United Republic of Tanzania
Ex Post Assessment of Longer-Term Program Engagement
Author: International Monetary Fund
Publication Date:
05 Jun 2006
eISBN:
9781451838497
ISBN:
9781451838497
Language:
English
Keywords:
ISCR; CR; private sector; exchange rate; Fund-supported program; economic growth; foreign direct investment; balance of payments; public spending; central government; foreign exchange
Download PDF (1.2 MB)

The report assesses the Ex Post Assessment of Longer-Term Program Engagement. It reviews the success of the Poverty Reduction and Growth Facility (PRGF) program in achieving rapid growth, low inflation, and a comfortable external position. It highlights that the design of the programs has been appropriate, and conditionality has been focused. It analyzes that the program implementation improved under the PRGF, although some challenges still remain. Against this background, a Policy Support Instrument would be an appropriate form of economic support for Tanzania.

Abstract

The report assesses the Ex Post Assessment of Longer-Term Program Engagement. It reviews the success of the Poverty Reduction and Growth Facility (PRGF) program in achieving rapid growth, low inflation, and a comfortable external position. It highlights that the design of the programs has been appropriate, and conditionality has been focused. It analyzes that the program implementation improved under the PRGF, although some challenges still remain. Against this background, a Policy Support Instrument would be an appropriate form of economic support for Tanzania.

I. Introduction

1. By the late 1970s, Tanzania was a highly state-controlled economy, characterized by an inflexible economic system comprised of monopolistic and heavily regulated production structures. The rigid economic system, the war with Uganda, and external shocks during the late 1970s resulted in major macroeconomic imbalances, economic stagnation, and a decline in per capita income that lasted over 15 years. Following a shift in the mid-1980s away from administrative control of economic activity, progress was made in liberalizing external trade and payments, domestic prices, and agricultural marketing. In the early-1990s, Tanzania began pursuing market-oriented reforms, initiating a liberalization of the financial sector and of the civil service and, to a limited degree, privatization. Large segments of the economy, however, continued to be dominated by public sector monopolies and, more importantly, macroeconomic stability proved elusive.

2. Since 1996, the Fund has supported Tanzania’s reform efforts on a continuous basis. In the mid-1990s, Tanzania’s economic reform and stabilization effort regained momentum following the first multiparty elections that were held in October 1995. In the first half of 1996, the newly elected government adopted a program monitored by the Fund staff aimed at addressing the fiscal imbalances and structural impediments that had hampered financial management. Performance under the Staff Monitored Program (SMP) was broadly successful. Following the SMP, three consecutive Fund-supported arrangements have been in place between 1996 and 2006, first under the Enhanced Structural Adjustment Facility (ESAF, 1996-1999) and subsequently under the Poverty Reduction and Growth Facility (PRGF, 2000-03 and 2003-06).

3. Given the Fund’s long-term engagement with Tanzania, this Ex-Post Assessment addresses the following questions: Have economic reforms in the context of Fund-supported arrangements placed the country on a path of sustainable growth and poverty reduction? Why has private sector performance been weak? What has underpinned fiscal adjustment in Tanzania? Has aid posed problems for macroeconomic management? And what are the medium-term challenges that need to be overcome for Tanzania to achieve durable economic growth that would reduce poverty consistent with achievement of the Millennium Development Goals (MDGs)?2

4. The paper is organized as follows. Section II lays out the objectives of Fund-supported programs in Tanzania. Section III analyzes performance under the programs, followed by a discussion in Section IV of key program design and implementation lessons and the appropriateness of conditionality. Policy challenges for the medium term are discussed in Section V, followed by a discussion of the strategy for future Fund involvement in Section VI.

II. Objectives of Fund- Supported Programs

5. Against the backdrop of large macroeconomic imbalances, the key challenge at the onset of Fund engagement in Tanzania was to restore macroeconomic stability. Once this objective was met, the overarching challenge was to accelerate growth and alleviate poverty—including by placing greater emphasis on private sector development and improving the economy’s supply response, and a reorientation of public expenditure toward social spending—and lay the basis for a gradual reduction in the dependence on aid.

6. The medium-term strategy underlying the program supported by the ESAF was primarily aimed at achieving macroeconomic stability. The program was based on strengthening fiscal performance, and central to this effort was improving the cash-management system, established under the SMP, and civil-service reform. Improvements in the fiscal balance were expected to reign in inflation. Structural reforms, including privatization and financial sector liberalization, were aimed at enhancing efficiency and improving competitiveness, with a view to enabling the private sector to play a greater role in economic activity.

7. With macroeconomic stability largely achieved under the ESAF arrangement, the objective of the first PRGF program (PRGF1) was to sustain the stability and create the conditions favorable for higher growth, with particular focus on poverty reduction. Growth was to be led by the private sector, predicated on further structural reforms. Policies to reduce poverty included a greater reorientation of expenditures toward social spending, consistent with the objectives and priorities laid out in the PRSP.

8. The 2003-06 program (PRGF2) aimed to accelerate investment-led growth and further reduce poverty. 3 Program objectives were to be met through a three-pronged strategy, comprising of greater focus, relative to the previous programs, on increasing domestic government revenues, with a view to reducing gradually aid dependence; further liberalizing the trade regime; and enhancing the economy’s supply response by removing key impediments to growth and improving the investment environment, with a view to boosting private sector development.

9. Objectives in the context of Fund-supported programs in Tanzania have been appropriate, and have evolved in a manner consistent with macroeconomic developments. The following section examines performance under the Fund-supported programs by posing a series of questions, with a view to assessing if program objectives were met.

III. Program Performance Relative to Objectives

10. Fund-supported programs in Tanzania have succeeded in establishing macroeconomic stability, reflected in rapid growth, low inflation, and a reasonably comfortable external position (Table 1). Rapid growth has, however, not translated into a significant decline in poverty, and has not been led by a significant pick up in private investment. Fiscal consolidation has been central to the success in macroeconomic stabilization, with substantial donor support for the reform program reducing the need for domestic financing. Aid inflows have, however, complicated macroeconomic management, making policy trade offs more stark. Debt relief under the HIPC Initiative was critical in achieving debt sustainability, and the outlook has improved further following Tanzania’s qualification for debt relief under the MDRI. While substantial structural reforms have been undertaken, certain persistent deficiencies continue to undermine Tanzania’s growth prospects.

Table 1.

Tanzania: Macroeconomic Indicators, 1996–2004 1/2/

article image

For the ESAF arrangement, national accounts were reported on a fiscal year basis (July-June), beginning in the year indicated in the column header. For the PRGF arrangements, data were reported on a calendar year basis.

Data for 2000–2002 are based on the 2000–2003 PRGF arrangement, data for 2003–2006 are based on the 2003–2006 PRGF arrangement.

