United Republic of Tanzania
2007 Article IV Consultation and First Review Under the Policy Support Instrument: Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the United Republic of Tanzania

This paper discusses the United Republic of Tanzania’s 2007 Article IV Consultation and First Review under the Policy Support Instrument. The report focuses on sustaining Tanzania’s recent strong economic performance, broad-based growth, and more rapid poverty reduction. This would require maintaining the structural reforms momentum through measures that enhance public resource mobilization and efficiency of spending and increase the financial sector’s contribution to growth. The authorities are taking steps to alleviate key bottlenecks constraining economic activity, notably by improving infrastructure and enhancing the business environment.

Abstract

This paper discusses the United Republic of Tanzania’s 2007 Article IV Consultation and First Review under the Policy Support Instrument. The report focuses on sustaining Tanzania’s recent strong economic performance, broad-based growth, and more rapid poverty reduction. This would require maintaining the structural reforms momentum through measures that enhance public resource mobilization and efficiency of spending and increase the financial sector’s contribution to growth. The authorities are taking steps to alleviate key bottlenecks constraining economic activity, notably by improving infrastructure and enhancing the business environment.

I. Background

1. Tanzania’s economic performance has been strong over the past decade, supported by prudent macroeconomic policies and far-reaching structural reforms. In particular, sound financing of government operations—including substantial assistance from international donors—limited the government’s recourse to domestic borrowing, which facilitated a monetary policy stance that reduced inflation while allowing for a rapid expansion of credit to the private sector for productive purposes. The structural reform agenda has focused on economic liberalization, improved public financial management and revenue administration, and financial sector development. Together with infrastructure investment and structural policies to enhance the business environment, this has contributed to solid productivity growth.1 Moreover, thanks to the growing economy, increased government revenues, and donor assistance, government spending expanded at a swift pace, most notably on pro-poor initiatives outlined in MKUKUTA, which sets forth Tanzania’s second-generation growth and poverty reduction strategies. Tanzania’s strong performance has been characterized by

  • Strong growth and low inflation. Since 2000, real GDP has grown by 6.3 percent a year on average. Growth has been broad based, and driven largely by productivity gains; a sharp contrast from the long period of economic stagnation experienced previously. Annual inflation, which had averaged some 30 percent in the past two decades, fell to single digits in 1998 and has generally been around the 5 percent mark since (Figure 1).

  • Increased government spending with only limited recourse to domestic borrowing. Since 1999/2000, government revenues and donor support have risen by 4½ percentage points and 6½ percentage points of GDP, respectively, allowing government spending to grow by some 10 percentage points of GDP, to slightly over 28 percent of GDP in 2006/07. Aside from sizable borrowing in 2005/06, government net domestic financing (NDF) was negligible since 1999 (Figure 2). Planned government spending on MKUKUTA priorities rose to 13.6 percent of GDP in 2006/07, up from 12.8 percent of GDP a year ago.2

  • Financial sector deepening. Intermediation by the banking system has expanded impressively, albeit from a very low base. The average stock of broad money (M3) reached 27 percent of GDP in 2006, while credit to the nongovernment sector reached 13 percent of GDP (from 17 percent and 5 percent of GDP, respectively, in 1999/00). On average, credit to the nongovernment sector grew by 32 percent a year during this period (Figure 3).3

  • Strengthened external position. Exports of goods and services have grown by about 18 percent a year on average since 1999/00. At the same time, imports grew by about 20 percent a year—mainly reflecting investment-related capital goods—resulting in a widening of the current account deficit (to a projected 11.2 percent of GDP in 2006/07). Foreign direct investment and donor project grants and concessional loans exceeded the current account deficit, which allowed for a strong buildup of international reserves (Figure 4). Gross reserves were then maintained at a comfortable level, as the Bank of Tanzania (BoT) has increased foreign exchange sales.

  • Low level of public debt. Extensive debt relief under the HIPC and Multilateral Debt Relief Initiatives, as well as additional bilateral relief, have greatly reduced Tanzania’s public debt burden (external and domestic), which was about 30 percent of GDP in net present value (NPV) terms at the end of June 2006.

