Country Report

Tanzania

Tanzania at a glance: 2005-06

OVERVIEW The Economist Intelligence Unit expects the ruling party, Chama Cha Mapinduzi (CCM), to win overwhelming victories in the presidential and parliamentary elections, which are due to be held in late 2005. More important will be the election of the CCM!s presidential candidate, which is to take place during the CCM!s national party congress in April 2005"the president, Benjamin Mkapa, cannot stand for a third term under the current constitution. We expe ct t he CCM!s presidential nominee to be a compromise candidate between the progressive and conservative factions. Assuming favourable weather, annual real GDP growth is forecast to be around 6% in 2005-06, as a slowdown in mining sector activities and institutional capacity constraints will prevent higher growth. Improved harvests should lower food prices and ongoing fiscal and monetary improvements should help to bring inflation down to an average of 4% in 2005-06. The current-account deficit is forecast to remain broadly unchanged, at around 3.7% of GDP, in 2005-06, as higher exports and rising services credits will be offset by increased imports and profit remittances.

Key changes from last month Political outlook • There have been no major changes to our political forecast in the last month. Economic policy outlook • Prospects for economic policy remain unchanged since last month. Economic forecast • There have been no major changes to our economic forecast in the last month.

February 2005

The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group.

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Contents

Tanzania

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2005-06 7 Political outlook 8 Economic policy outlook 10 Economic forecast

13 The political scene

18 Economic policy

21 The domestic economy 21 Economic trends 23 Agriculture 25 Manufacturing 26 Infrastructure 30 Other services

30 Foreign trade and payments

List of tables

10 International assumptions summary 12 Forecast summary 18 Interest rates in Tanzania 22 New consumer price index weights 23 Government budget, 2003/04 24 Sisal production 25 Cotton production 30 Tourism in Tanzania

List of figures

13 Gross domestic product 13 Consumer price inflation 21 Exchange rate, 2004

Country Report February 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005

Tanzania 3

Tanzania February 2005 Summary

Outlook for 2005-06 The Economist Intelligence Unit expects the ruling party, Chama Cha Mapinduzi (CCM), to win overwhelming victories in the presidential and parliamentary elections, which are due to be held in late 2005. More important will be the election of the CCM!s presidential candidate, which is to take place during the CCM!s national party congress in April 2005"the president, Benjamin Mkapa, cannot stand for a third term under the current constitution. We expect the CCM!s presidential nominee to be a compromise candidate between the progressive and conservative factions. Assuming favourable weather, annual real GDP growth is forecast to be around 6% in 2005-06, as a slowdown in mining sector activities and institutional capacity constraints will prevent higher growth. Improved harvests should lower food prices and ongoing fiscal and monetary improvements should help inflation fall to an average of 4% in 2005-06. The current-account deficit is forecast to remain broadly unchanged, at around 3.7% of GDP, in 2005-06, as higher exports and rising services credits will be offset by increased imports and profit remittances. The political scene Some instances of violence between police and opposition supporters were reported during local elections on the mainland in late November, and violence was also a problem during registration exercises on Zanzibar at the same time. The nature of the problems on Zanzibar indicate that a peaceful election may not resolve the situation. Constitutional amendments are planned to change the line of succession in case of presidential death or incapacitation. There have been signs that the government may seek to amend the Political Parties Registration Act to cut down on the number of extremely small parties. Economic policy The Bank of Tanzania continued to tighten monetary policy in the second half of 2004 to keep inflationary pressures down; the discount rate ended the year at around 14.5%. A variety of problems have delayed efforts to distribute anti- retroviral drugs in the country. Low-level corruption has come under the spotlight following the publication of a new booklet highlighting the problem. The domestic economy The Tanzanian shilling has remained stable against a weak US dollar. Inflation remains low, but the picture has been obscured by the introduction of a new basket of goods that make up the consumer price index. Poor rains have hurt prospects for the 2005 harvest and reduced hydroelectric power generation. Foreign trade and payments As a form of external debt relief, the UK has agreed that in 2005 it will pay 10% of Tanzania!s debt service to its multilateral creditors, including the IMF, the World Bank and the African Development Bank. The EAC customs union has been officially launched, but non-tariff barriers to trade remain a concern. Editors: Christopher Eads (editor); Pratibha Thaker (consulting editor) Editorial closing date: February 4th 2005 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

Country Report February 2005 www.eiu.com © The Economist Intelligence Unit Limited 2005 4 Tanzania

Political structure

Official name United Republic of Tanzania

Form of state Republic, formed by the 1964 union of Tanganyika and Zanzibar

Legal system Based on English common law, the 1977 union and 1985 Zanzibar constitutions, as amended

National legislature National Assembly, comprising 295 members (231 directly elected on the mainland; five delegates from the Zanzibar parliament; the rest appointed); Zanzibar!s House of Representatives (59 members, including 9 women appointees) legislates on internal matters

National elections October 2000 (legislative and presidential); next elections due in October 2005 (legislative and presidential)

Head of state President, elected by universal adult suffrage every five years

National government The president, vice-president and Council of Ministers; cabinet last reshuffled October 2000

Main political parties Chama Cha Mapinduzi (CCM); Civic United Front (CUF); National Convention for Construction and Reform (NCCR-Mageuzi); United Democratic Party (UDP); Chama Cha Demokrasia na Maendeleo (Chadema)

President Benjamin Mkapa Vice-president Ali Mohamed Shein Prime minister Frederick Sumaye

Key ministers Communications & transport Mark Mwandosya Community development, women's affairs & children Asha Rose Migiro Defence Philemon Sarungi Education Joseph Mungai Energy & mineral resources Daniel Yona Finance Basil Mramba Food & agriculture Charles Keenja Foreign affairs Jakaya Kikwete Health Anna Abdallah Home affairs Ramadhan Mapuri Industry & trade Juma Ngasongwa Justice & constitutional affairs Harith Bakari Mwapachu Labour & youth development Juma Kapuya Lands & human settlement development Gideon Cheyo Natural resources & tourism Zakia Meghji Science, technology & higher education Pius Ngwandu Water & livestock development Edward Lowassa Works John Magufuli

Central bank governor Daudi Ballali

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Economic structure

Annual indicators 2000a 2001a 2002a 2003b 2004b GDP at market prices (TSh bn) 7,267.1 8,186.2 9,068.1 9,547.2 10,583.1 GDP (US$ bn) 9.1 9.3 9.4 9.2 9.7 Real GDP growth (%) 5.7 6.1 6.3 5.6 5.8 Consumer price inflation (av; %) 5.9 5.1 1.0 3.5a 5.0 Population (m) 33.7 34.5 35.2 36.0 36.9 Exports of goods fob (US$ m) 663.3 776.4 902.5 1,142.4 1,235.1 Imports of goods fob (US$ m) 1,367.6 1,560.3 1,511.3 1,972.6 1,973.3 Current-account balance (US$ m) -498.6 -479.6 -251.3 -334.6 -343.0 Foreign-exchange reserves excl gold (US$ m) 974.2 1,156.6 1,528.8 2,038.4a 2,080.0 Total external debt (US$ bn) 7.4 6.7 7.2 7.4 7.5 Debt-service ratio, paid (%) 14.7 10.2 8.9 8.8 8.8 Exchange rate (av) TSh:US$ 800.4 876.4 966.6 1,038.4a 1,089.1 a Actual. b Economist Intelligence Unit estimates.

Origins of gross domestic product 2002a % of total Components of gross domestic product 2002b % of total Agriculture, forestry & fishing 47.5 Private consumption 82.9 Mining 2.7 Government consumption 19.8 Manufacturing 8.4 Gross fixed capital formation 22.1 Construction 5 Increase in stocks 0.2 Services 33.9 Exports of goods & non-factor services 26.6 Imports of goods & non-factor services -34.9

Principal exports 2003a US$ m Principal imports 2002a US$ m Gold 442 Consumer goods 368 Cashew nuts 42 Machinery 369 Coffee 50 Oil and other fuels 196 Tea 25 Industrial raw materials 208 Cotton 46 Food & foodstuffs 147

Main destinations of exports 2003c % of total Main origins of imports 2003c % of total Japan 11.83 South Africa 10.50 India 8.84 China 9.66 Netherlands 8.32 Japan 6.10 UK 5.48 India 5.94 a Official estimates. b Sums to over 100% owing to statistical discrepancies. c Based on trade partners’ returns; subject to a wide margin of error.

