IMF Says Spending Cuts, Lagging Capital Projects Slow Tanzania Expansion

  • Economic growth in first-half suffered from lower expenditure
  • Government has been slow in rolling out capital projects

Tanzania’s focus on more efficient expenditure, while good in the long run, has slowed expansion in one of Africa’s fastest-growing economies this year, according to the International Monetary Fund.

Even as President John Magufuli’s government reduced its recurrent expenditure “very sharply,” affecting large sections of the economy that are traditionally reliant on public spending, it also failed to roll out capital projects fast enough to counter the slowdown, said Bhaswar Mukhopadhyay, the IMF’s country representative.

Since assuming office in late 2015, Magufuli has fought to reduce government waste and inefficiency by firing officials seen as corrupt or ineffective, and demanding greater accountability of state funds in East Africa’s second-biggest economy.

“This particular government has also actually made the hard decisions to curb wasteful spending, try and re-orient spending toward capital spending,” Mukhopadhyay said Monday in an interview in the commercial hub, Dar es Salaam. “In the budget it had allocated significant amounts of money toward capital spending, but at least in the first half of the year, that capital spending had not started flowing at the same speed as had been anticipated.”

In March, Finance Minister Philip Mpango told lawmakers the administration had spent only 35 percent of the 2016-17 development budget, citing financial constraints.

The result has been a “soft patch” in growth, Mukhopadhyay said. While the economy expanded by a slower-than-expected 7 percent in 2016, it still beat sub-Saharan Africa’s 1.4 percent expansion last year. “In the immediate period, there seems to be in the first half of this calendar year some slowing from the very high growth rates that Tanzania has achieved in recent years,” he said. “But by and large, the fundamentals of the economy remain strong and growth remains strong.”

The government has taken longer than planned to finalize the public-sector deals and procurement and to get the spending going. “That’s clearly an area where people can work a little faster, get that money out quicker, get those projects running as soon as possible,” he said, citing a planned 2,200-kilometer railway that was delayed due to financing taking long to secure.

Business Environment

A reluctance to borrow from international markets due to high costs in the second half of 2016 also limited government spending, Mukhopadhyay said. Tanzania planned to borrow as much as $1 billion, and some of those deals are now being finalized, he said, without giving details. The state stayed away from the domestic market because of high interest rates.

“In the second half of the fiscal year, we will see an easing of the financing constraints. That should boost aggregate demand in the economy and boost growth as well,” he said.

The state has been “very conservative” about borrowing costs, he said. “Tanzania perhaps wanted to borrow at the much lower rates that existed three years ago. That’s not the state of the market right now.”

While securing a sovereign credit rating won’t reduce costs substantially, it will expand Tanzania’s opportunities to borrow, Mukhopadhyay said. The IMF has encouraged the state to seek a rating and there is interest within the government to expedite the process, he said.

Mukhopadhyay urged the government to improve the nation’s business environment by integrating tax systems and cutting the amount of regulatory obstacles for the private sector.

“Simplicity in the tax system, simplicity of regulations, imposing regulations only to the extent that they are really needed, that kind of rationalizing goes a long way toward improving the business environment,” he said.

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