BUSINESS & THE ECONOMY

by Ben Taylor

Tanzania formally attains Middle Income status

In July, the World Bank officially promoted Tanzania to the list of lower-middle income countries, recognising that the country has attained an annual per capita income of above USD $1,035. The World Bank calculation was based on economic data for 2019 and found that per capita GNI had increased from $1,020 in 2018 to $1,080 in 2019.

This is five years ahead of the official government target of achieving middle income status by 2025. According to William G. Battaile, the World Bank’s Lead Country Economist, “the upgrade is the product of the country’s strong economic performance of over 6% real gross domestic product (GDP) growth on average for the past decade”.

Tanzania joins 51 other countries on the lower-middle income list, including Kenya, Zambia, Nigeria, Ghana, Egypt and India, which includes countries with GNI per capita between $1,036 and $3,995.

Graduating to middle income status does not mean Tanzania will necessarily lose access to concessional financing from the World Bank. GNI per capita informs the decision on whether or not a country is eligible for loans from the World Bank’s concessional lending arm, but it is not the only indicator. Other factors, such as a country’s macroeconomic prospects, creditworthiness, risk of debt distress, vulnerability to shocks, institutional constraints, and levels of poverty and social indicators are also used to establish a country’s eligibility.

“I congratulate all my compatriots for this historic achievement. We had envisaged to achieve this status by 2025 but, with strong determination this has been possible in 2020,” wrote President Magufuli in a tweet.

Hassan Abbasi, the chief government spokesperson, explained that “discipline in financial expenditure and the prevailing peace and tranquillity also helped the country to earn the middle-income status.”

Economic data questioned
The Economist magazine published an article in July that questioned whether Tanzania’s economic data could be relied on. “The growth numbers do not stack up. From about 2017 several other indicators, from tax revenue to lending to the private sector, have slowed sharply. The IMF raised doubts last year when it said there were ‘serious weaknesses’ in the growth data. It pointed out that public-sector wages, lending to the private sector and imports were all falling while tax revenue was growing only weakly. The authors made it clear that the official 6.8% growth figure for 2017 was not credible. Publication of the report was blocked by the Tanzanian authorities. (The Economist has seen a copy.)

The IMF did later back down. It now reports Tanzania’s growth as 6.8% in 2017, 7% in 2018 and 6.3% in 2019.

However, The Economist notes that the IMF’s concerns have not disappeared. Performing their own analysis of official Government of Tanzania data, the magazine found several grounds to question official growth rates that have remained very steady at 6-7% in recent years. According to the magazine, tax revenue has shrunk in real terms, public-sector wages “crept up” by 2% in 2019, lending to the private sector by just 4%, the amount of money circulating edged up by only 2% in 2019, foreign direct investment has almost halved since 2013, exports and imports both fell between 2012 and 2018, and imports of machinery and construction equipment fell between 2015 and 2018.

“The growth numbers are out of line with almost everything else we are seeing out of Tanzania,” says Justin Sandefur of the Centre for Global Development, a think-tank.

The government says the economy will grow by 5.5% in 2020. That would, according to The Economist, “probably make Tanzania the best-performing economy in the world”. The IMF predicts 1.9%. [See below]

Covidonomics
With the true impact of Coronavirus on Tanzania remains impossible to verify, the likely economic impact is also uncertain. The discrepancy between the IMF and government growth projections in part reflect this uncertainty.

The African Development Bank (AfDB), lowered its growth forecasts for Tanzania as a result of the pandemic, though only from 6.4% to 5.2%. In contrast, the bank reduced growth forecasts for other east African countries by a much greater extent: from 6% to 1.4% in Kenya, from 6.5% to 2.5% in Uganda, and from 3% to -5% in Burundi.

“Real GDP growth in Tanzania will benefit from increased prices of gold, a major national export,” said an AfDB the report. Gold prices have reached above $1,900 an ounce, up 50% from May 2019, with the precious metal benefitting from its ‘safe haven’ status as the coronavirus outbreak triggered global economy fears.

The price surge partly contributed to making gold Tanzania’s leading foreign exchange earner, overtaking tourism which has been hit hard by the Covid-19 global pandemic.

According to the Bank of Tanzania, gold export earnings increased by 47% to $2.5 billion in the year to 31 May 2020. This in part relates to the long-awaited resolution of the dispute between Acacia/Barrick and the government of Tanzania that had slowed production and exports from some of Tanzania’s biggest gold mines. (See Energy and Minerals section).

The Minister for Finance and Planning, Dr Philip Mpango has also argued that the government’s decision not to impose any form of lockdown in response to the Coronavirus pandemic will lessen the economic impact.

“The country’s decision to keep the economy open has offered a major relief to the private sector in terms of business resilience”, said Peter Mathuki, Executive Director of the East African Business Council.

A budget for complicated year, and for managing debt
With an election due in October and a global pandemic causing havoc to lives and livelihoods across the globe, government budget calculations have been even more complicated than ever this year.

Nevertheless, the main headline in the budget presented to parliament in June is that the government plans to spend 30% of the annual budget on debt payments – a total of TSh 10.5 trillion (approximately USD $4.5bn) over the next year. These figures represent a considerable increase over 2019, when budgeted debt payments totalled TSh 6.2 trillion, or 18.7% of the total budget.

The parliamentary budget committee acting chairman, Mr Mashimba Ndaki, said the committee’s opinion was that despite commendable efforts to service verified debts, payment should be expedited to avoid expensive penalties. “Servicing the debts will enable service providers to clear loans secured from financial institutions in order to provide services to the government. This is mostly important at these moments of Covid-19,” he said.

Beyond this headline, the budget continued to extend a package of measures aimed at promoting investment and spurring economic growth, building on a business environment improvement plan that began in FY-2019/20.

Under the theme “Stimulating the economy to safeguard livelihoods, jobs, businesses and industrial economy,” the government foresees a rise in spending and the budget will likely have a deficit of 2.6% of GDP in FY-2020/21. It is also projected that in FY-2020/21 tax revenues will account for 12.9% of GDP from 12.1% in FY-2019/20. These targets call for reforms to improve tax administration.

Reforms included in the budget include creating a business-friendly environment for taxpayers, enhancing the capacity of tax adjudication forums and improving the ability to enforce tax laws. These reforms are in part a response to a common complaint amongst businesspeople that some officials of the Tanzanian tax administration were treating businesses unfairly. They also include the abolishment or reduction of sixty (60) fees and levies that were charged by Ministries Departments, Agencies and Regulatory Authorities.

“The year 2019/20 is ending with unexpected circumstances resulting from the destruction of transport infrastructure caused by heavy rains/floods across the country as well as the Covid-19 pandemic. The government will allocate more resources to the health sector in order to fight against the Covid-19 and support other most affected sectors,” told Parliament.

Low income earners will have a reason to smile as Dr Mpango is raising the Pay-As-You-Earn threshold from TSh 170,000 to TSh 270,000 so as to give employees some disposable income. And savings groups will now only be required to pay income tax when their gross revenues exceed TSh 100 million per year, up from TSh 50 million.

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