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Quarterly indicators 2002 2003 2004 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr Central government finance (TSh bn) Revenue & grants 545.06 393.60 490.12 583.19 635.45 481.74 450.44 799.47 Expenditure 471.02 485.46 619.78 536.75 596.57 694.48 694.08 653.84 Adjustment 9.47 -48.00 95.69 3.57 -51.32 41.18 18.81 -164.29 Balance 83.51 -139.85 -33.97 50.01 -12.45 -171.56 -224.82 -18.67 Prices Consumer prices (2000=100) 105.7 110.8 109.6 109.9 109.4 115.0 114.4 114.3 Consumer prices (% change, year on year) 1.7 3.5 3.6 3.6 3.5 3.8 4.4 4.0 Financial indicators Exchange rate TSh:US$ (av) 980.65 1,018.09 1,039.48 1,044.78 1,051.33 1,099.84 1,113.41 1,087.09 Exchange rate TSh:US$ (end-period) 976.30 1,030.15 1,047.39 1,044.65 1,063.62 1,108.41 1,107.32 1,060.45 Deposit rate (av; %) 2.79 3.10 2.70 2.75 3.64 4.43 3.98 4.09 Discount rate (end-period; %) 9.18 10.35 10.58 11.98 12.34 12.50 12.64 14.38 Lending rate (av; %) 16.15 14.78 14.43 14.66 14.05 13.56 13.81 14.40 Treasury bill rate (av; %) 3.50 5.27 5.83 6.70 7.23 7.27 7.80 8.60 M1 (end-period; TSh bn) 958.79 908.80 981.15 1,085.31 1,113.38 1,096.56 1,186.06 1,296.40 M1 (% change, year on year) 25.2 17.1 20.3 18.9 16.1 20.7 20.9 19.4 M2 (end-period; TSh bn) 2,048 2,088 2,206 2,297 2,388 2,478 2,603 2,796 M2 (% change, year on year) 25.1 19.6 22.7 19.0 16.6 18.7 18.0 21.7 Sectoral trends Productiona (annual totals; ‘000 tonnes) Coffee 49.5 ( 54.0 ) ( 57.0 ) Seed cotton 190.0 ( 155.0 ) ( 330.0 ) Sisal 23.5 ( 23.5 ) ( 23.5 ) Foreign trade (TSh bn) Exports fob 304.88 247.29 268.30 250.99 421.95 316.22 284.84 367.75 Imports cif -404.62 -448.58 -546.84 -616.27 -643.70 -543.91 -672.51 -635.88 Trade balance -99.74 -201.29 -278.53 -365.28 -221.75 -227.69 -387.67 -268.13 Foreign reserves (US$ m) Reserves excl gold (end-period) 1,528.8 1,546.3 1,669.1 1,922.4 2,038.4 1,973.1 1,877.7 2,003.0 a Crop year, ending year shown. Provisional for 2003-04. Sources: Food and Agricultural Organisation; Bank of Tanzania, Economic Bulletin; IMF, International Financial Statistics.

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Outlook for 2005-06

Political outlook

Domestic politics Owing to its national organisation and the huge advantages of long-term incumbency, the Economist Intelligence Unit expects the ruling party, Chama Cha Mapinduzi (CCM), to win overwhelming victories in the presidential and parliamentary elections, which are due to be held in late 2005. However, as the president, Benjamin Mkapa, cannot stand for a third term under the current constitution, the more important election will be that of the CCM!s presidential candidate, which is due to take place during the CCM!s national party congress, provisionally scheduled for April 2005. The battle within the CCM will be largely between conservatives, who are not keen to push ahead with the liberalising economic reforms of the Mkapa government, and progressives, who strongly support consolidating and building on them. Although we expect that the CCM will eventually select a compromise candidate between the two factions"Mr Mkapa was such a candidate when he was chosen"there is an outside possibility that, if the battle between the two factions becomes exceptionally bitter, the CCM could split. Such a split would be more difficult for the CCM to manage if it were to occur after it had selected its nominee and close enough to the actual poll to stop the party countering the move. However, this fear should not be overplayed, and press reports of rumoured divisions within the CCM should be treated with caution. Regardless of who is selected by the CCM, that candidate is likely to win the presidential poll easily. The new president will, however, probably need at least a year before he can firmly assert his authority within government"especially if he is a compromise candidate"and will probably only be able to push ahead with a clear new policy agenda in 2007. A more progressive president will also face the difficult task of convincing Tanzanians that they will continue to benefit from building on the current policies of structural and institutional reform. Political developments on Zanzibar may once again pose the greatest challenge to a new president. Despite major efforts by the leadership of the CCM, the opposition Civic United Front (CUF) and donors to ensure that the polls pass off peacefully, the fundamental problem on Zanzibar is still unresolved: the electorate is evenly split between the CCM and the CUF, yet the CCM is deeply uneasy about giving up power. Instances of violence occurred during the voter registration programme in late 2004 and, given the entrenched views and mistrust on both sides, this does not bode well for the results of any election being widely accepted. Although the heavy presence of security forces means that the October polls on the islands will probably pass off peacefully, if they are widely viewed as flawed, major outbreaks of civil unrest on Zanzibar, notably on the island of Pemba, remain a possibility. Perhaps the only way out of the impasse in this case would be the formation of a government of national unity, which has been identified as a possibility under the muafaka accord negotiated between the two parties to try and end the violence on the islands. But whether this is possible will depend on the authority of the new president and his commitment to overcoming the practical problems this would cause.

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Given the CCM!s overwhelming political domination of the mainland, the gains made by any opposition parties at the 2005 elections are likely to be only minimal. The opposition has demonstrated a general inability to form a united front against the government. The most high-profile opposition party in the last few years, because of events on Zanzibar, has been the CUF, although it is still unclear whether the CUF will be able to translate its political strength on Zanzibar into a strong nationwide showing. But the CUF, along with the Tanzanian Labour Party and Chama Cha Demokrasia na Maendeleo (Chadema), has been more active in campaigning on the mainland in recent months, and they may be able to gain votes in the forthcoming polls if they can translate the discontent felt in poorer urban areas over government economic policy into actual votes, although the gains will be marginal.

International relations Tanzania will maintain good relations with its regional neighbours and with donor countries. The main issues with donors will be over technical matters and will focus on ensuring better accounting and co-ordination of aid flows into the country. However, if a conservative, as opposed to a pro-reform, individual is selected as the CCM!s candidate, relations could become more tense after the elections in 2005. Ties would also be strained if there were serious doubts over the transparency of the Zanzibar election. At the regional level, two issues will continue to dominate. First, the need to push ahead with the implementation of the customs union protocol of the East African Community, which comprises Kenya, Tanzania and Uganda, and which will remain a source of political contention as trade barriers between the three countries are slowly reduced. Second, Tanzania will continue to play a key role in ensuring a political settlement in Burundi while seeking to speed up the repatriation of the large number of Burundian refugees"estimated at 300,000" who fled the civil war there and are now living in the border areas of Tanzania. The Tanzanian government seems to have thrown its support behind Pierre Nkurunziza, of the Conseil national pour la défense de la démocratie-Forces pour la défense de la démocratie (CNDD-FDD), whom we expect to win Burundi!s presidential poll in April 2005.

Economic policy outlook

Policy trends Since the late 1990s, guided by an IMF and World Bank-sponsored reform process aimed at controlling the fiscal deficit and liberalising the economy, the government has made good progress in creating a stable macroeconomic environment and boosting real GDP growth. Given Tanzania!s relative macroeconomic stability, the government!s main task will be to carry out the structural and institutional reforms needed to support real GDP growth of 8- 10% per year and thus bring about a sustained reduction in poverty. This, however, will be challenging: the main economic lesson of recent years has been that translating macroeconomic stability into jobs and improvements in the welfare of ordinary Tanzanians is much more complex than simply putting in place well-thought-out policies and spending more on agriculture, health and education.

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Instead, in order to turn macroeconomic stability into improvements in welfare, there will need to be more complex reforms and changes. These are likely to include improved agricultural performance (which has continued to prove difficult to attain; little progress has been made in expanding export crops or restructuring crop boards), better infrastructure and the diversification of the economy. A further hindrance to development is the weak legal system and the problem of corruption. Resolving these difficulties, together with detailed plans for establishing clearly defined property rights for many urban and rural Tanzanians, will be the key theme of a new three-year poverty reduction strategy (PRS) for 2005-08. However, progress with these reforms will remain slow: although support for reform exists within the government and among senior civil servants, there are strong vested interests opposed to liberalisation, particularly in the agricultural sector. In addition, the implementation of reforms will be slowed by a lack of capacity in the civil service.

Fiscal policy The key factor underpinning Tanzania!s solid macroeconomic performance of recent years has been the Ministry of Finance!s pursuit of a relatively tight fiscal policy. In general terms, over the coming years we expect little change in fiscal policy, which will continue to be guided by the prudent expenditure commitments outlined in the new PRS. This seeks to increase spending in the government’s identified priority sectors, notably agricultural and infrastructure development and the provision of education and healthcare facilities. Increases in agricultural investment and tax incentives included in the 2004/05 (July- June) budget"which are also expected to be continued and widened in the 2005/06 budget as well"are also likely to boost spending as will the rollout of the government’s anti-retroviral programme. But we also expect a number of additional factors to push up expenditure in 2005-06. First, preparations will need to be made for the elections, including the introduction of a national voter identification card system, while there are signs that the government has also succumbed to some more overtly strategic pre-election spending, such as the building of a new national stadium. On the revenue side, the government will continue to try to widen the tax base, improve tax administration and eliminate taxes that are a drag on business. However, donor grants will still account for a high 30% of total expenditure. Total revenue as a percentage of GDP is expected to dip slightly in 2005/06 as donor grants fall from their peak in recent years until issues of resource absorption and capacity constraints are addressed. Overall, we forecast a budget deficit of 1.6% of GDP in 2004/05 (8.6% of GDP, excluding grants). Slightly lower donor inflows following the establishment of a new government will push the deficit marginally higher, to 2% of GDP (8.2% of GDP, excluding grants) in 2005/06. The deficit will continue to be financed largely through domestic borrowing.

