1. My Tanzanian authorities’ perseverance with prudent macroeconomic policies and deepened structural reforms enabled the economy to recover swiftly from the global economic crises. They remain determined to persevere with this macroeconomic framework as they face new global challenges of a second spike in commodity prices, and repetitive drought conditions. They are confident that with continued support of the Fund and the international community, they stand a good chance of mitigating the effects of the commodity price surge and the fallout from the sovereign debt risks in advanced economies. They, in that regard, stand ready to take appropriate measures to protect the country’s macroeconomic stability.
2. My authorities appreciate the Fund’s constructive engagement and support under the PSI and the related technical assistance packages. Going forward, they are determined to further strengthen their macroeconomic framework, and achieve key national and regional objectives set out in their PRSP—Mkukuta II—and East African single market protocols that are supported by the PSI.
3. To that end, and in view of the strong performance under the program—with all end-December 2010 quantitative performance/assessment criteria observed with good margins, and implementation of structural reforms on track—they request Directors’ support for the completion of the second review of the PSI. They also request Director’s support for the modification of the end-June 2011 assessment criterion on international reserves, and rephasing of structural benchmarks.
Recent economic developments and respective policy environment
4. Tanzania’s strengthened economic fundamentals—policy-wise and the broadened economic base—helped the country weather the storm of the global economic downturn and return swiftly to a growth path. Real GDP growth that had declined from 7.4 percent in 2008 to 6.0 percent in 2009 as a result of the deterioration in the external environment, did recover to 7.0 percent in 2010. However, real GDP growth for 2011 is projected to decline to 6 percent, largely as a result of weather-induced power shortages and another round of deterioration of external environment—especially the effects of the surge in global energy and food prices and the decline in the inflow of development aid. The economy should, however, recover promptly once the government’s investments in additional power generation kicks in later this year, weather conditions normalize, external shocks subside, and donor funding increase to pre-crisis levels.
5. The trade account of the balance of payments in 2010/11 recorded an improvement following higher growth in exports—in particular gold and tourist receipts—which offset the impact of the fuel-related increase in the import bill. Overall, exports—both traditional and non-traditional—expanded at a particularly rapid pace, with manufacturing exports nearly doubling through the year. Official gross reserves by end-June 2011are estimated to increase to USD 3,816.2 million, sufficient to cover to about 4.7 months of import of goods and services. However, the recent assessment by the International Energy Agency that the current high oil prices may remain for a longer period due to surging demand and limited new supply could have a significant impact on the country’s import bill and its official reserves.
6. My authorities’ fiscal policy in the first half of the fiscal year remained within the PSI targets, mainly due to a proactive management of spending and improved revenue performance. The cash-budgeting system helped contain monthly expenditure within available resources and meet the domestic financing target. On the revenue front, data as of end-February indicates some improvement in domestic revenue collection and the full year performance is projected to exceed the outturn during the first half of the year. Nevertheless, the authorities concur with staff’s assessment that growing downside risks emanating from the impact of the protracted power shortages on corporate activity and profits may affect the level of revenue collections in the near term. Notwithstanding the difficulties entailed in modifying the fiscal regime of the mining sector for existing agreements, the authorities remain focused on broadening the tax base, and strengthening customs and tax administration. They view the recent Fund TA recommendations on tax policy and public finance management as fundamental inputs into their reform effort, and they look forward to further engagement with the Fund in this area with the view of raising the revenue yield.
7. The thrust of government spending remained in line with the overall macroeconomic framework—maintaining the level of spending on the key MDG clusters and infrastructure. The authorities’ modest fiscal stimulus—totaling about 2 percent of GDP and targeted at protecting employment and incomes, ensuring food security, and protecting investment in infrastructure and key social sectors—has a built-in sunset clause at the end of 2010/2011. In that regard, and in view of the projected shortfalls in general budget support by the country’s development partners, the authorities agree with staff over the need for streamlining of spending while protecting priority services and investments.
8. The government has made progress in raising funds from external non-concessional borrowing. Negotiations are in progress with various banks and institutions. The authorities are confident that they will make use of the entire non-concessional borrowing window for this financial year to finance key infrastructure projects.
9. My authorities’ monetary policy continued to support the overall macroeconomic framework with a low interest rate environment. Reemergence of inflationary pressures— mainly due to increases in the prices of food items and energy reflecting global trends—has raised new concerns. The Bank of Tanzania (BoT), in addition to strengthening the operation of its policy instruments for sterilization of liquidity and broadening of its monetary policy transparency, has adopted a tightened monetary policy stance to forestall the second round effects of the commodity price surge. They reaffirm that their flexible exchange rate policy has served the country very well also in supporting the diversification of exports.
