Tanzania
2002 Article IV Consultation, Fifth Review Under the Poverty Reduction and Growth Facility and Request for an Extension of the Arrangement and Waiver of Performance Criterion—Staff Report; Public Information Notice and News Brief on the Executive Board Discussion; and Statement by the Executive Director for Tanzania
Author: International Monetary Fund
Publication Date:
06 Jan 2003
eISBN:
9781451838312
Language:
English
Keywords:
ISCR; CR; creditor; government; PRGF arrangement; staff; growth facility arrangement; net present value; letter of intent; foreign exchange; exchange rate; debt relief; Exports
Download PDF (3 MB)

This paper examines Tanzania’s 2002 Article IV Consultation, Fifth Review Under the Poverty Reduction and Growth Facility (PRGF) and a Request for an Extension of the Arrangement and Waiver of Performance Criterion. Tanzania’s performance under the PRGF-supported program has been broadly on track. All the qualitative performance criteria through end-June 2002 were observed, but quantitative benchmarks on reserve money, extrabudgetary expenditure, and the accumulation of domestic budgetary arrears were not met. One structural performance criterion, relating to the amendment of legislation to tighten approval procedures for incurring or guaranteeing new foreign borrowing, was not observed.

Abstract

This paper examines Tanzania’s 2002 Article IV Consultation, Fifth Review Under the Poverty Reduction and Growth Facility (PRGF) and a Request for an Extension of the Arrangement and Waiver of Performance Criterion. Tanzania’s performance under the PRGF-supported program has been broadly on track. All the qualitative performance criteria through end-June 2002 were observed, but quantitative benchmarks on reserve money, extrabudgetary expenditure, and the accumulation of domestic budgetary arrears were not met. One structural performance criterion, relating to the amendment of legislation to tighten approval procedures for incurring or guaranteeing new foreign borrowing, was not observed.

I. Recent Economic Developments

1. Since the mid-1990s, Tanzania has made substantial progress in macroeconomic stabilization and structural reform. Real GDP growth has been on a rising trend; it has averaged more than 5 percent since the inception of the current PRGF-supported program in early 2000, resulting in a small increase in per capita incomes, while inflation has declined to below 5 percent (Table 2 and Figure 1). Higher real growth in the agricultural sector (which accounts for almost half of GDP) has been accomplished through the liberalization of production and marketing structures, as well as of agricultural prices and the foreign exchange regime. In addition, the mining and construction sectors have experienced strong growth, reflecting the commencement of large-scale gold mining operations and new tourist projects (Table 3).

Table 1.

Tanzania: Phasing of Performance Criteria, Reviews, and Disbursements Under the PRGF Arrangement, 2000–03

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Structural performance criteria had or will have test dates at or near the same date as quantitative performance criteria.

Table 2.

Tanzania: Selected Economic and Financial indicators, 1999-2003

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Sources: Tanzanian authorities; and Fund staff estimates and projections.

Fiscal years (July-June), beginning in the year indicated in the column header.

Weighted-average yield of 91 -, 182-. and 364-day treasury hills.

Excluding new debt issued to recapitalize government-owned banks.

Figure 1.
Figure 1.

Tanzania: GDP, Savings, and Investment, 1999–2004

Citation: IMF Staff Country Reports 2003, 001; 10.5089/9781451838312.002.A001

Sources: Tanzanian authorities; and staff estimates and projections.
Table 3.

Tanzania: National Accounts. 2000-05

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Sources: Tanzanian authorities; and Fund staff estimates and projections.

Figures represent the contribution of the change in the foreign balance to real GDP growth.

External current account, including grants (interest payments on a cash basis).

2. Real GDP grew by 5.6 percent in 2001 and is expected to grow by almost 6 percent in 2002. The 12-month rate of nonfood inflation rose from 1.5 percent in December 2001 to 7.2 percent in September 2002, largely as a result of a sharp increase in electricity tariffs in April1; however, the overall inflation rate continued to decline to 4.4 percent by September 2002, as favorable developments in agricultural output helped contain increases in food prices (Figure 2).

Figure 2.
Figure 2.

Tanzania: Prices and Interest Rates, January 1997–September 2002

Citation: IMF Staff Country Reports 2003, 001; 10.5089/9781451838312.002.A001

Source: Tanzanian authorities.

