Public Information Notices

Tanzania and the IMF





Public Information Notice (PIN) No. 99/28
March 31, 1999
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes Article IV Consultation with Tanzania

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On February 8, 1999, the Executive Board concluded the Article IV consultation with Tanzania1 (for further details see Press Release No. 99/6).

Background

In the mid-1980s, the Government of Tanzania began to move away from its previous emphasis on administrative control of economic activity. Over the next decade, liberalization of external trade and payments, domestic prices, and agricultural marketing was substantially achieved. In the early 1990s, liberalization of the financial sector began, as did civil service reform and, to a limited degree, privatization. However, large segments of the economy continued to be dominated by public sector monopolies. Moreover, macroeconomic stability proved elusive. After some decline in inflation from the 25 percent or higher rates that prevailed throughout the 1980s, inflation rose again in 1992/93 (July–June). It remained high through 1995/96, reflecting persistent weaknesses in budgetary management and the impediments to monetary policy posed by the insolvent condition of large state-owned banks and the losses of other parastatals.

The economic reform and stabilization effort regained momentum in the first half of 1996 following the election of a new government, and later in that year a three–year ESAF arrangement was approved. Macroeconomic performance under the first two annual ESAF arrangements, covering the program years 1996/97 and 1997/98, was generally good, despite adverse climatic conditions. There was also good progress on structural reform in the macroeconomic area, but some delays were encountered, particularly in the area of parastatal reform.

The 1996/97 drought was followed in 1997/98 by the El Niņo floods. The heavy rains had mixed effects on agriculture, with food crops generally less affected than export crops. However, severe disruption of transportation networks led to regional shortages and high distribution costs. Nonagricultural activity recorded high growth rates, but overall growth, estimated at 3.4 percent, was substantially below target. The impact of the floods on production and transportation of export crops produced a 19 percent decline in exports in 1997/98. Imports increased only slightly over their level in 1996/97, as there was a sharp decline in the price and volume of petroleum imports, and an increase in food imports was offset by a decline in imports of other consumer goods. The current account deficit (excluding official transfers) increased to 14.2 percent of GDP, but gross reserves nonetheless increased by more than 10 percent to the equivalent of 3.0 months of imports of goods and nonfactor services.

The key to Tanzania’s macroeconomic stabilization effort has been a strong fiscal stance, implemented through a rigorous cash management system. Government recurrent savings increased strongly and the budget’s overall balance (before grants and excluding foreign-financed development projects) improved from a deficit of almost 3 percent of GDP to a small surplus. Although a drop in revenues due to the floods required a sharp cut in expenditures in 1997/98, health and education received their full allocations, and domestically financed development expenditures, critical for obtaining release of donor funds, increased toward the end of the year to come close to the amounts budgeted.

The fiscal stance was supported by tight monetary policies. The growth in the money supply was kept below the growth in nominal GDP in both of the last two years. This contributed to a decline in inflation to 12 percent over the 12 months ending June 1998, the lowest rate in 20 years. As the banking system’s net credit to the government and the parastatal sector declined, credit to the private sector was able to increase strongly.

A recent structural reform in the macroeconomic area was the introduction of the VAT on July 1, 1998, and expenditure control mechanisms are being enhanced. However, reforms of the parastatal sector continued to lag. Accounting problems following the delayed split of the NBC in October 1997 into the NBC (1997) and the National Microfinance Bank (NMB) led to further delays in offering the banks for sale. Structural reforms aimed at enhancing the efficiency of the petroleum sector, the only sector still subject to price controls and complex arrangements for imports, are also behind schedule. Nevertheless, more than half of all the parastatal entities identified for privatization have been divested, and the strategy for privatizing the large parastatal monopolies has been settled. The policy of privatizing virtually all public enterprises remains intact and its implementation continues to move forward.

Executive Board Assessment

Executive Directors commended the Tanzanian authorities for their steadfast implementation of prudent macroeconomic policies and progress in structural reforms during the past three years,despite the severe economic disruptions caused by adverse weather conditions. Directors observed that strong growth of nonagricultural activity had mitigated the effects of these factors on overall output growth, inflation had continued on its downward trend, and a modest increase in external reserves had been achieved. Nevertheless, they noted that Tanzania’s continued exposure to external shocks highlighted the importance of further strengthening structural reform efforts, particularly in the financial sector. Directors therefore welcomed the authorities’ intention to proceed with their reform efforts under the third annual ESAF-supported program, which should go a long way toward placing Tanzania on a path of sustainable growth with an increasing role for the private sector. They also noted that sustained monetary and fiscal restraint over the coming year should result in major progress toward completion of the stabilization effort.

Directors commended the Tanzanian authorities for their strong fiscal policy and for maintaining government savings at a significantly positive level, while providing additional resources to the social sectors and infrastructure. They welcomed the authorities’ strict adherence to fiscal restraint, including their success in developing a commitment monitoring system and in using budgetary cash management within the envelope of available resources. Directors looked forward to the further planned strengthening of budgetary management. They also noted, with satisfaction, the progress made in repaying domestic arrears and domestic financing.

