Statement by Mr. Maxwell Mkwezalamba, Executive Director for the United Republic of Tanzania, and Mr. Jackson Odonye, Senior Advisor to Executive Director, June 23, 2017

Sixth Review Under the Policy Support Instrument and Request for a Six-Month Extension of the Policy Support Instrument

Abstract

Sixth Review Under the Policy Support Instrument and Request for a Six-Month Extension of the Policy Support Instrument

Our Tanzanian authorities welcome the Fund’s engagement, and express their appreciation for the policy advice and technical assistance (TA) received over the years. They acknowledge that the Policy Support Instrument (PSI) has been instrumental in shaping Tanzania’s macroeconomic policies. Noting that the current three-year PSI ends in July 2017, they consider an interim arrangement covering the period of negotiations for a successor PSI expected beginning in January 2018 to be essential to anchor policy and sustain the high level of growth achieved so far. In this regard, the authorities request for the completion of the sixth review under the PSI and a 6-month extension of the current PSI. They also request a waiver for the non-observance of the end-December 2016 assessment criterion on tax revenues that slightly missed the target.

The authorities welcome the staff report and broadly agree with the analysis on various reform efforts, including tackling corruption and tax evasion to improve revenue collection, and the drive for industrialization and human development under the government’s second Five-Year Development Plan, 2016/17–2020/21 (FYDP II). They reiterate that the rebalancing of recurrent expenses in favor of capital spending will strengthen the delivery of key services and investment as well as create more job opportunities.

Performance Under the Policy Support Instrument

The performance of the program under the PSI arrangement was broadly satisfactory as most quantitative targets for December 2016 and March 2017 were met. Similarly, targets on average reserve money, net international reserves, priority social spending, overall fiscal balance, and non-accumulation of external reserves were met. The December 2016 assessment criterion on tax revenues was, however, missed by a small margin, partly due to the shortfall on income tax and excises.

The authorities are making concerted efforts to meet and sustain performance of all structural benchmarks. The authorities are also committed to ensure conclusion of the ongoing audit for payment of VAT refunds. The planned migration to an interest rate-based monetary policy framework also recorded notable progress. The recent consultation between the Bank of Tanzania (BoT) and Fund staff held in Washington, D.C., at the end of the 2017 IMF/WB Spring Meetings helped the authorities to finalize arrangements for migration by early 2018. On settlement of government arrears to pension funds, the verification exercise was completed and a Cabinet approval is expected by September to close this issue.

Economic Developments and Outlook

Tanzania has been among the best performers in the sub-Saharan Africa (SSA) region in recent years. The economy remained strong in 2016 conforming with the authorities’ medium term targets, with growth averaging around 7 percent on the back of robust performance in mining, construction, and communication and transportation sectors. The real growth at 7 percent in 2016 confirms that the weakening economic activity in late 2016 was somewhat compensated. As a result, the authorities project growth at around 7 percent for 2016/17, instead of the projected GDP growth of 6.2 percent on Pages 8 and 9 and in Table 1 of the staff report. The two decades of strong growth has resulted in a six-fold increase in per capita GDP and is expected to continue in the medium term conditioned on recovery of the global economy, improved power supply, and implementation of infrastructural projects under the second FYDPII.

Over the course of 2016, inflation remained in single digit levels largely benefiting from tight monetary policy and fiscal restraint, subdued global oil prices, improved power supply, and exchange rate stability. Favorable rains in Tanzania’s southern region and the easing of drought conditions in the neighboring countries should further dampen food prices. Therefore, inflation, which was 5 percent in 2016, is expected to remain low and stable in line with the authorities’ medium term target.

Tanzania’s external current account deficit has continued to narrow, and the stock of external reserves has remained adequate. By end-March 2017, reserves were equivalent to 4 months of import as imports shrunk. Consequently, the shilling has appreciated by 3 percent in real terms since early 2017.

Fiscal Policy and Public Finance Management

Considerable efforts have been made to ensure fiscal prudence and adequate resources needed to implement the government’s development plan. The strong drive against corruption and tax evasion spearheaded by President John Magufuli is an important anchor, and government counts that the momentum can be sustained into the medium- to long-term. The authorities are adjusting spending in favor of investment to strengthen economic activity and create jobs, which is crucial for ensuring a sustainable development and inclusive growth.

Since FY2014/15, the revenue and deficit outturns have been broadly in line with program targets. The tax-to-GDP ratio has increased by about 1½ percent of GDP, influenced by the government’s fight against corruption and tax evasion. In 2016/17, the fiscal performance for the first nine months was broadly on track and tax revenue remained largely on target. The 2017/18 budget will strike a balance between raising public investment to address various development needs to ensure debt sustainability as provisioned by the FYDP II. The fiscal deficit is projected to be maintained at about 4½ percent of GDP in the medium term, which will cater for multi-year infrastructure projects before declining to about 3 percent of GDP.

Regarding expenditure management, significant savings are expected from delaying projects and cutting non-priority spending in the medium term. The authorities are mindful that successful implementation of investment projects is conditioned on mobilization of adequate resources, both from domestic and foreign sources. The authorities are also lengthening the average maturity of domestic debts to reduce the rollover risks. Initiative to revive and strengthen relationships between the government and development partners is expected to enhance the predictability of foreign assistance.

