New forecast lowers 2017 GDP growth to less than six per cent

30Nov 2017
The Guardian
New forecast lowers 2017 GDP growth to less than six per cent
  • • BMI Research has revised down GDP growth from 6.3 per cent in 2017 and 6.5 per cent in 2018 to 5.3 per cent and 5.7 per cent, respectively, on the back of the more challenging business environment

A prominent British economic research outfit has revised downwards Tanzania’s growth prospects starting this year citing increasing difficulties in the business environment as the main challenge that will upset the performance of the national economy over the next decade.

Treasury Chief Dr Philip Mpango. In this year’s budget, the government had set a target of attaining real GDP growth of 7.1 per cent in 2017 up from the actual growth of 7.0 per cent in 2016. File photo

In a recently economic note, BMI Research says it now sees the economy growing by 5.3 per cent in 2017 instead of the previous forecast of 6.3 per cent. The Fitch Group company has also lowered GDP growth projection for 2018 from 6.5 per cent to 5.7 per cent.

However, despite seeing rising challenges for doing business in the country, the company has it that Tanzania will continue to be the top economic performer in the region for many years to come.

“We have already revised down GDP growth from 6.3 per cent in 2017 and 6.5 per cent in 2018 to 5.3 per cent and 5.7 per cent, respectively, on the back of the more challenging business environment, and we could revise it down again should we see further measures,” BMI notes in the memo titled: Tanzania: Expropriation Reinforces Investment Risks.

“This increasingly challenging business environment will likely weigh on growth in the years ahead. Indeed, we forecast average real GDP growth of 6.0 per cent over the next decade which, while above the regional average, is lower than the 6.3 per cent average seen over the last decade,” it adds.

Both the government and the World Bank have also revised Tanzania’s 2017 growth forecasts, with the latter citing deterioration in business sentiment for the expected economic slowdown. In the new Tanzania Economic Update, the World Bank has cut its economic growth forecast for Tanzania to 6.6 per cent this year from an earlier estimate of around seven per cent.

The global lender said the GDP growth pace will increase to 6.8 per cent in 2018 noting that although the growth outlook remains favourable, the performance still faces downside risks. Over the short to medium term, it explains, the growth outlook is favourable, with key risks being both mostly domestic and under the government’s control.

“The growth rate is projected to reach 6.6 per cent in 2017, below the Government forecast of 7.1 per cent, mainly due to the under execution of the development budget and the weak business environment. In the medium term, the main risks relate to a further deterioration in business sentiment as a result of
increased policy uncertainty and to a decline in the execution rate of the development budget,” reads the report.

In this year’s budget, the government had set a target of attaining real GDP growth of 7.1 per cent in 2017 up from the actual growth of 7.0 per cent in 2016. According to Treasury chief Dr Philip Mpango, the economy is expected to expand by 7.1 per cent next year.

Early this month, the Finance and Planning minister told Parliament that the government has trimmed its growth forecast for 2017 from 7.1 per cent to 7.0 per cent. The growth is expected to remain strong on the back of expected rebound of the global economy, continued improvement in power supply, and implementation of infrastructural projects under the Second Five Year Development Plan.

“Real GDP grew by seven per cent in 2016, in line with the authorities’ targets, with activity particularly buoyant in the mining, construction, communication, and transportation sectors. Quarterly GDP data and high frequency indicators, however, suggest a weakening of economic activity in late 2016 (with growth of 5.6 per cent (yoy) in Q4 2016) and early 2017, reflecting slow budget execution, subdued private sector credit growth, and the impact of a drought,” the International Monetary Fund (IMF) notes in the July country report.

The World Bank cautions that the growth prospects could be weakened if there is no recovery to the growth of credit to the private sector. It says that private investment will be constrained if lending to the private sector does not increase.

The lender also says that government efforts to curtail borrowing from the domestic market are a positive development, but notes that without structural reforms and an improvement in business sentiment, the loosening of monetary policy alone may be insufficient to stimulate lending and investment, with
negative consequences for private sector led growth.

It notes that a further weakening in business sentiment could lead to lower levels of investment
and growth. Further uncertainty regarding future policy changes could compound the impact of low liquidity and weak credit conditions, deterring businesses from making investments, it adds.

“Moreover, the future performance of the extractive industries and tourism sectors, the largest earners of
foreign exchange, may not be as impressive as in the past due to the newly imposed restrictions on investment and trade, adding to the effect of regulation and the higher costs of doing business.”

The World Bank also has it that the key external risk to growth relates to continued low global commodity
prices. According to it, low commodity prices could impact Tanzania’s economy through delays to investment decisions in the extractive sectors, particularly natural gas.

They could also have an adverse impact on the growth prospects of commodity-intensive countries in the region, including Tanzania’s export partners. Under certain scenarios, it explains, low global commodity prices could also worsen Tanzania’s balance of trade.

“If global financial conditions again deteriorate, this could impact the implementation of capital projects and weaken the growth outlook. Some of Tanzania’s major infrastructure investments, including plans to develop the standard gauge railway and ports and airport infrastructure, are planned to be financed through external borrowing.”

On concerns regarding the business environment, the World Bank says that recent government actions have had a mixed impact on the business climate and on investor confidence. According to the Tanzania Economic Update, many in the business community have noted an overall deterioration in business sentiment due to perceived risks resulting from unpredictable policy actions and aggressive revenue collection efforts.

The report has it that although the government’s policy objectives of improving public administration, clamping down on corruption, and strengthening tax administration are positive, the transition has caused uncertainty, which has impacted private sector investment decisions. The weakening of business sentiment was confirmed by a survey of 100 medium-size firms conducted in June 2017.

According to it, about half of the respondents expressed the opinion that the economy had declined since the previous year, while less than one third expressed the opinion that it had remained the same. Looking forward, about 40 per cent of the managers were pessimistic about the prospects for the economy, and 36 per cent were pessimistic regarding their own businesses, a significant increase to the proportion that expressed the same opinion in December in 2016.