Tanzania and the IMF
News Brief: IMF Completes Review under Tanzania's PRGF Arrangement and Approves US$26 Million Disbursement
Free Email Notification
of Intent and
Mr. Horst Köhler
Dear Mr. Köhler:
1. Tanzania is implementing its program for poverty reduction and growth with support from the IMF through a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) extending to March 2003. The second periodic review under this arrangement was concluded by the Executive Board of the IMF on March 14, 2001. The present letter requests completion of the third review under the PRGF arrangement; to this end, it discusses progress in implementing the program since the beginning of 2001 and lays out the government's policy intentions and targets through mid-2002.
I. Recent Economic Performance and Policy Implementation
2. Recent macroeconomic developments remained broadly in line with the program objectives and targets. Real GDP growth, at 4.9 percent, was slightly lower than expected for 2000 (5.2 percent), while the 12-month rate of inflation declined as projected to 5.1 percent by June 2001. Gross official reserves amounted to US$983 million at end-June 2001, equivalent to five months of imports of goods and nonfactor services projected for 2001. The quantitative performance criteria for end-March 2001 for net domestic assets, net international reserves of the Bank of Tanzania (BoT), and net domestic financing of the government were observed with comfortable margins, and government revenue exceeded the respective benchmark. The quantitative benchmarks for end-June 2001 were also observed. The structural performance criteria on the reconciliation of the government's bank accounts with the BoT by end-March 2001 and with the commercial banks by end-June 2001 were observed, but the one on the completion of an audit of end-June 2000 budgetary arrears by March 2001 was not. This audit has now been completed, and we request a waiver for the nonobservance of this performance criterion.
3. Overall budgetary performance in fiscal year 2000/01 (July-June) was strong. Revenue reached the equivalent of 12.2 percent of GDP, about 0.4 percent higher than programmed, reflecting good performance across most taxes. Recurrent expenditures were 0.1 percent of GDP higher than programmed, largely because of higher interest costs. Meanwhile, allocations to the priority sectors--education, health, water, HIV/AIDS, roads, lands, and the judiciary--exceeded programmed projections for 2000/01 by 0.1 percent of GDP. In addition, funds were allocated to ensure that government ministries, departments, and agencies (MDAs) could clear identified arrears (particularly with respect to utilities) accumulated earlier in the fiscal year. The budget deficit (excluding grants and foreign-financed development expenditure) declined to 1.2 percent of GDP, compared with the program projection of 1.6 percent of GDP.
4. In recent months, following the abatement of strong upward pressure on the exchange rate, the focus of monetary policy has shifted to absorbing excess liquidity in the interest of holding inflation at a low single-digit level. The BoT effected this tightening of monetary policy in February 2001, after the 91-day treasury bill rate had declined to only 3 percent, by increasing the weekly tender size of treasury bills and selling foreign exchange. As a result, by June 2001 short-term interest rates had increased to 4.2 percent, and the growth of reserve money had been slowed to below the initial program projection. Nevertheless, the broad money aggregates M2 and M3 grew significantly faster than expected.
5. The deficit on the current account of the balance of payments declined to 9.1 percent of GDP in 2000, well below the program expectation of 15.9 percent, and also below the 12.1 percent realized in 1999. Traditional exports, expressed in U.S. dollar terms, were about 3 percent lower than in 1999, mainly on account of lower international commodity prices. Nontraditional exports, however, increased by more than 40 percent, mainly reflecting the coming on stream of new gold mines and a resumption of fish exports to European Union countries. Imports were slightly lower than in 1999 because of sharp declines in capital goods and food imports--after the completion of major investment projects in the mining sector and recovery from drought, respectively. The deficit on the services account declined because of lower imports and travel payments. Official transfers were larger than in 1999, but not by as much as expected. As a result of these developments, the overall balance of payments showed significant improvement over 1999 and the program for 2000. During the first six months of 2001, the external sector performance continued to improve, with the combined goods and services account recording a further reduction in the deficit compared with the corresponding period in 2000. The good performance of exports is largely explained by an increase in nontraditional exports of almost 50 percent, led by mineral exports, particularly gold.
II. Policies for Fiscal Year 2001/02
A. The Poverty Reduction Strategy
6. The policies laid out below have been formulated in line with the poverty reduction strategy paper (PRSP) adopted by the government in August 2000. We have prepared a report on the first year of implementation of the PRSP. In addition to highlighting the implementation record, this progress report includes a description of the new education and agricultural sector strategies, as well as a number of other elements missing from the original PRSP. A rural sector development strategy is under preparation and is expected to be completed before end-2001. The budget for 2001/02 has been formulated in line with the priorities and objectives of the PRSP and the new education and agricultural sector strategies.
