United Republic of Tanzania: Request for Debt Relief Under the Catostrophe Containment and Relief Trust; Press Release; Staff Report; and Statement by the Executive Director for the United Republic of Tanzania

Request for Debt Relief under the Catastrophe Containment and Relief Trust-Press Release; Staff Report; and Statement by the Executive Director for the United Republic of Tanzania

Abstract

Request for Debt Relief under the Catastrophe Containment and Relief Trust-Press Release; Staff Report; and Statement by the Executive Director for the United Republic of Tanzania

Tanzania faces exceptional balance of payments needs resulting from the impact of COVID-19 and has requested support under the Catastrophe Containment window of the CCRT. At present, there is no IMF-supported program.

Staff Appraisal

1. Health impact of COVID-19. As of May 8, 509 cases and 21 deaths have been reported. Since then, the authorities have not reported new cases or deaths and there is no information regarding the number of tests conducted. As in other countries, the data may significantly underestimate the true figure owing to lack of data on testing and deaths at home. In March, the authorities banned large gatherings (except for worship), suspended attendance to schools and educational institutions, cancelled international flights, and mandated the wearing of face masks in Dar Es Salaam. Some of these restrictions began to be lifted in late May, as the authorities considered that the situation is under control. Thus far, there has been no evidence of a major worsening or a health crisis as the hospital system does not seem to have been overwhelmed although the risk of spiraling infections remains.

2. Economic impact. COVID-19 is having an adverse economic impact on Tanzania, mainly through external channels. These include the collapse of international travel (tourism accounts for 15 percent of GDP and 35 percent of export receipts), lower activity in the hospitality and food service sectors, and a slowdown in the economies of the Tanzania’s main trading partners. While there is uncertainty about the extent of the impact (data as of March 2020 do not show a deterioration in economic conditions), these factors will become more prominent in coming months as the tourism high season was expected to begin in June. Moreover, should the number of COVID-19 cases and deaths intensify, the health system will be under severe pressure and more sectors of the economy will be affected. Real GDP growth is expected to fall to about 4 percent this fiscal year (ending in June) and further decelerate to less than 3 percent next year compared to the pre-crisis projection of nearly 6 percent. At present, the baseline macroeconomic projections assume that the health impact is contained and that the economic impact is mainly felt through the external sector with limited implications for the rest of the economy (Tanzania has not, contrary to other countries, imposed a lockdown on the economy). However, given the uncertainties about the effects of the pandemic, downside risks to growth are pronounced. In the baseline, foreign reserves will also be under pressure and are projected to decline by nearly 25 percent reducing the import coverage from 5.2 months at end-2019/20 to 3.7 months at end-2020/21 (if exceptional financing is not secured to help close the financing gap, the reserve coverage would fall to 3.2 months of imports). In FY2019/20, the fiscal revenue loss due to COVID-19 is estimated to be 0.1 percentage points of GDP relative to pre-COVID projections; this decline may not be pronounced thanks to higher gold receipts. The overall spending envelope is constrained in FY2019/20 by available financing and remains unchanged relative to pre-COVID projections, as the authorities indicated that they will use contingency reserves and reallocate funds from other spending categories to increase health spending by at least US$8.4 million. This amount is consistent with the authorities’ current assessment that the health impact of the crisis will not be sizable and that effects will come through economic spillovers. Regarding FY2020/21, fiscal revenues are projected to fall by about 0.6 percentage points of GPD, while spending needs could rise (relative to pre-COVID projections) by about 0.4 percentage points owing to additional spending on health and other measures that may be required to protect small businesses and the poor.. This would lead to fiscal and balance of payments financing gaps in the order of US$693 million (1 percent of GDP),1 and the authorities have submitted a request for emergency financial support from the IMF under the RCF/RFI. Such support is expected to have a catalytic effect on other multilateral support and grants from donors. The Fund’s emergency request and support by development partners are currently under discussion.2

3. Macroeconomic policies. The Bank of Tanzania reduced the discount rate from 7 percent to 5 percent, lowered minimum reserve requirements from 7 percent to 6 percent, increased the daily limits of mobile money transactions, and will provide regulatory flexibility to banks for loan restructuring operations. In FY2019/20, and compared to pre-COVID projections, revenues are somewhat lower and public spending higher. The authorities granted VAT and customs duties exemptions to medical equipment supplies, expedited the repayment of expenditure arrears, and allocated increased spending to health and social protection. For FY 2020/21, the authorities are currently planning for an 8.8 percent increase in priority social spending. While these amounts are insufficient, the authorities are expected to scale them up together with higher spending on social protection and possible support for small business as soon as additional external financing is secured.

4. Staff appraisal. Staff supports Tanzania’s request for debt relief under the CCRT. Tanzania meets the income threshold with GNI per capita of US$1,020, below the threshold of US$1,175, and staff assesses that it faces exceptional BOP needs stemming from the impact of COVID-19. Considering current financing constraints and the authorities’ plans to seek external support to deal with the consequences of COVID-19, staff considers that Tanzania is pursuing appropriate macroeconomic policies, although there are several risks. The authorities have committed to audits of external support for COVID-related spending and are also working to implement some governance measures, especially the AML/CFT framework and the repayment of expenditure arrears. In the coming year, beyond the measures directly aimed at mitigating the impact of COVID-19, the staff encourages the authorities to proceed with plans and staff recommendations related to arrears on VAT refunds and government expenditures, improvements in the business environment, and reforms to increase bank lending and lower interest rates.

