Tanzania and the IMF
Press Release: IMF Completes Second Review Under Tanzania's PRGF Arrangement and Approves US$4 Million Disbursement
August 6, 2004
Country's Policy Intentions Documents
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TanzaniaLetter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding
Mr. Rodrigo de Rato
Dear Mr. de Rato:
1. We recently held discussions with Fund staff on the second review of the economic programme supported by a three-year low access arrangement under the Poverty Reduction and Growth Facility (PRGF), which was approved by the Executive Board on July 28, 2003. The Government is committed to reducing the incidence of poverty in the country through the continued implementation of sound economic and financial policies necessary to maintain macroeconomic stability and achieve a higher rate of economic growth.
2. On behalf of the Government of United Republic of Tanzania, I hereby transmit the attached Memorandum of Economic and Financial Policies (MEFP), which reviews the implementation of the programme during fiscal-year 2003/04 (July-June) and describes the objectives and policies that the government intends to pursue during fiscal-year 2004/05 and over the medium term. The programme for 2003/04 has been implemented successfully and all the performance criteria and most benchmarks have been observed. I therefore request the completion of the second review and the third disbursement under the three-year PRGF arrangement. The fourth disbursement will be subject to a review expected to be completed in February 2005.
3. The Government believes that the policies set forth in the attached MEFP are adequate to achieve the objectives of the programme. In the course of implementing the 2004/05 programme, we will continue to provide the Fund with such information as the Fund may request. Tanzania will also consult with the Managing Director of the Fund on the adoption of any measures that may be appropriate, at the initiative of Tanzania, or whenever the Managing Director requests such consultation.
4. The Government of Tanzania intends to make the contents of this letter and those of the attached MEFP available to the public, and authorizes its publication and distribution together with all reports prepared by the Fund staff regarding the PRGF–supported program, subsequent to Executive Board completion of the review.
A. Recent Economic Performance and Progress Under the Programme
1. The overall performance of the economy during 2003/04 was satisfactory, despite the severe drought that adversely affected food supplies and hydroelectricity generation. Preliminary National Accounts for 2003 indicate that GDP grew at 5.6 percent in 2003, and the overall annual inflation rate increased slightly from 4.4 percent in June 2003 to 6.4 percent in May 2004. The increase in the inflation rate resulted from pressure on food prices, following a protracted drought that has adversely affected food production and the sharp increase in oil prices. The increase in prices was moderated by imports of cereals and other foods.
2. The quantitative benchmarks and performance criteria on net domestic assets of the Bank of Tanzania, the net domestic financing of the Government, reserve money, and the net international reserves of the Bank of Tanzania for end March 2004 were observed with comfortable margins (Table 1). There was no accumulation of budgetary or external payments arrears, and no contracting or guaranteeing of new external debt on non-consessional terms. The structural benchmarks and performance criteria established for the period through June 2004 were observed, as described in Table 3, with the remaining benchmarks expected to be met within the envisaged time frame.
3. Overall fiscal performance during 2003/04 has also been affected by the drought, and the need to replenish food supplies through imports and to provide financial resources to enable the power company—TANESCO—to import oil to generate thermal power, following a reduction in hydroelectricity generation because of the drought. Notwithstanding drought related shocks, a significant advance was made in 2003/04 towards achieving a sustainable fiscal position. Revenue performance exceeded budget estimates with annual receipts estimated to be 3.9 percent higher-than-budgeted. The principal factors that contributed to the good performance during 2003/04 were: improvements in tax administration, particularly in the areas of income tax and VAT. More significant was the effect of measures adopted in 2003/04 to control tax evasion in the petroleum sector. With the better than projected revenue performance and a restraint on expenditure, other than priority Poverty Reduction Strategy (PRS) sectors, and drought related emergency needs, the overall budget deficit (after grants) is expected to be contained at 2.9 percent of GDP, compared with the programmed deficit of 3.8 percent of GDP. There has been improvement in budget execution and increased expenditure efficiency, both in the PRS sectors as well as in Other Charges of all Ministries, Departments and Agencies (MDAs). Government is therefore realising improvements in expenditure planning and implementation, which signal that the initial problems with understanding of the Procurement Act are lessening, while cash management of nonessential expenditure has been improved substantially.
4. Although Parliament approved a Supplementary budget in February 2004 and large expenditures for other emerging needs have been provided for, the government’s recurrent expenditure was kept on track, as all MDAs experienced cuts on items such as travel allowances, seminars, workshops and purchase of vehicles. However, Government has ensured that expenditures on priority items in PRS sectors remained protected. The execution and reporting of capital expenditure financed by donors has also been improved during the fiscal year.
5. The over-performance of government fiscal operations indicates that the net domestic financing (NDF) target was met with big margin by end of 2003/04. The development partners front loaded disbursement of budget support funds in the first two quarters of the fiscal year, facilitating early allocation of funds to spending units. As a result of the better than programmed revenue, expenditure containment, and the external support broadly in line with programme estimates, the Government was able to meet its fiscal objectives for 2003/04 as agreed under the programme.
