## 1. Real Sector and External Developments ## Source details **Canonical URL:** [1. Real Sector and External Developments](https://www.imf.org/-/media/files/publications/cr/2018/cr1811.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr1811.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr1811.pdf.json) --- ### Background - Authorities’ economic program supported by the 2014–18 PSI arrangement showed relatively strong macroeconomic performance but uneven implementation of structural reforms. - Fiscal revenue and deficit outturns were broadly in line with program targets; Tanzania maintained a low risk of debt distress. - Progress made in improving accuracy and timeliness of fiscal data, but domestic payment arrears have been a recurring issue. - Bank of Tanzania (BoT) implemented a reserve money targeting framework and held inflation at single digit levels; international reserves remained at adequate levels. - Financial development improved gradually. - PSI arrangement originally scheduled to expire in July 2017 and was extended until January 15, 2018. ### PSI Performance and Structural Benchmarks - Program implementation for end-June 2017: - Most assessment criteria (ACs) and indicative targets (ITs) were met. - The AC on tax revenue was missed by 0.1 percent of GDP (shortfalls in excises); staff supports a waiver for non-observance. - The AC on accumulation of domestic payment arrears for end-FY2016/17 was missed by about 1.6 percent of GDP (based on unverified arrears figures); staff supports a waiver given corrective actions underway. - Corrective actions to address arrears: - Produce a strategy paper by end-January 2018 on arrears clearance and prevention. - Strengthen commitment control (process commitments through IFMIS, refrain from committing new projects without assurance of funds, impose sanctions on accounting officers authorizing supply without Local Purchase Orders). - Improve revenue forecasting, enhance cash and debt management. - Verification timeline for arrears claims: - Verification of half of the arrear claims, including the larger ones, slated to be completed by end-March 2018 and the remainder by June 2018. ### Recent Macroeconomic Developments - Real activity and prices: - Official real GDP growth reportedly at 6¾ percent (yoy) in the first half of 2017; other high-frequency indicators suggest weaker activity. - Headline inflation close to BoT’s 5 percent target. - Core inflation (excluding food and energy) around 2 percent. - External sector: - External current account deficit halved to about 3 percent of GDP in 2016/17. - Exports and imports both declined; imports fell sharply driven by a decline in capital goods, oil, and travel services. - International reserves strengthened to 5.2 months of import coverage at end-2016/17. - Monetary and liquidity conditions (October 2017 data points): - Average reserve money declined by 1.5 percent (yoy) in October. - Broad money growth at 6 percent (yoy) in October. - In response to tight liquidity, BoT reduced minimum reserve requirement from 10 to 8 percent, lowered discount rate from 16 to 9 percent, and stepped up liquidity injection operations. - Overnight interbank rate fell substantially; private sector credit declined by 1.5 percent (yoy) in October for the second consecutive month. - Banking sector (latest indicators): - Non-performing loans (NPLs) increased to 12.5 percent of total loans in September from 9.1 percent a year earlier. - Bank profits declined to 2 percent of assets and 8.7 percent of equity in September. - Twiga Bancorp under BoT statutory management since October 2016; FBME Bank and Mbinga Community Bank handed to Deposit Insurance Board for liquidation. ### Fiscal Developments and Budget Execution - FY2016/17 outcomes: - Overall fiscal deficit on a cash basis was 1.5 percent of GDP (below revised program target of 3 percent of GDP and initial programmed target of 4.6 percent of GDP). - Lower deficit driven by slow budget execution (especially development projects), delays in external financing, and project preparation/implementation delays. - Total revenue broadly in line with program; VAT refunds paid only Tsh 58 billion in 2016/17 versus Tsh 570 billion in 2015/16. - Late external loan disbursements and slow execution led to substantial buildup of government deposits with BoT, some earmarked. - Early FY2017/18 (July–September): - Revenue lower than programmed by 0.3 percent of GDP, mainly due to underperformance of excises and delays in revenue-enhancing measures. - Spending execution remained slow; overall fiscal surplus of 0.2 percent of GDP against programmed deficit of 0.8 percent of GDP. - Budget strategy and projections: - Government targeting a budget deficit close to 4 percent of GDP in 2017/18. Capital spending originally budgeted at about 10 percent of GDP; development projects amounting to 1.2 percent of GDP were delayed until mid-year review. - Updated staff projections suggest a 1.6 percent of GDP revenue shortfall relative to budget targets for 2017/18. - Staff recommendations: confirm identified expenditure cuts; increase domestic financing to cover revenue shortfall; step up investment project preparation and implementation; firm up budget financing plans; move away from earmarking resources. - Authorities indicated drawdown of proceeds from the US$500 million Credit Suisse loan secured in June–August and other earmarked government deposits will help accelerate development spending. - Medium-term fiscal framework: - Baseline scenario assumes overall fiscal deficit would increase to about 4½ percent of GDP for a few years while major public investment projects proceed, then converge back below 3 percent of GDP. - 2018/19 budget guidelines target a deficit of about 2½ percent of GDP (compared with 4½ percent under current PSI baseline); revenue target about ¾ percent of GDP higher than current baseline; expenditure target about 1½ percent of GDP lower. ### Economic Development Plan and Public Investment - FYDP II (2016/17–2020/21) aims for economic transformation via industrialization and human development, leveraging agricultural and mining potential and Tanzania’s geographic location. - Large public investments planned include: standard gauge railway (Dar es Salaam–Mwanza), 2100 MW Stiegler’s Gorge hydro project, Bagamoyo port development, Hoima–Tanga pipeline. - Timelines and financing modalities for major projects not fully decided; use of PPPs encouraged to limit government borrowing. ### Macroeconomic Outlook and Risks (selected projections from Text Table 2) - Projected indicators (2017/18–2020/21): - Real GDP growth: 6.2 (2017/18), 6.5 (2018/19), 6.8 (2019/20), 6.7 (2020/21) percent. - Inflation (yoy, %, end-period): 5.0 (2017/18), 5.0 (2018/19), 5.0 (2019/20), 5.0 (2020/21). - Overall fiscal balance (cash basis, % of GDP): -4.2 (2017/18), -4.6 (2018/19), -4.6 (2019/20), -3.7 (2020/21). - Government capital spending (% of GDP): 8.6 (2017/18), 8.9 (2018/19), 9.0 (2019/20), 8.2 (2020/21). - External current account balance (% of GDP): -4.8 (2017/18), -5.8 (2018/19), -6.0 (2019/20), -5.4 (2020/21). - Gross international reserves (months of next year's imports): 4.9 (2017/18), 4.6 (2018/19), 4.7 (2019/20), 4.7 (2020/21). - Staff baseline outlook: - GDP growth could remain around 6–7 percent in 2017/18 and over the medium term, assuming successful scaling-up of capital spending and improved business environment. - Inflation expected to remain close to 5 percent if BoT maintains sound monetary stance. - External current account deficit projected to widen to about 5 percent of GDP in 2017/18 and around 5.5 percent over the medium term. - International reserves expected to remain adequate at about 4½ months of prospective imports over the medium term, supported by project loan inflows and ENCB. - Risks: - Downside: poor business environment, continued slow execution of infrastructure spending, prolonged slowdown in private sector credit growth, tighter global financial conditions. - Upside: improved environment in neighboring countries leading to recovery in manufacturing exports and trans-shipment activities. ### Policy Recommendations and Actions Discussed - Strengthen public financial management and arrears prevention: - Produce a strategy paper on arrears clearance and prevention. - Strengthen commitment controls via IFMIS and impose sanctions for unauthorized commitments. - Improve revenue forecasting and enhance cash and debt management. - Fiscal policy: - Confirm expenditure cuts and increase domestic financing to cover the projected 1.6 percent of GDP revenue shortfall in 2017/18. - Step up investment project preparation and implementation; firm up budget financing plans; avoid earmarking. - Monetary policy and financial sector: - Maintain sound monetary policy stance to keep inflation near 5 percent. - Address rising NPLs and bank capitalization concerns; complete structural benchmarks to facilitate transition to interest-rate based monetary policy framework. - Public investment management: - Use the baseline medium-term scenario to guide public investment, keep deficit path consistent with low risk of debt distress, and employ PPPs where appropriate. ### Fiscal Structural Reforms — Findings and Recommended Measures - Budget credibility and domestic arrears: - Domestic payment arrears undermine budget credibility; arrears stem from unrealistic revenue and financing projections and weak commitment controls. - Plans to settle stock of domestic arrears in a medium-term context need development. - Tax administration and policy: - Raise domestic revenue mobilization in a business-friendly manner. - Strengthen tax administration through risk-based compliance analyses and audits; broaden tax base by streamlining tax exemptions and simplifying tax system. - Public Investment Management (PIM): - Improve investment spending efficiency and project appraisal and selection; fully enforce PIM manual. - Complete proposed amendments to the PPP Act and strengthen framework for assessing, reporting, and managing fiscal risks from PPPs. - Debt management capacity: - Timely debt recording and payments needed; public debt rose to 38 percent of GDP at end-2016/17 from 21 percent a decade ago. ### Monetary and Exchange Rate Policies — Findings and Recommendations - Liquidity and monetary stance: - Monetary policy needs vigilance amid expected recovery in public spending. - Close policy coordination between BoT and minister of finance on liquidity forecasting and government spending plans is needed. - Further liquidity injection operations by BoT should be avoided given current level of excess reserves. - Stalled private sector credit growth should be addressed by financial and structural measures, not further easing of monetary policy. - Transition to an interest rate-based framework: - Migration towards short-term interest rates as the operational target planned for early 2018. - Progress on three structural benchmarks: draft code of conduct for interbank cash market operations; review/expansion of eligible collateral to all government securities; electronic interbank money market platform launch planned for January (post-testing). - New framework will rely on open market operations, standing facilities and reserve requirements. - Exchange rate flexibility and reserves: - Exchange rate broadly stable since early 2016; gross international reserves increased to over 5 months of import coverage. - Staff recommended maintaining international reserves at about 4½ months of prospective imports given high financial dollarization. - Tanzania’s de facto exchange rate arrangement reclassified to stabilized from floating; staff stressed allowing greater exchange rate flexibility during transition and phasing out unsterilized FX operations. ### Financial Sector Policies — Findings and Recommended Measures - Nonperforming loans (NPLs) and bank supervision: - Increasing NPLs pressuring banks’ earnings, capital adequacy and liquidity. - BoT requested affected banks intensify loan recovery (including foreclosures and bad bank units) and tighten lending standards. - June 2017 BoT requirement to seek credit score information from credit reference bureaus for potential borrowers. - Staff recommended frequent thematic on-site reviews focused on credit and concentration risks and expedited implementation of Basel II capital requirements. - Community banks and sector-wide stability: - Six undercapitalized community banks instructed to comply with minimum capital requirement by end-2017; consolidation via a Federation of Community Banks encouraged. - Financial inclusion and SME access to credit: - Over 65 percent of adults now have access to formal financial services. - SMEs face high difficulty accessing bank credit: 44 percent of SMEs claiming difficulties; cost of financing remains prohibitive. - Staff suggested strengthening credit information system and improving access to collateral to provide affordable credit to SMEs. ### Business Environment and Governance — Findings and Recommendations - Business climate: - FYDP II aims to foster private sector-led growth; Tanzania ranks 137 out of 190 in the 2018 World Bank Doing Business survey. - Major obstacles: trading across borders, paying taxes, starting a business. - Recent events (export ban on mineral concentrates, changes to mining laws, delayed VAT refunds) increased private sector concerns and uncertainty. - Staff emphasized quick resolution of domestic arrears and VAT refunds; authorities intend to pay validated claims. - Staff encouraged measures to increase efficiency in trade logistics (e.g., national electronic single window), eliminate unnecessary permits/licenses, and improve online business registration. - TANESCO and energy sector: - TANESCO has arrears to gas and electricity suppliers equal to 0.8 percent of GDP in early 2017. - TANESCO pays TPDC Tsh 4.5 billion weekly for gas delivery as agreed. - Staff stressed accelerating financial assessment of TANESCO and developing a strategy for sustainability. - Anti-corruption and transparency: - Government developed National Anti-Corruption Strategy and Action Plan III (NACSAP III). - Staff supported regular publication of major parastatals’ financial reports and mobilizing AML tools to assist anti-corruption efforts. ### Data Quality and Capacity Development - Improvements in GDP data and external sector statistics welcomed but need acceleration to implement TA recommendations. - Staff recommended adopting the GFSM 2014 format for fiscal tables. - Priority capacity development areas: public financial and debt management; tax policy and administration; interest rate-based monetary framework implementation; bank supervision; GDP and BOP statistics. ### Staff Appraisal — Key Conclusions - Program performance and macro outcomes: - Tanzania’s 3½-year PSI arrangement marked by strong macroeconomic management and outcomes, but uneven structural reform implementation. - Revenue and deficit outturns broadly in line with program targets; low risk of debt distress. - BoT successfully carried out reserve money targeting; international reserves comfortable. - Remaining challenges and risks: - Need strong growth and job creation to address high poverty and large underemployed youth population. - Large infrastructure gaps and challenging business climate persist. - Short-term downside risks: slow budget implementation, challenging business environment, private sector concerns about heavy-handed enforcement. - Policy priorities emphasized: - Strengthen fiscal policy implementation and budget credibility; firm up budget financing plans and revisit 2018/19 budget assumptions. - Ensure reorientation from current to development spending does not reduce delivery of essential public services. - Continue BoT transition to interest rate-based monetary framework and allow greater exchange rate flexibility. - Urgently tackle rise in NPLs to revive credit growth and protect banks’ earnings and capital. - Accelerate structural reforms to improve business climate and governance, including reducing domestic arrears and finalizing VAT refund validation. - Accelerate improvements in data quality for GDP and external sector statistics. ### Program Recommendation - Staff recommends completion of the seventh review under the PSI. - Staff supports a waiver for non-observance of the end-June 2017 assessment criteria on tax revenues and domestic arrears on the grounds that the slippage was minor and corrective measures articulated. ### Debt Sustainability and Public Debt (selected DSA findings) - Domestic public debt: - Domestic debt stood at 9 percent of GDP at end-2015/16; adjusted domestic debt including additional liabilities increases it to 14.4 percent of GDP (2016/17). - External debt assessment: - PV of PPG external debt-to-GDP ratio peaks at 19.1 percent in FY20/21. - Risk of external debt distress: Low. - Baseline macro assumptions: - Real GDP growth projected around 6½-7 percent near term; medium-term 6.5 percent. - CPI inflation projected at about 5 percent. - External current account deficit fell to 2.7 percent of GDP in 2016/17; projected long-term current account deficit assumed at 5½ percent of GDP. - Fiscal deficit 1½ percent of GDP in 2016/17; projected to fall below 3 percent of GDP by 2022/23. - Net domestic borrowing expected to be around 1 percent of GDP during most of projection period. - ENCB share of foreign financing expected to increase to around 50 percent in the long term. - FDI projected to recover to 4 percent of GDP. - Stress tests and vulnerabilities: - Debt indicators sensitive to one-time depreciation shock; debt service-to-revenue indicator particularly sensitive to depreciation. - Policy implications: - Maintain prudent fiscal policy, raise domestic revenue in a business-friendly manner, improve public investment management, enhance debt management capacity, and carefully select projects financed by commercial loans. ### Key Quantitative Indicators (selected series and levels reported) - Real GDP growth (selected series): 7.0 6.2 6.0 6.2 6.5 6.8 6.7 (series heading "Real GDP7.06.26.06.26.56.86.7") - Inflation and deflators: - GDP deflator: 6.7 5.2 5.1 5.0 5.0 5.0 5.0 - CPI (period average): 6.0 5.4 5.3 5.0 5.0 5.0 5.0 - CPI (end of period): 5.5 5.8 5.4 5.0 5.0 5.0 5.0 - External and reserves: - Current account balance (percent of GDP): -6.5 -4.9 -2.7 -4.8 -5.8 -6.0 -5.4 (2015/16–2020/21) - Gross international reserves (Billions of US$): 3.9 4.5 5.0 5.3 5.6 6.1 6.8 - Months of imports of goods and services: 4.8 4.0 5.2 4.9 4.6 4.7 4.7 - Public debt and fiscal balances: - Public gross nominal debt (percent of GDP): 38.5 37.3 38.1 38.9 40.2 41.3 41.3 - Tax revenue (percent of GDP): 12.8 13.0 13.0 13.2 12.7 12.9 13.1 13.3 - Overall balance (cash basis, percent of GDP): -3.5 -2.9 -1.5 -3.9 -4.2 -4.6 -4.6 -3.7 - Monetary and financial aggregates: - Broad money (M3) series: 12.5 10.5 6.3 7.9 10.8 12.6 14.0 (heading "Broad money (M3)12.510.56.37.910.812.614.0") - Reserve money growth/levels and M3 growth series included in staff tables and text. - Credit to nongovernment sector growth and private sector credit contraction noted (e.g., private sector credit contracted by 1.5 percent (yoy) in October). - Banking sector soundness: - Gross NPLs to gross loans series include: 8.1 7.1 6.8 6.7 6.7 6.6 7.9 8.4 8.7 8.7 9.1 11.0 10.6 12.5 - Core capital to risk weighted assets: 18.26 percent in June 2017 (minimum regulatory requirement 10 percent). - Total capital to risk weighted assets: 20.26 percent in June 2017 (minimum regulatory requirement 12.0 percent). *Source: UNITED REPUBLIC OF TANZANIA — INTERNATIONAL MONETARY FUND, cr1811 excerpts and IMF staff estimates and projections.