5. Health and economic risks are on the downside. As in most countries, there are uncertainties about the extent of the outbreak and a possible second wave of infections that would not only require a stronger public health response but would also negatively impact economic activity. In addition, donor support might not materialize on time or as needed, which would require a much greater fiscal effort to open space for COVID-related spending. In this regard, the staff urges the authorities to ensure enough increases in budget allocations in the FY2020/21 budget to mitigate risks and maintain close cooperation with the World Health Organization, other multilateral agencies, and donors.

6. Upcoming debt service. Tanzania has debt service to the Fund of SDR 10.3 million falling due in the initial period of debt service relief up to October 13, 2020. The debt service falling due in the 24 months from April 14, 2020 amounts to SDR 18.6 million.

Table 1.

Tanzania: Selected Economic Indicators, 2016/17–2023/241

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Sources: Tanzanian authorities and IMF staff estimates and projections.

Fiscal year (July-June).

Historical figures are based on official data up to the third quarter of 2019.

Excludes liquidity management papers and domestic arrears.

Excludes external debt under negotiation for relief.

Includes investments made by parastatals and other public sector insitutions.

Historical figures are based on official data up to 2018.

Table 2.

Tanzania: Balance of Payments, 2016/17–2023/24

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Sources: Tanzanian authorities and IMF staff estimates and projections.

The Bank of Tanzania adjusts the estimated outturn to reflect information on project grants provided by ministries.

Relief on some external debt obligations is being negotiated with a number of creditors.

Includes valuation changes in gross reserves resulting from changes in exchange rates among major currencies.

Corresponding to scheduled debt service to the IMF from May 29, 2020 to October 13, 2020. The grant for the debt service falling due in the 18 months from October 14, 2020 is subject to the availability of resources under the CCRT.

Table 3.

Tanzania: Debt Service to the IMF, 2020–22

As of May 15, 2020 (In SDR)

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Appendix I. Letter of Intent

Ms. Kristalina Georgieva,

Managing Director, International Monetary Fund

700 19th St.

NW, Washington DC 20431, USA

Dear Ms. Georgieva,

RE: LETTER OF INTENT- CCRT REQUEST

The Covid-19 pandemic is having a negative impact on our economy. We are experiencing a deceleration in economic activity and exceptional balance of payments needs arising from the pandemic. The emerging balance of payments needs, that will be mostly felt in the fiscal year starting in July, is projected to be on the order of US$696 Million (1 percent of GDP and 12.6 percent of our end-March official external reserves).

To date we have (509) confirmed cases and (21) deaths and as in other countries, our ability to track the outbreak has been affected by insufficient capacity to test and deaths at homes, sometimes away from medical facilities. Our response to the crisis is as follows:

  • (i) Constrained fiscal revenues and higher spending needs have led to significant budget pressures. On health spending, we already spent an additional shilling 19.5 billion in FY 2019 / 20 to mitigate the impact of COVID-19;

  • (ii) In the FY20/ 21 budget, we are seeking to create budgetary space for these and other outlays to support economic activity and protect the poor by suspending our curtailing non-essential outlays. To that extent we have increased budgetary allocation for priority social sectors by 8.8 percent from the likely outturn of shillings 5,534.1 billion in 2019/2020 to shillings 6,022.1 billion 2020/ 21. The increase will serve to purchase medical equipment and supplies, improve medical facilities, and hire additional medical personnel;

  • (iii) The Government will ensure that COVID-19 intervention are fully financed. And we are requesting financial support from the IMF and donors to meet the emerging financing gap and remain committed to ensure fiscal and debt sustainability;

  • (iv) To ensure the appropriate use of funds spent on fighting COVID-19, the office of the Auditor General in consultation with the relevant partners providing funding will undertake and publish an ex-post audit of COVID-19 related spending; and

  • (v) Lastly, in order to provide liquidity and support economic activity we reduced the discount rate and reserve requirements and will support banks’ loan restructuring operations if justified on a case-by case basis. We are monitoring closely our balance of payments position and will ensure enough flexibility in the exchange rate to help absorb the shock and contain the financing gap.

Against this backdrop we hereby request grant assistance under the Catastrophe Containment window of the Catastrophe Containment and Relief Trust (CCRT) to cover our debt service to the IMF falling due in the 24-month period from April 14, 2020 to April 13, 2022 or as much as available from resources. This debt relief will free up some budgetary resources to address public health needs and help contain the balance of payments needs resulting from the pandemic.

We are working closely with IMF staff to maintain macroeconomic stability and we are in discussions to obtain additional financial support by accessing emergency financing facilities. We are confident that strong IMF support to our country will help catalyze wider support from other development partners. Lastly, we authorize the IMF to publish this letter and Board documents related to this request for debt relief from the CCRT.

As we thank you for your continued support and cooperation, please accept the assurances of our highest consideration.

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1

The financing gaps are included in the baseline projections in tables 1 and 2, but not in the authorities’ budget plan for FY 2020/21 because the budget needs to be fully financed and remaining financing requirements are not secured.

2

The specific amounts and exact list of agencies and donors are in the initial phase of discussions; they may comprise the Fund, the WB, the AfDB, the EU, as well as other donors.