Robust growth supported by numerous infrastructure projects

Growth accelerated in 2023, underpinned by rising exports and private investment on back of an improved business climate. Growth is set to continue in 2024, driven mainly by public and private investment in numerous infrastructure projects, one of the most important of which is the construction of the 1,443 km East African Oil Pipeline (EACOP) between Uganda and Tanzania. Construction of the EACOP, linking Uganda's oilfields to the Tanzanian port of Tanga, is scheduled to begin in mid-2024 and run until 2027. Other projects in the pipeline include energy projects, namely the construction of a hydroelectric power station, and rail projects with the development of cross-border railroads, notably the 651 km Tanzania-Burundi corridor for which financing for Phase II was approved by the African Development Bank in December 2023. Robust growth will also come from increased gold production and exports, supported by an expected rise in world prices and improved productivity in the mines (technological advances such as machine automation). The tourism sector will also drive economic activity. Inflation is expected to remain below the 5% target set by the Central Bank of Tanzania (CBT), which is likely to keep its key interest rate at a relatively low level (5%), thereby supporting private consumer spending and investment.

Ongoing efforts to reduce twin deficits

The budget deficit is expected to fall below 3% in fiscal year 2024, which is the target set by the East African Community (EAC), thanks to robust growth and fiscal consolidation. On that score, public revenues are expected to grow due to a broadening of the tax base in line with the IMF's USD 1.05 billion programme for 2022-2025 which aims to improve not only the business climate, but also tax compliance (administrative capacity-building through digitisation). However, budget spending will remain high, while state-financed infrastructure projects, with or without private participation, are multiplying, notably EACOP, roads, railroads, ports and energy infrastructures. In addition, the large public sector wage bill and high cost of debt servicing (3% of GDP) will continue to weigh heavily. In addition, local elections in 2024 and the Presidential election in 2025 should keep social spending levels up this year. The public deficit will be 60%-financed by domestic loans, the Central Bank of Tanzania and external loans. The risk of over-indebtedness remains limited as 85% of the external share of public consists of concessional loans, granted by multilateral (66%) and bilateral (19%) partners. Furthermore, the domestic portion is held mainly by commercial banks and pension funds.

The current account deficit will continue to shrink in 2024 thanks to rising gold exports and a rebound in the tourism sector. The surplus on the balance of services should be substantiated and will be driven by robust tourism. However, the trade balance is likely to remain in deficit due to a rise in the import bill, driven by increased requirements for capital goods for infrastructure projects. The primary income account (mainly investment income) will remain marginally in deficit due to the repatriation of profits by foreign companies. This will be partly offset by a surplus on the secondary income account, fuelled mainly by expatriate remittances. The current account deficit will be easily financed by loans (both concessional and non-concessional), foreign direct investment, aid and project loans (around 2% of GDP in 2023-2024). Disbursements under the IMF programme, together with a reduction in the BCT's interventions on the foreign exchange market owing to its monetary policy aimed at exchange stability and inflation control that is now focused on the interest rate will help maintain a stable level of foreign exchange reserves at four months of import cover.

Gradual improvement in the political climate

Re-elected in October 2020 for a second five-year term after garnering almost 85% of the vote in a high-tension election, John Magufuli died in March 2021. As a result, Vice-President Samia Suluhu Hassan was sworn in as President to complete Magufuli's term until 2025. While opposition parties were heavily repressed under former President Magufuli, the political climate seems to be gradually easing due to progress made by the current government. In January 2023, President Hassan lifted the ban on political rallies for opposition parties that was imposed in 2016 and paved the way for opposition figures to return to the country. Furthermore, in March 2023, under pressure from opponents, the President promised to relaunch the constitutional revision process that aims to reduce Presidential powers, create an independent electoral commission and authorise legal challenges to Presidential election results. However, no timetable has been set for the reforms and it seems unlikely that any such reforms will materialise before the 2025 elections. Furthermore, a possible change to the Constitution could reawaken latent tensions linked to Zanzibar's status and the archipelago's desire for independence.

