UPDATE ON TANZANIAN ECONOMY: SHORT-TERM GROWTH

UNCLAS SECTION 01 OF 03 DAR ES SALAAM 000950

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E.O. 12958: N/A
TAGS: ECON EAID FINE EINV ENRG PREL AA TZ
SUBJECT: UPDATE ON TANZANIAN ECONOMY: SHORT-TERM GROWTH
MUST CONTINUE LONG-TERM

SUMMARY
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1. (U) Tanzania's economy grew by 6.2 percent in 2006
despite drought-like conditions and a prolonged energy
shortage, according to second quarter Government of Tanzania
(GOT) and International Monetary Fund (IMF) reports. Exports
continue to rise with minerals the leading growth sector.
The country's import bill was higher however, partially from
the need to import more food due to the drought and higher
world oil prices. The Tanzanian Revenue Authority surpassed
its revenue targets through a successful reform program that
closed important tax loopholes. However, inflation was
considerably above the 4.0 percent target set three years
ago, reaching a monthly average of 5.7 percent in the GOT
fiscal year (July 1 to June 30). While the GOT is predicting
a 7 plus percent Gross Domestic Product (GDP) growth rate in
2007, 2008 and 2009, both the IMF and senior Government of
Tanzania officials realize that there needs to be more focus
on the rate of population growth which continues to rise and
could negatively impact any gains the economy might make.
End Summary.

Economic Growth Holding Steady
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2. (U) On June 12, in preparation for her budget
presentation to the Parliament, the Minister of Finance, Ms.
Zakia Meghji, discussed the state of the Tanzanian economy.
Meghii noted that the final calendar year 2006 figures show
Tanzania,s Gross Domestic Product (GDP) to have grown by 6.2
percent, slightly above the predicted growth rate of 5.9
percent. Meghji stated: "Were it not for drought conditions
and the power crisis that hit the country in early 2006, the
economy would have performed much better." The 2006 growth
rate of 6.2 percent followed three years of strong economic
progress for Tanzania: in 2005, 6.8 percent; in 2004, 6.7
percent; and in 2003, 5.7 percent. Minister Meghji said that
guidelines for the 2007/08 budget now under discussion in the
Union Parliament, predict Tanzania's GDP growth rate at: 7.3
percent in 2007; 7.7 percent in 2008; and 7.9 percent in 2009.

IMF Concurs
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3. (U) In a mid-May briefing to diplomats and multilateral
heads, Robert Sharer, Assistant Director in the African
Department of the International Monetary Fund (IMF),said
that IMF is in agreement with this prediction. Sharer noted
the economy of Tanzania is "going very well indeed," although
it remains fragile. Despite continued economic growth,
Tanzania is a "very poor country and will remain so for the
next 20 to 25 years," concluded Sharer. Sharer has visited
Tanzania three times per year for the last four years and
shared IMF's assessment of recent economic developments and
the policies needed to sustain Tanzania's policy reforms.


4. (U) Sharer said that the IMF predicts Tanzania's GDP will
grow by more than 7 percent in 2007: "Good for any standard
in the world," Sharer noted. The UN Economic Commission for
Africa has predicted an average 5.8 percent growth throughout
Africa in 2007. However in Sharer's view, making gains to
fight poverty in the short-term (two-to-three years) is
unrealistic since factoring in a two-percent population
growth rate makes the GNP-per-captia growth only 3.3 percent
per year. Sharer said there is a growing sense of concern
within the Government of Tanzania (GOT) about population
growth, observing that President Kikwete had commented
earlier in May that the GOT "needs to get serious" about
population growth and natural resource management.


5. (U) In February 2007, the Executive Board of the IMF had
reviewed Tanzania's macroeconomic framework, noting the areas
where solid gains had been made and encouraging sustained and
sound economic policies. At that time, Murila Portugal, the
IMF Deputy Managing Director, stated that "Tanzania has
achieved a sustained strong economic performance through
market-oriented policies within an appropriate macroeconomic
framework." His remarks were made at the conclusion of the
final review of Tanzania's economic performance under a
three-year Poverty Reduction and Growth Facility (PRGF)
arrangement. The review enabled an additional release of USD

DAR ES SAL 00000950 002 OF 003


4.2 million, bringing the total disbursement under the PRGF
arrangement to USD 29.4 million.

Key Sectors are Growing
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6. (U) A June 4 GOT Ministry of Economy, Planning and
Empowerment report stated that Tanzania,s exports of goods
and services in 2006 was USD 3.13 billion up from USD 2.95
billion in 2005. Growth in exports was led in 2006 by the
mineral sector, with a 16.4 percent increase to USD 824.7
million, up from USD 665.6 million in 2005. Tourism and port
services were also important factors in this growth, with the
export of manufactured goods increasing significantly as
well. Tanzania,s import bill was USD 3.9 billion, up from
USD 3.01 billion in 2005, approximately a 28.9 percent
increase. As a result, Tanzania's current account deficit
increased to 9.3 percent of GDP in 2005/06 as compared to 5.3
percent of GDP in 2004/05. According to a GOT Treasury
report released on June 11: "The projected moderate increase
in the current account deficit is expected to be covered by
higher external assistance in the form of grants and
concessionary loans, as well a continued increased in Foreign
Direct Investment (FDI)."


