Dar es Salaam is the centre for Tanzania’s finance industry Credit: Igor Grochev/Shutterstock
Tanzania is in need of reform to continue is impressive historical growth curve
editor's pickTuesday 06, November 2018
Tanzania has traditionally been one of the true growth stories on the African continent. Real GDP growth between 2013 and 2016 averaged a least seven per cent. However, since the last quarter of 2016 growth as slowed moderately with a full year growth expectation of 6.5 per cent for 2017 according to the African Economic Outlook 2018. Throughout 2018 and 2019 we are likely to see a recovery in this figure, although not quite to historic highs, with estimates placing GDP growth at around 6.7 per cent.
In Banker Africa #44 we argued that growth was likely to recover throughout 2017. This prediction overall came to fruition as despite the slow economic growth of 5.7 per cent for Q1 2017 growth throughout Q2 in transportation services, construction and agriculture to 7.8 per cent offset the shaky start to the year. Regionally, the country continues to be one of the best performers.
Mauricio Villafuerte, who led an IMF staff visit in late 2017 said, “Preliminary data for the first half of 2017 released by the authorities indicate that the economy grew at a still strong 6.8 percent. A good harvest should help support growth, but other macroeconomic indicators—lower-than-anticipated government spending and tax revenue collections, weak private sector credit growth and rising non-performing loans—suggest that there are downward pressures on growth.”
The Government and Central Bank have taken measures to expand the liquidity environment, and credit in the private sector accelerated notably in Q2 of 2018, according to FocusEconomics in its October 2018 Consensus Forecast Sub-Saharan Africa. However, the banking sector continues to be weighed upon by a significant stock of non-performing loans (NPLs).
Development spending has grown considerably in annual terms year-on-year due to an increase in public spending, although this figure has outpaced growth in tax revenues. The African Economic Outlook 2018 noted that public investment, particularly in infrastructure projects, is expected to support growth in the near-future. However, Government expenditure was 20.7 per cent below its target, although this figure was 8.4 per cent higher than the previous fiscal year. This was partially due to lower than expected revenues in 2016 and 2017, leading to a higher fiscal deficit than otherwise expected—3.7 per cent of GDP in 2016 and 2.1 per cent in 2017. The African Economic Outlook 2018 notes that although the level of public debt is sustainable, debt service costs have increased considerably in recent years, leading to a potential reduction in fiscal space.
The IMF noted falling tax revenue collections in early 2018 during the country’s seventh Policy Support Instrument (PSI) review. The PSI is an instrument of the IMF designed for countries that do not need balance of payments financial support. The PSI helps countries design effective economic programs that, once approved by the IMF's Executive Board, signal to donors, multilateral development banks, and markets the Fund's endorsement of a member's policies.
In this report the IMF stated that, “Although GDP data point to continued strong growth, other high frequency data suggest a weakening of economic activity. Tax revenue collections are lower than expected and credit growth has stagnated reflecting in part banks’ rising NPLs. Inflation remains moderate, and international reserves have increased substantially. There are downside risks to economic growth in the short term stemming from slow budget implementation, a challenging business environment, and private sector concerns about authorities’ enforcement of rules.”
In its review the IMF noted that performance under the PSI had been broadly satisfactory but that macroeconomic policies will need to be closely coordinated. Increased public infrastructure spending will, however, help support the construction sector with overall growth fuelled by the authority’s expansionary monetary policy stance.
Moody’s Investors Service said in its report released earlier this year entitled Banking System Brief: Tanzania that overall the country’s banking system will remain resilient with improving operating conditions, solid capital and liquidity, despite asset quality and profitability pressure.
“We expect operating conditions to gradually improve as private sector businesses adapt to higher taxes and liquidity in the system improves with the payment of Government arrears and more focus on infrastructure and development plans by the authorities,” said Christos Theofilou, a Moody's Assistant Vice President—Analyst and author of the report.
The operating conditions for banks in the East African country have been historically challenging, says Moody’s, with activities hampered by several measures including higher tax payments and delayed tax refunds weighting on private sector companies.
“Tanzanian banks' capital buffers will remain among the strongest in Sub Saharan Africa and globally, due to the banks' strong earnings Generation,” added Theofilou. “Although Tanzanian banks' profitability has declined due to lower interest income, reduced business activity and rising loan-loss provisions, it remains strong by global standards with a return on assets of two per cent during the first nine months of 2017.”
Moody’s adds that the country can expect to see broadly stable liquidity metrics due to the muted loan growth of around five per cent and growing financial inclusion, and stable Government and private sector deposits.
NPLs will continue to be a problem for Tanzanian banks and has indeed grown. At the end of 2014 NPLs stood at 6.8 per cent of total loans, whilst by September 2017 this figure had grown to 12.6 per cent. While improving operating conditions mean that banks' NPLs are close to their peak, NPLs may rise further in the first half of 2018 due to the continued, delayed impact from last year's public sector job cuts, a corporate liquidity crunch and lower corporate margins following a crackdown on tax collection,” Moody’s concluded.
In March of 2018 the agency assigned a first-time B1 issuer rating to the Government of Tanzania with a negative outlook. The ratings agency noted that the country’s very low institutional strength which is constrained by Governance challenges. Indeed, according to the 2016 Worldwide Governance Indicators (WGI) Tanzania falls in the bottom third of sovereigns rated by the agency on scores for rule of law, government effectiveness and control of corruption—although the country is ahead of the Sub Saharan Africa median.
The agency stated that the negative outlook is a reflection of the overall balance of risks to Tanzania’s credit profile marred by an unpredictably policy environment which has constrained the business climate.
The World Bank’s tenth edition of its Tanzania Economic Update broadly supported this hypothesis. The report noted that the two most important challenges for the country’s economy were that of the under-execution of the national budget and the decline in private sector sentiment.
Overall for the country to continue to maintain its success story close coordination by the authorities of macroeconomic policies will be required. Tanzania is faced with a large underemployed young population with high levels of poverty, meaning that strong growth and job creation are both required. Private-sector sentiment will need to be addressed to improve the business climate with sustained reforms. Private sector-led growth is always a much more sustainable model than that of continued government expenditure—although issues of infrastructure will still need to be addressed. By following through with these polices the Government will be able to establish further credibility and belief that it can follow through with its ambitious development plan. Furthermore, reforms in tax policy and administration are necessary to revive revenue growth. For the financial sector, addressing the high level of NPLs is the key concern to secure any vulnerabilities and help revive credit growth.
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