Tanzania Economic Outlook
- Overall macroeconomic performance has been strong, with inflation declining to single digits and gross domestic product (GDP) growth projected at about 7% in the medium term. The main drivers of growth are telecommunications, transport and financial intermediation, manufacturing and construction, and trade.
- Continued emphasis on sound economic management and strengthening political governance could ensure that the newly found natural gas resources will indeed play an important role in Tanzania’s socio-economic transformation over the medium term.
- While the structure of the economy has undergone some changes over the years, the slow progress in poverty reduction – largely due to underperforming agriculture and significant infrastructure bottlenecks – indicates that Tanzania is at best in the process of transformation.
Tanzania continues to do well in maintaining overall macroeconomic stability – which, along with institutional and policy reforms, has been a fundamental factor behind the strong economic growth rates. The main drivers of growth have been agriculture, manufacturing, wholesale and retail trade, transport and communication activities. The economy has also continued to record strong export growth. Tanzania’s medium-term growth prospects are around 7%, significantly boosted by natural gas discoveries.1 Nevertheless, underperformance in the agriculture sector – which employs 75% of the workforce – has been a key factor in jobless growth and chronic underemployment. Rapid aggregate GDP growth has not led to substantial reductions in poverty or improvements in overall socio-economic conditions for most of the population. Agricultural growth must be accelerated to achieve more effective poverty reduction.
The business environment could be further boosted by heightening Tanzania’s attractiveness to local and foreign investors through strengthening its human resource base and reinforcing overall institutional capacity and efficiency. However, while fiscal consolidation has been successful, the increased accumulation of quasi-fiscal arrears (notably in the energy and transport sectors) is a concern. Finally, overall growth prospects in the medium term depend heavily on solving Tanzania’s chronic energy crisis. Key risks to Tanzania’s growth and fiscal outlook stem from heightened financial difficulties of the power utility Tanzania Electricity Supply Company (TANESCO). If left unaddressed, these risks could result in further power outages and an additional fiscal burden.
The newly found natural gas resources could provide impetus for future development. Wise management of the additional fiscal revenues is crucial to ensure inclusive sharing of windfall gains and benefits. In particular, resources from extractive industries should be used to develop other job-intensive sectors and avoid risks associated with jobless growth, which will require extensively upgrading the country’s legal and institutional
framework and preparing sectoral investment plans. Timely completion of the ongoing constitutional review will also help ensure smooth elections in 2015.