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Recent Developments
The Tanzanian government is implementing a nationwide COVID-19 vaccination program, but to contain the spread of the virus and lay the foundation for a robust recovery, the pace of vaccination needs to accelerate. The government appointed an expert committee to advise on the COVID-19 response, and the authorities have followed the committee’s recommendations to resume reporting COVID-19 data to the World Health Organization while deploying vaccines across the country. Her Excellency President Samia Suluhu Hassan launched the vaccination program in August 2021, but by December 27th just 2,431,769 vaccine doses had been administered—a slow pace by global standards. Meanwhile, cases of the new Omicron variant were detected in Tanzania.
Limited vaccination progress and the uncertainty generated by new variants could further delay the recovery of international travel and tourism, which accounts for more than one-quarter of Tanzania’s total exports. The longer the pandemic persists, the greater the damage to human, physical, and financial capital, especially among women and the country’s poorest households.
High-frequency data suggest that economic activity is gradually recovering. The accommodation and restaurants, mining, and electricity sectors drove a sharp rebound in quarterly GDP during Q3 2021. Leading indicators such as cement production, electricity generation, private-sector credit, goods and services exports, nonfuel goods imports, telecommunications, mobility, and tourist arrivals all improved in 2021, though activity in most sectors remains below pre-pandemic levels.
Nevertheless, the preliminary findings from a recent telephone survey suggest that employment among heads of household returned to its January 2020 level in mid-2021. As a result, the World Bank estimates a real GDP growth rate of 4.3 percent and a GDP per capita growth rate of 1.3 percent in 2021, following a 1.0 percent of per capita GDP contraction in 2020. Meanwhile, the national poverty rate1 is estimated to have declined marginally from 27.1 percent in 2020 to 27.0 percent in 2021, driven by the recovery of employment and nonfarm business revenue.
In Zanzibar, the official quarterly GDP data show an expansion during the first half of 2021, but growth was uneven across sectors. The services sector, which accounts for nearly 50 percent of Zanzibar’s GDP, expanded by 9.4 percent in H1 2021, following a 2.4 percent contraction in H1 2020. An estimated 60,000 jobs are directly or indirectly linked to Zanzibar’s tourism sector.
Between January and September 2021, the number of tourist arrivals increased to 252,937, albeit still well below the 376,732 recorded during the same period in 2019. Nevertheless, rising tourist arrivals supported the growth of accommodations and food service, while public administration also contributed to the expansion of services. The industrial sector expanded more slowly during the period, while the agricultural sector contracted.
Although exports have increased, Tanzania’s current-account deficit has widened slightly. The current-account deficit reached 2.0 percent of GDP at end-September 2021, as import growth more than offset export growth. Services and manufacturing exports to East African Community (EAC) member states significantly increased due to improving relations between Tanzania and its neighbors, but the implementation of capital projects spurred a sharp rise in imports of oil and capital goods. The current-account deficit was funded largely by external loans and foreign direct investment. The Tanzanian shilling (TZS) remained relatively stable against the currencies of major trading partners in 2021. Gross official reserves increased to about US$6.7 billion by end-October 2021 (equal to about seven months of imports of goods and services) thanks to the disbursement of a US$751 million IMF Rapid Credit Facility. The authorities have continued to implement an expansionary monetary policy, but the growth rate of credit to the private sector remained relatively low at 5.6 percent in October 2021, while lending rates remained stubbornly high at about 17 percent. The banking sector is relatively stable, and the nonperforming loan ratio fell to 8.0 percent in October 2021, though it remains above the central bank’s national prudential threshold of 5.0 percent. Tanzania’s inflation rate rose to 4.1 percent in November 2021, its highest level in the past three years, but it remains among the lowest and least volatile in the EAC.
Significant revenue shortfalls widened the fiscal deficit, leading to increased domestic borrowing in 2020/21. The fiscal deficit expanded to 4.2 percent of GDP in 2020/21, more than double the 1.4 percent observed in 2019/20 and significantly above the 2.7 percent target for 2020/21.
