Tanzania
2004 Article IV Consultation and Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility—Staff Report; Staff Statement; and Public Information Notice and Press Release on the Executive Board Discussion
Author: International Monetary Fund
Publication Date:
07 Sep 2004
eISBN:
9781451838435
ISBN:
9781451838435
Language:
English
Keywords:
ISCR; CR; broad money growth; growth; staff projection; staff appraisal; PRGF; authorities' effort; reform program; state intervention; government sector; local government; ambitious plan
Download PDF (566.8 KB)

This paper examines Tanzania’s 2004 Article IV Consultation and Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility. Tanzania has continued to maintain macroeconomic stability and to make substantial progress in structural reform. Real GDP growth has been strong, averaging almost 6 percent during the past three years, and is increasingly driven by improvements in total factor productivity. High growth reflected both the continued strong performance in the manufacturing, mining, and construction sectors, as well as the solid growth in the agricultural sector.

Abstract

This paper examines Tanzania’s 2004 Article IV Consultation and Second Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility. Tanzania has continued to maintain macroeconomic stability and to make substantial progress in structural reform. Real GDP growth has been strong, averaging almost 6 percent during the past three years, and is increasingly driven by improvements in total factor productivity. High growth reflected both the continued strong performance in the manufacturing, mining, and construction sectors, as well as the solid growth in the agricultural sector.

I. Background

1. Following some 30 years of economic stagnation under a policy framework of state intervention and planning, Tanzania has, since the late 1990s, made major strides in macroeconomic stabilization and structural reform in the context of outward-looking market-oriented policies. Economic growth has risen sharply, averaging almost 6 percent for the past three years, and is increasingly driven by improvements in total factor productivity, reflecting the effect of structural reforms on the supply side of the economy, as well as the impact of higher foreign direct investment (FDI). At the same time, inflation has declined from an average of over 30 percent during the previous two decades to below 5 percent. These achievements have been the result of sound macroeconomic policies, notably the strengthening of expenditure management through adoption of a cash management system, and more effective controls on liquidity expansion in the financial sector. Reflecting the improved fiscal stance and the deepening of the financial system, domestic savings rose over the period 1995 to 2003 from 2.4 to 9.7 percent of GDP. In parallel, the savings-investment balance improved from -17 percent to -9 percent of GDP.1

2. A critical mass of structural reforms has underpinned Tanzania’s strong growth performance. Domestic marketing in the agricultural sector was liberalized, the majority of state-owned enterprises were privatized, and a market-oriented regulatory framework is being progressively put in place. The exchange system was completely liberalized for payments and transfers for current international transactions. Also, the trade regime was liberalized by reducing average tariffs and the number of tariff bands. Tanzania’s sound economic policies helped it reach the completion point under the enhanced Highly Indebted Poor Countries (HIPC) Initiative in November 2001. Debt relief under this initiative has been critical in establishing debt sustainability.

3. Consequent to the progress in macroeconomic and structural reforms, FDI flows to Tanzania have increased significantly to an annual average of about $300 million (3 percent of GDP) during the past five years, led by a surge in investments in the mining sector and privatization. As a result, growth in the mining, manufacturing, and services sectors increased substantially, with spillover effects for construction and transportation. The impact of these FDI flows on employment, however, has been limited, as investments in the mining sector were not labor-intensive.

4. Tanzania’s sharply improved growth performance has had a notable impact on poverty. While a comparison of 1990/91 and 2000/01 household budget surveys shows only a modest improvement in the incidence of poverty, per capita incomes fell in the first half of the 1990s, likely leading to a deepening of poverty. Thus, for poverty to have declined over the decade as a whole, the acceleration of growth in the second half of the 1990s likely had a strong poverty-reducing impact, in particular given that income distribution showed little change over the decade. This was particularly evident in Dar es Salaam, where poverty declined from 28 to 18 percent over the decade.

II. Recent Economic Developments and Performance Under the Program

5. Real growth in 2003 is estimated at 5.6 percent, despite a drought that affected agricultural production (Table 2). High growth reflected both continued strong performance in the manufacturing, mining and construction sectors, as well as the good performance of drought-resistant crops.2 Nonetheless, shortfalls in the production of some food crops and the poor transportation network resulted in food insecurity for an estimated 3.5 million people.3

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, 2001/02-2006/07

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

Data are on calendar year basis. 2001/02 data are for calendar year 2001.

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

Excluding new debt issued to recapitalize government-owned banks.

Including change in stock.

6. The estimated overall fiscal deficit before grants for 2003/04 was below program on account of substantially higher-than-budgeted revenue collections (Tables 3 and 4). In addition to the buoyancy of revenue in fast-growing sectors, the good performance reflected strong income tax revenue as income tax holidays expired, and higher tax receipts on petroleum imports, reflecting anti-smuggling efforts. Domestically-financed expenditure remained below budget, reflecting primarily lower interest payments on external debt. As a result, net domestic financing of the 2003/04 budget is expected to remain below the program target by 0.9 percent of GDP.

Table 3.

Tanzania: Central Government Operations, 2002/03-2006/07 1/

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Sources: Ministry of Finance; and Fund staff projections.