* ### 1. Real Sector and External Developments ______________________________________________________ 17 ### 1. Real Sector and External Developments ### Background - The authorities’ economic program supported by the 2014–18 PSI arrangement showed relatively strong macroeconomic performance but uneven implementation of structural reforms. - Fiscal revenue and deficit outturns were broadly in line with program targets; Tanzania maintained a low risk of debt distress. - Progress made in improving accuracy and timeliness of fiscal data, but domestic payment arrears have been a recurring issue. - The Bank of Tanzania (BoT) successfully carried out a reserve money targeting framework, holding inflation at single digit levels. International reserves remained at adequate levels. - Financial development improved gradually in recent years. - The PSI arrangement was originally scheduled to expire in July 2017 and was extended until January 15, 2018. ### PSI Performance and Structural Benchmarks - Performance under the PSI featured multiple assessment criteria (ACs) and indicative targets (ITs) and a mix of met and missed structural benchmarks across reviews (Text Table 1 summary). - Program implementation for end-June 2017: - Most ACs and ITs were met. - The AC on tax revenue was missed by 0.1 percent of GDP (shortfalls in excises). Staff supports a waiver for non-observance on the grounds that the breach was minor. - The AC on accumulation of domestic payment arrears for end-FY2016/17 was missed by about 1.6 percent of GDP (based on unverified arrears figures). Staff supports a waiver given corrective actions underway. - Corrective actions to address arrears include producing a strategy paper by end-January 2018 on arrears clearance and prevention, strengthening commitment control (process commitments through IFMIS, refrain from committing new projects without assurance of funds, impose sanctions on accounting officers authorizing supply without Local Purchase Orders), improving revenue forecasting, and enhancing cash and debt management. - Verification timeline for arrears claims: verification of half of the arrear claims, including the larger ones, slated to be completed by end-March 2018 and the remainder by June 2018. ### Recent Macroeconomic Developments - Official GDP: real GDP growth reportedly at 6¾ percent (yoy) in the first half of 2017; other high-frequency indicators suggest weaker activity. - Inflation: - Headline inflation close to BoT’s 5 percent target. - Core inflation (excluding food and energy) around 2 percent. - External sector: - External current account deficit halved to about 3 percent of GDP in 2016/17. - Exports and imports both declined; imports fell sharply driven by a decline in capital goods, oil, and travel services. - International reserves strengthened to 5.2 months of import coverage at end-2016/17 (compared with 2.4-3.2 months required by traditional measures). - Monetary and liquidity conditions: - Average reserve money declined by 1.5 percent (yoy) in October. - Broad money growth at 6 percent (yoy) in October. - In response to tight liquidity, BoT actions included reducing minimum reserve requirement from 10 to 8 percent, lowering discount rate from 16 to 9 percent, and stepped-up liquidity injection operations; overnight interbank rate fell substantially. - Private sector credit declined for the second consecutive month by 1.5 percent (yoy) in October. - Banking sector: - Non-performing loans (NPLs) increased to 12.5 percent of total loans in September from 9.1 percent a year earlier. - Bank profits declined to 2 percent of assets and 8.7 percent of equity in September. - Twiga Bancorp under BoT statutory management since October 2016; to be merged with another bank soon. - FBME Bank and Mbinga Community Bank handed to Deposit Insurance Board for liquidation. ### Fiscal Developments and Budget Execution - FY2016/17: - Overall fiscal deficit on a cash basis was 1.5 percent of GDP, below revised program target of 3 percent of GDP and initial programmed target of 4.6 percent of GDP. - Lower deficit driven by slow budget execution, particularly development projects, and delays in external financing and project preparation/implementation. - Total revenue broadly in line with program; weaker underlying collections offset by much lower-than-expected VAT refund payments (only Tsh 58 billion in VAT refunds paid in 2016/17 versus Tsh 570 billion in 2015/16). - Late disbursement of external loans and slow execution led to substantial buildup of government deposits with BoT, some earmarked. - Early FY2017/18 (July–September): - Revenue lower than programmed by 0.3 percent of GDP, mainly due to underperformance of excises and delays in implementing revenue-enhancing measures. - Spending execution, especially development projects, continued to be slow, leading to an overall fiscal surplus of 0.2 percent of GDP against a programmed deficit of 0.8 percent of GDP. - Budget strategy and projections: - Government targeting a budget deficit close to 4 percent of GDP in 2017/18. Capital spending originally budgeted at about 10 percent of GDP; some development projects amounting to 1.2 percent of GDP were delayed until mid-year review. - Updated staff projections suggest a 1.6 percent of GDP revenue shortfall relative to budget targets for 2017/18. - Staff recommended confirming identified expenditure cuts, increasing domestic financing to cover revenue shortfall, stepping up investment project preparation and implementation, firming up budget financing plans, and moving away from earmarking resources which reduces budget flexibility. - Authorities indicated drawdown of proceeds from the US$500 million Credit Suisse loan secured in June–August and other earmarked government deposits will help accelerate development spending. - Medium-term fiscal framework: - Baseline scenario assumes overall fiscal deficit would increase to about 4½ percent of GDP for a few years while major public investment projects proceed, then converge back below 3 percent of GDP. - 2018/19 budget guidelines target a deficit of about 2½ percent of GDP (compared with 4½ percent under current PSI baseline). Revenue target about ¾ percent of GDP higher than current baseline; expenditure target about 1½ percent of GDP lower because major investment projects not yet incorporated. ### Economic Development Plan and Public Investment - FYDP II (2016/17–2020/21) aims for economic transformation via industrialization and human development, leveraging agricultural and mining potential and Tanzania’s geographic location. - Government intends to maintain macroeconomic stability, address infrastructure gaps, combat corruption, and improve business environment to facilitate private sector-led growth and job creation. - Large public investments planned include: standard gauge railway (Dar es Salaam–Mwanza), 2100 MW Stiegler’s Gorge hydro project, Bagamoyo port development, Hoima–Tanga pipeline. - Timelines and financing modalities for major projects not fully decided. Baseline medium-term scenario from previous staff report continues to guide public investment plans, with use of PPPs encouraged to limit government borrowing. ### Macroeconomic Outlook and Risks (Text Table 2 highlights) - Projected indicators (2017/18–2020/21): - Real GDP growth: 6.2 (2017/18), 6.5 (2018/19), 6.8 (2019/20), 6.7 (2020/21) percent. - Inflation (yoy, %, end-period): 5.0 (2017/18), 5.0 (2018/19), 5.0 (2019/20), 5.0 (2020/21). - Overall fiscal balance (cash basis, % of GDP): -4.2 (2017/18), -4.6 (2018/19), -4.6 (2019/20), -3.7 (2020/21). - Government capital spending (% of GDP): 8.6 (2017/18), 8.9 (2018/19), 9.0 (2019/20), 8.2 (2020/21). - External current account balance (% of GDP): -4.8 (2017/18), -5.8 (2018/19), -6.0 (2019/20), -5.4 (2020/21). - Gross international reserves (months of next year's imports): 4.9 (2017/18), 4.6 (2018/19), 4.7 (2019/20), 4.7 (2020/21). - Staff baseline outlook: - GDP growth could remain around 6–7 percent in 2017/18 and over the medium term, assuming successful scaling-up of capital spending and improved business environment. - Inflation expected to remain close to 5 percent if BoT maintains sound monetary stance. - External current account deficit projected to widen to about 5 percent of GDP in 2017/18 and around 5.5 percent over the medium term, reflecting higher capital spending and imports. - International reserves expected to remain adequate at about 4½ months of prospective imports over the medium term, supported by project loan inflows and external nonconcessional borrowing (ENCB). - Risks to the outlook: - Downside: poor business environment, continued slow execution of infrastructure spending, prolonged slowdown in private sector credit growth, and tighter global financial conditions increasing financing costs. - Upside: improved economic/political environment in neighboring countries leading to recovery in manufacturing exports and trans-shipment activities. ### Policy Recommendations and Actions Discussed - Strengthen public financial management and arrears prevention: - Produce a strategy paper on arrears clearance and prevention. - Strengthen commitment controls via IFMIS and impose sanctions for unauthorized commitments. - Improve revenue forecasting and enhance cash and debt management. - Fiscal policy: - Confirm expenditure cuts identified and increase domestic financing to cover projected 1.6 percent of GDP revenue shortfall in 2017/18. - Step up investment project preparation and implementation; firm up budget financing plans; avoid earmarking that reduces fiscal flexibility. - Monetary policy and financial sector: - Maintain sound monetary policy stance to keep inflation near 5 percent. - Address rising NPLs and bank capitalization concerns; complete planned structural benchmarks to facilitate transition to interest-rate based monetary policy framework. - Public investment management: - Use the baseline medium-term scenario to guide public investment, keep deficit path consistent with low risk of debt distress, and employ PPPs where appropriate to limit government borrowing. Sources for projections and assessments: Tanzanian authorities and IMF staff estimates and projections. *Source: International Monetary Fund — “1. Real Sector and External Developments” (chapter).