Abstract
Elections took place in October 2015 and the new authorities confirmed their commitment to the objectives of the program. CCM, the ruling party since independence, retained a large majority in parliament, and its candidate, John Magufuli, was elected president. The new authorities have sent strong signals on their determination to reform the government, strengthen the work ethics of the public service, streamline expenditure, and fight tax evasion. Tanzania's macroeconomic performance remains strong. Real GDP growth is on track to remain at about 7 percent. Inflation, which rose to 6.3 percent in October 2015, is expected to converge to the authorities' 5-percent target in 2016. The external current account deficit is projected to decrease further due to lower oil imports. Program implementation slowed significantly ahead of the elections. While most assessment criteria (ACs) for June 2015 were met, the September indicative targets for tax revenue, average reserve money, and net international reserves (NIR) were missed. Revenue and financing shortfalls, together with weak commitment controls, led to the accumulation of further domestic arrears in 2014/15. Some progress was achieved in structural reforms but a number of benchmarks were missed.
On behalf of the Tanzanian authorities, we thank staff for their constructive engagement during the third review of the economic program supported by Fund-Policy Support Instrument (PSI). The program has become increasingly important in strengthening macroeconomic management and guiding key structural reforms. Notable progress has been made in implementation of the program, and following successful October 2015 general elections, the new authorities have confirmed their commitment to the objectives of the current program. The authorities prioritize fiscal sustainability in maintaining macroeconomic stability and have announced austerity measures to curb unnecessary spending, and increase revenue collection in the revised budget framework adopted in January 2016. In this regard, the authorities request the Executive Board’s support for the completion of the third review of the PSI, and for the requested waiver for the missed assessment criterion and modification of assessment criteria.
1) Program performance
Program implementation remains on track. Most of the assessment criteria (ACs) for end-June 2015 and the indicative targets for end-September were met. However, revenue and external financing shortfalls, together with challenges related to commitment controls, saw accumulation of additional domestic arrears, and a widening of the fiscal deficit. The authorities are requesting for a waiver on the missed end-June 2015 AC on tax revenue and its modification for December 2015. Corrective actions have been taken by reverting back to centralized system of payroll tax payments to avoid the delays caused by decentralization. Going forward, the recently revised budget framework commits the authorities to deepening tax reforms to enhance revenue collection. Considerable progress was also made in implementation of the structural benchmarks albeit with some delays, and the authorities are committed to conclude the remaining components of the reforms.
2) Recent economic developments and prospects
Tanzania’s economic performance has broadly been favorable in recent years, with a robust growth realized despite unfavorable external conditions. Although the recently announced third quarter GDP growth declined to 6.3 percent as compared to the 7.2 percent in the first half of 2015, it is expected that growth will remain at around 7 percent in 2015 and 2016. Inflation edged up to 6.6 percent and 6.8 percent in November and December 2015, respectively, an increase from 4.0 percent in January 2015. This was mainly attributed to high food inflation and the pass through effects from the depreciating shilling. It is expected that inflation will gradually decline to the objective of 5 percent in the near term.
Fiscal position deteriorated with the shortfalls in revenues, and delays in raising external non-concessional borrowing. This was mainly attributed to the delays caused by the decentralization of payroll tax payments and the unfavorable conditions on international financial markets. The new government has reverted back to the practice of withholding centrally, taxes and other contributions on civil service wages, and in addition adopted a revised budget framework 2015/16 which proposes to close a fiscal gap of about 1 percent of GDP through streamlining non-priority expenditures. It is also expected that more budget financing will be raised through ENCB.
Following the significant depreciation of the shilling experienced in early 2015, the authorities took timely measures to stabilize the exchange rate through tightening monetary policy and introducing temporary administration measures in the operations of the foreign exchange market. Further, the authorities undertook to actively coordinate monetary and fiscal policies to improve the overall macroeconomic stability objective. Foreign reserves sufficiently cover 4 months of projected imports of goods and services, and the current account balance is expected to improve further with the prevailing lower oil prices.
