IMF Executive Board Concludes 2007 Article IV Consultation with the United Republic of Tanzania

Public Information Notice (PIN) No. 07/79
July 16, 2007

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 27, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the United Republic of Tanzania.1

Background

Tanzania's economic performance has been strong over the past decade, supported by prudent macroeconomic policies and far reaching structural reforms. In particular, sound financing of government operations—including substantial assistance from international donors—facilitated a monetary policy stance that reduced inflation while allowing for a rapid expansion of credit to the private sector for productive purposes.

The structural reform agenda has focused on economic liberalization, improved public financial management and tax and customs administration, and financial sector development. Together with infrastructure investment and structural policies to enhance the business environment, this has contributed to solid productivity growth. The growing economy, together with increasing government revenues and donor assistance, has enabled government spending to expand at a swift pace, most notably on pro-poor initiatives outlined in MKUKUTA (Tanzania's second generation growth and poverty reduction strategy). Nevertheless, with a GDP per capita of less than US$340 and widespread poverty, Tanzania still has a long way to go to reach its Millennium Development Goals (MDGs), and will therefore require continued donor financing for many years to come, particularly, in the areas of education, health, and infrastructure.

Since 2000, real GDP growth has averaged 6.3 percent per annum, one of the highest in sub-Saharan Africa. Growth has been broad-based, led by the mining, construction, retail/trade and manufacturing sectors. Agricultural growth has been affected however by recurrent droughts. The most recent of these, in 2005-06, also coincided with poor hydrology to markedly reduce Tanzania's hydropower-generating capacity, forcing many businesses and consumers to rely on high-cost thermal generators. With world fuel prices trebling over the same period, the high cost of electricity squeezed business profits, and placed upward pressure on the import bill and inflation. Thus, real GDP growth slowed down to 6.2 percent in 2006—0.5 percentage points slower than in the previous two years—while inflation accelerated slightly to 6.7 percent. Going forward, strong rains and full recovery in hydropower production are expected to help boost growth and dampen inflation.

Exceptional improvements in tax and customs administration and public expenditure management have both reinforced development partner confidence in the authorities' commitment to reform, and increased the effectiveness of government expenditures. Since 1999/2000, government revenues and donor support have, respectively, risen by 4½ and 6½ percentage points of GDP, allowing government spending to grow by some 10 percentage points of GDP, to slightly over 28 percent of GDP in 2006/07. Moreover, the increased spending has focused on MKUKUTA priorities, with allocations rising to 13.6 percent of GDP for 2006/07, up from 12.8 percent the previous year.

Monetary aggregates have grown at a robust but prudent pace since 2000, reflecting rapid financing deepening, albeit starting from a very low base. Bank lending to productive nongovernment sectors has expanded sharply—at an average rate of 32 percent per annum—while the spread between lending and deposit rates has continued to narrow, indicating more efficient intermediation by banks.

The sharp increase in private sector lending coupled with higher issuance of treasury bills—mainly, for liquidity absorption purposes—have put upward pressure on government securities yields, with rates peaking at 18 percent in March 2007. The rates have also become increasingly volatile since 2005, reflecting a combination of challenges in liquidity forecasting and smooth implementation of reserve money targets. Going forward, pressure on nominal yields should subside with reduced reliance on domestic sterilization of aid inflows, near zero net domestic financing of the budget, improved liquidity forecasting system, and more even implementation of monetary policy.

The recent widening of the trade deficit reflects the rise in capital-goods and energy-related imports over the last two years. The exchange rate, which had depreciated in line with the terms of trade deterioration, has stabilized of late due to higher foreign exchange sales by the central bank and a reduction in the need for energy-related imports. The external position has also benefited from debt relief provided under the Heavily Indebted Poor Countries Initiative (HIPC) and Multilateral Debt Relief Initiative, as well as additional bilateral relief. Tanzania's external debt burden, in net present value terms, was reduced to about 16 percent of GDP at end-2006.

In light of its status as a mature stabilizer with comfortable international reserves, Tanzania has entered a new phase in its long-term relationship with the Fund. On February 16, 2007 Executive Directors approved a three-year program under the Policy Support Instrument (PSI). The government views the PSI as essential to reinforce appropriate macroeconomic and structural policies, and signal the strength of government policies to development partners.

Executive Board Assessment

Executive Directors commended Tanzania's strong overall economic performance in recent years, which has been grounded on a sound macroeconomic policy framework, progress on structural reforms, and substantial donor assistance. However, Directors noted that major challenges remain, including the high and pervasive poverty, significant capacity constraints in the public sector, and insufficient infrastructure and human capital. They emphasized the need to maintain prudent market-oriented policies and steadfastly pursue structural reforms, particularly in the agricultural sector, as the basis for attracting additional donor inflows and achieving the Millennium Development Goals.

