Tanzania Business Forecast Report Q2 2009

Financing problems are expected to loom large in 2009. With government revenues forecast todisappoint in this year and the next, Tanzania’s authorities now have to either cut expenditure- with attendant risks to political stability - or find new means of financing the deficit. Meanwhile,despite a forecast narrowing of Tanzania’s current account deficit, the likelihood that foreign directinvestment and international development assistance will fall short in 2009 means we expect adecline in the capital and financial account surplus. This, in turn, leads us to project both a drop inTanzania’s foreign reserves and a depreciation of the shilling.

Finally, we examine the prospectsfor a longer-term deterioration of foreign capital availability in the form of a partial withdrawal ofChinese investment from the continent.With donor countries now beginning to cut their aid budgets (Ireland is the first to officially do so)and the authorities beginning to revise down real GDP growth forecasts, the Tanzanian authoritiesare beginning to closely examine their options with regard to a looming budget deficit. Internationalborrowing has been ruled out, and we believe a combination of domestic borrowing, expenditurecuts and tax hikes will be deployed to finance the budget. We do not forecast a significant backlashon the mainland as the government cuts spending, but there is risk of regional instability on theislands of Zanzibar, which look set to face a particularly difficult year, in economic terms.Real GDP growth is set to slow sharply to 2.7% in 2009, from 7.5% in 2008, as all components ofGDP by expenditure suffer slowdowns. As the government finances its budget with a greater relianceon domestic borrowing, it will partially crowd out the private sector, compounding slowdownsin foreign direct investment and the tightening of international credit. The drop in investment-drivenimport demand, coupled with plummeting oil prices and a weaker shilling will lead to an improvementof the current account. These benefits will be partially mitigated, though, by falling tourismreceipts, donor aid and food exports.
Weaknesses in Tanzania’s physical infrastructure remain serious.
The country’s ports remainexpensive and inefficient, necessitating a presidential order to clear a major backlog. Meanwhilethe national airline required a government bailout and a railway run jointly by Tanzania and Zambiamay be privatised, following poor performance. Numerous other shortcomings still need addressing;property rights remain weak, skilled labour is in short supply and labour regulations remainhigh. Nonetheless, the country still manages to attract relatively high levels of FDI (at least duringbetter global economic climates) on the back of the high growth opportunities, efficient commercialcourts, long-standing political stability and a fairly competitive tax regime.