Source: Staff reports

A. What explains strong growth but the weak poverty response?

11. Tanzania’s annual average real growth rate of about 5 percent over the past decade was impressive, especially considering that the economy is dependent on rain-fed agriculture and is thus vulnerable to climatic conditions. Program objectives were broadly appropriate, but were generally not met under the ESAF-supported program, owing largely to adverse weather conditions (Figure 1).4 That said, growth rates averaging around 4 percent over the ESAF-supported program period compared favorably with outcomes averaging less than 3 percent during 1990-95. Outcomes relative to program projections improved during the subsequent PRGF arrangements, with real GDP growth averaging about 6 percent per year.

Figure 1.
Figure 1.

Tanzania: Real GDP Growth, 1996-2006 1/, 2/

(Annual percentage change)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

1/ Projections for the ESAF period are derived as a simple average of two fiscal years.2/ Program projections capture developments in macroeconomic data following program approval, and as modified in the context of the annual program.Sources: Staff reports.

12. Growth has been largely driven by domestic demand, led by strong consumption (Figure 2). A breakdown of the data suggests that since 2001, consumption demand was on average driven more or less equally by the public and private sectors. In this context, it is likely that some government aid-driven spending on education and health is classified as government consumption rather than investment, although these expenditures are likely to have a favorable long-term impact on the economy. Net exports have been rather flat. On the supply-side, agriculture—which accounts for about half of GDP and supports 80 percent of the population—has been the predominant contributor to growth (Figure 3). Other sectors, including manufacturing, construction, and mining (reflecting large-scale gold mining operations) have recorded rapid growth in recent years, but their contribution to growth has been modest owing to the small size of these sectors.

Figure 2.
Figure 2.

Tanzania: Decomposition of GDP Growth, 1996-2005

(Percentage points)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

Figure 3.
Figure 3.

Tanzania: Sectoral Contribution to GDP Growth, 1996-2005

(Percentage points)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

Sources: Staff reports and estimates.

13. Rapid economic growth in the context of Fund-supported programs has not translated into a noticeable reduction in poverty, which remains deep and pervasive, particularly in rural areas. Tanzania remains one of the poorest countries in the world, and among the poorest in sub-Saharan Africa. Indeed, while Tanzania’s per capita GDP growth rate has averaged about 2 percent since 1996, and nearly 2¾ percent in 2000–05, it’s GDP percapita, at about US$337 in 2005, is well below sub-Saharan Africa’s average of US$568. The country ranked 160th on the 2001 Human Development Index, below the average for sub-Saharan Africa.

  • Based on the most recent Household Budget Survey (HBS) conducted in 2001, 36 percent of Tanzanians are still below the poverty line (and 19 percent are below the food poverty line), compared with 39 percent poverty rate in the 1991 HBS. Non-income based poverty measures also portray a grim picture, and have only improved modestly in the context of Fund-supported programs, notwithstanding a reorientation of public expenditure toward social spending. Based on 2004 data, life expectancy is 43 years, infant mortality rate is 104 per 1000 live births, and child malnutrition is 29 percent for children under 5 years. PRSP-related education expenditures have, however, been successful in boosting the literacy rate to 70 percent for ages 15 and over.

  • Poverty in Tanzania has become more of a rural phenomenon, reflected in the fact that the poverty rate declined by 10 percentage points to about 18 percent in the capital Dar es Salaam between 1991 and 2001, whereas it declined by only 2 percentage points to 39 percent in the rural areas. Indeed, 87 percent of all poor people live in rural areas.

14. It is somewhat of a puzzle as to why, despite rapid growth in the context of Fund-supported programs, poverty reduction has been modest, particularly in rural areas. In this context, some considerations warrant a close look:

  • It is quite possible that poverty reduction in Tanzania began to occur only after the economic stagnation through 1995 had been overcome and there was a greater reduction in poverty since then. This is, however, difficult to assess, because of the lack of annual survey data that could help analyze the correlation between the rate of poverty and GDP growth in the period between the two surveys, and since 2001. Simulations, however, suggest that poverty reduction in Tanzania might have been more rapid in recent years.5

  • While annual GDP growth has averaged 5.2 percent since 1996, agricultural growth has on average been a full 1 percentage point lower, and this may have dampened poverty reduction in rural areas, where poverty is largely concentrated.

  • Recent studies suggest that more than agriculture growth, it is the composition of such growth that bears upon poverty, and that the lack of sufficient diversification in agriculture production—away from food crops—has undermined poverty reduction in Tanzania. 6 In particular, these studies find that poverty is lower in households that are involved in the production of cash crops and non-traditional agricultural goods (including horticulture and floriculture), all of which are exportable, than in households involved in the production of food crops. It is estimated, for example, based on data for 2005, that rural poverty would decline by 7 percent, if half of the households switched from food crops to cash crops.

15. Reforms in the context of Fund-supported programs have helped boost and diversify agricultural production and exports, but some of the more difficult issues have not been addressed. In particular, reforms have included the liberalization of agriculture production and marketing structures, as well as of agriculture prices and the foreign exchange regime. Programs have, however, not been able to address effectively supply-side constraints—including reforms of state-owned crop boards; the proliferation of local taxes, which on some export commodities represent almost 20 percent of the sale price; weak rural infrastructure; the lack of adequate skills; and poor customs systems and procedure—all of which have undermined agricultural production and exports, and private investment, more generally.

B. Why has private sector performance been weak?

16. Tanzania’s strong economic growth of recent years is not mirrored in the expansion of private sector investment. This might have dampened potentially faster growth and poverty reduction, and raises concerns about sustaining growth going forward.

  • Out of the 6½ percent average real GDP growth during 2000–04, gross fixed capital formulation has contributed less than 1¾ percentage points, although this was still an improvement over the previous five-year period. At the same time, gross private capital formation as a share of GDP declined from about 13½ percent during 1995–99 to about 11 percent since 2000. Moreover, the share of private capital formation in total capital formation declined from about 80 percent in 1999 to 60 percent in 2005.

  • Weaknesses in Tanzania’s private investment are reflected in modest financial deepening and the low levels of bank claims on the private sector. While credit growth to the private sector increased quite rapidly under the Fund-supported programs—averaging about 35 percent since 2001—it was from a very low base. This is reflected in the fact that net availability of funds to the private sector as a share of GDP, while continuing to increase in the context of the Fund-supported programs, has remained low through most of the program period (Figure 4).7 More importantly, however, there has been a significant concentration of credit—with about 200 “bankable companies” accounting for a predominant share of bank credit to the private sector—and large segments in the private sector, notably in the rural areas, have had virtually no access to such financing.

  • The modest role of the private sector is also reflected in export performance and the pattern of FDI inflows to the country. In particular, notwithstanding the large real depreciation of the shilling since 2000, the contribution of exports to GDP growth has not been significant. Similarly, while foreign direct investment inflows to Tanzania have been large, they have not been broad-based and have been largely limited to the mining sector.8 While it may be normal for foreign investors to first take the “low-hanging fruit,” such FDI does not typically generate multiplier effects on growth or increase productivity through technology transfer that is associated with investment in the manufacturing and, to a lesser extent, in the services sector.

