The Tanzanian authorities appreciate the constructive engagement and quality policy advice that they have received from the Fund, which has helped maintain overall macroeconomic stability over the years. The economy has improved remarkably, benefiting from market-oriented reforms and prudent macroeconomic policies, which have helped support economic diversification and boost growth. To anchor these achievements, the authorities have developed a medium-term development program, defined by the second Five-Year Development (FYDP II) Plan, whose formulation is expected to be completed shortly. The plan focuses on creating a better environment for business and job creation through improved infrastructure, access to finance and land, and education and skills development.
Our authorities broadly agree with the staff assessment and policy proposals, and request the Executive Board’s support in completing the Fourth Review Under the Policy Support Instrument (PSI) and in concluding the 2016 Article IV Consultation.
Macroeconomic Developments and Prospects
Growth remained robust in 2015, at around 7 percent, buoyed by construction, services, manufacturing, and a more diversified economy. Inflation averaged 5.6 percent in 2015 and was within single digits throughout 2015, reflecting tight monetary policy. The external position strengthened, with a narrowing of the current account deficit, reflecting increased exports of goods and services, notably gold, manufactured goods, transportation, and tourism; and the positive shock from lower oil prices.
Going forward, growth is projected to remain unchanged at about 7 percent in 2016 and the medium term, predicated on sustained high levels of public investment. Inflation is expected to remain around 5 percent. The external current account deficit, projected at around 9 percent of GDP in 2016/17 is expected to further narrow in the medium-term, when the Five- Year Development Plan (FYDP II) begins to yield benefits. Progress on governance continues with the new administration’s clear signal of commitment to deliver on sound public policies and governance.
The authorities continue to demonstrate their commitment to successful implementation of the PSI program. All the assessment criteria (ACs) and indicative targets for end-2015 and end-March 2016, except for the accumulation of domestic arrears, were met. While the implementation of structural benchmarks slowed temporarily, as the country transitioned to a new administration, significant progress was made in some areas, demonstrating the authorities’ commitment to structural reforms. In particular, the structural benchmark on producing a new medium-term debt management strategy was met and the document was published by end-2015. In addition, the technical work to merge the statutory minimum reserve and clearing accounts of commercial banks with the Bank of Tanzania (BoT), as well as work on the necessary changes to the IT system, is well-advanced. Given the sound progress, our authorities request that the Board approves the completion of the fourth PSI review.
Medium Term Macroeconomic Policies
a) Growth-Oriented Fiscal Policy
The Tanzanian authorities remain committed to fiscal and debt sustainability as they support growth and poverty alleviation. The draft 2016/17 budget has targeted a deficit of about 4.5 percent of GDP predicated on a large increase in public investment and domestic revenue. The authorities are confident that the budget can be adequately resourced, so as to avoid expenditure arrears.
To improve on revenue mobilization, the authorities will implement various tax policy and administration reforms. In this regard, they are optimistic that enhanced policies and tax compliance will boost additional revenues. Several tax administration measures are already underway, in the context of the recent Tax Administration Diagnostic Assessment and the rollout of Electronic Fiscal Devices. These measures are expected to significantly improve tax compliance and therefore help combat tax evasion. Tax policy reforms are focused on widening revenue base and streamlining exemptions. In addition, enhanced contribution is expected from parastatals towards the budget due to higher efficiency in fee collections to strengthen non tax revenue. To ensure adequate resources, large projects will only be implemented upon confirmation of adequate preparations and availability of revenue, with postponement of those for which external financing has not been mobilized.
On expenditure, going forward the plan is to support enhanced public investment. Capital expenditure is expected to double, bringing domestic investment to about 11 percent of GDP in 2016/17. Current expenditure is to be contained through a freeze on hiring and nominal wage with efforts to reduce public sector overheads. The authorities will use public-private partnership (PPP) for large infrastructure projects to limit government borrowing and support debt sustainability. Higher project financing and external non-concessional borrowing (ENCB) would also help finance the investment effort and higher fiscal deficit.
Efforts are underway to improve efficiency in public spending. In this regard, the authorities have launched a comprehensive public investment management manual. An expert has been hired to enhance IFMIS with a contract management module aimed to strengthen controls of multi-year commitments. In addition, a new public awareness campaign has been launched to warn suppliers that orders not generated through IFMIS will not be honored. In recent development, TANESCO is receiving increasing attention to shore its financial situation and ensure self-reliance. This includes the introduction of prepaid meters designed to enforce subscriber payments and intensify collection efficiency. Earlier this year, the government paid Tsh200 billion to clear its arrears on electricity bills.