Maintaining macroeconomic stability and promoting private sector activity through structural reforms remain central to our poverty reduction strategy. Many of these reforms are supported by the World Bank and by other donors.
B. The Macroeconomic Framework
7. In view of the good rainfall in most areas of the country and the much shorter than expected duration of the power rationing, we have revised the projection for real GDP growth from 5.1 percent to 5.9 percent in 2001, and to 6.2 percent in 2002. Reflecting the impact of the depreciation of the exchange rate during the first half of 2001, we have revised the end-2001 inflation target from 4.5 percent to 4.8 percent, although we intend to maintain the target for 2002 at 4 percent. Taking into account recent developments and a favorable balance of payments outlook, we have raised the gross official reserves target for end-2001 to 5.1 months of imports of goods and nonfactor services projected for 2002. In view of the delay in completing the audit of budgetary arrears, we have carried over resources for their elimination from the last fiscal year and have set the government's net domestic financing targets for the remainder of 2001 accordingly. The exchange rate will continue to reflect market conditions, with the BoT intervening mainly to smooth seasonal fluctuations and meet its reserve target.
C. Fiscal Policies
8. Fiscal policy will remain geared toward maintaining macroeconomic stability, while raising expenditure allocations to priority sectors. Under the recently approved budget, the budget deficit for 2001/02 (excluding grants and foreign-financed development projects) is expected to increase to 3.1 percent of GDP. The revenue-to-GDP ratio is expected to be 12.2 percent, while government expenditure (excluding foreign-financed development expenditure) is budgeted to increase from 13.4 percent of GDP in 2000/01 to 15.3 percent in 2001/02. In the context of the medium-term civil service pay reform, we have increased the average wage by about 9 percent, which will allow for professional and senior staff a further reduction in the gap relative to compensation in the private sector. In addition, the total allocation for recurrent expenditures on the priority sectors has been increased by 29 percent. We have also, in the context of the medium-term expenditure framework and the updating of the PRSP, identified further expenditure programs that will be implemented in case additional resources become available. The budget includes a contingency allowance of 0.5 percent of GDP, including for the possible cost of retrenchment of parastatal employees.
9. The deficit is entirely financed by concessional foreign financing, including debt relief under the Initiative for Heavily Indebted Poor Countries (HIPC Initiative). Following the completion of an inventory of public sector domestic debt by November 2001, we intend to start paying down the parastatal debt that was taken over by the government. Privatization receipts--expected to amount to T Sh 20 billion in 2001/02--will be used to cover the costs of parastatal restructuring. We also intend to clear all audited arrears that had been outstanding at end-June 2000 (about T Sh 40 billion) by end-December 2001, an action that will constitute a performance criterion under the PRGF arrangement.
10. In the context of the budget for 2001/02, we made further progress with tax reform. The withholding tax on goods and services--which is deductible from the corporate income tax--was abolished for holders of a taxpayer identification number (TIN); in order to limit the revenue losses, we decided to maintain the tax for taxpayers who have not registered for the TIN. We have also increased excise taxes, introduced a new gaming tax, and eliminated the exemption from the value-added tax (VAT) for government purchases. These measures are expected to offset a revenue loss expected from a further reduction and rationalization of import tariff rates. Nevertheless, out of revenue considerations, we decided to maintain the housing levy and merge it with the vocational education training levy in order to improve compliance. Following the issuance of revised notices in August, control over tax exemptions for nongovernmental, religious, and charitable organizations has been strengthened. The exemption on fuel purchases for the electricity company, TANESCO, will be removed in the context of the rationalization of electricity tariffs currently in preparation. The elimination of the government exemption from customs and excise duties had to be postponed for one more year because spending units were not yet in a position to submit their budget proposal for 2001/02 on a tax-inclusive basis. However, all necessary steps are being taken to ensure that this situation will be rectified in time for the 2002/03 budget. In the area of tax administration, the unified tax appeals mechanism and the large-taxpayer unit are expected to start operations in September 2001.