6. We have been proceeding with implementation of the planned tax policy and administration reforms. Following an extensive consultation with the stakeholders in April 2004, the Parliament approved the income tax bill, to be effective on July 1, 2004. The law will broaden the tax base and introduce self-assessment of the income tax. We have transferred tax files of additional large taxpayers to the large taxpayer department, which is being upgraded and reorganized along functional lines. Along with our decision to increase the VAT threshold from Tsh 20 to 40 million, this measure paves the way to a functional reorganization of the TRA headquarters.
7. In the area of public financial management, the Government has improved internal auditing function by putting in place audit committees, which are now operational in all MDAs. Training sessions are being conducted to sensitize the MDAs on the effective use of the committees. An internal audit manual has been finalised following stakeholders’ comments, and is being published. The manual will be followed with training. A draft report on the review of internal audit staffing levels and assessment of skills and other resource requirements, has been prepared. Improvements in the National Audit Office (NAO) are underway including preparation of strategic plans with respect to core functions of departments and filling of key positions in the NAO.
8. Progress in public financial management at the local government level, includes the establishment of Local Government Authority (LGA) Tender Boards in compliance with the Local Government Regulations, 2003. In addition, a manual to assist the implementation of the Regulations has been prepared and training in Councils has been carried out. In the effort to roll out (IFMS) to LGAs, a central support mechanism for those LGAs, which are already implementing the Epicor software, has been launched and will soon be provided for all other LGAs. The fiscal years for Central and Local Governments have been integrated with effect from 2004/05 (July–June).
9. Monetary policy during 2003/04 was tightened, with broad money growth (on a year-on-year basis) decelerating to 18.7 percent at end-March 2004, from 22.7 percent at end-June 2003. Reserve money remained below the programme target throughout the three quarters ending March 2004, as the Bank of Tanzania mopped up liquidity through open market operations, including net sales of foreign exchange in the interbank foreign exchange market. With a view to improving further liquidity management and the conduct of monetary policy, the Bank of Tanzania introduced the intra-day and Lombard facilities in December 2003 to be accessible to commercial banks under the master repurchase agreements. Thus, during the first three quarters to March 2004, M2 grew by 17.0 percent, as growth in currency in circulation decelerated and corporate customers’ deposits increased.
10. Credit to the private sector in domestic currency increased by 41.8 percent, fuelled in part by large corporations switching from borrowing abroad to borrowing domestically. The switching was mainly driven by the need to avoid exchange rate risks and to take advantage of reduced cost of borrowing domestically stemming from increased competition among commercial banks. Thus, the weighted average lending rate declined from 14.1 percent in June 2003 to 13.5 percent in March 2004. The weighted average deposit rate increased from 3.5 percent in June 2003 to 4.1 percent in March 2004, consistent with developments in the Treasury bills market, where the average weighted yields of all maturities increased from 6.5 percent in June 2003 to 7.6 in March 2004. Consequently, the margin between deposit and lending rates narrowed from 10.6 percentage points in June 2003 to 9.4 percentage points in March 2004. With rates ranging from 4.72 to 5.61 percent during the fiscal year through March 2004, and an inflation of about 4 percent, the 12-month time deposits rate was positive in real terms throughout the period under review.
11. Balance of payments developments during 2003/04 were largely in line with projections, recording substantial growth in both imports and nontraditional exports. However, the deterioration in the trade and current accounts was less than projected. Consequently the current account deficit is estimated at USD 552.1 million during 2003/2004, compared with the programme projection of USD 619.4 million, and from USD 245.7 million in 2002/03. The strong growth in imports (26.6 percent) was driven by an increase in the volume and the price of petroleum products and food imports. The drought experienced over most of the country reduced production of hydroelectricity and food supplies has increased imports of petroleum products for thermal power generation and food. Also, the anti-smuggling efforts resulted in an increase of the declared imports of petroleum. Growth in merchandise exports (16 percent) was characterized by an increase in non-traditional exports, particularly gold and manufactured products. Traditional exports remained depressed, although there were signs of a recovery in prices for coffee, cotton, tea and cashew nuts. Tourism receipts were higher than previously estimated. The overall balance of payments is expected to record a surplus of USD 243.9 million. Taking account of lower debt service payments and an increase in official programme loans and grants, gross international reserves reached USD 2,039.6 million in December 2003, but declined to USD 1,973.2 million by end of March 2004, the latter exceeding programme projections by USD 39.5 million.
12. The nominal exchange rate depreciated, from Tsh 1,050 per US dollar in December 2003 to Tsh 1,108.4 in March 2004; however, in real effective terms, the exchange rate remained about unchanged. Tanzania continues to maintain a freely floating exchange rate regime, with limited interventions for liquidity management and to smoothen wide fluctuations.
