports of Goods US$bn 9.8 10.3 11.0 10.9 11.2 12.2 13.7 15.7 17.9

Exchange Rate (LCU/US$, end of period) 1,571.73 1,571.62 1,578.57 1,731.82 1,756.00 1,787.61 1,816.21 1,842.54 1,866.50

Exchange Rate (LCU/Yen, end of period) 20.22 18.16 14.99 14.36 14.26 14.19 14.27 14.60 14.77

Exchange Rate (LCU/Euro, end of period) 2,033.55 2,073.65 2,177.04 2,102.49 1,861.35 2,019.99 2,270.26 2,432.15 2,497.39

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Foreign Exchange Earnings (US$ bil.) 6.4 7.4 8.7 8.5 9.3 10.2 11.2 12.5 13.7 ..

Portfolio Investment, Net (US$ bil.) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 ..

Portfolio Investment, Net (% of GDP) 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 ..

Foreign Direct Investment, Net (US$ bil.) 1.8 1.2 1.8 1.9 1.8 2.6 3.0 3.5 4.2 ..

Foreign Direct Investment, Net (% of GDP) 8.0 5.1 6.4 5.6 4.7 6.3 6.3 6.5 6.6 ..

Foreign Exchange Reserves, Excl. Gold (US$ bil.) 3.9 3.7 4.1 4.7 4.2 5.0 5.4 5.7 5.7 ..

Import Cover (Months) 5.2 3.7 3.8 4.1 3.5 3.7 3.4 3.2 2.8 ..

Total External Debt (US$ bil.) 9.0 9.9 11.6 14.2 16.3 18.1 20.4 22.9 25.9 ..

Total External Debt (% of GDP) 39.2 41.6 41.0 42.7 43.9 43.8 43.0 41.8 40.3 ..

Total External Debt (% of forex earnings) 140.9 134.2 133.4 168.1 175.5 178.2 181.3 184.1 189.0 ..

Short Term External Debt (US$ bil.) 1.5 1.6 2.1 2.3 2.4 2.7 3.1 3.6 4.1 ..

Short Term External Debt (% of total external debt) 16.9 16.2 18.2 15.9 14.7 14.9 15.2 15.5 15.8 ..

Short Term External Debt (% of international reserves) 38.8 43.2 52.1 48.3 56.8 53.5 57.8 62.6 71.5 ..

Total External Debt Service (US$ bil.) 0.2 0.1 0.2 0.3 0.4 0.5 0.6 0.6 0.7 ..

Interest Payment Arrears (US$ bil.) 0.9 1.0 1.1 1.1 1.2 1.3 1.4 1.5 1.6 ..

External Liquidity Gap (% of forex earnings) 47.0 67.4 61.6 75.6 74.0 81.6 88.7 96.2 105.5 ..

Source: Historical data from selected national and international data sources. All forecasts provided by IHS Global Insight. Table updated live from quarterly Sovereign Risk forecast bank (SRS).

Key facts and demographics 2 Area: 945,087 km (364,900 sq miles)

Language: Swahili and English (co-official)

Religion: Christianity, Islam and traditional African religions

Time Zone: GMT +3

Population: 47,780,000 (2012, World Bank)

Neighbours: Burundi, Democratic Republic of Congo, Kenya, Malawi, Mozambique, Rwanda, Uganda, Zambia.

Capital City: Dodoma (official and legislative); diplomatic, presidential and most government functions remain in Dar es Salaam

Primary Port: Dar es Salaam

Primary Airport: Dar es Salaam International

Currency: Tanzanian Shilling (TZS/TSh)

External trade

Overview

Agricultural products – most notably coffee, cashew nuts, cloves, and cotton – have traditionally been Tanzania's most important outbound goods, accounting for approximately 85% of export earnings. This share nevertheless has changed with the opening of a number of gold mines over the past decade, which has pushed Tanzania into competing with Mali for the spot as the third-largest sub-Saharan African gold producer after Ghana and South Africa. Gold exports now

© 2015IHS. page 15 of 18 constitute more than half of goods exports, with a large share of overseas shipments going to China and India. Tanzania also exports manufactured goods, minerals, tea, sisal, tobacco, and pyrethrum. Because of Tanzania's development-driven import demand, the country's main imports are machinery and transport equipment, petroleum products, and industrial raw materials. Other important imports include textiles, clothing, food, and drink. Tanzania's main import partners are the United Kingdom, South Africa, Japan, the United States, India, and Japan. Because of the fragile agricultural sector and the susceptibility of food production to erratic weather, Tanzania also regularly relies heavily on food imports.

Trading partners

Tanzania's major trading partners include: China, Germany, Japan, India, the European Union, United Arabic Emirates, United Kingdom, Kenya, Japan, India, and South Africa.

