World Bank warns Tanzania against over-reliance on China

With trade now standing at $2.6 billion, and development finance having grown to $1.2 billion, Tanzania is dangerously exposed to the slowdown in the world’s second-largest economy China. TEA GRAPHIC | NATION MEDIA GROUP 

By CHRISTOPHER KIDANKA

In Summary

• Increasing economic ties between Tanzania and China could be threatened by Beijing’s faltering growth, the World Bank has warned.
• China is one of Tanzania’s biggest trading partners and an increasingly important source of development funds and foreign direct investments. In 2014, the value of Sino-Tanzanian trade surged to about $2.6 billion from negligible levels in 2000.
• The World Bank says China’s faltering growth may have sizeable knock-on effects on the Tanzanian economy as a result of a deceleration in exports. A sharper-than-expected slowdown in China could spill over into the Tanzanian economy through both direct and indirect investments.

The recent declaration by a senior government official that Tanzania would get the lion’s share of a $20 billion fund set up by China to help African countries to industrialise is the latest signifier of the strong ties between the two countries.

However, the increasing economic ties between Tanzania and China could be threatened by Beijing’s faltering growth, the World Bank has warned.

China is one of Tanzania’s biggest trading partners and an increasingly important source of development funds and foreign direct investments. In 2014, the value of Sino-Tanzanian trade surged to about $2.6 billion from negligible levels in 2000.

Currently, the country is implementing phase one of its economic blue print, which began in 2011 titled Unleashing Tanzania Growth Potential.

Permanent Secretary in the Ministry of Industry, Trade and Investment Adelhelm Meru, said Tanzania is taking advantage of China’s industrialisation drive by investing in value-addition.

“By the year 2020, the industrial sector will be contributing 15 per cent of the country’s GDP,” he said.

In its economic update on Tanzania in a report titled, The Road Less Travelled: Unleashing Public-Private Partnerships in Tanzania, the Bank observes that in recent years, the Chinese economy has been slowing down, partly reflecting a rebalancing towards a consumption-driven, services-oriented growth model.

This, it states, sends a warning signal to the Tanzanian economy, whose ties with Beijing have recently been surging.

“The value of China’s development finance to Tanzania has also grown substantially in recently years, including $1.2 billion in 2013/14-2014/15 for the construction of the gas pipeline from Mtwara to Dar es Salaam. Moreover, the officially reported stock of Chinese FDI in Tanzania has increased significantly, standing at an estimated value of $60 million in 2013,” says the report.

Over the past decade, unparalleled growth in China was mainly driven by an investment boom that led to soaring demand for commodities.

The World Bank says China’s faltering growth may have sizeable knock-on effects on the Tanzanian economy as a result of a deceleration in exports. A sharper-than-expected slowdown in China could spill over into the Tanzanian economy through both direct and indirect investments.

Export values

China contributed to more than 10 per cent of Tanzania’s total exports value and was the third major export destination after India and South Africa.

The value of China’s development finance to Tanzania has also grown substantially in recently years, including $1.2 billion in 2013/14-2014/15 for the construction of the gas pipeline from Mtwara to Dar es Salaam.

The report shows the reported stock of Chinese FDI in Tanzania has increased significantly, standing at an estimated value of $60 million in 2013, while the increased economic ties have resulted in increased economic growth. However, it has also closes Tanzania’s vulnerability to downturns in China’s business cycles. 

According to the brief, which was presented to Tanzania’s Vice President Samia Suluhu Hassan by World Bank country director Bella Bird, the structural shift away from investment-propelled growth has recently begun manifesting itself in depressed demand and lower prices far commodities.

In particular, the slowdown in China’s economy has weighed heavily on most commodity prices, with metal prices dropping particularly sharply. For example, the price of gold stood at $1,245 per ounce in April 2015, a decline of 70 per cent from its peak in mid-2011. 

In addition, if the Chinese economy stalls, it may put a further strain on the availability of development finance far Tanzania. The magnitude of the ripple effect in the future depends on how successful and smooth China’s economic rebalancing will be. 

To redress the risk, Ms Bird said Tanzania needs to increase investments in infrastructure and human capital to further unlock its growth potential while enabling the private sector to create more jobs.

“This will not only have a stronger impact on poverty reduction but it is also consistent with the new government’s priorities and its commitment to the achievement of the country’s Vision 2025 goals.”

“There are needs but the resources are limited and a focused approach in which key development priorities are fully financed will be needed to achieve the desired results,” she said.

The report highlighted the need to explore public private partnerships (PPPs) since this is still “under-utilised way of financing development, consistent with the Sustainable Development Goals (SDGs).”

Ms Bird noted that despite Tanzania’s economic growth being relatively high, it has not yet led to acceleration in job creation and the number of people living below poverty line has remained stagnant at 12 million since 2007, partly due to high population growth. 

She said 800,000 young Tanzanians enter the job market every year where productive opportunities remain.

According to the Tanzania Bureau of Statistics, the unemployment rate in Tanzania averaged 11.46 per cent from 2001 until 2014, reaching an all-time high of 12.90 per cent in 2001 and a record low of 10.30 per cent in 2014.

Emmanuel Mungunasi, World Bank senior advisor and co-author of the report, said Tanzania needs to improve overall business environment, including through improved access to finance and electricity, for private sector development.

“Further development of the private sector will be key to accessing the needed resources including financing and creating more employment opportunities which are critical for poverty reduction,” he said.

Vice president, Samia Hassan pointed out that PPPs have not yet achieved the intended goals, but the government is keen on supporting the initiative to foster meaningful growth