How economy could be hurt if donors close their wallets

02Jan 2019
Fumbuka Ng'wanakilala
Dar es Salaam
Financial Times
How economy could be hurt if donors close their wallets
  • $1.2 Billion
  • The amount of financing that Tanzania received in 2017 from the International Development Association (IDA), a World Bank arm that gives grants or low-interest loans to poor countries
  • ECONOMIC OUTLOOK Tanzania risks damaging its relations with key development partners such as the European Union (UN) and the World Bank due to some policy positions adopted by the government - Fitch

FITCH Ratings, a global credit rating agency, has warned that Tanzania's rapid economic growth could be undermined if the government strains its already frosty relations with some of the country's biggest development partners, including the World Bank and the European Union (EU).

NO EASY RIDE - A file photo shows President John Magufuli and World Bank Group President Jim Yong Kim riding the World Bank-funded Dar es Salaam Bus Rapid Transit (BRT) on March 20, 2017, on their way to inaugurate construction of the Ubungo flyover, another transport project financed by pre-eminent global lender to the developing world.

While Tanzania is expected to record one of the fastest gross domestic product (GDP) growth rates in Africa in 2019 and beyond, the looming threat of aid cuts, regulatory uncertainty and delays in implementation of key infrastructure projects, such as the liquefied natural gas (LNG) terminal in Lindi Region, could dampen the country's economy outlook.

"Tanzania risks damaging its relations with key development partners the EU and World Bank due to policy positions adopted by the government," Fitch said in its latest country risk report for Tanzania seen by the Financial Times.

"Given that the government has already faced setbacks to implementation for projects, we note authoritarian policies and criticism by international observers could risk forfeiting more concessional loans in the future."

Fitch noted that concessional lending from multilateral organisations such as the World Bank are an important source of foreign currency for Tanzania and provide much-needed funding for development projects in transport, education, water and other sectors.

The Minister for Finance and Planning, Dr Philip Mpango, admitted recently that the country was passing through a difficult period as a result of the decision by some development partners to withhold aid to the government.

However the minister was adamant on Sunday when unveiling the state of the economy report in Dodoma that Tanzania would not sacrifice its sovereignty and bow to Western demands for adoption of gay rights in the country in exchange for financial aid.

Budget support from overseas donors as a percentage of total revenue has been gradually declining over the past few years, falling from 19.3 per cent in fiscal year 2010/11 to just 5.2 per cent in the 2015/16 financial year, with the downward trend expected to continue in 2018/19.

"Diminished aid flows will exert more pressure on the budget in the medium term, forcing the Tanzania Revenue Authority (TRA) to source these funds from elsewhere. However, we view this as credit positive on the whole, as it will reduce dependency on foreign aid flows, which can be a volatile source of revenue," Fitch said.

The World Bank is a key source of project funding for Tanzania, with the bank’s low-interest arm, the International Development Association (IDA), having lent the country $1.2 billion in 2017 for various transport, agricultural and governance projects.

Tanzania is also a significant beneficiary of EU development assistance, mainly financed by the European Development Fund (EDF). The EDF funding cycle for Tanzania during 2014-2020 amounts to 626 million euros.

The EU’s financial assistance to the country focuses on good governance, increasing access to energy and sustainable agriculture. It also finances actions to support civil society, business and employment.

'Regulatory obstacles'

A lack of agreement between the government and major oil companies threatens to further delay the LNG project that could potentially transform Tanzania's economy.

Royal Dutch Shell, Statoil, Exxon Mobil, Pavilion and Ophir Energy plan to build the natural gas export terminal in partnership with the state-run Tanzania Petroleum Development Corporation (TPDC).

The Bank of Tanzania (BoT) estimates that just starting work on the massive plant could add another 2 percentage points to the country’s annual economic growth.

But government negotiators and foreign oil companies are seemingly stuck on reaching consensus on a host government agreement (HGA), which would finally pave way for the start of the long-awaited project.

"Our positive long-term growth outlook for Tanzania over the next decade is in large part predicated on continued heavy infrastructure investment into rail, port and road," Fitch said.

"While this view remains broadly intact, regulatory uncertainty is likely to impact the pace of investment into the country, and we have already made a significant downward revision to our growth forecast on the back of the delay to the country's flagship LNG project."

Fitch highlighted the delay in the implementation of the $30 billion LNG plant due to regulatory obstacles as a factor that will likely worsen downside risks to Tanzania's otherwise bright economic outlook.

"We have already seen a final investment decision on Tanzania's flagship LNG project pushed back significantly, causing us to revise down our real GDP growth outlook for the country," it said.

"Moreover, rapid policy switches regarding tax and regulation under the Magufuli administration may continue to cause uncertainty for businesses, which would forfeit the foreign financing required for project progress."

Fitch said ongoing delays to the LNG project due to an unfavourable external environment and uncertainties regarding the fiscal regime in Tanzania could drag economic growth backwards.

The ratings agency said real GDP growth in Tanzania is expected to average 6.1 per cent over the next 10 years, despite the government's projections that annual economic growth will top 7 per cent.

Relatively stable political outlook

Fitch said declining investor confidence could also lead to a slowdown in overall GDP growth in the country.

"Additionally, recent sharp shifts toward less investor-friendly policy introduced by the Magufuli administration – part of an effort to narrow the country's fiscal deficits and temper popular discontent – may leave investors skeptical to expanding in the country," it said.

"Forced listings on the stock market for mining and telecoms companies, increasing non-tariff barriers to trade, and a range of new taxes for businesses are likely to erode investor confidence in the country. While ... the impact of these policies may be limited, a continued move in this direction may hinder the government's ability to attract financing for necessary improvements."

It noted that Tanzania's occasion squabbles and disputes with Kenya risked harming trade relations between the two neighbouring East African countries.

"A race between the Kenyan and Tanzanian governments for regional dominance in the East African Community (EAC) has increased competition for projects and led to a trade spat in 2017 in which both governments imposed import bans on the other.

These tensions were highlighted during the run-up to the 2017 Kenyan election when Magufuli and Kenyan opposition leader Raila Odinga were revealed to have a close friendship, while the Tanzanian opposition leader (Edward Lowassa) simultaneously endorsed President Uhuru Kenyatta," said the credit rating agency.

"A ramp-up intensions would hamper the pace of integration in the EAC, potentially affecting trade and infrastructure development."

On the upcoming general election next year, Fitch predicts that the ruling Chama Cha Mapinduzi (CCM) has a 65 per cent chance of winning the polls and thus further extending its rule.

"We view it as highly likely that the ruling party will remain in power after the next election, given the widespread popularity of President Magufuli's populist policies. Compared to the previous government led by Jakaya Kikwete, the current government benefits from being perceived as tough on corruption owing to moves such as the removal of 'ghost workers' from the government payroll, and the renegotiation of contracts with large telecoms and mining firms operating in the country," it said.

"Furthermore, while main opposition CHADEMA party has made gains in the last two elections, the opposition is still somewhat fragmented, with a large number of opposition candidates taking up the presidential vote share. Moreover, the CCM will benefit from access to greater resources and a wide support base."

The agency gives CHADEMA and other opposition parties only a 35 per cent likelihood of winning the presidential election in 2020.

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