* ### 17. Further fiscal structural reforms are needed. Discussions on specific measures to be ### 17. Further fiscal structural reforms are needed. Discussions on specific measures to be taken are ongoing in the following areas, with which the authorities mostly agreed as they were included in the medium-term budget guidelines: ### Fiscal structural reforms — findings and recommended measures - Budget credibility and domestic arrears - Continued incurrence of domestic payment arrears is undermining budget credibility. - Arrears stem from unrealistic revenue and financing projections behind too large budgetary spending envelopes and weak commitment controls. - Plans to settle the stock of domestic arrears in a medium-term context need to be developed. - Tax administration and policy - Raising domestic revenue mobilization in a business-friendly manner is critical to meet development needs while safeguarding fiscal sustainability. - Tax administration can be strengthened through risk-based compliance analyses and audits. - The tax base can be broadened by streamlining tax exemptions and simplifying the tax system. - Public investment management (PIM) - Improving investment spending efficiency and project appraisal and selection would help reduce spending pressure given constrained resources. - The PIM manual needs to be fully enforced to ensure rigorous feasibility and costing studies. - Considering the envisaged scale-up of PPP projects, proposed amendments to the PPP Act should be completed soon to clarify institutional responsibilities. - The framework for assessing, reporting, and managing fiscal risks arising from PPP projects should be further strengthened. - Debt management capacity - Debt recording and payments need to be done in a timely manner considering disputed external arrears and government guarantees provided, including to agricultural loans. - Public debt has risen to 38 percent of GDP at end-2016/17 from 21 percent a decade ago. ### Monetary and exchange rate policies — findings and recommendations - Liquidity and monetary stance - Monetary policy will need to be vigilant in the face of an expected recovery in public spending. - Tight fiscal policy stance and an easing of monetary policy have contributed to a substantial increase in deposits at the BoT. - Sizable liquidity injections from fiscal operations may complicate monetary policy management and increase volatility in short-term interest rates. - Close policy coordination between the BoT and the minister of finance on liquidity forecasting and government spending plans is needed. - Further liquidity injection operations by the BoT should be avoided considering the current level of excess reserves. - The stalled private sector credit growth should be addressed by financial and structural policy measures, rather than by further easing of the monetary policy stance. - Transition to an interest rate-based framework - Migration towards short-term interest rates as the operational target is planned for early 2018. - Good progress made on three structural benchmarks for the seventh PSI review to support this transition: draft code of conduct for interbank cash market operations; review and expansion of eligible collateral to all government securities; and an electronic interbank money market platform launch planned for January (post-testing). - The new framework will rely on open market operations (along with standing facilities and reserve requirements) as key instruments, requiring development of a good grasp of the monetary transmission mechanism. - Exchange rate flexibility and reserves - The exchange rate has remained broadly stable in both nominal and real effective terms since early 2016. - Over the last year, currency appreciation pressures from a sharp fall in the current account deficit were offset by the BoT’s net purchases of foreign exchange as part of operations to inject liquidity. - Gross international reserves have increased considerably to over 5 months of import coverage. - Given the high level of financial dollarization, staff recommended maintaining international reserves at about 4½ months of prospective imports rather than the earlier target of 4 months of imports. - Tanzania’s de facto exchange rate arrangement was reclassified to stabilized from floating, while the de jure arrangement remains classified as free floating. - Staff stressed that greater exchange rate flexibility should be allowed during the transition, and unsterilized foreign exchange operations should be gradually phased out. - To support interbank market development, the BoT may consider widening the Net Open Position (NOP) limit from current 7.5 percent, as recommended by an MCM technical assistance mission in 2014. ### Financial sector policies — findings and recommended measures - Nonperforming loans (NPLs) and bank supervision - Provision of credit to the private sector has declined as banks cope with deteriorating asset quality. - Increasing NPLs are exerting pressure on banks’ earnings and will likely affect capital adequacy and liquidity negatively. - The BoT has requested affected banks to intensify loan recovery (including via foreclosures and establishment of bad bank units) and tighten lending standards. - Some banks have written off large portions of NPLs and increased provisioning. - In June 2017, the BoT introduced a requirement to seek information on potential borrowers’ credit score from credit reference bureaus. - Staff recommended frequent thematical on-site reviews focused on credit and concentration risks and expediting implementation of Basel II capital requirements to allow risk-based capital adequacy ratios. - Community banks and sector-wide stability - Community banks account for only a small share of total financial sector assets but have cross-institutional linkages with larger banks. - The BoT instructed six undercapitalized community banks to comply with the minimum capital requirement by end-2017 and encouraged consolidation through establishing a Federation of Community Banks. - An upcoming joint IMF-World Bank Financial Sector Assessment Program (FSAP) for Tanzania should provide further inputs for the authorities’ financial sector reform agenda. - Financial inclusion and SME access to credit - Financial inclusion has improved considerably, particularly for households, supported by mobile money and banking expansion. - Over 65 percent of adults now have access to formal financial services. - Access by women to financial services needs further improvement; the situation for SMEs is weaker. - Among the EAC countries, the percentage of SMEs claiming difficulties in accessing bank credit is the highest (44 percent), and the cost of financing remains prohibitive for smaller companies. - To provide affordable credit to SMEs, staff suggested addressing structural issues such as strengthening the credit information system and improving access to collateral. ### Business environment and governance — findings and recommendations - Business climate and private sector concerns - FYDP II aims to create a business climate conducive to private sector-led growth and industrialization. - In the 2018 World Bank’s Doing Business survey, Tanzania ranks 137 out of 190 countries. - Trading across borders, paying taxes, and starting a business are cited as the biggest obstacles. - Recent events (e.g., an export ban on mineral concentrates, heavy-handed changes to the mining laws, delayed repayment of VAT refunds) have increased private sector concerns about heavy-handed and arbitrary enforcement of rules, increasing uncertainty and negatively affecting private investment. - Staff emphasized addressing government domestic arrears and VAT refunds issues quickly; authorities stated their intention to pay those liabilities after validating claims. - Staff encouraged implementation of measures under the World Bank’s proposed development policy operation to increase efficiency in trade logistics (e.g., a national electronic single window system), eliminate unnecessary permits and licenses, and improve an online business registration system. - TANESCO and energy sector sustainability - TANESCO has arrears to gas and electricity suppliers equal to 0.8 percent of GDP in early 2017. - TANESCO has continued to pay TPDC Tsh 4.5 billion weekly for TPDC’s bill for gas delivery to TANESCO as agreed between the two companies. - Staff stressed the importance of TANESCO’s financial sustainability to achieve credibility as an energy purchaser and facilitate energy sector development. - The ongoing financial assessment of TANESCO by Ernst & Young and the Controller and Audit General needs to be accelerated to develop a comprehensive strategy to put TANESCO on a sustainable financial footing. - Anti-corruption and transparency efforts - The government developed the National Anti-Corruption Strategy and Action Plan III (NACSAP III) focusing on transparency, accountability, enforcement in public procurement and revenue collection, and capacity building of watchdogs and oversight institutions. - The government plans to introduce a public expenditure tracking system. - Staff supported regular publication of major parastatals’ financial reports on the Treasury Registrar’s website. - Anti-money laundering (AML) tools could be mobilized to assist