Fiscal years run from July to June.

Unidentified financing (-)/expenditure (+). Includes expenditure carryover from the previous fiscal year.

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

Defined as a ratio (in percent) of gross grant and loan inflows to a sum of total expenditures and amortization payments.

Defined as a ratio (in percent) of current expenditures to a sum of program grants and loans (including basket funding).

Higher-than-programmed expenditure in 2003/04 reflects the impact of larger electricity subsidies and higher-than-programmed foreign financed developm

Including contingent liabilities.

Table 4.

Tanzania: Central Government Expenditure on Priority Sectors, 2002/03 - 2004/05 1/

(In billions of Tanzania shillings, unless otherwise indicated)

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Sources: Ministry of Finance.

Fiscal year runs from July to June.

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

7. Monetary developments also remained in line with the program (Tables 5 and 6). Substantial pressures on the expansion of reserve money continued to emanate from high inflows of official donor assistance to the budget, amounting to 10.6 percent of GDP, which are mostly spent locally. Relying increasingly on sterilization of excess liquidity through the sale of foreign exchange proceeds from aid inflows, while continuing with sales of liquidity paper as needed, the BoT maintained reserve money in line with the program (Figure 1).4 Consistent with the projected decline in velocity, broad money is expected to have grown close to 19 percent.

Table 5.

Tanzania: Summary Accounts of the Bank of Tanzania, December 2003 - June 2005

(In billions of 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 bank cash in vault.

Table 6.

Tanzania: Monetary Survey, December 2003 - June 2005

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

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Sources: Bank of Tanzania; and Fund staff estimates and projections.
Figure 1.
Figure 1.

Tanzania: Prices and Interest Rates, January 1997- May 2004

Citation: IMF Staff Country Reports 2004, 285; 10.5089/9781451838435.002.A001

Source: Tanzanian authorities.

8. Growth of credit to the private sector remained strong, in line with program projections, and has been broad-based. Key factors underlying high credit growth (34 percent on a year-on-year basis) are summarized in Box 1. This increase in credit has so far been accompanied by an improvement in banking soundness indicators. In particular, the ratio of nonperforming loans to capital dropped from 22 percent in 2002 to 9 percent in 2003.

Financial Sector Reform

High inflation and poor access to financial services have in the past been key factors explaining the financial sector’s limited contribution to economic growth and poverty reduction. In recent years, however, macroeconomic stability and substantial financial sector reforms have had a notable impact on broadening access by ordinary Tanzanians and small-and medium-size enterprises to financial services.

The financial indicators presented in the table below demonstrate these positive developments, which have so far not given rise to concerns about banking soundness. From 1997 to 2003, the spread between weighted average lending and deposit rates declined substantially from 18.4 to 11.4 percentage points. This sharp reduction was the result of increased competition stemming from the entry of foreign banks and the privatization of a number of large state-owned commercial banks. Deposits in commercial banks, in percent of GDP, steadily grew from 13.6 percent in 1997 to 17.2 percent in 2003, primarily reflecting commercial banks’ increasing efforts to open new branches. Because of the decline in lending rates, the increased availability of liquidity in the banking system, and growing confidence by the private sector, bank lending has been expanding at double digit rates since 1997. In addition, many large borrowers have switched from foreign currency loans to Tanzania Shilling-denominated loans, to avoid a currency mismatch in their balance sheet and the associated exchange rate risk. As a result, bank credit to the private sector, in percent of GDP, more than doubled in six years. In parallel, the ratio of nonperforming loans to capital declined sharply.

These developments have resulted in a narrowing of the gap of financial indicators between Tanzania and its neighbors. For example, Tanzania has surpassed Uganda in bank credit to the private sector, maintained the lead in bank deposits in percent of GDP, and considerably narrowed the gap in interest rate spreads.

Regional Comparison of Selected Indicators on Access to Financial Service (1997-2003)

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Sources: IFS and EDDS.

9. External developments in 2003/04 were in line with projections (Tables 7-10). The current account deficit widened by 3 percent of GDP, reflecting a substantial increase of imports. Exports rose by over 15 percent on account of strong growth of gold exports, while traditional exports continued to stagnate, reflecting mainly structural impediments (see para. 41). In March, the presidents of Kenya, Uganda, and Tanzania signed a trade protocol establishing a customs union with a three-band common external tariff (0, 10, and 25 percent) within the East African Community (EAC) and provides for the elimination of internal trade barriers within five years. Implementation of the protocol has been delayed to January 2005 to resolve outstanding technical issues.

Table 7.

Tanzania: Balance of Payments, 2002/3-2007/8

(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 subject to rescheduling and currently under negotiation.

Oil price is average of spot prices for U.K. Brent, Dubai and West Texas Intermediate. Projected oil prices are based on WEO projections.

Program and Project assistance (BOP definition) as percentage of GDP.

GDP numbers for Program columns have been changed to the currently revised levels for comparison purposes.

Table 8.

Tanzania: Disbursements of Program Assistance, 2002/03- 2004/05 1/

(In millions of U.S. dollars)

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Sources: Tanzanian authorities; and donors.

Fiscal years run from July to June.

Poverty reduction budget support.

Including loan baskets.