Tanzania¡¯s growth has remained resilient, accompanied by low Inflation. Fiscal and current account deficits are narrowing, driven by improved tax collection and strong trade performance. Pressures in the foreign exchange market persist, albeit with some promising signs of moderation. The medium-term outlook is positive, with GDP growth expected to align more closely with its long-term potential (estimated at around 6%), supported by ongoing structural reforms and an improved business environment.
In the first quarter of 2024, GDP growth accelerated to 5.6% year-on-year, building on 5.1% growth in 2023. Leading indicators affirm that the economy has maintained this strong momentum in the second quarter. On the supply side, growth was primarily driven by manufacturing, electricity, construction, tourism, trade, and financial services. Inflation declined from 3.3% in July 2023 to 3.0% in July 2024 (y-o-y), well below the Bank of Tanzania¡¯s medium-term target of 5%. The Bank of Tanzania continued to tighten its monetary policy stance to restore the equilibrium in the Forex market.
Despite a 0.3 percentage point increase in interest payment as a share of GDP, Tanzania's fiscal position has strengthened. The overall fiscal deficit declined from 4.0% of GDP during the first 11 months of FY2022/23 to 3.3% during the first 11 months of FY2023/24, driven by improved tax collections coupled with spending restraint in primary expenditure. The primary fiscal deficit declined from 2.1% of GDP to 1.2% over the same period.
Bolstered by favorable terms of trade, the Current Account Deficit narrowed from 4.2% of GDP in Q1-2023 to 2.4% of GDP in Q1-2024. Net FDI inflows continued to recover after a long decline and are estimated at around 2% of GDP. While Forex tensions persist, there are positive signs of moderation. Strengthened external conditions and greater flexibility of the exchange rate, which resulted in an over 12% depreciation of the Tanzanian shilling during the past year, have moderated the tensions in the Forex market and reduced the parallel market premium from an estimated 8-10% in Q1 to 4-5% as of September. Maintaining this momentum will be necessary to eliminate Forex distortions.
The present value of the public debt-to-GDP ratio is projected to remain comfortably below Tanzania's debt-carrying capacity benchmark of 55%. By the end of FY23, total debt held by the central government was increased by 44.3% of GDP, up from 42.5% of GDP in FY22, and reached $34.5 billion in nominal terms, marking a 12.3% rise from the previous fiscal year. External debt grew by 8.2%, while domestic debt surged by 20.3%.
Over the medium term, growth is expected to average around 6%, as improvements in the business environment and full implementation of reforms are likely to attract more investment, including Foreign Direct Investment (FDI). Headline inflation is projected to stay low and stable, anchored by a newly adopted interest rate-based framework. Going forward, the focus needs to be on translating the strong economic performance into poverty reduction, which has been a challenge for Tanzania. This requires further prioritization of human capital development, agricultural productivity, and strengthening of social protection and climate resilience.
Last Updated: Oct 01, 2024
