Statement by Peter Ngumbullu, Executive Director for United Republic of Tanzania and John Mafararikwa, Senior Advisor to Executive Director

This paper discusses United Republic of Tanzania’s Fourth Review Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria. A principal challenge for monetary policy continues to be liquidity management in the face of high foreign aid inflows. A comprehensive Financial Sector Reform Implementation Action Plan has been completed. Under the plan, efforts to remove key structural impediments to broaden access to financial services will be accelerated, including measures to facilitate increased medium- and longer-term lending, and streamline the pension sector.

Abstract

This paper discusses United Republic of Tanzania’s Fourth Review Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria. A principal challenge for monetary policy continues to be liquidity management in the face of high foreign aid inflows. A comprehensive Financial Sector Reform Implementation Action Plan has been completed. Under the plan, efforts to remove key structural impediments to broaden access to financial services will be accelerated, including measures to facilitate increased medium- and longer-term lending, and streamline the pension sector.

Introduction

July 29, 2005

1. Tanzania, made significant progress in the reform agenda in the past decade and remains politically committed to strengthen and maintain macroeconomic policy performance and stability, deepening of structural reforms and implementation of the new PRS; the National Strategy for Growth and Reduction of Poverty, which emphasizes economic growth, social well-being, improved governance and accountability as the cornerstones for addressing the country’s development challenges and meeting the MDGS. As the country heads towards the parliamentary and presidential elections at the end of October 2005, measures are being taken to ensure that balloting will be free, fair and peaceful. The new government is expected to continue with the political commitment to the country’s peace and stability, implementation and maintenance of strong economic reform agenda within a sound macroeconomic framework and address the main issues of poverty reduction, key structural reforms, strengthening of institutional capacity as well as enhancing efforts towards mobilization of domestic resources, an essential element for reduction in aid dependency in the medium- and long- term.

2. The Tanzanian authorities would like to thank the Board and Management of the Fund for the continued support and assistance given to the country’s reform agenda. They also thank the Fund Staff for the quality report prepared on Tanzania.

Recent Economic Developments and Program Performance

3. Tanzania’s economy continued to benefit from the momentum of sustained macroeconomic achievements under the PRGF program, with real GDP growth reaching 6.7 percent during 2004, up from 5.7 percent recorded in 2003. Inflation declined from 4.3 percent recorded in June 2004 to 4.0 percent at end May 2005, following a rebound in food production, buoyed by good weather. During fiscal year 2004/05, fiscal performance continued to be strong, with revenue collections, surpassing the annual target, and above last fiscal year’s collections by 20 percent, reflecting improved tax administration. Expenditure was broadly in line with budget estimates, except for slightly higher than projected development spending, financed from higher than projected external support. The government has also completed a review of various tax laws, with the intention of updating them in the coming year. The authorities completed the second corporate plan for the Tanzania Revenue Authority (TRA) in June 2005 as planned, and its implementation is expected to further improve the efficiency of the authority in revenue collection and administration.

4. The authorities continue to implement measures, aimed at further reducing the scope of public debt under the Public Financial Management Reform Program (PFMRP). The National Debt Management Committee (NDMC) recently adopted the national capacity building plan, which will provide a basis for enhancing capacity in debt management, and government has distributed to all ministries and independent departments the amended Government Loans, Guarantees and Grants Act together with a circular, clarifying key amendments of the act and their application. Similarly, the new Procurement Law of 2004, which decentralizes the government tendering process, has been widely distributed. The authorities continued to negotiate with its creditors for debt relief, for terms comparable with those agreed under the enhanced HIPC framework. Efforts are underway to have bilateral agreements signed with Brazil and other Japanese agencies. They also thank non-Paris club countries, which offered debt relief to Tanzania in line with the HIPC framework, and discussions continue with remaining creditors.

5. On monetary policy, the Bank of Tanzania continued to exercise vigilance in its monetary policy operations, keeping liquidity in the economy at programmed levels. Credit to the private sector continued its upward trend, increasing by about 30 percent during 2004/05, following improved business climate in the economy and growth in the number of credit worthy borrowers.

6. The external current account deficit stabilized at last year’s level as both imports and exports grew substantially. Large inflows of foreign assistance, recovery in traditional exports, higher receipts from tourism and increased mineral exports contributed to the improvement in the external account.

7. The government has continued to further its efforts to enhance good governance, by taking comprehensive measures to strengthen the Good Governance Coordination Unit (GGCU). These measures are part of the National Strategy for Growth and Reduction of Poverty (NSGRP), commonly referred to as MKUKUTA in Kiswahili and the National Anti-Corruption Strategy and Action Plan (NACSAP). Notwithstanding these impressive achievements, particularly in maintaining macroeconomic stability, structural reforms and improved private sector environment, the Tanzanian authorities are aware that many challenges remain. Poverty remains widespread, while the budget continues to be donor dependent. The government remains committed to measures that will address the remaining problems in the economy, as specified in its economic policy framework for 2005/06 and beyond.

