Tuesday, July 04, 2017 11:25 AM / BMI Research
BMI View: Tanzania's budget deficit will widen in the coming two fiscal years on the back of increased public investment in infrastructure. While this will lead to an increase in debt stock, limited currency risk, an elongated maturity profile and robust sovereign credentials will limit risks to debt sustainability.
Although Tanzania's fiscal deficit will narrow in fiscal year (FY) 2016/17 (running from July 2016 to June 2017) owing to an undershooting of capital spending targets, this trend will reverse course in the years ahead, with the country poised to report moderately higher budget deficits in FY2017/18 and FY2018/19.
While revenue collection will continue at a robust pace due to the Magufuli administration's fiscal reforms, progress in public infrastructure development will gain momentum, which will see an uptick in government spending.
As such, we forecast a deficit of 3.5% of GDP in FY2016/17, from 4.3% previously, followed by 3.8% in FY2017/18 and 4.0% in FY 2018/19. Tanzania's debt stock will increase steadily as a result, but we expect it will nevertheless do so at a sustainable level.
Public Investment to Strengthen Capital Expenditure
The narrowing of the deficit in FY2016/17 is in part a reflection of delays to infrastructure plans, resulting in more limited capital expenditure growth than foreseen in the government's targets.
According to latest estimates, capital expenditure growth in the first six months of the fiscal year did not hit its ambitious targets, growing 49.1% opposed to the target of 300%, leading the government to run budget surplus over this timeframe. However, spending will ramp up in the coming quarters.
Momentum on publicly-funded infrastructure projects will build up towards end-2017. This trend will continue in coming fiscal years, with our infrastructure team expecting construction on the regional standard gauge railway (the DIKKM project) to begin towards end-2017, which will see public spending on capital imports, labour and administration tick up.
The addition of two new container berths to Dar es Salaam port will also bring up government spending. We note that some of these extra costs will be offset by the current government's anti-corruption drive, which has included the removal of 'ghost workers' from the public sector payroll will be ongoing, and the dismissal of public officials accused of corruption.
However, this will not outweigh the increasing outlays required for infrastructure development. Thus, we expect expenditure as a percentage of GDP to rise to 22.2% in 2016/17 (from 19.0% previously), followed by 24.3% and 25.1% in FY2017/18 and FY2018/19 respectively.
Ongoing Tax Collection Efforts Will Bolster Revenue
Improvements in revenue collection will continue in coming quarters as the Magufuli administration cracks down on tax evasion and widens the base of taxpayers.
In particular, the government has sought to more stringently enforce tax regulations targeting large companies, which helped generate significant additional revenue in the short term.
Moreover, efforts to widen the base of taxpayers in the country through an online tax collection system and formalisation of workers will also see income taxes increase.
Given the share of informal employment in the country (estimated at 75.1% of total workers in 2014), there is significant room for growth in this area. We therefore forecast revenue to GDP to rise to 17.8% in FY2016/17 (up from 14.0% previously), followed by 19.2% and 19.7% in FY2017/18 and 2018/19 respectively.
Debt Stocks Will Remain Manageable Despite Higher Spending
While continued deficits will keep the country's borrowing requirement elevated, we see little risk to debt sustainability. According to our estimates, total government debt as a percentage of GDP reached 39.6% in 2016, and we expect it will rise to 41.2% by 2019.
The majority of Tanzania's debt is made up of concessional loans with a low interest burden and an elongated repayment schedule.
Further, the country has little commercial debt denominated in dollars, meaning foreign exchange risk is limited. The government plans to issue an inaugural eurobond in FY2017/18, although we expect borrowing costs will not be punitive as Tanzania's robust sovereign credentials continues to support investor sentiment toward the country.
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