13. By the end of March 2004, the Government had signed bilateral agreements under Paris Club VII with all Paris Club creditors except Brazil, and some Japanese government agencies. The Government continued its efforts to negotiate with Non-Paris Club creditors for debt relief on terms comparable to those under the Enhanced HIPC framework. Recently, Bulgaria has joined Kuwait and Saudi Arabia in providing relief under the HIPC framework, and some debt relief dialogue has been initiated with India, Iran, and the Abu Dhabi Fund.
14. Government’s recent progress in enhancing the environment for development of the private sector includes several initiatives. A Better Regulation Unit (BRU) has been established as a supportive unit for monitoring implementation of the Business Environment Strengthening in Tanzania (BEST) programme. The Unit is being strengthened with the newly seconded employees who have started to execute some activities under the first year plan. The recruitment of a CEO is expected by July 2004 to be followed by recruitment of the Lead advisor. A draft work plan for the Commercial Dispute Resolution (CDR) component under BEST is being finalised. As part of the proposed reforms, the designing of a new civil procedure code is underway and a draft has been circulated to stakeholders for consultation. The Business Licensing Reform has been approved by the Government following the consensus of stakeholders. The time in which to obtain a license will be reduced to two days and license fees will be reduced. The Ministry of Industries and Trade’s main role is limited to assessing and administering applications. The implementation plan for Small and Medium Enterprises (SME) policy is under stakeholder consultation, and zonal workshops are ongoing. The first phase of the Labour Law Reform was approved by Parliament in April 2004. It addresses employment relations, collective labour relations, dispute resolutions, and labour market institutions. This measure will contribute to improving the environment for investment and domestic bank lending.
15. The Government has continued its effort to promote good governance in line with the Poverty Reduction Strategy and the National Anti Corruption Strategy and Action Plan (NACSAP) 2003-05. Quarterly reports are being prepared depicting progress made in the implementation of the MDAs’ anti-corruption plans. There has been significant improvement in MDAs’ reporting. The Good Governance Coordination Unit (GGCU) in the President’s Office has commissioned work to include more quantitative and qualitative data in areas of monitoring and controlling public procurement, public finance and legal and judicial processing. This data is expected to provide guidance for future policy reform on governance. In addition, in order to ensure that complaints from the public are adequately addressed, a revision of the code of conduct for public servants has been carried out in consultation with stakeholders and has been published. Human and financial resources capacity to coordinate and implement the NACSAP is being addressed under the Public Service Reform Programme (PSRP). The Public Procurement Act, No. 3 of 2001, is due for amendment during the current budget session of Parliament, as part of Public Financial Management Reform Programme (PFMRP).
16. The Government continues to implement the PSRP in order to improve public service delivery. This will be achieved through the Government’s long-term plan of capacity building as well as pay reform which is performance-orientated. To improve public sector remuneration in line with the medium term reform programme, wages were increased by 13 percent in 2003/04. In addition, following re-evaluation in January 2004, the mechanism for Selected Accelerated Salary Enhancement (SASE) will continue in four ministries (Health, Finance, President’s Office—Public Service Management, and President’s Office—Planning and Privatisation). As part of performance monitoring and evaluation, the Government is implementing a range of performance based instruments including annual plans, performance budgets, service delivery surveys (SDSs) and open performance appraisals. The annual operating plans and action plans for 5 ministries and 8 executive agencies are being finalized based on self-assessment and service delivery surveys (SDSs).
II. The Medium Term Outlook And The Programme For 2004/05
A. Poverty Reduction Strategy (PRS) Review
17. The cycle of Tanzania’s original Poverty Reduction Strategy Paper is now complete with the publication of the third and final Progress Report in January 2004. The report was discussed by stakeholders during the Poverty Policy Week, held in November 2003. It included results from Tanzania’s second Poverty and Human Development Report (PHDR). Newly researched areas that were included in the PHDR include urban poverty, vulnerability and the geographic distribution of poverty, which is important in informing Government’s policy on poverty reduction. The report emphasizes that sustained economic growth remains key for better implementation of the Poverty Reduction Strategy (PRS), particularly ensuring that the benefits from growth are realised for the poor in rural areas where the majority of the population live. Some of the main findings in the report are that constraints facing agriculture require actions with regard to financing mechanisms, investment and provision of support services; regional diversity and inequality should be addressed through appropriate budgetary allocation mechanisms as well as provision of an enabling environment for domestic and foreign investment; and for sectors like roads, more effective coordination machinery between the central and local governments in the maintenance of roads needs to be developed with clearly assigned responsibilities. Sectors like education need a greater focus on quality and public-private partnership in provision of post-primary education and in health greater focus is needed on provision of services to the rural population as well as HIV/AIDS. Furthermore, data on crosscutting issues such as vulnerable groups of society and the environment need to be further developed.
