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
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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.

Table 8.

Tanzania: Program Assistance, 2005/06-2009/10 1, 2

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

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

Fiscal year: July-June.

For 2006/07 based on actual disbursements for Q1-Q3 and projections for Q4. For 2007/08 based on currently identified aid commitments.

Poverty reduction budget support.

Table 9.

Tanzania: Status of HIPC Initiative Agreements by Creditor

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Source: Bank of Tanzania.
Table 10.

Tanzania: Alternative Macroeconomic Framework–Scaling Up of Donor Assistance 1

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Source: Fund staff projections.

Assumes an increase of US$1 billion in annual donor support phased in over three years.

Table 11.

Tanzania: PSI Work Program, 2007 - 2009

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Source: Fund staff.
Table 12.

Tanzania: Millennium Development Goals, 1990-2004

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Source: http://www.developmentgoals.org, retrieved May 9,2007.

Tanzania: Reaching the MDGs—A Case for Scaling Up

Tanzania has benefited from a significant increase in donor aid. In 2005 official development assistance to Tanzania was 12.5 percent of GNI, up nearly 50 percent in U.S. dollar terms relative to 2000 (Table 1). Despite this surge, aid to Tanzania, at US$39 per capita, remained below comparable sub-Saharan African countries.

Table 1.

Official Development Assistance (ODA) in Selected Countries in Sub-Saharan Africa 1/

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Source: OECD DAC database for 2005 (latest year available).

The data are reported on a calendar year basis, and expressed as a ratio to gross national income. They are thus not comparable to external assistance data elsewhere in the report, which are on a fiscal year basis and/or shown as a ratio to GDP.

Increased aid has contributed to progress toward the MDGs; but at current trends Tanzania will not achieve all the MDGs by 2015. Through prudent macroeconomic policy implementation, the authorities have generally used the increase in aid effectively, as evidenced by accelerated growth and sharply higher pro-poor spending in recent years. Significant progress has been made in achieving universal primary education and lowering the child mortality, but progress has been mixed with respect to reducing poverty and hunger, increasing access to water, and reversing the prevalence of HIV/AIDS (Table 2).

Table 2.

Tanzania: Selected MDG Outcomes and Targets

(in percent, unless otherwise indicated)

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Source: World Bank and Tanzanian authorities (see also www.povertymonitoring.go.tz)

Tanzania appears relatively well prepared to absorb scaled-up aid. The increase in aid seen since 2000 has been used effectively while preserving competitiveness (Box 3), and despite higher T-bill yields arising partly from issuances for sterilization operations, credit to the private sector has grown at a rapid pace. Fiscal institutions are relatively strong: among SSA countries that are PRGF eligible, Tanzania has the highest rating in key public sector management indicators prepared by the World Bank, and a joint review conducted by Fund and World Bank staff in 2004 found that Tanzania had the highest ranking regarding the quality of public expenditure management systems among 26 HIPC countries. Public financial management is being further strengthened.

According to the United Nations Millennium Project and preliminary World Bank estimates, additional resources of at least US$1 billion over the current level of aid will be needed over the medium term to achieve the MDGs by 2015. However, there is no evidence that donors will scale up aid to Tanzania by the required amount during this period.

20. Following extensive debt relief, Tanzania’s debt position has greatly improved. As shown in Appendix II, Tanzania’s external debt will remain sustainable under standardized shocks, assuming its current account deficit is financed at highly concessional terms. Tanzania’s domestic debt remains relatively moderate (15 percent of GDP), and is expected to decline gradually relative to GDP in view of the authorities’ commitment to limit NDF over the medium term. As noted above, the authorities will continue to refrain from nonconcessional funding. Moreover, improvements in debt management will aim to lower debt service costs to the government, optimize the maturity profile, and facilitate financial market development.

F. Supporting Private Sector Development and Other Structural Issues

21. The authorities are taking steps to alleviate key bottlenecks constraining economic activity in Tanzania. In addition to the measures outlined in the MEFP, notably policies aimed at improving energy and transport infrastructure and enhancing the legal environment, the authorities are working on further removing impediments to bank lending through land titling and formalization of the informal sector through implementing measures to separate the information function of business registration from the taxation function.

22. The authorities are also continuing efforts to strengthen institutions of economic governance to minimize resource leakages and strengthen accountability. This will be carried out through effective implementation of the recently enacted National Anti-Corruption Strategy Plan (NACSP II), reinforced by improved and transparent public expenditure management. The implementation strategy will focus on creating an institutional framework to facilitate the participation of local governments, civil society, media and the private sector entities through the establishment of the National Anti-Corruption Forum.

V. The PSI Program: Policies for 2007/08

23. The policy direction for 2007/08 envisaged in the three-year PSI program remains appropriate.10 Reflecting the underlying medium-term growth trend, real GDP is projected to grow by 7.1 percent in 2007. In addition, prudent fiscal and monetary policies will aim to hold inflation to around 5 percent. Potential increases in electricity tariffs, as envisaged under the program, would create some modest pressure on inflation, but progress with reforms in the energy sector and TANESCO’s financial viability should help expand the energy supply and sustain growth.

24. The government’s budget for 2007/08 directs more resources to pro-growth and social objectives (MEFP, ¶ 20-28). Government revenues and spending are projected to increase to 16.1 percent and 28.4 percent of GDP, respectively, with donor grants and concessional lending providing sufficient financing to cover the difference. More than half of donor assistance will be delivered in the form of direct budget support (6.3 percent of GDP), including basket grants and loans directed to MKUKUTA priorities. Following a sharp increase last year, the wage bill in 2007/08 is expected to hold steady at about 5.8 percent of GDP, which includes the hiring of up to 11,000 new staff, mainly in education and health. In line with the authorities’ objectives to ease pressure on T-bill yields, NDF would be zero.