Data

Tanzania: Major Trading Partners, 2013

EXPORTS IMPORTS

Country Billions of USD Percent Share Country Billions of USD Percent Share

India 0.8 20.0 India 3.5 25.0

China 0.5 13.3 China 3.5 24.6

Japan 0.2 4.7 South Africa 0.7 5.1

United Arab Emirates 0.2 4.4 Kenya 0.6 4.4

Kenya 0.2 4.2 United Arab Emirates 0.5 3.8

Germany 0.1 3.4 United States 0.5 3.3

Netherlands 0.1 2.1 Bahrain 0.3 2.3

Malawi 0.1 2.1 Japan 0.3 2.2

Belgium 0.1 1.9 United Kingdom 0.3 1.9

Democratic Republic of Congo 0.1 1.9 Saudi Arabia 0.3 1.9

Source: IMF, Direction of Trade

Tanzania: Major Trading Partners, 2000

EXPORTS IMPORTS

Country Billions of USD Percent Share Country Billions of USD Percent Share

United Kingdom 0.1 20.2 South Africa 0.2 11.5

India 0.1 13.4 Japan 0.1 9.3

Germany 0.1 9.1 United Kingdom 0.1 7.0

Netherlands 0.0 6.3 Australia 0.1 6.2

Kenya 0.0 5.2 Kenya 0.1 6.1

France 0.0 5.0 India 0.1 5.8

Japan 0.0 4.8 China 0.1 4.5

Uganda 0.0 3.4 United States 0.1 3.9

Ireland 0.0 3.1 United Arab Emirates 0.1 3.7

Belgium 0.0 2.5 Saudi Arabia 0.1 3.6

Source: IMF, Direction of Trade

Economic development

Despite the high GDP growth rate over the past decade, Tanzania remains one of the poorest countries in the world. An estimated minimum GDP growth of 8% per year in real terms would be required to significantly alleviate poverty in accordance with the country's Millennium Development Goals. Poverty alleviation has also been highly uneven. As a result of its willingness to pursue a market-driven economy and implement key reforms, Tanzania has traditionally enjoyed very good relations with bilateral and multilateral donors, who contribute a large percentage of the government's annual budget. This has resulted in the country receiving large aid flows, and in November 2001, it also became the fourth country in the world (the third in sub-Saharan Africa) to receive enhanced debt relief under the Highly Indebted Poor Countries initiative sponsored jointly by the International Monetary Fund (IMF) and World Bank. Further debt relief has followed since, but this has not prevented Tanzania from running up debt and arrears again as it has expanded its public sector, which brought the country's external debt burden back up to an estimated USD14.1 billion at the end of 2014. In addition, relations with donors have been stretched by irregularities linked to the power sector, most recently the Independent Power Tanzania Limited scandal that erupted in late 2014. This episode had been seen as undermining the government's commitment to fighting poverty.

Tanzania has a number of goals with regard to its economic and fiscal policies. Since it abandoned its socialist past, Tanzania's economic policy had been focused on maintaining macroeconomic stability based on strong economic growth. The country also aims to improve fiscal stability by bettering the tax system to increase revenue collection and broaden the tax base in an equitable manner. Low and stable inflation will limit the expansion of broad money supply, to be consistent with economic growth and stable interest rates. To address Tanzania's dependence on the agricultural sector and the subsequent vulnerability to bad weather and commodity price fluctuations, efforts have been made to diversify the economy. Another goal is to foster private-sector development and attract foreign direct investment. With regard to Tanzania's fiscal policy, it aims to control the widening of the budget deficit, allocate more fiscal resources to priority sectors identified under its IMF Poverty Reduction and Growth Facility, and reduce waste and corruption in the public sector. Close cooperation with donors is essential to Tanzania's fiscal strategy and its debt sustainability, as they depend on continued access to concessionary donor funds of up to 4-5% of GDP, or around 45% of the budget, and practically eliminate domestic financing needs. This represents a significant risk: although there has been significant progress with expenditure management, tax reform and revenue mobilization still need improvement.

Labor markets

The population distribution of Tanzania's approximately 54 million people is extremely uneven. Density varies from 1 person per km² in arid regions to 130 people per km² in the well-watered highlands. Dar es Salaam is the country's largest city, and has traditionally been the capital. More recently, however, Dodoma, located in the center of the country, has been designated as the new capital, although the transition has not fully taken place yet. HIV/AIDS has been hurting the population, as it has in many of the countries in this region.

Although employment in the formal sector has grown rapidly, it was from a low base, and the agricultural sector still plays a dominant role. The change toward a market-oriented economy also significantly reduced government employment. The Integrated Labor Force Survey of 2006 found 1.9% of the total labor force unemployed, with a further 11.0% underemployed. This definition takes into account the large number of self-employed people and those with seasonal work. Unemployment disproportionately affects urban areas with the unemployment level in Dar es Salaam and other urbanities significantly higher than in rural areas. Educational levels remain low, as less than 5% of the labor force have progressed beyond the primary-school level, and even college graduates often find it difficult to find employment, as their degrees often do not adequately equip them for professional life.

