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Tanzania and the IMF

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Public Information Notice (PIN) No. 04/100
September 7, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2004 Article IV Consultation with Tanzania

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2004 Article IV consultation with Tanzania is also available.

On August, 6, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Tanzania.1

Background

Tanzania has continued to maintain macroeconomic stability and to make substantial progress in structural reform. Real GDP growth has been strong, averaging almost 6 percent in the past three years, and is increasingly driven by improvements in total factor productivity. High growth reflected both the continued strong performance in the manufacturing, mining and construction sectors, as well as the solid growth in the agricultural sector. At the same time, inflation has declined from an average of over 30 percent during the previous two decades to below 5 percent at end-2003. These achievements have been the result of sound macroeconomic policies, notably the strengthening of expenditure management through adoption of a cash management system, and more effective management of liquidity by the Bank of Tanzania. In addition, sizable donor support has virtually eliminated the government's need for domestic financing in recent years.

Tanzania's sharply improved growth performance has had a notable impact on poverty. While a comparison of 1990/91 and 2000/01 household budget surveys shows only a modest improvement in the incidence of poverty, per capita incomes fell in the first half of the 1990s, likely leading to a deepening of poverty. Thus, for poverty to have declined over the decade as a whole, the acceleration of growth in the second half of the 1990's likely had a strong poverty-reducing impact, in particular given that income distribution showed little change over the decade. This was particularly evident in Dar es Salaam, where poverty declined from 28 to 18 percent over the decade.

These achievements notwithstanding, Tanzania's high aid dependency makes its success in macroeconomic stabilization vulnerable to sudden withdrawals of aid. Furthermore, structural impediments to higher growth, including low agricultural productivity, poor governance, and limited access to financial services persist and will need to be addressed to accelerate the rate of poverty reduction.

Economic performance in 2003 remained strong. Despite severe drought, which resulted in food insecurity in parts of the country, real GDP grew by 5.6 percent. The 12-month rate of inflation reached 6.4 percent in May 2004, largely reflecting food shortages. However, favorable agricultural output following better weather conditions in 2004 has helped to contain inflationary pressures since then.

The fiscal performance in 2003/04 was substantially better than envisaged by the budget, mainly on account of strong tax revenue collection, partly reflecting the elimination of tax holidays and partly the implementation of administrative measures to curtail petroleum smuggling.

Substantial pressures on the expansion of reserve money continued to emanate from high inflows of official donor assistance to the budget, amounting to 10.6 percent of GDP, which are mostly spent locally. Relying increasingly on sterilization of excess liquidity through the sale of foreign exchange proceeds from aid inflows, while continuing with sales of liquidity paper as needed, the BoT maintained reserve money in line with the program. Growth of credit to the private sector remained strong and has been broad-based. This increase in credit has so far not been accompanied by any deterioration in banking soundness indicators.

Since the last Article IV consultation in 2002, the real effective exchange rate has depreciated continuously and is now broadly in line with economic fundamentals. Reflecting strong demand for imports and stagnation of traditional exports, the current account deficit, excluding grants, has been widening in recent years and reached 11 percent of GDP in 2003/04. However, a steady inflow of foreign assistance, including the debt relief under the enhanced HIPC Initiative, resulted in a further increase of the reserve cover, which is currently about seven months of imports of goods and non-factor service.

Structural reforms in recent years have focused on improving the investment climate with a view to creating a conducive environment for a private sector-led economic growth. To this end, the government continued its effort to divest its holdings in strategic enterprises. Among the most significant achievements since 2002 were the leasing of DAWASA and the approval by parliament of the privatization plan for the National Microfinance Bank, the largest commercial bank in the country. To promote private sector activities, a greatly simplified business licensing system was introduced. Measures to improve governance include the implementation of the National Anti-corruption Strategy and Action Plan and the quarterly publication of all individuals, companies, and NGOs that have received tax exemptions under the treasury voucher system.

Executive Board Assessment

Executive Directors commended the authorities for the significant progress in macroeconomic stabilization and structural reform under Tanzania's PRGF-supported program, which has resulted in higher economic growth with low inflation, strengthened external position, and reduced poverty. Tanzania's strong performance in 2003, despite a drought, demonstrates the economy's growing robustness to adverse shocks.

Directors considered Tanzania's medium-term economic prospects to be favorable, provided that the authorities continue to pursue sound policies and market-oriented structural reforms. They stressed the importance of sustaining high economic growth and translating its benefits into further reduction in poverty and improved living standards for the rural population. In this context, Directors welcomed the authorities' focus on promoting agricultural development. With continued strong policies and donor support, Tanzania is in a position to make significant progress toward the Millennium Development Goals.

Directors viewed current fiscal policy as broadly consistent with medium-term fiscal sustainability. They welcomed the authorities' efforts to mobilize domestic resources through ongoing reforms of tax policy and administration, including implementation of the Tanzania Revenue Authority's Corporate Plan, steps to reduce exemptions and curtail petroleum smuggling, and improvements in customs services and administration. Such measures are essential to boost the robustness of macroeconomic stability and contain aid dependency. It was also suggested in this context that the government develop a clear long-term strategy for reducing Tanzania's dependence on external aid.

While broadly agreeing that the 2004/05 budget targets are in line with the program's objectives and development needs, Directors expressed concern about the budget process. They urged the authorities to strengthen further the existing institutions and procedures, with a view to improving the coherence of the budget submitted to parliament with the budget guidelines and ensuring the comprehensiveness of the Public Expenditure Review (PER). In particular, they underscored the need to review the full fiscal implications of major infrastructure projects, including a new parliament building and a national stadium, as well as the costs associated with leasing arrangements, in the context of the PER.

