IMF Executive Board Concludes 2009 Article IV Consultation with The United Republic of TanzaniaPublic Information Notice (PIN) No. 09/72
June 2, 2009
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 May 29, 2009 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Tanzania.1
Tanzania sustained high rates of broad-based economic growth with generally low inflation over the past decade. Real GDP growth averaged about 7 percent a year during 2000–08, with substantial contributions from the mining, manufacturing, construction, and services sectors. Inflation was kept solidly in check for much of this period, but accelerated in 2008 (13.5 percent at end-year), driven mainly by lagged effects of the spike in international food and fuel prices and adverse regional food supply shocks. In contrast, nonfood inflation remained modest (5.8 percent). Sound macroeconomic policies and structural reforms, together with a favorable global environment and debt relief, provided the foundation for this successful outcome.
Despite the strong macroeconomic performance, progress on poverty reduction was mixed. There were substantial improvements in education and health outcomes, a significant increase in household assets, and improved residences. Nonetheless, the incidence of income poverty has declined only modestly.
The current global financial crisis and recession have begun to have a significant impact on Tanzania in 2009. Weakened demand for exports of goods and services—notably traditional cash crops and tourism—and a contraction of foreign investment are hitting key sectors of the economy. Real GDP growth is expected to drop to 4-5 percent this year, and downside risks remain. Moreover, Tanzania’s recovery from this economic slowdown is likely to be gradual, as demand for its exports and foreign investment are expected to lag behind a global recovery.
The economic slowdown has weakened government revenue performance. After five years of robust growth, revenues have stagnated (relative to GDP) and are falling well short of the budget target in the current fiscal year (July–June). To maintain expenditures as budgeted, the overall fiscal deficit (before grants) is expected to widen to 10½ percent of GDP in 2009/10, providing some fiscal stimulus to the economy. The economic slowdown is also expected to affect the financial system. While banks are currently well-capitalized and non-performing loans have remained at a low level, credit risk is likely to increase. The balance of payments is also under pressure, as the positive effects from the decline in international oil prices and strong gold prices have been more than offset by lower receipts from falling exports of other goods and services and reduced capital inflows.
Executive Board Assessment
Executive Directors commended the Tanzanian authorities for a good track record of sound macroeconomic policies and structural reforms. This strong performance has helped to sustain high rates of economic growth with generally low inflation for several years, as well as create sufficient fiscal space to allow for policy actions to help counter the impact of the current global economic crisis. A broadening in the domestic revenue base, together with substantial donor assistance, allowed for a strong increase in government spending over the past decade, particularly on programs to reduce poverty. Directors were concerned, however, that despite some important gains, progress in poverty reduction has been mixed.
Directors noted that the global financial crisis is having a serious impact on Tanzania. Real GDP growth is expected to fall significantly in 2009, as key sectors of the economy, including exported cash crops and tourism, face a severe downturn. Cutbacks in foreign direct investment and other financing will also weaken aggregate demand. Directors agreed that the authorities’ expansionary fiscal and monetary policies in the current situation are appropriate to cushion the effects of the crisis on Tanzania. At the same time, they emphasized that short-term policies must not jeopardize Tanzania’s hard-won economic stability. Fiscal stimulus should remain consistent with long-term fiscal and debt sustainability, monetary easing should not put at risk medium-term price stability, and international reserve losses should be contained, consistent with external stability. In this context, Directors encouraged the authorities to make progress in strengthening their medium-term fiscal policy framework.
Directors observed that the banking sector is sound but vulnerabilities remain in some areas. Banks are well capitalized and non-performing loans remain at a low level. Nonetheless, the economic slowdown will raise banks’ credit risks, notably through their exposure to export crop financing and personal loans, which have been growing rapidly in recent years. Welcomed steps have already been taken to raise supervisory standards, but more can be done to broaden monitoring to all financial institutions, and reinforce cross-border coordination between host country and home country supervisors. Directors stressed the crucial importance of having an effective system in place for financial supervision of the rapidly growing pension funds, and encouraged the authorities to accelerate progress in this area.
Executive Directors stressed the importance of raising Tanzania’s medium-term growth potential, underpinned by continued implementation of structural reforms. They welcomed the ongoing preparations for the update of the national poverty reduction strategy (MKUKUTA), and agreed with the authorities’ key priorities to raise agricultural productivity and improve Tanzania’s ailing infrastructure. This will require further improvements in the revenue base as well as significant financing, including from the public sector. Concessional financing remains the preferred funding source, consistent with medium-term debt sustainability.
Directors emphasized that strong public financial management is critical to ensuring that public spending is as effective as possible and to avoiding the re-accumulation of unsustainable public debt. Important steps have already been taken, for example to strengthen budgeting and public procurement practices, but further scope remains to raise value for money.