## 1tzaea2023002

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### Geographical location and project scope: Tanzania LNG project
- Confirmed offshore natural gas discoveries: 47.1 trillion cubic feet (made between 2010 and 2015) in deep-water blocks off the coast of Lindi and Mtwara.
- Existing small gas developments: Songo Songo and Mnazi Bay (since 2004/05) used for Ubungo power plant and industrial use.
- Project components:
  - Drilling development wells in deep offshore fields; subsea pipelines to onshore processing; construction of an onshore LNG plant; development of jetty loading facilities.
  - Total investment estimated at US$32.7 billion (over 40 percent of current GDP), expected to be executed during the second half of the current decade.
  - LNG plant: multiple mid-scale LNG trains with total production capacity of 15 million metric tons per year (mtpa) and production life span of about 30 years.
  - Exports targeted to international markets (Asia and Europe); a small portion of gas expected for domestic power generation, industry, institutions, and households.
- Investment and preparatory progress:
  - Framework agreement (detailed memorandum of understanding) signed on June 11, 2022.
  - Host Government Agreement (HGA) expected by mid-2023 to establish fiscal, legal, and commercial terms for the onshore part.
  - Onshore site identified in the Lindi region; TPDC commenced community compensation in May 2020.
  - Equinor Tanzania reports about US$4 billion invested to date in exploration and appraisal activities.
- Remaining steps and timeline:
  - Several legal, technical, and environmental steps required; a final investment decision is not expected before 2025.
  - Development and construction phase expected to take about 4-5 years after investment decision.
  - Plausible but optimistic scenario: increasing FDI during implementation period of 2026-30 and mid-life investment period of 2038-2043, with gas exports and consumption during 2030-2059.
- Additional capital needs:
  - Additional “Mid-Life” upstream drilling investment of about US$18 billion will be needed to maintain plateau gas production through 2052 and extend overall production to 2059.

### Potential macroeconomic impacts of the LNG project
- Overall potential:
  - If well-developed and managed, the LNG project could have significant macroeconomic impacts through large investment, production, exports, and fiscal revenue enabling human and physical capital accumulation.
- Current account effects:
  - Construction phase: likely significant deterioration due to high import intensity.
  - Example calculation: considering the estimated US$32 billion investment during 2026-29 and assuming about 80 percent import content, a back-of-the-envelope calculation suggests the current account balance could deteriorate by about US$6½ billion (5-6 percentage points of GDP) a year compared to the baseline (without LNG).
  - Production phase (2030-2059): current account expected to benefit substantially from LNG exports; magnitude depends on production size and international gas prices.
  - Stanbic (2022) export estimates: US$3.4 bln in a US$5.50 Million British Thermal Units (MMBTU) gas price scenario to US$8.2 bln a year in a US$12 MMBTU gas price scenario.
- Fiscal accounts:
  - Government equity stake assumptions in prior studies: 10-15 percent via TPDC.
  - If government holds equity, borrowing needs during construction: about US$3.2 bln-US$4.8 bln, increasing public sector debt by the same amount (depending on equity share and whether financed directly or through carried interest).
  - Government revenue estimates (Stanbic, 2022): annual government revenues range from US$2.2 bln (about 3 percent of current GDP) in a US$5.5 MMBTU gas price scenario to US$6 bln (about 8 percent of current GDP) in a US$12 MMBTU gas price scenario.
  - IMF (2014) simulations also show revenue estimates of several percentage points of GDP.
- Growth and economy-wide effects:
  - Direct and indirect impacts: limited growth impact from investment due to high import content, but material impacts from value added of gas production, related services, enhanced energy supply, and potential reinvestment of government revenues in human capital and infrastructure.
  - Risks: potential Dutch disease effects, macro-fiscal instability from price volatility, corruption, and internal conflicts if revenues are not well managed.
  - Stanbic (2022) growth impact estimate: 0.5-1.5 ppts per year depending on gas price assumptions of US$5.5-US$12 MMBTU (analysis relied on Mozambique project financials and may not be comparable to Tanzania’s project).

### Managing gas revenues: framework and trade-offs
- Macro-fiscal framework objectives:
  - Preserve short-term macroeconomic stability and long-term fiscal sustainability.
  - Balance saving and investment during the windfall; design a fiscal anchor based on either the non-resource balance or price-based rules to address exhaustibility and revenue volatility.
- Saving versus investment trade-off:
  - Permanent Income Hypothesis (PIH) approach: save most revenues to smooth spending/investment over time—useful theoretical benchmark but may not account for Tanzania’s development needs.
  - Immediate large-scale public investment approach: can scale up capital accumulation and growth in the short term but risks unsustainability, inefficiency, macroeconomic instability, and Dutch disease effects.
- Institutional and analytical needs:
  - Sound assessment requires granular information on investment costs, production structure for each block and the LNG plant, and the fiscal regime (production sharing agreements, royalties, taxes, fees, levies and charges).
  - Fund Technical Assistance (TA) requested by authorities on natural resource management to compile granular data and design institutional and policy frameworks for effective revenue management.
  - Recent TA: December 2022 Public Investment Management Assessment with Climate Module (C-PIMA) will be an important input.
- Suggested analytical next steps:
  - Future TA to support a comprehensive general equilibrium macroeconomic analysis when relevant parameters (expected cost, project production profile, fiscal regime) are known or developed.
  - Detailed assessment to include efficiency and effectiveness of public investment in Tanzania to gauge long-term use of gas revenues.
- Fiscal anchor recommendation:
  - Given the relatively short horizon of Tanzania’s gas reserves (estimated to last for no more than 30 years), use the non-resource primary balance (NRPB) as an appropriate fiscal anchor rather than the overall fiscal balance.
  - NRPB defined: non-resource revenues less primary expenditures (i.e., excluding net interest payments and income) expressed in percent of non-resource GDP.
  - Structural primary balance = NRPB + structural component of resource revenues; compute structural resource revenues via a price-based smoothing rule using a reference price (automatic formula or independent committee; automatic formula advisable for developing countries with limited institutional capacity).

### Project status and recommended policy actions
- Progress to date:
  - Negotiations between the government and private sector developers have gained momentum and an HGA is expected to be signed early this year.
  - Preparatory technical work on site selection and acquisition has advanced.
- Remaining steps before final investment decision: amendment of relevant laws, preparing project blueprints, environmental assessments, and a final investment decision.
- Policy recommendations:
  - Put in place proper institutional and policy frameworks for effective management of gas revenues.
  - Favor a balanced saving and investment approach that scales up public investment gradually, taking into account absorptive capacity, efficiency, revenue volatility, and exhaustibility of gas reserves.
  - Start developing a policy framework for effective management of gas revenues immediately while project preparations progress.
  - Build a comprehensive understanding of macroeconomic implications with Fund technical assistance and other partners.
  - Improve the efficiency and effectiveness of public investments to prepare for productive utilization of upcoming gas revenues.

### Climate vulnerability: stylized facts and recent trends
- Vulnerability and readiness:
  - Ranked 45th most vulnerable among 182 (ND-GAIN Country index).
  - Ranked 58th least prepared to leverage investments to adaptation actions among 192 (staff-recalculated readiness score excluding economic readiness indicator).
- Natural disasters (1980–2022):
  - Flood: 67%
  - Drought: 13%
  - Earthquake: 8%
  - Storm: 10%
  - Landslide: 1%
  - Wildfire: 1%
  - Flood frequency increased from an average of 0.8 floods per year between 1980 and 2010, to 1.8 per year during 2011-22.
  - EM-DAT estimates floods and earthquakes accounted for losses of about US$463.8 million between 1980 and 2022.
  - In 2021, drought affected almost 8,000 people per million population.
  - Number of displaced populations from floods increased from 182 in 2016 to 22,680 in 2020 (NEMPSI (2022-2032)).
- Frequency changes relative to comparators:
  - Frequency of floods in Tanzania increased by 45% during 2010-2020, while the frequency in SSA and the rest of world decreased by 14 and 15 percent, respectively.
  - Tanzania is among the top 10 countries in SSA with the highest frequency of natural disasters (floods, droughts, epidemics).