Monetary system

The Bank of Tanzania Act of 2006 gave the central bank a stronger mandate for achieving price stability and expanded its autonomy in monetary policymaking. The Bank of Tanzania (BoT) had already changed its focus from multiple-policy objectives to price stability as stipulated in the Bank of Tanzania Act of 1995, but remained sensitive to political pressure to stimulate growth. After a sharp increase in money supply in 2002, the International Monetary Fund now appreciates monetary instruments in the BoT as well developed which is important in a country that still largely depends on donor funds for its financing needs to ensure that surges of aid inflows do not trigger inflation increases. The inflation rate has remained steady in the last few years, having generally trended in mid-single digits compared with double-digit rates in the 1990s as monetary aggregates remained stable and improved food production and distribution reduced inflationary pressures. The BoT’s second objective is to improve the country's official reserve levels, which it has maintained to raise above five months of imports. Although the BoT intervenes to smooth large temporary fluctuations in the exchange rate, the value of the Tanzanian shilling is largely driven by market forces. A more liberal exchange-rate policy has also been important in attracting inflows of foreign direct investment. The signing of the East African Monetary Union Protocol in November 2013 augurs an increased harmonization of monetary-policy frameworks and targets among the five member countries of the East African Community (Burundi, Kenya, Rwanda, Tanzania, and Uganda) in the coming years.

Financial system

During the era of socialist economic policies, private banks were illegal until 1991. The banking system has come a long way since then. Today, it has more than 30 banks, with a combination of subsidiaries of international banks, large domestic banks, and smaller, typically domestic, banks. In addition, there are more than 20 non-bank financial institutions, pension funds, and insurance companies. Smaller clients are served by around 650 savings and credit cooperatives and a large number of microfinance institutions. Despite its diversity, however, the Tanzanian financial system is largely concentrated in commercial banking and is very small. With a capital adequacy ratio of 18-20% and limited lending activities, banks in Tanzania are generally well-capitalized and are expected to be resilient to shocks to credit quality. Their weakest area is a considerable exposure to interest-rate risk, resulting from large government bond holdings. The interbank market remains underdeveloped. There is already substantial excess liquidity in the system, but these funds tend to be held unevenly, with some banks holding the bulk of it and others experiencing shortages. Despite some successful financial sector reforms, the financial industry tends to play only a small role in the country's economy, providing very limited and mostly short-term credit. Tanzanians still have limited access to formal

© 2015IHS. page 17 of 18 financial services: only 6.4% of all households have a savings or current account. This figure is even lower in rural areas. Payment services are underdeveloped, particularly in rural areas. The financial sector provides liquidity mainly in the form of cash, current accounts, and time deposits, but only reaches around 6% of Tanzanian households. Maturity transformation in the private sector is negative, with an extremely low loan-to-deposit ratio, and most of the pension funds' longer-term liabilities are being invested in bank deposits, treasury bills, or short-term bonds.

Key sectors

Mining: Tanzania has huge potential in mining, especially for gold, with a number of the world's leading mining houses setting up operations there in recent years. Among the new projects unveiled in recent years are Australia's Resolute Golden Pride mine at Nzega in the Tabora region and the country's third modern large-scale gold mine, which is situated in the remote village of Bulyanhulu in the Shinayanga region and is owned by Canada's mining giant Barrick Gold Corporation. On the other hand, the Tulawaka mine closed in 2013 and the Geita Goldmine in the northern Mwanza region, which began official production in June 2000, has underperformed in recent years. African Barrick Gold opened the Buzwagi gold mine close to Mara in northern Tanzania in June 2009, with production expected to run until 2022. Agriculture: In spite of the transition, Tanzania remains predominantly an agrarian economy. Agriculture still accounts for more than 50% of GDP with up to 90% of the population being subsistence farmers. Most of the main cash crops—coffee, cotton, tobacco, and cashew nuts—are grown on small-holding farms, although tea and sisal are grown on commercial estates. The main food crop is maize, followed by cassava, sorghum, rice, millet, and plantains. The whole agricultural sector is vulnerable to weather fluctuations, and export earnings are susceptible to fluctuations in the obtainable price. In addition to erratic weather, the sector also suffers from relying on outdated farming methods, outdated equipment, and a lack of finance. The sector was also affected by the European Union ban on the export of fish from Tanzania. The ban was subsequently lifted and the export of fish has been gradually picking up. The government considers the development of the agricultural sector crucial to the development of the whole economy and its diversification. It has, however, been unable to provide the consistent financial support necessary to facilitate that development. Highlights

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