Tanzania at a Glance: 2000-01

COUNTRY REPORT

Tanzania At a glance: 2000-01

OVERVIEW The political scene will continue to be dominated by campaigning for the October elections and by the current political crisis in Zanzibar. The president, Benjamin Mpaka, has been elected unopposed as the CCM’s national presidential candidate. More importantly, Amani Abeid Karume has been selected as the CCM’s candidate for the Zanzibar presidential poll. Because of his general acceptablity to all parties on the island—partly the result of his father's legacy—there is now a possibility that political calm may return to Zanzibar. The government remains committed to tight fiscal and monetary policy. Overall, the macroeconomic outlook is positive, with reasonable levels of GDP growth and low inflation. Owing to strong aid inflows, the government will have little difficulty in financing its budget and current-account deficits. Key changes from last month Political forecast • President Benjamin Mpaka has been elected the CCM's presidential candidate. • Amani Abeid Karume is the party's candidate for the presidency of Zanzibar. His appointment improves the chance of a reduction in politically motivated violence on the island. Economic policy outlook • The recently passed budget maintained the government's commitment to its overall economic policy, which is led by a tight fiscal and monetary policy. • In line with Tanzania's PRGF, the budget focused on improving revenue collection and increasing spending on social services. Economic forecast • Driven by the strong supplies of domestic foodstuffs, which are helping to restrain prices, inflation continued its downward trend and is now at a 20-year low.

July 2000

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ISSN 0969-6776

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Outlook for 2000-01

Political forecast

Domestic politics In the lead-up to the national elections on October 29th 2000, the political scene will be dominated by two issues: the election campaign itself, and whether the Zanzibari question can be resolved or will lead to a further escalation of the violence that has plagued the island for the last three years. With the Chama Cha Mapinduzi party (CCM) poised to win a relatively easy victory on the mainland, it had seemed the main problem would be in Zanzibar. However, the recent election of Aman Abeid Karume as the CCM’s candidate for the island’s presidential poll does present an opportunity for national reconciliation, both on the island and between the island and the mainland.

The positive turning point in the political situation in Zanzibar can be traced to the decision made by the ruling CCM at a special meeting in Dodoma, in June 2000, that Zanzibar’s current president, Salmin Amour, should not run for a third term. This decision substantially strengthened the position of President Benjamin Mkapa, and he was subsequently chosen to be the party’s national presidential candidate. The decision also weakened the position of Mr Amour within his own party, and led the CCM in Zanzibar to nominate four presidential candidates for the island in the recent party elections. Although one of these four was Dr Bilal, the current Zanzibar chief minister and Mr Amour’s chosen successor, Mr Amour’s waning position with the party encouraged the campaign to support Aman Abeid Karume, the minister for communications and transport. Importantly, Mr Karume is also the son of the late Abeid Aman Karume, who founded the Zanzibar revolutionary government and—along with Julius Nyerere—was the main driving force behind the union of Tanganyika and Zanzibar.

Following Mr Karume’s selection as the CCM candidate, there was spontaneous and widespread public support for him throughout the island, both from the general population and, surprisingly, from the opposition parties. This positive reaction to his election gives him a strong chance of being able to reunite the divided CCM in Zanzibar. Moreover, as he is a candidate who is seen as being more acceptable to the opposition, there is a chance of that there will be less harassment of the main opposition party on the island, the Civic United Front (CUF). Moreover, it is also much more likely that, if elected, Mr Karume would seek to achieve consensus on the island by implementing the Commonwealth’s peace accord—without the modifications proposed by the outgoing president, Mr Amour. Finally, as the inheritor of his father’s pro- union mantle, he is likely to play down demands for independence from the mainland, although initially they will not be easy to ignore.

Election watch The election process in Tanzania is now well under way. The registration of candidates is to start on August 1st, and voting will take place on October 29th. Divisions within the CCM have now been resolved, and the party should easily win re-election. What is uncertain is the size of the CCM’s majority, and

EIU Country Report July 2000 © The Economist Intelligence Unit Limited 2000 2 Tanzania

whether the opposition will win enough seats to give it an effective voice in parliament. The ruling party has several important advantages. Many Tanzanians, especially those in rural areas, regard the CCM as the natural governing party and they are unlikely to change their allegiance. Years of one- party rule have also built up a considerable political infrastructure, which penetrates to village level and has financial resources superior to those of any of the opposition parties. The opposition parties are hindered further by the fact that they have failed to establish formal or informal electoral alliances. As a result they face the prospect of vote-splitting, even in the urban areas where they are comparatively strong. Durable electoral arrangements are unlikely to materialise. Probably the best that can be expected is for the leading opposition party, the National Convention for Construction and Reform (NCCR-Mageuzi), to make the most of its perceived image as the only real alternative to the CMM, thereby attracting both undecided and tactical anti-government voters to its camp. The forthcoming elections will be broadly free and fair, but the harassment of opposition parties will remain a feature of the campaign. The CCM has actively spoken out against such intimidation, but it has not acted against the actions of some members of the police because many senior officers have close links with the party.