Figure 4.
Figure 4.

Tanzania: Financing of the Private Sector, 1996-2006 1/

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

1/ Projections for 2005/2006.Sources: Staff reports.

17. A key reason why private sector participation in economic activity in Tanzania has been modest is because the business environment is very poor. Based on the 2006 Doing Business In report of the World Bank, Tanzania ranks 140th in the overall ease of doing business out of 155 countries surveyed. Similarly, the World Economic Forum 2005, ranks Tanzania 82nd out of 116 countries in the quality of the national business environment, and 71st in the Growth Competitiveness Index out of 117 countries. In particular:

  • Burdensome licensing procedures, reflected in high start-up costs, insufficient access to credit, restrictive labor regulations, difficulties in registering property and poor property rights, and very poor infrastructure are identified in the World Bank survey as some of the key factors undermining the business environment in Tanzania (Table 2).

  • Poor infrastructure, for example, is best reflected in the pressing problems currently faced by the energy sector. The country is ranked 101St out of 117 countries in the Global Competitiveness Report with respect to the production of electricity. Shortfalls in energy production and higher costs have undermined economic performance and the financial position of the state-owned power company (TANESCO).

  • Investors also underscore corruption and poor governance as important factors undermining private investment in Tanzania.9 In this context, government regulations that encourage rent seeking, including the complex business licensing system, with overlapping regulatory mandates; the ad hoc provision of tax exemptions; and a corruptible legal system, that makes dispute resolution particularly onerous, are identified as key factors affecting investor sentiment.

Table 2.

Doing Business in Sub-Saharan Africa: Selected Countries, 2005

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Identifies the bureaucratic and legal hurdles an entrepreneur must overcome to incorporate and register a new firm. It examines the procedures, time, and cost involved in launching a commercial or industrial firm with up to 50 employees and start-up capital of 10 times the economy’s per-capita gross national income (GNI).

Tracks the procedures, time, and costs to build a warehouse, including obtaining necessary licenses and permits, completing required notifications and inspections, and obtaining utility connections.

Measures the flexibility of labor regulations. It examines the difficulty of hiring a new worker, rigidity of rules on expanding or contracting working hours, the non-salary costs of hiring a worker, and the difficulties and costs involved in dismissing a redundant worker.

Examines the steps, time, and cost involved in registering property, assuming a standardized case of an entrepreneur who wants to purchase land and building in the largest business city—already registered and free of title dispute.

Explores two sets of issues—credit information registries and the effectiveness of collateral and bankruptcy laws in facilitating lending.

Measures the strength of minority shareholder protections against misuse of corporate assets by directors for their personal gain.

Looks at the procedural requirements for exporting and importing a standardized cargo of goods. Every official procedure is counted—from the contractual agreement between the 2 parties to the delivery of goods—along with the time necessary for completion.

Looks at the efficiency of contract enforcement by following the evolution of a payment dispute and tracking the time, cost, and number of procedures involved from the moment the plaintiff files the lawsuit until actual payment.

Source: International Finance Corporation (www.doingbusiness.org)

18. Fund-supported programs have been somewhat late in placing emphasis on investment climate issues. Indeed, it was only in the context of PRGF2 that program objectives targeted explicitly an improvement in the investment climate.10 More generally, once macroeconomic stability was achieved under the ESAF, Fund-supported programs could have placed greater emphasis on addressing the impediments undermining the investment climate, with a view to promoting sustainable investment-led growth. While some of these reforms—notably concerning the harmonization and streamlining of taxation; improving customs clearance procedures and administration; and access to credit—are broadly in the Fund’s “core” areas of expertise, others would have had to involve greater collaboration with the World Bank and other donors.

19. Governance issues received prominence in the PRGF-supported programs, and the perception of the severity of corruption in Tanzania has been improving, albeit gradually. Efforts to improve governance were made in the broader context of stimulating growth and fiscal reform.11 Adopting a National Anti-Corruption Strategy and Action Plan (NACSAP) was a trigger for Tanzania reaching its completion point under the Enhanced HIPC Initiative. The NACSAP focused on three areas—improving competence and attitude of the public service; increasing transparency; and strengthening the legislative and judiciary framework. The implementation of measures identified in the NACSAP was monitored in the context of Fund-supported programs through benchmarks. While Tanzania has improved its ranking on the corruption perception index of Transparency International (Figure 5), there continue to be concerns about graft, including in the granting of concessions for the exploitation of natural resources, delays in responding to complaints about corruption, and in the effectiveness of the legal system and the courts to address such problems. Moreover, there is skepticism that measures taken in the context of the NACSAP have sufficient teeth.

Figure 5.
Figure 5.

Tanzania: Comparison Transparency International Corruption Perception Index

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

Source: Transparency International

C. What has underpinned fiscal adjustment in Tanzania?

20. Fiscal adjustment was led by improvements in expenditure management, which made up for disappointing performance for most of the period on the revenue front, with large aid inflows limiting recourse to domestic financing.

Expenditure management has improved substantially

21. Improvements in public expenditure management have been key in anchoring fiscal adjustment, notably by helping align expenditures with overall fiscal targets in Fund-supported programs. 12 This was facilitated by the adoption of a centralized payment system, limiting spending to cash availability, and the development of a medium-term expenditure framework (MTEF). Expenditures were monitored through benchmarks in the programs, which were adjusted to reflect outcomes of external financing relative to projections (Figure 6). The Public Expenditure Review (PER) process, which is conducted in collaboration with donors, has served as an important mechanism to prioritize expenditures—articulated in the PRSP—consistent with the overall objective of reducing poverty. As a result, the composition of expenditures improved in favor of allocations for the priority sectors, including health and education (Figure 7). This was facilitated, in part, by a decline in the wage bill following civil service reform (Figure 8), and in interest payments on account of lower financing requirements and debt relief provided by donors. Accumulation of arrears—which was a serious problem in the context of ESAF and PRGF1—has been virtually eliminated during PRGF2, owing to the effective implementation of an integrated financial management system (IFMS).

Figure 6.
Figure 6.

Tanzania: Central Government Expenditure, 1996-2006 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

1/ Program projections capture developments in macroeconomic data following program approval, and as modified in the context of the annual program.Sources: Staff reports.
Figure 7.
Figure 7.

Tanzania: Central Government Spending on Priority Sectors 1/

(In percent of total expenditure)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

1/ Others include expenditure in water, agriculture, lands, and judiciary.Sources: Staff reports.
Figure 8.
Figure 8.

Tanzania: Public Sector Employment and Wage Bill, 1995-2005

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

Sources: Staff reports and estimates.

22. Notwithstanding improvements in expenditure policy, certain large expenditures have been made in the context of Fund-supported programs, which were at odds with the objective of reducing poverty through a prioritization of spending.

