Abstract
Fueled by a rebound in agriculture and improved electricity supply, economic growth reached 6.7 percent in 2006–07, and is on track to exceed 7 percent in 2007–08. In mid-2007, significant portfolio capital inflows put pressure on liquidity management. In the first quarter of 2007–08, fiscal performance was strong, but inflationary pressures intensified. After continuing to depreciate in most of 2007, the exchange rate recently reversed course. Strengthening monetary control is the key to reducing inflationary pressures and reining in high and volatile T-bill rates.
1. This statement reports on developments since the staff report for the Second Review under the Policy Support Instrument (PSI) was issued. The thrust of the staff appraisal remains unchanged.
2. The 12-month inflation rate fell to 7.3 percent in November, reflecting a considerable decline in the food component to 7.5 percent (from 11.4 percent in September). The nonfood component of inflation increased by 2½ percentage points to 7.1 percent.
3. Government revenues continued to exceed expectations through October 2007 (by 2 percent), somewhat diminishing the risk of a revenue shortfall in the current fiscal year (July–June). Total spending was below budget during this period, with a marked shift in the composition of spending toward foreign-financed development expenditures. As a result, net domestic savings through October amounted to just over T Sh 600 billion (nearly 3 percent of projected annual GDP), well above the forthcoming December target of T Sh 300 billion.
4. Steps taken by the Bank of Tanzania (BoT) in recent months to strengthen monetary and foreign exchange operations have succeeded in reining in reserve money (M0) growth. In particular, the BoT has relied more heavily on regular daily sales of foreign exchange to control liquidity, while reducing the amounts of government securities sold at primary auction. As a result, the BoT’s internal ceiling for average M0 was met comfortably in November, and through mid-December average M0 remained well below the PSI program ceiling for the month. At the same time, the weighted average yield on T-bills has fallen to 10.5 percent in mid-December (from about 17 percent in October), while the exchange rate has stabilized following an initial appreciation.