International relations Political stability and steady—if unspectacular—progress in implementing economic reforms have traditionally been the main reasons why Tanzania has attracted substantial foreign support, and these factors are expected to continue throughout the 2000-01 outlook period. There is some concern over the government’s apparent disregard for political pluralism, but it is unlikely to attract serious criticism from foreign donors. This is partly because the conflict in neighbouring states of the Great Lakes and Central Africa has increased the importance of Tanzania as a centre of regional stability.

The main international issue for the country is the problem of refugees fleeing the civil war in Burundi, of whom there are now around 320,000 living in displacement camps in western Tanzania. Concern over this influx is behind the government’s involvement in peace talks on the Burundian conflict. The talks are held in Arusha, Tanzania, under the mediation of the former South African president, Nelson Mandela.

Economic policy outlook

Policy trends Economic policy during the 2000-01 outlook period will be driven by requirements recently agreed with the IMF, under the poverty reduction and growth facility (PRGF). This will aim for macroeconomic stability and high real GDP growth—above 5%—in addition to structural reforms aiming to privatise parastatal companies and the management of public infrastructure. The government will also push ahead with public-sector reforms, notably a reduction in the number of civil servants and improved capacity for policy implementation. As in previous years, the timetable for implementing reforms will slip, although the IMF and World Bank are still expected to retain strong support for the government’s efforts.

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Fiscal policy Under the PRGF agreement with the IMF, the main emphasis of government fiscal policy is to improve the control of expenditure through the new integrated financial information and management (IFIM) system. The main challenge, however, is to raise additional revenue and keep the budget deficit within acceptable limits. Around 40% of spending is on salaries and interest payments on domestic and foreign debt, so expenditure cuts—which would require civil service reductions—will be politically sensitive, particularly in an election year. The remaining solution available to the government is to raise revenue and curb tax evasion, partly by simplifying the complex tax system (these were all themes of the recent June 2000 budget). This is a major aim of current policy, but it has met with a mixed reaction, including complaints from the business community about overzealous implementation which has led to the formation of a tax-payers association. Domestic revenue—excluding grants—has fallen from 12% of GDP in the 1995/96 financial year (July-June) to 11.5% in 1998/99, a level which is low even by African standards.

Monetary policy Tanzania has followed tight monetary policy in recent years and this is expected to continue. As the fiscal deficit has been brought under control, this has led to a sharp reduction in inflation, with the year-on-year rate falling to single digits in 1999. This allowed the government to ease monetary policy in the first half of 1999, but inflationary concerns—owing to the increase in oil prices—led to an increase in interest rates in the second half of the year. The government is expected to maintain this stance before easing policy towards the end of the year and into 2001 as the price of oil falls (see below).

Economic forecast

International assumptions The world economy is now entering a period of sustained economic growth against a background of relatively low inflation. The EIU estimates that global GDP will expand by 3.9% in 2000, although this will slip back slightly to 3.3% in 2001. The fall is largely the result of the forecast slowdown in the US economy—the driving force behind global expansion until now. However this slowdown will be partly offset by a pick-up in growth in Asian countries, including Japan, and growth will remain relatively strong in Europe.

The pick-up in the world economy has led to a surge in world trade and produced a positive outlook for many commodities. We forecast oil prices will average US$24.5/barrel in 2000 but to slip to US$20/b in 2001. Markets for soft commodities, however, are in a position of over-supply, pushing prices downwards. The outlook for coffee, cotton and tea—Tanzania’s main agricultural exports—is for prices to recover marginally in 2001, from the extremely low levels recorded in 2000. Gold prices, however, are expected to recover more sharply in 2000 and 2001.

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International assumptions summary (% unless otherwise indicated) 1998 1999 2000 2001 GDP growth US 4.3 4.2 5.0 2.9 OECD 2.4 2.9 3.7 2.9 EU 2.6 2.2 3.1 2.8 Exchange rates (av) US$ effective (1990=100) 119.3 116.4 117.5 112.9 ¥:US$ 130.9 113.9 107.5 104.0 US$:¤a 1.12 1.07 0.97 1.04 Financial indicators US$ 3-month commercial paper rate 5.34 5.18 6.50 6.63 ¥ 2-month private bill rate 0.72 0.27 0.05 0.64 Commodity prices Coffee (arabica; US cents/lb) 135.2 103.9 101.6 82.3 Cotton (US cents/lb) 65.3 53.1 59.0 68.0 Tea (£/kg) 2.0 1.8 1.8 1.7 Food, feedstuffs & beverages (% change in US$ terms) –13.9 –18.6 –2.8 5.3

a Ecu before 1999.