  • Tanzania remains very poor. Notwithstanding the progress of recent years, GDP per capita is well below the average for sub-Saharan Africa and poverty is widespread. Tanzania’s human development index also ranks below the average for sub-Saharan Africa.4 In support of Tanzania’s strong efforts, donor grants and concessional loans have risen to an expected 11.3 percent of GDP in this fiscal year (2006/07), equivalent to about 40 percent of total government spending. However, Tanzania will have very large needs for years to come, particularly in the areas of education, health, and infrastructure, and will continue to depend on donor support.

Figure 1.
Figure 1.

Tanzania: Recent Performance and Achievements

Citation: IMF Staff Country Reports 2007, 246; 10.5089/9781451838510.002.A001

Sources: Tanzanian authorities; IMF staff estimates; and UNDP Human Development Indicators. The Human Development Index is a summary measure based on life expectancy, literacy rate, and GDP per capita.
Figure 2.
Figure 2.

Tanzania: Fiscal Developments, 1999/00-2006/07

(percent of GDP)

Citation: IMF Staff Country Reports 2007, 246; 10.5089/9781451838510.002.A001

Sources: Tanzanian authorities and staff estimates.
Figure 3.
Figure 3.

Tanzania: Monetary and Financial Developments, 2000-06

Citation: IMF Staff Country Reports 2007, 246; 10.5089/9781451838510.002.A001

Source: Tanzanian authorities; IMF staff estimates.
Figure 4.
Figure 4.

Tanzania: External Sector Developments

Citation: IMF Staff Country Reports 2007, 246; 10.5089/9781451838510.002.A001

Source: Tanzania authorities; IMF staff estimates.

2. In light of its status as a mature stabilizer with comfortable international reserves, Tanzania has entered a new phase in its long-term relationship with the Fund. On February 16, 2007, the Executive Directors approved a three-year program under the Policy Support Instrument (PSI). The government views the PSI as essential to reinforce appropriate macroeconomic and structural policies, and signal the strength of government policies to development partners.

II. Recent Economic Developments and Performance under the PSI

3. Overcoming the aftermath of drought in early 2006, the economy continued to perform well in 2006/07. Real GDP is estimated to have grown by a robust 6.2 percent in 2006, slightly above the envisaged 5.9 percent, and inflation picked up only moderately, peaking at 7.3 percent in February 2007. Notably, the recent return of good rainfalls has led to an ongoing bumper harvest; also positively, hydro power supplies have been fully restored, thus ending the power blackouts that threatened to undermine economic performance. Pressure on food prices is easing, and inflation is on course to end the year close to the 5 percent target.

4. The authorities’ demand-management policies have been effectively implemented; NDF is expected to be near zero in 2006/07, mainly because strong revenues—which are expected to reach 15.7 percent of GDP, (1 percentage point above the program target), driven largely by tax administration reforms and the strong economy—more than offset delays in disbursement of donor support. On the spending side, higher than budgeted domestic interest costs, arising mainly from increases in T-bill yields, were largely offset by low primary expenditures.

5. The trend toward greater financial sector deepening continued, though broad money growth slowed markedly, as low NDF once again facilitated a rapid expansion of bank credit to the nongovernment sector. Financial indicators show that banks’ balance sheets have stayed sound during the credit expansion, notwithstanding a modest increase in nonperforming loans. Gross official international reserves stood at nearly US$2.2 billion at end-March 2007—the equivalent of 4.2 months of projected imports of goods and services for the following year.

6. Regarding performance under the PSI, all but one of the quantitative assessment criteria for end-December 2006 and all indicative targets for end-March 2007 were met, and most structural policies are proceeding as envisaged. The targets for NDF and NIR were met by wide margins; the latter partly reflects delays in MDRI-financed expenditures. Average reserve money slightly exceeded the ceiling for the end-December 2006 test date, but was soon brought back on track. With regard to structural policies, a Cash Management Unit was established and the joint Ministry of Finance-BoT Cash Management Committee is expected to formulate its first three-month cash flow forecast by end-June 2007. However, the integration of ASYCUDA and TISCAN systems at customs has been delayed by technical factors. The Financial Recovery Plan for TANESCO was approved as envisaged. The Anti-Corruption Bill was submitted to parliament in February and subsequently passed in April.5 The government has continued to publish the list of recipients of tax exemptions. The Cabinet’s approval of the second-generation Financial Sector Reform Action Plan in April will facilitate creation of a unified legal and regulatory framework for pension funds. However, the submission to government of the proposal has been delayed (until September 2007) for reasons outside the government’s control.

