Abstract
KEY ISSUES Tanzania’s macroeconomic performance remains strong. Real GDP grew by about 7 percent in 2014 and inflation is now slightly below the authorities’ 5 percent target. Growth is projected to remain strong and inflation moderate. Program performance since the last review has been uneven. All end-2014 assessment criteria were met, though the indicative target on tax revenue collection was missed. Good progress was made on structural benchmarks. Shortfalls in domestic revenue continued in early 2015 and delays were incurred in mobilizing external financing and adjusting expenditure in the context of the mid-year budget review. Monetary policy was loosened unexpectedly in late 2014 and interventions in the foreign exchange market increased. These developments, together with shortfalls in external program financing, led to the end-March 2015 targets on net domestic financing and international reserves being missed. The authorities intend to maintain a prudent fiscal policy in 2015/16. Expenditure measures were taken to adhere to the 2014/15 target for the overall deficit and the authorities are committed to a deficit (excluding arrears clearance) of 3.5 percent of GDP next year, consistent with a medium-term fiscal anchor of a deficit slightly below 3 percent of GDP. Discussions focused on measures that would allow a realistic but ambitious increase in revenue, to make more space for priority expenditure and reduce the risk of further arrears accumulation. The program allows for the settlement of existing arrears to suppliers and pension funds. Monetary policy has been tightened recently. This will help address the excess liquidity situation, which likely contributed to disorderly conditions on the foreign exchange market and pressures on international reserves. The recent depreciation of the shilling against the U.S. dollar reflects to a large extent the strength of the dollar and should not be resisted. Staff recommends completion of the second PSI review and modification of assessment criteria on net international reserves (NIR) and net domestic financing (NDF) for end- June 2015.
1. Tanzania’s strong macroeconomic fundamentals and performance, partly supported by successive Policy Support Instrument (PSI) arrangements with the Fund, have helped sustain the growth momentum, in spite of the challenges from the global economic environment. The steadfast implementation of the authorities’ Five Year Development Plan and the current national growth strategy, MKUKUTA II, have accelerated the attainment of broad-based and inclusive growth and considerably reduced the incidence of poverty.
2. The authorities are appreciative of the constructive engagement with the Fund, including within the context of the ongoing PSI program and the provision of essential technical assistance. They thank staff for the candid policy dialogue which has guided implementation of their macroeconomic policy and development agenda. They remain committed to pursuing prudent macroeconomic policies, while further deepening their structural reform agenda, including laying a solid foundation for the management of the new gas economy. In line with this, the authorities request Executive Directors’ support for the completion of the second review of the PSI and modification of assessment criteria.
Program performance
3. Tanzania continues to demonstrate a track record ofjudicious implementation of sound macroeconomic and structural policies, consistent with the PSI arrangement. Against the end-December 2014 test date, all quantitative assessment criteria, including net domestic financing (NDF) of the government, average reserve money, and net international reserves, were met with relatively comfortable margins. On the structural front, significant progress was recorded, notably in the preparation of a natural gas revenue management framework and in instituting measures to regularize domestic arrears. While acknowledging the fact that the end-March 2015 indicative targets on tax revenue collection and on NDF were missed, the authorities are confident of improved performance going forward on account of the decisive policy measures instituted to shore up domestic revenues and the reengagement of general budget support (GBS) partners.
Recent economic developments
4. Real GDP growth has over recent years followed an upward trajectory and is projected to have expanded by 7.3 percent in FY2014/15. Reflecting broad-based growth and increased diversification of the economy over time, the national account has been revised upward by more than 30 percent. Inflation remained well below the medium term target of 5 percent, while the current account deficit is estimated to have improved from 10.3 percent of GDP in FY2013/14 to 9.4 percent in FY2014/15. The stock of gross official reserves covered 3.9 months of projected imports of goods and services, excluding those financed by foreign direct investment.
5. Fiscal performance over the period was challenged by weak domestic revenue collection, partly on account of a decline in domestic demand and challenges encountered in the rollout of electronic fiscal devices to support VAT collection. Also, efforts at boosting tax compliance did not translate into increased income tax collection. On expenditures, policies focused on aligning expenditure with expected revenue outturns, and strengthening public expenditure management. Difficult expenditure adjustments by the authorities, including the revision of expenditure ceilings for MDAs capping their commitments in the Information and Financial Management System (IFMS) allowed attainment of the fiscal target of 3.8 percent of GDP in FY2014/15.
6. The conduct of monetary policy by the BoT was not ad hoc, but anchored on maintaining price stability consistent with the broader macroeconomic objectives of Government. To this end, growth of key monetary aggregates—M3, average reserve money, and private sector credit—remained broadly within their respective targets. In an effort to normalise liquidity conditions among banks, the BoT reduced the Statutory Minimum Reserve (SMR) ratio on private deposit liabilities by two percentage points in late December 2014. However, to address the excessive volatility of the Shilling against the US dollar occasioned by strengthening of the dollar following a rebound in the US economy, the cut in the SMR ratio was reversed in May 2015. The authorities also continued to steadfastly implement their Financial Sector Reform Program with the view to improve access and usage of formal financial services aimed at fostering economic growth and reducing poverty.
Near to medium-term outlook and policies
7. Growth is projected to remain robust at 7.3 percent in FY2015/16, supported mainly by infrastructure investment and productivity enhancement, and inflation is forecasted to remain in single digits in FY2015/16 and over the medium term. The current account balance is expected to improve further over the period, largely due to projected impressive export performance as the global economy continues to recover.
Fiscal policy and related reforms
8. An overall fiscal deficit of 3.5 percent of GDP is envisaged in FY 2015/16, reducing to below 3 percent over the medium term consistent with the authorities’ plan to maintain a low risk of debt distress, and in line with the related East African Community (EAC) macroeconomic convergence criterion. The authorities will focus on implementing the 2015 Budget Act, strengthening revenue measures and tax administration, containing expenditure within the approved budget limits and enhancing the borrowing strategy.
