Figure 1: Real GDP Growth and Inflation in Tanzania (2015/16-2021/22)
Sources: IMF 2018a, Tanzania Financial Sector Assessment Programme; IMF 2018b, Tanzania Seventh Review Under the Policy Support Instrument; IMF 2016, Tanzania 2016 Article IV Consultation. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2018a.
In 2017/18, the GoT increased spending by 27.2% after real GDP declined from 7.0% in 2015/16 to 6.0% in 2016/17[1]. The increased public spending in 2017/18 was mainly driven by a 42.5% increase in capital expenditure and a 17.7% increase in recurrent expenditure. As real GDP declined slightly in 2017/18, the GoT is projected to have moderated expenditure growth to a 16.8% increase in 2018/19, mainly through a 17.3% increase in recurrent expenditure and a 16.3% increase in capital expenditure[2]. The GoT has been responsive to declining real GDP growth and fortunately inflation has been declining which allowed it to boost growth through recurrent expenditure. Even though the GoT has maintained a fiscal deficit and could only increase public spending using public debt, public debt levels have been stable due to prudent and countercyclical fiscal policy.
Figure 2: Sources of Government Revenue in Tanzania (2015/16-2021/22)
Sources: IMF 2018a, Tanzania Financial Sector Assessment Programme; IMF 2018b, Tanzania Seventh Review Under the Policy Support Instrument; IMF 2016, Tanzania 2016 Article IV Consultation. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2018b.
As discussed above, the GoT has followed countercyclical fiscal policy, driven by increasing savings during high growth periods and supporting economic recovery through public spending during slow growth periods. The GoT initially increased public spending in response to slowing growth then moderated spending as real GDP growth became stable around 6.0%. In addition, the GoT reduced its external debt slightly from an annual average of 29.3% of GDP from 2015/16 to 2017/18, to a projected 28.7% of GDP in 2018/19[3]. Although public debt has increased to finance the widening deficit as public spending increased, the public debt levels have remained stable and sustainable. Total public debt has increased slightly from an annual average of 38.3% of GDP from 2015/16 to 2017/18, to a projected 38.6% of GDP in 2018/19. Hence, the GoT has implemented prudent fiscal policy by reducing its reliance on external debt by substituting international borrowing with domestic debt.
Figure 3: Government Revenue and Expenditure in Tanzania (2015/16-2021/22)
Sources: IMF 2018a, Tanzania Financial Sector Assessment Programme; IMF 2018b, Tanzania Seventh Review Under the Policy Support Instrument; IMF 2016, Tanzania 2016 Article IV Consultation. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2018b.
In the forward-looking medium-term from 2019/2020 to 2021/22, real GDP growth is projected to continue recovering from 6.2% in 2018/19 to an annual average of 6.7%[4]. However, the GoT is expected to follow procyclical fiscal policy because recurrent expenditure is projected to continue growing albeit at a moderate rate and the GoT is expected to widen the fiscal deficit and public debt to finance the deficit. Total public expenditure growth is projected to moderate from 16.8% in 2018/19 to an annual average of 15.3% from 2019/20 to 2021/22[5]. Public spending is mainly going to be driven by increased recurrent expenditure growth with recurrent expenditure projected to continue growing at an annual average rate of 15.6% compared to capital expenditure growth at 14.9% from 2019/20 to 2021/22[6]. During this period the fiscal deficit is projected to widen from -TZS 6.2 trillion (-3.2% of GDP) in 2018/19 to an annual average of -TZS 6.9 trillion (-4.1% of GDP) from 2019/20 to 2021/22[7]. Hence, public debt is also projected to increase in the forward-looking medium-term.
Figure 4: Government Expenditure Composition in Tanzania (2015/16-2021/22)
Sources: IMF 2018a, Tanzania Financial Sector Assessment Programme; IMF 2018b, Tanzania Seventh Review Under the Policy Support Instrument; IMF 2016, Tanzania 2016 Article IV Consultation. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2018b.