3. Fiscal consolidation has been central to the success in macroeconomic stabilization. In support of Tanzania’s reform program, donors have provided sizable financial assistance, which all but eliminated the government’s domestic financing needs (Table 4 and Figure 3). Expenditure management has been strengthened by the adoption of a centralized payment system and the limitation of spending to cash availability. At the same time, the composition of expenditure has improved in favor of allocations for poverty-reducing programs, as the wage bill has declined following the reduction in the size of the civil service, and interest payments have fallen on account of lower financing requirements and debt relief provided by donors. Revenue mobilization, however, has improved only marginally, owing to weaknesses in tax administration, the proliferation of tax exemptions, and a gradual move of the tax base from a large, easy-to-tax public sector to a predominantly informal private sector in the course of the divestiture of many parastatals.

Table 4.

Tanzania: Central Government Operations, 1999/2000–2003/04 1/

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Sources: Ministry of Finance; and Fund staff projections.

Fiscal years run from July to June.

Bonds issued to recapitalize government-owned Banks and parastatals and the conversion into bonds of interest arrears owed to the Bank of Tanzania. For program-monitoring purposes, such bonds are excluded from domestic financing.

Although foreign-financed development expenditure is included in the voted budget, actual spending is not fully captured in budget execution reports.

Statistical discrepancy between fiscal and monetary data.

Figure 3.
Figure 3.

Tanzania: Central Government Finances, 1997/98–2003/04 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2003, 001; 10.5089/9781451838312.002.A001

Sources: Tanzanian authorities; and Fund staff estimates and projections.1/ Fiscal years run from July to June; expenditure data excluding statistical discrepancy and recapitalization expenditure.

4. Fiscal performance in 2001/02 (July–June) was in line with the program (Tables 4 and 6). The overall deficit before grants was about 1.7 percent of GDP lower than budgeted, owing to lower recurrent expenditures, which did not, however, affect priority areas (see the authorities’ letter of intent (LOI) in Appendix I, para 5). This expenditure outturn, together with a revenue performance broadly in line with projections, resulted in a significant build up of government deposits with the Bank of Tanzania (BoT).

Table 5.

Tanzania: Central Government Revenue and Expenditure, Quarterly, 2002/03 1/

(Cumulative, in billions of Tanzania shillings)

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Sources: Ministry of Finance; and Fund staff projections.

Fiscal year runs from July to June.

Although foreign-financed development expenditure is included in the voted budget, actual spending is not fully captured in budget execution reports.

Table 6.

Tanzania: Central Government Expenditure on Priority Sectors, 2000/01 – 2002/03 1/

(In billions of Tanzania shillings, unless otherwise indicated)

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Source: Ministry of Finance.

Fiscal year run from July to June.

Government agency created in 2001 to coordinate AIDS-related interventions.

Excludes clearance of domestic arrears and recapitalization of banks.

5. Monetary developments in recent years were characterized by strong monetary expansion, as large foreign inflows were not fully sterilized and the demand for broad money expanded with the gradual deepening of the financial system Primarily reflecting the lack of suitable lending opportunities, the banking system developed an increasingly large structural liquidity surplus which triggered an excess demand for treasury bills and, consequently, a decline in interest rates on bills and deposits. Interest rates on loans, however, remained high, reflecting high costs and still weak competition in the banking system, although in the first half of 2002 banks exercised growing flexibility in their lending rates in order to deploy excess funds (Figure 2). The BoT has been slow in mopping up excess liquidity—be it through higher sales of foreign exchange (out of concern over adverse effects on Tanzania’s competitiveness from an appreciation of the shilling) or through a more aggressive issuance of treasury bills (out of concern over rising interest rates and the costs of the mopping-up operations).

6. So far in 2002, increases in reserve money and broad money have been exceeding program projections by wide margins, but as yet have not had much discernible impact on inflation.2 Although the monetary authorities stepped up the issuance of treasury bills, sold some foreign exchange, and engaged in repurchase operations to absorb some of the excess liquidity, the benchmark ceiling on reserve money for end-June was not observed (Table 7). In the third quarter of 2002. the BoT decelerated its mopping-up operations again, and the resulting excess demand for treasury bills led to a significant decline in interest rates (Figures 2 and 4)

Table 7.

Tanzania: Monetary Survey, 2001-03

(In billion of Tanzania shilling unless otherwise indicate)

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Source: Bank of Tanzania (BoT) and Fund staff estimates and projection.

Calculated as reserve requirement times banks’ deposits minus half of the bank cash in vault.