III. Key Challenges: Stepping Up Sustainable Growth and Poverty Reduction

7. The discussions focused on policies aimed at achieving and sustaining a higher rate of economic growth and poverty reduction. There was broad agreement that the MKUKUTA provides an appropriate framework for macroeconomic and structural policies, and that enhanced implementation and increased resources are key to achieving higher growth and more poverty reduction. The discussions covered the following issues:

  • Macroeconomic stability and growth. The authorities continue to view maintaining macroeconomic stability, anchored by sound financing of governmental operations, as a key to sustainable growth. They are firmly committed to maintaining low inflation, which they view as a key achievement of their reform efforts. Effective implementation of the structural reform agenda is also viewed as essential to further increase both public and private sector productivity, as is investment in infrastructure, particularly in the energy and transportation sectors.

  • Public sector efficiency and effectiveness. Ongoing reforms in tax policy and administration, public financial management, and the civil service will continue to aim at increasing public resources and allocating them more efficiently. To achieve higher quality spending and build donor support, better monitoring and reporting of spending on MKUKUTA priorities should be a priority.

  • Financial intermediation. Continued sound expansion of financial sector intermediation is central to strong and sustained private sector growth. Currently, the highly volatile yields on government securities reduce the financial sector’s incentive to broaden the provision of credit to the private sector. To ease pressure on yields and enhance stability, the authorities are taking steps to improve monetary policy operations and the functioning of the money market.

  • Exchange rate policy. The authorities recognize that the large donor inflows have led to liquidity management issues and put upward pressure on the exchange rate, raising concerns about competitiveness. In this context, the BoT will continue to maintain a flexible exchange rate policy while smoothing its implementation of monetary policy.

  • Debt management. The authorities reiterated their commitment to preserve recent gains in debt sustainability. Accordingly, they intend to avoid any future government contracts for or guarantees of nonconcessional debt and envisage strict curtailment of domestic borrowing.

  • Governance. The authorities recognize the importance of efforts to fight corruption and institute good governance practices, including through greater transparency.

  • Regional integration. The authorities view regional integration as an important supplement to their efforts to sustain sound economic policies and boost growth. As noted in Box 1, they view the East African Community (EAC) as the primary vehicle to strengthen their regional integration efforts.

  • Poverty reduction. Sustaining high rates of broad-based growth that encompasses agricultural and rural development would have the greatest impact on reducing poverty, which is indeed the focus of the MKUKUTA. Rapid expansion in the coverage and quality of education and health services is similarly essential. Efforts to strengthen information and control systems to link MKUKUTA goals to the annual budget and medium-term expenditure framework are intended to strengthen poverty reduction.

Moving Toward Greater Regional Integration Within the East African Community

The authorities view Tanzania’s economic future as being closely tied to the EAC. Efforts under way within the EAC to achieve greater regional economic and political integration include establishing a single market, harmonizing policies to promote cross-border trade and investment, developing regional infrastructure, and enhancing technological and human resource development. A key achievement, since the creation of the EAC in 2000, has been the establishment of the Customs Union (effective 2005) with a Common External Tariff (CET), which is expected to enhance intraregional trade (Table 1).

Table 1.

EAC Main Trading Partners

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Source: IMF, Direction of Trade Statistics

Policy discussions on deepening regional integration focused on harmonizing investment incentives and further trade liberalization. Discussions drew on the joint Selected Issues Paper prepared for Kenya, Tanzania, and Uganda.

  • Investment incentives. The authorities recognized the potential benefits of a coordinated approach to providing investment incentives in the EAC, possibly through a code of conduct that would set out rules for managing investment incentives and help avoid a mutually damaging “race to the bottom.”

  • Trade liberalization. The authorities agreed that Tanzania could benefit from lowering the CET top band and bringing “sensitive” products into the CET; they are committed to working with the Partner States to fully implement the EAC Customs Union Protocol, including the review of the CET by 2010.