### Projected climate change and sectoral macroeconomic impacts
- Climate projections:
  - Temperature: World Bank multi-model ensembles project a range of 0.4-4.3°C increase of mean temperature by the end of the century relative to the 1995–2014 baseline.
  - NEMPSI (2022-2032): western regions, southern highlands, and central part warmer by more than 2°C by 2041; most regions in the eastern zone will experience a temperature increase of 1°C.
  - Authorities’ NEMPSI projection: range of 1-2°C increase of mean temperature by 2041.
  - Precipitation: NEMPSI projects some parts may experience an increase in mean annual rainfall of 18 to 28% by 2100 (Lake Victoria Basin and North-Eastern Highland).
  - USAID Climate Risk Profile (2018): heavy rainfalls expected to become more frequent (7-40 percent more); intensity of heavy rainfall events expected to increase by 2-11 percent.
- Deforestation and energy use:
  - Tanzania has one of the fastest rates of deforestation in the world.
  - Estimated 80-90 percent of households use biomass—mainly wood and charcoal—as their main source of domestic fuel.
- Sectoral macroeconomic impacts:
  - Agriculture:
    - Accounts for about 25 percent of GDP and employs 75–80 percent of the workforce (USAID, 2018).
    - About 80 percent of agricultural production comes from low-input smallholder farms, predominantly rainfed.
    - Only about 1.5% of national crop land suitable for irrigation is irrigated.
    - National crop land area exposed to at least one drought per year will increase (BMZ and GIZ, 2021).
    - Crop-specific projections: millet, sorghum, rice, groundnuts and cassava projected to gain from climate change; maize projected to decrease 8-13 percent by 2050 (USAID, 2018).
  - Tourism:
    - In 2019, tourism was the largest foreign exchange earner, the second largest contributor to GDP, and the third largest contributor to employment (World Bank, 2021).
    - Rising temperatures and droughts threaten ecosystems and tourism revenue.
  - Infrastructure and energy:
    - 2019 Tanga flood: government estimate of total direct damages and losses of US$19 million.
    - In Dar es Salaam, infrastructure assets with the value of US$5.3 billion are increasingly at risk from flooding and sea level rise.
    - About 37 percent of Tanzania’s electricity generation capacity is based on hydropower and is susceptible to changing precipitation patterns.
    - Planned hydro capacity to meet future electricity demand: approximately 5,100 MW over the next twenty years.
  - Fisheries and construction:
    - Fisheries provide more than 4 million jobs and are threatened by rising sea level and sedimentation.
    - Construction also affected by climate change.

### Food security, public health, and socioeconomic vulnerabilities
- Food production vulnerability:
  - Food production highly vulnerable due to heavy reliance on increasingly unreliable rainfall.
  - With every event of flood or drought, there is an increase in food insecurity of 5–20 percentage points (IMF, 2020).
  - Tanzania accounts for 41.2 percent of SSA countries’ imported maize and cassava.
  - COVID-19 pandemic and the war in Ukraine have inflated food import bills and driven up prices of food, fuel and fertilizers.
- Public health impacts:
  - Climate change likely to escalate diarrheal diseases and malaria.
  - Tanzania has the third largest population at risk of malaria in Africa, with 90 % of the population living in malaria areas.
  - Rising temperatures will increase heat-related mortality and flood-related waterborne disease outbreaks.
- Inequality and socioeconomic impacts:
  - About half of the population lives below the poverty line and depends on weather-sensitive activities.
  - Post-disaster consumption inequality widens; limited financial buffers and low levels of education and health care impede adaptation.

### Climate policy, financing needs, and opportunities
- National strategies and institutions:
  - Updated Nationally Determined Contribution (2021); National Climate Change Response Strategy (2021–26); Five Year Development Plan III (2021/22–2025/26); National Environmental Master Plan for Strategic Interventions (2022–2032); Proposed Tanzania Vision 2050; National Disaster Management Plan (forthcoming).
  - Institutional roles: NCCSC, NCCTC, line ministries, Ministry of Finance and Planning (MOFP), Tanzania Meteorological Authority (TMA), Vice President’s Office, Union and Environment (VPO).
- Mitigation targets and financing:
  - Updated NDC (2021) sets GHG emission reduction target of 30-35 percent below BAU by 2030 (mainland Tanzania and Zanzibar).
    - Low ambition (30 percent): approximately 138 million tons of carbon dioxide equivalent (MtCO2e) lower than BAU by 2030.
    - High ambition (35 percent): approximately 153 MtCO2e lower than BAU by 2030.
  - Total funding required to support implementation of climate adaptation and mitigation activities is estimated at US$ 19.2 billion between now and 2030.
  - Tanzania committed to reduce greenhouse gas emissions economy-wide between 30-35% relative to BAU by 2030, estimated to cost around US$19 billion (Tanzania, 2021b).
  - Government phased out the temporary fuel subsidy in January 2023.
- Financing and international support:
  - OECD climate finance database (2015–2020): commitments for climate-related projects of US$3.8 billion (45 percent grants; 55 percent debt instruments), of which 93 percent is concessional.
  - Climate focus of committed funds: adaptation (48 percent), mitigation (40 percent), multiple focus (12 percent).
  - Tanzania is one of few countries with an accredited institution to directly access global climate funds.
- Opportunities:
  - Gas reserves can provide revenue and serve as transition fuels as coal-fired power stations are phased out.
  - Potential for renewable energy (solar, wind, hydro) and production of carbon neutral fuels (e-fuel and hydrogen-based fuels).
  - High biodiversity, substantial forestation, and relatively abundant land make Tanzania attractive for carbon-offset investments.
- Policy priorities:
  - Integrate climate-related risks into energy and infrastructure planning.
  - Improve preparedness, adaptation planning, and financing for adaptation and mitigation.
  - Strengthen institutional capacity, improve public investment efficiency, and mobilize international concessional finance and private investment.

