Statement by an IMF Staff Mission at the Conclusion of a Visit to TanzaniaPress Release No. 08/213
September 19, 2008
An International Monetary Fund (IMF) mission led by Mr. Roger Nord visited Tanzania September 9-19, 2008 to conduct the fourth review under the Policy Support Instrument (PSI). The mission met with Minister of Finance and Economic Affairs, Hon. Mustafa Mkulo; Governor of the Bank of Tanzania, Prof. Benno Ndulu; other senior government officials; private sector representatives; and members of civil society.
The mission issued the following statement in Dar es Salaam today:
"Tanzania's economy continued to perform strongly in 2007/08. Economic growth reached 7¼ percent, fueled by a robust expansion in the manufacturing, construction, and services sectors. Exports grew by 30 percent, contributing to a further increase in international reserves of the Bank of Tanzania; fiscal policy remained prudent, anchored by strong revenue performance; and credit to the private sector continued to expand at a healthy pace.
"However, inflation has risen sharply over the past nine months and has remained persistently above the Bank of Tanzania's target. Pressures from the international fuel and food price surge have played an important part in this. As global pressures subside, the key challenge for Tanzania is to ensure that domestic inflation also retreats. This is not automatic: it will require active support from both monetary and fiscal policy.
"The outlook for 2008/09 is for continued strong economic growth, drawing on robust export performance and continued dynamism in construction. So far, Tanzania has remained unaffected by the global financial market turmoil. But should tumultuous global financial conditions persist, or should global growth prospects deteriorate significantly, low-income countries may not remain immune. In particular, reduced access to foreign capital and slower export market growth may also dampen economic activity in Tanzania.
"In the short term, this calls for a judicious economic policy mix:
• The Bank of Tanzania will need to continue to pursue an active monetary policy aimed at combating inflation. The mission welcomed the steps taken so far to improve liquidity management. Looking ahead, with the objective of bringing inflation back down to below 7 percent by mid-2009, the Bank of Tanzania will need to use all the instruments at its disposal to rein in excessive growth in monetary aggregates.
• Successful disinflation will also require a continued supportive fiscal policy stance. The 2008/09 budget appropriately maintains a zero net domestic financing target. However, the ambitious revenue target leaves little room for slippage. It will be important to ensure that a shortfall in revenue is matched by expenditure restraint and avoid unwarranted recourse to domestic borrowing, which could prove costly and place further unwelcome strain on monetary policy.
"Longer-term policies should continue to aim at raising economic growth while maintaining the economic stability that has served Tanzania so well over the past decade.
"In particular, further financial sector development is a critical ingredient for long-term economic growth. Tanzania has developed a vibrant banking sector which is providing vital lending to the private sector. The challenge now is to improve access to banking services, and the legal reforms currently underway promise to provide a welcome boost to the residential mortgage market. The nonbank financial sector is also growing rapidly. The mission welcomes the intention to establish a single regulatory agency for the fast-expanding pension funds. It will be important to ensure that the new agency can become effective as soon as possible and for the Bank of Tanzania to exercise its oversight as a guarantor of financial stability.
"Increased public investment, including in critical infrastructure projects, can make an important contribution to long-term economic and social development in Tanzania. And over the past decade, increased fiscal space, stemming in equal parts from raising domestic revenue and securing more assistance from development partners, has allowed Tanzania to scale up public spending from 16 percent to a budgeted 27 percent of GDP, or from US$38 to US$150 per capita. The key priority now is to ensure value for money by further reinforcing public financial management. Long-term fiscal stability hinges on a continued prudent public debt strategy and when considering access to commercial borrowing, all available options need to be carefully weighed so as to minimize the long-term burden on public finances.
"The mission welcomes the action taken by the Tanzanian authorities to address the recommendations of the special audit of the External Payment Arrears (EPA) account at the Bank of Tanzania. This is an ongoing process and the mission looks forward to the continued implementation of the authorities' action plan. Much has been done to begin to restore the credibility of the Bank of Tanzania. Looking ahead, priorities are to further strengthen the internal controls of the central bank, refocusing it on the core functions of inflation control and financial supervision.
"It is expected that the IMF's Executive Board will discuss the fourth review of Tanzania's economic program under the PSI by end-December 2008."