Monetary policy As a result of the government!s relatively good fiscal discipline, the Bank of Tanzania (BoT, the central bank) has been able to bring inflation down to one of the lowest rates in Sub-Saharan Africa without having to tighten monetary policy excessively. Having raised Treasury-bill rates steadily in the last two years, we now expect these to remain broadly unchanged in the outlook

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period. The BoT will continue to set realistic monetary policy targets in terms of money supply growth, the growth of domestic credit and a single-digit inflation rate. The current targets for the year ending June 2005 are for 20-24% growth in broad money (M2) over the year and an inflation rate of 4% by June 2005. Both of these should be broadly achieved and we expect that similar target levels will be set for the year ending June 2006 in the next monetary policy statement, which is due in mid-2005. Similarly, we do not expect any major change in exchange-rate policy. The BoT will continue its policy of strategic interventions in the foreign-exchange market to ensure the slow and smooth depreciation of the shilling against the US dollar, but such interventions will be minimal while the US dollar remains weak. Foreign-exchange reserves are expected to remain comfortably above the BoT!s target of seven months! import cover over the forecast period.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2003 2004 2005 2006 GDP growth World 3.8 5.0 4.1 4.0 OECD 2.0 3.3 2.5 2.4 EU25 1.1 2.3 2.1 2.2 Exchange rates ¥:US$ 115.9 108.1 95.5 94.0 US$:€ 1.132 1.244 1.380 1.400 SDR:US$ 0.714 0.675 0.634 0.627 Financial indicators € 3-month interbank rate 2.33 2.13 2.10 2.25 US$ 3-month Libor 1.21 1.62 3.34 4.52 Commodity prices Oil (Brent; US$/b) 28.8 39.0 36.8 29.0 Gold (US$/troy oz) 363.3 412.3 435.0 396.3 Cotton (US cents/lb) 63.3 62.2 48.5 54.5 Coffee (Arabica; US cents/lb) 64.2 80.3 87.0 70.1 Tea (US$/kg) 1.5 1.7 1.7 1.7 Food, feedstuffs & beverages (% change in US$ terms) 6.6 9.3 -5.1 -2.7 Industrial raw materials (% change in US$ terms) 13.0 20.5 -2.1 -4.7 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. Although the global economy is growing rapidly, tighter economic policies in the developed economies are likely to cause world GDP growth (on a pur- chasing power parity basis) to slow to a still robust 4.1% in 2005 and 4% in 2006. The outlook for the prices of Tanzania!s main exports is mixed. Coffee prices are expected to spike in the early part of 2005 as a result of speculative actions on the market, but will fall as global oversupply negates market sentiment. The lack of increased stability in global markets and the weakness of the US dollar will keep gold prices high over the forecast period, averaging US$435/troy oz in 2005 and US$396/troy oz in 2006. Increased global cotton production will push prices down in 2005, before lower global stocks allow

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prices to rise in 2006. Continued high global demand and a lack of spare production capacity will keep international oil prices high, averaging US$36.8/barrel in 2005. Increased production should help oil prices to fall to an average of US$29/b in 2006.

Economic growth Better economic management in recent years and progress with reform have improved the resilience of the Tanzanian economy. As a result, setbacks such as drought are unlikely to prove as damaging as they would have done in the mid-1990s, and the economy may well have a "growth floor" of about 3%. Growth in agriculture should pick up in 2005, although the pick-up will be slow given the poor short vuli rains in late 2004, before returning to more historic growth levels in 2006. Strong expansion in the manufacturing sector and in retail trade and infrastructure development, notably road building and investment in electricity and water infrastructure, is expected in 2005-06. Growth in tourism-related activities is expected to continue over the forecast period. Growth rates in the mining sector will slow somewhat over the forecast period, as further large investments are not expected, although existing gold mines will increase production. As a result, we forecast real GDP growth of 6.1% in 2005 and 6% in 2006. This is close to the country’s upper growth limit, but below the higher growth rate of 8-10% needed to have a more substantial impact on reducing poverty.

Inflation Inflationary trends have become a little more complex to understand in recent months, because in September 2004 the National Bureau of Statistics (NBS) introduced a new basket to determine the consumer price index (CPI). The main change is a reduction in the weighting given to food in the CPI index from over 70% to 55%, which has reduced the rate of inflation substantially. With a back series for the new data unlikely to published quickly, current comparisons on a year-on-year basis will be between the new basket of goods and the old basket, which means that the inflation rate is not only affected by changes in the prices of goods but also by the changes in the composition of the basket. Although this is far from satisfactory, the overall inflation trend is unlikely to be altered substantially, with the CPI index expected to moderate during the remainder of the year as increases in food prices slow. The forecast fall in international oil prices in 2005-06, as well as a return to more normal weather conditions and the maintenance of fiscal discipline, should bring inflation down to an average of 4% in 2005 and 2006.

Exchange rates The traditional annual pattern for the Tanzanian shilling is for it to depreciate in the first few months of the year as multinationals repatriate profits and few foreign-exchange earnings flow in, before foreign-exchange inflows are boosted from April through November as export receipts from cotton, coffee and cashews come in (the period June-November is also the peak tourist season and an important source of foreign exchange). This trend was, however, complicated in 2004 owing to the ongoing weakness of the US dollar"which allowed the shilling to appreciate more than would normally be expected in the second half of the year, to end 2004 at TSh1,043:US$1. Although the shilling depreciated slightly in January 2005, the picture will continue to be complicated by the ongoing weakness of the US dollar and the political

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uncertainty surrounding the CCM!s choice of presidential candidate. Overall, the US dollar is forecast to remain weak throughout 2005-06, and this should help the shilling to remain largely stable. As a result, we expect the shilling to average TSh1,091:US$1 in 2005 and TSh1,095:US$1 in 2006.

External sector Exports are expected to rise in 2005-06, owing mainly to strong international gold prices and rising gold production but also to marginal improvements in some traditional agricultural exports. Total exports are forecast to rise to US$1.27bn in 2005 and US$1.29bn in 2006. Continuing strong economic growth, as well as donor-funded projects, will cause imports to edge up to US$2.05bn in 2005 and US$2.1bn in 2006. Growth in services credits in 2005-06 is expected to be healthy; however, tourism earnings, especially on Zanzibar, could be hit by pre-election security concerns in 2005. Interest payments on external debt and profit remittances by gold mining companies are forecast to keep the income account in deficit in 2005-06. Although donor support will ease slightly over 2005-06, the current transfers account will remain firmly in surplus. Overall, the current-account deficit is forecast to remain broadly unchanged, at between 3.5#4% of GDP, in 2005-06, as higher exports and rising service credits will be offset by higher imports and profit remittances.

Forecast summary (% unless otherwise indicated) 2003a 2004a 2005b 2006b Real GDP growth 5.6 5.8 6.1 6.0 Gross agricultural production growth 4.0 4.5 5.2 5.0 Consumer price inflation (av) 3.5c 5.0 4.0 4.0 Consumer price inflation (year-end) 4.6c 4.2 3.8 4.3 Lending interest rate 14.5c 14.5 12.5 12.0 Government balance (% of GDP) -0.5 -0.9 -1.6 -2.0 Exports of goods fob (US$ m) 1,142.4 1,235.1 1,271.7 1,286.1 Imports of goods fob (US$ m) -1,972.6 -1,973.3 -2,047.3 -2,091.2 Current-account balance (US$ m) -334.3 -343.0 -402.6 -433.2 Current-account balance (% of GDP) -3.6 -3.5 -3.8 -3.7 External debt (year-end; US$ bn) 7.4 7.6 7.6 7.7 Exchange rate TSh:US$ (av) 1,038.4c 1,089.3 1,091.0 1,094.8 Exchange rate TSh:¥100 (av) 896.0c 1,007.3 1,142.4 1,164.7 Exchange rate TSh:€ (year-end) 1,341.7c 1,418.0 1,551.2 1,598.5 Exchange rate TSh:SDR (year-end) 1,580.5c 1,626.6 1,766.7 1,827.9 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Actual.

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Gross domestic product Consumer price inflation % change, year on year av; %

Tanzania (a) Sub-Saharan Africa Tanzania (a) Sub-Saharan Africa 7.0 10

6.0 8 5.0

4.0 6

3.0 4 2.0 2 1.0

0.0 0 01 02 03 04 05 06 01 02 03 04 05 06 2000 2000 (a) Mainland only.

The political scene

Local government elections The countdown to the parliamentary and presidential elections, scheduled to spill over into violence be held in October 2005, has not started well: the first stage of local elections" which were held in the last week of November and normally attract little or no interest outside the country"were beset by numerous incidences of politically motivated violence and rioting. The main factor driving the violence seems to have been basic inefficiency and chaos at the polling stations. Many polling stations did not have the basic stationery required for votes to be cast; many of the registered candidates! names and parties were clearly mixed up; and voter registration lists were problematic, leading to long delays and rising frustration amongst many who turned up to cast their votes. In particular, the problem of registration was a major cause of contention, at least partly because the issue had already been pushed into the spotlight earlier in the month, when an alliance of opposition parties filed a petition in the High Court to postpone the elections on the grounds that they should only be held when the new permanent voter registration exercise had been completed and not under the old electoral lists (November 2004, The political scene). Under Tanzania’s current system of government, those selected in this first stage"often called "neighbourhood" or "village" elections"will then contest council elections, which will be held in conjunction with the parliamentary and presidential elections in October.

