Abstract
With the third wave of the pandemic now underway in Tanzania, the authorities face ongoing impacts from the global health crisis. The new administration has shifted to a more direct response to the pandemic under the Tanzania COVID-19 Socio-economic Response and Recovery Plan (TCRP) and is re-engaging donors and partners to bolster this endeavor. Support from development partners is vital, as the global crisis has constrained exports and public finances, inhibiting the authorities’ ability to effect priority spending in a timely manner. Among other things, resource constraints continue to impact vaccine acquisition and administration adversely, as well as the authorities’ ability to contain scarring and protect vulnerable sectors, posing significant downside risk to the recovery.
With the third wave of the pandemic now underway in Tanzania, the authorities face ongoing impacts from the global health crisis. The new administration has shifted to a more direct response to the pandemic under the Tanzania COVID-19 Socio-economic Response and Recovery Plan (TCRP) and is re-engaging donors and partners to bolster this endeavor. Support from development partners is vital, as the global crisis has constrained exports and public finances, inhibiting the authorities’ ability to effect priority spending in a timely manner. Among other things, resource constraints continue to impact vaccine acquisition and administration adversely, as well as the authorities’ ability to contain scarring and protect vulnerable sectors, posing significant downside risk to the recovery.
I. Introduction
1. Our Tanzanian authorities wish to thank Fund management and staff for the constructive engagement. They broadly agree with staff’s assessment and policy recommendations and view the Fund’s emergency support as critical to unlock essential additional donor financing.
2. The COVID-19 pandemic continues to exact a heavy toll on Tanzania with severe socio-economic consequences. As a result, hard-won gains made on the socio-economic and poverty reduction fronts over the last decade, have been reversed. The global pandemic’s negative impact on growth and associated shortfalls in fiscal and export revenues have created urgent fiscal and balance of payment needs which, if not addressed, would result in immediate and severe economic disruption. As noted by staff, without urgent financial assistance, there could be severe health, social, and economic impacts for the country. Furthermore, with a significant share of the COVID-19 health financing required for the Tanzania COVID-19 Socioeconomic Response Plan (TCRP) as yet unidentified, the catalytic role of IMF emergency facilities will be important to back the authorities’ current discussions with donors on additional financing needed to support the TCRP and contain risks to welfare and the economy, while backing macroeconomic stability.
3. Against this background, the authorities seek Directors’ support for a disbursement under the exogenous shocks window of the Rapid Credit Facility (RCF) equivalent to 33.33 percent of quota, and a purchase under the Rapid Financing Instrument (RFI) equivalent 66.67 percent of quota; with the two totaling SDR 397.8 million. This will support existing and prospective policies to address the shock and place the economy on a sustainable growth path. Tanzania has lower public debt ratios than many of its comparators and its debt is sustainable. Capacity to repay the Fund remains adequate, and in line with Fund policy, the central bank has committed to undergo a safeguards assessment in time for any subsequent arrangements.
4. As affirmed in their letter of intent, the authorities commit to ensuring the appropriate use, monitoring, and reporting of COVID-19 related spending. They will use the resources for health expenditure to fight the pandemic and to provide support to affected households and economic sectors. A dedicated TSA sub-account for COVID funds has been created and pandemic-specific Integrated Financial Management Information Systems (IFMIS) codes will be used to track RCF and RFI spending. Quarterly reports of RCF and RFI spending will be published within one month of the end of each quarter on the Ministry of Finance website, which will also host pandemic related public procurement contracts, including the names of the awarded companies and their beneficial owners. A post-crisis audit will be completed and published online. The authorities are also committed to reporting on COVID developments, including testing, cases, and deaths, from quarter 4, 2021.
II. Effects of the COVID-19 pandemic
5. The country is in the third wave of the pandemic, induced by new variants, with the unprecedented impact continuing to adversely affect vulnerable and low-income groups, amidst limited economic support and constrained provision of essential health services as demand outweighs supply. Alongside the sizable impacts on tourism, traditional exports and jobs reflected in the staff report, World Bank reporting also shows increased poverty. All this highlights the need to prioritize spending on health, education, tourism, small and medium sized enterprises (SMEs), and social safety net programs.
6. Despite the buffer provided by higher gold prices and gold export receipts – including during the initial partial containment in response to earlier waves, prolonged pandemic effects are now beginning to show in the economy. Pandemic-induced shocks have slowed GDP growth significantly, mainly on account of weakened external demand, global travel restrictions and the disruption to trade links and market access. The tourism sector, a primary source of foreign exchange earnings, saw the number of international tourist arrivals more than halved in 2020. The steep decline in gross international reserves, declining tourism receipts, subdued export performance and elevated health requirements are thus expected to lead to significant deterioration of the external sector position in 2020/21 and 2021/22. In the near term, emergency imports of COVID-19 testing machines, vaccines, and other medical supplies alongside rising oil import prices, are likely to add to the deterioration of the external position. The fiscal position has also deteriorated against the backdrop of revenue declines alongside elevated health spending needs. The authorities’ efforts at re-prioritization and re-allocation of budgetary resources have reached their limit.
