IMF Executive Board Completes Fifth Review Under Tanzania's PRGF Arrangement and Approves US$4.1 Million Disbursement

Press Release No. 06/71
April 7, 2006

The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Tanzania's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 03/127.) The completion of the review enables a further release of an amount equivalent to SDR 2.8 million (about US$4.1 million) under the arrangement, and will bring the total disbursements under the program to the equivalent of SDR 16.8 million (about US$24.4 million.)

Following the Executive Board's discussion on Tanzania's economic performance, Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, stated:

"The Tanzanian authorities deserve credit for sustaining strong economic performance through market-oriented policies within an appropriate macroeconomic framework. Despite recent successes, Tanzania will need to maintain sound policies and steadily pursue key structural reforms and capacity building for many years to remove key impediments to broad-based growth and achieve lasting inroads against poverty. Sustained reform efforts will be needed to stimulate private-sector led growth, particularly in such areas as infrastructure, energy, governance, and the business environment.

"The authorities' strong efforts to maintain prudent economic policies are commendable, particularly in light of the challenges posed by the impact of the drought on agricultural output and energy production. In this context, it will be critical to resolve the energy supply issues without unduly burdening public finances, while, at the same time, developing a sound financial recovery plan to address the finances of TANESCO and a Power Sector Strategy to address power generation over the medium term.

"In response to the drought, a more accommodative policy stance is warranted, including a higher net domestic financing of the budget and a modest upward adjustment in money growth, to avoid crowding out private sector credit to productive sectors. Nevertheless, the authorities will closely monitor prices for signs of emerging inflationary pressures and the Bank of Tanzania will continue to use its full range of tools, including heavier reliance on foreign exchange sales and better management of government deposits in commercial banks, to help better distribute the impact of sterilization efforts on interest and exchange rates.

"The authorities' ongoing efforts to mobilize further domestic resources are critical to provide resources for key development programs and to reduce the dependence on foreign aid. In this regard, it will be important to deepen the tax and customs administration reform efforts to help support government policy objectives. The extent of tax incentives for Special Economic Zones and the potential for revenue loss are worrisome and addressing structural impediments to private sector growth would be a more effective and less costly way of attracting private sector investment. The effectiveness of government spending will be enhanced by better linking the goals of MKUKUTA, Tanzania's new five-year PRSP, to the budget process and the Medium-Term Expenditure Framework.

"The Fund commends the authorities' decision to ensure that the MDRI relief from the Fund is channeled to addressing pressing social and growth-critical economic challenges, especially those emanating from the drought, and without affecting domestic liquidity. In this regard, it will be important to ensure that the use of these resources is subject to all regular procurement and financial management rules and is incorporated in the budget, beginning in 2006/07.

"The authorities' interest in a successor program in the context of a PSI is a logical development in light of Tanzania's position as a mature stabilizer," Mr. Carstens said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.



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