Organisation and policing of The general disorganisation at the polling stations subsequently spilled over the elections needs to improve into violent clashes between the police and political activists, notably in Dar es Salaam, where one student was shot dead by a policeman and where supporters of the ruling Chama Cha Mapinduzi (CCM) party attacked the Buruguni headquarters of the opposition Civic United Front (CUF). In the end, a total of 143 polling stations were closed, although the polls were held successfully a week later. However, the general confusion over the polls and the need to re-run the elections in at least three districts in Dar es Salaam"and in various other urban centres"means that the results have been delayed, although the CCM has claimed an overwhelming victory in the polls. It claims

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that over 90% of the candidates selected represent the CCM. Of the opposition parties, it seems that the CUF was the main winner, clearly emerging as the largest opposition party on the mainland. Although the political climate on the mainland was quickly restored by the government after these incidents, they do indicate that the government will have to seriously improve its organisation prior to the national polls in October and ensure that the national voter registration exercise which is currently under way is completed successfully. In particular, it needs to ensure that the voter lists are available for inspection well in advance of the polls actually being held, so that there is sufficient time available for queries to be resolved. More worrying, and a development that bodes particularly poorly for the October polls, was the fact that the police probably overreacted to the incidents"as reflected in the death of a teenager in Dar es Salaam. Moreover, they failed to prevent the attacks on the CUF!s headquarters. Over the years, there has been some considerable discussion in Tanzania that the police force has a poor escalation ladder and often overreacts to relatively minor events, often with the use of live ammunition. After decades of one-party rule, senior members of the police and army still identify closely with the CCM and, in particular, overreact to opposition demonstrations. Despite efforts to improve this through training sponsored by several donors, led by the US, the overall situation has not improved significantly and the poor police reaction, rather than the initial unrest, is often the main factor that turns a relatively minor event into a larger crisis.

Voter registration on Zanzibar Although political tensions are likely to calm on the mainland in the coming also spills over into violence months, the ongoing controversy over the voter registration exercise on Zanzibar may prove more difficult to manage. Although this was always going to be a difficult exercise, the eruption of violence on the island of Pemba in late November during the registration exercise"against a backdrop of violence on the mainland, which is usually much more politically calm"sets a worrying precedent for the forthcoming elections on Zanzibar. This time the violence was centred around events at the Ng’ombeni primary school voter registration centre, which is in a CUF stronghold. The unrest on Pemba led to the death of one person and serious injuries for several others. The main bone of contention on Pemba, and Zanzibar in general, continues to be ongoing concerns over who is being registered to vote in October. In particular, the CUF claims that the CCM is trying to ship mainlanders onto Pemba and have them registered before the polls to try and secure it victory in at least some constituencies on the island. The spark that caused the recent unrest was the attempt to register members of the Zanzibar coastguard and a group carrying out national service (Jeshi la Kujenga Uchumi). Certainly in the latter case, this means that the group was exempted from having to complete the required period of residence on the islands in order to vote, which is three consecutive years. According to the CUF supporters, the coastguards are officially based on the main island, Unguja, and should be required to vote there. However, according to the CCM and Zanzibar Electoral Commission

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(ZEC), they have been officially transferred to Pemba, which is where they should be registered. Although registration officials initially tried to calm the situation, arguing that those who opposed the registration could file an official petition against it, tempers quickly became inflamed as protestors tried to seize registration papers to burn them, and the subsequent chaos quickly escalated into clashes between rival supporters. It was during these that firing occurred, although it is not clear by whom. The CUF blames the action on the security forces, whereas the CCM blames this action on the CUF’s so-called "blue guards", which they further accuse of trying to intimidate those legally entitled to vote. Whoever is to blame, one man was killed and several were severely wounded, one of whom was airlifted to hospital in Dar es Salaam. To raise tensions further, several days later the Pemba commander of the Zanzibar Volunteer Force was stabbed to death, in what many people consider an act of revenge for the death of the CUF supporter. Tensions were raised even further when the police then arrested several people over the latter death, whereas they have yet to take any action over the shooting at the registration centre, even though there were a considerable number of eye witnesses to the incident.

A peaceful election may not The recent events on Zanzibar once again highlight that considerable progress resolve problems on Zanzibar will still have to be made if the wider population on the islands is to feel that the voter registration exercise has been conducted fairly. Without this, the 2005 election is unlikely to resolve the political impasse on the island. The need for a high level of confidence in the voter registration exercise stems from the fact that Zanzibar remains deeply, and relatively evenly, divided between CCM and CUF supporters, both of which have to accept the results of the election. The extent of this division was also clearly illustrated by the re-emergence of the debate over whether there need to be changes to the constituencies on Zanzibar following the 2002 national population census. Although nothing has been positively decided, the CUF is particularly concerned that there will be a reduction in the number of seats on Pemba, and an increase on the main island of Unguja"Pemba currently has 21 constituencies, compared to 29 on the main island. If the changes are made, they should reflect the new distribution of the population on the islands, as recorded in the 2002 population census. However, at present most CUF supporters feel that the proposed changes are simply an act of gerrymandering by the CCM. Following the recent clashes, the central committee of the CCM once again directed its secretary-general, Phillip Mangula, to meet with the CUF to try and resolve the issue as part of the ongoing dialogue that has been running since violence erupted in January 2001, after the October 2000 elections. This dialogue eventually resulted in the signing of the muafaka political accord, which is still in the process of being implemented by both sides (August 2002, The political scene). The recent violence should give new impetus to the dialogue, which should help to calm the situation in the short term, but it is still not clear whether this will allow a fundamental breakthrough in the stalemate or help to resolve the concerns over voter registration.

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Government of national unity In fact, there seems to be a growing consensus amongst most political would pose practical problems commentators that a breakthrough would only be possible if the CUF and CCM were to agree to form a government of national unity on Zanzibar, something that is still under discussion in the muafaka implementation talks, but over which little progress has been made to date. One of the main problems with this for the CCM is that the current president of Zanzibar is a member of the cabinet of the national government. This is of huge symbolic importance, as it means that Zanzibar has a major degree of representation in the mainland government. If the presidency was to pass to the CUF, it is difficult to imagine that the CCM on the mainland would accept that a member of the opposition could sit in the cabinet. Conversely, if the CCM was to assume the presidency, the person would have considerable difficulty in reporting back to a government of national unity, which included members of the CUF, details of the discussions of the cabinet in Dar es Salaam. There is also a very practical problem in that even if the CUF were brought into the government, the balance of power would still remain with the CCM, as it still has a high degree of control over the security forces and civil service, with many senior members of both unwilling to serve under a CUF minister. Although none of these problems would be insurmountable with imagination and compromise on both sides, they do highlight the fact that the formation a government of national unity would not be a straightforward task and would have the potential to create as many problems as it resolved.

A number of constitutional Political attention on the mainland has now reverted back to the passage of the amendments are being made 14th Constitutional Amendment Bill in the Bunge (parliament). This aims to tidy up a number of areas which remain unclear under the current constitution, as well as instances where political developments have made the existing arrangements unsuitable. One of the key changes being debated in parliament is whether the prime minister would automatically assume the presidency in the unlikely event of the death, or incapacity, of both the president and the vice-president. This is unclear under the current constitution; political experts assume that the presidency would pass to the parliamentary speaker. This proposed change has created a political ruction. Some local papers claim that once the new change is in place, the incumbent president, Benjamin Mkapa, will retire early on the grounds of poor health. This, they claimed, would allow him to engineer a situation under which the current prime minister, Frederick Sumaye, would take over as acting president. This would then place Mr Sumaye in a much stronger position to be able to mount an effective bid for the presidency. The government has, unsurprisingly, dismissed the rumours as "rubbish", but they do highlight the fact that with nothing decided as to who will be the next president, there is likely to be a growing frenzy of speculation in the local media about attempts by the president and his supporters to try and engineer the succession of a supposedly favoured candidate.

Changes to party registration There is also a strong chance that the government will seek to amend the are being considered Political Parties Registration Act before the polls. The aim is to cut down on the number of extremely small parties that are currently registered, even though they play no active role in political life. Under the proposals, a political party

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will have to have at least one active elected member, whether they be in parliament or a councillor, or a least five chairmen in local government. The proposed amendments would also force the parties to improve their administration: they would be required to have a permanent register of their members in every region of the country and to summit annual accounts detailing how they used government funding. Under Tanzanian law, a party will be registered if it has at least 200 members in ten of the country!s 26 province-like administrative districts. The envisaged changes may also include a clause which restricts the ability of people who are not a paid-up member of a party from making public statements about the operations of the party.