### State-owned enterprises (SOEs): roles, risks, and fiscal exposure
- Historical and institutional context:
  - Post-independence socialist period featured large PSC/SOE role; reforms since 1990s reduced size and role of SOEs.
  - At PSRC start (1992): government owned 455 PSCs, of which 399 were SOEs.
  - By PSRC wind-up (2007): 251 SOEs divested (136 privatized; 115 liquidated/closed/placed under debt recovery).
- SOE landscape (as of December 2022 and FY 2020/21):
  - 248 PSCs with majority (at least 51 percent) government ownership.
  - Government held minority stakes (less than 51 percent) in 50 other companies.
  - Government’s total portfolio investment (equity holding) in both majority and minority owned companies amounted to about Tsh 68 trillion (about 44 percent of GDP) in FY 2020/21 (OTR, 2022).
- Study of 12 systemically important SOEs (as of June-2021):
  - Held about 88 percent of total non-financial SOEs debt as of June 2022.
  - These 12 SOEs held public sector assets of about 24 percent of GDP and equity of about 6 percent of GDP.
  - Employed about 16,426 citizens.
  - Aggregate figures (Table 1):
    - Total employees: 16,426
    - Assets: 37,616 (Billions of Tsh)
    - Equity: 9,201 (Billions of Tsh)
    - Debt: 5,697 (Billions of Tsh)
    - In percent of GDP: Assets 24.2, Equity 5.9, Debt 3.7
- Financial performance and fiscal risks:
  - Average yield of non-financial SOEs was 2.8 percent in 2020/21 (declined from 2018/19).
  - Seven of the 12 selected SOEs were profitable in 2020/21.
  - 10 of the 12 paid dividends with an average yield of 1.5 percent.
  - Profitability (return on assets) marginal; cost recovery ratios often below recommended benchmarks.
  - Some tourism-dependent PSCs required bailouts in 2020/21: TANAPA, NCAA, TAWA.
  - Leverage concerns:
    - Average liability-to-asset ratio of the selected SOEs: 76 percent (recommendation benchmark: 30 percent).
    - Three SOEs highly leveraged: ATCL, TPDC, TRC.
    - ATCL and TRC had negative equity (technically insolvent).
    - Five SOEs (ATCL, KADCO, NDC, TRC, TTCL) had interest coverage ratios well below 1.
  - Liquidity concerns:
    - Seven of the 12 SOEs had current ratios below 1 in June 2021.
- Government transfers and support (FY series):
  - Government subvention: 2018/19 Tsh 117.1; 2019/20 Tsh 98.7; 2020/21 Tsh 77.7 (Billions of Tsh).
  - Equity injection/capital grants: 2018/19 Tsh 472.7; 2019/20 Tsh 1,704.8; 2020/21 Tsh 2,666.7 (Billions of Tsh).
  - Dividend payment to government: 2018/19 Tsh 178.0; 2019/20 Tsh 152.8; 2020/21 Tsh 134.7 (Billions of Tsh).
  - Taxes paid to government: 2018/19 Tsh 91.0; 2019/20 Tsh 249.6; 2020/21 Tsh 143.1 (Billions of Tsh).
  - Memo items:
    - Yield (in percent) of dividends: 2018/19 2.9; 2019/20 2.4; 2020/21 1.5.
    - Outstanding balance of tax liabilities: 2018/19 Tsh 2,299.9; 2019/20 Tsh 2,622.3; 2020/21 Tsh 3,573.3 (Billions of Tsh).
      - In percent of GDP: 2018/19 1.7; 2019/20 1.8; 2020/21 2.3.
    - Total outstanding debt: 2018/19 Tsh 5,450.1; 2019/20 Tsh 5,320.8; 2020/21 Tsh 5,697.0 (Billions of Tsh).
      - In percent of GDP: 2018/19 4.1; 2019/20 3.7; 2020/21 3.7.
  - FY 2020/21 government support composition to the 12 SOEs:
    - Tsh 2.7 trillion (1.7 percent of GDP) in capital grants or equity injection.
    - Tsh 77.7 billion in recurrent grants (subvention).
    - Outstanding tax liabilities of the 12 SOEs: Tsh 3.6 trillion (2.3 percent of GDP).
    - Government collected Tsh 134.7 billion in dividends (equivalent to 1.5 percent of equity) and Tsh 143 billion in taxes from these SOEs.
- Contingent liabilities and actions:
  - Government contingent liability of about Tsh 4.8 trillion (about 2.8 percent of GDP) for a guarantee related to insurance coverage of a large hydro dam.
  - In late 2022, the government converted Tsh 5 trillion (about 2.6 percent of GDP) of on-lent debt of TANESCO and TPDC to equity to improve solvency.
- Preliminary FY2021/22 data showed improvements in financial positions for some SOEs; profitability for five SOEs with available data improved notably.

### Legal, institutional, and transparency issues for OTR and PSC governance
- Legislative fragmentation:
  - OTR oversight subject to multiple Acts: Treasury Registrar Act, Public Corporations Act, Government Loans, Guarantees and Grants Act, NBC Bank Act, Budget Act 2015, Finance Act of 2001 (as amended), Mining Act of 2017, and other laws.
  - Some laws have conflicting effects on OTR oversight; powers granted to parent Ministries under the Public Corporations Act may undermine OTR's role.
  - Recommended legal reform options:
    - Consolidate laws pertaining to PSC governance by issuing a single Act; or
    - Amend the Treasury Registrar Act to be the main law with overriding effect in matters relating to PSC governance.
- OTR capacity and ICT:
  - OTR launching ICT platforms (OTRMIS) but faces capacity constraints.
  - OTR lacks adequate competencies in reviewing shareholders’ agreements, management contracts, technical assistance agreements, and investigations of specialized businesses.
  - OTRMIS modules:
    - Board Management Information System,
    - Financial Analysis and Reporting System,
    - Geographical & Business Information Systems.
  - Capacity building recommendations: recruit personnel with requisite skills and build capacity of existing staff.
- Transparency and audit:
  - Public Corporations Act requires PSC accounts to be audited; audits for fully government-owned PSCs are required to be conducted by a government-owned audit firm.
  - Audited financial statements of most SOEs are not publicly available and there is no legal requirement for publication.
  - Recommendation: ensure SOEs publish audited statements on a timely and regular basis to meet high transparency standards.
- Risk assessment and monitoring:
  - Strengthen OTR reporting to include risk-based financial performance assessments and forward-looking stress scenarios where data permits.
  - Enforce OTRMIS to compile timely information and monitor risks and vulnerabilities.

### Monetary policy transmission mechanism (MTM) and empirical findings
- Data and methods:
  - Monthly data from July 2006 to December 2021 (sample varies with VAR lag structure).
  - Empirical approaches: recursive structural VAR and FAVAR models; dynamic principal component analysis used.
  - VAR and FAVAR analyses cover 2005M01: 2021M12; broader dataset covers 2006-2022.
- Central bank framework:
  - Bank of Tanzania (BoT) currently employs a reserve money targeting framework.
  - Monetary instruments include repurchase/reverse repurchase agreements, open market operations, purchases/sales of foreign currency in the interbank FX market, statutory minimum reserve ratio, the discount rate, and standby facilities.
  - Tanzania is transitioning towards an inflation-targeting framework using a short-term interest rate as the operating target.
- Channels examined: Money, Interest rate, Exchange rate, Credit (bank-lending and balance sheet), Expectation, Asset price (not empirically analyzed).
- Key empirical results (SVAR and FAVAR):
  - Reserve money shocks increase prices permanently, with an estimated time lag of about 2 years, and significantly affect output.
  - Interest rate channel effective:
    - Positive shock to the T-bill rate affects output and prices almost immediately.
    - One standard deviation interest rate shock significantly affects near-term output and prices.
    - Positive impact on prices consistent with the “price puzzle.”
  - Credit channel active: credit shocks significantly affect prices and output.
  - Exchange rate channel: FX shocks affect output and prices; positive exchange rate shock absorbs inflationary pressures but deteriorates competitiveness and weighs on output growth.
  - FAVAR supports SVAR findings for prices; for output, interest rate shocks remain significant but reserve money shocks are not statistically significant in FAVAR.
- Variance decomposition and policy-relevant findings:
  - Variability in both output and prices over a 2-year horizon is most sensitive to the T-bill rate shock.
  - Using overnight interbank rate as proxy: variability in inflation impacted most by reserve money changes only up to three quarters and is largely surpassed by interbank rate changes afterwards.
  - Short-term interest rate innovations have significant and faster impact on prices.
  - Credit shocks have measurable impacts on output and prices, underscoring the role of financial sector depth.
- Policy implications:
  - Support for transitioning from reserve money targeting to an interest-rate based monetary policy.
  - Open market operations (OMOs) are effective and their increasing use by BoT is justified.
  - Anchoring expectations and clear communication critical to mitigate the price puzzle when moving to inflation targeting.
  - Financial sector reforms to increase bank lending flexibility and deepen credit markets should continue in parallel with the monetary policy framework transition.
  - Greater exchange rate flexibility, while preserving FX stability, is important for output growth and macro stability.
  - Pending LNG development heightens the importance of an effective MTM and a robust monetary policy operations framework to manage significant FDI flows and energy price volatility.

