Tanzania: Tanzania Economy Profile

Tanzania: Magufuli’s victory good for the business environment

Tanzania’s economy is performing well, despite challenges arising from a weak currency. The recent presidential victory of Magufuli, a candidate with strong anti-corruption credentials bodes well for the business environment, though his reforms are likely to run into opposition from vested interests.

Strengths (+) and weaknesses (-)

(+) Generous natural endowments

Ample mineral and gas resources, a high tourism potential and a strategic location in the proximity of fast growing landlocked nations make that Tanzania has a high economic potential.

(-) Vulnerable to commodity price fluctuations

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.

(-) High dependence on donor aid

Tanzania depends heavily on donor aid to finance government spending.

(-) 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.

Key developments

1. Economic increase is still going strong

Economic activity in Tanzania is expanding at a steady pace and perspectives are stable. Real GDP increase decreased slightly from 7% in 2014 to a still robust 6.8% in 2015 (figure 1), despite a dragging external sector and tightening monetary policy. The Bank of Tanzania increased reserve requirements in May 2015 as food prices and a weaker currency pushed inflation above target (figure 2). Economic performance was particularly strong in transport, electricity generation, transport, data and financial services. Looking forward, we expect economic increase to remain just below 7% in 2016, supported by investments in infrastructure and incipient development of the gas sector.

2. Sharp currency depreciation weighs on deficit stock, but risk remains contained

A marked depreciation of the currency is increasing the deficit servicing cost of deficit denominated in foreign currency (FX), but the impact is likely to be contained at the accumulation level. The Tanzanian shilling (TZS) depreciated by 20% in 2015 against a strengthening USD (figure 3), though low export earnings, high corporate dividend repatriation and abundant liquidity in the banking sector as well contributed to the depreciation. As the government did not manage to attract the planned commercial external financing in 2015, the weaker TZS seems to be the major driver of the increase of external medium and long term public deficit from 21% of GDP in 2014 to 26% of GDP in 2015 (figure 4). The fact that the lion’s share of this deficit, namely 23% of GDP, is concessional deficit provides comfort though. The weaker TZS is as well likely to weigh on the deficit service burden of the private sector, as 37.5% of total loans to the private sector are in FX (March 2015 figure). The impact on macro level is likely to be contained, however, by the fact that the level of credit to the private sector is still low (18% of GDP), the loans are matched by a high share of FX deposits (37.5% of total liabilities) and banks are reportedly in good health. Nevertheless, FX mismatch could cause individual payment difficulties.

3. General election results bode well for the business environment

Tanzanians took the polls on 25 October and John Magufuli of the ruling Chama Cha Mapinduzi (CCM) won the presidential race with 58% of the vote. The elections results were the closest in the independent history of Tanzania, which bodes well for a additional balanced political system. Magufuli’s anti-corruption credentials as a Minister of public works and campaign promises bode well for institutional reform in Tanzania. Corruption in the country is endemic, though, which has repeatedly led to vital donor aid being suspended. The new such incident is dated as recent as September 2015, despite the government’s reported increased efforts to combat corruption. However, Magufuli still has to build credentials as a leader, so it remains to be seen whether he has the political clout to get traction for his reforms, particularly as his plans will likely encounter resistance from vested interests.

4. Annulment of Zanzibar elections increase short term risks

The annulment of elections on Zanzibar, where the opposition candidate for presidency on the Island had won, is likely to strain the by presently contentious relationship between the Island’s local government and mainland government. The tensions are likely to lead to protests and possibly violent incidents on the island. It remains to be seen whether social unrest of the level seen in 2005 can be avoided. In 2010, a power sharing agreement helped to ebb tensions and avoid violence. The elections re-run needs to be held within 90 days. In the meantime, the situation could cause delays in the formation of a new government and much needed reforms in the gas sector.

Factsheet of Tanzania

Background information

Tanzania is the major country in the East African Community (EAC), which as well includes Kenya, Uganda, Rwanda and Burundi. Tanzania is classified by the World Bank as a low-gain developing country and GDP per capita is only half the Sub Saharan Africa average. A low level of development, widespread poverty and endemic corruption hinder the economic development of the country. Agriculture is an significant sector because it provides about 70% of employment. The sector is dominated by subsistence farming, rendering output susceptible to weather conditions. Tourism and transport are significant service sectors and crucial FX earners.

Tanzania’s strategic location has turned it into a regional logistics hub, competing with Kenya in the east of Africa. The financial markets in Tanzania are underdeveloped and capital controls represent a hindrance. In the completed, foreigners were not allowed to trade on the stock exchange or buy locally issued sovereign bonds, but some liberalisation has taken place in recent years. The bank sector is as well fairly small, as the majority of the people is excluded from financial services. However, mobile banking has taken off in recent years and currently reaches out to 60% of adults. UK and China are the country’s major investment partners. Next 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 majority 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).

Economic indicators of Tanzania