3) Medium term policies
a) Fiscal policy
The authorities are committed to medium term fiscal sustainability in line with the East Africa Community macroeconomic convergence criterion. In this regard, they will continue to deepen tax policy and administration reforms including by implementing the VAT reforms, and making amendments to the Income Tax Act on the tax rules affecting the mining and petroleum sectors. It is also expected that additional momentum from the recent Presidential drive to fight tax evasion, will have a positive impact on revenue collection. Further, the authorities aim to reduce non-priority expenditures while preserving priority capital spending and accommodating the new government development priorities.
To settle the accumulated domestic expenditure arrears the authorities have set in motion verification and clearance processes for the 2014/15 arrears including those related to TANESCO and pension funds. In addition, to avoid further occurrences of arrears, commitment controls have been tightened and a centralized database is being developed to track projects over their entire lifecycle to support monitoring and strengthening control of multi-year commitments.
In line with effective public debt management the authorities are committed to strengthening the regulatory and institutional framework. In this regard, they are working to accelerate the approval of the National Debt Management Policy, and the amendments to the Government Loans, Guarantees and Grants Act. The authorities have also introduced a new information system to enhance monitoring of parastatals, including a cap on spending to ensure better expenditure control.
b) Monetary and exchange rate policies
In line with the objective of maintaining price stability, and with the heightened inflationary pressures, the authorities intend to keep a tight monetary policy to facilitate a gradual decline of inflation back to the objective of 5 percent by end 2016. Efforts to modernize the monetary policy framework are ongoing including the setting up of a Modeling and Forecasting Unit at the central bank. Further, to facilitate the transition towards an interest-rate based framework, efforts are being made to improve market functioning and strengthen BoT communication with market players.
The authorities remain committed to a flexible exchange rate regime and will only intervene in the foreign exchange market to smooth short term exchange rate volatility. In addition, BoT will provide clear signals on its objective in participating in the interbank foreign exchange market as a way to enhance transparency in the market. Further, the authorities will reexamine the temporary administrative measures introduced in the foreign exchange market by end-June 2016. With regard, to the recently liberalized capital account transactions, the authorities aim to review the prudential rules to ensure they are not overly restrictive to foreign investor participation.
c) Financial sector
The financial soundness indicators affirm that the banking system is liquid, adequately capitalized and profitable; already, almost all banks have increased their capital adequacy levels to the new levels ahead of schedule. Further the authorities are strengthening the bank supervision framework by developing onsite examination procedures for consolidated supervision and also improving data collection for macro-prudential surveillance.
In deepening financial inclusion and in line with the National Financial Inclusion Framework, the authorities are taking various measures, to achieve the target set of 50 percent formal access to financial services by 2016. A financial education strategy is being put in place to ensure customers are well informed. In addition to the established Complaints Resolution Desks, the authorities are also developing a regulatory and supervisory framework to enhance financial consumer protection, and create conducive environment for mobile telephony financial services.
d) Other reforms
Resolving TANESCO arrears remains important in returning the entity to a financially viable position. With a draft strategy to address TANESCO’s arrears now prepared, the government has commenced payment of accumulated arrears of electricity bills in the past few months. Other measures proposed in the strategy to address the arrears include renewed efforts to collect arrears from private electricity customers, measures to improve efficiency in revenue collection, reduce system losses, and improve the generation mix.
4) Conclusion
The new authorities prioritize prudent macroeconomic policies and good governance and accountability in the process of strengthening economic growth and poverty reduction. Already, the authorities have demonstrated their readiness to take timely policy measures to maintain macroeconomic stability, and are committed to forge ahead with the structural reforms and strengthen institutional capacity. Furthermore, they are committed to continue their engagement with the Fund and other development partners in implementing their development agenda. In this regard, the authorities look forward to the conclusion of this third PSI review as a support to their continuing efforts to enhance macroeconomic management.