  • In particular, in the context of PRGF1, the government purchased an air traffic control system (ATC), which raised concern across civil society and the donor community, notably on the financing of the project and the lack of transparency. It was contested—and correctly so—that the supposedly concessional financing of the project by the private sector came at the expense of an inflated price for the ATC, and that procurement transactions lacked sufficient transparency.

  • In this context, staff advised the authorities to include in future all public investment projects in the context of the public expenditure review (PER) process, so as to ensure proper prioritization of projects before spending commitments are made. Despite the government’s commitments to do so, similar expenditures were undertaken in the context of PRGF2, including to construct a national stadium and a new parliament building, without these being reviewed by the PER process. While staff expressed concern with these expenditures, they were, however, accommodated in the program, including through adjustments in the program targets.13

  • Fund-supported programs should have been more firm in opposing such spending, both because they were not a priority and since they raised concerns about transparency and accountability in decision-making.

23. Recent reforms have aimed at improving expenditure policy. In particular, the lack of comprehensiveness in the PER process is being addressed by putting in place internal budget guidelines to review line ministries’ spending plans comprehensively in the MTEF, with clear links planned to the National Strategy for Growth and Reduction of Poverty (NSGRP) and on the basis of identifiable outcomes. The newly developed Strategic Budget Allocation System (SBAS) has ensured strategic linkages between NSGRP outcomes and the budget, providing an advanced framework for allocating and assessing the impact of poverty reducing expenditures.

Revenue mobilization has been weak

24. Domestic revenue mobilization in the context of Fund-supported programs has been very weak, despite significant reforms.

  • Program targets concerning domestic revenues have straddled between being unrealistic under the ESAF, “unambitious” under PRGF1, and somewhat more appropriate under PRGF2. Targets under the ESAF arrangement were unrealistic, largely because they did not reflect fully the impact of the envisaged fiscal reforms that had the potential to significantly reduce revenues; targets under PRGF1 were unambitious, especially since they were based on performance under the ESAF, where revenue mobilization was also adversely affected by weather-related decline in economic activity; and relative to the previous programs, revenue targets under PRGF2 reflected the program’s greater emphasis on mobilizing revenue, and were broadly appropriate. Revenue outcomes were significantly below program projections in the context of the ESAF arrangement and generally better than projected under the PRGF arrangements (Figure 9.).14

  • While revenue performance under the first two of the Fund-supported programs was disappointing, this is not for want of trying. Indeed, significant reforms were undertaken, with a view to rationalizing the tax system and improving administration (Appendix 3).

  • Revenue mobilization suffered, however, because tax collection and administration did not keep pace with the rationalization of the tax system and tariff reform; there was a proliferation of tax exemptions and incentives (including tax holidays), notably in the context of setting up export processing zones (EPA Act);and because the tax base moved gradually from a large, easy-to-tax public sector to a predominantly informal private sector in the course of the divestiture of many parastatals.

  • Recognizing the weak revenue performance under the ESAF and PRGF1 and the need for significant catching up, boosting revenue mobilization was a key objective underpinning the design of PRGF2—predicated on improvements in tax administration, based on technical assistance provided both by the Fund and other donors.

Figure 9.
Figure 9.

Tanzania: Central Government Revenue (excluding grants), 1996-2006 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

1/ Program projections capture developments in macroeconomic data following program approval, and as modified in the context of the annual program.Sources: Staff reports.

25. Revenue performance has improved more recently, but there is still a large gap between revenue potential and the outcome.

  • There have been improvements in revenue mobilization in the context of PRGF2—with revenues as a share of GDP increasing by about 2½ percentage points without any increase in tax rates.

  • Notwithstanding this progress, there is still a considerable gap between revenue potential and outcome, estimated at about 3.6 percent of GDP.15 Also, central government revenue at 13.6 percent of GDP in 2004/05 compares poorly with other countries in the region (Figure 10).

Figure 10.
Figure 10.

Cross-Country Comparison of Revenue Performance, 2004/2005 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

1/ Ratios are calculated on the basis of data for FY 2004/2005 for Kenya, Tanzania, and Uganda, and calendar year 2004 for Mozambique and Zambia.2/ Excluding Nigeria and South Africa.Sources: Staff reports and estimates.

26. Moreover, despite the recent progress, central government revenues as a share of GDP have only recovered to the level prevailing at the onset of Fund engagement in Tanzania. This raises the question of whether aid inflows have undermined the government’s resolve to bolster revenue mobilization. This is a difficult question to answer with any degree of certainty, but conceivably if greater emphasis had been paid in the context of the ESAF and PRGF1 on bolstering revenue mobilization, including by taking a firmer stance on the issue of tax exemptions and incentives and focusing technical assistance on improving tax administration consistent with the pace of tax and tariff reform, outcomes would likely have been more satisfactory.

Deficits have been largely aid-financed

27. The overall fiscal balance was broadly consistent with program objectives (Figure 11). Expenditure restraint to offset shortfalls in revenue mobilization and in foreign financing kept the overall fiscal balance close to program objectives. Over the program period, recourse to expenditure cuts to meet financing shortfalls declined, and as donor support for the budget increased markedly, Fund-supported programs allowed for a significant widening of the fiscal deficit before and after grants.

Figure 11.
Figure 11.

Tanzania: Central Government Overall Balance, (after grants), 1996-2006 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

1/ Program projections capture developments in macroeconomic data following program approval, and as modified in the context of the annual program.Sources: Staff reports.

28. Fiscal deficits under the Fund-supported programs have been financed largely through external assistance, limiting recourse to domestic financing. Broadly, even at times when aid inflows were lower than projected, expenditure cuts (relative to program projections) have been relied upon to achieve the fiscal target. Indeed, targets concerning net domestic financing of the government—a performance criterion under the Fund-supported programs, which was adjusted for deviations in projected aid inflows—have almost always been met, and often by significant margins (Figure 12). On the one hand, not seeking recourse to domestic financing has helped limit a possible crowding-out of the private sector. This has been particularly relevant, since the domestic debt market is relatively thin, because of which yields on government securities are highly sensitive to any significant change in government borrowing.16 On the other hand, this has on some occasions undermined expenditure smoothing, and underscores the need for greater coordination between fiscal and monetary policy and for deepening domestic debt markets.

Figure 12.
Figure 12.

Tanzania: Net Domestic Financing of the Government, 1996-2006 1/

(In billions of Tanzania shilling)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

1/ Net domestic financing is measured as cumulative change from the beginning of the fiscal year (July 1).Sources: Staff reports.