The GoT needs to reconsider its recurrent spending growth in the forward-looking medium-term because procyclical fiscal policy will worsen the fiscal position. Increasing recurrent expenditure is expected to result in higher public debt because the GoT is expected to continue maintaining a fiscal deficit. Total public debt is projected to increase slightly from 38.6% of GDP in 2018/19 to an annual average of 39.8% of GDP from 2019/20 to 2021/22[8]. Instead of increasing recurrent expenditure the GoT should take advantage of the improve real GDP by reducing public debt and increasing public savings or investment. In spite of taking a procyclical fiscal approach in the forward-looking medium-term, the GoT is expected to pursue prudent fiscal policy by continuing to rebalance public debt away from depending on external public debt.
Figure 5: Gross Government Debt in Tanzania (2015/16-2021/22)
Sources: IMF 2018a, Tanzania Financial Sector Assessment Programme; IMF 2018b, Tanzania Seventh Review Under the Policy Support Instrument; IMF 2016, Tanzania 2016 Article IV Consultation. Note: (*) Figures from 2018/19 onwards are projections from the IMF, 2018b.
Hence, domestic public debt is projected to increase from 11.0% of GDP in 2019/20 to 12.0% of GDP in 2020/21[9]. As a result of the prudent fiscal policy of rebalancing public debt, debt-servicing costs are projected to remain sustainable in spite of the increased public debt in the medium-term. Public debt-servicing costs are projected to increase from TZS 313.0 billion (1.4% of total government revenue) in 2018/19 to an annual average of TZS 815.0 billion (2.9% of total government revenue) from 2019/20 to 2021/22[10]. Therefore, the GoT is expected to retain fiscal sustainability due to its prudent fiscal policy in spite of the procyclical approach to fiscal policy.
The GoT should take a cautionary note of its fiscal policy stance in the forward-looking medium-term. Although the GoT has maintained countercyclical and prudent fiscal policy from 2015/16 to 2018/19, the GoT is expected to take a procyclical and prudent fiscal policy stance in the forward-looking medium-term. In spite of the positive and robust real GDP growth and moderate CPI, the GoT’s fiscal stance in the forward-looking medium-term is not sustainable as this is projected to increase the fiscal deficit, public debt and debt-servicing costs. Nevertheless, at current levels, public debt remains stable and affordable.
[1] IMF 2018a. Tanzania Financial Sector Assessment Programme, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 24 July 2019].
[2] IMF 2018b. Tanzania Seventh Review Under the Policy Support Instrument, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 18 August 2019]; IMF 2016. Tanzania 2016 Article IV Consultation Report, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 24 July 2019].
[3] IMF 2018a. Tanzania Financial Sector Assessment Programme, ibid.
[4] IMF 2018a. Tanzania Financial Sector Assessment Programme, ibid.
[5] IMF 2018b. Tanzania Seventh Review Under the Policy Support Instrument, ibid.
[6] IMF 2018b. Tanzania Seventh Review Under the Policy Support Instrument, ibid.
[7]IMF 2018a. Tanzania Financial Sector Assessment Programme, ibid.; IMF 2018b. Tanzania Seventh Review Under the Policy Support Instrument, ibid.; IMF 2016. Tanzania 2016 Article IV Consultation Report, ibid.
[8] IMF 2018a. Tanzania Financial Sector Assessment Programme, ibid.; IMF 2018b. Tanzania Seventh Review Under the Policy Support Instrument, ibid.
[9] IMF 2018a. Tanzania Financial Sector Assessment Programme, ibid.; IMF 2018b. Tanzania Seventh Review Under the Policy Support Instrument, ibid.
[10] IMF 2018a. Tanzania Financial Sector Assessment Programme, ibid.; IMF 2018b. Tanzania Seventh Review Under the Policy Support Instrument, ibid.
