Public Information Notice: IMF Concludes Article IV Consultation with Tanzania
September 15, 2000
|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.|
The IMF Executive Board on August 1, 2000 concluded the 2000 Article IV consultation1 and completed the first review of Tanzania’s new PRGF arrangement with Tanzania.
Tanzania has largely completed its macroeconomic stabilization. Following earlier, limited reforms, the government carried its far-reaching liberalization and reform strategies substantially further under the 1996-99 Poverty Reduction and Growth Facility (PRGF) arrangement.2 Macroeconomic performance under the program was generally good, in spite of unfavorable climatic conditions. Although annual economic growth remained below the target of 6 percent, the 4.2 percent attained on average permitted some rise in per capita incomes. Inflation has been brought down from 27 percent in 1995 to 5.9 percent in June 2000, the lowest rate in more than 20 years. Gross international reserves rose to US$776 million at the end of 1999, in line with the medium-term target of four months of imports of goods and nonfactor services. Developments through end-June 2000 were largely in line with the objectives of the government’s program for 2000, which include real GDP growth of 5.2 percent and an end-period 12-month inflation rate of 5.0 percent by end-December.
The progress in macroeconomic stabilization was based on strong fiscal policies, resulting in an overall budget balance, after grants and the grant element of concessional loans, that remained positive throughout the period. However, the key instrument of fiscal restraint, the cash management system continued to experience weaknesses in its implementation. Revenues have generally fallen short of budget projections, largely because of substantial reductions in external taxes and a failure of corporation taxes to recover from the earlier decline of the parastatal sector of the economy, in addition to excessive tax incentives for new investment. Accordingly, full funding of expenditures in line with the budget was not possible; however, over the period of the PRGF arrangement, the shortfalls declined and expenditures were increasingly protected. In recent months, following fiscal slippages in the second half of 1999, the government successfully implemented measures to address the revenue shortfall and expenditure overrun. In fact, cash expenditures were kept well below program limits, reflecting technical problems in implementation of the budgetary cash management system; some domestic arrears also accumulated, but were largely cleared by the end of the fiscal year.
The government’s repayment of domestic financing (excluding new debt issued to recapitalize banks) of 0.4 percent of GDP annually on average has permitted credit to the private sector to recover strongly from the stagnation of the mid-1990s, while real interest rates have remained positive in the context of monetary restraint. Balance of payments and exchange rate developments reflected the strong growth of concessional assistance. In the first quarter of 2000, exports rebounded from the low level of last year. The nominal exchange rate has remained stable at around T Sh. 800 per U.S.dollar since August 1999, while, following the sharp depreciation in nominal terms in June-August 1999, the real effective exchange rate depreciated by 4.2 percent during the twelve-month period through March 2000.
Tanzania has also made substantial progress with structural reforms, despite some delays. Macroeconomic reforms included major tax reforms, a strengthening of the frameworks for expenditure control, monetary management, and financial sector development, and further liberalization of the external sector. Civil service reform included further rationalization and retrenchment, and the beginning of pay reform. Privatization has also gained momentum and about half the commercial parastatal entities have been removed from government control, with particularly important progress in the banking sector, as the sales agreement for the National Bank of Commerce (NBC) (1997) was signed in March 2000. The petroleum sector has been fully liberalized and subsidies largely eliminated. The government has focused its efforts to improve its governance record and begun to develop sectoral anti-corruption plans.
In addition to macroeconomic stabilization and structural reform, the government has intensified its efforts to directly address poverty issues. Following the adoption of the 1997 National Poverty Eradication Strategy, in 1999 the government issued “Poverty and Welfare Monitoring Indicators,” as a basis for assessing poverty eradication programs. Poverty reduction priority areas have been identified in the context of the Medium-Term Expenditure Framework (MTEF), and are also reflected in the budget. The ongoing preparation of the Poverty Reduction Strategy Paper (PRSP) is centered around the “Tanzania Assistance Strategy” (TAS) process, a broad-based forum, including the government, civil society (including NGOs) and donors. The PRSP will focus on specific policy targets for poverty reduction, social indicators, and institution building.