D. Did aid inflows complicate monetary policy and macroeconomic management?

29. The monetary policy objective of reigning in inflation was largely achieved. Inflation in Tanzania registered a continuous decline since the first program year, and reached single digits in 1999 for the first time in two decades. Following minor slippages in meeting ESAF program objectives, owing largely to weather-related food price increases, performance improved significantly under the PRGF programs. Inflation was broadly consistent with program objectives in PRGF1 and better than expected so far in PRGF2 (Figure 13). The key to the rapid decline in inflation was a tightening of monetary policy—based on improvements in fiscal performance and large aid inflows, which reduced the government’s domestic financing needs—and favorable developments in agricultural output that helped contain increases in food prices.

Figure 13.
Figure 13.

Tanzania: Inflation, 1996-2006 1/2/

(Annual average)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

1/ Projections for the ESAF period are derived as a simple average of two fiscal years.2/ Program projections capture developments in macroeconomic data following program approval, and as modified in the context of the annual program.Sources: Staff reports.

30. Large aid inflows have, however, posed challenges for macroeconomic. Program ceilings on the net domestic assets of the BoT and the floors on NIR were typically met by large margins (Figure 14 and 15).

  • The policy response to greater-than-projected aid inflows in the context of the ESAF and initially under PRGF1 (between 1999 and 2000) involved sterilization through the sale of treasury bills, largely because inflation was still considered to be on the higher side and international reserves were at relatively low levels. This, however, led to a sharp increase in interest rates (Figure 16).

  • Concerned with rising interest rates and upward pressures on the exchange rate, policy was subsequently modified in the context of PRGF1 in favor of unsterilized foreign reserve accumulation. This was based on an assessment that owing to confidence in domestic policymaking and falling inflation, demand for money had increased. As a result, program benchmarks on reserve money were exceeded, but the impact was not inflationary, implying that program benchmarks may have been tight or that the demand for money was underestimated.

  • In the context of PRGF2, concerned with the rapid rise in liquidity and the attendant inflationary risks, staff pushed, and appropriately so, for modifying the anchor for monetary policy to target reserve money rather than the net domestic assets of the BoT.17 As a result, the policy response to larger aid inflows has involved greater sales of foreign exchange to dampen inflationary pressures, a policy action rarely used previously for fears of currency appreciation, and has led to greater absorption of aid. That said, the full leeway provided under the programs for such sales has seldom been used.

Figure 14.
Figure 14.

Tanzania: Net International Reserves of the Bank of Tanzania, 1996-2006

(In millions of US dollars)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

Sources: Staff reports.
Figure 15.
Figure 15.

Tanzania: Net Domestic Assets of the Bank of Tanzania, 1996-2006

(In billions of Tanzania shillings)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

Sources: Staff reports.
Figure 16.
Figure 16.

Tanzania: Real Interest Rate, 1996-2005

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

Sources: IFS, Staff reports.

31. In the context of large aid inflows, balancing the conflicting objectives of monetary and credit policy on the one hand and external competitiveness and export performance on the other has been a challenge for the Bank of Tanzania (BoT). Indeed, the issue of how best to balance inflationary pressures associated with liquidity emanating from greater-than-projected donor aid against upward pressures on domestic interest rates and the exchange rate from increased sterilization operations, received substantial attention during program discussions with the authorities.

  • In this context, the reluctance of the BoT to sterilize the impact of aid inflows through sales of foreign exchange—reflecting the implicit objective of influencing the nominal exchange rate to maintain competitiveness and ward off possible “Dutch Disease”—and relying more on either treasury bill sales (in a rather thin market for domestic debt) or on unsterilized intervention, has led to volatility in real interest rates, thereby undermining private investment and not allowing for adequate absorption of aid (Appendix 2).

32. Against this background, Fund-supported programs adapted quite well. In particular, policy advice, reflected inter alia in the change of the nominal anchor for monetary policy, noted correctly that competitiveness and export performance in Tanzania is largely constrained by structural factors and supply-side constraints, and that rising interest rates would have a more adverse impact on export and growth prospects than a more appreciated exchange rate. In this context, however, improvements are required concerning the appropriate measure for setting reserve money targets (and is further discussed in section IV).

E. Were external and debt objectives achieved?

33. The objective of improving external viability was broadly achieved under the Fund-supported programs, although the viability of the balance of payments has been largely dependent on foreign assistance. The external current account deficit as a percent of GDP was less than programmed in most years, reflecting among other things a smaller absorption of foreign aid (Figure 17). The level of gross official reserves exceeded program targets for the most part, owing to aid inflows and better than expected performance in the current account. External debt service as a share of exports remained below projected debt levels, and ceilings on nonconcessional borrowings and external arrears were observed.

Figure 17.
Figure 17.

Tanzania: Current Account Deficit (excluding grants), 1996-2006 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

1/ Program projections capture developments in macroeconomic data following program approval, and as modified in the context of the annual program.Sources: Staff reports.

34. The exchange rate while being market-determined in principle, was influenced by the Bank of Tanzania’s efforts to maintain competitiveness. Following a large appreciation of about 48 percent between 1995 and 2000, the real effective exchange rate (REER) has since depreciated by more than 35 percent, largely triggered by a 40 percent depreciation in the NEER as well as by inflation differentials with trading partners (Figure 18). As noted previously, in the context of large aid inflows, the BoT has sought to influence the exchange rate, with a view to limit any significant nominal appreciation. Recent staff studies provide empirical evidence to support the view that the exchange rate is broadly aligned with economic fundamentals.18

Figure 18.
Figure 18.

Tanzania: Exchange Rate Measures 1/

(1991=100)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

1/ Period averageSources: Staff reports and estimates.

Export performance

35. Exports of goods and services have increased in the context of Fund-supported programs. Export earnings declined over the ESAF program, reflecting largely the weather-induced decline in the output of export crops and the damage to transport infrastructure that disrupted access to external markets. In the context of PRGF1, and broadly since 2000, exports have risen, helped by ongoing trade liberalization (Figure19). Moreover, there has been a substantial shift in composition from traditional to non-traditional exports (Figure 20). In particular, the share of non-traditional exports in total exports has risen by more than half between 1995 and 2003. Much of the increase in the share of non-traditional exports has, however, been related to gold sales—the share of manufactured goods in total exports has actually declined relative to 1995 (Figure 21).19

36. Notwithstanding the recent increase in exports, their contribution to overall economic performance has been modest, and compares poorly with the region. (Figure 22). In particular, the share of exports in GDP was about 17 percent in 2004, compared with around 40 percent for Sub-Saharan Africa (excluding Nigeria and South Africa). This is attributable in part to the fact that, while exchange rate competitiveness is broadly in equilibrium and the manufacturing sector is estimated to be highly responsive to real exchange rate depreciation, export performance has been hindered by various supply-side constraints, as described previously.

Figure 19.
Figure 19.

Tanzania: Percent Change in Export Volume and REER

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

Source: WEO database and INS.
Figure 20.
Figure 20.

Tanzania: Composition of Exports

(In percent)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

Figure 21.
Figure 21.

Tanzania: Indices of Export (Non-Traditional) Volume

(Base year = 1990)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

Source: Staff reports and estimates.
Figure 22.
Figure 22.

