Careful Now

Careful Now

The economy grew 7.1% in 2013, with output in communications (up 10.6%), financial services (up 13.2%), and manufacturing (up 8.2%) leading the way—elsewhere, output rose 7.8% in both mining and construction and 7.1% in transport. Inflation also fell, tumbling from 12.1% in December 2012 to 6.2% in November 2013. For year-to-September 2014, inflation came in at 6.6%, down from the YoY figure of 6.7% for August, according to the National Bureau of Statistics (NBS), a result of slowing food price rises.

As for the future, GDP growth is currently on an upward trend, having outstripped the 6.9% expansion clocked in 2012. The African Development Bank Group projects 7% growth in 2014 and 2015, with the government’s own target for 2014 at 7.3%.

But despite real growth, high unemployment (hovering at around 10% and particularly prevalent among the youth), a hefty tax deficit of $1 billion, and the government’s reliance on borrowing remain causes for concern in the medium term, with low international commodity prices hurting export revenues in 2013 and the country staying at 163rd of 170 countries on the UN Development Program’s Human Development Index, with one-third of Tanzanians below the basic-needs poverty line—GDP per capita stood at $694.8 at end-2013, according to the World Bank. Following large gas discoveries, it will now be crucial that the authorities ensure the resources are used to end chronic energy shortages and that wealth is distributed evenly. In that respect, the World Bank has cautioned the government against spending based on unpredictable future gas earnings.

THE CURRENT ACCOUNT

The current account deficit (CAD) widened 7.6% in year to August 2014. An increase in imports hurt the figure, according to the Bank of Tanzania (BoT), while the government also received less aid and fewer loans. In the 12 months to August, the deficit grew from $4.451 billion the year before to $4.791 billion, once again exposing the country’s vulnerability to external risk; a drop in gold prices, for example, led to a fall in gold revenues, down 5.7% to $1.687 billion in year to August. The tourism sector, having become the number one category in terms of revenue generation, grew its earnings by 15% over the year to August, reaching $2 billion for the first time as a result of increased visitor numbers, according to the BoT. Over the same period, total imports were valued at $11.307 billion, up 7.2% from the previous year, with the manufacturing sector partly to thank for the increase. Revenues from traditional exports were up a touch, by 1.9% to $834 million year to August, with tobacco, cloves, and sisal behind the improvement. To cover its back, the government has official reserves of $4.53 billion. The CAD, standing at 12%-14% of GDP, will continue to be financed by foreign aid, FDI, and commercial loans.

SHARKS IN THE WATER

Despite solid 7.1% growth in 2013, the Bretton Woods institution has warned that poor export performance, a government tax deficit of $1 billion, and a government overreliance on borrowing threaten the growth trend. A high unemployment rate, especially among young people, exacerbated by the low level of urbanization, is one key concern, with 90% of the country’s poor living in rural areas. In that regard, the encouragement of urbanization may help to get more people into jobs in the long term. A World Bank update also underlined the effect of missed tax targets on public investment, with infrastructure projects negatively affected. Indeed, much of Tanzania’s budget is geared toward paying wages and servicing debt, while development spending is sidelined. As of March 2014, government debt arrears with suppliers and pension funds stand at 5% of GDP.

To boost revenues, the government has signaled its desire to up the mechanization rate across the agricultural sector, which represents three-quarters of employment and one-quarter of GDP, with 70% of farmers currently relying on hand hoes, while just 20% make use of animals for plowing. To get the job done, the government is looking to expand financial inclusion in rural areas as, currently, just 9% of the population has access to formal financial services.

FDI

According to UNCTAD figures, Tanzania increased its FDI stock to $12.7 billion in 2013, leaving Kenya and Uganda, on $3.4 billion and $8.8 billion respectively, in the dust. The country pulled in $1.9 billion over the year, with Kenya managing just $514 million. The energy and mining sectors are the clear drivers of attraction, as oil and gas exploration and preparatory works continue in the East African nation. BG Group is one such investor in the hydrocarbons sector, while African Barrick Gold is also dropping cash in Africa’s fourth largest gold producing nation. The top sources of investment for 2013 were the UK, followed by Canada, Switzerland, and the US, according to the Tanzania Investment Centre (TIC), which is spearheading the drive to improve the investment environment, providing assistance to businesses with a minimum capital investment over $300,000 if foreign owned and $100,000 if locally owned. UNCTAD now predicts a haul of $1.6 billion in 2014 and $1.8 billion in 2015.

The discovery of hydrocarbons could usher in a new era for Tanzania, easing pressure on the state budget and encouraging the transfer of knowledge through new foreign investments. That said, it could be years before the good stuff begins to flow, and Tanzania has plenty of house keeping it will need to be getting on with should it hope to keep the wheels turning in the medium term. A widened export basket, better transport infrastructure, and a more efficient tax regime will be crucial in getting exports and government revenues back on track, yet a successful battle with inflation, increased output across a number of sectors, a successful FDI haul, and overall economic growth will keep investor interest piqued in the African nation.