A growing deficit forced Tanzania to increase its domestic borrowing in the 2012/2013 financial year, breaching a ceiling set by the International Monetary Fund.

The country’s overall fiscal deficit rose from five per cent of GDP in the 2011/2012 financial year to the current 6.6 per cent, triggering higher local borrowing of up to 2.3 per cent of the GDP, in the process passing the ceiling of one per cent set by the international lender.

According to the World Bank’s fourth Tanzania Economic Update, released last Friday, the deterioration in fiscal accounts is the result of the government’s overestimation of revenue and underestimation of expenditure.

Domestic revenue

The report says that, during the period under review, domestic revenue increased by 0.2 per cent of GDP, while the total value of public expenditure increased by 0.8 per cent, reaching a value equivalent to 27.8 per cent of the GDP.

“The resulting gap was met through domestic financing, with the value of public borrowing reaching a figure equivalent to more than 2.3 per cent of GDP, exceeding the ceiling of one per cent as agreed by the International Monetary Fund (IMF),” says the report.

The World Bank says the government will have to reduce the deficit to 5 per cent and keep the public debt below 50 per cent of GDP in order to maintain its debt distress risk at a low level.

However, the attainment of these desired levels is dependent on higher levels of “revenue mobilisation and controlled expenditure.”

Tax exemptions

According to the World Bank, the achievement of higher levels of revenue mobilisation is dependent on the government’s capacity to reduce the level of tax exemptions, which currently cost the economy the equivalent of four per cent of GDP annually.

In addition, the government will have to successfully implement reforms to the country’s VAT system and collect higher levels of non-tax revenues.

Compared with the recent past, the level of public debt has increased to a value in excess of 40 per cent of the GDP as at the end of 2012/2013 financial year.

The report further warns that while the government appears committed to the necessary fiscal adjustments, there may be a temptation to delay implementation due to political pressures related to the forthcoming national elections slated for November 2015, with history showing public expenditure is generally higher in the months preceding the general election.

The prospect of significant future gas revenues may also encourage the authorities to borrow excessively, despite the uncertainty regarding the timing and magnitude of the expected revenues.

The report says that, overall, the Tanzanian economy has performed well in the past one year, with rapid and stable economic growth of about seven per cent and significant drops in the rate of inflation.

Population growth

However, the rate of economic growth is less impressive when adjusted for the rapid rate of population growth, which currently stands at 2.7 per cent.

“This growth in the economy has not been enough to provide full, productive employment to more than a small portion of the 700,000 additional workers who enter the job market every year,” says the report.

As a result, many young workers find themselves engaged in small-scale informal activities with limited productivity.

The main drivers of Tanzania’s rapid economic growth continue to be a small number of fast-growing, capital-intensive sectors, particularly communications, financial services, construction, manufacturing and retail trade.

Highest rate

The service sector, driven by the expansion of transport, communications, retail trade and financial services, recorded the highest rate of annual growth in 2012 at eight per cent.

By contrast, labour-intensive sectors, particularly agriculture, in which 80 per cent of Tanzanian households are employed, recorded an average annual growth rate of 4.2 per cent.

“Similar trends, with higher rates of growth recorded by the less labour-intensive sectors, were observed across the board during the first two quarters of 2013,” says the report.

With regard to inflation, the report says it has continued to fall over the past 18 months, declining to 6.3 per cent in October this year from 20 per cent at the end of 2011.

According to the report, the steady and significant decline has been the result of a combination of the implementation of a stricter monetary policy and a decline in food and energy prices.

The World Bank says the decline has also contributed to the stabilisation of the real exchange rate, which appreciated by almost 20 per cent in 2011/2012 as a result of the large inflation differential between Tanzania and its trading partners.

Exports declined

Over the first eight months of 2013, the total value of exports from Tanzania declined by 5.3 per cent compared with the same period last year. The decline is partly explained by lower world prices for some commodities, particularly gold. During the same period, the value of imported goods and services also declined.

While the decline in exports was apparent in all categories, the overall decline in the total value of imports has been largely driven by the decline in the value of capital goods, especially machinery, and to a lesser extent of consumption goods.

By contrast, the total value of intermediary imports increased by more than 17 per cent, largely driven by increases in the value of oil and fertilisers.