Country Report Tanzania
The Tanzanian economy achieved 6.8% growth in 2012 and is expected to show a steady 7% average over the coming years, though poor energy and transport infrastructure are keeping it below potential. Recent discoveries of natural gas reserves can change the Tanzanian economic performance (relief from power shortages; diversification of export revenues). However, large capital investments are required and reform is therefore crucial. Both the current account and the fiscal account showed a slight improvement in 2012, but both deficits remain high and can become a matter of concern. However, both donor support and private funding was readily available in 2012. Corruption scandals in the high ranks took place, and though proper action was taken, future developments could have an impact on social stability and donor confidence.
Economic structure and growth
Tanzania is the largest country in the Eastern African Community  and the second biggest economy in the union though the gap with the leader of the group, Kenya, is narrowing as nominal GDP of Tanzania grew from USD 26bn to USD 31bn (in PPP terms nominal GDP grew from USD 68bn to USD 74bn). The country consists of mainland Tanzania and the semi-autonomous archipelago of Zanzibar. Given the per capita income, Tanzania is classified by the World Bank as a low-income developing country. Though GDP per capita at PPP indicates Tanzania is not doing bad for the region (figure 1), finding itself in the vicinity of Kenya and Uganda, the spread of poverty shows that the majority of the population is not benefiting from this and poverty is still widespread (68% of the population lives on less than USD 1.25 a day).
The developments in 2012 confirm Tanzania as one of the fastest growing economies in the region with a yearly average growth of 6.8% in the past 5 years. The same growth rate was also achieved in 2012, indicating that Tanzania maintains itself on a path of stable growth. Forecasts for 2013-2017 are also in line with this trend, expecting a growth rate of more than 7% based on the assumption of more favorable rains, increased capital investments and growth of trade and tourism, while the poor energy and transportation infrastructure will keep growth below potential. Economic growth in Tanzania is mainly driven by domestic consumption which safeguards its perspectives from the deteriorating global outlook. The recently discovered natural gas reserves (estimates have tripled to around 33-43tcf in 2012, estimated at a value of USD 430bn according to local sources, though a large part of it is offshore) and the plans for building 2 pipelines could attract important capital investments and provide the infrastructure to support higher growth. The plans for the Dar-es-Salaam – Tanga – Mombasa pipeline are going ahead, while the financing of the pipeline between Mtwara and Dar-es-Salaam have already received USD 1.2bn from the Import/Export Bank of China. Furthermore, (such) capital investments by the government in the gas sector could also give a boost to the mining sector.
The services sector is the main sector of the Tanzanian economy, generating 49% of GDP. Though the large tourism and transportation portion makes this sector vulnerable to global economic conditions, such an impact was not observable in 2012. The second largest sector is agriculture (27% of GDP), which is still dominated by small-scale farmers lacking the capital to invest in machinery and irrigation and is therefore vulnerable to fluctuating weather conditions, especially drought which has posed difficulties in the past. The mining sector has continued to grow in importance in 2012, revenues from gold export representing 36% of total exports and 11% of GDP. Actually, Tanzania has become the third largest gold producing African country, a position they share with Mali.
Figure 3: Growth performance
The banking sector in Tanzania comprises more than 40 banks (including 10 local community banks which are limited in products on offer and regional coverage), though 8 of them hold around 75% of the assets. According to financial soundness indicators in 2011, the sector is in good condition, the main banks being well capitalized and incurring low levels of nonperforming loans. Despite steady growth in recent years, credit to the private sector remains low (20% of GDP in 2011), though there is potential for expansion as the loan-to-deposit ratio was 90% in 2011. Promising for the development of the banking sector is the licensing of Dun & Bradstreet as the first Credit Reference Bureau in September 2012, as the lack of in-depth credit information was previously signalled as an impediment. Further reforms for consolidating the sector are also expected to benefit efficiency improvement.
 ^ The East African Community (EAC) is regional intergovernmental organisation between Burundi, Kenya, Rwanda, Tanzania and Uganda having as objectives the implementation of a customs union, of a common market and of a monetary union by 2016.
Political and social situation
Tanzania is regarded as one of the most stable countries in the region. The country is a multi-party democracy and elections usually take place peacefully. The latest presidential and parliamentary elections took place in 2010. The parliamentary elections resulted in a comfortable win for the revolutionary Chama Cha Mapinduzi (CCM) party, taking 75% of the seats. The conservative Chama Cha Demokrasia na Maendeleo (Chadema) party emerged as the main opposition party with 13% of the seats. Jakaya Mrisho Kikwete (CCM) was re-elected as president, taking almost two-thirds of the vote, while his main opponent Wilbroad Slaa (Chadema) took 26% of the vote. Elections were peaceful, but the turnout was low and vote-counting process was dense. Next elections are scheduled for 2015.
CCM’s influence is expected to shrink due to internal divisions and the opposition gaining ground as public discontent with the current administration increased due to recent corruption scandals. However, CCM is still expected to dominate the political scene and win the elections in 2015 (though Kikwete cannot run for president again, the party seems to have a suitable candidate in Asha-Rose Migiro a former minister and UN deputy secretary-general). The semi-autonomous archipelago Zanzibar has a track record of political and ethnic frictions. Despite political tensions having been reduced by the two main rival parties agreeing to form a common government, social unrest by separatists and Muslim extremists remains an issue.
Corruption is a persistent issue in Tanzania as the Corruption Perception Index also indicates (slightly worsening from 100 to 102), despite various measures taken by the government including the Prevention and Combating Corruption Bill and the Prevention of Corruption Bureau. The situation culminated in scandals in the high ranks such as government representatives and the central bank governor. Though proper action was taken, future developments could have an impact on donor confidence. Despite the prime minister acting upon it and reorganizing the government, the scandals have increased the public’s discontent with the current administration.