*Prepared by Melesse Tashu (IMF). Source: UNITED REPUBLIC OF TANZANIA — INTERNATIONAL MONETARY FUND.*

### 1. Geographical Location of the LNG Project _______________________________________________ 5

### A FIRST LOOK AT TANZANIA’S LNG PROJECT AND ITS MACROECONOMIC IMPLICATIONS

### Background and context
- Tanzania has confirmed offshore natural gas discoveries of 47.1 trillion cubic feet made between 2010 and 2015 in deep-water blocks off the coast of Lindi and Mtwara.
- Existing small gas developments: Songo Songo and Mnazi Bay (since 2004/05) used for Ubungo power plant and industrial use.
- Project scope:
  - Drilling development wells in deep offshore fields; subsea pipelines to onshore processing; construction of an onshore LNG plant; development of jetty loading facilities.
  - Total investment estimated at US$32.7 billion (over 40 percent of current GDP), expected to be executed during the second half of the current decade.
  - LNG plant: multiple mid-scale LNG trains with total production capacity of 15 million metric tons per year (mtpa) and production life span of about 30 years.
  - Exports targeted to international markets (Asia and Europe); a small portion of gas expected for domestic power generation, industry, institutions, and households.
- Investment and preparatory progress:
  - A framework agreement (detailed memorandum of understanding) signed between the Tanzanian government and private developers on June 11, 2022.
  - Host Government Agreement (HGA) expected by mid-2023 to establish fiscal, legal, and commercial terms for the onshore part.
  - Onshore site identified in the Lindi region; TPDC commenced community compensation in May 2020.
  - Equinor Tanzania reports about US$4 billion invested to date in exploration and appraisal activities.
- Remaining steps and timeline:
  - Several legal, technical, and environmental steps required; a final investment decision is not expected before 2025.
  - Development and construction phase expected to take about 4-5 years after investment decision.
  - Plausible but optimistic scenario: increasing FDI during implementation period of 2026-30 and mid-life investment period of 2038-2043, with gas exports and consumption during 2030-2059.
- Additional capital needs:
  - An additional “Mid-Life” upstream drilling investment of about US$18 billion will be needed to maintain plateau gas production through 2052 and extend overall production to 2059.

### Potential macroeconomic impacts
- Overall potential:
  - If well-developed and managed, the LNG project could have significant macroeconomic impacts through large investment, production, exports, and fiscal revenue enabling human and physical capital accumulation.
- Current account:
  - Construction phase: likely significant deterioration due to high import intensity.
  - Example calculation: considering the estimated US$32 billion investment during 2026-29 and assuming about 80 percent import content, a back-of-the-envelope calculation suggests the current account balance could deteriorate by about US$6½ billion (5-6 percentage points of GDP) a year compared to the baseline (without LNG).
  - Production phase (2030-2059): current account expected to benefit substantially from LNG exports; magnitude depends on production size and international gas prices.
  - Stanbic (2022) export estimates: US$3.4 bln in a US$5.50 Million British Thermal Units (MMBTU) gas price scenario to US$8.2 bln a year in a US$12 MMBTU gas price scenario.
- Fiscal accounts:
  - Government equity stake assumptions in prior studies: 10-15 percent via TPDC.
  - If the government holds equity, borrowing needs during construction: about US$3.2 bln-US$4.8 bln, increasing public sector debt by the same amount (depending on equity share and whether financed directly or through carried interest).
  - Government revenue estimates (Stanbic, 2022): annual government revenues range from US$2.2 bln (about 3 percent of current GDP) in a US$5.5 MMBTU gas price scenario to US$6 bln (about 8 percent of current GDP) in a US$12 MMBTU gas price scenario.
  - IMF (2014) simulations also show revenue estimates of several percentage points of GDP.
- Growth and economy-wide effects:
  - Direct and indirect impacts: limited growth impact from investment due to high import content, but material impacts from value added of gas production, related services, enhanced energy supply, and potential reinvestment of government revenues in human capital and infrastructure.
  - Risks: potential Dutch disease effects, macro-fiscal instability from price volatility, corruption, and internal conflicts if revenues are not well managed.
  - Stanbic (2022) growth impact estimate: 0.5-1.5 ppts per year depending on gas price assumptions of US$5.5-US$12 MMBTU—caveat: analysis relied on Mozambique project financials and may not be comparable to Tanzania’s project.

### Managing revenues from natural gas: key considerations
- Macro-fiscal framework objectives:
  - Preserve short-term macroeconomic stability and long-term fiscal sustainability.
  - Balance saving and investment during the windfall; design a fiscal anchor based on either the non-resource balance or price-based rules to address exhaustibility and revenue volatility.
- Saving versus investment trade-off:
  - Permanent Income Hypothesis (PIH) approach: save most revenues to smooth spending/investment over time—useful theoretical benchmark but may not account for Tanzania’s development needs.
  - Immediate large-scale public investment approach: can scale up capital accumulation and growth in the short term but risks unsustainability, inefficiency, macroeconomic instability, and Dutch disease effects.
- Institutional and analytical needs:
  - Sound assessment of direct and indirect macroeconomic impacts requires granular information on investment costs, production structure for each block and the LNG plant, and the fiscal regime (production sharing agreements, royalties, taxes, fees, levies and charges).
  - Fund Technical Assistance (TA) requested by authorities on natural resource management to compile granular data and design institutional and policy frameworks for effective revenue management.
  - Recent TA: December 2022 Public Investment Management Assessment with Climate Module (C-PIMA) will be an important input.
- Suggested analytical next steps:
  - Future TA to support a comprehensive general equilibrium macroeconomic analysis when relevant parameters (expected cost, project production profile, fiscal regime) are known or developed.
  - Detailed assessment to include efficiency and effectiveness of public investment in Tanzania to gauge long-term use of gas revenues.

*Prepared by Melesse Tashu (IMF).*

### 14.      International experience shows that a balanced saving-investment approach that

### 1tzaea2023002 - 14.      International experience shows that a balanced saving-investment approach that

### Investment approach and fiscal anchors
- A balanced saving-investment approach that scales up public investment gradually helps achieve stability, efficiency, and sustainability.
- Empirical evidence supports gradual investment scale up that accounts for absorptive capacity, efficiency of public investment, and exhaustibility of gas resources (Berg et al, 2012; IMF, 2013; and Gurara et al, 2019).
- Gradual scaling up:
  - De-links investment decisions from revenue fluctuations, shielding the economy from commodity price volatility.
  - Allows space for external savings of some revenues, helping mitigate the Dutch disease effect and serving as a buffer against shocks and exhaustibility of gas reserves.
- Tanzania’s gas revenue windfall is estimated to last for no more than 30 years.
- Using the overall fiscal balance as a fiscal anchor can lead to abrupt adjustments when revenues fluctuate or cease, with disruptive effects on public services and economic activity.
- The non-resource primary balance (NRPB) is recommended as an appropriate fiscal anchor for countries with shorter reserve horizons (IMF, 2012).
  - NRPB defined: non-resource revenues less primary expenditures (i.e., excluding net interest payments and income) expressed in percent of non-resource GDP.
  - Setting fiscal policy based on the NRPB helps delink fiscal policy from resource revenue volatility and ensures sustainability when the reserve horizon is short.
  - Structural primary balance = NRPB + structural component of resource revenues; a price-based smoothing rule using a reference price can compute structural resource revenues.
  - Two approaches to determine the reference price: an automatic formula or determination by an independent committee. For developing countries with limited institutional capacity, the automatic formula is more advisable (IMF, 2012).