Exports of Goods and Services, 1997-2004

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

Source: Regional Economic Outlook, Sub-Saharan Africa Supplement, October 2005.

External debt sustainability

37. Reaching the completion point under the Enhanced HIPC Initiative was critical for restoring external debt sustainability in Tanzania. Tanzania reached the completion point under the Enhanced HIPC Initiative in November 2001 and has received most of the expected debt relief. Debt indicators at the HIPC completion point were significantly better than at the decision point, owing to better-than-expected export performance. External debt as a share of exports at end-June 2001 was reduced to 105 percent in NPV terms, bringing it to the point of debt sustainability (Figure 23). Tanzania’s debt indicators have continued to further evolve favorably. Updated debt indicators (before relief under the MDRI) indicate that the NPV of debt-to- exports ratio is projected to fall further, stabilizing at about 92 percent, instead of 115 percent as projected at completion point. All debt indicators remain well below indicative threshold levels.

Figure 23.
Figure 23.

Tanzania: Debt Sustainability Indicators, 2000-2010

(as a percent of exports)

Citation: IMF Staff Country Reports 2006, 198; 10.5089/9781451838497.002.A001

1/ Excluding debt relief under the MDRI.Sources: Staff reports and estimates.

38. Tanzania’s debt outlook has improved further following its qualification for debt relief under the MDRI. In particular, the NPV of debt as a share of exports is expected to decline further to about 46 percent in 2006.20 Recognizing the need for improving debt management, Tanzania adopted a National Debt Strategy (NDS) in 2002, under which the government amended the Loans, Grants, and Guarantees Act of 1974 to make contracting and guaranteeing of new foreign debt by the government (including its parastatals) subject to approval from the Minister for Finance.21 In addition, the NDS included capacity-building initiatives and strengthened debt management through the establishment of a national debt management committee.

F. Have structural reforms improved the economy’s supply response?

39. Structural reforms in Tanzania have aimed at enhancing the economy’s supply response and improving economic performance.

Fiscal reforms

40. Civil service reform in Tanzania aimed at limiting the role of the civil service to priority areas and improving the efficiency of government administration. Progress in this area has been uneven. Reforms, initiated in the context of the ESAF and implemented in cooperation with the World Bank and other donors, aside from further reducing the size of the civil service, was accompanied by a major pay reform, in which most allowances were monetized and fully integrated into the wage bill along with a reduction in wage compression. Following substantial delays initially, particularly in implementing the retrenchment component, reforms eventually led to a reduction in the size of the public sector and in the wage bill as a share of GDP. Subsequently, in the context of PRGF2, the government adopted a medium-term pay strategy, with a view to enhancing the prospects for the government to recruit, retain, and motivate a critical mass of technical and professional staff. However, little was accomplished in adjusting the pay scale for this group, while critical staff in priority sectors received instead selective salary enhancements. Concurrently, a complex system of allowances—recorded outside of the wage bill—accounted for an increasing share of the total remuneration of the beneficiaries.

41. The privatization and restructuring of state-owned enterprises (SOEs) aimed at removing the burden of parastatal operations on the budget and enhancing the role of the private sector in economic activity. Building on the divestiture of more than 100 SOEs during 1992–95, the ESAF arrangement provided for the removal of at least 50 enterprises annually during 1996–98 from government control through sale, lease, liquidation, or divestiture. About two-thirds of all state-owned enterprises were privatized by end-2002. Reforms were largely successful, particularly concerning the privatization of commercial enterprises. Implementation was, however, slower than projected in the privatization of banks and the utilities, owing to technical factors in offering these enterprises for privatization or liquidation, the need for appropriate sequencing (including the establishment of appropriate regulatory frameworks), lack of coordination, and the need for elaborate consultation to achieve political consensus.

Financial sector

42. Reforms have targeted a strengthening of the financial system, with a view to enhancing its competitiveness, soundness, and contribution to investment and growth. Reforms in the context of the Fund-supported programs have included the privatization of state-owned financial institutions; improvements in the prudential and regulatory framework; and the alleviation of impediments to broad-based lending by the banks (Appendix 4). Lack of sufficient government commitment initially delayed reforms in the financial sector and adherence to conditionality under Fund-supported programs has varied, with privatization of state-owned banks, in particular, being characterized by significant delays.

43. More recently, progress has been made in the implementation of the recommendations of the joint Bank-Fund Financial Sector Assessment Program (FSAP, 2003). In particular, drawing upon the FSAP recommendations, a comprehensive Financial Sector Reform Implementation Action plan has been put together in the context of PRGF2, notably with a view to accelerating efforts aimed at removing key structural impediments to broadening access to financial services, including medium- and longer-term lending (this was a structural benchmark under PRGF2). Delays in the submission to parliament of amendments to key banking legislation, aimed at providing greater autonomy to the central bank while enhancing transparency and accountability and strengthening banking supervision, however, underscore the difficulty of reaching rapid consensus on some of these reforms.22

44. Notwithstanding financial sector liberalization, reforms aimed at promoting bank lending and the availability of credit, more generally, have been lackluster. Key impediments to greater bank lending to the private sector, identified by a broad spectrum of investors, include the inability to use land as collateral, underdeveloped leasing, equity and export finance markets, as well as the absence of a centralized system for credit information. In this context, significant improvements are required in effectively implementing the Land Act of 1999. Despite amendments in 2004 that addressed the issue of legal protection for lenders, a key outstanding issue that remains relates to the harmonization of the provisions of the Land Act with other laws that are related to land issues.23 These are important to the effective implementation of the Land Act. Another problem in this context concerns inadequate judicial reforms, and the role of the legal system and its inability to enforce contracts and protect bank lending. Despite the introduction of Commercial Courts in 1999 to address this anomaly, there are still problems associated with the possibility of appeals after banks receive favorable adjudication in these courts. Furthermore, capacity constraints in these courts have undermined the speedy resolution of cases and therefore the willingness of banks to engage in more broad-based lending.

45. Under PRGF2, several initiatives were taken to facilitate access to financing, especially for smaller or rural enterprises. These include the implementation of the National Microfinance Policy of 2000 and operationalization of the legal, regulatory and supervisory framework for microfinance; development of the Export Credit Guarantee Scheme (ECGS) which provides guarantees to commercial bank lending for crop marketing; establishment of the Small and Medium Enterprise (SME) scheme to guarantee commercial bank credit to SMEs and of the Development Finance Guarantee Facility (DFGF) to provide credit for medium-term development finance; and the establishment of a (private) credit information bureau.24

Exchange and trade reforms

46. Exchange rate and capital account liberalization facilitated trade and foreign investment flows. Tanzania liberalized its exchange rate system in 1994 by introducing an interbank market-based foreign exchange rate, which facilitated trade related financial transactions. This and the liberalization of foreign exchange availability for making payments and transfers for current international transactions led to Tanzania accepting in the context of the ESAF program, in July 1996, the obligations under the Article VIII of the Fund’s Articles of Agreement. Tanzania liberalized its capital account progressively in the context of the PRGF programs, initially by focusing on attracting foreign direct investment (FDI) and subsequently by allowing foreign portfolio investment in early 2003.