11. We also made progress in strengthening expenditure management. Since the beginning of the fiscal year, government-spending units have been basing all their expenditures on local purchase orders (LPOs) generated by MDAs and their respective subtreasuries from the integrated financial management system (IFMS). As a result, all central government budgetary expenditure is now implemented through the system. The regulations under the new Public Finance Act became effective on July 2, 2001, and we have notified the public that the government will not honor any LPOs that are not generated by the IFMS. The budget for 2001/02 provides adequate funding for expenditures that have been a major source of arrears in recent years, including utility bills and expenditure on food (for schoolchildren, hospital patients, soldiers, and prisoners). As is the case with contributions to pension funds and interest costs, these expenditures are now considered first charges under the cash management system to avoid underfunding. These measures, as well as the generation by the IFMS of comprehensive monthly commitment, expenditure, and arrears monitoring reports from the start of the current fiscal year, should assist in preventing new expenditure arrears. The submission by the MDAs of cash-flow plans from October 2001 will further strengthen the cash management system. We intend to begin publishing quarterly budget execution reports drawn from the IFMS, starting with a report for the first quarter of 2001/02. This action will constitute a performance criterion under the PRGF arrangement.
12. With regard to increasing the comprehensiveness of the IFMS, the 12 revenue collection points of the Tanzania Revenue Authority (TRA) in Dar es Salaam were brought on-line during the month of July 2001. Training for staff operating the computerized system will be stepped up during 2001/02. We have rolled out IFMS to all regions, and all subtreasuries are now operating on the IFMS. We have also introduced commitment control in all spending units, both at the central level and in the regions. Various circulars and directives have been issued to spending units detailing procedures to be adopted in the procurement of goods and services using the IFMS. All balances in government bank accounts with the Bank of Tanzania and the commercial banks as of end-June 2000 were reconciled, and, since July 2001, large-volume bank accounts at the Bank of Tanzania have been reconciled on a weekly basis. The reconciliation process allowed 169 accounts of the more than 300 bank accounts with the Bank of Tanzania to be closed.
13. Our fiscal decentralization strategy will focus on a number of areas that will help promote increased harmonization and transparency of the operations of local governments. In this regard, we intend to develop a strategy and a timetable for harmonizing local government taxes; we will also review the possibility of having all levels of government adopt the same fiscal year. In order to increase accountability for the use of public funds, we will require local governments to submit quarterly reports of their revenue and expenditure; these will form the basis for a consolidated annual report on their operations, which will be published. In the meantime, we are giving publicity to the amounts and timing of budget transfers to local governments, as well as requiring local authorities to post their quarterly reports in a public location.
D. Monetary Policy and Financial Sector Reform
14. Monetary policy will continue to aim at keeping inflation in low single digits. The BoT will limit the growth of reserve money to a rate consistent with this objective. At the same time, the monetary program will allow credit to the private sector to grow commensurate with the expected growth in economic activity and further financial deepening. With a view to improving monetary policy operations, both the BoT and the Ministry of Finance will strengthen their capacity and cooperate closely in refining the framework for liquidity forecasting.
15. With regard to promoting the development of the financial sector, the proposed amendments to the Land Act to facilitate the use of land and real estate as collateral for bank lending will be considered by the government in the near future. In addition, work on establishing a credit information bureau and on modernizing the payment and settlement system is ongoing. We have further strengthened banking supervision by hiring more staff and have completed an up-to-date set of regulations with the issuance of a regulation on corporate governance of financial institutions. Draft regulations governing microfinance institutions are expected to be issued by end-2001 that will provide for their supervision on the basis of international best practices.
E. External Sector Issues
16. The budget for 2001/02 included a consolidation and reduction in import tariffs, involving a reduction in the number of nonzero bands from four to three. At the same time, all split import duty rates have been eliminated. Effective November 2001, we will start implementing a program of tariff reduction in the context of the Southern African Development Community (SADC) whereby import tariffs on 11 percent of our total trade with the member countries will be eliminated. Also negotiations leading to an East African Community (EAC) customs union are under way. Meanwhile, we are applying an 80 percent tariff discount on imports from EAC member countries. We expect to gradually reduce the top import tariff rate beginning with next year's budget, in harmony with our partners in the region. To address suspected dumping, we introduced earlier this year a registration requirement for importers of sugar and imposed suspended duties on selected commodities, in line with the regulations of the World Trade Organization (WTO). The justification for suspended duties on sensitive import items will be kept under review.
17. Tanzania is current on its external debt obligations. We have signed 8 of the 13 bilateral agreements under Paris Club VI and expect to sign the remaining agreements by October 2001. Among non-Paris Club official creditors, China has already signed an agreement, while Egypt and Kuwait have indicated their intention to provide debt relief in line with the HIPC Initiative. Together, these three creditors account for 24 percent of total non-Paris Club debt. We will continue to make efforts to negotiate rescheduling agreements with the remaining creditors.