Economic Policies for 2005/06 and the Medium Term

8. The recently adopted new PRS (MKUKUTA) spells out Tanzania’s policy direction in the coming five years, which mainly focuses on the attainment of the MDGs. The MKUKUTA improves on the PRS, by building its strategy around clusters of outcomes, taking into account inter-sectoral linkages and synergies. The strategy puts more emphasis on growth for poverty reduction, through policy interventions in key areas. All sectors of the economy are expected to continue to experience strong growth, with real GDP growth reaching 6.9 percent during 2005. Growth is expected to be driven mainly by agriculture, which is the mainstay of the Tanzanian economy, supported by other important sectors, especially mining, tourism and infrastructure. Over the medium term, GDP growth is expected to reach 7.5 percent. To attain this objective, the government will remain committed to the reform agenda, while implementing prudent fiscal, monetary and structural polices.

Fiscal Policy

9. The 2005/06 budget drew its guidance from the MKUKUTA, while focusing on the objective of maintaining macroeconomic stability. The strategic linkage between the budget and the MKUKUTA was facilitated by the newly developed Strategic Budget Allocation System (SBAS). The authorities continue to work towards ensuring that over time, as work on full costing of the MKUKUTA is attained, the government’s Medium–Term Expenditure Framework will translate comprehensively the policy objectives into program targets and activities. As a step forward, the expenditure programs in the current budget are already driven by policy priorities within available and budgeted resources. The authorities continue to implement measures that will strengthen public administration systems and domestic resource mobilization.

10. The government envisages an increase in domestic revenue, to reach 14.3 percent of GDP during 2005/06. The increase will be driven by the full one year impact of the implementation of the new Income Tax Act, improved tax administration following tax reforms at the TRA, graduation of a number of tax exempted companies into the tax net and increased revenue from new gas related projects. The Tanzanian authorities fully recognize the need to strengthen internal revenue capabilities and finally reduce donor dependency. The government will therefore continue to strengthen tax administration, streamline customs procedures and improve expenditure management.

Monetary Policy

11. Monetary policy will continue to be directed towards maintaining appropriate level of liquidity in the economy to ensure that inflation remains low, while foreign reserves remain at sufficient level. In this connection, the Bank of Tanzania (BOT) will continue to sterilize liquidity arising from high donor inflows, through appropriate mix of Treasury bill sales and foreign exchange interventions. Moreover, the BOT will continue to improve its techniques for liquidity forecasting and maintain close policy collaboration with the government.

12. The financial sector, an important channel for monetary policy transmission, will also continue to be strengthened. The authorities will implement Tanzania’s comprehensive second generation of the Financial Sector Reform Program (FSRP), which builds on the recommendations of the second FSAP. The program’s aim is to optimize financial sector contribution to investment and growth. The authorities intend to amend the main banking laws, namely, the Bank of Tanzania Act and the Banking and Financial Institutions Act, to provide greater autonomy to the central bank while enhancing its transparency and accountability and strengthen bank suspension.

Structural Policies

13. The government will actively focus its policies towards enhancing good governance and improving the business environment. The Anti-Corruption Law is currently being reviewed by the government and is expected to be passed by Parliament by April 2006. The Law will grant greater operational autonomy to the Prevention of Corruption Bureau in investigating cases related to corruption, in line with Tanzania’s obligations under the UN Convention Against Corruption, the African Union Convention on Preventing and Combating Corruption and the SADC Protocol Against Corruption.

14. In order to establish a well functioning, transparent and efficient business registration system, the government is preparing a Bill to be submitted to Parliament soon. Given the importance of the energy sector to the economy, the government is considering options for restructuring the electricity company, TANESCO with the objective of increasing its operational efficiency and reducing long term debt to sustainable level.

Conclusion

15. Tanzania has over the decade consistently implemented broad based policy reforms, which have resulted in sustained high level of growth. The authorities will continue to implement policies aimed at deepening these reforms. They recognize that over 80 percent of Tanzanians reside in rural areas, and their future livelihood hinges on transforming agriculture and improving rural infrastructure and therefore more efforts and resources need to be redirected to effectively correct these imbalances. It is for this reason that the new PRS (MKUKUTA) will put more emphasis on attaining sustainable growth levels necessary for improvement in social well-being of the majority of Tanzanians.

United Republic of Tanzania: Fourth Review Under the Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement
Author: International Monetary Fund