Some opposition parties seem In general, the proposed changes would seem to be a welcome development to be invigorated and may help to drive a consolidation of the opposition into a smaller number of more active"and perhaps more competitive"parties, as well as ensure that there is less infighting within them. However, much will depend on the extent to which the registrar of political parties, John Tendwa, implements the letter of the law. There is also some indication that a move towards a smaller number of more active parties is already happening without the passage of new legislation. In particular, although the Economist Intelligence Unit still expects that the CCM will easily win the forthcoming national elections, there are signs that some of the larger opposition parties are making more of an effort to mount effective election campaigns. In particular, it does seem that the CUF, the Tanzanian Labour Party (TLP) and Chama Cha Demokrasia na Maendeleo (Chadema) are clearly emerging as the main opposition parties to the government and that all three have found a new dynamism. Rather than relying on the radio to appeal to distant rural voters, all three have started to make a real effort to get out and visit voters. In particular, the "go-to-the-people" strategy being adopted by Chadema seems to have had some resonance with the CUF and the TLP, both of whom could well adopt a similar theme in coming months. Chama Cha Mapinduzi's battle for the presidency picks up

One of the few advantages that the three main opposition parties have over the ruling party, Chama Cha Mapinduzi (CCM), is that although none have selected their presidential candidates, the process of doing so is unlikely to prove as prolonged, or as distracting, as that of the CCM. The campaign to be the CCM!s presidential candidate also faces the prospect of being clouded by allegations of corruption and vote-buying. The president, Benjamin Mkapa, clearly alluded to this in an interview with a Swahili newspaper, Majira, when he noted that many candidates had started campaigning for the elections prematurely and were falling head-over-heels over each other in their efforts to secure support. A major part of the CCM’s success over the years has been its ability to mobilise its huge membership base, centred around the ten-cell machinery which it developed while the country was a one-party state. However, this system now only works really well in rural areas, and even here the overall strength of the ten-cell system has suffered significantly in recent years as the CCM has faced an ongoing financial crisis. This, in turn, has reduced party discipline and increased politicians! ability to buy votes.

Faced with ongoing media allegations about the former prime minister, John Malecela, and his rather overt displays of financial muscle in recent months, it has been reported that the party has dispatched teams to various regions around the country to make more detailed investigations into the various allegations.

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Economic policy

Bank of Tanzania continues to The Bank of Tanzania (BoT, the central bank) continued to tighten monetary tighten monetary policy policy in the second half of 2004, although it did ease it very slightly in the final few months of the year, owing to the fact that the introduction of the new basket of goods to calculate the consumer price index led to a significant fall- back in the inflation rate. Having ended 2003 at 12.34%, the central bank pushed up the discount rate to nearly 15% by October, although it did ease back marginally to end the year at around 14.5%. The increase in the discount rate was mirrored by the increase in the Treasury-bill rate, which ended 2004 at 9.6%, compared to 7.6% at the end of 2003, although there had been no major change in the inflation rate. With the budget deficit under control, and low and stable inflation, the main thrust of the increase in the T-bill rate seems to be a general acceptance within the central bank that interest rates in 2001-02 were too low and could have led to an inflationary bubble if they had been left at those levels for too long"they also acted as a disincentive to savings. However, the rise in T-bill rates has not been accompanied by a significant rise in savings or deposit rates, which means that the main benefit will have been absorbed by the commercial banks, rather than having been passed on to savers. The commercial banks justify this on the grounds that most savings accounts in the country have only small sums of money and high levels of transactions, which make them costly and complex to administer. On a more positive note, the lending rate has not increased; having been pushed down from a peak of 21% in 2001, it was relatively stable at around 13-15% in 2004. This is a development which will have been welcomed by the central bank, although, as the Economist Intelligence Unit has argued before, the headline lending rate can be a misleading indicator of the overall cost of lending, as the latter often depends on the fees and charges imposed by banks on arranging loans (May 2004, Economic policy).

Interest rates in Tanzania (%; average unless otherwise indicated) 2000 2001 2002 2003 2004a Discount rate (end of period) 10.70 8.70 9.18 12.34 14.90 Deposit rate 7.39 4.81 3.29 3.05 4.17 Treasury-bill rate 9.78 4.14 3.55 6.26 7.89b Lending rate 21.58 20.26 16.43 14.48 13.92 a Based on data up to October. b The end of year rate was 9.6% according to local bank sources. Sources: Bank of Tanzania; Standard Bank.

Boosting lending to agriculture The government has tried to remedy the problems faced by farmers! who want sector moves to centre stage to raise capital through its ongoing reform of the land ownership laws, in particular its passage of the Land Amendment Act 2003 (May 2004, Economic policy). Under this Act, although all land remains government-owned, both citizens and non-citizens can lease it for periods of 33, 66, or 99 years, which helps banks assess the long-term viability of agricultural projects. The government also announced in the last budget that it was considering setting up an Agricultural Development Bank to boost lending to the agricultural sector (August 2004, Economic policy). In addition, in late November the BoT

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organised a meeting between the government and the financial sector to explore ways in which lending to the sector could be boosted. The two main issues on the agenda were: • how financial institutions could increase lending to small- and large-scale farmers who, according to current provisions regarding collateral, do not qualify for bank loans; and • how interest rates on loans to the sector can be kept down. The basic problem to be overcome is that lending to the sector is risky, especially as the agricultural sector continues to be dominated by smallholder farmers with plot sizes of between 0.9 ha and 3 ha, who have little capital and are very vulnerable to weather conditions. But there remains an important incentive for the banks, in that many in Tanzania are awash with capital which is simply being invested in government securities at relatively low, although safe, rates of return. Optimistically, some banks do seem reasonably confident that they can push ahead with increased lending to the agricultural sector, even if initially only to medium- and large-scale farmers. Standard Chartered Bank, for example, has stated that it believes it can use some of the lessons learnt from lending to the Zimbabwean agricultural sector in Tanzania. To this end, it has announced that it will seek to set up a TSh35bn (US$32m) floriculture bond before the end of the year. It has also introduced a special "Agriculture Deposit Account", under which all deposits in this account will only be loaned to the agricultural sector. Similarly, Barclays Bank is also talking about introducing a "Structured Trade and Commodities Facility", which will seek to boost lending to commercial farmers and smallholder co-operatives, along the lines of a similar facility that has worked well in Zambia.

The rollout of anti-retroviral Following trips to both Tanzania and Malawi in late 2004, Stephen Lewis, the drugs has experienced delays UN secretary-general!s special envoy for HIV/AIDS in Africa, made some interesting observations about the Tanzanian government’s ongoing efforts to tackle the pandemic in the country. In a long press briefing he argued that one of the issues that struck him most about developments in Tanzania was that despite strong demand for anti-retroviral treatment and an apparent commitment by the national government and donors to the cause, to date the process of providing such treatment seemed to have been undermined in a variety of, often unexpected, ways on both the national and local level. This has meant that although the rollout of anti-retroviral provision was originally scheduled for March 2004, it was delayed until October 2004 and then again into 2005. In a highly illustrative example of how even insignificant developments have delayed the rollout, Mr Lewis highlighted an example from Zanzibar. Commenting on his trip to a Zanzibar hospital, he noted that although 195 people were on a list for immediate treatment, to date they had not received it" a situation that he suspected might still be unresolved despite his visit. This was because, according to the hospital staff, they needed to conduct a CD4 count blood test, which measures the immune system!s strength after a

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diagnosis of HIV infection, before they would dispense the drugs. They were unable to do this, however, as the hospital had no CD4 counter. As a result, they had not moved forward, even though most doctors accept that, although advisable, the test is not a compulsory requirement prior to the administration of the drug programme.

The rollout should gather Mr Lewis did note, however, that despite the delays he was optimistic that the momentum in 2005 rollout would gather momentum in 2005. It is now expected that the first group of recipients"totalling about 44,000 people"will start obtaining supplies in June. This should allow the government to reach its target of providing the drugs to 220,000 people by the end of 2005. With an estimated 450,000 people in need of anti-retroviral treatment, this would be close to achieving the "3 by 5" target, which is part of the UN’s Millennium Development Goals. Mr Lewis noted that not only had the worse delays been overcome, but that he was hopeful that the additional planning that had been carried out would result in the rollout being more efficient and better organised than if it had taken place more quickly. He also said that the groups targeted for delivery had been clearly identified. In particular, he was supportive of the fact that the government has decided that treatment will be free and will be based on generic fixed dose combinations (FDCs) of anti-retrovirals, which will reduce the cost to the government. The government has also managed to train four-six healthcare professionals for each of the 60 facilities where treatment will be offered"a key factor in encouraging a successful rollout.

Petty corruption moves into The ruling party, Chama Cha Mapinduzi (CCM), has become concerned about the spotlight the shadow of corruption hanging over the campaigning for its presidential nomination, but for most people their main experience of corruption remains their dealings with civil servants. As part of their attempts to address the issue of corruption at this level, the Prevention of Corruption Bureau (PCB) and a non-governmental organisation, HakiClimu, have launched a new educational booklet which describes the most common forms of corruption and the best methods of dealing with it. At the press launch of the book, the PCB’s director- general, Anatoli Kamazima, noted that in the background studies for the book they had found that 70% of civil servants were willing to consider taking a bribe, while civil servants believe that the overwhelming majority of their colleagues have engaged in corrupt practises. When questioned further, most civil servants argued that their colleagues only resorted to corruption because of low wages, although 10% would probably continue to accept bribes whatever their wage level. As a result, one of the key recommendations of the report is that civil-service salaries be raised. The report also highlighted other issues related to corruption which are much less frequently commented upon. For example, the report highlighted that sexual corruption was common in schools, where students are reportedly forced to give sexual favours in order to pass exams. A total of 40,000 copies of the booklet have been printed and will be distributed around the country.

