Tanzania’s economy shows fresh vigour
AFTER decades of being seen as a politically stable but economically stagnant collectivist backwater, Tanzania is emerging as one of the region’s fastest-growing economies. An economy that for a long time relied on policy-support programmes from the IMF and international donors, Tanzania is gradually diversifying and delivering stronger growth.
This economic resurgence occurs at a time when the continent is confronting serious economic headwinds, including weakening Chinese growth, a decline in commodity prices, a stronger dollar, higher borrowing costs and drought. While it has not been invulnerable to this harsh economic climate, Tanzania has outshone most economies in the region.
Strong regional trade, urban migration, rising incomes and financial inclusion along with the rise of mobile money and credit demand are driving the diversification and underpinning the strong growth. Implementation of sound macroeconomic policy has helped. Inflation has remained well contained thanks to appropriate monetary policy. While the shilling has not been immune to dollar strength, it stabilised far quicker than other African frontier currencies. Fiscal policy has been focused on investment, and reserves have been kept at reasonable levels.
John Magufuli’s election as president has contributed positively to economic activity and the reform momentum. His election campaign promised a high work ethic and zero tolerance for inefficiency and corruption. In the short time he has occupied the presidency he has eliminated thousands of public service ghost workers, cut ministries from 30 to 19 and begun a campaign to reduce tax evasion by firms.
Investors and multilateral institutions see Tanzania’s economic prospects in a positive light. GDP growth, averaging 6.5% over the past decade, is expected to average about 7% until 2020. Infrastructure development has been one of the main drivers of the robust growth rate. The pace of infrastructure roll-out is expected to continue.
Magufuli pledged to end the ongoing power crisis. Steps would include building liquefied natural gas plants and upgrading the logistics infrastructure to allow Tanzania to take advantage of its untapped energy resources; it has 55 trillion cubic feet of undersea gas. Its position as a transport hub for six landlocked countries is a policy priority. The dramatic shift in emphasis of the latest budget towards capital spending indicates commitment. Projects announced include improvements in logistics links and rural electrification.
There are, however, areas of concern that pose risks for Tanzanian growth. While there has been progress in improving the tax system, with the overhaul of the Tanzania Revenue Authority leadership leading to improvements in tax collection, a lot still has to be done to improve efficiency and transparency of collection. Tax reforms, especially the 18% VAT on
The 18% VAT on tourism . . . could hurt the country’s largest foreign currency earner
tourism, could hurt that sector, which is the country’s largest foreign currency earner.
The accumulation of arrears from contractors, the pension fund and a weakness in budget formulation threatens fiscal stability. While government debt is manageable, with no sign of debt distress, we remain concerned about the impact an external shock could have on the shilling, and the cost of servicing hard-currency-denominated debt.
Magufuli’s restoration of investor confidence has resulted in a resurgence of donor aid. But last year’s corruption scandals and the Zanzibar election disputes, leading to an outflow of aid, highlighted Tanzania’s need to reduce its dependence on aid.
Nxedlana is FNB’s chief economist