7. (U) According to the Treasury report, key export sector
growth areas include: mineral exports representing 47.8
percent of export earnings; industrial products, 11.4
percent; fish and fish products, 8 percent; tobacco, 3.8
percent; coffee, 3.6 percent; and cotton, 3.2 percent.
Tanzania,s export of goods and services are expected to grow
by an average of 10 percent per year over the next three
years. During the same period, imports are expected to grow
by 12 percent. The import bill will rise due to investments
needed in the energy sector and projected higher world market
oil prices.


8. (SBU) Andrew McAlister, the Canadian High Commissioner to
Tanzania, noted during Sharer's IMF briefing that growth in
the banking sector had been impressive in 2006, but still
only 8 percent of Tanzanians have bank accounts. McAlister
also highlighted the "huge revenue losses" associated with
illegal timber trafficking and issuance of wildlife hunting
licenses. Sharer agreed that the allocation of many hunting
blocks is done in secret, but added that hunting block fees
would be included in a government study of all revenues other
than taxes, the terms of reference for which are being
finalized.


9. (SBU) All briefing participants agreed that the
transparency of the Bank of Tanzania's (BOT) accounts are key
as all of the formal economy flows through the Central Bank
accounts. Sharer said the IMF insisted that an international
firm audit the BOT and that the terms of reference for this
audit include every transaction.

Tax Revenue Collection Up
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10. (U) Despite the moderate slow-down in the GDP economic
growth rate in 2006, the Tanzanian Revenue Authority was able
to surpass its domestic revenue collection target of 14.5
percent of the GDP during the 2006/07 fiscal year. According
to the Ministry of Finance, the increase reflects "continued
tax and customs administration reforms and policy measures
announced one year ago, in the course of the 2006 budget
deliberations in the Parliament." Sharer praised the TRA
calling its reform "by far the most effective, well-organized
and well-executed reform of a tax administration." Through
the TRA's reform efforts, tax revenues went from 11 percent
of the GDP last year to 16 percent in 2006/07, well-above its
budgeted performance target (14.5 percent). This increase
was attributed to closing existing loopholes rather a hike in
the tax rates. Provisional Treasury figures showed that by
June 30, last day of the GOT fiscal year, revenue collections
should reach 2.55 Tz shillings (approx. USD 20.3 billion) as
compared to the target of 2.46 trillion Tz shillings (approx.
USD 19.60 billion).

...But Inflation on the Rise as Well
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11. (U) The Minister of Planning, Economy and Empowerment,
June Ngasongwa announced on June 8 that the average inflation
rate in fiscal year 2006/07 was well above the target of 4
percent that had been set in 2004. Over the last eleven
months, the inflation rate averaged over 5.7 percent per
month. Drought, which affected both food supplies and energy
production, coupled with escalating crude oil prices,
adversely affected the GOT,s efforts to curb inflation,
according to Minister Ngasongwa. He noted that prices began
to decline in the first quarter of 2007, especially the price
of food items such as potatoes, bananas, beef, beans and
groundnuts. In addition, the Bank of Tanzania's May 2007
monthly report showed that the country's Strategic Grain
Reserve (SGR) reached 125,509 metric tons in April 2007. One
year previously, April 2006, there were only 6,210 metric
tons in the SGR, during the height of the drought-related
food shortage that was felt severely throughout most of the
country. The GOT has revised the target inflation rate for
the next twelve months (FY2007/08) to an average of 4.5
percent.

Constraints
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12. (U) While IMF's Robert Sharer believed the GOT is
serious about economic objectives, the government continues
to experience capacity constraints and thus, progress is
"slower than desired." In his view, despite experiencing the
2006 drought and energy shortage, Tanzania is still moving in
the right direction. However, Sharer recognized that the GOT
continues to face serious problems, including linking public
expenditures to government policy objectives, undisbursed
public funds, and weak internal communications between GOT
agencies and other entities.

Doing Business in Tanzania
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13. (U) Doing business in Tanzania continued to be
challenging with high costs for labor, electricity and water.
Jonathan Njau, Chief Executive Officer of the Dar es Salaam
Stock Exchange, recently encouraged companies to go public,
noting the tax incentives that become available.
Publicly-listed companies pay 25 percent corporate tax
instead of 30 percent and a 5 percent tax on dividends rather
than 10 percent. While no Tanzanian company was ranked as
one of Africa's Top 200 Companies in African Business 2006
survey, and only three Tanzanian companies ranked in the top
50 in East Africa, Njau noted that all three were firms that
had gone public.

Comment
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14. (SBU) The cautious optimism for Tanzania's economy must
be tempered by patience, as progress remains slow. There is
no silver bullet for economic growth or reform. For example,
in April 2007 the World Bank praised Tanzania for being one
of the ten countries that made the most significant reforms
among the indicators monitored by its "Doing Business
Report." However, even after taking commendable reforming
strides, Tanzania ranked only 142 out of 175 world economies
in the "ease of doing business." Commitment to economic
reforms must remain steady, as sustained economic growth of 6
to 8 percent as well as serious attention to slowing down the
population growth is needed over a period of years and
decades in order for Tanzania to alleviate poverty among its
38 million plus citizens.
RETZER