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The domestic economy

Economic trends

The shilling remains stable Having appreciated steadily in the final three months of 2004, there were some tentative signs that the Tanzanian shilling was following its traditional pattern of weakening in the first few months of the year when demand is at its highest and supply of foreign exchange at its lowest. According to Bloomberg rates, the shilling hit a high for the year of TSh1,035:US$1 at close of trading on December 30th, having started the year trading at TSh1,055:US$1. The shilling depreciated marginally against the US dollar in the first three months of 2004, before trending sideways for two months and then slowly appreciating from late June onwards. However, in January of this year, the shilling did slip back marginally against the US dollar, ending the month trading at TSh1,100:US$1, in line with seasonal patterns.

Exchange rate, 2004 TSh:US$1; inverted scale 1,020

1,040

1,060

1,080

1,100

1,120

1,140 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Source: Bloomberg.

Although we expect the US dollar to remain weak in 2005, which will limit the extent of any depreciation of the shilling in the course of the year, we still expect the first half of the year to be reasonably volatile for the shilling. Not only are the first few months of the year traditionally the weakest time period for the currency, but given the political speculation over who will replace the current president, it would not be all that unsurprising if the value of the shilling was subject to periodic sharp fluctuations, although assuming that the new presidential candidate of the ruling party, Chama Cha Mapinduzi (CCM), is committed to the current reform effort, any fluctuations should stabilise in the second half of the year.

Inflation remains low Although there has been no significant increase in the rate of inflation in recent months, the overall picture remains clouded by the introduction of a new basket of goods that makes up the consumer price index and the lack of a detailed back series of inflation data using the new basket. According to the National Bureau of Statistics, the year-on-year inflation rate in September 2004 was only 4%, down from the 4.1% recorded in August. But the comparison made is with the old index in 2003, which makes a meaningful analysis of the

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data much harder"the change is due as much to the weighting of goods in the index as to changes in the prices of goods. On a month-on-month basis, the inflation rate rose by a modest 0.2%, although the still crucial food component of the index fell by #0.1%. Apart from drinks and tobacco, all other components of the index were modestly positive on a month-on-month basis. The complete details of the new basket have been published, from which it is possible to study trends in the weightings over time. As already noted (November 2004, The domestic economy: Economic trends), the key change made this time is the reduction in the weighting for "food" from 71.2% to 55.9%, although this is offset somewhat by the increase in the weighting for "drinks and tobacco". The other major changes are the increased weightings for "transport" and "fuel, power and water". In contrast, the main fall is in the "rents" component of the index, which now accounts for only 1.4% of the index. This largely reflects the ongoing rise of squatter settlements in many urban areas, which are either owner-occupied or illegally constructed, and the demise of formal renting of houses and apartments over the years.

New consumer price index weights (% of total, based on data from the Household Budget Surveysa) CPI weights CPI weights CPI weights CPI weights 1969 HBS 1976/77 HBS 1991/92 HBS 2000/01 HBS Food 47.0 64.2 71.2 55.9 Drinks & tobacco 7.7 2.5 4.4 6.9 Rents 8.6 4.9 3.9 1.4 Fuel, power & water 6.6 7.6 4.7 8.5 Clothing & footwear 10.8 9.9 3.7 6.4 Furniture & household equipment 2.8 1.4 2.5 2.1 Household operations & maintenance 3.5 3.4 1.5 2.1 Personal care & health 5.0 1.3 2.2 2.1 Recreation & entertainment 1.6 0.7 1.2 0.8 Transport 6.4 4.1 1.2 9.7 Education 0.0 0.0 1.5 2.6 Miscellaneous goods & services 0.0 0.0 2.0 1.5 Total 100.0 100.0 100.0 100.0 a The surveys cover around 200 items collected in 20 towns in mainland Tanzania. Source: National Bureau of Statistics.

Final budget data are The Ministry of finance and Bank of Tanzania (BoT, the central bank) have published for 2003/04 published their final budget outturn data for fiscal year 2003/04 (July-June). Unsurprisingly, the final outturn was not all that different from the projections in the revised budget, which was produced after the government published a supplementary budget early in 2004 (May 2004, Economic policy). Perhaps the most worrying aspect of the budget outturn remains the fact that it has still fallen considerably short in terms of overall development expenditure. In particular, foreign-funded development expenditure was projected at TSh667.4bn (US$612m) in the budget, but in the end was only TSh544.9bn, a shortfall of 18.4%. This has been an ongoing feature of the budget in recent years, although, in general, foreign-funded development expenditure has increased very rapidly from only TSh251.2bn in 2001/02 to its current levels.

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Government budget, 2003/04 (TSh bn) Budget Revised budget Outturn Total revenue 1,393.0 1,400.6 1,459.3 Tax revenue 1,264.2 1,273.2 1,340.1 Non tax revenue 128.9 127.4 119.2 Total expenditure 2,418.4 2,559.1 2,550.3 Recurrent expenditure 1,610.9 1,755.7 1,872.4 Development expenditure 807.4 803.4 677.9 Overall balance (before grants) -1,025.3 -1,158.5 -1,091.0 Grants 727.7 725.9 655.4 Adjustment to cash 0.0 0.0 190.1 Overall balance (before grants) -297.7 -432.6 -355.1

Sources: Bank of Tanzania; Ministry of Finance.

On the revenue front, domestic receipts continued to grow strongly in 2003/04. Tax revenue came in at TSh1,340.1bn, significantly above the TSh1,273.2bn in the revised budget, driven by increases in both taxes on imports and income taxes. In total, tax revenue turned out to be 6% higher than originally forecast in the budget and 20% higher than the level achieved in 2002/03. Despite the growth in domestic revenue, grants still represented around 50% of overall revenue, and without them the government would have faced a major fiscal problem. Grants, did however, actually fall back marginally in 2003/04. This reflects the delays in moving ahead with project spending, to which much of the money is linked, and the fact that after several years in which donor support has increased rapidly disbursements have now reached a plateau.

Agriculture

A quick rebound in the There is unlikely to be a rapid rebound in the agricultural sector in 2005, after agricultural sector is unlikely the poor rains of the last 18 months. Although normal rainfall is still expected when the longer msimu rains set in, the US-funded Famine Early Warning Systems Network (FEWS NET) has reported that the slow and late onset of the short vuli rains has caused some farmers to lose confidence and they have already planted less than would be expected in a normal year, while those crops that have been planted have not developed as quickly as expected. This means that there will continue to be pockets of food insecurity. This will have a knock-on effect on livestock production, which will take longer to recover following the drought. A fuller understanding of the outlook is only really likely when the Ministry of Agricultural and Food Security completes its final assessment of the 2003/04 season (July-June) and makes its more detailed forecasts for the coming year. However, on a more positive note, the Strategic Grain Reserve has continued to move ahead with its programme of grain purchases to try and re-build stocks. Further releases of reserves in the coming months should ensure that food prices do not rise too rapidly.

There is renewed interest In the last year, there has been a considerable increase in interest in developing in sisal the country’s sisal crop. Sisal production has seen a prolonged period of decline from the 1970s, although Tanzanian production surged in 1999/2000 as a large

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matured section of acreage was harvested and taken out of production. However, global demand for sisal has picked up in recent years, notably as a backing for carpets and even as a carpet fibre in its own right, as well as for being blended with metals to reduce their weight as a high technology construction material. The pick-up in global demand and increase in production from the smaller acreage now under production does seem to indicate that the two-decade-long fall in production has at last slowed, and there may even be a modest recovery in the coming years.

Sisal production 1998/99 1999/00 2000/01 2001/02 2002/03 Total area cultivated (ha) 185,666 42,587 46,118 46,118 50,073 Quantity of production (tonnes) 23,229 41,083 23,542 23,641 23,280 Producer price (TSh/tonne) n/a n/a 368,077 337,732 450,000

Source: Tanzanian Sisal Authority

Speaking to the local press in Dar es Salaam in late November, the executive director of the Sisal Board of Tanzania, Odhiambo Wilson, estimated that sisal production for the 2003/04 year would be around 25,000 tonnes, the highest level since the early 1990s (excluding the one-off high in 1999/00), and that the industry currently employs around 15,000 people directly or indirectly. He said that the pick-up in production reflected the increase in global demand, which had allowed the Sisal Board to raise the price it has been offering for sisal in recent years. According to Wigglesworth and Co., one of the leading sisal traders, the global price for top-grade sisal is now around US$815-915/tonne, compared to only US$620-650/tonne in 2001. It has also been announced that the Sisal Board has secured funding from the Arab Bank for Economic Development to conduct a study aimed at boosting smallholder production, while the Common Fund for Commodities is considering investing in the construction of a pilot plant at the Kwaraguru Sisal Estate in the Tanga region. This will use the residue from the current production of sisal to provide biogas and fertiliser. Under the project, it is estimated that 4,500 ha of sisal would be sufficient to produce gas to generate 1mw of electricity, which would be enough to meet the entire needs of the estate and leave a 75% surplus to be sold to other users. In general, the renewed interest in sisal is expected to continue in the coming years, with an ongoing modest recovery in production. However, a return to the heydays of production of over 100,000 tonnes is extremely unlikely.

Cotton production rebounds The poor rainfall of recent years may have had a negative impact on food production, but given reasonably buoyant international and producer prices, it has encouraged farmers to boost production of cotton, which is a relatively drought resistant crop. Cotton is grown mainly in the north of the country around the shores of Lake Victoria and down towards Shinyanga, areas which have been affected by the drought. According to the Tanzanian Cotton Lint and Seed Board (TCLSB), by the end of September 2004 it had already produced 3,002 tonnes of cotton seed over its target of 250,000 tonnes. However, it should be noted that although this represents a pick-up in production compared to recent years, this is still only the level produced in the mid-1990s.