The authorities are working with EAC Partner States to address the issue of overlapping memberships in regional trade arrangements. Tanzania is also a member of the Southern African Development Community (SADC) (Kenya and Uganda are members of the Common Market for Eastern and Southern Africa (COMESA)). Through the EAC Secretariat, consultations with COMESA and SADC are underway on how the three regional integration blocks can work together to avoid potentially conflicting obligations.

IV. The PSI Program: Policies for the Medium Term

A. Medium-Term Economic Outlook

8. The authorities’ demand-management policies will be geared to maintaining macroeconomic stability. Productivity trends are projected to drive high real GDP growth over the medium term. Real GDP is projected to grow by 7-8 percent a year, with particularly strong growth in the construction, manufacturing, mining, and tourism sectors.6 Given agriculture’s large share in the economy, and its direct role in reducing poverty, it will be essential to effectively implement policies to enhance the growth of agriculture—a primary focus of MKUKUTA programs. Structural reforms and investment in infrastructure, particularly in the transport and energy sectors, will also be critical. Sound and prudent monetary policies would contain inflation. In line with the MKUKUTA, the authorities will continue to target inflation to about 5 percent in the medium term.

9. Macroeconomic stability would be underpinned by sound fiscal policies. In particular, the authorities stressed their continued commitment to contain NDF to near zero in the medium term to avoid crowding out resources for productive private sector activity. Sustained tax and customs administration reforms, supplemented by possible tax policy measures, target revenue of over 17 percent of GDP by 2009/10. With sustained donor support, this would permit the government to maintain high levels of spending on MKUKUTA priorities. Monetary aggregates are projected to expand at a strong pace, reflecting current trends in financial sector deepening, but the authorities stand ready to curb such growth if inflationary pressures emerge. External prospects remain broadly favorable. Driven by strong economic growth, both exports and imports would continue to rise, with the current account deficit falling slightly to about 14.5 percent of GDP. Gross official international reserves are projected to rise modestly to about $2.3 billion, or 3.5 months of the following year’s imports.

B. Enhancing Public Resource Mobilization and Efficiency of Spending

10. Ongoing efforts to strengthen tax and customs administration will continue to be a high priority. In addition to providing increased resources for high priority MKUKUTA-related spending, raising the revenue-to-GDP ratio would reduce Tanzania’s long-term reliance on donor support. Reforms in customs administration aim to enhance trade facilitation and strengthen compliance. On domestic taxation, efforts will focus on continued strengthening of auditing and enforcement capacity, with a particular emphasis on increasing collections from sophisticated taxpayers and extending applicable procedures developed for large taxpayer enforcement to medium taxpayers. Over the medium term, the authorities may consider additional tax policy measures to help attain their medium-term revenue targets. In addition, the authorities plan to improve collection of nontax revenues, including by improving procedures for the licensing of natural resources.

11. The authorities recognize the critical importance of further strengthening public financial management (PFM). Substantial improvements in the budget preparation process, as well as in its execution and monitoring, are key to ensure that public resources are allocated efficiently and to put the objectives of MKUKUTA within reach. In addition, achieving greater budget flexibility through increased donor aid in the form of budget support is directly related to the quality of PFM. The authorities will assign top priority to enhance the credibility of the MTEF, with a view to strengthen the links between MKUKUTA and the budget. In this regard, the authorities plan to improve the integration of the Strategic Budget Allocation System (SBAS) and the Integrated Financial Management System (IFMS). The authorities also expressed their intention to implement most recommendations of the external review of the donor-financed public financial management reform program (PFMRP), particularly broadening the scope of the PFMRP to include line ministries and improved coordination with the Local Government Reform Program. Moreover, as noted below, important efforts are underway to strengthen cash management.

12. Addressing capacity constraints in all areas of the government is essential for stepping up policy implementation. The public service reform program (PSRP) and revised medium-term pay strategy (MTPS) are aimed at attracting and retaining high-quality staff through adequate remuneration. The authorities will soon launch phase II of the PSRP, which will incorporate forthcoming recommendations of the Presidential Commission on Public Service. The objective is to enhance accountability and coordination across government sectors to facilitate a stronger pro-growth and poverty reduction approach.