In order to support debt sustainability, the authorities are committed to strengthen public debt management regulatory and institutional framework. Despite delay in approving the National Debt Management and Amendment of Government Loans, Guarantees, and Grants Act caused by changes in the structure of the Ministry of Finance and Planning, the authorities are confident of its passage into law by end-July 2016.
b) Monetary and exchange rate policies
The authorities are committed to prudent monetary policy to keep inflation close to objective target of 5 percent and continue to improve monetary policy operations by pushing ahead with modernization of monetary policy framework. To strengthen the Lombard facility, the collateral framework is being reviewed with a view to expanding the range of eligible instruments to access central bank facilities. In addition, measures are ongoing to make Lombard rate more predictable to enhance stability of short term interest rates. Significant progress has been made towards introducing partial reserve averaging. While the structural benchmark in this regard was not met, technical work on merging the statutory minimum reserve and clearing accounts of commercial banks with the BoT and required changes to the IT system have advanced. The ongoing Fund’s support to building forecasting and policy analysis capacity is expected to further strengthen the conduct of monetary policy.
The flexible exchange framework will continue to guide foreign exchange management. Although the shilling depreciated significantly in 2014/15 on the back of lower inflows, the situation has since stabilized. Going forward, BoT is determined to retain the flexible rate and to intervene in the exchange rate market to smooth excess volatility while ensuring international reserves remain adequate.
The banking sector remains sound and stable, with banks generally well capitalized, liquid and profitable. The majority of the banks continue to record low NPLs of less than 5 percent of gross loans, while the few others with high NPLs have been directed by BoT to take immediate steps to lower them, with the larger banks required to report more frequently on their progress. Banks are also encouraged to increasingly use the credit reference bureaus to reduce their credit risks.
Further, the BoT continues to strengthen the supervisory and regulatory framework, and has recently, concluded a pilot exercise on consolidated supervision of large domestic banks with cross-border operations. In addition, BoT has started drafting guidelines to ensure effective implementation of Basel II/III framework, and is working to improve stress test model and capacity.
The authorities are aware that financial sector development remains crucial in sustaining growth and promoting macroeconomic stability, and have resolved to further strengthen financial inclusion. To this end, the authorities are drafting microfinance legislation to ensure effective regulation and supervision of the microfinance sector. They have also rolled out mobile platform to enable users participate in capital market activities. A range of measures are also being considered to facilitate development of the government debt market.
Implementation of structural reforms continued to rank high in the government’s development agenda and is necessary to sustain the country’s strong growth momentum, and promote economic diversification. In this regard, the authorities focus on establishing a better environment for business and job creation, while providing durable infrastructure, and access to finance.
To improve the business environment, government aims to reduce cost of doing business through legal and regulatory reforms, easing registration and licensing requirement, enforcing property rights and legal instruments. To sustain development of energy sector, the authorities have resumed discussions with international partners involved in off-shore exploration with a view to providing conditions to allow for investment decision. Further, to enhance SME’s access finance, the authorities are establishing an SME Access to Finance Framework, as well as exploring financing mechanisms for enterprises and establishing collateral registry for SMEs. An internet based information portal for SMEs was launched in March 2016, to enhance financial literacy and entrepreneurship skills for micro, small and medium enterprises.
Further, the authorities have reiterated their commitment to deliver quality public policy and governance. In this regard, the National Anti-Corruption Strategy (NACSAP) has been established focusing on building systems of integrity, accountability and transparency in public institutions.
Additionally, the authorities are also intensifying efforts towards completion of the East African Community (EAC) common market while evaluating the benefits of removing non-tariff barriers in the region. This further demonstrates the commitment of government to the cause of regional integration and need to accelerate free movement of people, goods and services within the region.
Data quality is receiving priority attention. Considerable progress has been made in preparing the consolidated financial statements for the wider public sector while plans are underway to subscribe to the Enhanced General Data Dissemination Standard (e-GDDS). The completion of these processes will enhance quality decision making for analysts and investors.
Tanzania’s economic performance has continued to be strong through the transition period to a new administration, with growth projected to remain solid in the coming years, supported by prudent macroeconomic policies and structural reforms. With the authorities’ commitment to policy and structural reform implementation, the economic program under the Fund’s PSI remains broadly on track. In this regard, they request Board support in approving the completion of the Fourth PSI Review. Finally, with continued Fund engagement and support from the international community, the authorities remain committed to implementing their development agenda in order to support sustainable inclusive growth and macroeconomic stability.