anti-corruption efforts, including by ensuring banks apply adequate preventive measures on accounts of politically exposed persons. - Data quality and capacity development - Improvements in GDP data and external sector statistics, including trade and FDI, are welcome but need to be accelerated to implement TA recommendations. - Staff recommended adopting the GFSM 2014 format for fiscal tables in line with international best practice. - Priority capacity development areas include public financial and debt management; tax policy and administration; implementation of an interest rate-based monetary framework; bank supervision and regulations; and GDP and BOP statistics. ### Staff appraisal — key conclusions - Program performance and macro outcomes - Tanzania’s 3½-year PSI arrangement has been marked by strong macroeconomic management and outcomes, but uneven implementation of structural reforms. - Revenue and deficit outturns have been broadly in line with program targets. - Tanzania has maintained a low risk of debt distress. - The BoT has successfully carried out a reserve money targeting framework, holding inflation at single digit levels. - International reserves have remained at comfortable levels. - Remaining challenges and risks - Strong growth and job creation are needed to address high poverty and a large underemployed youth population. - Large infrastructure gaps and a challenging business climate persist despite FYDP II objectives. - Recent performance is mixed; official GDP data point to strong growth but other high-frequency data indicate much weaker activity. - Downside risks to short-term growth include slow budget implementation, a challenging business environment, and private sector concerns about heavy-handed enforcement of rules. - Policy priorities emphasized by staff - Strengthen fiscal policy implementation and budget credibility; firm up budget financing plans and revisit assumptions in the 2018/19 budget guidelines to ensure realistic budgeting. - Ensure reorientation of spending from current to development does not lead to lower delivery of essential public services required for FYDP II human capital objectives. - Continue BoT efforts to transition to an interest rate-based monetary framework and allow greater exchange rate flexibility. - Urgently tackle the sustained rise in NPLs to revive credit growth and protect banks’ earnings and capital positions. - Accelerate structural reforms to improve the business climate and governance, including reducing domestic arrears, finalizing validation of VAT refunds, and addressing high business costs. - Accelerate improvements in data quality for GDP and external sector statistics. *Source: UNITED REPUBLIC OF TANZANIA — INTERNATIONAL MONETARY FUND, cr1811 excerpt.* ### 37. Staff recommends completion of the seventh review under the PSI. Staff also supports ### cr1811 - 37. Staff recommends completion of the seventh review under the PSI. Staff also supports ### Program recommendation - Staff recommends completion of the seventh review under the PSI. - Staff supports a waiver for the non-observance of the end-June 2017 assessment criteria on tax revenues and domestic arrears on the grounds that the slippage was minor and in light of the articulation of corrective measures. *UNITED REPUBLIC OF TANZANIA — INTERNATIONAL MONETARY FUND* ### Real sector and external developments - Economic growth has been robust in the past years with strong performance in services and construction. - Tanzania is among the most diversified commodity-exporting countries in Sub-Saharan Africa, but its competitiveness remains below its peers (Global Competitiveness Index, 2014). - The current account deficit has halved due to a sharp decline in imports. - Active FX operations and external borrowing have allowed to increase international reserves. - Real GDP Growth (2006–2017): series plotted against Sub-Saharan Africa and EAC average (chart reference). - Contributions to Real GDP by Sector (2011–2016): Agriculture, Industry and construction, Services (chart reference). Key external figures (Table/figure summaries): - Current account deficit (percent of GDP) and Gross international reserves (months of imports) tracked across 2000/01–2016/17 (chart reference). - Gross international reserves (USD million) and months of imports charted. ### Fiscal developments - Tax collection has stalled. - Budget implementation slowed substantially in FY16/17, resulting in a lower fiscal deficit. - Public debt remains modest, albeit rising, mostly driven by external debt. - Revenues underperform relative to income level and are among the lowest in the EAC. Selected fiscal metrics (from Table 1 and Table 2 series): - Real GDP: 7.0 6.2 6.0 6.2 6.5 6.8 6.7 (series heading "Real GDP7.06.26.06.26.56.86.7") - GDP deflator: 6.7 5.2 5.1 5.0 5.0 5.0 5.0 - CPI (period average): 6.0 5.4 5.3 5.0 5.0 5.0 5.0 - CPI (end of period): 5.5 5.8 5.4 5.0 5.0 5.0 5.0 - Core inflation (end of period): 3.0 ... 1.9 ............ - Current account balance (Table 1): -6.5 -4.9 -2.7 -4.8 -5.8 -6.0 -5.4 (2015/16–2020/21) - Gross international reserves (Billions of US$): 3.9 4.5 5.0 5.3 5.6 6.1 6.8 - Public gross nominal debt (percent of GDP): 38.5 37.3 38.1 38.9 40.2 41.3 41.3 - Tax revenue (percent of GDP, Table 1): 12.8 13.0 13.0 13.2 12.7 12.9 13.1 13.3 (series in Table 2b) - Overall balance (cash basis, percent of GDP, Table 2b): -3.5 -2.9 -1.5 -3.9 -4.2 -4.6 -4.6 -3.7 - Overall balance before grants (percent of GDP, Table 2b): -4.0 -3.8 -2.1 -4.8 -5.0 -5.7 -5.6 -4.7 Central government operations (selected levels, Table 2a): - Total revenue (Billions of Tanzanian Shillings): 13,907 16,656 16,640 18,781 17,940 20,331 23,330 26,477 (columns for years) - Total expenditure (Billions of Tanzanian Shillings): 17,760 20,803 18,890 24,582 24,035 28,078 31,857 34,417 - Development expenditure (Billions of Tanzanian Shillings): 4,340 8,588 7,273 10,909 10,362 12,047 13,669 13,930 - Interest payments (Billions of Tanzanian Shillings): 1,486 1,678 1,715 1,803 1,803 2,641 3,043 3,548 - Grants (Billions of Tanzanian Shillings): 495 1,007 1,092 998 998 1,502 1,598 1,581 Fiscal composition notes: - Recurrent expenditures and wages and salaries tracked across years; transfers to PSPF and TANESCO noted in tables. - Clearance of arrears figures included in domestically financed development expenditure (e.g., clearance of arrears 958 1,677 ... 1,800 1,800). ### Inflation, exchange rate, and monetary developments - Inflation remains contained around the BoT’s medium-term target. - Monetary aggregates and credit have slowed down sharply. - Overnight rates have declined significantly, with some key T-bills and T-bonds rates gradually following. - Bank of Tanzania intervened mostly on the buy side; real exchange rate broadly mirrors nominal rate. Monetary and price indicators (Table 1, Table 3): - Broad money (M3) growth/levels: 12.5 10.5 6.3 7.9 10.8 12.6 14.0 (series heading "Broad money (M3)12.510.56.37.910.812.614.0") - Average reserve money: 7.2 8.2 1.1 5.9 7.8 8.1 8.2 - Credit to nongovernment sector: 19.1 6.5 1.2 4.4 8.0 11.3 15.0 - Treasury bill interest rate (end of period): 15.1 ... 7.6 ............ - Non-performing loans (percent of total loans): 12 8.5 ... 11 7.4 ............ - Reserve money (Table 3, selected): Reserve money and net international reserves series charted; Net international reserves (Millions of U.S. dollars) 3,758 3,616 3,560 3,797 4,068 4,233 4,249 4,750 5,315 5,113 4,989 5,151 Monetary survey highlights: - M3 growth (12-month percent change): 18.8 15.5 12.5 4.3 2.9 4.1 10.5 6.3 4.1 6.2 6.9 7.9 (series in Table 3) - M3 (as percent of GDP): 22.7 22.2 23.1 20.5 21.0 20.8 22.8 22.0 19.1 20.0 19.9 21.3 - Private sector credit growth (12-month percent change): 24.8 23.6 19.1 11.7 7.2 3.7 6.5 1.2 -1.6 0.7 1.0 4.4 ### Financial sector developments and soundness - Financial sector depth, measured by access to financial services, is higher than in countries with similar income levels. - The system is largely dominated by commercial banks, but its assets have declined over time. - Bank concentration remains significant: 4 largest banks account for 50 percent of total bank assets; top 12 account for 75 percent. - Bank lending to non-government sector improved over time but recently stalled at around 17 percent of GDP. - Bank credit portfolio impacted by rapidly increasing NPLs in trade, manufacturing, and transport and communication; NPLs remained high in agriculture. - Financial dollarization (foreign currency deposits and loans in commercial banks) remains higher than in other peers. Financial soundness indicators (Table 5, selected): - Claims on the non-government sector to GDP (calendar year end): 14.2 14.6 15.5 14.3 15.2 16.2 16.8 17.4 18.0 18.0 17.9 15.7 15.7 15.6 - Claims on the private sector to GDP: 13.2 13.9 14.4 13.3 14.2 15.0 15.7 16.2 16.9 17.0 16.9 14.9 15.0 14.9 - Foreign exchange loans to total loans: 33.5 35.4 36.3 37.5 38.2 38.7 37.7 37.7 36.7 36.7 36.1 36.0 36.5 36.7 35.1 - Gross nonperforming loans (NPLs) to gross loans: 8.1 7.1 6.8 6.7 6.7 6.6 7.9 8.4 8.7 8.7 9.1 11.0 10.6 12.5 - NPLs net of provisions to capital: 22.5 15.6 16.0 14.8 16.2 14.8 18.6 18.8 21.1 22.2 24.5 22.1 28.5 Banking structure and liquidity: - Net loans and advances to total assets: 49.7 50.8 52.9 53.3 52.8 53.5 54.6 55.1 56.1 56.5 55.6 54.3 53.4 52.7 - Liquid assets to total assets: 34.0 32.3 31.0 30.6 30.4 31.0 30.6 29.1 30.4 28.1 28.7 28.9 30.6 31.0 - Total loans to customer deposits: 68.6 71.8 74.3 76.9 76.0 77.0 78.5 82.4 85.7 87.1 86.3 86.0 83.1 84.9 ### Balance of payments and macro external flows - Current account (Millions of U.S. Dollars, Table 4): -2,937 -2,425 -1,337 -2,560 -3,384 -3,838 -3,724 (2015/16–2020/21) - Trade balance (Millions of U.S. Dollars): -3,317 -3,210 -2,326 -3,515 -4,213 -4,815 -4,972 - Exports, f.o.b. (Millions