F. Structural Reform
18. TANESCO's financial problems will be further aggravated by new financial obligations following the completion of the arbitration case concerning the costs of the Independent Power Tanzania Limited (IPTL) power plant. The ruling requires TANESCO to make monthly capacity payments of about US$2.8 million (0.4 percent of GDP on an annual basis), starting when the plant is ready for production, which is expected by October 2001. Under normal circumstances, there will only be limited use of IPTL's capacity for some years to come and, presently, TANESCO lacks the resources to make these payments, as well as to establish a T Sh 11 billion liquidity facility mandated under the IPTL contract. To address this situation, the government has taken a number of measures. First, it has reconstituted TANESCO's board and decided to engage a management company to strengthen its management, starting in November 2001. Second, the government will allow TANESCO to increase the average electricity tariff to accommodate partly the IPTL's financial requirements and compensate for inflation since the last increase in 1998; at the same time, TANESCO will revise the structure of the tariffs so as to reduce the high industrial rates. Third, TANESCO will strive to reach an agreement with the government of Zanzibar ensuring that henceforth the Zanzibar State Fuel and Power Corporation will pay its current obligations to TANESCO without delay and work toward a solution for its outstanding arrears to TANESCO. The above measures notwithstanding, TANESCO will require T Sh 26 billion in support from the budget during 2001/02.
19. To promote good governance and integrity, the government has prepared 26 ministerial anticorruption plans, based on the National Anti-Corruption Strategy. These plans foresee both "quick-wins" and medium-term actions. The government has started implementing quick-win actions that require little or no additional expenditure, such as effecting greater transparency in procurement practices. For medium-term actions, donor financing has been requested. The government will publish quarterly and annual progress reports and discuss them with donors and other stakeholders during 2001/02. The preparation of a new public service bill to facilitate performance monitoring and enhance accountability in the civil service is on track for submission to parliament by October 2001. The legal sector action plans are being finalized for adoption and implementation before the end of 2001.
20. We have been strengthening the macroeconomic and sociodemographic database, including by launching the poverty database in May 2001. Statistics is treated in the budget as a priority item. In this regard, the 2001/02 budget has adequately funded the preparation of a core set of macroeconomic statistics and the conduct of the 2002 population census. In addition, preparations are under way to submit a new Statistics Law to parliament by October 2001. The first metadata for Tanzania were recently posted on the IMF's General Data Dissemination System (GDDS) website.
G. Concluding Remarks
21. The government of Tanzania will continue to provide the IMF with such information as the IMF requires to assess Tanzania's progress in implementing the policies described in this letter. Moreover, we will continue to consult with the IMF on Tanzania's economic and financial policies in accordance with the IMF's policies on such consultations. Quantitative and structural performance criteria and benchmarks are set out in the attached Tables 1 and 2. The government requests that the quantitative performance criteria already established for September 2001 with respect to net domestic financing of the government, net domestic assets, and net international reserves of the Bank of Tanzania be modified as shown in Table 1. Compliance with the quantitative performance criteria for end-September 2001 and with the structural performance criteria for end-2001 will be determined in the context of the fourth review under the PRGF arrangement, to be completed by end-January 2002. Compliance with the quantitative performance criteria for end-March 2002 and with structural performance criteria to be specified at the time of the fourth review will be determined in the context of the fifth review under the PRGF arrangement to be completed by end-July 2002. The technical memorandum of understanding (TMU) of February 24, 2001 is replaced by the TMU attached to this letter. The government of Tanzania remains fully committed to the implementation of the economic and financial program supported by the PRGF arrangement.
Minister for Finance
Memorandum of Understanding on Selected
Concepts and Definitions Used in the
Monitoring of the PRGF-Supported Program
1. The purpose of this technical memorandum of understanding (TMU) is to describe concepts and definitions that are being used in the monitoring of the Poverty Reduction and Growth Facility (PRGF)-supported program, as laid out in Table 1 of the government's letter of intent of August 31, 2001, to which this TMU is attached.
Net international reserves
2. Net international reserves (NIR) of the Bank of Tanzania (BoT) are defined as reserve assets minus reserve liabilities. The BoT's reserve assets include (i) monetary gold; (ii) holdings of SDRs; (iii) the reserve position at the IMF; (iv) holdings of foreign exchange; and (v) other liquid and marketable assets readily available to the monetary authorities. Reserve assets exclude assets pledged or otherwise encumbered, including but not limited to assets used as collateral or guarantee for a third-party external liability (assets not readily available). The BoT's reserve liabilities include (i) all short-term foreign exchange liabilities to nonresidents; (ii) all liabilities to the IMF; and (iii) the balance in the account of the European Union (EU) for the clearance of domestic arrears. Reserve liabilities exclude (i) the balances in the accounts of the Multilateral Debt Fund (MDF); (ii) the balances in the accounts of the Poverty Reduction Budget Support Fund (PRBS); and (iii) medium- and long-term foreign liabilities.