7. In the financial sector, the pandemic increased the banking sector’s prior vulnerabilities highlighted in the 2018 FSAP. Among other things, the pandemic led to a significant slowdown in the growth of credit to the private sector in 2020, alongside rising non-performing loans (NPLs), with the NPL ratio peaking at 10.4 percent in June 2020. The pandemic may exacerbate weaknesses such as insufficient loan loss provision, undercapitalized banks, and high balance sheet dollarization. The full impact of the pandemic on the banking sector will only be evident once the regulatory flexibility on loan restructuring provided by the central bank in the wake of the pandemic, that allows for delays in NPL recognition and required loan-loss provision, is lifted.
III. Pandemic Response
8. A Special Committee was established to advise the government on appropriate steps to tackle the crisis, following which the authorities developed an overarching policy framework; the Tanzania COVID-19 and Social-Economic Response and Recovery Program (TCRP), to guide the management of the pandemic and stimulate economic activity. The TCRP includes a National Development and Vaccination Plan and a National COVID-19 Response Plan, and outlines key interventions in health, education, water and sanitation, tourism, support to SMEs, and social protection. Priority is given to tourism (including in Zanzibar), given the sector’s contribution to foreign exchange receipts alongside growth, jobs, and poverty reduction.
9. In the health sector the authorities have, among other things, taken steps to strengthen detection and surveillance capabilities, and their infection prevention and control capacity, while establishing the basis for an effective vaccination roll-out campaign. They plan to vaccinate 20 percent of the population in 2021 and an additional 40 percent in 2022. Following receipt of over 1 million doses of the Johnson and Johnson vaccine, a vaccination drive spearheaded by Her Excellency President Hassan was launched. Alongside vaccine doses distributed to health posts across the country, the authorities’ communication strategy seeks to address any public perception issues related to the vaccine. Our authorities, in collaboration with development partners, also continue to implement the second Productive Social Safety Net (PSSN-II), aimed at improving targeted poor households’ access to income earning opportunities and social services. The authorities are committed to increasing the coverage of the PSSN over and above the current active beneficiaries’ level.
10. Accommodative macroeconomic and financial policies are intended to moderate the fallout from the pandemic and support the recovery. To support private sector activity, the government waived duty on raw materials used by local manufacturers of health-related materials; expedited the verification and settlement of business sector claims and arrears; continued to reserve 10 percent of local governments’ gross revenues for women, youth, and people with disabilities, who are the most vulnerable to pandemic impacts; and settled wages and other charges for institutions in the hospitality industry which is heavily impacted by the crisis (TCRP, August 2021, p.31). Given the limited allocations in the current budget for health and emergency spending, a supplementary budget will be tabled with Parliament in February 2022, following the mid-year review of the current year’s budget. The supplementary budget will cater for increased demand for COVID-related spending, which has not been fully provided for in the current budgetary allocation.
11. The Bank of Tanzania (BoT) acted promptly to limit the impact of the pandemic on the financial sector and ensure adequate liquidity in the system. The BoT discount rate was reduced from 7 to 5 percent; while the statutory minimum reserve requirement was lowered from 7 to 6 percent; and a special loan facility was introduced in July 2021 to banks and other financial institutions for on-lending to the private sector. Besides aiming to scale up credit to the private sector, this facility sought to lower market interest rates, increase liquidity, boost economic activities, and in so doing, help hasten the recovery.
12. BoT also relaxed the policy limiting the number of loan restructurings, with maturity extensions enabling lower debt service and /or temporary suspension in debt service. These temporary measures apply to those sectors most impacted by the crisis. Cognizant that the duration of the pandemic could raise NPLs, and considering pre-COVID vulnerabilities, the central bank has stepped up financial regulatory oversight and will closely monitor the banking sector’s health. Among other things, it requires financial entities to strengthen their credit underwriting practices. The authorities are committed to preserving financial stability while ensuring adequate liquidity to support credit to the economy.
IV. Post Crisis and Medium-Term Policy Measures
13. The central bank will review the existing framework to cater to developments in the banking sector and enforce the mandatory use of credit reports from credit reference bureaus. The authorities will begin to phaseout regulatory forbearance as the non-gold economy shows signs of sustained recovery.
14. The Tanzania Development Vision 2025 encapsulates the broad development goals under the pillars of high-quality livelihood, good governance and the rule of law, and a strong and competitive economy. These pillars reflect the authorities’ vision and the aspiration for sustainable and shared growth, underpinned by investment in human and physical capital. While they continue to navigate the pandemic, therefore, public policy remains geared towards realizing the broad objectives articulated in the development plan. Structural reforms will continue, including those guided by the Blueprint for Regulatory Reforms to Improve the Business Environment (2018). The Blueprint aims to address structural gaps, including contract enforcement to improve the business environment, and articulates the fair allocation of resources to all citizens. As the crisis wanes, a renewed focus on these objectives can be expected.
V. Conclusion
15. The authorities value Fund support and its catalytic role, as they seek financing to meet priority spending needs. They remain committed to implementing polices that engender sustainable and shared growth. They appreciate the Fund’s engagement and technical support, and look forward to Directors’ favorable consideration of their request for emergency financing under the RCF and RFI. This support will boost current efforts to get past the crisis and lay the groundwork for more structured longer-term engagement if needed, with the IMF, helping the authorities implement policies to preserve macroeconomic stability and pursue broader economic reforms to promote sustainable and inclusive growth.