Economic growth We forecast real GDP growth of 5.2% in 2000 and 5.7% in 2001. This will be led by strong growth in the agricultural sector and supported by rapidly rising gold production, investment in the Songo-Songo gas project, tourism and privatisation. However, this rise in the rate of growth is unlikely to be fast enough to make significant inroads into poverty in Tanzania.

To some extent the rains failed during the 1999/2000 agricultural season in the centre and north of the country, but we forecast that the agriculture sector— the backbone of the Tanzanian economy—should recover in 2000 and 2001. The recovery in cash crops will be led by increased cotton and tea production, as international prices for these crops have been less affected by oversupply. The recent growth in non-traditional agricultural commodity production should also be maintained, with output of cashew nuts and pyrethrum remaining buoyant.

Outside the agricultural sector, growth will be driven by developments in the mining and industrial sectors. Expansion of the mining sector—which grew by 17% in 1997 and by 27% in 1998—will remain strong. The expansion will be led by increased gold production, which is expected to rise rapidly in the next two years as a number of projects now under development come on stream. The development of other minerals—which so far has been relatively disappointing—is expected to increase modestly. Economic growth will also be underpinned by the development of the Songo-Songo gas project. Assuming the dispute between Independent Power Tanzania of Malaysia and the state power utility, Tanesco, is settled in the latter’s favour before the end of the year, construction of the pipeline and power plant is expected to begin in 2001. Tourism growth should continue to be healthy, as Tanzania benefits from the weakness of its main competitor markets—Kenya and South Africa—and the privatisation of state owned tourism facilities. The effects of this privatisation

will not be felt until later in the outlook period, but it should provide new capital, skills and marketing for the potentially valuable—if dilapidated— facilities.

Forecast summary (% unless otherwise indicated) 1998a 1999b 2000c 2001c Real GDP growth 3.7 4.1 5.2 5.7 Agricultural production growth 2.0 3.0 4.0 4.5 Gross fixed investment growth 7.1 7.0 7.0 7.7 Consumer price inflation (av) 12.8 7.9 6.0 5.5 Short-term interbank rate 26.7 29.8 17.5 16.5 Government balance (% of GDP) –4.1 –5.1 –4.4 –3.8 Exports of goods fob (US$ bn) 0.6 0.5 0.9 1.1 Imports of goods fob (US$ bn) –1.4 –1.4 –1.6 –1.7 Current-account balance (US$ bn) –1.0 –0.9 –0.5 –0.6 % of GDP –11.7 –11.1 –6.6 –7.1 Total foreign debt (year-end; US$ bn) 7.6 7.0 6.9 3.4 Exchange rates (av) TSh:US$ 664.7 744.8 830.0 900.0 TSh:¥100 507.8 653.8 772.1 857.1 TSh:¤ 744.4 793.5 771.9 897.8

a Actual. b EIU estimates. c EIU forecasts.

Inflation The rate of inflation—which fell to single digits in 1999––is expected to continue the downward trend in 2000-01. Despite official concerns that the sharp rise in international fuel prices will feed through to higher inflation, this effect is more likely to be limited as the consumer price index is heavily weighted toward basic foodstuffs. Meanwhile food price inflation is declining, and this momentum is expected to be maintained throughout 2000-02 under the impact of higher agricultural production. Coupled with tight monetary policy, this will ensure that inflation is kept within the range of 5-6% over 2000-01.

Exchange rates The Tanzanian shilling averaged Tsh744.78:US$1 in 1999, ending the year at Tsh797.33:US$1 after a substantial fall between June and July 1999 caused by weak foreign-exchange reserves. The currency will remain vulnerable to such downward slides in 2000 and in 2001, although the more positive outlook for exports and strong aid inflows will ensure any depreciation will not be as sharp as those experienced during 1999. Otherwise we forecast a gradual depreciation of the shilling, to reach an average of Tsh830:US$1 in 2000 and Tsh900:US$1 in 2001.

External sector Despite weak international prices for most of Tanzania’s agricultural exports during the outlook period, export volumes should increase substantially with the recovery from the drought of 1998-99. As well as increases in coffee, cotton and tea, exports will be aided by a large increase in gold production. Higher GDP growth, however, will accelerate import demand, ensuring that the trade account remains firmly in deficit. A fall in the invisibles deficit, however, should be apparent over 2000-01, as service earnings are boosted by tourism

gains and high levels of aid inflows, which will boost the current transfers balance. Debt service will fall under the heavily indebted poor countries debt relief initiative, although most of this benefit will occur outside our forecast period. These factors combined will lead to a reduction in the current-account deficit from an estimated US$911m in 1999 to US$541m in 2000 and US$595m in 2001.

Editor: David Cowan Editorial closing date: June 26th 2000 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule.