After picking up a touch this year, we think that economic growth in Tanzania will slow in 2020 and in 2021. President John Magufuli’s increasingly erratic policymaking will deter investment while external conditions will cause the country’s terms of trade to worsen.
- After picking up a touch this year, we think that economic growth in Tanzania will slow in 2020 and in 2021. President John Magufuli’s increasingly erratic policymaking will deter investment while external conditions will cause the country’s terms of trade to worsen.
- Initial optimism about John Magufuli as a no-nonsense president who could “get things done” has gradually faded since his election in 2015. The business environment has deteriorated as a result of his erratic policymaking. In 2017, gold mining firm Acacia was fined a record $190bn for allegedly underreporting mineral exports. And after failing to set higher market prices for cashews last year, the government banned cashew exports and bought the entire harvest instead, costing as much as 0.6% of GDP. (See here.)
- In the first years of Magufuli’s presidency, economic growth remained strong – averaging 6.6% over 2015-2017. Favourable external conditions bolstered the economy. In 2016 for instance, earnings from the country’s main export, gold, were up by 28% as prices surged. Spending on large-scale public infrastructure investments – including a new railway and a major hydroelectric dam – also boosted activity. But cracks have begun to open, as evidenced by a plunge in foreign direct investment inflows. (See Chart 1.)
- Data from the World Bank show that growth decelerated markedly in 2018, to 5.2%. (See Chart 2.) The authorities question this estimate and stand by the official figure of 7.0%. (The government has criminalized the criticism of official statistics.) For our part, we share the World Bank’s more gloomy view. Erratic policymaking, disputes with foreign investors, and faltering government spending (public development expenditure was 80% below target during Q3 2018) weighed on economic activity.
- We expect that, as a result of improvements in the country’s terms of trade this year, growth will briefly rise to 5.5%. Higher gold prices will raise export earnings. And lower oil prices are set to reduce the fuel import bill, softening inflation. This, in turn, will boost domestic demand.
- But after a brief rebound, we think that the slowdown will resume in 2020. Tanzania’s external position will probably deteriorate again. Our commodities team forecasts a drop in gold prices, hurting export revenues. And we expect Brent crude to end 2020 at $65bp, more than 8% above our end-2019 forecast – this will push up fuel imports as well as inflation. We doubt that fiscal loosening ahead of the 2020 elections will succeed in offsetting this. The public debt burden – which stood at 36% of GDP in 2018 – should remain manageable. Our growth forecast of 5.3% next year lies below the consensus.
- The growth-sapping effects of unpredictable economic policies will become more evident after the 2020 polls. President Magufuli is all but certain to get re-elected, entrenching an ever more unstable business environment. Foreign direct investment inflows are likely to fall further. And we doubt that the government can sustain a large number of expensive infrastructure projects. Over the long term, economic growth is likely to fall below 5%.
Chart 1: Foreign Direct Investment (% of GDP)
Chart 2: GDP (% y/y)
Sources: UNCTAD, IMF
Sources: Refinitiv, Focus Economics, Capital Economics
Virág Fórizs, Emerging Markets Economist, +44 20 7808 4079, email@example.com