Noting the continuing high dependence on aid and the large social and developmental needs of the country, several Directors called for a more ambitious revenue effort in the coming year. They commended the authorities for the recent replacement, with careful preparation, of the sales tax with a value-added tax (VAT). They highlighted the need to complement this by comprehensive reforms of the customs duty regime and the income tax system, particularly through a reduction of statutory exemptions. Directors were also concerned that the authorities had expanded the strictly limited exemptions under the original VAT act and urged them to prevent any further erosion. They welcomed the recent steps to strengthen customs administration, but stressed the need to take decisive steps toward a systematic reduction of customs duties and exemptions, as well as the need for effective implementation of the preshipment inspection system. Directors felt that these improvements should have positive effects on trade and economic growth.

Directors emphasized the importance of the efforts envisaged under this year’s budget to maintain strict wage restraint, to press ahead with civil service retrenchment, and to implement administrative reforms of the central and local governments. They noted the importance of ensuring adequate remuneration for civil servants, and of further progress with public sector reforms.

Directors commended the authorities for adhering strictly to a restrained monetary policy in the context of their market-determined exchange rate system. This had contributed to reducing inflation to its lowest level in 20 years and strengthening the external reserve position. In view of Tanzania’s continued vulnerability to external shocks, they recommended a further increase in its international reserves. Directors also emphasized the need for sustained monetary restraint, so that credit to the private sector could continue to increase in a noninflationary context.

Directors stressed the importance of developing financial institutions that would contribute to the efficient mobilization and intermediation of financial resources in Tanzania. They were encouraged by the recent steps—albeit after much delay—toward privatizing the former National Bank of Commerce and urged the authorities to complete this process expeditiously. Some Directors endorsed the authorities’ cautious approach to foreign portfolio investment, but others recommended a more rapid liberalization and underlined the benefits that would accrue to Tanzania. They noted, in particular, the importance of permitting foreign portfolio investment in companies listed on the stock exchange in order to mobilize foreign savings and deepen Tanzania’s capital markets. Directors encouraged the authorities to proceed with this process while undertaking appropriate safeguards in terms of strengthening the regulatory and supervisory system.

Directors welcomed the fact that important decisions in the area of parastatal reform had been made, but stressed the need to accelerate privatization in a transparent manner. They noted the cost of delay in reforming the petroleum sector and urged the authorities to complete quickly the liberalization of prices and imports. Directors also urged the authorities to persist in addressing governance issues.

Directors noted Tanzania’s high debt service burden and looked forward to an early consideration of Tanzania’s possible eligibility under the HIPC Initiative, and a few recommended that this be done at the time of the mid-term review of the current ESAF arrangement.

Directors encouraged the authorities to improve statistical techniques and coverage further with additional technical assistance and training as needed. They encouraged Tanzania to prepare expeditiously for participation in the General Data Dissemination System.


Tanzania: Selected Economic Indicators, 1994/95–1998/991

1994/95 1995/96 1996/97 1997/98 1998/99
Proj.

Annual percentage change
Domestic economy
Real GDP 2.6 4.1 4.0 3.4 4.3
Consumer prices (end of period) 21.1 22.8 16.4 12.0 7.5
In millions of U.S. dollars2
External economy
Exports, f.o.b. 592.9 695.9 793.6 644.9 673.7
Imports, f.o.b. 1,509.7 1,370.3 1,387.8 1,401.6 1,510.0
Current account (excluding official transfers) -1,047.0 -941.9 -842.0 -1,119.6 -1,181.7
(in percent of GDP) -21.1 -16.2 -12.0 -14.2 -14.1
External assistance3 755.9 863.6 1,091.4 1,104.8 1,296.6
Debt service due4 477.6 520.2 482.0 439.3 426.5
(in percent of exports of goods and nonfactor services) 43.5 44.6 36.9 36.4 33.6
Gross official reserves 255.1 240.1 460.5 502.5 678.4
(in months of imports of goods and nonfactor services) 1.6 1.5 2.8 3.0 3.7
Change in real effective exchange rate (in percent)5 -3.8 22.2 13.3 10.8 n.a.
In percent of GDP2
Financial variables
General government balance (including grants) -5.0 -3.0 1.9 0.2 0.9
Government recurrent savings -2.7 -0.8 1.0 1.0 1.1
Change in broad money (in percent) 36.6 16.6 18.2 7.7 12.4
Change in credit to the nongovernment sector (in percent)6 13.4 -8.0 0.8 52.8 60.6
Interest rate (in percent)7 38.6 17.0 7.0 12.4 n.a.

Sources: Tanzanian authorities; and IMF staff estimates and projections.

1The fiscal year in Tanzania runs from July through June.
2Unless otherwise noted.
3Official transfers and loans (including IMF disbursements).
4Before debt rescheduling and debt relief; including IMF.
5(+) = appreciation.
6The 1995/96 figure has been adjusted to exclude loan write-offs by the National Bank of Commerce and the
Cooperative and Rural Development Bank.
7Weighted average of 3-, 6-, and 12-month treasury bill rate; end of period.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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