18. We are currently preparing the second cycle PRS to be finalized by the end of 2004, with the aim of updating the current PRS including, its objectives and its priority sector approach. The PRS will focus on outcomes, service delivery, growth and employment creation and elaboration of the integration of the Millennium Development Goals into the PRS. Stakeholders’ views will be incorporated through a participatory process that will involve all levels including grassroots level. Studies have been commissioned on macro-micro linkages and vulnerability, which are expected to be completed by June 2004. In addition, the findings from the Agriculture Survey, 2003 will improve income poverty assessments as will a planned second Household Budget Survey to be conducted during the second cycle of the PRS, as outlined in the Poverty Monitoring Master Plan.
19. The Tanzanian economy continues to be dominated by agriculture, which is also the source of livelihood for about 80 percent of the population. The small size of farms, inadequate use of technology, and dependency on rain are the main obstacles to meaningful transformation of the sector and the rural communities. In addition to recent reforms of land law, abolition of nuisance taxes at the local government level, and existing tax relief for agricultural inputs, the Government will take additional measures during 2004/05 aimed at attracting large scale investment in the sector. They include increasing funding for implementing the District Agricultural Development Plans (DADPs), subsidy for transportation of fertiliser in the main cereal producing regions, increased funding for agricultural research and extension services, and strengthening and rationalization of the export credit guarantee scheme.
B. Growth and Inflation Objectives
20. Real GDP growth is projected at 6.3 percent in 2004 and 6.5 percent in 2005. It is based on the expected recovery in agriculture and a further pick up in manufacturing and continued growth in manufacturing for exports, including exports of products from the Export Processing Zones and the SMEs. Following the slowdown towards end-2003, wholesale and retail trade, including tourism, are expected to expand strongly as a result of increased investment. Over the medium term, GDP growth is projected to rise to 6.9 percent in 2006 and to 7.4 percent by 2007. The annual inflation rate is projected to decline to 4.0 percent by the end of 2004/05, and stabilize at about that level over the medium term.
21. To improve statistical transparency, the Government will continue to publish reliable statistics in a timely manner. The Government recognises that the current Consumer Price Index (CPI), whose basket is based on the 1991 household survey, is outdated. A new series of CPI with a basket based on the 2002 survey will be introduced soon.
C. Fiscal Policy for 2004/05
22. Government’s fiscal policy in 2004/05 and the medium term continues to be aimed at increasing the resource envelope, reducing dependency on foreign aid assistance, financing the PRS and maintaining foreign and domestic debt sustainability.
23. Tax policy in fiscal year 2004/05 will be geared towards increasing revenue yields in order that Tanzania moves forward in its aim of reducing dependency on foreign aid assistance. Following a number of tax reform measures introduced in the past year and a range of further measures, as discussed below, the programme for 2004/05 assumes a revenue to GDP ratio of 13.5 percent, compared with 12.9 percent for the estimated outturn of 2003/04. The projection has been made on a cautious basis, and we expect that, if all the reform measures are effectively implemented and our macroeconomic objectives are attained, revenue collections are likely to be closer to 14 percent of GDP. In that event, the additional receipts will be channeled to additional outlays on non-PRS priority areas, which are being tightly constrained.
24. Key policy actions being taken consistent with our tax reform programme, as detailed in previous letters to the Fund are:
25. In addition, we are introducing the following reform measures to improve operations of the customs:
26. Revenue is also expected to benefit from implementation of the new Income Tax Act, which became effective July 1, 2004. The implementing regulations for the Act provide, among other things, for the limitation of the Minister’s authority to grant exemptions to emergencies and subject to approval of the cabinet. In the context of the ongoing comprehensive review of tax laws, we will submit to Parliament amendments to these laws limiting discretionary powers to grant exemptions from import and excise duties. In addition we will amend the Tanzania Investment Act so as, among other things, to limit the applicability of the fiscal stability clauses to at most five years, without contravening existing agreements. Moreover, we are reviewing the legislation governing the operations of the mining sector, including whether the existing tax regime is appropriate. Also, we will continue to license only those companies for Export Processing Zones (EPZs) that have access to preferential trade agreements, and will not add any companies to the list of strategic investors maintained by the Tanzania Investment Center.
27. Expenditure policy in 2004/05 and in the medium term aims mainly at financing the PRS and ensuring that Government’s policy commitments made to various stakeholders are consistently reflected in expenditure allocations. Medium term expenditure policy continues to be in line with the PRS. In the programme for 2004/05, expenditure on PRS sectors accounts for 46 percent of total expenditure. This level of expenditure is achieved despite exceptional requirements in the energy sector and costs related to the preparation for the upcoming elections. In addition, a new formula-based recurrent expenditure allocative system has been adopted in order to facilitate greater strategic allocation of intergovernmental grants to LGAs. For 2004/05, the formula has been used to allocate resources for the health and education sectors. Local government development expenditure budgets for these sectors have also been similarly allocated.
