Abstract
This paper discusses key findings of the Fourth Review under the Policy Support Instrument (PSI) for the United Republic of Tanzania. By October 2008, inflation had risen to 11.8 percent mainly reflecting the surge in global food and fuel prices, but is expected to begin to recede. Poverty indicators have improved, although progress is slower than hoped in some areas. The outlook for 2009 is for continued robust growth, but the current global environment poses serious downside risks. Despite some slippages, there has been good progress on the PSI-supported program.
The Executive Board of the International Monetary Fund (IMF) has completed the fourth review under the three-year Policy Support Instrument (PSI) for Tanzania.
The PSI was approved on February 16, 2007 (see Press Release no. 07/26) and is aimed at sustaining broad-based high growth and accelerating progress in poverty reduction. To that end, the PSI supports enhancing public resource mobilization and efficiency of spending; bolstering financial sector reforms and the effectiveness of monetary policy; and improving the business climate to stimulate private sector-led growth.
On completing the review, the Executive Board also approved waivers for the nonobservance of two assessment criteria: the end-June ceiling on average reserve money, and the signing of a memorandum of understanding between the Ministry of Finance and Economic Affairs (MoFEA) and the Bank of Tanzania (BoT) delineating responsibilities in the areas of liquidity management and financial operations, which was implemented with a delay.
Following the Board’s discussion on Tanzania, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, made the following statement:
“The Tanzanian authorities continue to implement sound macroeconomic policies. Strong fundamentals—including low public debt and ample international reserves—will help Tanzania cope with the current global economic downturn and volatile commodity prices. Nevertheless, downside risks remain, and the authorities must remain vigilant, developing contingency plans.
“The fiscal stance for 2008/09 provides an appropriate modest stimulus, while retaining the target of zero net domestic financing, which is supportive of monetary policy. The revenue target is ambitious, and the authorities will need to exercise expenditure restraint in the event of a revenue shortfall.
“While the recent drop in global commodity prices will help bring inflation down, monetary control needs to be strengthened to return inflation to the authorities’ medium-term objective. In this regard, the recent agreement between the Ministry of Finance and Economic Affairs and the Bank of Tanzania on their respective roles and responsibilities will help improve liquidity forecasting and management.
“The banking sector has fared well, but prudential regulation and supervision need to be strengthened, especially in the context of plans to gradually liberalize the capital account of the balance of payments. Strengthening oversight over the rapidly-growing pension funds is particularly important.
“Recent improvements in governance and public accountability are welcome, including the decisive actions taken to investigate and prosecute wrong-doers in the external payments arrears fraud case. The Bank of Tanzania should continue to improve its internal control mechanisms, drawing on the recommendations of the IMF’s safeguards assessment report. The Bank of Tanzania’s plans to re-focus its attention on its core tasks of monetary policy and financial supervision are important.
“Maintaining high economic growth is critical to accelerate poverty reduction in Tanzania and make decisive progress toward the Millennium Development Goals. Higher infrastructure investment is needed to support growth, but care should be taken to achieve value for money and avoid a re-accumulation of unsustainable public debt,” Mr. Portugal said.