Introduction

1. The Tanzanian authorities are committed to sustaining prudent macroeconomic policies and deepening structural reforms. Economic growth exceeded 7 percent in 2007 and medium-term prospects are strong. They are thankful to the Fund for the constructive engagement and support, and are appreciative to staff for the forthright policy dialogue and advice under the program.

2. The authorities remain resolute in implementing the PSI-supported economic program. All end-December 2007 quantitative assessment criteria were observed. Implementation of all structural assessment criteria and benchmarks were on track, and program targets for the remainder of 2007/08 will be maintained. In view of the strong and good economic performance under the program the authorities request Directors’ support for the completion of the third review of the PSI. They broadly agree with the thrust of the assessment in the well balanced staff report on the third review of the PSI, and will respond appropriately to the policy actions recommended.

Recent Economic Developments

3. Tanzania’s impressive economic performance has been uninterruptedly sustained over the past decade, reflective of the sustained economic reforms; broad-based growth; and consistency in taking advantage of the favorable external environment. Real GDP growth is estimated at 7.3 percent in 2007 on account of good performance by transport and communications, mining, construction, tourism and trade, and manufacturing sectors, as well as stability in agricultural performance. Inflation remained within the single digit range, with headline inflation at 6.4 percent by end-December 2007, slightly above the authorities’ objectives. Inflationary pressures intensified during the second half of 2007 due mainly to a surge in high oil and food prices. The authorities recognize the enormous challenges and implications of the protracted increases in the prices of these commodities on the external account and price stability in the near to medium term. Nonetheless, they are of the view that in response to measures taken to ease food shortages as well as sustained prudent fiscal and monetary policies, the inflationary spike should ease in the coming months. The authorities also call on the Fund to be more understanding by providing fiscal space and greater and timely access to the appropriate Fund facilities to enable them address the challenges of unprecedented high oil and food prices.

4. The fiscal position improved substantially during the first half of 2007/08, owing to strong revenue performance of up to 2 percent of GDP, higher than the program projections, and better than projected external financing for project and basket loans. However, major recurrent expenditure categories were below projections during the July-December 2007 period, mainly on account of slow procurement and recruitment processes. Significant savings on the budget in terms of interest costs were realized on account of a substantial fall in Treasury yields. Development expenditure benefited from accelerated disbursement of foreign project financing, to close above program projections.

5. The Bank of Tanzania (BoT) revised its monetary strategy in October 2007 by introducing a better mix of monetary policy instruments and broadening monetary policy transparency. Treasury bills have since been complemented with frequent sales of small amounts of foreign exchange in the market and more use of the repo instruments. As a result, reserve money growth has remained on track, and the Treasury bills yields have fallen sharply from 17.1 percent in June 2007 to 7.4 percent in March 2008. Despite the tighter monetary policy stance, the banking system continued to meet the strong demand of private sector credit in line with the accelerating economic growth.

6. External developments during the first half of 2007/08 were broadly in line with program targets on account of an 18 percent export growth, reflecting a strong performance in manufacturing and a recovery of traditional exports. Also, inflows of official foreign exchange and foreign direct investment (FDI) have remained strong. As a result, despite a rapid growth in imports that accounted for the widening of the current account deficit, the foreign exchange reserves level improved to 4.5 months of imports. In the same period, the nominal exchange rate of the shilling to the U.S. Dollar appreciated.

Outlook and Policies for 2008/09 and in the Medium-Term

7. Tanzania’s economic performance is expected to remain strong in 2008/09 and the medium term, with real GDP growth projected to reach 7.8 percent in 2008 and 8.0 percent in 2009. Strong performance is expected to continue in the communication, construction, financial intermediation, manufacturing, and agriculture sectors. Accelerating the rate of growth and poverty reduction in the medium to long term will continue to be central in the authorities’ program design and implementation. A new household survey to be completed in mid-2008 is expected to show a tangible improvement in poverty indicators. These build on the MKUKUTA (PRSP) Annual Implementation Report (MAIR) of November 2007 that showed strong progress in the achievement of some MDGs performance indicators, particularly in education and health. Notwithstanding such impressive developments, the authorities concur with staff assessment that the country faces three main challenges in the near term: maintaining fiscal stability in the face of uncertain financing; dealing with inflationary pressures; and addressing governance weaknesses and strengthening public accountability.