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Cotton production (tonnes) 1999/2000 2000/01 2001/02 2002/03 2003/04 Total seed cotton production 100,500 123,558 148,180 188,689 139,969 Average price paid (TSh/tonne) 123 180 165 180 280a a The floor price in 2003/04 was set at TSh225/tonne, compared to TSh140/tonne in 2002/03. Source: Cotton Marketing Board.

Although the TCLSB has still to announce the price that it will set for the coming year"the 2003/04 price was TSh225/kg"it has started to distribute seeds for this year!s crop and is in the process of obtaining fertilisers and pesticides. However, the increased production is causing a range of problems, of which the most important is capacity for proper storage. Considerable quantities of cotton are still in storage with farmers, in buyers! warehouses or at ginneries, and delays in ginning can reduce the quality of the cotton, especially if it is not stored properly. Because of this, Tanzanian cotton will continue to be sold at a discount to the more widely quoted international cotton prices.

Some new projects are The possibility of some diversification of the farming sector has been boosted announced by the announcement by some small-scale companies that they plan to boost their production of anti-malarial drugs in Tanzania. African Artemisia in Arusha and its Kenyan sister company, East Africa Botanicals, have recently received support from the US Agency for International Development and the World Health Organisation (WHO) to boost production of "sweet wormwood" (artemisia annua), a herb of Chinese origin but which grows well in the Kilimanjaro region. In clinical trials, the plant has been shown to be effective in combating malaria. Shortages have emerged owing to growing demand and slow Asian production growth. Meanwhile, the diversified East African manufacturing group, BIDCO, has announced that it is considering establishing estates to grow palm oil in Kigoma, which is along the shores of Lake Tanganyika. Increased production would be processed in the company’s under- utilised factory in Dar es Salaam.

Horticulture has attracted Investment in the agricultural sector does seem to have been helped, at least fo reign i nvestment partially, by the establishment of a land bank, by the Tanzanian Investment Centre (TIC) (May 2003, The domestic economy; Agriculture). The aim of the land bank is to build up a stock of land available for rent by investors, so that they do not have to go around searching for land when they visit the country. According to the TIC, it currently has 3.5m ha of land in the bank, despite the increase in the number of projects being allocated land: 12 projects were registered with it in 2001, rising to 16 in 2002 and 20 in 2003. However, to date the investment, especially by foreign investors, has largely been in horticulture based around Arusha, rather than in the wider agricultural economy.

Manufacturing

Outlook for EPZs is not clear In an interview in mid-November, the minister of trade and industry, Juma Ngasongwa, perhaps spoke too soon when claiming that he expected the

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number of firms that are investing in Tanzania’s export processing zones (EPZs) to have reached 20 by June 2005 (there are currently only four). This, he claims, would lead to a ten-fold increase in jobs from 1,500 at present to around 15,000. The National Development Corporation (NDC), which is responsible for developing the EPZs that are being proposed around the country, has also announced some of the sectors in which it feels that it can attract investment. These include textiles, leather goods, agro-processing, wood products, fish processing and gemstone polishing. At present, two EPZs are operational in Dar es Salaam, the Millennium Business Park and the Tabata Industrial Area. Plans are also relatively advanced to develop a further two at the Dar es Salaam airport and next to Kilimanjaro International Airport, and further suitable sites have been identified in Kigoma, Tanga and Mtwara. The Zanzibar Investment Promotion Agency also plans to develop an EPZ on the island. On a less optimistic note, however, Grace Mwenda, an assistant minister at the Ministry noted that many investors were still complaining about the poor level of infrastructure in the existing EPZs. In particular, the high cost of power, unreliable water supplies and the high cost of training the workforce to boost their productivity to required levels are all major problems. The chances of meeting the minister’s target also suffered a setback on December 16th, when one of the pioneering investors in the EPZs, Nida Textiles, announced that it had ceased production. This brings the total number of operational firms down to only three: Star Apparels and Africa Pride Textile Mills, which are taking advantage of Tanzania’s membership of the African Growth and Opportunity Act to export textiles to the US; and Reclaimed Appliances, which specialises in refurbishing second-hand electrical household goods. Whether this closure will cast a shadow over the EPZ policy in Tanzania is not clear, but for the programme to be effective the government will have to improve the zone!s supporting infrastructure. One key development could be to try and link an EPZ site in Dar es Salaam with the Songas gas project, with the gas providing a reliable alternative source of power. However, Nida!s closure should not be blown out of proportion. Experience from other EPZs in Africa shows that firms open and close on a regular basis, with some re-opening with new ownership or investment in a relatively short timeframe. Some experts have also likened attracting investment into EPZs to trying to fill a bucket with holes in the bottom: the bucket can be filled but you need to keep pouring in enough water to offset the leakage. Similarly, with an EPZ, the aim is to keep attracting enough new firms to set up in the zones to offset the fact that the closure rate of firms is often relatively high, as they compete in a highly competitive sector and have little capital investment. This is especially the case with textile exporters.

Infrastructure

The government seeks As part of its efforts to continue attracting investment into the country, the investment in infrastructure government helped to organise the Tanzania Investment Forum, which was held in London in late November. In one of the key addresses at the conference, the minister of state for planning and privatisation, Abdallah Kigoda, strongly stressed the need for the country to attract investment in

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infrastructure. In particular, he noted that the government was seeking investment in the following. • The energy sector, where the government is targeting both hydroelectric and thermal power plans and the exploitation of the country’s coal and gas reserves. • The railways, where it hopes both to expand the existing network and develop dry-ports. The idea of building commuter lines within Dar es Salaam was raised again, along with the building of a link to the Mchuchuma coal deposits. • Investment in maritime transport, notably on inland lakes, and the development of new and existing port facilities. • Improvements in local airports and in providing airfreight handling facilities and services, such as cold storage depots. All these projects have been on the drawing board for some time, so it remains unclear whether they will attract investors, but the development of better infrastructure will be a key issue facing the country’s new president in 2006. Investors should also potentially receive support for some of these projects from the World Bank. The International Development Agency"a part of the World Bank which lends to the poorest countries"is currently considering a US$530m loan to fund a ten-year programme to develop Tanzania!s infrastructure. As well as providing ongoing support for the upgrading of the country’s road network, other aspects being considered include investment in the Dar es Salaam bus fleet and in specific projects involving ports, aviation and railways.

Rail transport is identified as a The need to attract more investment into Tanzania!s infrastructure and develop a key sector needing investment co-ordinated transport strategy based on a more developed rail network, was also a central theme of a statement issued by the minister of communications and transport, Mark Mwandosya, which coincided with national transport week in mid-October. In his statement, the minister outlined ambitious plans to develop non-road transport, in particular, to develop the country’s rail network so that the need to transport heavy goods by road is reduced. In the statement the minister once again stressed the government’s commitment to concessioning both the Tanzania Railway Corporation (TRC), which is currently underway, and the Tanzania-Zambia Railway Authority (Tazara). It would also like to develop the proposed Arusha-Musoma railway in co-operation with the national rail companies of Uganda and Kenya, which are also in the process of being concessioned. At present, the northern corridor rail line runs up from Tanga to Arusha, but the aim is to extend it to Musoma on the shores of Lake Victoria, which would substantially reduce the cost of transporting goods to Uganda. The government is also keen to encourage trade through to Rwanda via Tanzania. At present goods are transhipped via the Isaka Dry Port, but they must be taken by road, whereas a railway line from Isaka (Tanzania) to Kigali (Rwanda) would make this much more efficient. The African Development Bank has already agreed to fund a feasibility study for the line. There are also plans for a similar study looking at developing a rail line in southern Tanzania

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which would service the planned Mtwara Development Corridor. This would link Mtwara to Mbamba Bay on Lake Nyasa. However, all of these projects are highly ambitious and much could depend on the success in turning around the TRC, which is currently in the process of being concessioned.

Tanzania's rail network

UGANDA

Lake Victoria Musoma KENYA RWANDA

Mwanza

BURUNDI Arusha Moshi Shinyanga

Singida Kigoma Kaliua Tabora Korogwe Tanga Manyoni

L a k DODOMA Zanzibar e Mpanda T (Political capital) a n Morogoro ga Kilosa DAR ES SALAAM ny i D.R.C. k (Commercial a TANZANIA capital) Kidatu INDIAN OCEAN Mbeya Tunduma

ZAMBIA Mtwara

MALAWI Mbamba Bay Lake 0 km 100 200 300 Nyasa MOZAMBIQUE 0 miles 100 200

Poor rains affect hydroelectric The need to resolve the problems of the country’s power sector have once power generation again been illustrated by the emergence of power cuts in Dar es Salaam in recent months, owing to low water levels at the country’s main hydroelectricity dams. The poor rains of recent years mean that the water levels are estimated to be their lowest since 1994. In particular, low water levels have restricted production at the 80-mw Kidatu hydroelectric dam. However, in contrast to previous years, thanks to the development of the Songo Songo project (which can provide 112 mw of gas-generated electricity) and the diesel plant run by Independent Power Tanzania (ITPL; which can provide 100 mw), demand can be met by thermal sources and there are unlikely to be prolonged periods of load shedding. In previous years"especially the mid-1990s"load shedding had a very negative impact on manufacturing in particular. There is also the possibility that surplus power generated by the Geita Gold Mining company and the Mtibwa Sugar plantation could be transferred to the national grid should the national electricity company, the Tanzania Electric Supply Company (Tanesco), require additional power.

