Tanzania Tanzania at a glance:

Transcription

1 Country Report Tanzania Tanzania at a glance: OVERVIEW Presidential and parliamentary elections are not due until late Given the overwhelming political domination of the ruling party, Chama Cha Mapinduzi (CCM), the Economist Intelligence Unit expects it to win the elections outright. Since the president, Benjamin Mkapa, cannot stand for a third term (and will not amend the constitution to do so), he will step down. It is likely that the CCM s new presidential candidate will, rather like Mr Mkapa, be a compromise candidate who emerges late in the selection process. As a committed reformer, Mr Mkapa will use his last two years in office to push ahead with structural and institutional reforms. Although this will lead to fairly impressive real GDP growth rates of over 5% in , and moderate inflation, the impact on poverty levels will be felt only gradually. Key changes from last month Political outlook The largest opposition party, the Civic United Front (CUF), has threatened to take the government to court over its failure to create a national voters! register. The CUF believes that not having a voters! register will allow the ruling party to rig election results more easily. Economic policy outlook The Presidential Parastatal Sector Reform Commission has begun the process of privatising the country!s largest bank, the National Microfinance Bank. The advertisement for preliminary bids for 49% of the bank was posted on the commission!s website in January and plans are under way to publish it in leading international newspapers. An agreement has been finalised between the government and a Canadian company, Barrick Gold Corporation, for the construction of a new 526,000- oz gold mine, the Tulawaka project. This highlights the viability of mining sector projects in Tanzania as well as strong international gold prices. Economic forecast We have adjusted our forecast for international gold prices to US$421/troy oz in 2004 and US$375/troy oz in As a result, Tanzania!s exports will rise to US$1.2bn in 2004 and US$1.1bn in January 2004 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

2 The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. London The Economist Intelligence Unit 15 Regent St London SW1Y 4LR United Kingdom Tel: (44.20) Fax: (44.20) london@eiu.com Website: New York The Economist Intelligence Unit The Economist Building 111 West 57th Street New York NY 10019, US Tel: (1.212) Fax: (1.212) dantecantu@eiu.com Hong Kong The Economist Intelligence Unit 60/F, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) Fax: (852) hongkong@eiu.com Electronic delivery This publication can be viewed by subscribing online at Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office Copyright 2004 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN Symbols for tables n/a means not available; means not applicable Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

3 Tanzania 1 Outlook for Political outlook Domestic politics Tensions and discontent on Zanzibar Presidential and parliamentary elections are not due until late Given the overwhelming political domination of the ruling party, Chama Cha Mapinduzi (CCM), the Economist Intelligence Unit expects it to win the elections easily. The president, Benjamin Mkapa, cannot stand for a third term (and will not amend the constitution in order to do so), so he will step down. It is likely that the CCM s new presidential candidate will, rather like Mr Mkapa, be a compromise candidate who emerges late in the selection process. As a committed reformer, Mr Mkapa will use his last two years in office to push ahead with structural and institutional reforms. Although this will lead to impressive real GDP growth rates of over 5% in and moderate inflation, the government will need to work hard to convince Tanzanians that they are benefiting from the reforms. Although we expect the CCM to win the 2005 elections, it is possible that an opposition party, probably the Civic United Front (CUF), may be able to capitalise on the discontent with government economic policy in urban areas and win seats, although not to the extent that it has a chance of winning the elections. None of the existing opposition parties has managed to put together a coherent, or even populist, challenge to the government. Any major change in Tanzania s political make-up is more likely to result from a split in the CCM" but the split would need to be large enough to create an opposition faction capable of posing an effective challenge to the government. Although the press often reports rumours of splits within the CCM, a major rupture is extremely unlikely in Tensions between competing factions, however, could escalate in the run-up to the 2005 elections, sustaining the risk of a split if one faction were to feel alienated by the party s candidate for the presidential poll. Although the Tanzanian mainland will remain one of the most politically stable parts of Sub-Saharan Africa, there are two potential sources of political unrest, and even violence, in the country. The first is the semi-autonomous island of Zanzibar, where disputed elections between the CCM and the CUF in 1995 and 2000 eventually erupted into violence that caused around 31 deaths in late January Despite strong donor engagement in a reconciliation process between the parties, violence is possible in the run-up to the 2005 elections, especially if there is only limited progress towards reforming the electoral commission and drawing up a permanent register of voters. The second threat to political stability comes from religious tension on the mainland, although the threat should not be exaggerated. There have been outbreaks of religious violence in recent years against a background of political tension on Zanzibar and disaffection among urban Muslims, who feel that they have not benefited from Tanzania s economic reform programme and that they have suffered from a lack of educational opportunities. However, neither of the potential sources of unrest will have a significant impact on Tanzania s overall political stability.