Directors supported the Bank of Tanzania's conduct of monetary policy, with the primary objective being price stability. Recognizing the challenges of liquidity management against the backdrop of continued high aid flows, they noted the trade-offs between open market operations and foreign exchange sales. In view of the fact that the real exchange rate is currently broadly in line with fundamentals, Directors supported the authorities' intention to use foreign exchange sales to absorb excess liquidity resulting from higher-than-programmed foreign inflows. They encouraged the authorities to accelerate the implementation of recommendations identified in the safeguards assessment to further reduce vulnerabilities and enhance transparency in central bank operations.

Directors commended the good progress in financial sector reform, which has contributed to a rapid increase in financial intermediation and a healthier banking system. They observed, however, that while banking soundness indicators have remained strong, the relative high concentration of loans and maturity mismatches warrant close monitoring and strengthened bank supervision. Directors were encouraged by the authorities' commitment to the broad agenda of reforms aimed at further deepening Tanzania's financial sector to enhance its contribution to investment and growth. They welcomed, in particular, the ongoing review of financial sector legislation and regulations, and the recent establishment of an interagency committee to accelerate the implementation of the Financial Sector Assessment Program (FSAP) recommendations. In this connection, Directors looked forward to the implementation of sectoral FSAP action plans now under development.

Directors took note of the challenges posed by capacity constraints and weak institutions for policy implementation. Shortages of skilled civil servants and weaknesses in public administration constrain absorptive capacity and generate a climate conducive to governance problems. Directors therefore welcomed reform efforts underway in these areas, including in the civil service. They urged further efforts to ensure consistent and integrated policies across all levels of government, noting that the new poverty reduction strategy (PRS) now under preparation would be helpful in this regard.

Directors urged accelerated efforts to implement structural reforms aimed at promoting private sector activity, enhancing competitiveness, and diversifying the economy while reviving traditional exports. They welcomed the recent steps taken to improve the business climate, including amendment of the Land Act, reform of local government taxation, and simplification of business licensing. Implementation of these reforms will need to be closely monitored to ensure effectiveness. In this context, Directors encouraged the authorities to maintain broad-based consultation with the business community to identify ways to further strengthen the reform agenda. It will also be essential to improve infrastructure, labor skills, and the legal and regulatory framework. Directors welcomed the authorities' commitment to further improve public enterprise performance, particularly through a restructuring and eventual privatization of the energy sector. They stressed the importance of timely efforts to lock in reforms, in advance of next year's elections.

Directors commended the authorities for the adoption of a national strategy and action plan to address corruption and improve governance, as well as plans for similar efforts at the local level. They urged strong implementation and coordination of these efforts. In particular, Directors urged follow-up by the Prosecutor's Office to complaints over individuals made by the Auditor General and the Prevention of Corruption Bureau. In this regard, they stressed the importance of early finalization of a new anti-corruption law, which would provide a comprehensive framework for effective prosecution of corruption cases.

Directors were in broad agreement with the Joint Staff Assessment of Tanzania's third Poverty Reduction Strategy Paper (PRSP) Progress Report, and considered that the PRSP continues to provide a sound basis for continued Fund concessional assistance. They noted that Tanzania has made significant progress in implementing its poverty reduction strategy, and that the process now firmly forms the basis for continued government-donor dialogue. Directors highlighted, in particular, the need to assess the impact of policy implementation over the past five years, to improve the monitoring and evaluation systems, and to strengthen the link between the PRS and the budget process. They looked forward to a full PRS update, which should aim to deliver greater prioritization and coherence of reform agendas across relevant parties.



Tanzania: Selected Economic Indicators, 2002/03-2003/04 1/


 

2002/03

2003/04


 

(Annual percentage change)

 

Domestic economy 2/

   

    Real GDP

6.2

5.6

    Consumer prices (end of period)

4.4

4.6

 
 

(In millions of U.S. dollars) 3/

External economy

   

    Exports, f.o.b.

1,010.1

1,173.3

    Imports, f.o.b.

1,659.6

2,100.7

     Current account (excluding official transfers)

-734.0

-1,136.8

        (in percent of GDP)

-7.3

-10.9

    External assistance 4/

1,020.5

1,264.0

    Public external debt service paid

83.2

97.0

        (in percent of exports of goods and nonfactor
        services)

4.8

5.1

    Gross official reserves

1,670.4

1,951.9

        (in months of imports of goods and nonfactor
        services)

6.8

7.0

    Change in real effective exchange rate (in percent) 5/

-17.4

...

 
 

(In percent of GDP)

Financial variables

   

    Central government balance (including grants)

-1.6

-2.9

    Change in broad money (in percent)

22.7

19.1

    Change in credit to the nongovernment sector
     (in percent)

36.6

34.3

    Interest rate (in percent) 6/

6.1

...


Sources: Tanzanian authorities; and IMF staff estimates.

1/ Fiscal years run from July to June.
2/ data are on calendar year basis; 2002/03 data are for calendar year 2002.
3/ Unless otherwise indicated.
4/ Multilateral and bilateral grants and loans (including IMF disbursements).
5/ (+) = appreciation.
6/ Weighted average of 3-, 6-, and 12-month treasury bill rate; end of period.


1 Under 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 Executive Directors, and this summary is transmitted to the country's authorities and this PIN summarizes the views of the Executive Board.




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