TANZANIA: IN our previous articles, we explored Tanzania's economic landscape, focusing on challenges such as capital inflows, currency fluctuations and inflation risks, alongside global economic shifts and with the Monetary Policy Committee (MPC) of the Bank of Tanzania (BoT) met in October 2nd 2024, we anticipated critical decisions regarding the Central Bank Rate (CBR) and how Tanzania would respond to these dynamics; now that the MPC has convened and opted to maintain the CBR at 6.0 per cent, this article reviews the outcomes, the context behind the decision and potential implications for Tanzania's economy.
Inflation Management
One of the primary reasons for holding the CBR steady is the low inflation rate, which stood at 3.1 per cent in August 2024 and is projected to hover around 3.2 per cent for the fourth quarter.
This stability is attributed to a combination of prudent monetary policy, stable global commodity prices and domestic conditions such as adequate food supply and a stable power grid. The MPC also noted that inflation risks remain low, with only potential geopolitical disruptions posing an upside risk to inflation.
The decision to maintain the CBR, rather than reduce it as seen in other Sub-Saharan African countries like Ghana and Rwanda, appears justified. With inflation well within the BoT's target range of 5 per cent, there is little immediate pressure to cut rates further.
However, this cautious stance could be seen as overly conservative, particularly if global conditions continue to improve and inflationary pressures ease further. A more aggressive rate cut could have stimulated credit growth and economic activity, but the BoT has opted for a wait-and-see approach, likely reflecting concerns about potential external shocks.
Economic Growth and Sectoral Contributions Tanzania's economy grew by 5.6 per cent in the first quarter of 2024, with projections of 5.8 per cent and 5.6 per cent growth for the second and third quarters, respectively. This steady growth is driven by key sectors such as agriculture, construction and transportation.
The MPC's optimistic outlook on growth is reinforced by improvements in both global and domestic economic conditions, particularly in agriculture, where increased investment in irrigation and the use of quality inputs like fertilisers and seeds are expected to boost output.
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While the growth outlook remains positive, the report lacks a detailed analysis of potential sectoral challenges. For instance, the construction sector may face rising input costs due to global supply chain disruptions and agriculture remains vulnerable to climate-related risks.
The BoT could have provided more insight into how it plans to support these sectors in the face of such risks.
Foreign Exchange and Trade Balance
The MPC report highlights an improving external sector, with the current account deficit narrowing from 4.4 per cent of GDP in 2023 to 3.2 per cent in 2024, largely driven by increased exports, particularly in tourism, gold and agricultural products like tobacco and cashew nuts. Foreign exchange inflows have improved due to high gold prices and rising tourism numbers and the Tanzanian shilling's depreciation slowed to 10.1 per cent year-on-year in September, compared to 12.5 per cent in June.
However, despite this improvement, the shilling remains under pressure and the BoT's decision to maintain the CBR suggests a cautious approach to managing foreign exchange volatility. The report notes that lower prices for petroleum products and moderate fertiliser imports are expected to reduce pressure on foreign exchange reserves, which stood at 5.4 billion US dollars in September 2024. Nevertheless, the country's external debt remains high at 37.7 billion US dollars, equivalent to 46.9 per cent of GDP.
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While within the SADC macroeconomic convergence criterion, this debt burden poses a long-term risk, particularly if the global economy faces new shocks.
Fiscal Performance: A Positive but Unsustainable Trend?
Tanzania's fiscal performance was described as satisfactory, with tax revenue surpassing targets due to improved tax administration and compliance. Public debt, while high, remains within acceptable levels according to regional benchmarks and expenditure is reportedly well-aligned with available resources. However, the reliance on improved tax collection to drive fiscal performance raises concerns about the sustainability of this approach, particularly if economic growth slows or tax revenues fall short.
While Tanzania's fiscal position appears solid for now, any significant external or domestic shocks could jeopardise this stability.
Private Sector Credit and Financial Stability
One of the report's positive highlights is the continued robust growth of private sector credit, which averaged 17.1 per cent for the quarter ending September 2024. This growth is supported by improved asset quality in the banking sector, with the nonperforming loan (NPL) ratio declining to 3.9 per cent in August from 5.1 per cent a year earlier. The BoT's cautious approach to monetary policy has helped anchor inflation expectations and support credit growth, particularly in the private sector.
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However, the report does not address potential risks associated with the rapid expansion of credit. If global or domestic economic conditions worsen, banks could face a sudden deterioration in asset quality, leading to a tightening of credit conditions. While the NPL ratio has improved, it is essential that the BoT remains vigilant about the risks of over-lending, particularly in sectors that are vulnerable to external shocks, such as agriculture and construction.
A Cautious Path Forward
Overall, the Bank of Tanzania's decision to maintain the Central Bank Rate at 6 per cent reflects a balanced approach to managing inflation and supporting steady economic growth. The MPC's cautious stance is understandable given the uncertainties in the global economy and the potential risks to inflation and foreign exchange stability. However, there is room for more aggressive policy action, particularly if global conditions continue to improve and inflationary pressures remain subdued. The BoT's focus on maintaining stability is commendable, but a more proactive approach may be necessary in the coming months to ensure that Tanzania fully capitalises on the improving global economic environment. The country's fiscal and debt management strategies, while currently sustainable, will need to be carefully monitored to avoid potential future challenges.