28. Recurrent expenditure is projected at 18.9 percent of the GDP compared to 16.8 percent in fiscal year 2003/04, the increase being largely in the PRS and energy sectors. The civil service wage bill has been enhanced in 2004/05 to 4.4 percent of GDP, compared with 4.1 percent in 2003/04. In addition to allowing for new recruitments in priority sectors, the increase will move the level of the wage bill toward the medium term pay reform target of 4.8 percent of GDP. Total poverty related expenditures are projected at Tsh 1,479 billion (11.9 percent of GDP) in 2004/05, compared with 9.9 percent of GDP in 2003/04.
29. Projected foreign financing of development projects in 2004/05 continues to reflect the improvement in the reporting and recording system for donor assistance, as well as start of some big new projects, such as the Secondary Education Development Programme, Central Corridor Road Project, and National Sports Stadium, the three of which will attract substantial foreign financing commitments in 2004/05.
30. The programme includes a provision of TSh 125 billion (gross of assistance from the World Bank’s emergency power supply project) or one percent of GDP as a transfer to TANESCO to cover the deterioration in its finances resulting from the drought, higher oil prices, and the financial impact of past investment decisions taken by Government. The Government recognizes the temporary nature of the budget support to TANESCO in fiscal year 2003/04 and the urgency of helping TANESCO to achieve financial sustainability. To this end, a 4.3 percent tariff increase was implemented effective May 1, 2004. In addition, TANESCO’s Board of Directors will make necessary tariff adjustments up to a maximum of 5 percent every six months, in order to cover costs. Following an agreement with stakeholders, the Government has completed the buy down of Allowance for Funds Used During Construction (AFUDC) for the Songo Songo project, which reduces TANESCO’s operating costs significantly. With continued improvement in operation and financial efficiency, timely tariff adjustments, and financial support from the World Bank, TANESCO is on the way to be self-sustainable. The Government is committed to place TANESCO’s finances on a sustainable basis by 2005/06, without recourse to budgetary transfers other than for external debt service.
31. Taking account of net foreign financing, donor grants, and some privatization receipts, net domestic financing for 2004/05 will be limited to TSh 157 billion, or 1.3 percent of GDP. In the medium term, Government intends to ensure that the net domestic financing ratio is contained below 0.8 percent of GDP. We believe this goal is attainable as a number of outlays this year are of a one-off nature, notably the subsidies for energy and provisions for the elections.
D. Public Expenditure Management, Expenditure Execution and Tracking
32. The cash management system for 2004/05 is expected to continue to be aided by front loading of programme assistance like in the previous year. Cash budgeting remains the main tool for managing resource releases to MDAs, with allocations to priority sectors continuing to be made on quarterly basis. The government will continue to produce its expenditure reports based on the Integrated Financial Management System (IFMS). In order to better capture foreign financed development expenditures in the IFMS, the Accountant General will ensure that MDAs submit reports on quarterly basis. In addition, the quarterly budget execution reports for 2004/05 will reflect expenditure for the priority sector items in order to improve transparency of execution at detailed levels of expenditure.
33. The government remains committed to ensuring that there is no accumulation of budgetary arrears. To this end the government will continue to monitor the payment of bills and assess the MDA’s quarterly reports for any undisputed bills outstanding for more than three months.
E. Reduction of Fiduciary Risk
34. During 2004/05, the Government will focus on three reform areas in order to reduce fiduciary risk and minimize resource leakage. These include public financial management, government procurement reform, and promotion of good governance.
35. The Government seeks to secure effective and sustainable financial management systems that support an equitable delivery of public services. Such arrangements are intended to reduce and minimize resource leakages as well as strengthening accountability of public funds. Effort in this regard targets implementation of the Public Financial Management Reform Programme (PFMRP) as the main instrument for reducing fiduciary risk of budget support. In this regard, the government will consolidate and deepen implementation of the revised public financial management reform programme. The government has already appointed the programme manager—and a programme component manager prepared the interim plan of work and budget—and is finalizing procedures for establishing the programme secretariat and appointment of the program coordinator.
36. Procurement reforms include the submission to Parliament of amendments to the Procurement Act in June 2004. Following the amendments, the Central Tender Board will be transformed into a Public Procurement Regulatory Authority operating as an Executive Agency and rolling out the procurement process to MDAs thereby reducing the burden on the central agency, streamlining its functions to overseeing of procurement functions and allowing it to focus on policy reforms. The decentralisation reform will also facilitate speed in procurement by spending units. The Chairperson and Executive Secretary to the Board have been appointed and a Procurement Appeals Authority has also been established.
37. Recognising the role of good governance in the fight against poverty, the Government will increase the human and financial resources available to the Good Governance Coordination Unit (GGCU) to improve the effectiveness of its role in coordinating and implementing the NACSAP. Quarterly dialogue with stakeholders on good governance will be initiated to enhance debate on policy reforms and the quarterly reports on NACSAP implementation by MDAs. To enhance the level of anti-corruption activities at the local government level, funding for anti-corruption action plans for all LGAs is included in the 2004/05 budget to facilitate the implementation of LGAs action plans by 2005/06. The Government is also in the process of preparing a new anti-corruption law. With a view to maintaining the transparency regime, we will continue to publish all exemptions granted to companies, individuals, and NGOs under the Treasury voucher scheme.
