Press Release: IMF Executive Board Completes Sixth Review Under Tanzania's PRGF Arrangement and Approves a Three-Year Policy Support Instrument

February 16, 2007

The Executive Board of the International Monetary Fund (IMF) today completed the sixth and last review of Tanzania's economic performance under a three-year Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 03/128). The completion of the review enables a further release of SDR 2.8 million (about US$4.2 million) and will bring the total disbursements under the arrangement to SDR 19.6 million (about US$29.4 million).

The Executive Board also approved a three-year Policy Support Instrument (PSI) for Tanzania to support the country's economic efforts. The PSI seeks high and sustainable growth and more rapid poverty reduction based on enhancing public resource mobilization and efficiency of spending, increasing the financial sector's contribution to growth and the effectiveness of the monetary policy, and improving the business climate. Approval of a PSI for Tanzania signifies IMF endorsement of the policies outlined in the program.

The IMF's framework for PSIs is designed for low-income countries that may not need, or want, IMF financial assistance, but still seek IMF advice, monitoring and endorsement of their policies. PSIs are voluntary and demand driven. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PSI-supported programs are consistent with a comprehensive framework for macroeconomic, structural and social policies to foster growth and reduce poverty. Members' performance under a PSI is normally reviewed semi-annually, irrespective of the status of the program. (see Public Information Notice No. 05/145).

Following the Board's discussion on Tanzania, Mr. Murilo Portugal, Deputy Managing Director and Acting Chairman, stated:

"Tanzania has achieved sustained strong economic performance through market-oriented policies within an appropriate macroeconomic framework. To consolidate recent successes, Tanzania will need to maintain sound policies and steadily pursue key structural reforms, including in the critical energy sector, and capacity building to remove key impediments to growth and achieve lasting inroads against poverty.

"The Tanzanian authorities are undertaking actions and commitments to address the allegations of an impropriety in the management of the government external payment arrears account managed by the Bank of Tanzania. The authorities remain committed to transparency and to consult with the Fund in adopting and implementing appropriate remedial measures.

"The Policy Support Instrument is viewed as the appropriate next step in the Fund's relations with Tanzania. Tanzania's macroeconomic framework and structural reform agenda are consistent with the government's objectives of high and sustained broad-based economic growth and poverty reduction within a stable macroeconomic environment.

"Tanzania is undertaking structural reforms in three key areas. First, tax, customs, and capacity-building reforms are expected to further mobilize public resources, improve the efficiency of government spending, and support economic and social objectives. Second, financial sector reforms, including improvements in credit information, pension investment guidelines, and liquidity management, will help enhance this sector's contribution to growth and the effectiveness of monetary policy. Third, improvements in the business environment, including anti-corruption efforts, are expected to facilitate productive private sector activity and investment.

"Fiscal policy should remain focused on economic and social objectives while limiting net domestic financing to avoid crowding out private sector credit. The monetary framework remains appropriate, with the envisaged deceleration of broad money growth consistent with inflation objectives while still facilitating adequate credit to the private sector.

"Recent energy production shortfalls have been damaging. Resolving energy supply issues on a timely basis, including through appropriate increases in generation capacity and tariffs as envisioned under the PSI, will be critical to maintaining strong economic performance and putting the finances of the energy parastatal, TANESCO, on a sound and sustainable basis," Mr. Portugal said.

ANNEX

Recent Economic Developments

In the last three years Tanzania has achieved strong economic performance, securing high growth, low inflation, adequate reserves, and a sustainable external debt position. Due to an energy crisis caused notably by drought-related reductions in hydropower and higher fuel prices, real GDP growth is expected to slow to 5.9 percent in 2006, from 6.8 percent in 2005. The impact of the energy crisis on inflation has been limited so far, as businesses largely absorbed higher costs. The current account deficit, however, widened to 9.3 percent in 2006 from 5.3 percent in 2005, as rapid growth in exports was offset by higher oil an drought-related imports. Nonetheless, the overall balance of payments position remained positive due to continued strong inflows of donor assistance and debt relief of $3.8 billion received under the Multilateral Debt Relief Initiative (MRDI) in 2006.

Program Summary

Tanzania's program under the PSI aims to achieve sustainable broad-based high growth and poverty reduction, while maintaining macroeconomic stability. The program includes three core objectives:

• Enhancing public resource mobilization and efficiency of spending. Boosting Tanzania's revenues would facilitate higher expenditures on key government priorities, particularly infrastructure, and reduce the country's aid dependency over the long term. One goal of the program is therefore to raise central government revenue to about 15.5 percent of GDP through further tax customs administrative reforms and tax policy measures. In addition, the government intends to improve efficiency in spending by better aligning spending with poverty-reducing and growth-enhancing measures.

• Increasing the financial sector's contribution to growth and the effectiveness of monetary policy. The program includes measures to facilitate lending to small and medium-sized enterprises, considered a key source of economic growth with strong lending prospects, as well as further efforts on legal and regulatory reforms for the provision of medium-term credit. The reform agenda also considers measures to strengthen monetary operations, which the authorities see as an important area given ongoing liquidity pressures from high aid inflows. Strengthening liquidity forecasting by promoting better information flows, and enhancing transparency and communication with financial markets are part of this agenda.

• Improving the business environment and enhancing investment. Further improving the business environment will facilitate private sector activity and investment. The program envisages efforts to remove key bottlenecks and impediments, including inadequate infrastructure and energy provision, weak governance and an overly burdensome regulatory environment.