25. The continued strong performance of revenues in 2007/08 is based on sustained vigorous implementation of tax and customs administration reforms. In particular, integration of the system-based procedures of the Customs and Excise Department and the Destination Inspection (TISCAN) will be finalized and implementation of risk management procedures will be given priority (structural benchmarks—MEFP ¶ 21). On domestic taxation, the Large Taxpayers Department (LTD) of the Tanzania Revenue Authority will continue to strengthen its audit capacity and, using techniques developed by the LTC, dedicated units will be established to cover medium taxpayers using techniques. Modest tax policy measures—including higher excise taxes on selected products and fuel levy and other road usage charges—being introduced in 2007/08 will reinforce the revenue target.

26. The authorities will continue to improve cash management to strengthen both budget execution and the implementation of monetary policy. The Cash Management Unit set up in the office of the Accountant General is expected to produce its first cash plan shortly. In addition, the Cash Management Committee, with representatives from the Ministry of Finance and BoT, initiated meetings in May. It will mainly prepare a liquidity management plan for the fiscal year to optimize government resources and communicate imminent revenue and spending operations to inform the BoT’s monetary policy operations. In addition, the Committee will oversee the closure of government accounts in commercial banks, or their linkage to the Treasury Single Account (TSA), as sub-accounts. This will reduce idle government balances in commercial banks and further facilitate the conduct of monetary policy (MEFP, ¶ 23).

27. The BoT will maintain a cautious monetary stance aimed at ensuring that inflation remains subdued without constraining current trends in financial sector deepening (MEFP, ¶s 29-31). Both reserve and broad money are targeted to grow by 21 percent 2007/08—a strong pace, but below the average in recent years.11 Reflecting the slowdown in dollarization tendencies since early 2007, the ratio of foreign currency deposits to shilling deposits is expected to be largely unchanged in 2007/08. At the same time, much of the sterilization operations needed to mop up liquidity will be achieved through sales of foreign exchange, which will ease the need to issue government securities for this purpose and alleviate pressure on interest rates. The government’s zero domestic financing will allow credit to the private sector to continue growing at a rapid pace (40 percent). While soundness indicators reflect a healthy position for the banking sector as a whole, the BoT’s banking supervision department will remain vigilant, including a greater emphasis on risk-based assessment of bank balance sheets.12

28. To further encourage financial sector deepening, the authorities intend to implement the new second-generation Financial Sector Reform Action Plan in 2007/08. In particular, the BoT will make the preparations needed to create a credit reference database to facilitate lending operations by financial institutions; a unified legal and regulatory framework and investment guidelines for pension funds will also be developed and submitted to government (structural benchmarks—MEFP, ¶ 31 and Table 3).

29. The external current account deficit before grants is projected to be unchanged relative to GDP in 2007/08. In U.S. dollar terms, however, import growth is projected to be stronger than originally envisaged—driven mainly by capital goods imports—and would outpace the solid expansion in goods and services exports. The current account deficit is expected to be largely financed by positive capital account developments, notably increased foreign direct investment, but while donor support will continue to be substantial, it is expected to fall short of earlier projections. As a result a modest overall balance of payments deficit is projected for 2007/08, in contrast to the small surplus that had been envisaged. Gross international reserves would decline slightly, to just under US$2 billion by the end of June 2008. While this is lower than the original program projection (US$2.2 billion), reserve coverage would remain comfortable at about 3.5 months of imports of goods and services projected for the following year.

30. Strengthening the operations and finances of the energy sector will continue to be a major focus of structural reforms, and the authorities remain committed to moving rapidly to full commercial viability for TANESCO. TANESCO’s performance and finances have been significantly strengthened by the restoration of hydro capacity due to favorable rains. Nevertheless, further tariff increases and continued close monitoring will be essential. To this end, TANESCO will submit an application to the regulatory authority for an increase in electricity tariffs in July 2007 (structural assessment criterion, MEFP, ¶ 34)). In line with the new regulatory framework for the sector, the requested increase must be supported by detailed cost data. To comply with this requirement, TANESCO has contracted two experts to prepare cost-of-service and financial analyses. The submission will reflect the full cost recovery principle, including all current operations, system maintenance, depreciation, and commercial financing costs. EWURA is required to rule on the tariff request within 12 weeks.

31. The authorities are moving forward expeditiously with the launching of the special audit of the government EPA account managed by the BoT (MEFP, ¶ 36). The Terms of Reference have been finalized, in consultation with Fund staff, and the Controller and Auditor General (CAG) has initiated the tendering process. An auditor will be selected promptly, and it is expected that the audit will be completed by October 2007 (structural benchmark). Upon completion, the special audit will be made available to Fund staff and the staff will discuss possible next steps, including any remedial measures that may be appropriate, in the context of reviews of the PSI.

VI. Program Monitoring

32. The PSI-supported program would be monitored through the quantitative and structural assessment criteria, indicative targets, and benchmarks specified in Tables 1 and 3 of Appendix I. The second review will be based on quantitative assessment criteria for the end-June 2007 test date and the structural assessment criterion for end-July 2007. The third and fourth reviews will be based on quantitative assessment criteria for the end-December 2007 and end-June 2008 test dates, respectively. Quantitative indicative targets were also set for end-September 2007 and end-March 2008. Conditionality in key areas of the structural reform agenda include progress on the special audit noted above, revenue mobilization and public expenditure management, financial sector reform, and the energy sector.

33. The authorities’ economic program faces some policy risks, notably with regard to effective implementation of energy reforms, possible pressure for more direct government interventions to accelerate growth and reduce poverty, and government implementation and monitoring capacity constraints. Tanzania is also vulnerable to climate and terms of trade shocks. While Tanzania depends heavily on donor aid, the ample stock of international reserves shields the economy and government operations from temporary shortfalls in disbursements. Steps have also been taken, such as enhanced donor coordination under the Joint Assistance Strategy for Tanzania, to ensure more predictable longer-term commitments of aid.

VII. Staff Appraisal

34. Tanzania has sustained strong economic performance for several years; the approval of the PSI program in February 2007 solidifies its status as a mature stabilizer. Relative to the region as well as to its own record, real economic growth has been high, inflation low, and the external position much improved during this period. This performance was underpinned by a good record of sound government financing, prudent monetary and exchange rate policies, and steady implementation of a market-oriented structural reform agenda. Moreover, the outlook is good for sustained strong economic performance in the medium term.