Net domestic assets and reserve money
3. Net domestic assets (NDA) of the BoT are calculated as the BoT's reserve money minus its net foreign assets (NFA). Reserve money is defined as the sum of currency issued by the BoT and the deposits of the commercial banks with the BoT. Net foreign assets (NFA) of the BoT consist of its NIR, net other foreign assets, and its medium- and long-term foreign liabilities. For purposes of deriving NDA from reserve money and NFA, the latter are converted into Tanzania shillings at the program exchange rate.
Net domestic financing of the government of Tanzania
4. Net domestic financing of the Government of Tanzania (NDF) includes financing by the banking system (BoT and commercial banks) and the nonbank public of the budget of the central (union) government of Tanzania. Financing by the banking system excludes liquidity paper issued by the BoT for monetary policy purposes. For the purposes of the program, NDF excludes privatization proceeds, government debt issued for the recapitalization of the NBC and the NMB, and debt of parastatal companies assumed by the government. NDF is calculated as the cumulative change since the beginning of the fiscal year in the sum of (i) loans and advances to the government by the BoT minus all government deposits with the BoT (including the balances in the accounts of the MDF and the PRBS); (ii) loans and advances to the government by the commercial banks minus all government deposits held with the banks; and (iii) the outstanding stock of domestic debt as identified in the monthly domestic debt report issued by the Ministry of Finance.
External payments arrears
5. External payments arrears consist of the total amount of external debt service obligations (interest and principal) of the government and the BoT that have not been paid at the time they are due, excluding arrears on external debt service obligations pending the conclusion of debt-rescheduling arrangements. Under the program, the avoidance of external payments arrears is a continuous performance criterion.
Contracting or guaranteeing of external debt on nonconcessional terms
6. The term "debt" will have the meaning set forth in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000 (Decision No. 12274-(00/85)). Government debt is outstanding debt owed or guaranteed by the Government of Tanzania or the Bank of Tanzania (but does not include debt of any political subdivision or government-owned entity with separate legal personality that is not otherwise owed or guaranteed by the Government of Tanzania).
7. Government debt is considered nonconcessional if the grant element is lower than 35 percent, calculated using discount rates based on Organization for Economic Cooperation and Development (OECD) commercial interest rates (CIRR), adjusted as appropriate for different maturities. This performance criterion applies not only to debt as defined in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000 (Decision No. 12274-(00/85)), but also to commitments contracted or guaranteed for which value has not been received.
Central government recurrent revenue
8. Under the program, central government revenue consists of tax revenue and nontax revenue, cumulative since the start of the fiscal year, excluding privatization proceeds. Tax revenue consists of all revenue collected by the Tanzania Revenue Authority (TRA) minus nontax revenue collected by the TRA, as per the monthly TRA revenue report. Nontax revenue consists of nontax revenue collected by the TRA, dividends, revenue collections by the treasury and the ministries and regions, and appropriations in aid.
9. The avoidance of extrabudgetary expenditure is a continuous benchmark under the program. For the purposes of the program, extrabudgetary expenditure is defined as expenditure paid from accounts outside the regular budgetary (paymaster-general) accounts, including from the accounts of nonbudgetary government entities such as the Presidential Public Sector Reform Commission or the TRA. This benchmark implies that under the program all recorded fiscal transaction by the Government of Tanzania and its agencies, whether authorized in the budget, in any other law, or unauthorized, have to occur within the general framework of accounts that are reported to the IMF on a monthly basis and presented to parliament at least once a year.
10. The avoidance of new budgetary arrears constitutes a benchmark under the program. New budgetary arrears are defined as arrears accumulated during the fiscal year on wages, domestic interest, goods and services, and tax refunds.
Foreign program assistance
11. Foreign program assistance is defined as grants and loans received by the Ministry of Finance through BoT accounts and is calculated as the cumulative sum, since the beginning of the fiscal year, of the receipts from (i) program loans and (ii) program grants.
12. The quantitative targets for the BoT's net international reserves will be adjusted downward for any shortfall in foreign program assistance.
13. The quantitative limits on the BoT's net domestic assets will be adjusted upward for any shortfall in foreign program assistance converted into Tanzania shillings at the average quarterly exchange rate.
14. The quantitative limits on the BoT's net domestic assets and on reserve money will be adjusted downward to the extent that eligible bank reserves fall short of 10 percent of the deposits held by the public with the commercial banks.
15. The quantitative limits on net domestic financing of the Government of Tanzania will be adjusted upward for any shortfall in foreign program assistance converted into Tanzania shillings at the average quarterly exchange rate.