F. Monetary Policy
38. Monetary policy objectives for the year 2004/05 will continue to be directed towards maintaining low and stable inflation, to ensure the maintenance of macroeconomic stability. The Bank of Tanzania will maintain the appropriate level of liquidity and will mop up excess liquidity, including the excess liquidity emanating from capital and aid flows. The capacity to forecast bank liquidity on a daily basis, including developing a framework for projecting government operations on a daily basis, will be strengthened with a view to improving overall liquidity management. In this regard the operationalisation of the Tanzania Interbank Settlement System (TISS), on April 8, 2004, which enables all large taxpayers to make payments electronically and directly into the Government accounts at the BoT is expected to substantially improve the forecasting liquidity.
39. The monetary programme for 2004/05 targets reserve money to increase from Tsh 812 billion at the end of June 2004 to Tsh 1,001 billion at the end of June 2005. Accordingly, M3 is projected to grow by 23 percent, while M2 would grow by 24 percent. Growth of credit to the private sector would be 34 percent.
40. Last year, together with the IMF and the World Bank, we undertook an overall review of our financial system in the context of the FSAP. That assessment indicated that Tanzania’s financial system is liquid, well-capitalized, and resilient to shocks. The system has achieved significant improvements in recent years, including the establishment of a competitive financial structure through the entry of a large number of new banks, a reduction in interest rate spreads, a substantial increase in private sector credit, and a reduction in credit to the government as a percent of overall assets of the financial system. Furthermore, these developments are underpinned by favourable indicators of bank soundness including a declining trend in non-performing assets. However, the FSAP concluded that the financial system plays a limited role in the economy and its current depth and efficiency must be improved to help support economic growth.
41. Building on this assessment, we are undertaking a comprehensive reform to remove the main obstacles to lending to private sector, deepen financial intermediation, and help develop the financial system. In March 2004, the Government established an interagency, interministerial financial sector reform committee to oversee the FSAP reform agenda. This committee is chaired by the Governor of the BoT, and includes the Permanent Secretaries for Finance of the Union and Zanzibar governments, Commissioner of Insurance, CEOs of all pension funds, and representatives of commercial banks through the Tanzania Bankers Association (TBA). The committee held its first meeting in May 2004, to establish its terms of reference, and to form technical working groups in the areas of bank supervision, financial markets, micro-finance, policy analysis, insurance, pension funds, and employment and labour. These groups will complete sector action plans by end-2004 at the latest. Implementation of each plan will begin upon completion.
42. Consistent with the FSAP findings, we have initiated efforts to enhance access, reform government-owned financial institutions, undertake legal and judicial reforms, strengthen bank regulation and supervision, promote microfinance, and take other measures consistent with our goals in this area. With a view to further improving the availability of medium-term credit to key sectors of the economy, in particular agriculture, the government is considering options to introduce a development finance guarantee facility for such credit, in partnership with commercial banks, consistent with the objective of enhancing private-sector led financial intermediation. An export credit guarantee scheme established in 2002 has proven effective in boosting credit to export-oriented sectors of the economy, and has not resulted in a weakening of the procedures for the assessment of credit worthiness of the involved commercial banks or in any recourse to government guarantees, thus far. The export credit guarantee scheme is market based and fully funded, but is not yet large enough to be transferred to an autonomous agency outside the BoT, as intended.
43. In establishing a new development finance guarantee facility, government will ensure that it: (i) operates on market principles, is fully funded, and protects public resources (ii) includes transparent regulations and procedures, particularly in the selection process for companies seeking to benefit from the guarantees, and (iii) includes appropriate risk-sharing between the government and commercial banks. With a view to establishing the new facility under best practices, the government has requested the Fund and the World Bank to provide assistance on the modalities of establishing the system as rapidly as possible, and intends to request financial assistance from development partners to provide the initial funding for a self-sustaining facility.
44. The BoT will continue to monitor the restructuring and/or privatisation of state-owned banks, including National Microfinance Bank (NMB), the Peoples Bank of Zanzibar (PBZ), Tanzania Postal Bank (TPB) and Tanzania Investment Bank (TIB). Following the expression of interest in NMB by several commercial banks, groups and associations, a number of potential investors have been pre-qualified. Information memoranda are being prepared and all pre-qualified bidders will soon have access to the data-room. We will issue final bid instructions by December 2004. The preparation for the restructuring of PBZ is at advanced stage, while the initial diagnostic studies for the restructuring of TIB and TPB have been completed.
45. After the amendment of the Land Act in February 2004, the Government will accelerate land surveys and modernize the land registry to enable commercialization of land leases and facilitate their use as collateral for bank loans. Other measures to improve access to credit include the establishment of a credit bureau by the Tanzania Bankers Association. In addition improvements will be introduced to facilitate the speedy and effective enforcement of commercial contracts.