C. Increasing the Financial Sector’s Contribution to Growth and Enhancing Monetary Policy

13. The authorities are progressively implementing changes in monetary policy operations, in line with recommendations by technical assistance from the Fund aimed at providing a more stable setting for domestic markets. These changes are also designed to help curb high yields on Treasury Bills and reduce volatility (Box 2). The BoT—armed with better projections of the government’s cash flow needs, provided by the new Cash Management Committee—will aim to position reserve money on a continuous basis to avoid the need for sharp end-quarter contractions. In addition, the authorities will seek to reduce issuances of government securities; this will be achieved through fiscal policies to limit NDF, and by scaling back their use for sterilization operations through increasing foreign exchange sales for liquidity management purposes. Reflecting the authorities’ broad agreement with staff’s advice, the monetary program for 2007/08 calls for a net reduction in liquidity paper and a moderate increase in foreign exchange sales by the BoT.7 Steps will also be taken to elevate competition in the T-bill/bond market and to develop the secondary market for these instruments over time.

Tanzania: High and Volatile Government Securities Yields

Tanzania’s T-bill yields have risen steadily since late-2002, to more than 600 basis points above the average in other EAC countries in real terms. Since mid-2004, yields have become progressively more volatile, with peaks and troughs almost 9 percentage points apart. Moreover, yields appear to have demonstrated downward stickiness, so that volatility itself may have contributed to the rising trend (Figure 1).

Figure 1:
Figure 1:

Tanzania T-bill rates

(2002-2007)

Citation: IMF Staff Country Reports 2007, 246; 10.5089/9781451838510.002.A001

Demand and supply factors have been driving these results. On the supply side, the volume of T-bill sales—used mostly for mopping up liquidity—began rising steadily in 2002, before increasing sharply in 2005, when the government incurred large domestic financing needs (Figure 2). In addition, sales of T-bills by the BoT were concentrated toward the end of the quarter (Figure 3). This concentration was intensified by the need to roll over maturing issues, resulting in predictable “pressure points” in the market. On the demand side, T-bills competed with strong private sector demand for credit in Tanzania’s robust economy, including occasional but large syndicated loans and initial public offerings. Further complicating matters, demand is concentrated among a few large banks. Indeed, the government maintains large and growing unremunerated deposits with one of these banks, which further increases that institution’s market power, and creates liquidity that the BoT then needs to mop up. The trend toward dollarization has also weakened demand for T Shilling assets in recent years. Finally, demand tends to be dampened at the end of the quarter—just when new issues are highest—because of business taxes falling due.

Figure 2:
Figure 2:

Gross T-bill sales by purpose

(Tsh bn)

Citation: IMF Staff Country Reports 2007, 246; 10.5089/9781451838510.002.A001

The authorities are taking steps to ease pressure on yields: (i) consistent with Fund advice, the BoT now targets the daily average of reserve money, instead of end-quarter point targets, thus spreading out liquidity management; (ii) the Cash Management Committee has been set up to provide weekly and monthly forecasts of government revenues and expenditures so monetary policy can be implemented in a more timely manner; (iii) the BoT conducts a larger share of sterilization operations through sales of foreign exchange. In addition, dollarization pressures have eased in line with a firming up of the exchange rate.

Looking ahead, additional measures could be considered to reduce volatility of yields and enhance competition in the T-bill market: (i) the use of repo operations for fine-tuning purposes could be increased, and spread across each quarter; (ii) the central government could transfer its deposits in commercial banks to the BoT; (iii) auctions and instruments could be rationalized around a few key benchmark maturities suited to the current stage of financial market development; (iv) retail participation in T-bill auctions could be encouraged; (v) Actions to encourage activity in the secondary market—such as, less frequent T-bill auctions and market-maker requirements for primary dealers—could facilitate price discovery and enhance efficiency in the primary market.

14. Notwithstanding significant progress in recent years, Tanzania’s financial sector remains relatively small, and access to bank credit is limited. The second-generation Financial Sector Reform Action Plan approved by Cabinet, encompasses a number of initiatives to address this problem, notably (i) a unified legal and regulatory framework and investment guidelines for pension funds; (ii) legal and regulatory framework for a credit information system; (iii) a survey of existing microfinance operations; and (iv) regulations to fully operationalize the recently approved BoT and Banking and Financial Institutions Acts.