8. Among the authorities’ main priorities, are consolidating fiscal stability, supported by continued robust revenue performance, while accommodating substantive increases in development expenditure for social and productivity-enhancing investments and strengthening the external position. The authorities are confident that these, coupled with tighter monetary policy of the BoT and the accelerated growth performance would relieve pressure on food prices and allow inflation to subside to the 5 percent target. The strong economic performance and favorable outlook notwithstanding, the authorities are conscious that they will have to consolidate macroeconomic stability to mitigate the immediate risks to their economic outlook, including inflation and revenue shortfalls; address infrastructure bottlenecks; and deepen implementation of structural reforms to sustain the high economic growth necessary to increase per capita income and reduce poverty substantially. In this connection, the authorities are determined to step up implementation of the MKUKUTA and Tanzania Vision 2025, which offers an appropriate framework for further diversification of the sources of production and exports, improvements in public finance management, and better integration in the regional and global economy.

Fiscal Policy

9. The authorities’ objective is to sustain fiscal stability in the medium- to long-term. In this connection, the 2008/09 budget aims at raising revenue performance to 16.2 percent of GDP, on the basis of broadening of the tax base, strengthening of tax and customs administration, controlling tax exemptions, and improving the customs processes. Other near-term revenue reforms and measures include reforming the mining sector’s fiscal and regulatory regimes; indexing specific excise duty rates; and adjusting forestry and hunting fees, the fuel levy and road user charges. The authorities are determined to further increase the revenue collection to 20 percent of GDP in the medium term mainly through measures to broaden the tax base and enhance tax collection. On the expenditure side, the authorities are taking a cautious stance due to the uncertainty of foreign financing. To this end, total expenditure is forecast at 26.5 per cent of GDP as compared to the 27.3 percent outturn expected for 2007/08. Consistent with the MKUKUTA strategies, priority continues to be placed on growth promoting expenditure, education and health.

10. Raising productivity and long-term growth through, inter alia, public infrastructure development remain a central policy objective of the authorities. The planned capital expenditure includes investments in infrastructure and social sectors, with increased allocation for infrastructure financed by the Millennium Challenge Account (MCA) and other financing options including issuing sovereign bonds and public-private partnerships (PPPs). Recurrent expenditure as a percentage of GDP is projected to remain broadly at the 2007/08 level. While the authorities are determined to maintain a zero net domestic financing (NDF) of the budget, the projected shortfall in external financing may require a readjustment of this policy stance thereby raising up to 1.0 percent of GDP from domestic sources. NDF would be adjusted in the course of the fiscal year in response to the level of available foreign financing. The Government would also adjust spending should external budget support fall short of the budget figures. However, the Government recognizes that safeguarding such NDF objective is challenging, as it is subject to risks of revenue shortfalls. The authorities, therefore, intend to execute the budget on the basis of a prioritized expenditure plan, enabling protection of priority spending linked to increasing productivity and the achievement of the MDGs, coupled with the implementation of required internal reallocations. The authorities have made strong progress in implementing the public finance management (PFM) reform, and the Phase II of the PFM will increase ownership of the reforms by the various tiers of Government beyond the Ministry of Finance and Economic Affairs (MOFEA) to line ministries. To this end, strategic allocation of resources in accordance with government priorities and along the MKUKUTA clusters, ensuring aggregate fiscal discipline and accountability, and strengthening of expenditure tracking will enhance ownership of the PFM reform agenda.

Monetary and Financial Sector Policies

11. The BoT is committed to continue anchoring its prudent monetary policy on maintaining low and stable inflation. To this end, it has reaffirmed its determination to further bolster its open market operations, maintain a flexible exchange rate policy, rely substantially on foreign exchange sales for sterilization of liquidity, and continue to improve liquidity forecasting. In this connection, the BoT’s monetary policy for 2008/09 will aim to reduce M3 growth and monitor reserve money growth. The BoT is also committed to enhance transparency of its policy stance and promote orderly financial markets. Coordination between fiscal and monetary policies will be further strengthened to increase absorption of public funds, while adequately preventing pressures on interest and exchange rates, as well as on domestic prices. In this regard, the joint Cash Management Committee (CMC) is strengthening its operations. Private sector credit is projected to continue its robust expansion to support the authorities’ growth objectives. The BoT is also reviewing the existing regulatory framework governing capital account transactions with a view to adapting it to the needs of the country’s economy. To consolidate progress attained on the predictability of the monetary policy stance, the BoT will continue to inform the market players and the general public, on a regular basis, on recent economic developments, and the objectives and rationale underlying the adopted monetary policy stance.