### Project status, macroeconomic implications, and recommendations
- Progress to date:
  - Negotiations between the government and private sector developers have gained momentum and an HGA is expected to be signed early this year.
  - Preparatory technical work on site selection and acquisition has advanced.
- Remaining steps before final investment decision include amendment of relevant laws, preparing project blueprints, environmental assessments, and a final investment decision.
- Potential benefits if the LNG project proceeds:
  - Direct impacts from LNG investment and gas production on economic activity.
  - Revenue from LNG exports could enable government investment in human capital and infrastructure, raising the economy’s potential and lifting millions out of poverty.
- Policy recommendations:
  - Put in place proper institutional and policy frameworks for effective management of gas revenues.
  - Favor a balanced saving and investment approach that scales up public investment gradually, taking into account absorptive capacity, efficiency, revenue volatility, and exhaustibility of gas reserves, rather than pure PIH savings or aggressive investment scaling.
  - Given the relatively short horizon of Tanzania’s gas reserves, base fiscal policy formulation on the non-resource primary balance rather than the overall balance.
  - Start developing a policy framework for effective management of gas revenues immediately while project preparations progress.
  - Build a comprehensive understanding of macroeconomic implications of the project: Fund technical assistance could help develop frameworks that account for investment, cost, and production profiles and the global LNG market outlook.
  - As project implementation progresses, consider putting in place a fiscal framework for management of gas revenues with technical support from the Fund and other development partners.
  - Improve the efficiency and effectiveness of public investments to prepare for productive utilization of upcoming gas revenues.

### Climate vulnerability: stylized facts and recent trends
- Tanzania is highly vulnerable to climate change and at the bottom quartile of readiness score in the global sample.
  - Ranked 45th most vulnerable among 182 (ND-GAIN Country index).
  - Ranked 58th least prepared to leverage investments to adaptation actions among 192 (staff-recalculated readiness score excluding economic readiness indicator).
- Natural disasters (1980–2022):
  - Floods accounted for about two thirds of all natural disasters (Flood: 67%).
  - Droughts: 13%; Earthquake: 8%; Storm: 10%; Landslide: 1%; Wildfire: 1%.
  - Flood frequency increased from an average of 0.8 floods per year between 1980 and 2010, to 1.8 per year during 2011-22.
  - EM-DAT estimates floods and earthquakes accounted for losses of about US$463.8 million between 1980 and 2022.
  - In 2021, drought affected almost 8,000 people per million population.
  - Number of displaced populations from floods increased from 182 in 2016 to 22,680 in 2020 (National Environmental Master Plan for Strategic Interventions (NEMPSI) (2022-2032)).
- Frequency changes relative to comparators:
  - Frequency of floods in Tanzania increased by 45% during 2010-2020, while the frequency in SSA and the rest of world decreased by 14 and 15 percent, respectively.
  - Tanzania is among the top 10 countries in SSA with the highest frequency of natural disasters (floods, droughts, epidemics).

### Projected climate change and sectoral macroeconomic impacts
- Projected climate changes include higher temperature, increased duration of heat waves and dry spells, increased frequency and intensity of heavy rains, and rising sea levels.
- Temperature projections:
  - World Bank multi-model ensembles: Tanzania expected to face a range of 0.4-4.3°C increase of mean temperature by the end of the century relative to the 1995–2014 baseline.
  - NEMPSI (2022-2032): western regions, southern highlands, and central part warmer by more than 2°C by 2041; most regions in the eastern zone will experience a temperature increase of 1°C.
  - Authorities’ NEMPSI projection: range of 1-2°C increase of mean temperature by 2041.
- Precipitation projections:
  - NEMPSI: some parts may experience an increase in mean annual rainfall of 18 to 28% by 2100, particularly over the Lake Victoria Basin and North-Eastern Highland.
  - USAID Climate Risk Profile (2018): heavy rainfalls expected to become more frequent (7-40 percent more); intensity of heavy rainfall events expected to increase by 2-11 percent.
- Deforestation and unsustainable practices:
  - Tanzania has one of the fastest rates of deforestation in the world.
  - Estimated 80-90 percent of households use biomass—mainly wood and charcoal—as their main source of domestic fuel.
- Sectoral impacts (macroeconomic):
  - Agriculture:
    - Accounts for about 25 percent of GDP and employs 75–80 percent of the workforce (USAID, 2018).
    - About 80 percent of agricultural production comes from low-input smallholder farms, predominantly rainfed.
    - Only about 1.5% of national crop land suitable for irrigation is irrigated.
    - National crop land area exposed to at least one drought per year will increase in response to global warming (BMZ and GIZ, 2021).
    - Crop-specific projections: millet, sorghum, rice, groundnuts and cassava projected to gain from climate change; maize production projected to decrease 8-13 percent by 2050 (USAID, 2018).
    - Livestock production at risk from increasing dry spells, flood losses and degraded pasture.
  - Tourism:
    - In 2019, tourism was the largest foreign exchange earner, the second largest contributor to GDP, and the third largest contributor to employment (World Bank, 2021).
    - Rising temperatures and increased frequency and intensity of droughts put wetlands and riverine systems at risk and can shift suitable ranges of plant and wildlife species, threatening ecosystem services and tourism revenue.
  - Infrastructure:
    - Droughts and floods have caused damages to infrastructure with major economic costs.
    - 2019 Tanga flood: government estimate of total direct damages and losses of US$19 million.
    - In Dar es Salaam, infrastructure assets with the value of US$5.3 billion are increasingly at risk from flooding and sea level rise.
    - About 37 percent of Tanzania’s electricity generation capacity is based on hydropower and is susceptible to changing precipitation patterns.
    - Heavy rainfalls in 2017 and 2020 threatened dam structures; dry spells in 2015 led to near cessation of the Mtera dam.
    - Planned hydro capacity to meet future electricity demand: approximately 5,100 MW over the next twenty years.
  - Other sectors:
    - Fisheries (coastal and inland) provide more than 4 million jobs and are threatened by rising sea level and sedimentation exacerbated by heavy rains.
    - Construction also affected by climate change.

### Key implications and priorities
- It is crucial to integrate climate-related risks into energy and infrastructure planning given projected changes.
- Building resilience requires improved preparedness, adaptation planning, and financing for adaptation and mitigation.
- Strengthening institutional capacity, improving public investment efficiency, and developing fiscal frameworks that account for resource exhaustibility and revenue volatility are essential for Tanzania to realize benefits from gas revenues while managing climate and fiscal risks.

*Source: UNITED REPUBLIC OF TANZANIA, INTERNATIONAL MONETARY FUND.*

### 7.      Food production in Tanzania is highly vulnerable to climate change. Given Tanzania’s

### Food production in Tanzania is highly vulnerable to climate change

### Food security and agricultural vulnerability
- Food production is highly vulnerable due to heavy reliance on increasingly unreliable rainfall.
- Both floods and droughts can reduce crop production and increase post-harvest losses.
- With every event of flood or drought, there is an increase in food insecurity of 5–20 percentage points (IMF, 2020).
- Tanzania accounts for 41.2 percent of SSA countries’ imported maize and cassava, the two most consumed staples.
- Successive shocks—COVID-19 pandemic and the war in Ukraine—have inflated food import bills and driven up prices of food, fuel and fertilizers, compounding existing food supply vulnerabilities and food price inflation.

### Public health impacts
- Climate change threatens the health and sanitation sector via more frequent heatwaves, floods, and droughts.
- Increased temperatures and heavy rainfall events are likely to escalate diarrheal diseases and malaria, both leading causes of death in Tanzania.
- Areas previously free of malaria are now affected due to rising temperature and moisture levels.
- Tanzania has the third largest population at risk of malaria in Africa, with 90 % of the population living in malaria areas.
- Rising temperatures will result in more frequent heat-related mortality; increased flooding threatens further outbreaks of waterborne diseases.