15. The government is continuing to implement limited direct initiatives to facilitate medium-term lending. These are based on best practices for offering private sector credit promotion by partial government guarantee of commercial lending to the private sector. Amounts guaranteed under these facilities for loans to small and medium-size enterprises remain modest and consistent with the authorities’ commitment to limit fiscal risks.

D. Exchange Rate Policies and Competitiveness

16. The authorities stressed their intention to maintain the flexibility of their exchange rate policy. Recognizing the pressures on liquidity emanating from substantial donor inflows, in addition to occasional interventions to maintain market order, the BoT intends to undertake increased foreign exchange sales for sterilization purposes. The authorities agreed with staff suggestions that the operation of the foreign exchange market could benefit from more frequent small sales of foreign exchange. They cautioned, however, that the market’s thinness and seasonal volatility complicate their intervention operations.

17. The staff believes that Tanzania has maintained its international competitiveness (Box 3). The staff continued to emphasize that structural factors leading to a high cost of doing business are the major barriers to enhanced competitiveness. The authorities agreed that, going forward, there is great scope to boost productivity and improve infrastructure to further strengthen competitiveness. However, they also expressed some concern that upward pressure on the exchange rate could affect traditional exports, which have stagnated for many years. The staff noted that, unlike other exports that have grown strongly in recent years, traditional exports did not respond to the shilling’s depreciation since 2001.8 This suggests that their disappointing performance reflects mainly weak supporting financial services and transport infrastructure for subsistence and small-scale farming, which continue to dominate Tanzania’s agricultural production. Indeed, the staff views the level of the exchange rate as broadly appropriate and noted that lower-than-programmed foreign exchange sales could exacerbate the problem. of high interest rates, raise domestic debt service costs to the government, or lead to higher inflation.

Competitiveness in Tanzania

Recent developments suggest that, on balance, Tanzania’s external competitiveness remains robust. Following a rapid depreciation in 2001-04, the real exchange rate has stabilized in recent years (Text Figure 1). Supporting the findings of a 2004 staff study (Country Report 04/284), two recent studies by staffs of the Fund (WP/07/90) and the World Bank (forthcoming) suggest that Tanzania’s real exchange rate has fluctuated around its equilibrium value since the early 1990s, and remains broadly in line with fundamentals.

Text Figure 1.
Text Figure 1.

Tanzania: Real and Nominal Effective Exchange Rates, 1994-2007

(Index, 2000=100)

Citation: IMF Staff Country Reports 2007, 246; 10.5089/9781451838510.002.A001

Export performance has been relatively strong, although developments across sectors have been mixed. Exports of gold and other nontraditional exports have continued to expand at a very rapid pace, with annual growth averaging about 26 percent and 14 percent, respectively, over the last five years (Text Figure 2). However, traditional exports—including cotton, coffee, tea, tobacco, and cashew nuts—have remained virtually flat in nominal U.S. dollar terms, hovering between US$250-350 million per year over the last decade. This seems to reflect mainly weak supporting financial and transport infrastructure for subsistence and small-scale farming, which continue to dominate Tanzania’s agricultural production. Overall, Tanzania has maintained its share in global world export markets in recent years (Text Figure 3). The current account deficit has widened from 9½ percent of GDP in 2001/02 to an expected 15½ percent of GDP in 2006/07, but remains fully financed by growing external assistance (11½ percent of GDP) and FDI (4 percent of GDP)

Text Figure 2.
Text Figure 2.

Tanzania: Compostion of Goods Exports, 1997-2006

(in millions of US dollars)

Citation: IMF Staff Country Reports 2007, 246; 10.5089/9781451838510.002.A001

Text Figure 3.
Text Figure 3.

Share of GNFS Exports to Total World Exports

Citation: IMF Staff Country Reports 2007, 246; 10.5089/9781451838510.002.A001

Institutional indicators suggest a continued improvement in the business environment and competitiveness, although from a low base (Table 1). Significant progress continues in improving investor protection, removing informal barriers to trade, reducing corruption, and strengthening governance. However, weaknesses remain in a number of areas, including restrictions in obtaining licenses, rigid regulation in the hiring and firing of workers, and ease of property registration. Weak energy and transport infrastructure also continues to hamper Tanzania’s competitiveness.