Directors agreed that fiscal policy remains appropriately focused on minimizing domestic borrowing while raising spending on poverty reducing activities. They commended the strong revenue performance in recent years, observing that revenue growth is essential to reducing dependence on donor financing, and welcomed plans to further strengthen tax and customs administration. They also encouraged the authorities to press forward with reforms to improve public financial management to ensure that public resources are allocated efficiently and in line with the priorities of the poverty reduction strategy. Directors considered Tanzania to be a good candidate for a significant increase in donor support, but noted the importance of further work to assess the macroeconomic effects of aid.

Directors commended the authorities' prudent monetary policy stance that has kept inflation comparatively low. They noted the challenge of properly managing bank liquidity in the context of substantial donor inflows and under-developed financial markets. They supported increased reliance on foreign exchange sales to contain liquidity, noting that this will help to ease pressure on treasury bill yields. However, they stressed that appropriate balance will need to be struck in the use of liquidity management instruments. Directors also supported the authorities' other efforts to improve liquidity management to reduce the level and volatility of treasury bill yields, including domestic bond market development, better liquidity forecasting through improved coordination between monetary and fiscal policy, daily targeting of average reserve money, and transfer of government deposits from commercial banks to the central bank.

Directors considered the real exchange rate to be broadly in line with fundamentals. They were of the view that the flexible exchange rate policy has helped to preserve Tanzania's international competitiveness in the face of several adverse shocks. Nevertheless, they underlined the need to remove structural impediments to competitiveness. Directors encouraged the authorities to continue to avoid non-concessional borrowing in order to preserve external debt sustainability.

Directors noted that ongoing financial sector reforms have contributed to a rapid expansion of financial intermediation, although small- and medium-sized enterprises and the rural sector have not benefited much. They welcomed the second-generation Financial Sector Reform Action Plan, which is intended to address this gap. Directors, however, stressed the importance of minimizing contingent liabilities in connection with the partial guarantee of commercial lending to small- and medium-sized enterprises.

Directors emphasized the importance of the authorities' commitment to improving governance and transparency. They welcomed efforts to address the allegations of improprieties in the management of the external payment arrears account at the Bank of Tanzania, and looked forward to timely completion of the special audit of this account. They recommended that another safeguards assessment of the Bank of Tanzania be undertaken to complement the audit. Directors encouraged the rapid implementation of the recently approved Anti Money Laundering Act, and welcomed the adoption of the National Anti-Corruption Strategy Action Plan and the approval of the Anti-Corruption Act.

Directors welcomed the authorities' plans to remove key bottlenecks to economic activity in Tanzania, particularly those to upgrade the energy and transport infrastructure and to further modernize and simplify the legal framework governing business activity. They encouraged vigorous implementation of the financial recovery program for the energy parastatal to ensure its commercial viability and reduce the potential drain on the budget.

Directors considered that Tanzania has much to gain from deeper regional cooperation and integration. They supported a coordinated approach to providing regional investment incentives, full implementation of the East African Community's Customs Union Protocol, and further trade liberalization to deepen the regional integration process.


Tanzania: Selected Economic Indicators, 2004/05 - 2006/07 1/

2004/05 2005/06 2006/07

 

 

Proj.

(Annual percentage change)

Domestic economy 2/

  • Real GDP

6.7 6.7 6.2
  • Consumer prices (end of period)

4.1 5.0 6.7
(In millions of U.S. dollars) 3/

External economy

  • Exports, f.o.b.

1,594 1,736 1,830
  • Imports, f.o.b.

2,728 3,436 4,081
  • Current account (excluding official transfers)

-1,144 -1,608 -2,051
  • (in percent of GDP)

-9.4 -13.3 -15.4
  • External assistance 4/

1,409 1,354 1,515
  • Public external debt service paid

124 68 32
  • (in percent of exports of goods and nonfactor services)

4.6 2.3 1.0
  • Gross official reserves

1,969 1,995 2,045
  • (in months of imports of goods and nonfactor services)

5.9 4.4 4.0
  • Change in real effective exchange rate

  • (in percent) 5/

-0.6 -7.6 --
(In percent of GDP)

Public finance

  • Domestic revenues

13.3 14.1 15.7
  • Central government balance

  • (including grants)

-3.5 -6.1 -4.5
  • Net domestic financing

1.1 2.3 0.2
  • Public external debt 2/

69.2 64.4 35.5
(In percent)

Monetary and financial variables

  • Change in broad money

25.5 31.6 21.0
  • Change in credit to nongovernment

  • sector

26.2 35.9 35.1
  • Treasury bill rate 6/

10.4 9.3 16.0
  • Spread (lending vs. deposit rates) 2/

10.4 9.7 9.2

Sources: Tanzanian authorities, and IMF staff estimates

1/ Fiscal years run from July to June.

2/Data are on calendar year basis; 2004/05 data are for calendar year 2004.

3/ Unless otherwise indicated.

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

5/ (+) = appreciation

6/ Monthly weighted average of 35-, 91-, 182- and 364-day treasury bills. March 2007 figure is used for 2006/07.


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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