of U.S. Dollars): 5,601 6,006 5,240 5,601 6,153 6,809 7,498 - Imports, f.o.b. (Millions of U.S. Dollars): -8,918 -9,217 -7,565 -9,116 -10,366 -11,624 -12,470 - Services (net): 887 1,295 1,639 1,733 1,878 2,020 2,331 - Income (net): -841 -985 -1,106 -1,288 -1,588 -1,616 -1,663 - Current transfers (net): 334 476 455 511 538 573 580 - Financial account (Millions of U.S. Dollars): 2,404 2,765 2,216 2,546 3,380 3,862 3,970 - Foreign Direct Investment: 1,463 1,338 1,273 1,368 1,552 1,976 2,358 - Public Sector, net: 616 865 787 1,294 2,017 2,068 1,889 - Gross official reserves (BoT) (Millions of U.S. Dollars): 3,870 4,470 5,000 5,316 5,601 6,077 6,794 - Months of imports of goods and services: 4.8 4.0 5.2 4.9 4.6 4.7 4.7 ### Key policy and program implications (as reflected in staff text and tables) - Completion of the seventh PSI review recommended by staff supports continued policy engagement. - Waiver for non-observance of specific end-June 2017 assessment criteria granted due to minor slippage and corrective measures. - Fiscal consolidation challenges: stalled tax collection, slowed budget implementation in FY16/17, rising external debt share. - Monetary and financial sector monitoring warranted given slowing monetary aggregates, credit, and rising NPLs in key sectors. - External position improved via import compression and reserve accumulation supported by FX operations and external borrowing. *Source: Tanzanian authorities and IMF Staff calculations, unless otherwise indicated.* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Macroeconomic developments and outlook - During the three-year implementation of the current Policy Support Instrument (PSI) program (started mid-2014), Tanzania experienced: - Real GDP growth averaging about 7.0 percent between 2014 and 2016. - Inflation averaging 6.0 percent (around single digits and close to the medium-term target of 5 percent). - Current account deficit narrowed from 11.0 percent of GDP in 2013/14 to 2.8 percent of GDP in 2016/17. - Gross official reserves reached USD5,000.4 million at end-June 2017, sufficient to cover about 5 months of projected imports; compared with USD4,637.7 million in June 2014 (sufficient to cover 4.5 months of imports). - 2017 developments and near-term outlook: - Real GDP estimated growth of 6.8 percent in first half of 2017 (compared with 7.7 percent in same period 2016); targeted growth rate revised to 7.0 percent from initial 7.1 percent. - Headline inflation eased to 4.4 percent in November 2017; core inflation dropped to 1.4 percent. - Inflation expected to remain in single digits in 2017/18 around the medium-term target of 5.0 percent; upward risk from possible rise in oil prices due to OPEC production cuts. - Current account: narrowed to 2.7 percent of GDP in 2016/17 (from 6.5 percent in 2015/16); projected deficit about 5 percent of GDP in 2017/18 as imports grow faster than exports driven by major investment projects (including Standard Gauge Railway and Lake Albert—Tanga oil pipeline). - Oil imports expected to record a marginal increase in value given expected world price increases while import volumes remain broadly unchanged. - 2016/17 fiscal and revenue performance: - Total domestic revenue collection including Local Government Authorities (LGAs) own sources: 15.3 percent of GDP. - Tax revenue: 12.9 percent of GDP (13 percent increase in nominal terms vs same period 2015/16). - Non-tax revenue: 71 percent higher vs same period 2015/16 (largely from transfer of parastatals’ past retained earnings). - Capital spending execution about 62 percent of target due to external financing shortfalls; fiscal deficit was much lower than program due to underspending and unrealized financing. - Monetary conditions and money/credit dynamics: - BoT reduced discount rate from 16.0 percent to 12.0 percent in March 2017, and to 9.0 percent in August 2017. - Statutory Minimum Reserve (SMR) requirements on private sector deposits lowered to 8.0 percent in April 2017 from 10.0 percent. - Extended broad money supply growth slowed to 6.0 percent in 2016/17 (from 12.7 percent in 2015/16); credit to private sector growth slowed to 1.2 percent in 2016/17 (from 19.1 percent in 2015/16). - Growth of M3 eased further to 5.6 percent in October 2017; credit to private sector contracted by 1.5 percent. - Shilling remained stable against the U.S. dollar during 2016/17 and first 5 months of 2017/18. ### Banking sector, financial stability, and reserves - Banking sector capital and liquidity: - Ratio of core capital to total risk weighted assets: 18.26 percent in June 2017 (minimum regulatory requirement 10 percent). - Ratio of total capital to total risk weighted assets: 20.26 percent in June 2017 (minimum regulatory requirement 12.0 percent). - Asset quality and provisioning: - Non-performing loans (NPLs) to gross loans: 8.7 percent in June 2016; 10.6 percent in June 2017; 12.5 percent in September 2017. - Banks increased provisions for NPLs, affecting profitability. - Reserve and external buffers: - Average reserve money closed below upper limit by TZS 540.9 billion in June 2017 and by TZS 559.4 billion in September 2017. - Accumulation of net international reserves (NIR) was above floor by more than US$500 million in June 2017 and September 2017, driven by net purchases of foreign exchange from the domestic market and receipts from external non-concessional loan proceeds. ### Program performance against assessment criteria and targets - Assessment criteria and indicative targets: - Average reserve money and accumulation of NIR: met for end-June 2017 and end-September 2017. - Tax revenues as of end-June 2017: missed by 0.1 percent of GDP (decline in importation of dutiable and taxable goods and decline in sales for local markets for cement, beer, soft drinks producers). - Fiscal deficit: 1.6 percent of GDP vs assessment criterion of 3.2 percent of GDP (underspending/unrealized financing). - Non-accumulation of domestic payment arrears: missed; verification of arrears’ claims incomplete (completion by end-March 2018 for half of claims including larger ones, and by end-June 2018 for remainder expected to substantially downward revise arrears stock). - Indicative targets as of end-September 2017: tax revenue missed by 0.2 percent of GDP; priority social spending missed by 0.1 percent of GDP; fiscal deficit was 0.2 percent of GDP vs indicative target of 1.2 percent of GDP. ### Fiscal policy and structural fiscal reforms - 2017/18 budget execution and revenue performance: - Government aimed to maintain fiscal deficit under program objective of 3.9 percent of GDP. - Total domestic revenue fell short of budget target by 15 percent (0.6 percent of GDP) in first quarter ending September 2017, affecting excise duty performance (decline in sales by firms producing cigarettes, bottled water, alcohol). - Substantial build-up of government deposits at the Bank of Tanzania noted; Government confident in implementing prudent fiscal policy to realize 2017/18 budget revenues; October and November 2017 trends show improvement in revenue collection. - Major investment financing: - SGR Project financing: - First phase (DSM–Morogoro) projected cost: US$1.215 billion (being implemented using government own sources). - Second phase (Morogoro–Makutupora) total contract price excluding VAT, provisional sums and contingency: US$1,460 million; will be implemented using blended financing (ECA facilities, DFIs, other commercial facilities). ECA disbursements in line with implementation; DFIs and other commercial loans disbursed directly to Treasury. - Revenue administration and tax policy measures: - TRA to enhance risk-based audit and compliance management; improve block management system administration and monitoring; strengthen capacity to monitor transfer pricing and invoice mispricing by multinationals; enhance information sharing with Government Agencies and Regional Revenue Bodies. - Enhance voluntary compliance via Comprehensive Taxpayer Communication Strategy and improve presumptive tax scheme. - Implement e-Single Window system for port community and cross-border trade; fast-track Integrated Domestic Revenue Administration System (IDRAS) to integrate EFDMS, TANCIS and other internal TRA systems. - Domestic arrears management and public financial management: - Government policy aims to improve budget credibility, reduce domestic arrears stock and prevent new arrears. - Initiatives: verification of unpaid claims and phased clearance using earmarked budget allocations; scrutinize MTEFs of MDAs, RSs, LGAs; require system-generated Local Purchase Orders (LPO) from IFMS before supply; subject commitments to funds availability and warrants; require Minister for Finance and Planning approval before government borrowing as per Government Loans Guarantees and Grants Act, CAP 134; reduce transaction costs using existing procurement bodies. - Pension arrears and reform: - Initial commitment to issue non-cash bond to clear pension arrears in 2017/18 suspended pending pension fund reform completion. - Government working on reforms including possible merger to two funds and reviewing downward the formula of pension benefits. ### Monetary and financial sector policies and reforms - New monetary policy framework: - Expected adoption by March 2018, using overnight interbank cash market interest rate as operational target rather than reserve money. - Policy rate bounded by standing facilities available toward end of trading day; full allotment system at policy rate within prescribed business trading hours. - BoT prepared operational guidelines for IBCM (Code of Conduct) and GMRA; Code of Conduct to be operational by end-March 2018; IBCM system ready by end-December 2017 with pilot from mid-January 2018. - Approved collateral framework to accept all government securities with