35. Despite these developments, Tanzania remains a very poor country with many pressing social needs and significant capacity constraints. The authorities will need to sustain for many years sound policies and structural reforms that will mobilize and efficiently use resources if they are to achieve their economic and social goals.

36. Structural reforms to enhance public sector effectiveness and efficiency—critical factors in Tanzania’s success—are expected to continue. Improvements in revenue administration have translated directly into increased government revenues, which together with high economic growth and substantial donor support, have enabled government spending to expand at a very strong pace, with minimal recourse to costly domestic financing. Staff welcomes the authorities’ resolve to continue their efforts in revenue administration. On the spending side, while there has been much progress with public financial management reforms (notably, the extended coverage of IFMS), more is needed. In particular, the MTEF process has yet to become an integral part of the annual budget formulation process and better tracking of MKUKUTA spending needs to be established. These improvements would not only provide more effective information to government policymakers, but also give the donor community a much better sense of how their assistance is being used, encouraging them to provide additional resources in the form of budget support.

37. High and volatile yields on T-bills are costly to the government and could impair the financial intermediation that supports private sector growth. The authorities are taking steps to reduce this volatility by minimizing the need to issue new T-bills at the time of heightened pressure points in the market, which occur mainly at the end of the quarter. Having shifted to targeting average reserve money, the BoT aims to position the daily reserve money stock early on, such that program ceilings can be met without resorting to intensive sales of T-bills at the very end of the period. In addition, to enable the BoT to better assess short-term liquidity management needs, the Cash Management Committee (CMC) formed in May 2007 should immediately begin to provide near-term forecasts of liquidity generated by government operations. Staff also encourages the CMC to make rapid progress with moving government deposits at commercial banks to the BoT, which will help absorb liquidity. Greater reliance on foreign exchange sales for sterilization operations and spreading maturities of debt rollovers across the yield curve, together with the government’s target of zero NDF, should further ease pressure on T-bill yields. Looking ahead, steps would be needed to strengthen competition in the primary market and create an environment for secondary market trading.

38. The authorities’ flexible exchange rate policy—whereby the BoT generally enters the market only to meet potentially disruptive demand for or supply of foreign exchange—has served Tanzania well. As a result, the shilling has depreciated in recent years, mainly as the terms of trade have deteriorated, which has helped to preserve Tanzania’s international competitiveness in times of adverse shocks. In light of the need for large sterilization operations to mop up liquidity from donor-funded government spending, however, staff encourages the authorities to take a more proactive approach to sterilization, particularly through more systematic sales of foreign exchange by the BoT.

39. Despite the banking sector’s remarkable expansion of financial intermediation in recent years, a majority of Tanzanians still have little or no access to financial services. With cabinet’s approval of the second-generation Financial Sector Reform Action Plan, staff anticipates that progress in deepening and broadening financial services will be stepped up, notably by establishing the credit reference database and a unified legal and regulatory framework and investment guidelines for pension funds. Staff would caution the authorities, however, to ensure that proper incentives are upheld in credit guarantee schemes offered by the BoT and government to minimize contingent liabilities.

40. While the outlook for Tanzania’s public debt sustainability is benign, staff supports the authorities’ cautious stance toward external borrowing on commercial terms. In particular, the government should continue to refrain from guaranteeing commercial borrowing by public enterprises.

41. Staff welcomes the efforts of the electricity utility TANESCO to vigorously implement its financial recovery program by seeking a full cost recovery tariff increase in the months ahead. With this measure, and in light of more favorable operating conditions, staff encourages the authorities to make rapid progress towards TANESCO’s commercial viability. Sufficient revenues and sound financing are essential for necessary maintenance and expansion of the electricity network and supplies, whose shortcomings have been a serious impediment to doing business.

42. Improvements in governance and transparency have supported Tanzania’s recent economic development and helped to attract donor support. In this regard, staff is encouraged by the authorities’ efforts to strengthen the Prevention of Corruption Bureau through the recently approved Anti-Corruption Act. Staff also welcomes the authorities’ expeditious tendering for the special audit of the government’s external payment arrears account managed by the BoT in line with the terms of reference agreed with Fund staff. Staff will continue to follow progress with the special audit.

43. Tanzania has set targets to implement the Anti-Money Laundering Act (2006) and create a Financial Intelligence Unit by mid 2007. Staff welcomes these developments and will follow the progress of these measures. Tanzania will also undergo a technical assistance needs assessment (TANA) by the ESAAMLG, the FATF-style regional body for Eastern and Southern Africa, in 2007.

44. The PSI program is broadly on track. The small deviation from the envisaged reserve money path has been redressed, and the ambitious and broad-based structural reform program is proceeding as envisaged, notwithstanding modest delays in some areas, generally owing to technical factors. Tanzania’s performance warrants the continued strong support of the international community. Staff thus recommends completion of the first review.

45. Staff proposes that the next Article IV consultation with Tanzania take place within 24 months, subject to the provision of the Decision on Consultation Cycles in program countries.

APPENDIX I: Letter of Intent

June 12, 2007

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, D.C. 20431

U.S.A.

Dear Mr. de Rato:

Letter of Intent and memorandum of economic and financial policies

1. The Government of the United Republic of Tanzania is implementing a financial and economic programme with support from the Fund through its Policy Support Instrument (PSI). We recently held discussions with the Fund staff on the first review of the new programme approved by the Executive Board of the Fund on 16th February, 2007. On behalf of the Government, I hereby transmit the attached Memorandum of Economic and Financial Policies (MEFP), which reviews recent economic developments, progress in the implementation of our 2006/07 programme, and sets out the policies that the Government intends to pursue in 2007/08.