9. On the revenue front, the authorities will seek to eliminate discretionary tax exemptions, while ensuring transparency in issuing statutory exemptions. The use of electronic fiscal devices (EFDs) in all business transactions will be strictly enforced to minimize tax evasion. Moreover, the recently introduced Tanzania Customs and Integrated System (TANCIS) and the Centralized Price Based Valuation System will be rolled out throughout the country, with a view to also address the persistent complaints of double taxation by importers of goods from Zanzibar to Tanzania mainland. The new VAT Act also becomes operational on July 1, 2015.
10. Cognizant of the country’s continued low risk of debt distress, as reaffirmed by the updated debt sustainability analysis, the authorities will continue to utilize on external non-concessional borrowing (ENCB) to finance strategic infrastructure projects. They will seek to ensure that ENCBs are secured timely to prevent a recurrence of the fiscal challenges encountered in executing the 2014/15 budget. In addition, the authorities plan to issue Eurobonds and will soon be signing agreements with Moody’s and Fitch Ratings agencies for the provision of credit rating.
11. The authorities remain committed to aligning expenditure with revenues outcomes, by effecting the necessary expenditure adjustments, where necessary. While noting staff’s concerns that the upcoming presidential and parliamentary elections constitute a fiscal risk to the program, the authorities underscore the fact that experience with the conduct of elections in Tanzania does not support staff’s assessment. They highlight that expenditures related to the elections have been fully incorporated in the 2015/16 budget.
12. The progress made thus far in addressing the perennial problem of accumulation of domestic arrears will be sustained. The authorities are determined to complete the repayment of outstanding arrears to suppliers arrears. They appreciate the inclusion in the program of an adjustor to NDF in FY2015/16 to allow for the clearance of arrears to pension funds, and have completed preparation of a strategy to address them. Going forward, they undertake to strengthen commitment controls in the IFMS, and ensure that liabilities to the Public Service Pension Fund will be fully budgeted.
13. My authorities value the support of GBS partners which they underscore should continue to be predicated on the principle outlined in the partnership framework memorandum, devoid of considerations that are outside their direct control. To this end, while appropriate action has been taken by the government in respect of the Independent Power Tanzania Ltd. (IPTL) case in line with the country’s accountability and governance principles and mechanisms, the authorities wish to emphasize that the matter is currently subject to due process, including in international jurisdictions.
Monetary and exchange rate policies
14. The BoT will continue to implement tight monetary policy, supported by benign supply side factors, to tame inflation expectations, with the objective of maintaining inflation below the policy target of 5 percent over the medium term. In this context, the BoT will continue to deploy a mix of monetary policy instruments to ensure that liquidity is maintained at appropriate levels. In addition, the BoT will continue instituting measures to modernize its monetary policy framework by implementing its roadmap to price-based monetary policy framework. Furthermore, the BoT will continue to enhance monetary operations by strengthening liquidity management and forecasting.
15. On the exchange rate, the BoT reaffirms its commitment to a market determined exchange rate, and continues to see this as the first line of defense against external shocks. In this regard, the BoT will continue to participate in the foreign exchange market for liquidity management purposes and to smooth out short-term exchange rate volatility while strengthening the gross foreign reserves position to ensure at least 4 months of imports cover. That said, the BoT is determined to utilize the policy instruments at its disposal to prevent episodes of extreme exchange rate volatility from undermining the progress accomplished in attaining low and stable inflation and efforts at building confidence in the market.
Financial sector stability
16. Financial soundness indicators up to end-March 2015 affirm that the banking system remains liquid, adequately capitalized and profitable. The BoT will continue to strengthen its financial stability monitoring tools and arrangements to preserve its stability and soundness. To this end, close supervision of the FBME Bank, alleged by US authorities to be an institution of primary money laundering concern, will continue. In the meantime, the BoT is considering an appropriate resolution strategy in the event this concern materializes, while, at the same time, taking action to strengthen the AML/CFT supervisory framework. As the authorities prepare to extend liberalization of the capital account outside the EAC, the BoT will seek to further strengthen its regulatory and oversight capacity.
Other reform measures
17. My authorities are pleased to disclose that following exploration in recent years, a series of significant discoveries of natural gas amounting to about 55.08 trillion cubic feet has been recorded. This is expected to attract significant investment flows over the medium term with correspondingly large export and budget revenue flows. To maximize the benefits of this potential natural resource wealth and preserve intergenerational equity, the authorities have prepared an Oil and Gas Revenue Management Policy. Cognizant of the potential macroeconomic and budget management challenges, an appropriate fiscal framework and rules for managing resource revenues, including a Natural Gas Revenue Fund fully integrated in the budget, will be established.
18. Deliberate policy measures by the national power utility, TANESCO, including two successive tariff increases over a two-year period, increase in power generation capacity, and a reduction in technical losses, have helped significantly improve the company’s financial position. The upcoming completion of a new gas pipeline and a gas-fueled power plant is expected to reduce the cost of power generation, further strengthening its financial position. In line with program commitments, the authorities will prepare a strategy to clear all outstanding arrears to suppliers and ensure its strict implementation.
Conclusion
19. The Tanzanian economy’s strong fundamentals and the authorities’ commitment to sound policies have helped the economy sustain the growth momentum in spite of headwinds from a difficult external environment. The authorities are determined to persevere with efforts at sustaining macroeconomic stability, enhancing domestic resource mobilization, creating fiscal space for increased investment in infrastructure, and promoting broad-based and pro-poor growth. Finally, the authorities consider the Fund’s policy advice and technical assistance critical to the successful implementation of their development agenda.