prescribed haircuts (replacing previous acceptance of government securities of 180 days only) to extend maturity spectrum and address market segmentation. - Measures to address NPLs and bank governance: - BoT developed a restructuring strategy with banks with sizable NPLs; instructed banks to use credit reference bureau reports for credit appraisals and to implement stringent collection and recovery measures. - Plan to implement IFRS 9 in January 2018. - BoT introduced Capital Charge for Operational Risk effective August 2017; requirement for banks to hold 2.5 percent capital buffers above minimum capital requirement ratios (for core and total capital). *Appendix I. Letter of Intent — Dodoma, December 21, 2017* ### 2.5 percent. These regulatory changes will increase pressure on capital adequacy ratios and ### cr1811 - 2.5 percent. These regulatory changes will increase pressure on capital adequacy ratios and ### Banking sector capitalization and community banks - Regulatory changes will increase pressure on capital adequacy ratios and profitability of banks. - The Bank will make assessment of the situation and take appropriate measures. - The sector currently has six undercapitalized community banks. - The Bank has encouraged the banks, through the Community Banks Association (COBAT) to consider consolidation option through establishing a Federation of Community Banks as a resolution. - COBAT has initiated the process of merging of these banks by engaging various strategic investors. - The proposed model is expected to increase the scale of operations and minimize operating costs. - The Bank granted an extension period of up to 31st December 2017 as a deadline for all undercapitalized community banks to comply with the minimum capital requirements of Tsh 2.0 billion. - The extension period was given after submission of proposals from some community banks and COBAT on possible recapitalization options, either individually or through the federation. ### Business climate and governance reforms - BRELA is developing an Online Business Registration System to enable customers to register their business names online; the System is expected to be launched before the end of 2017. - Through the Regional Communication Infrastructure Programme, the Government is developing a National Business Portal to provide business-related information and issue business licenses online; the Portal is also expected to be launched before the end of 2017. - The Government has prepared a Blue Print for Regulatory Reforms to Improve Business Environment to address multiple taxes/levies/fees; the blue print is ready in place and waiting for approval. - Governance and accountability measures emphasized to tackle mismanagement of public resources, corruption, poor service provision, tax evasion, and bureaucratic snags. - Examples of governance actions: - Misuse of public funds controlled through expenditure cuts and proper allocation based on available priorities. - Ensured money directed to local governments are spent in accordance with intended purposes. - Pursued corrupt leaders, officials, businessmen, and contractors to remove hurdles to doing business. - Provided sufficient resources to the legal sector to resolve pending court cases on time. - Measures to minimize tax avoidance and evasion include use of modern equipment, public education, and legal measures. - Government engagement with private sector: - Private sector invited to provide views during preparation of government budget, formulation of policies, and enactment of laws and regulations. - Special meetings with the private sector to listen to complaints and address them. ### Quantitative assessment criteria and indicative targets (selected indicators and outcomes) - Average reserve money (upper bound) reported values and met status: - Program1 Adjusted Actual 7,729 7,729 6,980 ✓ - 7,925 7,925 6,434 ✓ - 7,236 7,236 6,695 ✓ - 7,352 7,352 6,793 ✓ - Average reserve money target examples: - 7,652 7,846 7,164 7,279 - Tax revenues (floor) entries and met status: - 7,086 7,086 7,064 ✗ - 10,672 10,672 10,580 ✗ - 14,185 14,185 14,055 ✗ - 3,822 3,822 3,564 ✗ - Priority social spending (floor; indicative target) entries and met status: - 1,580 1,580 1,758 ✓ - 2,370 2,370 2,585 ✓ - 3,160 3,160 3,405 ✓ - 930 930 835 ✗ - Accumulation of domestic expenditure arrears (ceiling) examples show noncompliance: - 0 0 190 ✗ ; 0 0 222 ✗ ; 0 0 1,780 ✗ - Fiscal balance (cumulative, floor) examples and met status: - -2,403 -2,403 94 ✓ - -3,650 -3,650 -658 ✓ - -3,140 -3,179 -1,594 ✓ - -1,392 -1,443 206 ✓ - 310 104 94 ✓ - 439 139 625 ✓ - 600 568 1,044 ✓ - -98 -103 630 ✓ - Accumulation of external payment arrears (continuous AC ceiling): - 0 0 0 ✓ (repeated across columns) - Memorandum items (selected): - Foreign program assistance (cumulative grants and loans; millions of U.S. dollars) sample values: 160 160 7820 220 214 734 234 226 655 151 129 - o.w. Program grants (millions of U.S. dollars) sample values: 3 43 466 505 066 167 167 149 515 128 - External nonconcessional borrowing (ENCB) disbursements to the budget (millions of U.S. dollars) sample values: 3 629 629 529 449 441 135 075 075 521 391 391 56 - Notes and program mechanics: - Floor will be adjusted downward by the amount in U.S. dollars of any shortfall in foreign program assistance and ENCB financing of the government up to the equivalent of US$300 million. - Starting from June 2016, AC for the end of the fiscal year, otherwise IT. - Cumulative from the beginning of the fiscal year (July 1). - Assessment criteria and indicative targets apply to upper bound only. - The deficit in 2016/17 and 2017/18 will be raised by the amount of arrears to PSPF on account of the 1999 reform and the amount of loans in arrears made by pension funds to government entities (recognized by the government) that were cleared during the fiscal year. This adjuster will be capped by the total amount of arrears identified in the strategy to clear arrears to pension funds. - The deficit will be increased by any shortfalls in foreign program grants up to a cumulative ceiling of equivalent to US$200 million calculated at the program exchange rate. - The fiscal deficit is measured on a cash basis from the financing side at the current exchange rates and is defined as a sum of (i) net domestic financing (NDF) of the Government; (ii) net external financing and (iii) privatization receipts as defined in the TMU. ### Structural benchmarks under the Policy Support Instrument (June–December 2017) - Public Financial Management - Issuance of non-cash bonds in settlement of arrears to PSPF on account of the 1999 reforms as well as to all pension funds on loans made to the government. - Macroeconomic rationale: To address fiscal risks. - Target date: End-September 2017. - Status: Not met. The government decided to reform first the current pension schemes, including merging them into two. - Monetary and Financial Policies - Issue operational guidelines for commercial banks outlining new principles for conducting monetary operations under a new interest rate-based monetary policy framework, setting rules for disseminating information on government securities’ auction results and overnight interest rates, and establishing eligibility criteria for banks’ access to standing facilities. - Rationale: Operational steps needed to move to an interest rate-based monetary policy framework. - Target: Seventh Review. - Status: In progress. The BoT has prepared draft operational guidelines, which are expected to be operational by March 2018 in line with the expected move to an interest rate-based monetary policy framework. - Expansion of eligible collateral by accepting government securities with longer remaining maturities (i.e.: over 90 days) for the BoT’s lending facilities. - Rationale: To improve the functioning of the BoT’s lending facilities. - Target: Seventh Review. - Status: Met. - Introduce an electronic platform for the interbank market. - Rationale: To improve price discovery mechanism in the interbank market and enhance transparency of interbank transactions. - Target: Seventh Review. - Status: In progress. The BoT has developed an electronic platform, a pilot test of which will begin in mid-January. ### Capacity Development Strategy—Summary (July 2016) - Macro-challenges: - Economic prospects remain favorable with emphasis on reforms and infrastructure spending. - Short- to medium-term growth outlook positive, especially if natural gas production starts as expected in the mid-2020s. - Inflation remains contained while the current account deficit has come down due to lower oil imports. - New administration (elected October 2015) emphasizes better governance, strong action on corruption, higher revenue mobilization, and reorientation of spending from current to capital expenditure. - Key surveillance/program priorities: - Expenditure and public financial management: address suppliers’ arrears and arrears to pension funds; improve composition of spending and investment management; address fiscal risks. - Tax policy and administration: expand revenue base and performance to fund development. - Debt sustainability: maintain current debt vulnerabilities at a low level; build debt management capacity. - Monetary policy: prepare transition to an interest rate-based monetary policy framework. - External and financial stability: prepare for closer EAC integration and capital account liberalization; modernize regulatory and supervisory framework for the financial sector. - TA priorities: - Re-orient composition toward key fiscal and monetary reforms; prioritize improving BOP and national accounts data. - Fiscal issues: arrest accumulation of arrears, improve commitment controls, budget preparation, revenue forecasting, fiscal controls, better debt and cash management, improve revenue through tax