2. Implementation of the 2006/07 programme has been satisfactory, with all but one of the quantitative assessment criteria for end-December 2006 and most structural benchmarks observed. The end-December target for reserve money was missed by a narrow margin, but the financial programme has been brought back into line with the PSI framework, as evidenced by all end-March indicative targets being observed. The submission of a proposed unified legal framework and investment guidelines for pension funds, a structural benchmark for end-June 2007, has been delayed due to factors outside the Government’s control and is now anticipated to be completed by end-September 2007. In this regard, we request the completion of the first scheduled review under the PSI.

3. The Government will continue to pursue appropriate fiscal and monetary policies and implement the necessary structural reforms, especially the Second Generation Reforms of the Financial Sector, tax and customs policy and administration reforms, and improvement of the business environment to promote investment, as the prerequisites for accelerated and sustainable growth in a stable macroeconomic environment. We also intend to aggressively pursue the growth agenda through investment in productive infrastructure in order to sustainably protect gains made in the provision of social services, reduce aid dependency, and ensure progress towards attaining our poverty reduction objectives as specified in the MKUKUTA.

4. Although the power situation has improved following the recovery of hydro-generation capacity, we will continue with implementation of the various measures outlined in TANESCO’s Financial Recovery Plan in order to address the energy crisis. The 2007/08 programme aims at continuing the fiscal and financial sector reforms currently underway. The programme also provides for continued strengthening of public expenditure planning and budgeting, and hiring of additional staff in the education and health sectors.

5. In the context of the PSI framework, we will keep the IMF regularly updated on economic and policy developments, and provide the data needed for the monitoring of the programme. We would request that the second review of performance under the programme take place before end-December 2007 and that the third and fourth reviews take place by April 30, 2008 and October 31, 2008, respectively. The Government will also consult regularly with the Fund on any relevant developments at the initiative of the Government, or whenever the Managing Director of the IMF requests such a consultation.

6. The Government of Tanzania intends to make this letter and the attached MEFP, together with Fund staff reports related to the Article IV Consultation and the first review under the PSI, available to the public and authorises publication on the IMF website once the review is completed by the Executive Board.

Yours sincerely,

/s/

Zakia Hamdani Meghji (MP)

Minister for Finance

United Republic of Tanzania

Attachment: Memorandum of Economic and Financial Policies

Attachment I Tanzania: Memorandum of Economic and Financial Policies

I. Recent Macroeconomic Developments and Progress Under the Programme
Introduction

1. Tanzania continues to enjoy strong overall macroeconomic performance, after sustained economic reforms over the last ten years. However, 2006 was characterised by a slow down in economic activity on account of persistent drought which adversely affected agricultural production and hydro-power generation, and the high oil prices on the world markets. Real gross domestic product (GDP) is now estimated to have grown by 6.2 percent compared to 6.8 percent recorded in 2005. The trade and tourism, manufacturing, mining, construction, and communication sectors continued to register strong growth.

2. Inflation was maintained at a single digit level, albeit with a rising trend mainly on account of food and oil prices. From 5.4 percent at the beginning of 2006, inflation peaked at 7.7 percent in May 2006 before declining to 7.2 percent in March 2007 and further to 6.1 percent in April 2007. Inflation is expected to decline further in the coming months as food prices decline reflecting an expected good harvest with the return of favourable weather conditions.

Fiscal policy and public resource management

3. The Government’s fiscal programme for 2006/07 (July-June) has been implemented successfully, with outcomes broadly in line with programme targets. Despite the energy crisis, domestic revenue collections have been well in excess of programme estimates and are projected to reach 15.7 percent of GDP, a full 1 percent of GDP above the programme target, mainly due to better than expected performance of import duties, corporation tax, and domestic excises. The good performance witnessed in recent years is premised on robust economic performance and recent policy and administration reforms, whereby the Tanzania Revenue Authority (TRA) is benefiting from the integration of its operations and increased use of technology.

4. The tax and customs administration reforms progressed well on the basis of TRA’s Second Corporate Plan, as evidenced by improved revenue performance and taxpayer service. TRA’s Large Taxpayer Department (LTD) achieved International Standards Organization (ISO) certification during 2006/07. The Customs Department rolled out ASYCUDA++ to seven more stations including Tunduma, Kasumulu, and Zanzibar, and started implementation of a time bound action plan for integrating ASYCUDA++ with the destination inspection programme. TRA also finalized the Facilitated Client Scheme, under which importers with a good track record can make use of expedited import clearing procedures.

5. Government expenditure was on track too, and is projected at 28.1 percent of GDP, marginally below the programmed forecast. The Government continued to exercise a cautious stance in budget execution, observing the evolving impact of drought, oil prices, and increasing domestic interest payments. Foreign financing is likely to be below expectation mainly due to non-disbursement because of delays in the implementation of some legislative reforms. Nevertheless, expenditure for priority social services linked to the achievement of the MDGs was implemented as budgeted. The overall budget deficit has been contained and is projected at 12.5 percent of GDP, 1 percent of GDP lower than the programme projection, with domestic financing of the budget within the programme target.

6. Following the substantial increase of the wage bill in the 2006/07 budget, implementation was monitored closely, and results were in line with projections at 5.9 percent of GDP. The Presidential Commission on Public Service Pay submitted its report in December, 2006 as envisaged, focusing on a medium term policy to relate Government employment levels and their budgetary implications. The Government is currently reviewing the Commission’s recommendations against MKUKUTA implementation priorities and budgetary feasibility, with a view to developing an updated medium term pay policy.

7. The focus of our expenditure management strengthening programme continues to be promoting transparency and accountability in public expenditure, consistent with the objectives of the MKUKUTA. The Integrated Financial Management System (IFMS) has now been rolled out to 85 of the 122 Local Government Authorities (LGAs). In view of the observations of the Controller and Auditor General expressed in the National Audit Office’s (NAO) audits of the 2005/06 public accounts (the reports are posted on the NAO’s website) in relation to the capacity of accounting staff, and following a major recruitment exercise during the year, the Government continued to train accounting staff at both central and local Government levels. The objective is to ensure that all Ministries, Departments, and Agencies (MDAs) and LGAs have appropriately qualified accounting and internal audit staff.

