Country Report Tanzania
Bright prospects for the energy sector in Tanzania bode well for the already robust economic growth and gave the country access to international debt markets in 2013.
Strengths (+) weaknesses (-)
(+) Generous natural endowments
Ample mineral and gas resources, a high tourism potential and a strategic location in the proximity of fast growing landlocked countries make that Tanzania has a high economic potential.
(-) Susceptibility to volatility on commodity markets
A narrow export base (majority of exports are minerals and agricultural commodities) and dependency on oil imports render Tanzania very susceptible to international commodity price fluctuations.
(-) Vulnerability of the economy to weather conditions
Good weather is crucial for agricultural output and energy supply, 71% of which comes from hydropower.
(-) Poor development and weak institutions
A large infrastructural deficit, poor access to finance and pervasive corruption hamper the Tanzanian business environment. On top of that, widespread poverty and low human development could become a trigger for social unrest.
1. Growth remains strong and outlook improves on the back of natural gas discoveries
In 2013, Tanzania continued to show robust economic growth, while additional natural gas discoveries gave a boost to the long term outlook. After 6.9% growth in 2012, real GDP growth is estimated to have picked up slightly to around 7% in 2013, despite a drop in output in the important gold sector. For 2014, economic growth is forecast at around 8% on the back of growing investments in the energy sector and strong private consumption. Additional gas discoveries made in 2013, pushed estimated reserves by one-third to 40trn cubic feet, a level similar to that of Uzbekistan. Moreover, the government expects confirmed reserves to grow to 200trn cubic feet in the coming years. The additional discoveries in 2013 triggered all four international players present in the Tanzanian gas sector to submit proposals for building an onshore LNG plant, indicating the current level of reserves is regarded as commercially viable. While LNG production is unlikely to start before 2020, investments in the sector are poised to support growth in other sectors until then. However, the development of the gas sector could run into several challenges. First, the energy sector needs reforms, but revision of legislation has already incurred delays and is likely to continue to do so in the coming two years, as politicians focus on the challenge of the 2015 elections.
Besides, as the ruling CCM party is losing popularity, it is expected to become increasingly interventionist. Such a tendency was visible in the terms of the Production Sharing Agreement released in November. Second, local communities expect to have high gains from the reserves. Unmet demands already led to violent protests in Mtwara in 2013. Should the government not address the grievances of local communities, unrest could pick up and deter investors. Therefore, while growth is set to remain robust in the medium term and will get a boost from the nascent energy sector, there are significant downside risks present.
2. Fiscal and external imbalances worsen, though from a low base
An upsurge in public (external) debt and debt structure changes in recent years have increased macroeconomic imbalances. Even so, debt levels remain sustainable. In order to support growth, Tanzania has been running persistently large budget deficits since 2009, and 2013 was no exception. Last year’s budget deficit is estimated at 6% of GDP, up from 4.4% a year earlier. For 2014, the shortfall is forecast at around 5% of GDP. However, the risks to this scenario are tilted to the downside, as public spending could increase in the run up to the 2015 elections. As a result of the budget deficits, public debt has increased at an alarming rate, from 26% of GDP - after debt relief in 2006 - to 43% of GDP in 2013. External debt incurred a roughly similar upsurge, up from 29% of GDP in 2006 to 43% in 2013, since 75% of public debt is financed externally. On top of that, the government’s appetite for non-concessional debt has increased markedly, as the promise of future returns from the nascent gas sector has given Tanzania access to the international markets and raised the interest of new official creditors, especially China. Since July 2010, the government has contracted non-concessional debt worth USD 2.7bn, or 8.4% of GDP. This includes a privately placed USD 600m seven year bond issued in March 2013. Consequently, at least 20% of public (external) debt is on non-concessional terms. The acceleration of public (external) debt is concerning, but readily available commercial and official financing, both internationally and at home, provides comfort. The higher share of non-concessional debt comes from a low base and is therefore also not yet a matter of concern. However, should the gas sector returns not materialize, both issues could become a serious concern.
3. Policy stalls as focus shifts to new constitution and 2015 elections
In 2013, the political focus rested on two main issues: a new constitution and general elections in 2015. On the positive side, the new draft constitution presented in December 2013, subject to a referendum in 2014, offers a more balanced and suitable constitutional basis. For example, it introduces a three-tier government, that could temper secessionist tensions in Zanzibar, and gives parliament increased authority over public borrowing. Also positive is the fact that the commotion around the 2015 elections is related to the succession of the president and to an increasingly popular opposition - both part of normal democratic practice. On the negative side, as politicians are distracted by these issues, policy stalls, which could discourage investors.
4. Regional integration picks up, despite ‘foot dragging’ by Tanzania
Tanzania is a member of the EAC and the four other members represent Tanzania’s fourth largest market. Hence, Tanzania is set to benefit from regional integration. It is therefore positive that, in 2013, the EAC signed a protocol for establishing a monetary union. However, Tanzania’s sustained efforts to hinder integration pushed three other members - Kenya, Rwanda and Uganda - to pursue further integration separately (e.g. they introduced a single tourist visa), which could lead to isolation of Tanzania in the future and would hurt its economic interests.
 The East African Community (EAC) is a customs union comprising of Kenya, Uganda, Tanzania, Rwanda and Burundi.
Tanzania is the largest country in the EAC and the 2nd biggest economy in the union. Tanzania is also a member of SADC. Given its per capita income level, Tanzania is classified by the World Bank as a low-income developing country. Agriculture is an important sector because it provides 70% of employment. The sector is dominated by subsistence farming, rendering output susceptible to weather conditions. Tourism and transport are important service sectors and crucial FX earners. Tanzania’s strategic location has turned it into a regional logistics hub, rivalling Kenya in the east of Africa. The financial markets in Tanzania are underdeveloped and capital controls represent a hindrance. Foreigners are not allowed to trade on the stock exchange or buy locally issued sovereign bonds. The bank sector is also fairly small, as the majority of the population is excluded from financial services (60% in rural areas, 45% in urban areas and 68% of SME’s). Credit growth is slow because an inefficient judiciary discourages banks to take on new clients and an ineffective monetary policy framework does not translate the lower inflation to lower borrowing costs. UK and China are the country’s main investment partners.
After independence from the UK, Tanganyika (mainland) and Zanzibar (a semi-autonomous archipelago) united into Tanzania in 1964. The country is regarded as one of the most stable states in the region. It has been a multi-party democracy since 1995 and elections usually take place peacefully. However, there are some political and religious/secessionist frictions in Zanzibar and violence by separatists and Muslim extremists is therefore a threat. International relations are good, but there are some regional tensions related to border (Malawi) and refugees (Burundi, Rwanda).
 The Southern African Development Community (SADC) is a regional economic community comprising 15 states in the south if Africa