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The problem for the government is that these thermal sources of electricity are expensive, so to help cover the costs without having to raise electricity tariffs significantly, the government negotiated a US$43.8m energy sector loan with the World Bank in July 2004. The money has theoretically been ready for disbursement since mid-September, but progress has been delayed as the government, Tanesco and the World Bank had to iron out the exact final terms of the agreements. However, now that the negotiations are concluded, the government is confident that there will be no major power outages in the period up to March, from when the onset of the long rains should start to see a gradual re-filling of the three major hydroelectric dams, Mtera, Kihansi and Kidatu. Another factor which may help in the long term are the ongoing investigations into the terms of ITPL!s contract with Tanesco, by the Prevention of Corruption Bureau and the non-governmental organisation, Transparency International (working with the organisation, African Parliamentarians Against Corruption). The contract for ITPL to supply power to Tanesco has already been re- negotiated once, in 2001, after the International Centre for Settlement of Investment Disputes ruled that the US$150m project cost, which was being used to calculate the electricity tariff, was too high (May 2001, The domestic economy: Infrastructure). The current investigations have increased the spotlight on the Mechmar Group"the Malaysian company that operates the power station. Given the company!s desire to avoid unfavourable publicity, this could potentially force it to sell off the station, which would then allow a further re- negotiation on yet more favourable terms. Long-term power plan identifies the current grid as a problem

Although expensive to run, it is clear that with the two thermal power stations up and running, investment in new power generation plants may not necessarily be a priority. Instead, upgrading the national grid is probably more important. This certainly seemed to be one of the main conclusions drawn by PB Power, a South African consultancy, which recently developed a twenty-five year Integrated Resource Plan for the National Development Corporation (NDC), which included a long-term outlook for Tanzania!s power sector. The plan broadly accepts the long- term forecasts for growth in demand that the Tanzania Electric Supply Company (Tanesco) submitted as part of the 2002 National Energy Policy. This forecasts growth in demand of 11.5% per year between 2004-08 and 8.7% per year between 2009-13, assuming that Tanzania starts to export power to Kenya. Domestic demand is forecast to grow by 7.5% and 7.2% per year in the respective periods.

According to PB Power, under this growth scenario, and with the addition of extra turbines already under way at the Ubungo power station which will make use of gas from the Songas project, it would only be necessary to commission the Mchuchuma power station’s first turbine in 2008 (it would be a 100-mw turbine) with subsequent units brought on line in 2010 and 2012. Because the study was commissioned by the NDC, which is pushing hard for the Mchuchuma project, this is a central feature of the study. According to PB Power, the development of the Mchuchuma power station and its interconnection into the Tanesco grid is feasible and cost effective, although other energy consultants have questioned the viability of the project. As imports of power from Zambia are due to come on line in around 2020, this means that the proposed

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Ruhudji hydroelectric station would only then come on stream in around 2025. However, even this will depend substantially on whether further new gas reserves are found in the intervening period. Meanwhile, the main focus of investment in the system will be to upgrade the existing grid network. A main weakness of the current grid is that it is only a 220-kv network. If upgraded to 330 kv, this would substantially improve the efficiency and stability of the current system, as well as increasing the likelihood of importing power from Zambia and exporting it to Kenya. Other services

Tourist board sets an Speaking at the World Travel Markets Fair in London in November, the ambitious target managing director of the Tanzanian Tourist Board (TTB), Peter Mwenguo, announced that the TTB’s goal was to attract 1m visitors to the country per year by 2010. It estimates that 600,000 tourists visited the country in 2004 and forecasts that this will increase to 670,000 in 2005, providing earnings of US$735m. If these data prove to be correct, it would mark a significant increase in visitor numbers compared to 2003, when, according to the National Bureau of Statistics, Tanzania attracted 576,000 tourists"a marginal increase over 2002. A potentially worrying trend is that in recent years earnings from tourism have tended to stagnate. In 2003 the 576,000 tourists who visited the country provided foreign-exchange earnings of US$731m, and the large increase in visitor numbers forecast by the TTB for 2005 will apparently not yield a significant increase in revenue. This reflects the fact that the cost of visiting Tanzania has probably fallen in recent years, as tour operators have responded to very intense competition from other African locations, notably South Africa and Kenya. It also reflects the ongoing rise in backpacking tourists in Tanzania, who tend to spend much less than those on more formal tours.

Tourism in Tanzania 1999 2000 2001 2002 2003 Number of tourists 628,188 501,668 525,122 575,000 576,000 Tourism earnings (US$ m)a 733.3 739.1 725.0 730.0 731.0 a National Bureau of Statistics tourism earnings differ significantly from current-account figures. Source: National Bureau of Statistics.

Foreign trade and payments

The UK offers more debt relief The UK government is using its presidency of the G8 during 2005, combined with it holding of the EU presidency in the second half of the year, to focus international attention on the problems facing African states. A key part is being played in this by the Blair Commission for Africa, which is supposed to identify key development problems facing the continent, and of which the Tanzanian president, Benjamin Mkapa, is a key member. The Commission is due to report prior to the G8’s annual summit in June. The UK is also pushing for an increase in external debt relief. As part of this initiative, the UK!s chancellor, Gordon Brown, made a rare overseas trip in January 2005, including a stopover in Tanzania, where he signed a unique accord with the government under which the UK will pay 10% of Tanzania!s debt service to its multilateral creditors, including the IMF, the World Bank and the African Development

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Bank. This currently amounts to around US$3.5m a year. The money saved on debt service is supposed to be spent on health and education and other priority sectors.

Total long-term debt US$ m

Bilateral 2,540

Multilateral 3,570

Total: US$6,110 m

Source: World Bank, Global Development Finance.

However, the long-term impact of the move remains unclear. Although Tanzania has moved into the heavily indebted poor countries (HIPC) initiative and received considerable bilateral and multilateral debt relief, in recent years its external debt stock has started to rise again, largely because of new borrowing from multilateral lenders. Some of this has been for priority sectors, such as education, which the World Bank has heavily supported. However, infrastructure development in, for example, the energy sector and road building, has been a larger recipient of financial support. This raises the question of whether aid aimed at servicing the costly loans contracted for these sectors is as effective as aid that would be given directly to the government to solve efficiency and capacity problems in infrastructure and utilities management. Moreover, even if aid is increased, it is unclear that Tanzania needs more aid. Aid has already increased substantially in recent years, and there is a strong argument that rather than increase it further, what Tanzania really needs is a period of consolidation, during which the government develops the capacity to ensure that aid flows are effectively managed and that there are more positive linkages with the local economy, so that the aid will have a much greater impact.

The East African Customs Although the event was surrounded by considerable confusion, with last- Union is officially launched minute negotiations continuing into December, the East African Customs Union did come into effect on January 1st 2005. However, owing to the delays caused by the last-minute negotiations, it seems that the authorities in all three countries failed to fully issue the legal notices required for the new community tariff levels to be applied, which meant that for a number of days after January 1st the old national tariff levels were still being implemented. The implementation has been particularly difficult along the Kenyan border, as it is Kenyan exports to Tanzania and Uganda which have been the main bone of contention. The duties on many of these are to be phased out over time

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because of the fear in the smaller states that they will be swamped by Kenyan manufactured exports. To try and offset this, under the agreement the government has selected 880 products which will continue to be taxed at rates of between 2% and 25%. An additional source of potential confusion is that the preferential treatment commitments made by the three governments under Common Market for Eastern and Southern Africa (Comesa) and Southern African Development Community (SADC) rules will continue to apply during the transitional period between now and 2010. However, the overall fall in tariffs means that the Tanzanian government estimates that it will lose around TSh19bn (US$17.4m) in customs revenue in the coming year.

Non-tariff barriers are There is still considerable concern over the use of non-tariff barriers to trade. a concern Following the implementation of the customs union agreement, the Confederation of Tanzanian Industries (CTI) issued a public call to the three governments to phase out non-tariff barriers to trade as well as to improve the domestic industrial environment, which will be crucial if Tanzanian industry is to be able to compete effectively with Kenyan firms. Potential non-tariff barriers identified by the CTI include general problems such as difficult export and import procedures and the need to meet complex foreign-exchange requirements, as well as more specific constraints like differing safety or registration requirements for goods.

More ambitious plans are to With the customs union now in place, the main focus of EAC integration in the come under the spotlight coming years will switch to deepening and widening the union. In this respect, an extraordinary summit of the three presidents has been scheduled for March 2005 at which a report on forming an East African Federation by 2010 will be discussed. The report was presented to them at an earlier meeting in Arusha in late November. Issues to be looked into include: • the introduction of a common currency; • the setting up of a common central bank; • the introduction of East African passports and the removal of immigration restrictions; • the development of a common airspace; and • the possibility of widening membership to Burundi and Rwanda. There is a possibility that progress could be even more dramatic if the three heads of state use the momentum of recent months to try and draw up an East African constitution by the end of the year. Under provisional plans presented to them in November, this could then serve as an interim constitution prior to being fully adopted by 2009.

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