THE GOLDEN TICKET?

Tanzania 2015 | DIPLOMACY | YEAR IN REVIEW

Inflation has dropped dramatically over the past year, but a widening current account deficit continues to underline external vulnerability. The discovery of significant gas reserves, however, could be a much-needed shot in the arm.

The economy grew 7.1% in 2013, up from 6.9% in 2012. For 2014, the African Development Bank Group is calling a figure of 7%, although the government's own target stands at 7.3%. Inflation, which clocked at 12.1% in December 2012, had fallen to 6.2% by November 2013, and stood at 6.6% as of year-to-September 2014, a result of slowing food prices, according to the National Bureau of Statistics (NBS). GDP per capita stands at $694.8 as of end-2013, underlining the country's continued struggle to improve personal incomes; Tanzania is 163rd of 170 countries on the UN Development Program's Human Development Index, with one-third of Tanzanians below the basic-needs poverty line. Much of the country's workforce—a hefty 75%—are engaged in agricultural activities, while the sector represents just one-quarter of GDP. The result is a low urbanization rate and the exclusion of much of the population from the financial system—just 9% of the population has access to formal financial services. According to the 2010/2011 Tanzania National Panel Survey, a whopping 26% of farmers are not connected to export markets, instead producing only for consumption. Furthermore, only 25% can sell over half of their output.

This level of informality, coupled with an unemployment rate of over 10%, is at the heart of the government's revenue woes. The tax deficit currently stands at approximately $1 billion, while state coffers rely on borrowing; investment in development works are often first for the chop in favor of wages and debt servicing. In current account terms, Tanzania suffers from fluctuating commodity prices abroad, with the country especially vulnerable to the price of gold. At end-May 2014, the current account deficit (CAD) widened by 24% to $4.94 billion. The government's safety net is an official reserve of $5.15 billion according to the World Bank, while the CAD continues to be financed via foreign aid, commercial loans, and FDI. And in terms of the latter, the discovery of hydrocarbon resources in the East African nation has certainly made an impact; FDI stock increased to $12.7 billion in 2013, with the country pulling in $1.9 billion over the year. Major investors include BG Group and African Barrick Gold, with the UK the top source of investment, followed by Canada, Switzerland, and the US, according to the Tanzania Investment Centre (TIC).

Mining represents 40% of export earnings for the country, with growth coming in at 6.9% in 2013, down 7.8% in 2012 due to fluctuations in the global gold market. As the fourth largest gold producer in Africa, the metal forms a key part of the Tanzanian economy, at the same time exposing exporters to the external risks associated with the commodity. In year to end May 2013, gold revenues came in at $1.98 billion, but, over the same period a year later, that figure had fallen to $1.75 billion a result of a drop in international prices.

Elsewhere in the economy, tourism continues to flex its muscle as an alternative money winner, contributing $4.3 billion indirectly and directly in 2013, representing 12.9% of GDP. And with more people discovering what Tanzania has to offer—almost 44% of the country's land is dedicated to national parks and game reserves—the sector has the potential to be a continual revenue earner, especially if more of the country is opened up via the development of infrastructure.

In that respect, the government is set for a windfall with the recent discovery of between 43 billion and 51 trillion cubic feet (tcf) of gas. With tenders having being carried out and bids now being evaluated from a number of international firms, Tanzanians are playing a waiting game to see if the production sharing agreements (PSAs) signed with the Tanzania Petroleum Development Corporation will benefit them directly. But despite the revelation that there is more in the hills than just gold, the World Bank has issued a warning to the government over spending based on unpredictable future gas earnings. But as well as export earnings, the government also plans to use some of the extracted gas to power a series of new gas-fired plants, cutting the country's reliance on hydropower, which currently forms 60% of generation capacity and leads to outages during periods of drought. By 2017, it is estimated that Tanzania needs $1.9 billion per year if it is to ensure a stable electricity supply.

The discovery of hydrocarbons could be the golden ticket for Tanzania, allowing the government to rid itself of debt and invest in the kind of infrastructure needed to boost exports, encourage urbanization, and open up much of the country to private investment. That said, it could be some time before the gas begins to flow, and in the meantime Tanzania needs to attend to its deteriorating export profile and unemployment challenges.