8. The Public Procurement Regulatory Authority (PPRA) and the Public Procurement Appeals Authority (PPAA) are now fully staffed and operational. The PPRA has developed a capacity building plan covering all public institutions, including Parliament, as well as civil society organisations. It has also commenced procurement audits in line with its mandate under the Public Procurement Act, 2004. The Government continues to set aside sufficient resources to ensure effective implementation of the institutions’ functions. The National Audit Office has continued to strengthen itself, with the 2005/06 reports released on a timely basis for a second consecutive year.

9. In order to improve the effectiveness of the BoT’s liquidity management, a Cash Management Unit (CMU) was established in the office of the Accountant General. The unit supports the functions of a Joint Treasury - Bank of Tanzania Cash Management Committee (CMC), including forecasting of liquidity injection from Government operations and developing recommendations for both Government expenditure and monetary operations programming.

Monetary policy

10. Against a backdrop of the drought and oil price related inflationary pressure, the Bank of Tanzania (BoT) has geared monetary policy to contain inflation at single digit level. The rate of growth of broad money supply has been reduced from 32 percent at end-June 2006 to a projected 21 percent at end-June 2007.

11. The financial system continued to portray signs of a thin market, with high interest rate spreads. The BoT’s decision to substantially reduce the minimum bid amount from TZS 50 million to TZS 5 million (aimed at widening the circle of direct participation) resulted in an increase in non-bank private participation in the treasury bills market. Demand for Treasury Bills has remained strong, as investors responded to the upward trend in yields. The Treasury bond market remained active during the year, with concentration of preference on 2-year and 5-year bonds.

Financial sector reforms

12. The Government is implementing the second generation financial sector reforms in the context of its Financial Sector Reform Implementation Action Plan (FSIAP). The plan and its action matrix, which identifies key actions and the corresponding development partner support in each of the nine major areas of reform,1 have been formally adopted by the Government in March 2007, which has also signed funding instruments with development partners for implementation of some of the plan’s key components. Proposals for draft leasing and mortgage laws are currently being discussed by stakeholders, with the intention of presenting them to Parliament in the course of 2007/08. Commercial banks’ lending to SMEs has also improved, with some banks introducing specific desks and products for this purpose. The use of the Government’s SME Credit Guarantee Scheme has improved too, and the inter-agency committee on financial sector reform is finalising a proposed unified legal and regulatory framework and investment guidelines for pension funds for submission to Government for adoption and implementation. An anti-money Laundering legislation was approved by Parliament, and implementation will commence earnestly in the coming year.

External sector developments

13. The external sector performance has been positive, although the export sector remains vulnerable to exogenous factors such as climatic conditions and terms of trade shocks. During 2006/07, developments in the external sector were highly influenced by changes in global oil prices and drought related requirements at home. A sharp increase in international oil prices, coupled with increased demand for oil in the energy sector resulted in a higher import bill which erased the gains from exports, with consequent widening of the current account deficit. Nonetheless, the overall balance of payments position remained positive due to continued strong inflows of donor assistance and debt relief received under the Multilateral Debt Relief Initiative.

14. Foreign currency reserves have been maintained at around USD 2 billion, equivalent to about 4 months of next year’s import cover. The BoT’s interventions in the foreign exchange market, aside from sales for sterilisation purposes, have therefore been limited to periods of erratic market movements not in line with economic fundamentals. The foreign exchange market was characterised by a general depreciation trend of the shilling vis-à-vis the USD.

Energy

15. Tanzania suffered major drought during the last three years, leading to loss of a substantial portion of its power generation capacity. Aggravated by a long non-investment period and high world oil prices, this precipitated an energy crisis in Tanzania, and a financial crisis in TANESCO. To mitigate the impact of these developments on the economy, the Government adopted a Financial Recovery Plan (FRP) for TANESCO, including the acquisition of leased gas and diesel fired generation, improvement of hydrology management procedures in the dams’ catchment areas, a tariff adjustment and an investment programme of about USD 1.3 billion. While there has been a significant recovery of hydro generation capacity recently, the leased capacity (140MW of gas-fired and 40MW of diesel-fired) contracted on an emergency basis in line with the FRP, is being drawn upon to cover any supply deficits. Government action in dealing with the energy crisis is premised on the recognition that, unless the problems in the sector are adequately addressed, the economic growth rates envisaged in the MKUKUTA cannot be attained, with substantial implications for our poverty reduction effort. In line with the FRP, a 6 percent tariff increase was implemented in February 2007, following approval by the Energy and Water Utilities Regulatory Authority (EWURA).

Infrastructure

16. The Government has prepared a draft Medium Term Transportation Infrastructure Investment Plan (TSIP) covering all sub-sectors and reforms in the sector, including Local Government and cross-cutting issues. The preparation process was highly consultative. Upon finalisation, the TSIP will be prioritised and aligned with the Medium Term Expenditure Framework. TANROADS has continued to improve its performance, as reflected by its improved absorptive capacity, maintenance performance, and road conditions. The Government is committed to the maintenance of the existing road network and will, through the Roads Fund and increases in the fuel levy to generate greater yield, explore financing options for increasing the resource envelope for this purpose.

Poverty reduction

17. The 2006 status report on progress towards achieving the MKUKUTA goals shows progress in most areas. In education, primary school enrolment has reached 96 percent—compared to just 59 percent in 2000—secondary school enrolment has also increased, and pupil:teacher ratios are falling. However, many indicators remain substantially below the MKUKUTA targets and there are significant regional disparities. Data on other priority areas are not readily available, so the Government is developing additional data sources to enable more effective monitoring of progress under the MKUKUTA.