47. Trade liberalization promoted openness by enhancing export competitiveness and facilitating access to lower-cost imports. Trade liberalization was achieved broadly in two phases, first in the context of Tanzania’s commitments under the Cross-Border Initiative (CBI) during the ESAF program, and second, in the context of Tanzania’s regional integration with the East African Community (EAC) and the Southern African Development Community (SADC) under the PRGF2 program. Most export duties were abolished under the ESAF and rationalization of import tariffs was achieved under both liberalization phases. This led to a reduction in the number of non-zero tariff rates from more than four to two, a drop in the maximum tariff from 40 to 25 percent, progress in reducing non-tariff barriers and suspended duties, as well as the adoption in 2005 of the EAC common external tariff.

48. Tanzania faces complications, however, from being a member of both the EAC and SADC, while its EAC partners are members of yet another regional trade agreement, namely the Common Market for Eastern and Southern Africa (COMESA). Such an asymmetric configuration has the potential to create confusing and conflicting situations which are bound to intensify over time as the respective integration agendas of the EAC, SADC, and COMESA deepen. In this context, Tanzania would need to ensure sufficient flexibility in its integration commitments to avoid contradictory requirements of these regional agreements which would likely arise. Above all, it is important that Tanzania anchors its regional integration efforts within a multilateral framework of liberalization, while leveraging cooperation at the regional level to tackle regulatory impediments to trade.

IV. Implementation Lessons, Program Design, and Conditionality

A. What explains the relative success of Fund-supported programs in Tanzania?

49. The success of Fund-supported programs in Tanzania reflects a combination of political will, a wide consultative process underpinning the reforms, and a good coordination of donor efforts.

Political commitment and ownership

50. Performance under the Fund-supported programs has been strong, and reflects the political will and commitment at the highest levels of the government. The relative success and durability of economic reforms in Tanzania can be attributed to a confluence of factors, including a strong and tested sense of ownership of the reforms since early in the process, a wide consensus on necessary policy actions and measures based on consultation with civil society, and consistent support from development partners. Tanzania’s experience under Fund-supported programs, however, contains an element of “unevenness” in the implementation of reforms. In particular, program implementation was fairly strong concerning fiscal reforms, reflected in improvements in expenditure management, considered to be among the best in Sub-Saharan Africa, and, more recently in the context of PRGF2, in revenue performance (even though still somewhat disappointing compared to potential). At the same time, however, financial sector reforms, including the privatization of state-owned banks, have taken longer. Moreover, despite financial sector liberalization, financial intermediation remains modest, with large segments of the private sector, notably in the rural areas, having limited access to credit.

PRSP Process

51. Strong country ownership allowed the Poverty Reduction Strategy Paper (PRSP) to become the main instrument for coordinating the domestic poverty reduction program between the authorities and the international donor community. The first PRSP aimed at decreasing poverty by identifying priority spending areas that would benefit from additional funding, mostly health and education. To enhance its effectiveness, the PRSP was continuously updated in the annual progress reports by expanding and reprioritizing government expenditures and made increasingly responsive to local poverty problems. The approach was adjusted in the government’s second-generation PRSP, the MKUKUTA, which aimed at reducing poverty through an outcome-based approach. The PRSP was built on a consultative process and helped translate the government’s longer-term goals—articulated in the framework of the government’s 1997 National Poverty Eradication Strategy and the government’s National Development Vision 2025—into medium-term objectives anchoring the Fund-supported programs.

Collaboration with the World Bank and other Donors

52. In the context of large aid inflows, coordination between the multilateral institutions and donors has been critical to the success of reforms in Tanzania. In particular, the Fund has collaborated closely with the World Bank and other donors, including by providing technical assistance on areas of core expertise, but some areas have received less attention than they should have.

53. The Bank took the lead in supporting Tanzania in its reform efforts in a number of areas. This includes civil-service reform, education and health, decentralization, energy, tax administration, public enterprise reform and privatization. In improving public expenditure management, the Fund has taken the lead, with the Bank focusing on strategic resource allocation and operational efficiency of public expenditures.25 Likewise, on tax policy and administration, the Fund has taken the lead on providing advice on tax policy issues, while the Bank and other donors have led the efforts in supporting the government’s efforts to enhance domestic revenue collection, including through reforms of the Tanzania Revenue Authority. Similarly, following the joint Bank-Fund FSAP in 2003, the two institutions have jointly helped the authorities formulate a reform strategy aimed at addressing the weaknesses identified by the exercise, including through technical assistance. In this context, an implementation matrix covering reforms across the various financial sectors has helped secure the buy-in of other donors. Notwithstanding the close collaboration between the Bank and the Fund, gaps have been identified in the coordination process, including in the setting of priorities for timely delivery of the Poverty and Social Impact Assessment (PSIA).26

54. Reforms in all the above-mentioned areas were critical, but the Fund and the Bank could have placed greater emphasis on alleviating some of the supply-side constraints (identified above) that have undermined agricultural production and exports, which is key for reducing poverty. Moreover, both institutions could have placed more emphasis on reforms aimed at improving the investment climate—including by addressing with greater urgency issues relating to the business licensing system, access to credit, and the introduction of commercial courts—with a view to facilitating investment-led growth. Similarly, notwithstanding the important role that the Bank has played in reforming the energy sector, and notably TANESCO, greater urgency could have underpinned the reforms, particularly since problems have reached crisis proportions.

55. Other donors and creditors have also been very active in Tanzania. The United Kingdom, the Netherlands, Ireland, Sweden, Norway, Germany, and others have also provided budget support tied to the PRSP. Sound macroeconomic management remains an important requirement for the donors’ provision of budget support. Donors have also supported structural and institutional reforms in public expenditure management, tax administration, education and health; and assisted with capacity building. This means that both the Fund and the Bank would need to work closely with other donors in supporting Tanzania.

B. Program Design

56. Against the background of large macroeconomic imbalances, owing largely to fiscal profligacy, adjustment in the Fund-supported programs was appropriately anchored on strengthening fiscal performance. This meant that in addition to quantitative targets that would underpin the macroeconomic framework, programs included structural conditionality with significant focus on boosting fiscal performance. Furthermore, owing to constraints on a substantial increase in revenue, fiscal adjustment, particularly in the context of ESAF and PRGF1, was appropriately predicated on improvements in expenditure policy and management. In this context, however, strong emphasis was placed on ensuring that poverty-reducing expenditures were protected. This form of fiscal consolidation appeared to have generated the political consensus needed to achieve the stabilization goals and lay the foundation for major structural reforms.