### Inequality and socioeconomic impacts
- Climate change disproportionately affects vulnerable groups; poorer households are most adversely impacted.
- About half of the population lives below the poverty line and depends on weather-sensitive activities (rain-fed agriculture, herding, fishing).
- Post-disaster consumption inequality always widens across households.
- Limited financial buffers and low levels of education and health care impede adaptation capacity, increasing vulnerability to food insecurity and income losses.

### Policy framework and institutional arrangements
- Key national strategies and plans:
  - Updated Nationally Determined Contribution (2021).
  - National Climate Change Response Strategy (2021–26).
  - Five Year Development Plan III (2021/22–2025/26).
  - National Environmental Master Plan for Strategic Interventions (2022–2032).
  - Proposed Tanzania Vision 2050.
  - National Disaster Management Plan (forthcoming).
- Institutional roles:
  - National Climate Change Steering Committee (NCCSC) and National Climate Change Technical Committee (NCCTC) for coordination and technical advice.
  - Line ministries integrate sectoral climate targets and implement climate-relevant infrastructure and regulations.
  - Ministry of Finance and Planning (MOFP) leads climate-related public investment planning, budgeting, and disaster risk financing, and is counterpart for external financing.
  - Tanzania Meteorological Authority (TMA) provides weather and climate services.
  - Vice President’s Office, Union and Environment (VPO) oversees NDC and NCCRS implementation and UNFCCC communication.

### Current and planned interventions
- Increasing food security: promoting investment in irrigation and improving agricultural productivity in arid areas.
- Flood prevention and resilience: strengthening key infrastructure (rebuilding highway bridges, flood barriers) and building institutional capacity for sustainable water body and catchment management.
- Reducing charcoal dependence and deforestation: promoting clean technologies and renewable energy; tree planting campaigns.
- Preserving ecosystems: coastal and marine conservation, wetland conservation, and water sources conservation.
- Other adaptation projects: Reversing Land Degradation and Food Security in Semi-Arid Areas (LDFS) (2017–2022); Ecosystem-Based Adaptation for Rural Resilience in Tanzania (2018–2022); Construction of sea wall in Mikindani (Mtwara) and Sipwese (Pemba).

### Mitigation ambitions and financing needs
- Tanzania’s updated NDC (2021) sets a GHG emission reduction target of 30-35 percent below business-as-usual (BAU) emission level by 2030 (including mainland Tanzania and Zanzibar).
  - Low ambition scenario, 30 percent reduction: approximately 138 million tons of carbon dioxide equivalent (MtCO2e) lower than BAU by 2030.
  - High ambition scenario, 35 percent reduction: approximately 153 MtCO2e lower than BAU by 2030.
- Total funding required to support implementation of climate adaptation and mitigation activities is estimated at US$ 19.2 billion between now and 2030.
- Tanzania committed to reduce greenhouse gas emissions economy-wide between 30-35% relative to BAU by 2030, estimated to cost around US$19 billion (Tanzania, 2021b).
- The government phased out the temporary fuel subsidy in January 2023, which could help reduce greenhouse emissions.

### Financing, private sector, and international support
- Mobilizing domestic revenues can provide some fiscal space, but NDC implementation requires financing beyond domestic resources.
- Authorities expressed interest in the Resilience and Sustainability Trust (RST) to support climate efforts.
- Private flows: private sector investment in adaptation is important but represents only a small fraction of overall financing needs; it should be mobilized where possible.
- Progress on climate financing:
  - Tanzania is one of few countries with an accredited institution to directly access global climate funds.
  - OECD climate finance database (2015–2020): commitments for climate-related projects of US$3.8 billion in the form of grants (45 percent) and debt instruments (55 percent), of which 93 percent is concessional.
  - Climate focus of committed funds: adaptation (48 percent), mitigation (40 percent), multiple focus (12 percent), mainly in transport, water and sanitation, energy, and agriculture sectors.
- More financial and technical support is needed for project assessment, execution, and access to multilateral climate funds.

### Macroeconomic resilience and opportunities
- Tanzania’s gas reserves can provide revenue and serve as transition fuels as coal-fired power stations are phased out.
- Potential for renewable energy (solar, wind, hydro) and strategic location offer advantages for production of carbon neutral fuels (e-fuel and hydrogen-based fuels).
- High biodiversity, substantial forestation, and relatively abundant land make Tanzania attractive for carbon-offset investments.
- Realizing these opportunities requires improved business environment and regulatory reform in the energy sector.

### Conclusions and policy implications
- Climate goals are integrated into national planning (FYDPIII, NCCRS 2021-26) with a focus on environmental protection and sustainable natural resource use.
- Responding to climate change requires mounting spending and financing; adaptation is expensive but substantially less costly than frequent disaster relief (IMF, 2020).
- Efficient mobilization of domestic resources and additional international financing (grants, concessional finance) are pivotal given the estimated US$19 billion financing gap.
- Strengthening technical capacity for project assessment and execution, enhancing access to multilateral funds, and mobilizing private investment are priority policy actions.

*Source: IMF — Tanzania country report excerpt (climate change chapter).*

### 1.      State-owned enterprises (SOEs) played key roles in the economic history of Tanzania.

### 1.      State-owned enterprises (SOEs) played key roles in the economic history of Tanzania.

### Historical role and reforms
- After independence in 1961 the government adopted a socialist system with major investment and productive activities carried out through public statutory corporations (PSCs), including SOEs.
- SOE sector growth halted following the 1970s and 1980s economic crises; estimated annual fiscal loss from SOEs reached about 7 percent of GNP in late-1980s (OTR, 2022).
- Reforms since the 1990s aimed to reduce size and role of SOEs, improve operational efficiency, and enhance private sector role:
  - Presidential Parastatal Sector Reform Commission (PSRC) established in 1992.
  - At PSRC start: government owned 455 PSCs, of which 399 were SOEs (commercial entities).
  - By PSRC wind-up in 2007: 251 SOEs divested (136 privatized; 115 liquidated, closed, or placed under debt recovery).

### Current SOE landscape and key statistics (as reported)
- As of December 2022:
  - Tanzania had 248 PSCs with majority (at least 51 percent) government ownership.
  - Government held minority stakes (less than 51 percent) in 50 other companies.
  - Government’s total portfolio investment (equity holding) in both majority and minority owned companies amounted to about Tsh 68 trillion (about 44 percent of GDP) in FY 2020/21 (OTR, 2022).
- This study assesses 12 systemically important SOEs which:
  - Held about 88 percent of total non-financial SOEs debt as of June 2022.
  - Covered sectors: communication, energy, housing, industry, logistics, mining, transportation.
  - As of June-2021, these 12 SOEs held public sector assets of about 24 percent of GDP and equity of about 6 percent of GDP.
  - Employed about 16.4 thousand citizens.
- Aggregate figures for the 12 selected SOEs (from Table 1):
  - Total employees: 16,426
  - Assets: 37,616 (Billions of Tsh)
  - Equity: 9,201 (Billions of Tsh)
  - Debt: 5,697 (Billions of Tsh)
  - In percent of GDP: Assets 24.2, Equity 5.9, Debt 3.7