18. The report, in recognition of the centrality of faster and broad based growth for sustainable poverty reduction, recommends implementation of clear growth strategy in order to focus investment in the productive sectors of the economy. As regards the energy sector, the report calls for the diversification and expansion of energy supplies in order to counter the cyclic shortfalls in hydro power generation and meet the growing demand. As implementation of decentralisation by devolution policy progresses into its next phase, it is also recognised that financing of activities and spending at the LGAs’ level will need special monitoring. The government appreciates these and other challenges in the effort to eradicate poverty, and in linking resources with MKUKUTA targets.

II. Programme for 2007/08

19. The economy is expected to recover during 2007/08 as improved weather leads to good agricultural harvest and alleviates recent difficulties with the power supply. Economic growth is projected at 7.1 percent in 2007 and 7.5 percent in 2008, and 7.9 percent in 2009. Pressure on prices is expected to moderate in the coming months following the harvest, with inflation anticipated to stabilise at around our medium term objective of 5 percent.

Fiscal Programme

20. For 2007/08, the programme cautiously envisages that domestic revenue could reach TZS 3,103 billion, or 16.1 percent of GDP, reflecting the impact of continued tax and customs administration reforms and tax policy measures to be implemented in the 2007/08 budget. The measures include indexation of the specific excise duty rates for non-petroleum products, including alcoholic drinks, tobacco products, soft drinks, and an upward adjustment of the fuel levy and charges on road usage to raise resources for maintenance of the expanded road network (expected to yield about 0.7 percent of GDP). Taking into account projected foreign financing, it is expected that net domestic financing of the budget will be eliminated. The 2007/08 budget has been formulated assuming more revenue than in the program. However, consistent with the commitment not to resort to domestic financing of the budget, implementation of the budget will keep expenditures aligned with the resources available, while protecting high priority spending.

21. The Government will continue to implement tax administration reforms based on the TRA’s Second Corporate Plan and the Tax Modernisation Project. The programme for 2007/08 prioritises further Customs reform, especially (i) rolling out ASYCUDA++ to the remaining stations, (ii) completing the integration of customs’ and TISCAN’s import clearance processes by end-March 2008 (structural benchmark); (iii) continuing developing risk management and selectivity principles, with an action plan to be completed to this effect by end-September 2007 (structural benchmark) and its subsequent implementation; (iv) strengthening post-clearance auditing; and (v) starting to interconnect the information systems of EAC countries to strengthen control of transit goods. Other actions include new customer service centres, and further integration of TRA’s operations, and the establishment of dedicated units within six TRA offices to serve medium-sized taxpayers. The LTD, which assumed responsibility for qualifying taxpayers outside Dar es Salaam and increased the number of cases under its jurisdiction to 370 taxpayers with effect from 1st July, 2006, will continue to strengthen its audit capacity. The Government will also continue to publish the list of tax exemption beneficiaries each quarter.

22. Improving public expenditure management will remain a key priority in the coming year. In this sense, the Government will strengthen the link between budgetary resource allocation and MKUKUTA priorities, in particular by achieving greater integration of the Strategic Budget Allocation System (SBAS) and the IFMS, and emphasizing the role of the Medium Term Expenditure Framework in the budget formulation process. In addition, a Planning & Reporting System (PlanRep) similar to the SBAS has been introduced in all Local Government Authorities (LGAs) for preparation of their budgetary requirements for 2007/08. The allocations for direct MKUKUTA interventions in the 2007/08 framework account for 65% of the total budget, compared to 46 percent and 43 percent in 2005/06 and 2006/07 respectively. In view of increased expenditure on education, the allocation for Improvement of Quality of Life and Social Well-being (Cluster II) interventions increased from 36 percent in 2006/07 to 47 percent of the resources allocated for direct MKUKUTA interventions, with 37 percent allocated for Growth and Reduction of Income Poverty (Cluster I); and 16 percent for Governance and Accountability (Cluster III). The Government will continue to build capacity to monitor budget implementation against these targets, in addition to the broader MKUKUTA Monitoring System (PMS) which monitors the impact of interventions by all stakeholders on the status of poverty in the country. In addition, the Expenditure Tracking and Monitoring Unit established at the Ministry of Finance is monitoring budget implementations by MDAs in order to improve further the efficiency in resource utilisation. To enhance budget reporting, with technical assistance from East AFRITAC, the Government is examining options for tracking budget execution along the MKUKUTA clusters with a view to putting in place a functional classification capable of supporting such reporting for the next budget cycle.

23. Further improvements in cash management are planned during 2007/08. The CMC has already identified all Government accounts with commercial banks and is currently preparing a plan to complete their transfer to the BoT. The CMU is developing a cash plan for 2007/08 together with three month cash flow forecasts, and the CMC will monitor its implementation through the year. The cash flow forecast will be updated every quarter (structural benchmark).

24. The budget for 2007/08 envisages a slight decline of the wage bill as a percentage of GDP, achieved through a slow down of the nominal increase of the allocation for salaries and wages relative to GDP growth. The Government is reviewing the recommendations of the Presidential Commission on Public Service Pay as a basis for updating the Medium Term Pay Policy (MTPP). The Government is aware of the need for additional staff, especially in frontline services, against the broadly recognised fact that without a motivated and better performing public service the efforts to reduce poverty can be frustrated. Implementation of the updated MTPP, however, will continue to reflect the MKUKUTA priorities, and overall sustainability of the fiscal and macroeconomic frameworks.

25. Development expenditure is projected at 9.1 percent of GDP, compared to an expected 8.6 percent in 2006/07, with the increase coming from higher foreign financing. Other expenditures are projected to increase modestly, with total expenditure at 28.4 percent of GDP compared to 28.2 percent under the 2006/07 programme. Notable increases relative to the 2006/07 programme are expected in domestic interest payments (from 0.7 percent of GDP to 1.2 percent of GDP) and foreign financed development expenditure (from 4.7 percent of GDP to 5.4 percent of GDP). Public debt management continues to receive the attention of the Government, to avoid a slide back to unsustainable debt.

26. In the medium term, there is expected to be a growing increase of expenditures on infrastructure relative to increases in social service expenditure, in part to implement a faster growth strategy and reduce liquidity pressures arising from use of aid for public domestic procurement of non tradable goods and services.

