Press Release No. 97/54

The International Monetary Fund (IMF) approved the second annual loan under the Enhanced Structural Adjustment Facility (ESAF)¹, in an amount equivalent to SDR 71.4 million (about US$97 million), to support Tanzania’s economic program for 1997/98. The initial amount of SDR 51.41 million (about US$69.8 million) has been increased by SDR 20 million (about US$27.17 million) to assist Tanzania in dealing with the effects of drought. The loan is available in two equal semiannual installments, the first of which can be drawn on December 19, 1997. The three-year ESAF credit, equivalent to SDR 161.6 million (about US$220 million) was approved on November 8, 1996 (see 96/55).

Background

In the mid-1980s, the government of Tanzania began to move away from its previous emphasis on administrative control of economic activity. Over the next decade, the liberalization of external trade and payments, domestic prices, and of agricultural marketing was substantially achieved. In the early 1990s, liberalization of the financial sector began, as did civil service reform and, to a limited degree, privatization; but large segments of the economy continued to be dominated by public sector monopolies. After some decline in inflation from the 30 percent or higher rates that prevailed throughout the 1980s, inflation returned to that level in 1993/94 and remained above 20 percent in 1995/96, reflecting persistent weaknesses in budgetary management and the impediments to monetary policy posed by the insolvent condition of large state-owned banks and the losses of other parastatals. After the government undertook renewed adjustment efforts toward the end of 1995, inflation has been sharply reduced, budgetary savings have become significantly positive, and international reserves have risen sharply. Moreover, there has been progress with structural reforms; most notably, the largest state-owned bank was split into two subsidiaries as a prelude to privatization. The private sector appears to be growing rapidly, albeit from a small base.

The Program for 1997/98

The key macroeconomic objectives of the 1997/98 program that the ESAF loan supports are to (1) achieve a real GDP growth rate of 4.7 percent; (2) reduce the inflation rate to no more than 13 percent; and (3) limit the external current account deficit, excluding official transfers, to 14.4 percent of GDP. To achieve these objectives, fiscal policy targets a surplus on the current government budget of 1.1 percent of GDP, reflecting the rationalization of the structure of both revenues and expenditures. Preparations are underway for the introduction of a value-added tax in July 1998. Monetary policy under the program will be consistent with achieving the program’s inflation and balance of payments objectives.

Structural Reforms

The government is continuing with reforms of the banking and the parastatal sectors, and with civil service reform. The scope of privatization has been widened to include the utilities and other core parastatals, and its pace is being accelerated.

Addressing Social Needs

Key steps being taken to strengthen the delivery of health and education services are devolution to local authorities to enhance community involvement, and a shift in resources to meet basic requirements, such as primary education and preventive health services. In addition, a National Poverty Eradication Strategy is also being drawn up.

The Challenge Ahead

While Tanzania’s adjustment under the first annual arrangement was impressive, continuing progress will require determination on the part of the authorities, considering: (i) the uncertainty about both the effects of the drought and the prospects for rapid recovery from it; (ii) the need for continued strong and sustained fiscal performance; and (iii) the fact that Tanzania has a large internal debt burden and is heavily dependent on foreign aid.

Tanzania joined the IMF on September 10, 1962, and its quota² is SDR 146.9 million (about US$200 million). Its outstanding use of IMF financing currently totals SDR 150 million (about US$204 million).

Tanzania: Selected Economic Indicators 1994/95 1995/96 1996/97 1997/98* 1998/99* (Percent change) Real GDP 2.6 4.1 3.9 4.7 5.7 Consumer prices (annual average) 34.0 25.7 17.1 13.0 7.8 (Percent of GDP) Overall fiscal balance (deficit -) -3.9 -2.2 2.3 0.5 0.2 External current account balance, excluding official transfers (deficit -) -24.4 -16.0 -12.4 -14.4 -12.1 (Months of imports) Gross official reserves 1.6 1.4 2.6 2.9 3.7 Sources: Tanzanian authorities; and IMF staff estimates and projections. * Projections. 1The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with 5½-year grace period. 2A 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.