### Financial performance and fiscal risks
- Roles and risks:
  - SOEs provide key public services and can generate revenue through taxes and dividends.
  - Inefficient SOEs impose fiscal risks via subsidies, on-lending credit risk, recapitalizations/bailouts, debt service from guarantees, and realization of contingent liabilities.
- Common causes of SOE financial weakness:
  - Engagement in quasi-fiscal activities (below-cost pricing, non-commercial job creation).
  - Operational inefficiencies from capacity constraints and non-competitive remuneration.
  - Political appointments undermining managerial competence and independence.
  - Weak governance, oversight, and absence of independent boards/audits.
- Quantitative assessment approach:
  - Rates profitability, solvency, and liquidity against industry standards (profitability: return on assets; cost recovery; solvency: liability-to-asset ratio; interest coverage; liquidity: current ratio).
  - Forward-looking stress tests noted as important but beyond this study due to limited data.
- Key findings on financial health (2020/21 and surrounding years):
  - Average yield of non-financial SOEs was 2.8 percent in 2020/21 (declined from 2018/19).
  - Seven of the 12 selected SOEs were profitable in 2020/21.
  - 10 of the 12 paid dividends with an average yield of 1.5 percent.
  - Profitability (return on assets) was marginal and cost recovery ratios often below recommended benchmarks.
  - Some tourism-dependent PSCs required bailouts in 2020/21: TANAPA, NCAA, TAWA.
  - Leverage concerns:
    - Average liability-to-asset ratio of the selected SOEs: 76 percent (recommendation benchmark: 30 percent).
    - Three SOEs highly leveraged: ATCL, TPDC, TRC.
    - ATCL and TRC had negative equity (technically insolvent).
    - Five SOEs (ATCL, KADCO, NDC, TRC, TTCL) had interest coverage ratios well below 1.
  - Liquidity concerns:
    - Seven of the 12 SOEs had current ratios below 1 in June 2021.
- Government support and fiscal flows (Table 5, FY series):
  - Government transfers and support to the 12 SOEs:
    - Government subvention: 2018/19 Tsh 117.1; 2019/20 Tsh 98.7; 2020/21 Tsh 77.7 (Billions of Tsh).
    - Equity injection/capital grants: 2018/19 Tsh 472.7; 2019/20 Tsh 1,704.8; 2020/21 Tsh 2,666.7 (Billions of Tsh).
    - Dividend payment to government: 2018/19 Tsh 178.0; 2019/20 Tsh 152.8; 2020/21 Tsh 134.7 (Billions of Tsh).
    - Taxes paid to government: 2018/19 Tsh 91.0; 2019/20 Tsh 249.6; 2020/21 Tsh 143.1 (Billions of Tsh).
  - Memo items:
    - Yield (in percent) of dividends: 2018/19 2.9; 2019/20 2.4; 2020/21 1.5.
    - Outstanding balance of tax liabilities: 2018/19 Tsh 2,299.9; 2019/20 Tsh 2,622.3; 2020/21 Tsh 3,573.3 (Billions of Tsh).
      - In percent of GDP: 2018/19 1.7; 2019/20 1.8; 2020/21 2.3.
    - Total outstanding debt: 2018/19 Tsh 5,450.1; 2019/20 Tsh 5,320.8; 2020/21 Tsh 5,697.0 (Billions of Tsh).
      - In percent of GDP: 2018/19 4.1; 2019/20 3.7; 2020/21 3.7.
  - FY 2020/21 government support composition to the 12 SOEs:
    - Tsh 2.7 trillion (1.7 percent of GDP) in capital grants or equity injection.
    - Tsh 77.7 billion in recurrent grants (subvention).
    - Outstanding tax liabilities of the 12 SOEs: Tsh 3.6 trillion (2.3 percent of GDP).
    - Government collected Tsh 134.7 billion in dividends (equivalent to 1.5 percent of equity) and Tsh 143 billion in taxes from these SOEs.
- Contingent liabilities and later actions:
  - Government has a contingent liability of about Tsh 4.8 trillion (about 2.8 percent of GDP) for a guarantee related to insurance coverage of a large hydro dam.
  - In late 2022, the government converted Tsh 5 trillion (about 2.6 percent of GDP) of on-lent debt of TANESCO and TPDC to equity to improve solvency.
- Preliminary FY2021/22 data showed improvements in financial positions for some SOEs; profitability for five SOEs with available data improved notably.

### Legal and institutional frameworks, transparency, and oversight
- Ownership and centralization:
  - Treasury Registrar Act 2002 mandates the Office of the Treasury Registrar (OTR) to hold all investments comprised of paid-up capital of PSCs; ownership is centralized in OTR consistent with OECD guidance.
- Operational autonomy and board independence:
  - Public Corporations Act requires PSCs to operate on commercial principles and vests control with Boards of Directors.
  - Article 6 allows parent Ministries to give general or specific directions to Boards, which conflicts with international best practices that require independent Boards free from government interference.
- Audit and publication of accounts:
  - Section 9 requires PSC accounts to be audited; audits for fully government-owned PSCs are required to be conducted by a government-owned audit firm.
  - Audited financial statements of most SOEs are not publicly available and there is no legal requirement for publication.
  - Recommendation: ensure SOEs publish audited statements on a timely and regular basis to meet high transparency standards.
- Oversight by OTR:
  - OTR enters annual performance contracts with PSC Boards, conducts financial performance reviews and management audits, and prepares annual reports on SOE performance.
  - Current OTR reports cover dividend returns, consolidation fund contributions, qualitative operational and governance assessments.
  - Suggested strengthening: include a risk-based financial performance assessment of major PSCs to identify and mitigate risks to public investments.

### Key policy implications and recommendations (implicit in study)
- Strengthen SOE financial monitoring and regular publication of audited financial statements to improve transparency.
- Enhance OTR reporting to include risk-based financial performance assessments and forward-looking stress scenarios where data permits.
- Reduce quasi-fiscal activities and clarify mandates to ensure SOEs operate on commercial principles.
- Improve corporate governance: limit political interference in Board appointments and operations; ensure independent and competent Boards and management.
- Address high leverage and liquidity shortfalls through targeted reforms, recapitalization strategies, and measures that reduce contingent liabilities exposure.

*Source: 1tzaea2023002 - 1.      State-owned enterprises (SOEs) played key roles in the economic history of Tanzania.*

### 22.      While the OTR is granted autonomy by law

### 1tzaea2023002 - 22.      While the OTR is granted autonomy by law

### OTR legislative framework and governance of PSCs
- The OTR operates under a fragmented legislative framework that could undermine its effectiveness.
- The OTR’s custodian, oversight, and advisory role over PSCs is subject to multiple Acts including:
  - Treasury Registrar Act,
  - Public Corporations Act,
  - Government Loans, Guarantees and Grants Act,
  - NBC Bank Act,
  - Budget Act 2015,
  - Finance Act of 2001 as amended,
  - Mining Act of 2017,
  - and other laws.
- Some of these laws have conflicting effects to the oversight role of the OTR.
- Example of potential conflict: powers granted to parent Ministries in the Public Corporations Act (powers to appoint Directors in Section 9 and give directions to Directors in Section 6) could undermine the oversight role of the OTR.
- Recommended legal reform options:
  - Consolidate the various laws pertaining to PSCs governance either by issuing a single Act; or
  - Amend the Treasury Registrar Act to be the main law with overriding effect in matters relating to PSCs governance.

### OTR capacity, ICT systems, and oversight effectiveness
- The OTR is strengthening its oversight capacity by launching ICT platforms, but it faces capacity constraints.
- The OTR’s new ICT systems (OTRMIS) could help strengthen oversight and transparency of PSCs if effectively deployed.
- The OTR lacks adequate competencies and expertise in core functions, including:
  - review of shareholders’ agreements,
  - review of management contracts,
  - review of technical assistance agreements,
  - investigations of certain specialized businesses in which the government has stake (OTR, 2022).
- Capacity building measures recommended:
  - Recruit new personnel with the right skills and expertise; and
  - Build the capacity of existing personnel.
- OTRMIS composition:
  - The OTRMIS has three modules including:
    - Board Management Information System (designed to enhance management of board appointments),
    - Financial Analysis and Reporting System (designed to enhance financial data reporting from PSCs),
    - Geographical & Business Information Systems (designed to facilitate assets management of privatized entities).

