Tanzania economy: Outlook - Facing macroeconomic challenges

COUNTRY BRIEFING
FROM THE ECONOMIST INTELLIGENCE UNIT

Having achieved a measure of macroeconomic stability and strong growth in recent years, the main challenge for the President Jakaya Kikwete-led government is to translate these successes into a noticeable increase in employment and improvements in welfare. This will become more difficult at a time when high inflation is perceived to be eroding incomes and a tighter global economy limits access to finance. The government will seek to boost expenditure in line with the priorities outlined in its medium-term, five year national strategy for growth and the reduction of poverty (NSGRP; usually referred to by its Swahili acronym, Mkukuta), which runs to June 2010. It will also try to ensure that projects outlined in the Chama Cha Mapinduzi party's election manifesto are implemented and will look to promote private-sector growth by improving infrastructure, reforming the weak legal system and reducing corruption.

However, there are still concerns about government policy. The administration's commitment to private-sector reform has been questioned in view of its renegotiation of the mining tax regime, its backtracking on some state privatisations, and its refusal to allow citizens to participate in the initial public offering of a Kenyan mobile-phone operator, Safaricom. A further concern is the government's erratic progress in reforming agriculture. It has shied away from the fundamental reforms--such as changes to the complex laws surrounding land ownership--which will be necessary to boost the commercial agricultural sector's overall growth. This is unlikely to change over the remainder of the president's first term: although he is committed to market-orientated reforms, his agenda will not be best served by some members of parliament and civil servants, who will remain more closely aligned with Tanzania's socialist economic past.

The twin themes of the first budget presented by the finance minister, Mustafa Mkulo, in mid-June were increasing domestic revenue collection and reducing dependence on donor funding. Although these are laudable goals, the reality is that donors will probably continue to provide around 40% of government revenue for the foreseeable future. The government's options will be reduced in the current tight global financial climate, which will delay plans to issue a sovereign bond. Whether the government can meet its ambitious goal of boosting domestic revenue collection by 31% in fiscal year 2008/09 (July-June) is not clear. However, if economic growth remains strong and the government succeeds in widening the tax base and improving tax administration, it will not be far from this target. The Economist Intelligence Unit expects a budget deficit equivalent to 2.1% of GDP in 2008/09 and 1.9% of GDP in 2009/10, financed largely by concessional external borrowing.

The central thrust of the monetary policy of the Bank of Tanzania (BoT, the central bank) in recent years has been to control the growth of the broad money supply, while allowing for strong real GDP growth and an expansion in credit growth to the private sector to meet a clear inflation target. It is likely that the BoT will just miss its inflation target of 7% by June 2009, largely as a result of high food price inflation. However, we expect inflation to ease throughout 2009-10, as prices for food and fuel moderate.

As part of its efforts to fight inflation, the BoT tightened monetary policy in the middle of 2008, when there was no apparent slowdown in the inflation rate. However, since early October the rise in rates has slowed significantly, with the BoT apparently indicating that it is unwilling to allow further rises, as this would undermine the government's ambitious economic growth targets. In late November the BoT opted to increase statutory reserve requirements on commercial banks. While this confirms its willingness to be proactive in the fight against inflation, it is not clear how effective this will be, as most commercial banks already hold statutory reserves above the existing minimum levels.