Tanzania
Sixth Review Under the Poverty Reduction and Growth Facility and Requests for Waiver of a Performance Criterion and for a New Three-Year Arrangement Under the Poverty Reduction and Growth Facility—Staff Report; Press Release on the Executive Board Discussion for Tanzania; and Statement by the Executive Director for Tanzania

Tanzania showed strong economic growth owing to its sound macroeconomic policies and structural reforms, under the Poverty Reduction and Growth Facility (PRGF) Arrangement. Executive Directors commended this step, and emphasized for higher revenue mobilization through reforms of tax administration and tax policies. They encouraged the authorities to fight corruption, enhance governance, and stressed the need to maintain fiscal consolidation and accelerate structural reforms. They agreed that Tanzania has successfully completed the sixth review under the PRGF Arrangement, and granted waiver.

Abstract

Tanzania showed strong economic growth owing to its sound macroeconomic policies and structural reforms, under the Poverty Reduction and Growth Facility (PRGF) Arrangement. Executive Directors commended this step, and emphasized for higher revenue mobilization through reforms of tax administration and tax policies. They encouraged the authorities to fight corruption, enhance governance, and stressed the need to maintain fiscal consolidation and accelerate structural reforms. They agreed that Tanzania has successfully completed the sixth review under the PRGF Arrangement, and granted waiver.

I. Recent Economic Developments and Performance Under the Program

A. Recent Economic Developments

1. Macroeconomic developments in 2002 were generally favorable (Tables 2 & 3). Real GDP grew by about 6.2 percent, slightly above the program target, on account of the strong performance of the agricultural, mining, and construction sectors. Annual inflation declined to 4.4 percent at end-2002 (from 4.9 percent in 2001) and 4.3 percent in May 2003. Nonfood price inflation, however, has risen since mid-2002, reaching 9.6 percent in January 2003 before declining to 5.4 percent by May 2003, reflecting mainly the pass-through of utility price increases by parastatals and higher fuel prices.

2. Fiscal developments in 2002/03 (July–June) were characterized by better-than-projected revenue performance and shortfalls in expenditure (Tables 4 & 5). Revenue is estimated to have exceeded the program target by 0.2 percent of GDP on account of buoyant collections of income taxes. Total expenditure is expected to remain below projections by about 1.8 percent of GDP, owing to delays in the disbursement of donor funds and problems with the recording of foreign grant-financed development expenditure.1 The overall deficit, before grants, was below the budget by about 2 percent of GDP. Thus, the government is estimated to have improved its position with the banking system by 0.2 percent of GDP, compared with the programmed net borrowing of 0.6 percent of GDP.

3. Monetary developments in 2002 were marked by rapid growth in bank deposits (mainly foreign currency), larger-than-envisaged increases in private sector credit, and declining interest rates. Notwithstanding a robust growth in private sector credit, the increase in deposits significantly exceeded the demand for bank lending, resulting in a buildup in excess liquidity in the banking system. Consequently, the Bank of Tanzania (BoT) stepped up the absorption of liquidity in the last two months of the year, and, as a result, banks’ excess reserves declined to a more normal level by year’s end (Table 6).2 The 12-month growth rate of broad money (M3) was, however, 25 percent at end-2002 and 19.6 percent at end-March 2003, against the program targets of 21 percent and 16 percent, respectively (Table 7). The increase in broad money is attributed to changes in the money multiplier, related, in turn, to a higher-than-anticipated demand for deposits due to the opening of new bank branches and changes in bank technology. As banks’ excess reserves fell, yields on 91-day treasury bills rose from 2.5 percent in September 2002 to 4.4 percent in December 2002 and 5.4 percent in May 2003. Moreover, the spread between deposit and lending rates narrowed, reflecting the growing competition in the banking sector.

Table 1.

Tanzania: Phasing of Performance Criteria, Reviews, and Disbursements Under the Poverty Reduction and Growth Facility (PRGF) Arrangement, 2003–06

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Source: Fund staff.
Table 2.

Tanzania: Selected Economic and Financial Indicators, 2000–04

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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.

Including new debt issued for the recapitalization of banks.

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

Excluding new debt issued to recapitalize government-owned banks.

For 2002/03 onward, debt service due is net of expected HIPC relief from bilateral and commercial creditors.

Table 3.

Tanzania: National Accounts, 2000–06

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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).

Table 4.

Tanzania: Central Government Operations, 2001/02–2006/07 1/

(In billions of Tanzania shillings)

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Sources: Ministry of Finance; and Fund staff projections.

Fiscal years run from July to June.

Statistical discrepancy between fiscal and monetary data.

Basket funds are sector-specific accounts established by the government for channeling donor support to fund specific activities in different sectors.

Table 5.

Tanzania; Central Government Expenditure on Priority Sectors, 2001/02–2003/04 1/

(In billions of Tanzania shillings, unless otherwise indicated)

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Source: Ministry of Finance.

Fiscal year runs from July to June.

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

Excludes clearance of domestic arrears and recapitalization of banks.

Table 6.

Tanzania: Summary Accounts of the Bank of Tanzania, December 2001–June 2004

(In billions of Tanzania shillings, unless otherwise indicated; end of period)

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Sources: Bank of Tanzania; and Fund staff estimates and projections.

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

Table 7.

Tanzania: Monetary Survey, December 2001–June 2004

(In billions of Tanzania shillings, unless otherwise indicated; end of period)

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Sources: Bank of Tanzania (BoT); and Fund staff estimates and projections.

The growth in foreign currency reflects largely the depreciation of the Tanzanian shilling as well as the slow demand for credit denominated in foreign currency.

The sharp increase in broad money at end-2002 distorts the trend in average velocity in 2002 and 2003. However, end-period velocity is less volatile and shows only a marginal decline, consistent with a gradual improvement in banking services, especially in the rural areas. Velocity for June is based on fiscal-year GDP.

4. Tanzania’s overall balance of payments position strengthened in 2002/2003,3 owing to larger inflows of donor assistance, as well as the impact of debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative, (Tables 8 & 9). However, the current account deficit, excluding official transfers, widened slightly. There was a strong increase in nontraditional exports, mainly gold, combined with a moderate improvement in traditional exports, reversing a declining trend. Imports also rose significantly in 2002/03, reflecting the investment cycle of the mining sector and a return to trend following lower than normal imports in 2002. Additionally, service imports increased because of a rise in telecommunications-related payments.

Table 8.

Tanzania: Balance of Payments, 200071–2007/8

(In millions of U.S. dollars, unless otherwise indicated)

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

Arrears are on non-Paris Club official and commercial debt, which is subject to rescheduling.

Oil price is average of spot prices for UK. Brent, Dubai and West Texas Intermediate.

Net aid flows are defined as grants phas concessional foreign borrowing minus actual debt-service payments. From 2003/04, actual payments are equal to scheduled payments.

Significant decline in foreign direct investment ratio in 2001/02 is partly due to data coverage issues.