### SOE fiscal risks, performance concerns, and recommended actions
- Two large SOEs are identified as technically insolvent and require immediate equity injection:
  - Air Tanzania Company Limited (ATCL),
  - Tanzania Railway Corporation (TRC).
- ATCL specifics:
  - Engages in purely commercial business,
  - Falls under high-risk rating (red zone) by all indicators of financial performance.
  - Possible policy action: finding a strategic private sector partner with the objective to improve the returns of the government’s investment.
- TRC recommended diagnostic review areas:
  - tariff structure,
  - quasi-fiscal activities,
  - internal operational efficiencies.
- Other SOEs with weak financial positions and liquidity risks include:
  - TANESCO,
  - NDC,
  - STAMICO.
- Recommended actions for SOEs:
  - Closely monitor performance of SOEs with weak financial track record;
  - Review underlying causes of weak financial positions to mitigate fiscal risks;
  - Consider equity injections where technically insolvent.

### Accountability, transparency, and information needs
- Improvements needed to strengthen Tanzania’s public finance management:
  - Tighten legislative loopholes;
  - Build capacity of the OTR;
  - Effectively implement the recently developed ICT systems.
- Transparency recommendation:
  - Timely and regularly publishing SOEs’ audited financial statements to strengthen transparency and accountability.
- Data and risk assessment limitations:
  - The study conducts the risk assessment based only on historical data due to data availability limitations.
  - A more complete identification of risks and vulnerabilities would include a forward-looking assessment using sensitivity, scenario, and stress-testing analyses.
  - Enforcing OTR’s newly developed ICT systems would be helpful for compiling timely information and monitoring risks and vulnerabilities.

### Monetary policy transmission mechanism (MTM) in Tanzania — key findings
- Study scope and data:
  - Uses monthly data from July 2006 to December 2021 (exact sample period varies according to the VAR lag structure).
  - Empirical approaches: recursive structural VAR and FAVAR models; dynamic principal component analysis used.
- Central bank framework context:
  - The Bank of Tanzania (BoT) currently employs a reserve money targeting monetary policy framework.
  - Monetary policy instruments include repurchase and reverse repurchase agreements, open market operations, purchases and sales of foreign currency in the interbank foreign exchange market, statutory minimum reserve requirement ratio, the discount rate, and standby (intraday and Lombard) facilities.
  - Tanzania is transitioning towards an inflation-targeting framework that uses a short-term interest rate as monetary policy’s operating target, in line with EAC harmonization efforts.
- Channels examined:
  - Money Channel,
  - Interest Rate Channel,
  - Exchange rate channel,
  - Credit (bank-lending and balance sheet) channel,
  - Expectation channel,
  - Asset price channel (not empirically analyzed due to limited asset price data).
- Recursive SVAR results:
  - Reserve money shocks affect output and prices.
    - A positive shock to reserve money increases prices permanently, with an estimated time lag of about 2 years, and significantly affects output.
    - In the overnight interbank rate case, the significant output response to a reserve money shock is relatively prompt (about 2 quarters) and lasts longer than in the T-Bill rate case.
  - Interest rate channel effectiveness is strong:
    - A positive shock to the T-bill rate affects output and prices almost immediately.
    - A one standard deviation interest rate shock significantly affects near-term output and prices.
    - The positive impact on prices is consistent with the “price puzzle” phenomenon documented for Tanzania and other EAC countries.
  - Credit channel active:
    - Significant effect of a credit shock on prices and output.
  - Exchange rate channel:
    - FX shocks affect output and prices; evidence of a significant role for the exchange rate channel.
- FAVAR results:
  - Supportive of SVAR findings for prices: both reserve money and interest rate shocks have positive impact on prices.
  - For output: impact remains statistically significant from interest rate shocks, but not from reserve money shocks.
- Policy implication:
  - With sticky lending rates remaining a phenomenon in Tanzania, financial sector and other reforms to increase bank lending flexibility and strengthen the MTM should continue in parallel with the monetary policy operations framework transition, particularly given the potential future development of Liquified Natural Gas (LNG) resources.

*UNITED REPUBLIC OF TANZANIA — INTERNATIONAL MONETARY FUND*

### 14. Variance decomposition analysis reveals significant contribution of interest rate shocks

### 14. Variance decomposition analysis reveals significant contribution of interest rate shocks

### Key empirical findings
- Variability in both output and prices over a 2-year horizon is most sensitive to the T-bill rate shock.
- Using the overnight interbank rate as a proxy for interest rate in the regression:
  - The variability in inflation is impacted most by reserve money changes only up to three quarters and is largely surpassed by the changes in interbank rates afterwards.
- Short–term interest rate innovations (both overnight interbank and T-bill rates) have significant and faster impact on prices.
- T-bill rates appear more correlated with prices than interbank rates, although high volatility in the interbank market (attributed to liquidity-related factors) likely affects this comparison.
- Credit shocks have measurable impacts on output and prices, underscoring the role of financial sector depth for growth.
- Exchange rate shocks:
  - A positive exchange rate shock absorbs inflationary pressures.
  - The same positive exchange rate shock deteriorates competitiveness and weighs on output growth, notably in open-economy sectors such as tourism.

### Model specifications and estimation details (as reported)
- Sample periods and data coverage:
  - VAR and FAVAR analyses cover 2005M01: 2021M12.
  - The broader dataset used in the chapter covers from 2006-2022.
- VAR models:
  - Recursive VAR models use 4 lags (based on residual diagnostic tests and lag selection criteria).
  - FAVAR models reported use 7 lags (one specification) and 5 lags (another specification) based on residual diagnostic tests and lag selection.
- Inference and uncertainty:
  - Accumulated impulse responses and 95% confidence bands reported.
  - Hall (1992) percentile bootstrapped standard errors with 999 bootstrap replications were used for confidence intervals.
- Horizon and response aggregation:
  - Accumulated impulse responses are shown over horizons up to 60 periods in the figures.
  - Variance decomposition focused on a 2-year horizon for comparing contributions of shocks.

### Policy implications (E)
- The study provides strong support for transitioning from reserve money targeting to an interest-rate based monetary policy, as envisaged by the Bank of Tanzania (BoT).
- Policy-relevant findings:
  - The use of an interest rate rule–based monetary policy can be more effective than reserve money targeting.
  - Open market operations (OMOs) are an effective monetary policy instrument; their increasing deployment by BoT through sale/purchase of liquidity papers is justified by the results.
  - Anchoring expectations is critical given the observed positive impact of interest rate shocks on prices (the price puzzle); moving to inflation targeting requires clear communication and a deep, well-functioning financial market to establish credibility.
  - Financial development is important: deeper and better-functioning credit markets could strengthen the credit channel and support output growth.
  - Greater exchange rate flexibility, while preserving FX stability, is important for output growth and overall macro stability because rigid FX can transmit inflationary pressures differently and affect competitiveness.
- Operational and institutional considerations:
  - Strengthen the link between policy and market interest rates.
  - Revamp the monetary policy toolkit and deepen the financial sector to improve transmission.
  - Improve communication and build credibility around an inflation-targeting framework to mitigate the price puzzle.

### Conclusion (F) and forward-looking considerations
- The evidence shows the operation of the interest rate channel and the MTM generally, supporting further progress toward using short-term interest rates as the operational target of monetary policy.
- Remaining reform priorities include:
  - Strengthening the link between policy and market interest rates.
  - Further monetary policy operations reform.
  - Financial sector deepening to enhance transmission.
- The pending development of LNG resources heightens the importance of:
  - An effective monetary transmission mechanism (MTM).
  - Greater exchange rate flexibility.
  - A robust monetary policy operations framework to manage development- and exploitation-related macroeconomic challenges arising from significant FDI flows and global energy price volatility.

*Source: Chapter 14, “Variance decomposition analysis reveals significant contribution of interest rate shocks,” United Republic of Tanzania — INTERNATIONAL MONETARY FUND*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1tzaea2023002.pdf_