Press Release No. 11/401

Press Release No.11/401
November 7, 2011

An International Monetary Fund (IMF) mission, led by Mr. Peter Allum, visited Dar es Salaam during October 26–November 7, 2011 to conduct discussions for the third review under the Policy Support Instrument (PSI).¹ The mission met with Finance Minister Mkulo, Bank of Tanzania Governor Ndulu, and other senior officials, as well as representatives of the private sector, civil society, and development partners. The mission wishes to thank the authorities for their warm hospitality, close collaboration, and the high quality of the discussions.

At the conclusion of the mission in Dar es Salaam, Mr. Allum issued the following statement:

“Despite recent power shortages, Tanzania’s economy continues to grow strongly, expanding 6.3 percent in the first half of 2011. Core inflation, measured excluding food and energy components, remains in single digits, while headline inflation has approached 17 percent (year-on-year), boosted by global energy prices, food price effects from the drought in the Horn of Africa, and the recent depreciation of the shilling. Public spending has risen as a share of gross domestic product (GDP) in recent years to deliver significant growth in local government health, education and other social programs as well as scaled up investments in roads and other infrastructures. However, overall recurrent spending has outpaced revenue and grant financing, contributing to growing fiscal deficits and a rising public debt stock.

“Under the PSI program through June 2011, the Bank of Tanzania’s reserve money targets were met and foreign commercial borrowing was kept well within program limits. However, partly due to the shortfall in commercial borrowing, domestic financing of the budget was higher than planned and the target for accumulating net international reserves was missed. Structural reforms are moving forward, notably to strengthen debt management capacity.

“Discussions during the mission focused on ensuring that public spending does not exceed the available fiscal space; setting the right policy mix for reducing inflation; and the financial implications of Tanzania’s emergency power plan.

“It was agreed that the budget deficit in 2011/12 should be allowed to exceed the earlier programmed level (6 percent of GDP) to help finance the emergency power plan and accommodate expanded social spending. At the same time, savings will be implemented in non-priority programs, ensuring that the deficit is reduced from year-ago levels to around 6½ percent of GDP. This fiscal tightening will also help the disinflation effort.

“The authorities intend to pursue prudent fiscal policies in 2012/13 and beyond to stabilize Tanzania’s rising public debt, projected to end this year at close to 42 percent of GDP. The government has agreed that recurrent spending in the 2012/13 budget should not exceed the financing provided by revenues and grants. This will require continuing efforts to prioritize spending and/or increase revenue collections.

“The authorities will maintain tight liquidity conditions to help reduce the demand for foreign exchange and stem inflationary pressures. The floating exchange rate regime will be maintained, and the accumulation of international reserves will benefit in the coming months from new donor funding and other credits.

“The government’s emergency power plan combines public and private investment in new thermal power capacity, with initial investments having already reduced the frequency of load-shedding. The purchase cost to the state power utility of the new power supplies is relatively high, and the government recognizes that early steps will be needed to strengthen the power utility’s finances.

“Reflecting discussions in these and other areas, the authorities and the mission reached understandings, ad referendum, on economic policies and reforms that could be supported under the PSI. The IMF Executive Board is expected to take up the third PSI review in January 2012.”

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¹ The PSI is an instrument of the IMF designed for countries that do not need balance of payments financial support. The PSI helps countries design effective economic programs that, once approved by the IMF's Executive Board, signal to donors, multilateral development banks, and markets the Fund's endorsement of a member's policies. (See http://www.imf.org/external/np/exr/facts/psi.htm.) Details on Tanzania’s current PSI are available at www.imf.org/tanzania.