Press Release No. 96/55

The International Monetary Fund (IMF) today approved a three-year credit for Tanzania under the enhanced structural adjustment facility (ESAF) ¹, equivalent to SDR 161.6 million (about US$234 million), to support the government's economic reform program for 1996-99. The first annual loan, equivalent to SDR 51.4 million (about US$74 million), will be disbursed in two equal semiannual installments, the first of which will be available on November 27, 1996.

Background

After an extended period of macroeconomic instability, Tanzania has made substantial progress with structural reforms in recent years. The external trade and payment system, monetary management, agricultural marketing arrangements, and, more recently, the parastatal sector have been extensively liberalized. Parastatal reform, through the imposition of a hard budget constraint on public enterprises, and the privatization of about one-third of the 382 public enterprises, is beginning to generate important improvements in economic efficiency. However, for the three years up to the beginning of 1996, macroeconomic conditions deteriorated, largely because of deficiencies in budgetary management, poor tax administration, weaknesses in expenditure controls, and shortcomings in the management of the financial sector. Against this background, and taking the opportunity afforded by the installation of the new government, a Fund staff-monitored program for January-June 1996 was put in place. The program focused principally on eliminating the main impediments to sound budgetary management, and on reforming the financial sector. Performance was broadly satisfactory, although progress with restructuring the financial sector was slower than envisaged.

Medium-Term Strategy for FY1996/97 - FY1998/99 and the Program for FY1996/97

The government's medium-term strategy aims at accelerating the growth of economic activity to achieve higher per capita incomes and reduce poverty. The overall macroeconomic objectives to be achieved by the end of the three-year program period, FY1998/99, are: (a) a real GDP growth rate of 6 percent; (b) an average rate of inflation of 5 percent; and (c) an external current account deficit, excluding grants, of 13.3 percent of GDP, compared with 20.6 percent of GDP in 1994/95, while increasing gross official reserves to the equivalent of three months of imports by end-June 1999.

Within this medium-term strategy, the program for FY1996/97, supported by the first annual ESAF loan, aims at accelerating real GDP growth to 5 percent; lowering the average inflation rate to 15 percent; and reducing the external current account deficit, excluding grants, to about 15 percent of GDP, while increasing gross international reserves to the equivalent of almost 10 weeks of imports.

To achieve these objectives, fiscal policy will seek to improve the government's savings performance so as to reduce budgetary dependence on foreign financing. The government's revenue performance will be strengthened by eliminating important sources of revenue loss; rationalizing the numbers and type of bonded warehouses; intensifying efforts to collect tax arrears; and broadening the tax base into sectors which at present contribute little to government revenue. Also, to sharply curtail tax evasion, import taxes between Zanzibar and mainland Tanzania are to be harmonized by end-December 1996. At the same time, the budgetary process will be strengthened, to ensure that adequate funding is available for priority areas, namely health, education, and water supply. Monetary policy will aim at reducing monetary growth, while ensuring that sufficient bank credit is available to the private sector.

Structural Reforms

Building on the progress already made, the privatization program will be expanded by accelerating the disposal of assets managed by the Parastatal Sector Reform Commission. A hard budget constraint for the parastatals will continue to be implemented. The restructuring and privatization of the public utilities will be accorded the highest priority. Imports of refined petroleum imports will be liberalized by January 1997, and petroleum prices completely freed by June 1998.

Addressing Social Issues

Under the program, the government's expenditure priorities are being reordered. Spending on primary and secondary education will be increased, and healthcare spending will focus on cost-effective community efforts and on preventive measures. The government will give high priority to the provision of water and sanitation services to both the rural and urban populations.

The Challenge Ahead

Tanzania's debt burden is expected to decline substantially and reach a manageable level within the next five years. However, the outlook remains highly vulnerable to developments in the terms of trade and other exogenous shocks. In these circumstances, the authorities will need to firmly implement their adjustment policies, and to stand ready to adopt additional measures if the need arises. They need to be especially prudent in their debt management strategy, relying on grants and highly concessional loans to finance carefully selected and effectively implemented investment projects.

Tanzania joined the IMF on September 10, 1962. Its quota ² is SDR 146.9 million (about US$213 million). Its outstanding use of IMF credit currently totals SDR 121 million (about US$175 million).

Tanzania: Selected Economic Indicators 1994/95 1995/96 1996/97* 1997/98* 1998/99* (Percent change) Real GDP 3.8 4.5 5.0 6.0 6.0 Consumer prices (average) 34.0 25.7 15.0 7.5 5.0 (Percent of GDP) Overall government budget balance, excluding grants (deficit-) -6.9 -4.9 -2.4 -2.0 -1.3 External current account balance, excluding grants (deficit-) -20.6 -16.3 -15.1 -14.2 -13.3 Sources: Tanzanian authorities; and IMF staff estimates and projections. *Program projections. 1 ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and to improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent per annum, and are repayable over 10 years, with a 5 -year grace period. 2 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.