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Tanzania fiscally solid but lacks investments

Can the new government of Tanzania deliver the investments that its economy and people need?

For a country still coming to grips with a contested poll in Zanzibar and the withdrawal of hundreds of millions of dollars of development assistance funds from the US and possibly other Western countries, Tanzania has a surprisingly solid fiscal outlook. The nation’s GDP has increased by about 7% for the last several years, and its current account deficit is narrowing. It continues to attract more foreign direct investment (FDI) than most of its East African neighbors, with FDI rising 14.5% in 2015 and 61.7% in the last six months alone. It is sitting on 25-30 trillion cubic feet of prime natural gas reserves and 54 billion cubic feet of newly discovered helium. The national debt is around $19.6 billion as of February 2016 – quite manageable for the size and trajectory of the economy.

However, Tanzania’s economic reality is not as rosy as these gross economic figures appear, nor are the risks to its economic performance worth glossing over. Poor stewardship of oil and gas resources have plagued many an emerging country, including the real threat of Dutch Disease, which is a strengthening of a nation’s currency due to lucrative commodity exports that often makes other sectors uncompetitive and can easily lead to volatile boom-and-bust cycles. Other obstacles which lawmakers in Dodoma must contend with include the worryingly low levels of student learning in government primary schools, as well as the alarmingly high levels of maternal mortality, as a recent World Bank report indicated.

No substitute for investment

Perhaps the two biggest issues confronting Tanzania’s fiscal and broader economic prospects are the relative lack of FDI in high-growth areas – namely, infrastructure and agriculture. Tanzania’s success marshaling domestic and foreign investment capital has not extended to the infrastructure sphere. The East African giant has gained little FDI when it comes to roads, bridges, railways, ports, airports, electricity, water, and telecoms projects in recent years, which has put more pressure on the public sector to make up the deficit.

There are, of course, exceptions, such as Dangote Cement’s impressive $500 million plant in Mtwara helping to fuel infrastructure growth, which the government likes to continually highlight as an example of fruitful economic diplomacy. But this masks how few steps have been made towards establishing a well-developed equity market for infrastructure investments, and making public-private partnerships in key areas more enticing for investors, both domestic and foreign.
Anemic agriculture

Moreover, Tanzania, like many other African states, suffers from an incredibly unproductive agricultural sector. Agriculture employs a whopping 80% of Tanzanians, provides 85% of exports, and contributes about one-quarter of the country’s GDP. In fact, according to some estimates, Tanzania became self-sufficient in food production this year. At the same time, the agriculture sector only accounts for 11% of GDP growth, only 27% of the country’s arable land is cultivated, and only 1% of suitable areas are irrigated, according to the International Fund for Agricultural Development.

There are no easy solutions here, but the government needs to figure out a way to make the 80% of the cultivated land that is worked by smallholder, hand hoe-reliant farmers more efficient. Some tried-and-tested methods include focusing much more on seasonal loans in rural areas coupled with robust capacity building programs, as well as the broader objective of furthering regional integration in order to open up more markets for Tanzanian agricultural goods.
A way forward

It is worth mentioning that President Magufuli’s administration has made some effort thus far to tackle these two economic impediments. Paying back government arrears to contractors has helped restart some derelict but incredibly important roadway and electrification projects. In addition, the government has not been shy in using its extensive powers of eminent domain to transfer ownership of idle lands often purchased for speculative purposes to farmers and herders (though care must obviously be taken here, lest Tanzania end up like Zimbabwe).

But far, far more needs to be done. Magufuli needs to quickly move from rhetoric to action. Boosting infrastructure and agricultural investment will guard against any future fiscal shocks and help diversify the Tanzanian economy in this crucial period before the domestic commodity boom takes place.

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