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Public Information Notice (PIN) No. 03/03
January 6, 2003
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2002 Article IV Consultation with Tanzania

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2002 Article IV consultation with Tanzania is also available.

On November 18, 2002, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Tanzania. 1

Background

Since the mid-1990s, Tanzania has made substantial progress in macroeconomic stabilization and structural reform. Real GDP growth has been on a rising trend; it has averaged more than 5 percent since the inception of the current Poverty Reduction and Growth Facility (PRGF)-supported program in early 2000, resulting in a small increase in per capita incomes, while inflation has declined to below 5 percent. A key factor contributing to a higher growth momentum in agriculture has been the liberalization of production and marketing structures, as well as of agricultural prices and the foreign exchange regime. Notwithstanding these achievements, poverty remains pervasive in Tanzania, and its growth momentum has been constrained by structural impediments, notably governance-related problems and rigidities in the financial sector and serious capacity constraints. Moreover, weaknesses in tax policy and tax administration limit the government's ability to mobilize revenue, leaving Tanzania highly dependent on foreign assistance.

Real GDP grew by 5.6 percent in 2001. The 12-month rate of nonfood inflation rose from 1.5 percent in December 2001 to 7.2 percent in September 2002, largely as a result of a sharp increase in electricity tariffs in April; however, the overall inflation rate continued to decline to 4.4 percent by September 2002, as favorable developments in agricultural output helped contain increases in food prices.

Fiscal consolidation was central to the success in macroeconomic stabilization. In support of Tanzania's reform program, donors provided sizable financial assistance, which all but eliminated the government's domestic financing needs, a major source of inflationary pressures in the past. Fiscal performance in 2001/02 (July-June) was broadly in line with the budget.

Monetary developments in recent years were characterized by strong monetary expansion, as large foreign inflows were not fully sterilized and the demand for broad money expanded with the gradual deepening of the financial system. Primarily reflecting the lack of suitable lending opportunities, the banking system developed an increasingly large structural liquidity surplus, which triggered an excess demand for treasury bills and, consequently, a decline in interest rates on treasury bills and deposits. So far in 2002, increases in reserve money and broad money have been exceeding projections by wide margins, but as yet have not had much discernible impact on inflation.

Since early 2001, the Tanzania shilling has depreciated against the U.S. dollar by about 15 percent, reflecting the larger-than-anticipated monetary expansion. The ensuing real effective depreciation has now fully compensated for the real appreciation during 2000, leaving agricultural producers to face, as before, the impact of lower international prices for coffee and cotton.

Tanzania's balance of payments position has strengthened substantially in recent years as a result of growth in nontraditional exports and a steady flow of foreign assistance; together with the debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative, these developments have resulted in a large increase in international reserves.

Structural reforms have focused on the reform and privatization of parastatals, as well as the creation of a market-oriented regulatory framework. Since 1992, about two-thirds of all state-owned companies have been privatized, including large enterprises, such as the port container terminal, part of the telecommunications company, and the National Bank of Commerce; meanwhile, the divestiture of strategic enterprises in the utility and transportation sectors is now gaining momentum. The government has taken measures aimed at strengthening economic governance, especially in public expenditure management, and improving the investment climate, with the recently created Investor Round Table serving as an important forum to identify impediments to investment.

Executive Board Assessment

Executive Directors commended the Tanzanian authorities for their steady pursuit of sound macroeconomic and structural policies, which, despite serious capacity constraints and an often adverse external environment, have resulted in high real GDP growth, low inflation, and a comfortable level of international reserves, and which have been supported by a steady flow of highly concessional assistance and debt relief from the international donor community. Directors considered that the main challenge for Tanzania is now to sustain high growth and reduce poverty while gradually lessening the dependence on external aid. In this regard, they noted that good progress has been made in the implementation of the poverty reduction strategy, and believed that with the continuation of sound policies Tanzania will be well on the way to achieving the targets set out in its Poverty Reduction Strategy Paper (PRSP).

Directors attached high priority to medium-term fiscal consolidation, but noted that Tanzania's low revenue yield and concomitant heavy dependence on external assistance hinder the attainment of this objective. They therefore welcomed the recent measures to increase revenue collection, but stressed that further and more concerted efforts to widen the tax base and improve tax and customs administration will be needed. Directors endorsed the decision not to introduce the Export Processing Zone Act until it has been reviewed, given the potential for revenue losses.