Going forward, tax policy reforms will focus on increasing tax and non-tax revenue yield from 15.3 percent of GDP in 2016/17 to 16.4 percent of GDP in 2017/18. The review of the tax exemption regime will continue and improvements will be made to the presumptive tax scheme. Key tax administration reforms will focus on the Electronic Single Window System for processing documents; use of the Integrated Domestic Revenue Administration System (IDRAS); strengthening the compliance management function; establishing taxpayers’ data base; strengthening ports’ management and controls; and building capacity, including for managing the PPPs and associated risks. The performance of non–tax revenue will be strengthened through enhanced collection methods within the national departments and agencies, local government authorities, and public entities.

Debt Management Policy

Tanzania remains comfortable on debt sustainability and efforts will be made to maintain the trajectory. The recent debt sustainability analysis (DSA) conducted in mid-2016 reflects that Tanzania can afford a higher fiscal deficit of up to 4½ percent of GDP in the medium term and still retain its low risk profile. Additionally, the authorities are aiming to contract project financing from multilateral development banks and export credit agencies consistent with the objectives of their recent medium-term debt strategy (MTDS) to reduce the risk of debt distress.

Monetary, Exchange Rate, and Financial Sector Policy Issues

Pending developments in the financial market, the BoT will continue with the current discount rate and the statutory minimum reserves (SMR) ratio, and increase the use of reverse repos and foreign exchange (FX) sales to boost liquidity. Expectedly, these actions will complement fiscal developments and enhance collaboration of the relevant authorities, especially in anticipation of the planned fiscal spending. The BoT will also continue to build international reserves to absorb external shocks. Exchange rates will continue to be market-determined with the BoT managing and, occasionally, smoothing liquidity in the Interbank Foreign Exchange Market to remove excess volatility.

Modernizing the monetary policy framework to be more forward looking remains an important goal. Early in the year, the reform, which has interbank call market (IBCM) rate as an operational target, commenced with the introduction of reserve averaging. Improvements will continue on the development of an electronic platform for interbank cash market operations, integration of the forecasting and policy analysis system (FPAS) into the monetary policy formulation process, improvement in the functioning of domestic financial markets, expansion of the range of eligible collateral for monetary operations, and enhancement of coordination with fiscal policy. The process will also involve issuing operational guidelines to commercial banks, outlining new principles for conducting monetary operations, setting rules for disseminating information on IBCM results and overnight interest rates, and establishing eligibility criteria for access to standing facilities. The BoT will also continue to monitor banks’ free reserves to maintain stability in the IBCM rate.

The banking system’s resilience has strengthened in recent years, reflecting the introduction of higher regulatory requirements. The sector remains sound and stable with banks maintaining adequate capital and mandatory prudential liquidity levels. The BoT has directed banks with high NPLs to formulate and implement strategies to bring their ratios to a maximum of 5 percent. It also encourages banks to increase the use of existing credit reference system and to tighten credit standards and reduce risks. Higher capital requirements will provide banks with additional buffers to withstand the recent increase in credit risk. The BoT has also put under administration one small bank for failing capital standards and closed another bank which had prolonged liquidity problems and a money laundering concern.

Structural Reforms

Tanzania’s development priorities as outlined in the FYDPII are geared to facilitate industrial transformation and human development. The strategy seeks to harness its comparative advantage, particularly in agriculture and mining, and the potential of becoming a trading hub in East Africa. To this extent, the government is addressing infrastructure gaps to facilitate private sector-led growth, and creating a conducive business environment for job creation. It plans to tap Tanzania’s enhanced domestic revenue potential to address large investment needs with public-private partnerships (PPPs) playing an important role in major infrastructure projects. Attention will be paid to raising skills to manage unintended risks of PPP projects. A full costing for the projects, which can be high, will be determined when current updates of the medium- to long-term macroeconomic frameworks are completed.

On improving the business environment to align with the FYDP’s objectives of private sector-led growth, the authorities underscore the recent revival of dialogue with the private sector, spearheaded by the Minister of Finance in collaboration with the Minster for Industries, Trade and Investment. A quarterly forum was agreed for that purpose in addition to the forum for Tanzania’s National Business Council, which is chaired by the President. These outlets have become veritable vehicles for disseminating government policies and collecting feedback.

Further, the government is making efforts to clear arrears in the energy sector to make the public electricity utility firm (TANESCO) sustainable. Given its stock of arrears to gas suppliers, an agreement has been reached between Tanzania Petroleum Development Corporation (TPDC) and TANESCO to gradually clear them. On natural resource management, the government team is almost through with the draft term sheet to facilitate the preparation of a host government agreement for the Liquefied Natural Gas project. Another effort is the government strong drive against corruption, which has resulted in higher fiscal revenues and uncovered fraudulent expenditures. The draft Foreign Exchange Regulations 2017 prepared by the BoT has reflected the views of the Capital Market and Securities Authority preparatory to a full open capital account by end-December 2017.

Conclusion

Our authorities are steadfastly committed to the implementation of sound macroeconomic policies and look forward to continued engagement with the Fund. They also commit to continue their structural reforms aimed at unlocking the growth potential. In this regard, they look forward to the completion of the sixth review under the PSI and approval of the extension of the PSI for six months, including a waiver for the non-observance of the end-December 2016 assessment criterion on tax revenues.