46. To enhance the independence of the Bank of Tanzania and to modernize further the banking system, the Government will review and amend the Bank of Tanzania Act 1995 and the Banking and Financial Institutions Act 1991. It is intended that any amendments to these Acts considered necessary will be submitted to Parliament by February 2005 at the latest. During 2004/05 the BoT will put in place the regulatory and supervisory framework for microfinance institutions, following the amendments of the Banking and Financial Institutions Act, 1991 and the Bank of Tanzania Act 1995 implemented in the past two years. Under the amendments related to microfinance, the BoT is empowered to regulate and supervise the activities of all microfinance institutions, including all savings and credit societies and schemes.
47. The Banking and Financial Institutions Act, 1991 was amended in 2003 to empower Bank of Tanzania to regulate and supervise the activities of all savings and credit societies and schemes whose deposits have surpassed a specified threshold. The law was also amended to facilitate the provision of long-term finance to the productive sector, for example by allowing operation of housing finance companies. To further improve bank regulation and supervision, the BoT will continue to review all prudential regulations and circulars with a view to relaxing unduly constraining regulations and tighten loopholes, a process that is expected to be completed by December 2004. Subsequently new circulars will be issued, consistent with the revised Bank of Tanzania Act. The BoT will review the minimum core capital for non-bank financial institutions and regional banks, will also develop new prudential regulations on areas of cross border supervision and consolidated supervision, and will assist the Government in implementing anti-money laundering measures and combating financing of terrorism. The BoT also intends to work towards the adoption of a risk based supervisory framework to enhance its banking supervisory effectiveness and efficiency, and will improve its banking system information system (BSIS). The Government will continue implementing the recommendations of the Financial Action Task Force (FATF) under the East and Southern African Anti-Money Laundering Group (ESAAMLG) in order to strengthen the measures that combat anti-money laundering and financing of terrorism. During 2004/05 the Government will adopt a regulatory and supervisory framework for microfinance and will strengthen and modernize the supervisory framework for insurance companies.
G. External Sector Issues
48. On the external front, exports are expected to increase moderately to US$1,276.5 million with a continued strong performance in the mining and manufacturing sectors and a modest pick-up of traditional exports. Given the end of the drought and the projected stabilization of oil prices, a lower, albeit still strong, import growth rate is expected to push imports to about US$2,456 million. The resulting moderately higher current account deficit, offset by higher aid inflows, is expected to result in an increase in gross international reserves of US$161.5 million to US$2,113.4 million by the end of next fiscal year. The BoT will continue to allow the exchange rate to be market determined and limit their interventions to liquidity management, and smoothing out excessive fluctuations.
49. Efforts to enhance efficiency and export performance continue to be pursued by the Government through trade liberalization mainly within the framework of the East African Community (EAC) and SADC. In this regard, in March 2004 the Presidents of Kenya, Uganda and Tanzania signed a protocol for the establishment of the EAC customs union. The protocol establishes a common external tariff (CET) and substantially reduces non-tariff barriers between the member states. The member states are committed to reducing the top CET to 20 percent after 5 years. The protocol will come into force after it has been ratified by the Parliaments of the three member states. Moreover, in a move to further eliminate existing non-tariff barriers, the government is committed to phasing out the remaining suspended duties currently imposed on a limited number of imported commodities.
H. Private Sector Development
50. The Government continues in its efforts to foster private sector development. Preparation of the Private Sector Development (PSD) Strategy which mainstreams SME development is under way. Implementation of selected activities under the PSD strategy is expected to commence by November 2004. In line with the approved business license reform proposal, the Government will implement the system by initiating one-year pilot phase of the new business licensing system in Dar es Salaam starting FY 2004/05. The system is expected to limit the time it takes to obtain a license to two days. Following successful implementation of the pilot phase, the system will be rolled out country-wide.
51. Regarding reforms in Labour Law, the Government will put more efforts to operationalise the Law. Under the BEST programme, drafting is currently underway of Phase II of the labour legislation, which includes occupational safety and health, worker’s compensation, and employment promotion. It is expected to be submitted to Parliament by November 2004.
1. The purpose of this Technical Memorandum of Understanding (TMU) is to describe concepts and definitions that are being used in the monitoring of the quantitative performance criteria and benchmarks under the Poverty Reduction and Growth Facility (PRGF)-supported program, as laid out in Table 2 of the government’s letter of intent of July 22, 2004 to which this TMU is attached.
Net international reserves
2. Net international reserves (NIR) of the Bank of Tanzania (BoT) are defined as reserve assets minus reserve liabilities. The BoT’s reserve assets include (i) monetary gold; (ii) holdings of SDRs; (iii) the reserve position at the IMF; (iv) holdings of foreign exchange, including the Tanzanian government’s Poverty Reduction Budget Support (PRBS) and foreign currency deposits at the BoT, and (v) other liquid and marketable assets readily available to the monetary authorities. Reserve assets exclude assets pledged or otherwise encumbered, including but not limited to assets used as collateral or guaranteed for a third-party external liability (assets not readily available). The BoT’s reserve liabilities include (i) all short-term foreign exchange liabilities to nonresidents, and (ii) all liabilities to the IMF. Reserve liabilities exclude medium and long-term foreign liabilities.