27. Donor coordination is an important and integral element in the Government’s effort to strengthen planning and budgeting. In December, 2006, the Joint Assistance Strategy for Tanzania (JAST), or Mkakati wa Pamoja wa Misaada Tanzania (MPAMITA) in Swahili, was adopted. The JAST is a result of a broad Government-led consultative process with development partners and non-state actors, and reflects the Government position on rationalization and harmonization of donor support. The overriding objective of this initiative is to reduce further the transaction costs associated with different strategies and enhance national ownership and Government leadership of the development process. Based on the JAST, the 19 participating development partners have, in close consultations with the Government, prepared a Joint Programming Document (JPD) fully aligned to the MKUKUTA objectives.

28. Building on the JAST and JPD, the Government will address the problem of inadequate predictability of external assistance by leading joint analysis with development partners on alternative scenarios for expenditure and external financing, aiming at a clearer consensus on medium term strategies and expenditure plans prior to the 2008/09 budget cycle. It is envisaged that this will facilitate scaling up of aid in line with the international community’s commitments in pursuit of faster growth and poverty reduction.

Monetary policy

29. Monetary policy during 2007/08 will continue to focus on achieving the inflation target of 5 percent. Controlling the growth of reserve money will remain central in the implementation of monetary policy, and the BoT views the programmed deceleration of the annual growth rate of reserve money to 21 percent by end-June 2008 as consistent with the targeted reduction in inflation.

30. The BoT and the Government will enhance the coordination between monetary and fiscal policies in order to avoid undue volatility in financial markets. The regular projections of the Government’s cashflow will be produced by the Cash Management Committee will contribute to more accurate projections of liquidity conditions. In addition, with the move to targeting monthly average reserve money, the BoT will continue to strengthen the mechanisms for positioning the stock of reserve money early each month to avoid the need for sharp adjustments at the end of the month to meet the reserve money targets. The continued strengthening of a more even application of monetary policy and flexibility in the use of an appropriate mix of instruments for sterilisation purposes, coupled with the policy of no domestic financing of the budget deficit, should help ease pressure on interest rates. While the implementation of monetary policy will continue to be refined in response to market developments, it is expected that, given the current comfortable level of international reserves, sales of foreign exchange by the BoT will continue to play an important role in sterilisation operations. In order to enhance the predictability of the BoT’s policy stance, the BoT will, subject to market conditions, seek to move to a more regular pattern of sales of a small amount of foreign exchange for sterilisation purposes. The BoT will continue to inform market players on the objective and rationale of this approach.

31. The financial programme is consistent with continued strong growth in credit to the private sector. Small and medium sized enterprises, exporters and other investors in the productive sectors of the economy are also poised to benefit from financial sector reforms underway, including the already established credit guarantee schemes and the envisaged Development Finance Guarantee Facility (DFGF). The Government and the BoT will continue to carefully monitor the usage of these credit guarantee schemes in order to maximize their effectiveness in a transparent manner, while minimizing fiscal risks. In accordance with the financial sector reform programme, the BoT is working to establish a credit reference database for the collection of information on payment records of borrowers in banks, other financial institutions and entities. The database and its operating guidelines are expected to be operational by end-June 2008 (structural benchmark).

Energy:

32. The Government will continue implementing reforms in the energy sector in order to improve performance of the sector. The Government strategy in this regard is guided by the following objectives:

(a) Ensure the sector makes an appropriate contribution to the country’s growth agenda through better quantity, quality, and pricing of energy;

(b) Support TANESCO in achieving financial sustainability in the medium term, and operational financial viability as soon as possible;

(c) Finance capital expenditures, with support from development partners, as required by TANESCO to improve its power generation and service delivery to consumers, and to diversify the electricity generation resource base;

(d) Support interventions to expand access to modern energy services, particularly to the peri-urban and rural population; and

(e) Support enabling conditions to attract more private investment in the sector, notably for the addition of new generation, to promote competition, and lower operational costs.

33. Improved weather conditions have led to an early recovery of the hydro generation capacity, and improved finances for TANESCO. The Government intends to use this favourable development to move more rapidly to commercial viability for TANESCO. However, implementing a tariff increase by July 2007 (a structural benchmark) is not feasible—consistent with the recently introduced regulatory environment for public utilities, all tariff requests must now be submitted to a newly instituted independent regulator (EWURA). In approving the February 2007 increase, EWURA requested that future tariff requests be based on a detailed cost analysis (including audited accounts and other information). To help prepare the tariff submission in line with EWURA requirements, TANESCO has procured the services of financial and tariff experts who are expected to complete their work by July 2007.

34. It is intended that by end-July 2007 TANESCO will submit to EWURA a request for a tariff increase to return TANESCO to full cost recovery on operational basis, including the full cost of current operations, maintenance and depreciation, and the cost of servicing its commercial borrowing (structural assessment criterion). This would exclude the cost of capital investment projects to expand generation, transmission, and distribution capacity. The next tariff increase would be subject to review by the regulator (up to 90 days), following which the approved tariff would be implemented. TANESCO is committed to seek to implement future increases to maintain tariffs at the level sufficient to recover the full commercial cost of its operations. Implementation of the FRP will continue to be monitored through monthly meetings of a special Government - Development Partners Task Force on Energy. The government appreciates the Fund’s continued support in dealing with the energy crisis, including agreeing to the use of MDRI resources for procurement of emergency leased generators and rehabilitation of the power infrastructure, and joining the government effort to mobilise donor support for implementing the five year investment plan.

Governance

35. In addition to deepening reforms to address the remaining structural constraints to faster economic growth, the Government is committed to strengthening institutions of economic and political governance and fighting corruption to minimise resource leakages and strengthen accountability as outlined in the MKUKUTA. In this regard, the second National Anti-Corruption Strategy Action Plan (NACSAP II) was launched in December 2006 and a new Anti-Corruption law was submitted to Parliament for first reading in February 2007 (structural benchmark) and approved in April 2007. The law integrates all anti-corruption conventions ratified by Tanzania, and contains measures to strengthen the capacity and effectiveness of the Prevention of Corruption Bureau (PCB) and the prosecution of corrupt practices. With the support of development partners, the Government is also scaling up its efforts to implement its comprehensive Legal Sector Reform Programme (LSRP). Other measures in this area include the continued strengthening of the NAO, and capacity building for public expenditure tracking by local communities.