The Board of the IMF approved a new three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) on March 31, 2000 and the Boards of the IMF (on March 31) and the IDA (on April 4) endorsed the government’s interim PRSP, decided that Tanzania had reached the decision point under the enhanced HIPC Initiative, and approved interim debt relief. On April 14, 2000, an agreement was reached between Tanzania and the Paris Club on a three-year flow rescheduling on Cologne terms, providing a reduction of 90 percent in net present value terms and covering about US$0.7 billion of arrears on principal, interest, and current maturities.
Executive Board Assessment
Executive Directors commended Tanzania for the strong implementation of its macroeconomic program and the progress made with structural reforms, notably in the financial, petroleum, and telecommunications sectors. These efforts have contributed to continued economic growth and lower and declining inflation. Nevertheless, with the economy still vulnerable to external shocks, low domestic saving, a heavy external debt burden, and high poverty incidence, Tanzania continues to face a number of major challenges. Continued prudent macroeconomic policies and the effective implementation of structural reforms are, therefore, needed to improve the climate for private sector activity, to strengthen the growth potential of the economy, and to reduce poverty on a sustainable basis.
Directors commended the authorities for the measures taken to address the revenue shortfall and expenditure overruns in 1999. They noted with concern, however, the severity of the expenditure cuts in the early months of 2000, which also resulted in new interest, supplier, and tax refund arrears. In order to overcome the weaknesses in the cash management system, Directors urged the authorities to strengthen the analytical capacity of the Ministry of Finance so that fiscal and cash management problems can be identified and corrected at an early stage. In this context, Directors welcomed the full implementation of the new Integrated Financial Management System, which should make public expenditure management more transparent and efficient.
Directors welcomed the substantial tax reform measures in the 2000/01 budget, including the elimination of the exemption for VAT on petroleum products. They underscored, in particular, the importance of the elimination of the VAT exemption on government consumption of petroleum products as a first step toward eliminating all tax exemptions for the government.
Directors also urged the authorities to continue their efforts to widen the tax base and improve tax administration. In this connection, they commended the authorities for their measures to address smuggling and tax evasion in the petroleum sector, as well as their intention to establish a large-taxpayer unit during 2000/01. More generally, Directors stressed that a stronger fiscal revenue effort remains critical to Tanzania’s medium-term prospects.
Directors endorsed the Bank of Tanzania’s (BoT) cautious monetary policy stance, which had kept interest rates high, despite the strengthening of the fiscal balance, in view of the uncertainties with regard to the structural character of the higher demand for money in the early months of 2000. The subsequent easing of policy was also regarded as appropriate, although some Directors considered that it could have been implemented more gradually.
Directors welcomed the recent strength of Tanzania’s exports, but noted that the large aid inflows will put upward pressure on the real effective exchange rate. In this regard, they emphasized the importance of continuing structural reforms to increase the efficiency of the external sector. Directors noted that the restrictive external trade measures imposed in 1999 had detracted from the beneficial effects of the cuts in external tariffs. They welcomed the unwinding of these measures at a somewhat faster pace than had been envisaged. Directors urged the authorities to complete this process as soon as possible, and to resume the program of reducing external tariffs at an early date. Faster trade liberalization would serve to enhance Tanzania’s attractiveness to investors.
With regard to other areas of structural reform, Directors noted with satisfaction the progress in privatization. Although the recent revision in the approach to privatization had caused some initial delays, it should reduce considerably the time needed for the finalization of negotiations on the sale of government-owned entities in the future. Directors also supported the measures being taken to strengthen prudential regulation by the BoT of the banking sector.
On governance issues, Directors noted with concern that corruption remains a problem in Tanzania. They regretted that progress in implementing governance and anticorruption reforms had been slow, and urged the authorities to press ahead with the full and early implementation of the national anti-corruption strategy. They noted that the newly established commercial court should facilitate the prompt and effective resolution of disputes.
Directors commended the authorities for the large increase in budgetary allocations for poverty reduction, which exceed interim debt relief under the HIPC initiative, despite the tight budgetary situation because of the expected outlays on elections. They also noted with satisfaction the ongoing preparations for a broad-based PRSP. Several Directors considered that improved statistics, especially with regard to poverty surveys and assessments, would help the authorities better monitor the implementation of the PRSP.
The quality and timeliness of most macroeconomic data in Tanzania remain poor, and these deficiencies complicate the analysis of economic and financial developments. Directors encouraged the authorities to implement further measures to strengthen the National Bureau of Statistics.