Domestic revenue collection fell short of the government’s objective by 1.7 percent of GDP, as the recovery remained slow and revenue targets were ambitious. Total domestic revenue amounted to 14.4 percent of GDP, while public spending totaled 18.6 percent. Recurrent and development expenditures both increased as the authorities accelerated arrears clearance, expanded public service delivery, and ramped up the implementation of capital projects. Despite stronger arrears management, the government has not finished verifying its 2020/21 arrears, and the stock of VAT-refund arrears remained high at TZS 920 billion in June 2021. The widening fiscal deficit was largely funded by increased domestic borrowing, and while the public and publicly guaranteed debt stock remained low at US$29.6 billion (40.6 percent of GDP) in October 2021, the cost of debt service has increased significantly and now consumes nearly 40 percent of domestic revenue.
The latest joint IMF-World Bank Debt Sustainability Analysis, conducted in September 2021, concluded that Tanzania’s risk of external debt distress had increased from low to moderate.
The downgrade primarily reflected the collapse of tourism exports during the COVID-19 pandemic in a context of increased non-concessional borrowing and rising debt service. In addition, the new debt-carrying-capacity classification lowered the debt-burden thresholds. The results of the analysis underscore the importance of boosting revenue mobilization and maximizing concessional borrowing. Other key recommendations include: (i) improving public investment management and proceeding only with investment projects that offer clear socioeconomic payoffs; and (ii) enhancing the coverage and transparency of public-sector debt statistics, including nonguaranteed debt, to minimize the risk of unanticipated liabilities. Given the large fiscal demands of the pandemic response, to preserve debt sustainability the government will need to carefully balance emergency spending with the country’s broader development agenda.
Growth is expected to strengthen over the next two years, assuming pandemic conditions ease and the external environment improves. The real GDP growth rate is projected to reach 4.5–5.5 percent in 2022 and average about 6 percent over the medium term as exports and domestic demand recover. After contracting in 2020 and rebounding in 2021, GDP per capita is expected to continue expanding in 2022. The current-account deficit is projected to widen to 3.7 percent of GDP in 2022 due to rising imports, which will more than offset an expected increase in exports.
The fiscal deficit is projected to widen to 4.2 percent of GDP in 2022, driven by pandemic-related public spending and the implementation of several major capital projects. The national poverty rate is expected to decline to 26.7 percent in 2022 and reach 26.4 percent in 2023, supported by the growth of high-quality nonfarm employment, including among women.
Risks to Tanzania’s economic outlook have moderated, but the recovery continues to hinge on external developments and domestic health policies, as well as continued support to the private sector. Real GDP is expected to grow by between 4.5 and 5.5 percent in 2022, below its long-run potential growth rate of about 6 percent. Tanzania’s vulnerability to the global pandemic remains high amid the slow vaccination rollout. The evolution of the pandemic and the pace of vaccination, both globally and domestically, will be the most crucial factors driving Tanzania’s outlook. An accelerated domestic vaccination program, increased regional trade and cooperation, and policy reforms designed to improve the business environment and support the growth of the private sector have somewhat mitigated downside risks, but the emergence of new coronavirus variants, reduced capital flows, elevated debt levels, persistent inflationary pressures, and supply bottlenecks continue to threaten the projected recovery.
The government will need to strengthen its pandemic response in the short term while laying the groundwork for a private-sector-led recovery over the medium-to-long term. Priority policy actions should focus on saving lives, protecting poor and vulnerable households, attracting new foreign and domestic investment, supporting an employment-intensive and resilient recovery, and expanding the available fiscal space while maintaining debt sustainability (Table 1). In line with the conclusions of previous editions of the Tanzania Economic Update (TEU), achieving the country’s development vision will require the government to revise, strengthen, and expand its existing efforts to support struggling firms while implementing structural reforms to address longstanding constraints on private investment and women’s access to economic opportunities, including excessive bureaucracy, predatory taxation, inadequate infrastructure, and skills shortages. The authorities have established a track record of sound macroeconomic management, but further reforms to revenue policy and administration, public expenditures, and debt management will be necessary to create adequate space to increase priority social spending and productive investment without jeopardizing fiscal sustainability.