On the external front, efforts to position the country as a crossroads for regional trade (oil pipeline project with Uganda, strengthening the country's integration into the EAC, etc.) could fortify ties with neighbouring countries. Bilateral relations are also being strengthened, notably with the United Arab Emirates, where the operation of part of the port of Dar es Salaam has been entrusted to the UAE group DP World for a period of 30 years (contract signed in October 2023). DP World has announced an immediate USD 250 million investment programme to modernise and expand the current ageing and regularly saturated facilities. The agreement was strongly criticised by the Tanzanian opposition, which denounced the growing influence of the United Arab Emirates in East Africa, and an "abandonment of sovereignty".

TWIN DEFICITS STILL LARGE, SUSTAINABLE PUBLIC DEBT

The public deficit, which remained high in 2021-2022 due to expenditures linked to the Socio-Economic Response and Recovery Plan, will increase again in 2022-2023 due to social and development costs. To combat the impact of inflation on household purchasing power, the government has announced fuel and fertilizer subsidies. Furthermore, health expenditure linked to the fight against COVID-19 will remain high until 2024. Finally, while partial debt service relief was granted in 2020-2021, debt service will increase in 2023. Public debt, which has increased by almost 15 percentage points of GDP since the early 2010s due to the financing of infrastructure projects, is expected to stabilize in 2023. The risk of debt distress remains limited, as about 70% of the external share (approximately 71% of total public debt) comprises concessional loans from multilateral and bilateral partners. Its domestic share is held mainly by commercial banks and pension funds.

Structurally in deficit due to Tanzania’s dependence on imports, the current account is expected to continue to post a significant (albeit slightly shrinking) deficit. Indeed, the deterioration in terms of trade and the slow recovery in tourism receipts due to the war in Ukraine will continue to weigh on the trade deficit. However, continued strong exports of mining products, starting with gold, will mitigate this deterioration. The primary income account (mainly investment income) is in deficit, particularly because of the repatriation of corporate profits. This is only half offset by the surplus in the secondary income account, mainly fuelled by expatriates’ remittances. The current account deficit will continue to be financed primarily by loans (concessional and non-concessional), foreign direct investment, and project aid. Exceptional financing from the IMF (USD 1 billion loans under the Extended Fund Facility) and the World Bank will contribute. A new allocation of SDRs equivalent to USD 543 million in 2021 will supplement the foreign exchange reserves, which were still estimated at 4.5 months of imports in end-June 2022.

EFFORTS TO EASE THE SOCIAL CLIMATE AND STRENGTHEN EXTERNAL RELATIONS

Reelected in October 2020 for a second five-year term with nearly 85% of the vote in a high-stakes election, John Magufuli died in March 2021. Vice President Samia Suluhu Hassan was sworn in as President to complete Magufuli’s term (2025). On the domestic front, the President has taken steps to calm the social climate, starting with abolishing the mobile money tax in September 2022. Introduced in 2021, this tax provoked protests, leading the government to reduce it once. In addition, subsidies for fuel and fertilizer should also limit social discontent over price increases. Moreover, after years of fending off pressure from opposition parties and rights activists, the CCM has said that it is ready to reform the country’s constitution. However, without a timetable, such a reform seems unlikely to materialize before the 2025 elections. A possible body revision could reawaken latent tensions over Zanzibar’s status and the archipelago’s desire for independence.

Externally, efforts to position the country as a regional trade hub (pipeline project with Uganda, strengthening the country’s integration into the EAC, etc.) could strengthen ties with neighboring countries. While the Kitaya attack (October 2020), near the border with Mozambique, signaled that insecurity linked to the Islamist insurgency in its neighbor could reach it, it also allowed for greater security cooperation between the two countries. After the DRC joined the EAC in March 2022, multilateral cooperation on regional security is expected to intensify to contain the continuing instability there.