policy and administration, natural resource taxation, fiscal transparency, address fiscal risks. - Monetary policy: assist transition to a forward-looking, interest rate-based framework via improvements in money and T-bill markets, greater use of domestic currency instruments, focus on excess reserves, and strengthen forecasting/analytical capacity (implementing an FPAS model). - Financial sector: assistance on regional integration, consolidated supervision, transition to Basel II/III, enhancing macroprudential framework, oversight of non-bank financial institutions. - Statistics: improve compilation of price and national accounts statistics; more timely and comprehensive coverage of fiscal and debt statistics; support on BOP data, particularly the financial account. - Authorities’ views: - Agreed with the priorities; indicated TA on revenue administration, tax policy, public financial management, transition to an interest-rate based monetary policy framework, and statistics should remain focus. - Appreciated Fund advice and noted usefulness when complemented by hands-on training and prioritized to absorption capacity. - Assessment of past TA effectiveness: - Progress mixed: advances in adoption and implementation of VAT reforms, new Budget Law, capital account liberalization, improvements in debt management, adoption of new regulations on financial supervision; limited progress in fiscal policy formulation/implementation and modernization of monetary policy framework. - Risks and mitigation: - Key risks: limited implementation and absorption capacity, political economy constraints, excessive caution (e.g., in monetary area). - Mitigation: regular follow-up, resident experts providing intensive support, align recommendations with East African Community (EAC) convergence process. ### Debt Sustainability Analysis (Seventh Review) — key findings - Risk of external debt distress: Low. - Augmented by significant risks stemming from domestic public and/or private external debt? No. - Date: December 22, 2017. - Background and macro assumptions (selected): - Tanzania’s public and publicly guaranteed (PPG) debt to GDP ratio increased by more than 15 percentage points of GDP since 2006/07 to 36.2 percent of the GDP at end-2015/16. - Most of the increase (some 13 points) was accounted for by external debt. - While most of Tanzania’s PPG external debt is concessional, borrowing on non-concessional terms has increased in recent years. - Official bilateral and multilateral creditors continue to account for more than two thirds of external PPG debt as of end-2015/16. - The share of commercial financing increased to about 30 percent at end-2015/16 from just over 4 percent at end-2010/11. - More recently, to finance high priority infrastructure projects, the authorities raised US$500 million through a commercial loan from Credit Suisse over the period June-August 2017. - Policy implications highlighted: - Prudent fiscal policy and continued efforts to secure strong economic growth momentum are key to success of the authorities’ strategy. - Policy measures recommended include raising public domestic revenue in a business-friendly manner, improving spending efficiency by focusing on effective public investment management, and enhancing debt management capacity. - Exposure to volatility in export markets and tightening of financing terms pose downside risks to debt prospects. *Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA).* ### 3. Domestic public debt has increased gradually, but remains relatively small. Domestic debt ### 3. Domestic public debt has increased gradually, but remains relatively small. ### Domestic public debt stock and composition - Domestic debt stood at 9 percent of GDP at end-2015/16, with only about a third stemming from short-term instruments. - Commercial banks continue to hold the largest share of government domestic debt. - Adding several outstanding government liabilities and other contingent liabilities currently not accounted for in the domestic debt stock increases it to 14.4 percent of GDP (as reflected in the 2016/17 figures, the first projection year under the current DSA update). - Examples of additional liabilities include arrears to pension funds and loans to government entities, budget expenditure arrears, TANESCO’s arrears to its suppliers, and other actual or contingent liabilities. ### External debt assessment (External DSA) - Tanzania’s external debt is assessed to remain “low” in this DSA update. - The present value (PV) of the PPG external debt-to-GDP ratio peaks at 19.1 percent in FY20/21, in line with the previous DSA. - All debt burden indicators under the baseline scenario and various bound tests remain below their respective policy-dependent thresholds. - Some ratios breach thresholds under the historical scenario, mainly due to a larger historical current account deficit, which has recently fallen substantially and is projected to remain relatively low throughout the projection period. ### Baseline macroeconomic assumptions (Box 1) - Real GDP growth: - Projected to remain strong in the next few years (around 6½-7 percent), reflecting a scaling up of public investment, mainly in transportation and energy infrastructure. - Over the medium term, growth is assumed to revert to its historical average of about 6.5 percent. - Inflation (CPI): projected at about 5 percent. - Current account balance: - External current account deficit fell to 2.7 percent of GDP in 2016/17 from 10.7 percent in 2013/14. - Projected long-term current account deficit has been assumed to narrow by 2½ percentage points of GDP to 5½ percent of the GDP (compared to the previous DSA). - Government balances and domestic borrowing: - Fiscal deficit recorded at 1½ percent of GDP in 2016/17. - Fiscal deficit is assumed to widen over the medium-term relative to 1½ percent of GDP, with an initial expansion for public investment under FYDP II, followed by gradual consolidation. - Fiscal deficit projected to fall below 3 percent of GDP by 2022/23. - Net domestic borrowing expected to be maintained at around 1 percent of GDP during most of the projection period. - External financing flows: - Ratio of ENCB (external non-concessional borrowing) to total annual foreign financing expected to increase to around 50 percent in the long term. - FDI projected to recover gradually to its historical average of 4 percent of GDP. - Access to grants assumed to taper. ### Vulnerabilities, stress tests, and sensitivity - Several debt indicators remain sensitive to shocks: - A one-time depreciation shock is the most extreme scenario among bound tests for most ratios, highlighting sensitivity to exchange rate volatility. - Debt service-to-revenue indicator is particularly sensitive to depreciation. - More costly terms of external finance increase vulnerability in the debt-to-exports measure. - Breaches of thresholds for the debt-to-exports and debt service-to-revenue ratios under the historical scenario underscore the importance of: - Expanding the export base. - Boosting public revenue sources. - Adhering to fiscal consolidation over the medium to longer terms. ### Public DSA (public debt and debt-service outlook) - Total public debt and debt service ratios suggest a low level of vulnerability under the baseline: - PV of total public debt as a share of GDP expected to increase modestly to a peak of 43.6 percent of GDP in 2019/20 and to decline gradually thereafter. - This remains below the benchmark of 56 percent of GDP associated with heightened public debt vulnerabilities for medium performers, and below the EAMU convergence criterion of 50 percent. - Bound tests indicate low vulnerability for projected paths of total public debt indicators: - Under the historical scenario, PV of debt-to-GDP, PV of debt-to-revenue, and debt service-to-revenue ratios grow gradually and reach the highest among scenarios by end of projection period, reinforcing the need for envisaged fiscal consolidation. ### Key statistics and projections (selected figures from the DSA) - Domestic debt: 9 percent of GDP (end-2015/16); adjusted domestic debt including additional liabilities: 14.4 percent of GDP (2016/17). - PV of PPG external debt-to-GDP: peaks at 19.1 percent in FY20/21. - External current account deficit: 2.7 percent of GDP in 2016/17 (previously 10.7 percent in 2013/14). - Projected long-term current account deficit: 5½ percent of GDP (narrowed by 2½ percentage points versus previous DSA). - Real GDP growth: around 6½-7 percent near term; medium-term 6.5 percent. - CPI inflation: about 5 percent. - Fiscal deficit: 1½ percent of GDP in 2016/17; projected to fall below 3 percent by 2022/23. - Net domestic borrowing: around 1 percent of GDP during most of the projection period. - ENCB share of foreign financing: around 50 percent in the long term. - FDI: projected to recover to 4 percent of GDP. ### Policy recommendations and conclusions - DSA update indicates a low risk of external debt distress under the baseline and stress tests, but risks remain from potential exchange rate depreciation and a narrow export base. - Recommended policy actions: - Maintain sound fiscal and monetary policies to support robust growth, low current account balances, and strong international reserves. - Raise public domestic revenue in a business-friendly manner to maintain growth momentum. - Scale up development spending to address the infrastructure gap while improving spending efficiency through improved public investment management and enhanced debt management capacity. - Leverage concessional and semi-concessional sources of financing when available. - Carefully select projects to be financed by commercial loans. *Source: IMF staff estimates and projections, Tanzania DSA update (excerpts provided).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1811.pdf_