  • Program design issues concerning domestic revenue mobilization and expenditure policy and management have been discussed previously in section IIIC, and will not be repeated here.

57. The choice of nominal anchor for monetary policy in Fund-supported programs was sufficiently flexible in accommodating changing macroeconomic circumstances.

  • Given the reliance on foreign assistance, program targets were adjusted to reflect potential volatility associated with such inflows. In particular, programs allowed for larger net domestic financing of the budget (and lower international reserve targets) if aid flows were less than expected; on the other hand, if aid inflows were larger than expected, the programs did not require a reduction in domestic financing, thereby allowing for a larger overall fiscal balance and promoting aid spending.

  • The design of PRGF1 did not provide for aid absorption. In particular, given the nominal anchor for monetary policy—net domestic assets of the BoT—the central bank did not feel compelled to sterilize aid inflows through the sale of foreign exchange. This was, however, addressed in the context of PRGF2, when the nominal anchor was switched to reserve money. This succeeded in encouraging greater use of foreign exchange sales, with a view to balancing better the conflicting objectives of monetary and credit policies on the one hand and promoting external competitiveness on the other.

58. One area of concern pertaining to the setting of quantitative conditionality relates to the target for reserve money. In particular, under the Fund-supported program (PRGF2), performance criteria (PC) concerning reserve money are based on end-of-period data. On occasion, the path of reserve money within the quarter has significantly exceeded the target, only to be temporarily lowered at the end of the quarter, as the BoT withdrew liquidity on a short-term basis and provided waivers to banks to draw down their reserves below required levels. Such window-dressing operations inter alia undermine the quality and transparency of monetary policy operations and impede the development of money markets. While the current monetary targeting framework has served Tanzania well by providing a nominal anchor that has underpinned low inflation—the framework should be adapted to improve the liquidity management of the BOT and provide more transparency with respect to the BOT’s operations. This will facilitate market development, improve the transmission of policy, and make the financial system more resilient to shocks.

C. Conditionality and Compliance

59. Fiscal conditionality was predominant in all of Tanzania’s Fund-supported programs. The three programs included altogether 156 structural conditions (prior actions, performance criteria, and benchmarks); with benchmarks constituting nearly 75 percent of all conditions (Table 3). Fiscal conditionality, primarily focusing on tax policy and administration—aimed at improving revenue mobilization—and expenditure management, accounted for nearly 44 percent of the total conditions. Moreover, fiscal reforms were supported by several quantitative targets in all three programs. The remainder of the structural conditions aimed at general economic management, the restructuring and privatization of state-owned enterprises, trade liberalization, and financial sector reform.

Table 3.

Tanzania: Structural Conditionality, 1996–2006

article image

3rd year of the program is not completed yet.

Average conditions over the program period for ESAF- and PRGF-supported programs approved in the years 1996, 2000, and 2003. The average for the PRGF 2003-2006, is based on reviews completed until end-2004.

Source: MONA, staff reports.

60. Conditionality has generally been used to achieve key program objectives, and there has been a reduction in both the scope and the number of conditions as programs have evolved In particular, PRGF2 made parsimonious use of structural conditionality, limited to reforms that are critical for the achievement of macroeconomic objectives. As a result, the number of structural performance criteria declined from 61 in PRGF1 to 37 in PRGF2. Notwithstanding the streamlining, the number of structural conditions in Fund supported programs in Tanzania was significantly greater than those in other ESAF/PRGF arrangements across the membership (Table 3).

61. Some conditionality in Fund-supported programs has focused on longer-term objectives, notably to ensure that rapid growth is durable. The ESAF and PRGF1 arrangements addressed a broad range of factors that affect investor sentiment and private sector activity. In the context of PRGF2, however, there was an explicit objective to enhance the economy’s supply response by removing key impediments to growth and improving the investment environment. Against this background, there was a structural benchmark aimed at improving the business licensing system, which had been identified by investors as an important factor undermining private investment in Tanzania. Arguably, such reforms are not in the Fund’s area of expertise, but they are key to boosting private investment and sustaining rapid growth over the medium-term.

62. Compliance with program conditionality has improved with each program. During ESAF and PRGF1, most structural benchmarks and PCs were observed with delays, attributable in large part to difficulties in reaching political consensus on more contentious reforms, including privatization. This trend was, however, reversed during PRGF2, as nearly all structural benchmarks and PCs were met on time. More generally, Tanzania’s compliance with conditionality has improved over time, with the number of performance criteria and structural benchmarks met on time rising (Table 4). In particular, the waiver rate of structural performance criteria declined from 60 percent under the ESAF to 31 percent under PRGF1, and has declined further in the context of PRGF2. Similarly, the implementation rate of structural benchmarks (including those that were met with a delay) increased from 50 percent under the ESAF to 95 percent in PRGF1 and about 100 percent in the first two years of PRGF2 (Appendix 5).

Table 4.

Tanzania: Implementation of conditionality, 1996–2006

article image

3rd year of the program is not completed yet.

Includes two structural benchmarks for the 1st year, “Select consultants to prepare detailed plan for unbundling TANESCO (6/30/2000)” and “Issue implementing regulations for Public Finance Management Act and Public Audit Act (8/31/2000)”, and 1 structural benchmark for the 2nd year, “Commence operations of the large taxpayer unit in the TRA (7/1/2001)”, of 2000-2003 PRGF have been delayed with no clear status of their implementation.

Source: MONA, Staff Reports.

V. Policy Challenges for the Medium Term

63. Sustained reforms in the context of Fund-supported programs have led to strong economic performance, but growth has not been adequate to reduce poverty significantly and aid dependency portends risks to macroeconomic stability. To make serious inroads against poverty and reduce dependence on aid gradually, Tanzania will need to sustain rapid growth for long periods of time, based on diversification and greater private sector participation in economic activity, improve domestic revenue mobilization, and alleviate structural deficiencies in the economy.

Sustaining Growth and Reducing Poverty

64. Challenges remain for Tanzania to achieve the Millennium Development Goals target for income-based poverty reduction (Table 5). The MDG income poverty target is to reduce the poverty rate by half by 2015 relative to 1990, which for Tanzania would be to reduce the poverty rate to 19.3 percent of the population. Based on statistical simulations, annual GDP and rural GDP growth for Tanzania would have to be on average about 5.1 and 4.8 percent, respectively, to achieve the MDG income poverty target, assuming no increase in income inequality and no change in the population growth rate.27 While staff projections of the average growth rate for the whole economy over the medium-term are consistent with these simulations, rural GDP growth since 1996 has been about one percentage point less than the simulated need. Similarly, simulations suggest that while the urban poverty rate is on the right path to halving the poverty rate by 2015, the rural poverty rate remains above the path that would be needed to achieve the MDG goals.

Table 5.

Tanzania: Millennium Development Goals 1/

article image

Figures in italics refer to periods other than those specified.

Source: World Development Indicators database, April 2005