Tanzania: Domestic and foreign investments spur green growth

ACCORDING to the Bank of Tanzania, economic growth in the first quarter of 2024 is estimated at 5.1 percent, supported by increased domestic and foreign investments.

This was supported by the notable growth in credit to the private sector, which remained in double digits for the last two years. Headline inflation saw a slight increase of 10 basis points in the year ending April 2024, standing at 3.1 percent, from 3.0 percent in March.

Despite the slight increase, inflation remains within the central bank’s target range of between 3.0 percent and 5.0 percent. The stable inflation is due to the stabilization of food prices, as non-core inflation stood at 1.4 percent, 50 basis points higher than in February.

The unprocessed food index saw slight annual deflation of 0.5 percent in April from 0.6 percent in March and 0.1 percent in February. However, the index recorded monthly inflation of 1.0 percent, down from 1.9 percent in March 2024 due to seasonal movements.

The period between February and April is historically known to have the highest monthly food inflation as it is far from harvest seasons.

Taking into account the weight and importance of food products in the consumption basket of the Tanzanian community, together with the importance of agriculture as a sector in the balance of payments, employment and its share in GDP, the government has has been taking a number of initiatives to improve the agricultural sector and domestic food security, which has partly contributed to the recent stability of food prices.

Some of the government’s initiatives include providing 1.0 tri/- agricultural facility in the central bank available to commercial banks, to lend to the sector at less than 9.0 percent from 2021. In the same vein, the Bank of Tanzania waived the minimum legal reserve for credits granted to agricultural activities.

The government also provided subsidies on agricultural inputs, such as fertilizers, to alleviate input prices during the pandemic and the global supply shock experienced since late 2021. Additionally, in 2023, the Ministry of Agriculture oversaw the establishment of the Insurance Consortium Tanzania Agricultural Organizations (TAIC). which is a collaboration between the government, agriculture stakeholders and insurance companies.

The main objective is to train farmers against the risks surrounding agricultural activities and at the same time attract financing to the sector.

Furthermore, in his budget speech, the Agriculture Minister hinted that the Ministry is finalizing talks with NBC Bank regarding the issuance of Food Security Bond by the National Food Reserve Authority (NFRA) for ensure sufficient domestic food supply.

Although this is a notable development for the sector and a demonstration of how capital markets can be used for economic development, generating NFRA cash flows for debt service is a crucial issue that should be considered, in order to avoid a greater debt burden. We await the final structure of the program.

While non-core inflation was minimal, energy inflation was on fire, as the energy, fuels and utilities index rose 9.3 percent in the year ending April 2024, the highest pace among all the segments of the inflationary consumption basket. This follows rising fuel prices following geopolitical tensions in the Middle East and Europe. Notably, the annual inflation of the index increased from 5.1 percent in December 2023.

Energy inflation is supported by the approximate 16 percent increase in domestic fuel prices published by EWURA. Monthly prices rose 1.7 percent and 4.0 percent since the beginning of the year. The year-on-year increase is reflected in the 11 percent rise in the global price of crude oil, according to Trading Economics.

Global fuel prices have seen slight volatility in recent weeks as rising global supply suppresses prices, while geopolitical tensions, especially in the Middle East, drive prices up. Core inflation stood at 3.9 percent, largely influenced by the personal care, social protection and miscellaneous goods and services segment, which increased 7.5 percent in the year ending in April.

Other influential segments on core inflation were transportation (4.35 percent), driven by rising fuel prices, and the restaurants and accommodation services segment (4.05 percent), as tourism deteriorates following government promotion and continued recovery from the pandemic.

Despite subdued inflation, the Bank of Tanzania raised the central bank policy rate (CBR) by 50 basis points to 6.0 percent in April, as a preventive measure against persistent inflationary pressures arising mainly from persistent challenges exchange rates faced by developing countries.

The Federal Open Market Committee (FOMC), at its meeting held on May 1, 2024, kept interest rates at their highest level in 23 years, amid persistent inflation data in February and March. This contrasts with expectations at the beginning of the year, when markets anticipated at least three rate cuts in 2024.