Tanzania Economic Update 2007 and Outlook for 2008
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Embassy of Switzerland in Tanzania Form CH@World A 754 Country: Tanzania Last update: 13.07.2020 STUAL Tanzania Economic Report 2020 0. Summary The overall performance of the Tanzanian economy in 2019 was robust, and the economy recorded a GDP growth of 6.9% according to the Bank of Tanzania (BOT)1 and 5.8% according to the World Bank (WB)2, respectively. In July 2020, the country’s economy progressed from a low income country to a lower-middle income country in the World Bank’s classification – an important milestone and the result of almost two decades of strong economic growth. This report also includes an outlook on the impact of COVID-19 on the Tanzanian economy. As per July 2020, Tanzania is already suffering substantial economic costs related to the pandemic, which has impacted the livelihoods of many Tanzanians. The impact on the country’s economy is mainly through the external sector. World Bank estimates that in the short-term, the pandemic will dramatically undercut Tanzania’s growth outlook and increase poverty in 2020. However, Tanzania will most likely not be among the economically most affected countries in Sub-Sahara Africa, due to its relatively sound macroeconomic situation pre-COVID and the surge in gold price - Tanzania’s most important export. As a net oil-importer Tanzania is also profiting from lower oil prices. The Government of Tanzania has introduced only limited lockdown measures and re-opened the economy much faster than almost all countries in the region. There is fear of a further slowdown of the economy in the coming year due to the outbreak of COVID-19, unpredictability of Government policies and the General Election, which are scheduled in October 2020. These are all contributing factors to unconducive business environment. The Government’s Five Year Development Plan for fiscal years up until 2020/22 prioritises industrialization and job creation. Yet, despite this objective, the economic policy remains inconsistent. The Government promised to pursue a private-sector-led development strategy, with plans to remove bureaucratic impediments to doing business. However, an increasingly complicated tax regime, erratic regulatory changes and deficient consultation with the private sector make Tanzania a challenging place to do business. Tanzania’s economy is affected by its contradictory fiscal policies and little participation of the private sector in the economic policy making. However, the Government will have to develop a robust partnership with the private sector in order to succeed with the planned industrialisation and the much needed job creation. So far, the Government’s messages to the private sector and to foreign investors have remained inconsistent. While the Government tries to attract new investors, it should also care about investors and companies already operating in Tanzania, as some might leave the country. Future economic growth and attractiveness of Tanzania as a business destination will depend on the Government’s response to the impact of COVID-19, removing existing structural constraints, enforcing rule of law, fostering sound institutions and making economic policy and important business decisions more predictable. The Government will have to continue its fight against the persistent corruption and implement the National Anti-corruption Strategy, to 1 Annual Report 2018-2019, Bank of Tanzania (BOT), January 2020 2 Tanzania Economic Update, Addressing the Impact of COVID-19, the World Bank WB, June 2020 1 address the challenge of unemployment and unskilled labour force, to create a more conducive and stable business as well as investment environment. Moreover, the GoT will also face increased pressures to address persistent inequality and poverty. Despite two decades of strong economic growth, the absolute number of poor people in Tanzania is still increasing. 1. Assessment of the economic problems and issues 1.1. General Context The overall performance of the Tanzanian economy in 2019 was strong, and per 1st of July 2020, the country’s economy progressed from a low income country to a lower-middle income country in World Bank’s classification3. The GNI per capita in Tanzania grew from USD 1’020 in 2018 to USD 1’080 in 2019. Tanzania’s high growth over the last years was due to increased public consumption together with burgeoning infrastructure, communication, financial services (mainly mobile money services), the mining sector and growth in the tourism sector. In 2019, the economy recorded a GDP growth of 6.9% according to the Bank of Tanzania (BOT)4 and 5.8% according to the World Bank (WB)5, respectively. Tanzania is among the top three countries in East Africa in terms of economic performance. Between 2013 and 2018, the average GDP growth of Tanzania (6.5%) was behind only Ethiopia (9.5%) and