4 2 Tanzania International relations Tanzania will maintain good relations with its regional neighbours and with donor countries. Regional issues are likely to dominate foreign policy in , as Tanzania has assumed the presidency of the Southern African Development Community (SADC) for a year from October The issue of refugees (predominantly those who fled the civil war in Burundi and are now based in Tanzania in the border areas) will also be a major concern for the government, which will keep up its efforts to remind donor governments of the costs faced by a poor country in hosting large numbers of refugees on a longterm basis. The government is also likely to work hard with the Kenyan government to counter any perception that East Africa is a safe haven for terrorists. The main issues with donors will be technical, and will focus on ensuring a more accountable and co-ordinated flow of aid into the country. Economic policy outlook Policy trends Fiscal policy In the past few years, guided by an IMF- and World Bank-sponsored reform process aimed at controlling the fiscal deficit and liberalising the economy, the government has made good progress in creating a stable macroeconomic environment and boosting real GDP growth. We do not expect this overall policy thrust to change over the forecast period. Given Tanzania s relative macroeconomic stability, the main task for the government will be to carry out the structural and institutional reforms that are needed to support real GDP growth of 7-8% per year and thus bring about a sustained reduction in poverty levels. The government will also continue to receive donor support to finance large increases in public spending on primary education and healthcare. So far, good progress has been made only in primary education"an area in which Tanzania has traditionally been successful. The key to sustained economic growth will be better infrastructure and improved agricultural performance (which will be more difficult to achieve, as little progress has been made on expanding export crops or restructuring crop boards). There is also a need to strengthen the legal system and reduce corruption. Although there is support for reform within the government and among senior civil servants, there are strong vested interests opposed to liberalisation, particularly in the agricultural sector. In addition, implementation will be slow because of a lack of capacity in the civil service. The government will attempt to address some of these issues. The economic stability of recent years has been underpinned by Tanzania s system of strict cash budgeting, which has controlled the size of the budget deficit. Given the success in controlling the deficit, fiscal policy will now concentrate on better expenditure management; in particular, the government will seek to improve the civil service s capacity to implement projects. The government will also try to widen the tax base, improve tax administration and eliminate taxes that are a drag on business. Not surprisingly, all of these were themes of the budget for fiscal year 2003/04 (July-June). Although progress with tax reform will be hindered by the tax exemptions that the government has granted to several large investors, we expect fiscal discipline to

5 Tanzania 3 remain strong, and forecast a budget deficit of 1.2% of GDP in 2003/04, up from an estimated 1% of GDP in 2002/03 (excluding grants, this amounts to 6.5% and 6.6% of GDP respectively). In 2004/05, with elections looming, the government s fiscal austerity is likely to slip, but only moderately, and we forecast a deficit of 1.6% of GDP (6.6% of GDP excluding grants). We have also assumed that not all the grants expected will be delivered; US$1.2bn of grant aid was expected by the government for 2003/04, but only US$560m is forecast to be disbursed. We forecast that US$588m of grant aid will be disbursed in 2004/05 and US$617m in 2005/06. The fiscal deficit will be financed via domestic and external borrowing. Monetary policy As a result of the government s good fiscal discipline in recent years, the Bank of Tanzania (BoT, the central bank) has been able to bring inflation down to one of the lowest rates in Sub-Saharan Africa without having to tighten monetary policy excessively. To date, monetary policy has set targets for the rate of money supply growth; the most recent monetary policy statement, in June 2003, set a growth rate of 10-12% for broad money (M2) for the year ending June 2004 in order to achieve an inflation target of 4%. We do not expect this target to be achieved, owing to structural constraints and because the poor rains in 2003 caused inflation to rise in the second half of the year. However, inflation will remain moderate and fairly stable. Given the difficulty of hitting such precise inflation targets, we expect the central bank to move to more flexible inflation-targeting (where a target range is set) towards the end of the forecast period. Given a moderate loosening of fiscal policy in 2005, the bank is likely to follow with a slightly tighter monetary policy. Economic forecast International assumptions International assumptions summary (% unless otherwise indicated) GDP growth World OECD EU Exchange rates :US$ US$: SDR:US$ Financial indicators 3-month interbank rate US$ 3-month Libor Commodity prices Oil (Brent; US$/b) Gold (US$/troy oz) Cotton (US cents/lb) Coffee (Arabica; US cents/lb) Tea (US$/kg) Food, feedstuffs & beverages (% change in US$ terms) Industrial raw materials (% change in US$ terms) Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