12. The authorities are committed to strengthen implementation of the second generation financial sector reforms with a view to deepening and broadening financial intermediation. To this end, they have enacted the Social Security Bill that creates a single regulator for the pension sector and assigned to the BoT the responsibility of establishing investment guidelines. The BoT has in turn made commitment to expeditiously assess the financial health of the pension funds in preparation of the investment guidelines. The BoT will also continue to strengthen banking supervision, particularly by enhancing its capacity for risk-based assessment of bank soundness through stress testing and periodic reporting to its Board. To this end, the BoT plans to expand its staff complement and seek Fund technical assistance and staff training.

Structural reforms

13. The authorities are determined to consolidate the gains achieved on reforms, PFM, public accountability and macroeconomic stability. They are equally determined to continue improving the overall investment climate that will further facilitate private sector development, attract and retain FDI, boost domestic entrepreneurship and sustain high economic growth. In addition to vigorously pursuing prudent macroeconomic and financial policies, the authorities are resolved to deepen implementation of the reform program. Moreover, steps will be taken to strengthen the fiscal risk management practices arising from public private partnerships (PPPs), the recommendations of the special audit of the external payments arrears (EPA) account including a verification and settlement of the remaining EPA claims, and the power sector reform agenda that has been enhanced by the new Electricity Act paving the way for competition and private investment in the sector.

14. The BoT is also undertaking a fundamental review of its functions, with a view to developing and implementing a strategy for refocusing its operations in the near term. In this regard, the authorities intend to clarify the relationship between the MOFEA and the BoT regarding some of the tasks that the BoT conducts on behalf of the MOFEA, including the management of the EPA account, and cost sharing of monetary policy operations. The authorities also plan to review the regulatory framework for preventing money laundering based on an assessment by the regional body, the Eastern and Southern African Anti-Money Laundering Group. They are grateful for the Fund’s timely response to their voluntary request for a safeguard’s assessment and other areas of technical assistance. The Fund’s technical assistance packages have enabled the authorities to make considerable progress on its reform agenda. My authorities feel that going forward they will need a wide range of technical assistance from the Fund to enable them implement more ambitious economic policies to spearhead further growth. To this end, they call on the Fund to ensure that in its implementation of its current policy on technical assistance special attention is taken to safeguard the development objectives of the country.

15. The authorities together with their East African partners are steadfast in strengthening the regional integration agenda. In this regard, they have initiated negotiations towards the establishment of an East African Common Market as a follow up to the existing East African Customs Union. The interim trade agreement with the European Union in the context of economic partnership agreements will continue to provide full duty free and quota free access for EAC goods exports to the EU markets. Nevertheless, the reciprocal nature of this agreement signifies that in the long-term the revenue implications should be carefully assessed in the context of maintaining the country’s fiscal stability and the overall program objectives. The authorities will also continue to work closely with the regional partners to formulate a coordinated approach to participate actively in the multilateral effort for a rapid and successful conclusion of the Doha Development Round.

Conclusion

16. The authorities’ continued commitment to strong policies under the program has yielded strong economic results, with substantial progress on all fronts. They are aware of the need for further reforms to consolidate the progress made in order to meet the challenges posed by the current surge of inflationary pressures. In the near term, the authorities are determined to ensure that the program focuses on sustaining macroeconomic stability, increasing domestic resource mobilization, promoting pro-poor growth, and increasing investment in infrastructure and core social services like education and health. In line with MKUKUTA objectives and Tanzania Vision 2025, the authorities are determined to ensure that the sustained macroeconomic stability and deepened structural reforms for a broad-based growth provides a sound basis for poverty reduction and attainment of the MDGs. They are confident that going forward, continued engagement with the Fund and the support of the development partners through increased financing support and policy advice will enable them achieve their development goals particularly the large investment needs in infrastructure, energy, water and education.