Rwanda (6.7%). There are, however, concerns about data quality which means economic growth numbers in Tanzania could be overstated by the Government. Public consumption, gross fixed capital formation and exports rose in 2019. Also, recurrent and development spending and tax revenue in 2018/19 rose in the first half of 2019/20, as well as credit to the private sector, imports of capital goods and raw material. Growth of the economy was led by nonmanufacturing industry, especially mining and construction, transport, communication and financial services. The growth in mining production (12.6%) was driven by a rebound in gold, which went up by 11.6%. Growth in construction (14%) was driven by work on public infrastructure such as roads, bridges, water supply facilities, buildings, and residential projects. This was reflected in the rise in production of construction materials for the domestic market, such as cement, iron and steel.(WB) Independent experts have doubted the economic benefits of some of the mega projects currently being constructed which means that long term return on investment beyond the construction phase of these works is uncertain. Moreover, Tanzania is increasingly financing these projects with non-concessional external funds. From 2011 to 2018, the agricultural sector contribution to GDP grew much slower than the rest of the economy, averaging 4.4 percent a year and 1.4 percent per capita. In 2018, agricultural GDP per capita was 10 percent higher than in 2011, while in industry it rose by 55 percent. However, with 75.5 percent of the poor dependent on agriculture for their livelihoods, growth of the agricultural sector is crucial for poverty reduction. (WB) The poverty rate in Tanzania fell from 34.4 to 26.4 percent in 2018. Although there has been economic growth and a decline in poverty in the past years, poverty was not reduced as much as the population grew, resulting in an increase in the absolute number of poor people. In 2018, about 14 million people lived below the national poverty line of TZS 49,320 per adult equivalent per month. About 26 million (49 percent of the population) lived below the $1.90 per person per day international poverty line.6 3 https://blogs.worldbank.org/opendata/new-world-bank-country-classifications-income-level-2020- 2021 4 Hereafter, if not stated otherwise, the source BOT refers to the Annual Report 2018-2019, by the Bank of Tanzania, January 2020 5 Hereafter, if not stated otherwise, the source WB refers to the Tanzania Economic Update, Addressing the Impact of COVID-19, by World Bank, June 2020 6 Tanzania Mainland Poverty Assessment, World Bank, 2019 2 Inflation in 2018/2019 was low. According to the BOT, headline inflation averaged 3.2 percent. The annual inflation according to World Bank averaged 3.5 percent, which is below the 4.7 percent in the preceding year and the 5.0 percent medium-term target. The low inflation was a result of a decline in both food and nonfood inflation, the former was driven by adequate domestic food supply and government measures to facilitate importation of rice, wheat and sugar; the latter was due to subdued fuel prices. The low inflation is projected to be sustained in 2019/20. (BOT) This is the lowest rate since 2000. Tanzania’s inflation rate has been the lowest in the East African Community. (WB) The value of the Tanzanian shilling remained stable throughout 2019, except between January and February 2019. In that period, the shilling depreciated by 0.7 percent against the US-dollar and 2.2 percent against the Kenyan shilling, while appreciating 1.1 percent against the Chinese yuan and 2.1 percent against the euro. This was a result of BOT interventions in the foreign exchange market. (WB) The growth rate in money supply in the period between 2017 and 2019 was not stable. In 2019, there was a growth of 11.1% in credit to the private sector, compared to 4.9% in 2018. This is due to a surge in loans to agriculture, construction and transport services. (WB) The fiscal deficit rose from 1.9 percent of GDP in 2017/2018 to 3.1 percent of GDP in 2018/2019, which is within the country target of not more than 3.2 percent. The deficit was financed through borrowing, mostly at commercial rates. (BOT) In the first half of 2019/2020, the fiscal deficit stood at 0.4% of GDP, compared to 0.1% for the same period in 2018/2019. This, while domestic revenue collection remained at the same level as in 2018/2019. The rise in fiscal deficit was mainly driven by spending, especially for development projects. (WB) While debt is still manageable, mainly due to very prudent public spending, the increased borrowing for large infrastructure projects with limited economic benefits is raising some concerns. In 2018/2019, domestic revenue collection decreased to 13.8 percent of GDP (15.1 percent of GDP in 2017/2018) according to the World Bank, lower than the 15.5 percent targeted.