Net domestic assets and reserve money
3. Net domestic assets (NDA) of the BoT are defined as the BoT’s reserve money minus its net foreign assets (NFA). Reserve money is defined as the sum of currency issued by the BoT, including the vault cash of commercial banks, and the deposits of the commercial banks with the BoT. Net foreign assets (NFA) of the BoT consist of its NIR and its medium- and long-term foreign liabilities. For purposes of deriving NDA from reserve money and NFA, the latter are converted into Tanzania shillings at the program exchange rate.
Net domestic financing of the government of Tanzania
4. Net domestic financing of the Government of Tanzania (NDF) includes financing of the budget of the central (union) government of Tanzania (“government”) by the banking system (BoT and commercial banks) and the nonbank public. NDF is calculated as the cumulative change since the beginning of the fiscal year in the sum of (i) loans and advances to the government by the BoT (excluding liquidity paper issued by the BoT for monetary policy purposes) minus all government deposits with the BoT; (ii) loans and advances to the government by the commercial banks minus all government deposits held with the banks; and (iii) the outstanding stock of domestic debt to nonbanks excluding: government debt issued for the recapitalization of the NBC and the NMB; debt swaps with COBELMO (Russia) and the government of Bulgaria; mortgage on acquired sisal estates; compensation claims; and debt of parastatal companies assumed by the government. The items constituting NDF are provided in the attached Table 1.
5. Government deposits at the BoT include government deposits as reported in the BoT balance sheet, and foreign currency-denominated government deposits at the BoT, including the PRBS account and the foreign currency deposit account.
6. Government deposits with commercial banks include the new Songas liquidity facility.
External payments arrears
7. External payments arrears consist of the total amount of external debt service obligations (interest and principal) of the government and the BoT that have not been paid at the time they are due, excluding arrears on external debt service obligations pending the conclusion of debt-rescheduling arrangements.
Contracting or guaranteeing of external debt on nonconcessional terms
8. The term “debt” will have the meaning set forth in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000 (Decision No. 12274-(00/85)). Government debt is outstanding debt owed or guaranteed by the Government of Tanzania or the Bank of Tanzania (but does not include debt of any political subdivision or government-owned entity with separate legal personality that is not otherwise owed or guaranteed by the Government of Tanzania).
9. Government debt is considered nonconcessional if the grant element is lower than 35 percent, calculated using discount rates based on Organization for Economic Cooperation and Development (OECD) commercial interest reference rates (CIRR), adjusted as appropriate for different maturities. This performance criterion applies not only to debt as defined in Point 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000 (Decision No. 12274-(00/85)), but also to commitments contracted or guaranteed for which value has not been received.
10. Budgetary arrears are defined as new arrears accumulated during the fiscal year on wages, domestic interest, and goods and services.
Foreign program assistance
11. Foreign program assistance is defined as grants and loans received by the Ministry of Finance through BoT accounts and is calculated as the cumulative sum, since the beginning of the fiscal year, of the receipts from (i) program loans and (ii) program grants.
Net International Reserves
12. The quantitative targets for the BoT’s net international reserves will be adjusted downward by the amount in U.S. dollars of any shortfall in foreign program assistance, relative to projections shown in Table 2 of the government’s letter of intent of July 22, 2004. For purposes of illustration, program adjustor calculations are shown in attached Table 2.
Net Domestic Assets
13. The quantitative limits on the BoT’s net domestic assets will be adjusted upward for any shortfall in foreign program assistance in U.S. dollars, converted into Tanzania shillings at the average quarterly exchange rate (see attached Table 2).
Net Domestic Financing
14. The quantitative limits on net domestic financing of the Government of Tanzania will be adjusted upward for any shortfall in foreign program assistance in U.S. dollars, converted into Tanzania shillings at the average quarterly exchange rate (see attached Table 2).
Data Reporting Requirements
For purposes of monitoring the program, the government of Tanzania will provide the data listed below.
15. Reporting of developments in relation to the program’s benchmarks and performance criteria to be provided monthly:
Table of Quantitative Performance Criteria and Benchmarks (LOI, Table 2).
Table with the Structural Benchmarks and Performance Criteria (LOI, Table 4). The column of this table, labeled “Status,” will be updated on a monthly basis with a view to monitor progress with the structural benchmarks and performance criteria.
16. Other data to be provided monthly, quarterly, or other frequency of compilation:
Table on priority sector expenditure targets and performance.
The flash report on revenues and expenditures.
The external cash flow statement, including details on payments of interest
and principal on government external debt.
The published consumer price index report of the National Bureau of Statistics (NBS).
The annual national accounts statistics in constant and current prices as prepared by the NBS.