Tanzania: Downgrade of medium- to long-term political risk classification from 5/7 to 6/7

Tanzania has been downgraded to category 6/7 following the deterioration of its financial situation

Tanzania’s financial situation has gradually deteriorated in the past years following a steady increase in the external debt and more expensive external debt funding. The increase of the external debt has not been matched by a comparable increase in current account receipts, which raises concerns about the country’s external debt sustainability. The Covid-19 pandemic impact on Tanzania’s economy, and on the export sector in particular, has led to a further deterioration of financial indicators. A protraction of the current crisis could further deteriorate the economic and financial situation of Tanzania. Additionally, Tanzania’s reliance on external borrowing makes the country very vulnerable to a tightening of global financial conditions. For these reasons the country has been downgraded from category 5/7 to 6/7.

In the last decade, Tanzania’s classification remained stable as a result of its solid macroeconomic performance

Tanzania was amongst the top performers in East Africa in the years preceding the Covid-19 pandemic, as a result of its solid economic performance and relatively healthy public finances. In the 2009-2019 period, the country enjoyed high economic growth levels averaging 6.5%. The pre-Covid-19 outlook for the medium term was positive, with projections of growth levels at around 6%, driven by important infrastructure projects. In spite of large investments, the public debt stock and the public interest payments were at a moderate level in 2019, relative to GDP and public revenue. Additionally, the country was considered one of the least volatile countries in the region, with low inflation rates and relatively stable exchange rates. The main source of uncertainty was former President Magufuli’s increasingly authoritarian tendencies and unpredictable policy measures.

Although the country has weathered the crisis better than other countries, the outlook for the export sector remains subdued

Following the Covid-19 pandemic, the country experienced its lowest GDP growth level in almost 30 years (1% GDP growth in 2020). This deceleration was the result of mainly external drivers that affected the country’s main export sectors. The global economic downturn depressed both demand and prices for agriculture and manufacturing goods. The tourism industry, one of the fastest growing sectors in Tanzania, was impacted as well due to the global and national travel restrictions. As for internal restrictions, they are estimated to have played a minor role, as the authorities declared the country Covid-19 free in June 2020 (without any scientific proof) and lifted all containment measures by July 2020. The IMF projects a GDP growth of only 2.7% in 2021. The deceleration of growth levels is expected to continue in the 2022-2026 period (about 5% on average). In general, the outlook for the country remains subdue because of the uncertainty over the evolution of the Covid-19 pandemic and the global economic recovery. 

The slowdown in economic activity linked to the Covid-19 shock has not led to a deterioration of public finances. The fall in public revenues due to the economic slowdown has been mitigated by higher gold receipts while public expenditure has increased only marginally. The authorities have provided limited support to the economy and have funded it by reallocating funds from other spending categories, using contingency reserves and grants received. As a result, the overall fiscal deficit was moderate in 2020 (1% of GDP). The low fiscal deficit and muted economic expansion kept Tanzania’s public debt levels stable in 2020, at the previous year level (38.2% of GDP). The public debt burden is projected to decrease in the following 5 years, driven by recovering growth rates and limited fiscal deficits. Despite the relatively low public debt levels, public interest payments have been increasing since 2010. 

Tanzanian structural current account balance deficit deepened slightly in 2020, reaching 2.7% of GDP. The deterioration is very limited considering that, for about 30% of its current account receipts, Tanzania relies on tourism, one of the sectors most severely hit by the current pandemic. The shock was mitigated by the increase of gold prices due to its safe haven status and the contraction of imports driven by a fall in oil prices. On the contrary, in 2021, the current account balance is projected to deepen significantly (-4.3% of GDP) as the mitigating factors dissipate and the tourism sector outlook continues to be subdued. Looking forward, the current account balance deficits are projected to remain substantial and larger than pre-Covid-19 levels as long as the tourism sector remains depressed. The country’s inefficient management of the Covid-19 pandemic and the non-existent vaccination campaign may further hinder the local recovery of the sector and, subsequently, of current account receipts. Hence, gross foreign exchange reserves are expected to remain under pressure, even if they are still at an adequate level for the time being. In June 2020, in order to alleviate Tanzania’s additional balance of payments needs created by the Covid-19 pandemic, the IMF granted the country a debt relief of about USD 14.3 million under the Catastrophe Containment and Relief Trust (CCRT). In October 2020, the country received a second tranche of USD 11.7 million and the IMF announced that additional debt relief up to USD 25.7 million (conditional on funds availability) could be made available.

Tanzania’s external debt sustainability has gradually deteriorated in the past years 

The country’s external debt remains at a moderate level compared to GDP but at a high level compared to current account receipts. The funding of ambitious investment programmes has led to a steady increase of external debt levels in absolute and relative terms since 2007. In absolute value, the external debt has been multiplied by more than 5 between 2007 and 2019 whereas the current account receipts have only doubled during the same period. This is a worrying situation as it means that the country is not able to generate sufficient foreign exchange earnings to pay back its external debt. Moreover, the external debt service has been on the rise as well. The increase in the external debt service is a result of Tanzanian authorities’ reliance on more expensive non-concessional borrowing to finance current account and fiscal deficits. In recent years, Tanzania’s access to concessional lending has decreased and foreign grants have fallen due to the lack of commitment of the authorities to implement reforms. A weak global recovery from the Covid-19 pandemic would put further pressure on Tanzania’s financial outlook, especially if global financial conditions were to tighten. 

Analyst: Andres Hernandez Cardona – a.hernandezcardona@credendo.com