Directors commended the impressive progress made in the areas of expenditure reform and transparency. However, they noted that domestic arrears have continued to accumulate, and urged the authorities to move quickly to strengthen expenditure control and to set up the institutional and legal framework needed to give effect to the recently adopted national debt strategy. Directors welcomed the budget's increasing focus on education and health. They believed that the effectiveness of expenditure in these sectors, especially at the local government level, would be enhanced by the planned measures to improve the tracking of poverty-related spending. Directors looked forward to the completion of the civil service reform, which should help attract qualified personnel, halt the departure of well-trained staff, and improve the quality of public service.

Directors emphasized the need to keep monetary developments under control in order to contain inflation and to restore positive real interest rates. They therefore supported the decision to convert the government's non-marketable debt to the central bank into securities. Directors considered that the flexible exchange rate regime has served Tanzania well, by facilitating timely adjustments to changes in Tanzania's external environment. Nevertheless, they believed that Tanzania's competitiveness needed to be strengthened by structural reforms to improve the investment climate and strengthen the productive sectors.

Directors considered privatization to be vitally important to the development of the private sector and to the achievement of the authorities' economic growth objectives. They applauded the government's accomplishments to date in this area, and encouraged the authorities to push ahead with the privatization of the large enterprises, especially those in the utility and transportation sectors. Directors also stressed the importance of improving the business environment and removing impediments to private investment, particularly through institution-building, and labor market, administrative, and judicial reform. They looked forward to follow-up action on the policy matrix of short-term actions that had emerged from the recent Investors' Roundtable Conference.

Directors regarded financial deepening as another crucial input into the expansion of the private sector in Tanzania, with microfinance development considered to be especially important. They noted the existence of structural impediments to bank lending and persistent large interest rate spreads, and called for an accelerated effort to remove these impediments, including an amendment of the Land Act to unblock the use of land as collateral for bank loans. Directors welcomed the authorities' request for an Financial Sector Assessment Program (FSAP) review.

Directors noted the strong country ownership that has allowed the PRSP to become the main instrument for coordinating domestic poverty reduction programs between the authorities and the international community. Directors also recommended that the linkage between the PRSP and the budget be strengthened to ensure that the poor benefit more fully from the resources freed from the HIPC Initiative. They looked forward to receiving the second annual progress report on PRSP implementation, and the joint staff's assessment of it.

Directors noted with satisfaction that Tanzania's public and publicly-guaranteed external debt burden remains sustainable after the HIPC Initiative completion point. They urged a cautious external debt management strategy, with tightened approval procedures for foreign borrowing. However, Directors expressed concern that some non-Paris Club and commercial creditors have failed to provide debt relief on terms comparable to those provided by the Paris Club. They commended the authorities for establishing a special account earmarked for honoring debt-service payments to these creditors, and supported the authorities' request for Fund assistance in encouraging the participation of these creditors in the HIPC Initiative.

Directors looked forward to the publication of the second progress report on implementation of a national anticorruption strategy. They urged the authorities to vigorously enforce laws and regulations aimed at promoting good governance.

Directors observed that, notwithstanding considerable technical advice in the statistical area and generally good implementation of such advice, Tanzania's database remains weak because of capacity constraints. They recommended that priority be given to removing key data weaknesses in the areas of the national accounts, the balance of payments, and the consumer price index.


Tanzania: Selected Economic Indicators, 2000-2001


 

2000

2001


 

(Annual percentage change)

Domestic economy

   

Real GDP

4.9

5.6

Consumer prices (end of period)

5.5

4.9

 

(In millions of U.S. dollars) 1/

External economy

   

Exports, f.o.b.

663.3

776.4

Imports, f.o.b.

1,337.2

1,492.1

Current account (excluding official transfers)

-856.4

-873.1

(in percent of GDP)

-9.4

-9.3

External assistance 2/

1,185.3

938.3

Public debt service paid

194.1

103.4

(in percent of exports of goods and nonfactor services)

14.6

7.1

Gross official reserves

974.4

1,156.6

(in months of imports of goods and nonfactor services)

5.1

6.1

Change in real effective exchange rate (in percent) 3/

12.4

-7.5

 

(In percent of GDP) 1/

Financial variables

   

Central government balance (including grants) 4/

-1.6

-1.1

Change in broad money (in percent)

14.8

17.1

Change in credit to the nongovernment sector (in percent)

9.4

18.8

Interest rate (in percent) 5/

5.7

3.9


Sources: Tanzanian authorities; and IMF staff estimates.

1/ Unless otherwise noted.

2/ Multilateral and bilateral grants and loans (including IMF disbursements).

3/ (+) = appreciation.

4/ Fiscal years beginning in July of year shown.

5/ Weighted average of 3-, 6-, and 12-month treasury bill rate; end of period.


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.



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