6 4 Tanzania The global economy is recovering rapidly, and we forecast that world GDP growth (on a purchasing power parity basis) will average 4.3% in 2004, before slowing to a still robust 4% in However, although the US economy will pick up relatively quickly in , growth in the EU will remain sluggish. Owing to the slow global recovery, and because of oversupply in the coffee and tea markets, the outlook for the prices of Tanzania s main exports is mixed. Prices for coffee and tea will remain depressed. The price of gold will soar in 2004, to a high of US$421.3/troy oz before falling to US$375/troy oz in Cotton prices will also improve in , supported by strong global demand. Global oil prices are likely to fall throughout the forecast period as tensions in the Middle East begin to subside and Iraqi oil comes on stream. Oil prices are forecast to fall from US$28.7/barrel in 2003 to US$22.4/b in 2004 and US$20.1/b in High gold prices will deliver higher overall export earnings for Tanzania. Economic growth Inflation Semi-annual estimates produced by the National Bureau of Statistics indicate that real GDP grew by 4.7% in the period January-June 2003 compared with the year-earlier period. Despite strong growth in mining, construction and manufacturing, overall growth was hampered by the poor performance of the agricultural sector (owing to poor rains), which grew by only 3.2% but constitutes 45% of the Tanzanian economy. Agricultural growth should rebound slightly in the second half of the year as the export season for cotton and coffee begins, and we still forecast growth for 20o3 at 5.2% (with agriculture growth at 3.6%). In 2004 and 2005 we expect a rebound in both tourism and agriculture (given average rainfall), as well as lower oil prices. As a result, real GDP is forecast to grow by 5.5% in 2004 and 5.8% in Industrial output and retail trade will remain strong, as will mining, manufacturing and infrastructure development (led by the Songo Songo gas project and investment in social services). Despite problems with the weather, the setback in 2003 is unlikely to be as great as it would have been in the mid- 1990s. The improved economic management of recent years and progress with reform have improved the resilience of the economy and it now has a growth floor of 3%, even if the rains are poor. However, it is not yet dynamic enough to achieve the annual growth rates of 7-8% needed to have a significant impact on poverty levels. Poverty will be overcome only with further reform, as structural constraints, including weak marketing institutions, poor rural infrastructure, and a shortage of credit and agricultural inputs, continue to limit growth. Although the central bank has managed to meet its inflation target for fiscal year 2002/03"year-on-year inflation was 4.4% in June 2003, compared with a target of 4.5%"it is uncertain whether the BoT will be able to meet its new target of 4% for the year ending in June Although inflation remained low in 2003, the ongoing food shortages in some parts of the country led to an increase in the rate in late 2003 (and in early 2004): the trend in food prices is particularly important, as food accounts for over 70% of the consumer price index. Therefore, if the inflation rate were to rise to 5% in the first quarter of 2004, it is unlikely to fall quickly enough to meet the target. However, we

7 Tanzania 5 remain largely unconcerned by this; inflation is expected to remain low and stable throughout the forecast period, averaging 4.5% in 2004 and 4.7% in Exchange rates External sector After falling sharply in early 2003, the Tanzanian shilling has been remarkably stable, trading in the TSh1,040-1,060:US$1 range. Part of the reason for its stability in 2003 has been the weakness of the US dollar on global markets. We expect the shilling s movement in 2004 broadly to reflect its regular annual pattern, depreciating in the first quarter (as multinationals repatriate profits before the end of the financial year and as few foreign-exchange earnings flow in), before stabilising in April-June as cotton and coffee exports bring in foreign exchange, and remaining steady in September-November on the back of inflows of export receipts from cashew nuts. The period June-November is also the peak tourist season and an important source of foreign exchange. Although the shilling will drift down, we still expect it to be relatively stable in 2004 as the economy, gold exports and tourism rebound, averaging TSh1,120:US$1 and ending the year at TSh1,200:US$1. The downward pressure on the shilling is likely to intensify in 2005, when falling global gold prices will reduce export receipts as imports pick up owing to the pre-election boom. We therefore expect the shilling to depreciate more quickly than in 2004, averaging TSh1,266:US$1 and ending the year at TSh1,309:US$1. Total exports are forecast to edge up in 2004, to US$1.2bn, supported largely by higher international gold prices. However, as global gold prices fall back, even with rising production, exports will fall slightly in 2005, to US$1.1bn. Imports are forecast to rise in line with real GDP growth and rising investment, to reach US$1.8bn in Services credits suffered a temporary setback in the first half of 2003 as tourism earnings fell, but they will pick up again in Debt relief under the IMF-World Bank s heavily indebted poor countries (HIPC) initiative has reduced interest payments over the past five years, but profit remittances by gold mining companies are forecast to pick up in , causing income debits to remain stable during that period. Inflows of current transfers have declined in recent years as donors have rationalised their support programmes. Nevertheless, donor support will remain substantial and the current transfers account will remain firmly in surplus in Overall, the current-account deficit is forecast to improve from an estimated 5.2% of GDP in 2003 to 3.7% of GDP in 2004, before widening to 4.8% of GDP in 2005.

8 6 Tanzania Forecast summary (% unless otherwise indicated) 2002a 2003 b 2004c 2005c Real GDP growth 6.2b Gross agricultural production growth 5.0b Consumer price inflation (av) Consumer price inflation (year-end) Short-term interbank rate Government balance (% of GDP) Exports of goods fob (US$ bn) Imports of goods fob (US$ bn) Current-account balance (US$ bn) Current-account balance (% of GDP) -2.7 b External debt (year-end; US$ bn) 6.5b Exchange rate TSh:US$ (av) , , ,265.8 Exchange rate TSh: 100 (av) , ,188.5 Exchange rate TSh: (year-end) 1, , , ,754.1 Exchange rate TSh:SDR (year-end) 1, , , ,004.5 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. Editors: Ravi Bhatia (editor); David Cowan (consulting editor) Editorial closing date: January 16th 2004 All queries: Tel: (44.20) london@eiu.com Next report: Full schedule on