Table 1.

Institutional Indicators in Selected Countries in Sub-Saharan Africa

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World Bank’s Doing Business Database (http://www.doingbusiness.org/). Total of 175 countries included. Positive change means an improvement in the rank.

World Economic Forum (http://www.weforum.org). Total of 125 countries included. Positive change means an improvement in the rank.

E. Scaling Up Donor Assistance and Debt Sustainability

18. Staff views Tanzania as a strong candidate for possible scaling up of aid (Box 4). This view is based on Tanzania’s strong economic performance together with extensive and pressing social and economic needs. Moreover, the reforms noted above and in the attached MEFP are designed to enhance the PFM reforms and capacity building to ensure that additional assistance would be used effectively. However, while donors view Tanzania’s reform efforts favorably and will likely continue supporting the country, they do not appear to have plans to scale up assistance.

19. At the authorities’ request the staff prepared a scaling up scenario (Table 10). The scenario assumes that annual disbursements of donor assistance will increase by US$1 billion over the current level over a three-year period (from US$1.7 billion in 2007/08 to US$2.7 billion in 2010/11).9 Staff calculations indicate that the macroeconomic implications of such an additional increase in aid are manageable. The higher aid, all of which is assumed to be in the form of grants, is likely to have a modest stimulative effect, with annual real GDP growth projected to increase by about 0.2 percentage points over the medium term, and additional positive supply-side effects to materialize beyond 2010/11. The impact on the real exchange rate is also likely to be moderate. Relative to the size of the market, the additional sales of foreign exchange would be modest (about 2-3 percent of annual trading volumes) and would result in a real appreciation on the order of 1½–2½ percent a year. Correspondingly, export growth would likely be dampened slightly, while imports would grow at a slightly stronger pace, resulting in a commensurate widening of the external current account deficit. In keeping with the authorities’ objectives to maintain annual inflation at 5 percent or below, the stance on monetary policy was left essentially unchanged. Increased foreign exchange sales by the BoT would be used to mop up most of the additional liquidity injections arising from the non-import component of government spending, although a small amount of government securities may need to be issued to accommodate some buildup of gross international reserves so that import coverage is maintained.

Table 1.

Tanzania: Selected Economic and Financial Indicators, 2005/06-2009/10

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

Data are on calendar year basis. For example, 2005/06 data are for calendar year 2005.

Monthly weighted-average yield of 35-, 91- 182-, and 364-day treasury bills. March 2007 figure used for 2006/07.

Excluding new debt issued to recapitalize government-owned banks during their restructuring.

Including change in stock.

Table 2.

Tanzania: National Accounts, 2005-10

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

Tanzania: Central Government Operations, 2005/06-2009/10 1

(Billions of Tanzania Shillings)

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Sources: Ministry of Finance; Bank of Tanzania; and Fund staff projections.

Fiscal year: July-June.

Program VAT and excise collections were projected before the announcement to abolish VAT on oil products and the increase of excise rates.

Some projected external debt obligations are under negotiation for relief with a number of creditors.

Basket funds are sector-specific accounts established by the government to channel donor support to fund-specific activities.

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

Table 4.

Tanzania: Summary Accounts of the Bank of Tanzania, 2006/07-2007/08

(Billions of Tanzania Shillings, unless otherwise indicated; end of period)

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

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

Table 5.

Tanzania: Monetary Survey, 2006/07-2007/08

(Billions of Tanzania Shillings, unless otherwise indicated; end of period)

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

Cumulative from the beginning of the fiscal year (July 1).

Table 6:

Financial Soundness Indicators, 2002-06

(Percent, end of calendar year)

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Sources: Bank of Tanzania and Fund staff estimates.

Calendar year; end of period claims relative to annual GDP.

The increase in non-performing loans to gross loans between 2005 and 2006 was due largely to a change in reporting standards.

Difference between lending rate and time deposit rate.

Table 7.

Tanzania: Balance of Payments, 2005/06-2009/10

(Millions of U.S. dollars, unless otherwise indicated)

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

Relief on some projected external debt obligations is being negotiated with a number of creditors.