Jakaya Kikwete started a constitution review process and submitted a draft law at the end of November 2011 in order to replace the outdated legislation from 1977. The vote was hampered by opposition parties and led to increased tensions. The president reached out to both the opposition and civil-society groups for input and has already agreed to amend the Constitutional Review Act according to proposals from the opposition party Chadema. The new constitution is expected to be available for public review in 2013 and to be subject to referendum in 2014.
Tanzania has good relations with all neighbouring countries, except for some tensions with Malawi over a disputed border. As both parties have reached to international arbitration for a solution, resolution to violence is highly unlikely.
The economic policy of Tanzania is strongly focused on economic growth as a means of combating poverty. To support this, the government has been focusing on investment and development, especially on the development of infrastructure This has led to a large fiscal deficit which reached a record of 6.9% of GDP in 2011. 2012 shows a slight improvement to 6.2% of GDP. However, given the high demand for public debt in 2012 (the government issues towards the end of 2012 were oversubscribed) and the increased assistance from donors, the government is not expected to have problems in servicing debt. The fiscal deficit could also ameliorate from an improvement of the tax collection system, Tanzania currently collecting the lowest ratio of taxes-to-GDP in the region.
Tanzania is still highly reliant on foreign aid (around 10% of GDP), though recent borrowing sourced from non-concessional lending indicate a shift away from this. The IMF approved a precautionary Standby Credit Facility in July 2012, confirming the fact that Tanzania still enjoys the confidence of development partners due to the government’s stance on recent corruption cases. However, future negative developments with respect to corruption could erode donor confidence.
Figure 4: Public finances
Corruption also influences the perception of the business environment. The deterioration of the index of doing business indicates the situation has worsened (from rank 127 to 134 out of 183), despite efforts to improve the situation by harmonizing legislation with that of partner EAC countries. The regulatory framework is still perceived as the toughest in the region, increasing the cost of doing business. The tax system is indicated as a large impediment by investors. In light of the large capital investments needed to boost economic growth, failure to improve the business climate can form a hurdle for development.
The monetary policy of Tanzania rests with the Bank of Tanzania (BoT) and targets the growth of monetary aggregates, especially reserves. Despite some tightening towards the end of 2011 following double-digit inflation, monetary policy has been accommodative in order to complement the government’s expansive fiscal policy. Given the rudimentary state of the domestic bank system, the transmission mechanism is still weak and impeded the central bank from stabilizing prices in 2012 when inflation reached 16%. The Bank of Tanzania recently announced to shift its policy to inflation targeting to reflect the growth and increased sophistication of the financial system. However, given the limited effectiveness of the Tanzanian transmission mechanism, it remains to be seen what consequences this will have.
Both fiscal and monetary policies are expected to remain on the stimulative side, though more moderate than in past years in order to control inflation. An alternative calculation of inflation leaving out food and energy prices indicates that these goods form the main sources of inflationary pressure. As these goods are expected to stabilize in 2013, inflationary pressure should also diminish. The Tanzanian shilling, the country’s currency, has a managed floating exchange rate regime. Its rate is driven by market forces, but the BoT intervenes to smooth large fluctuations in its rate. Considering the expected growth in the gas sector, Tanzania should watch out for the development of “Dutch disease”.
According to the policy platform Development Vision 2025, the gas sector is regarded as a vehicle for economic development. Considering the fact that large capital investments are necessary as most of reserves are offshore, the development of a good regulatory framework is crucial. Gas was declared a priority sector and the process of developing a regulatory framework for it made good progress in 2012. A draft policy was submitted in November 2012 and was on balance investor friendly, though pressure from the populist party is expected to lead to a sobering of the terms for investors. Based on the model of Trinidad and Tobago, a Network Operating Centre will be set up for operating activities and will be separate from the Tanzanian National Oil Company. Considering the estimated value of the gas reserves (USD 430bn according to local sources), the development of the sector can have a substantial impact on the Tanzanian economy. Though extraction is estimated to start later than 2021, the impact will translate to increased foreign investment inflows and growth in construction in the coming years.
Balance of Payments
The main component of the balance of payments is trade and keeps the current account balance in the red, though 2012 shows an improvement to 13.3% of GDP (in comparison to the record 17.9% of GDP in the previous year). The trade deficit ameliorated to USD 4.5bn in 2012, though it remained large due to high oil prices and public spending on infrastructure (construction, communication and transportation sectors) and despite increasing gold prices.
The services trade shows a surplus of USD 342mn reflecting external demand for tourism and transportation. The transfer balance is the second largest component at a surplus of USD 375mln reflecting donor inflows.
The capital account shows an impressive growth of the net direct investment flows of about 50% year-on-year (from a stable USD 1bn in previous years to USD 1.5bn in 2012).
Tanzania benefited from extensive debt relief in 2007, reducing external debt to USD 4.6bn or 30% of GDP in mid-2007. Debt has built up since and amounted to USD 11.5bn in 2012, or 37% of GDP. 85% of it concerns medium and long term debt and is mainly owned to official creditors. Debt due for 2012 amounted to USD 3.5bn, at the same level with FX reserves which kept deteriorating in recent years down to a 3.6 months coverage in 2012. In February 2013, Tanzania already drew upon the IMF Standby Credit Facility in order to improve the level of the FX reserves and increase resilience to balance-of- payments pressures. Furthermore, increasing revenues from gold export and the potential from the gas sector should improve their level in the future.