10. The banking system has weathered the global crisis well, with continued strong capital base, but the authorities are mindful of the recent upturn in the level of non-performing loans (NPLs) and, in that regard, continue to monitor these aggregates carefully. The authorities are aware that a key challenge facing Tanzania’s financial sector today is to ensure that the pension funds are strong, and managed professionally, in the interests of the existing and prospective pensioners. In that regard, they have attached high priority to strengthening the operations of the new regulator, the National Social Security Regulatory Authority, with, inter alia, finalization of the investment guidelines for the social security funds.
Medium-term policy framework
11. My authorities will continue to actively use their fiscal policy to spur economic growth to its trajectory and to address the effects of repetitive internal and external shocks. To achieve these objectives, measures including sustaining budgetary spending levels for the priority services, modest scaling-up of investment in infrastructure and primary sectors to shore-up economic growth, and deepening structural reforms to improve the business environment will continue to be prioritized.
12. To maintain spending in these priority areas while embarking on a fiscal consolidation path, the authorities will continue to strengthen domestic and concessional resource mobilization in the medium term. Cognizant of the overall resource limitations, they intend to facilitate greater inflows of FDI and participation of the private sector through PPPs, and fully utilize the current three-year non-concessional financing window—about $1.5bn. They will especially remain vigilant of the contingent liabilities arising from greater use of FDI and PPPs, and debt sustainability implications of non-concessional funding. To that end, they are building capacities in these areas, and are grateful for the recent tripartite discussions with the Fund, the World Bank and the African Development Bank. Going forward, they will further explore the non-concessional lending facilities at the latter two institutions.
13. On the expenditure side, the authorities will pursue expenditure streamlining in line with the program. Going forward, they will seek to discuss with staff the various options and related implementation modalities during the subsequent staff missions. Additionally, they will take steps to strengthen budget execution, and improve the alignment between policy objectives and the budget through prioritization of public investment in line with their Medium-term Public Investment Plan (MPIP) and the forthcoming Medium-term Economic Development Plan.
Monetary and exchange rate policies
14. My authorities’ monetary policy will continue supporting their macroeconomic framework through maintaining sufficient liquidity in the financial system, and low and stable inflation. They will remain vigilant of the inflation pressures arising from the resurgence of global commodity prices and domestic supply shocks. To achieve the objective of anchoring its monetary policy on low and stable inflation, the BoT will continue to bolster its open market operations, maintain a flexible exchange rate policy, rely substantially on foreign exchange sales for sterilization of liquidity, and continue to improve liquidity forecasting. The BoT reaffirms its commitment to maintain the transparency of its policy stance and to promote orderly financial markets. The authorities will also seek to make progress in the preparation for and negotiations of the East African Monetary Union. To that end, the targeted support by the Fund in key relevant areas will be greatly appreciated by the EAC partners.
15. The BoT will continue to strengthen its supervisory and regulatory services to the financial institutions to stem the reemergence of exposure to concentration of loan portfolio and to contain the recent surge in NPLs. It will also continue to strengthen the regulatory framework for financial institutions consistent with the recommendations of the recent FSAP and further build on the recent inaugural Financial Stability Report. Following the operationalization of the National Social Security Regulatory Authority, the BoT will finalize the inaugural set of the investment guidelines for the pension funds.
16. My authorities’ commitment to the implementation of a wide range of reforms underpins the Mkukuta II objectives. Improving the stock and quality of infrastructure—from road and rail networks to energy and telecommunications and regional infrastructure projects—is a priority with the aim of enhancing productivity in the primary sectors and competitiveness of the country as a whole, and strengthening the East African single market. Additionally, the authorities’ pursuit of agricultural transformation—Kilimo Kwanza— should inject the needed momentum in tackling poverty in a predominantly agrarian economy. The new national social protection framework would guide the authorities’ policy thrust in other poverty-reduction programs.
17. Tanzania’s macroeconomic fundamentals and the authorities’ continued commitment to strong policies helped the economy to restore its growth momentum faster than earlier envisaged. They are aware of the reemerging risks and are, therefore, prepared to take appropriate measures to protect the gains in the country’s macroeconomic stability. In the near term, and notwithstanding the need for fiscal consolidation, the authorities are determined to ensure that the program focuses on sustaining macroeconomic stability, enhancing domestic resource mobilization, promoting broad-based and pro-poor growth, and increasing investment in infrastructure, primary sectors and core MDG clusters. Going forward, they reaffirm that continued engagement with the Fund and the support of development partners will enable them achieve these goals.