36. The Government will continue working closely with the Fund in relation to the planned special audit of the external payment arrears (EPA) account operated by the BoT on behalf of the Government. As detailed in our supplementary Letter of Intent dated February 8, 2007, the Controller and Auditor General has launched, at the request of the Government, a competitive bidding process for a special audit of the transactions related to the account. The special audit will be conducted by an international audit firm compliant with International Standards of Auditing (ISA) and experienced in International Financial Reporting Standards (IFRS). The Terms of Reference for the special audit were agreed with Fund staff and are drawn to cover all the transactions from the EPA account during 2005/06, as well as the verification, monitoring, and control procedures related to the account. It is intended that the special audit be completed by end-October 2007 (structural benchmark) and the results of the audit will be shared with Fund staff. Following the completion of the audit, the Government is committed to the adoption and implementation of appropriate remedial measures as may be necessary. These will be discussed with Fund staff in the context of the reviews under the PSI. The Government has suspended all payments from the account until finalisation of the audit. Thereafter, any outstanding obligations and planned payments will be integrated in the fiscal framework of the Government.

Conclusion:

37. The economic and financial programme to be implemented by the Government during 2007/08 will be monitored by the quantitative assessment criteria and indicative targets set forth in Table 1 and the structural assessment criterion and benchmarks shown in Table 3. The programme seeks to promote high and sustainable growth as a basis for more rapid poverty reduction. This primary objective will be pursued on the basis of sustained macroeconomic stability, enhanced public resource mobilisation, efficiency in public spending, increasing the contribution of the financial sector to economic growth, and continuously improving the business climate to increase investment. The Government is confident that the development partners, including the Fund, will maintain and increase their support through financing and policy advice, especially in view of the large investment requirements in communication infrastructure, energy, water, and education.

Table 1.

Tanzania: Quantitative Assessment Criteria and Indicative Targets Under the Policy Support Instrument, 2006/07 and 2007/08

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Note: For precise definitions of the aggregates shown and details of the adjustment clauses, see the Technical Memorandum of Understanding (TMU) attached to the Government’s letter of November 20, 2006.

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

To be adjusted upward for the Tanzania shilling equivalent of any shortfall in foreign program assistance from the amounts shown in the memorandum item.

Assessment criteria and indicative targets apply to upper bound only.

Floors are set US$ 200 million below projected levels. Floor will be adjusted downward for any shortfall in foreign program assistance from the amounts shown in the memorandum item.

Continuous assessment criterion under the PSI; excludes arrears on debt-service payments pending the conclusion of debt-rescheduling agreements.

Table 2.

Tanzania: Status of Previously Agreed Structural Assessment Criteria and Benchmarks under the Policy Support Instrument, December 2006-July 2007

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Note: MEFP references relate to the November 20, 2006 Letter of Intent, unless othewise specified.

Originally a proposed structural benchmark to be implemented by end-December 2006.

Structural benchmark.

Originally a proposed structural assessment criterion to be implemented by end-December 2006.

Table 3.

Tanzania: Structural Assessment Criterion and Benchmarks Under the Policy

Support Instrument, July 2007-June 2008

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Assessment criterion.

ministry of finance

dar es salaam, tanzania

dar es salaam

june, 2007

1

For a discussion on GDP and productivity growth in Tanzania, see Box 2 of staff report for the Sixth Review Under the Three-year Arrangement Under the Poverty Reduction and Growth Facility and Request for a Three-Year Policy Support Instrument (Country Report 07/138).

2

Since 2005/06, the authorities are budgeting expenditure linked to MKUKUTA clusters: growth and income poverty, quality of life and social wellbeing, and governance and accountability. This has replaced the previous definitions of priority spending.

3

Nevertheless, the banking system serves a narrow segment of the Tanzanian population. According to a recent survey, only 11 percent of adults have bank accounts.

4

Based on the 2001 household survey. Results from an ongoing survey should be available in 2008.

5

The new act indirectly strengthens the prosecutorial powers of the Prevention of Corruption Bureau (PCB) by, inter alia, expanding the definition of corruption.

6

The medium-term growth projection is predicated on the continuation of the trend in total factor productivity observed over the past decade (see Box 2 in Country Report 07/138).

7

The BoT is further studying operational issues regarding the planned foreign exchange sales.

8

Following a strong appreciation in the second half of the 1990s, the shilling has steadily depreciated since 2001, largely because of deteriorating terms of trade, although the pace of depreciation has slowed recently.

9

The increase to US$2.7 billion is a lower bound of estimated additional assistance needed to reach MDGs by 2015 (see Box 4), however, an updated estimate is not yet available. Achieving this level of annual disbursements by 2010/11 represents a US$0.4 billion increase over projected aid in 2010/11 in the program’s baseline scenario. Going forward, the increase in aid relative to the baseline would then be maintained.

10

With the 2006/07 program broadly on track, the authorities did not seek any modifications to the quantitative assessment criteria for June 2007.

11

Given the uncertainties of money demand during a period of significant financial deepening and structural change, the program’s monetary targets will need be kept under close review.

12

Anecdotal evidence suggests there may be some foreign participation in the T-bill market through local subsidiaries of foreign banks. Going forward, such developments should be studied closely to ensure that the regulatory environment remains appropriate.

1

The nine areas are: (1) monetary policy reform; (2) strengthening the banking sector; (3) developing financial markets; (4) reforming the pension sector; (5) strengthening the insurance industry; (6) facilitating the provision of long term development finance; (7) strengthening micro and rural finance; (8) legal and judicial reform; and (9) land administration.

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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
Author:
International Monetary Fund