IMF Executive Board Completes Fourth PSI Review for Tanzania and Concludes 2016 Article IV Consultation
July 20, 2016
On July 18, 2016, the Executive Board of the International Monetary Fund (IMF) completed the fourth review of Tanzania’s economic performance under the program supported by the Policy Support Instrument (PSI) 1 and also concluded the 2016 Article IV consultation 2 with Tanzania.
The PSI for Tanzania was approved by the Executive Board on July 16, 2014 (see Press Release No. 14/350).
Following the Board discussion, Mr. Min Zhu, Deputy Managing Director and Acting Chair, made the following statement:
“Tanzania’s macroeconomic performance has been strong under the Policy Support Instrument. Growth has remained close to 7 percent and inflation is moderate. Most quantitative program targets for end-2015 were met, while progress on structural reforms slowed due to the transition to the new government.
“The macroeconomic outlook is favorable, supported by the authorities’ ambitious development agenda, although risks are tilted to the downside. Sustaining high growth and implementing the development agenda while preserving fiscal and external sustainability will require a range of reforms. Somewhat higher fiscal deficits could be sustained for a few years while keeping a low risk of debt distress. However, creating fiscal space for higher infrastructure investment through sustained efforts to raise domestic revenue and increasing spending efficiency, particularly in public investment, is imperative.
“The implementation of the 2016/17 budget will be a first test of the authorities’ capacity to reconcile these various objectives. Careful prioritization and implementation of expenditures will be required to ensure that spending does not exceed available resources and to avoid domestic arrears accumulation.
“Despite significant progress in recent years, financial development remains low. Further development would support higher growth, as well as improve the overall effectiveness of macroeconomic policy. Beyond credit growth, financial development will require further improving access, particularly for businesses, and reducing high borrowing costs. Further development of the interbank and government debt markets is also desirable.
“Vigorous reforms will be required to foster further structural transformation of the economy. The authorities’ focus on creating a better environment for business and job creation is welcome, like the authorities’ strong drive against corruption. Improving the financial sustainability of the public electricity utility, TANESCO, is critical for the development of the energy sector. Tanzania could also benefit from the completion of the East African Community common market.”
The Executive Board also completed the 2016 Article IV Consultation with Tanzania.
Tanzania has achieved strong growth and macroeconomic stability over the past two decades. This performance was the result of market-oriented reforms and prudent macroeconomic policies. Growth has been driven by construction, services, and basic manufacturing, and the economy has become more diversified. Inflation, while still volatile, has remained moderate. Poverty has decreased but remains high (at 28.2 percent of the population, based on the national poverty line) with a large population of underemployed youth, and despite substantial progress toward the Millennium Development Goals (MDGs), Tanzania is likely to have missed about half the 2015 targets.
Growth has remained strong and inflation moderate in the past two years. Real GDP grew by 7 percent in 2015, with activity particularly buoyant in the construction, communication, finance, and transportation sectors. Inflation remained in single digits throughout 2015, averaging 5.6 percent, despite the significant exchange rate depreciation in the first half of 2015. Inflation in April 2016 was 5.1 percent, close to the authorities’ target of 5 percent. The external position recorded mixed developments. The current account deficit declined from 10.7 percent of GDP in 2013/14 to a projected 8.6 percent in 2015/16, mainly due to lower oil prices. The surpluses in the capital and financial accounts, however, narrowed due to lower donor support and foreign direct investment related to natural gas exploration. International reserve coverage is estimated to have declined somewhat to 3.6 months of prospective imports of goods and services in June 2016. The banking system appears sound overall, but there is wide variation within the system. The level of financial development has improved in recent years, though at a gradual pace.
Implementation of the 2015/16 budget has faced challenges. While the budget was built on ambitious but realistic revenue projections, it still had to be adjusted for external financing shortfalls and to make room for expenditures carried over from 2014/15 and some of the new government’s priorities in education. The revised budget targets a lower overall deficit of about 3.25 percent of GDP (compared with 4.2 percent in the original budget and the program). Available information (on a cash basis) for the first three quarters suggests that this target is well within reach, reflecting a significant slowdown in the execution of capital expenditures. The stock of expenditure arrears decreased during the third quarter of the fiscal year (January- March 2016), reflecting the partial clearance of construction arrears and reversing an increase during the first two quarters.
While macroeconomic management has been able to deliver fiscal sustainability and macroeconomic stability, the quality of fiscal management deteriorated until recently in some areas (e.g., expenditure arrears control) and the pace of reform has abated in recent years. The modernization of monetary policy has made only limited progress in the past two years. The business environment remains challenging and the perception of corruption has increased substantially. As a result, program performance under the PSI has been mixed. The government’s second Five-Year Development Plan (FYDP II), published in June 2016, aims to address these issues. It focuses on economic transformation through industrialization and human development. To facilitate private sector-led growth, the government aims to provide critical infrastructure and create a business environment that is conducive to job creation. The government also aims to reduce poverty by improving social services (education, health, housing, water and sanitation), enhancing income security, and promoting social protection. The plan will start being implemented with the 2016/17 budget.
Executive Board Assessment 3
Executive Directors commended Tanzania’s strong macroeconomic performance, with high growth and low inflation, and noted that, notwithstanding some delays in the structural reform agenda, the outlook remains favorable, although downside risks and challenges persist. Against this backdrop, Directors considered the second Five Year Development Plan (FYDP II) as appropriately focused on further reducing poverty and creating a business environment that is conducive to job creation, including by addressing the infrastructure gap, improving access to finance and land, and enhancing education and job training. They underscored that preserving fiscal and external sustainability while implementing FYDP II is crucial and will require a range of reforms.
Directors agreed that somewhat higher fiscal deficits could be sustained for a few years while keeping a low risk of debt distress. Nevertheless, they stressed that creating fiscal space for higher infrastructure investment through sustained efforts to raise additional domestic revenue and streamline current expenditure is imperative. Directors were encouraged by the authorities’ plans to strengthen tax administration and to consider further tax policy reforms. Measures to increase spending efficiency, particularly in the area of public investment, will also be needed.
Directors stressed that careful prioritization and implementation of expenditures would be required under the 2016/17 budget to ensure that spending does not exceed realistic revenue and financing projections and to avoid domestic arrears accumulation. In this context, they welcomed the authorities’ intention to postpone the launch of two large investment projects until the next mid year budget review confirms the availability of revenue. Directors noted the need to strengthen fiscal risk and debt management, and welcomed ongoing efforts to better monitor and manage state owned enterprises.
Directors welcomed the Bank of Tanzania’s strong commitment to monetary and price stability, but emphasized that faster implementation of reforms aimed at modernizing the monetary policy framework is needed. Noting that Tanzania could potentially enjoy large gains from further financial development, Directors welcomed the recent impressive improvements in financial inclusion among households, and encouraged increasing access to financial services for small and medium enterprises. They also recommended further developing the interbank and government debt markets, which would complement the modernization of the monetary policy framework as well as fiscal and debt management reforms.
Directors welcomed the authorities’ intention to keep the exchange rate flexible, and encouraged them to rebuild international reserves gradually to counter the risks from rising recourse to international capital markets, ongoing liberalization of the financial account, and volatility in global commodity prices and financial conditions. Strengthening buffers would also bring Tanzania closer to its commitments under the prospective East African Monetary Union.
Directors underscored that the targeted high growth and structural transformation of the economy requires a rekindling of the reform agenda. In particular, they noted that improving the business environment will be critical to spur long term competitiveness and job creation, and also encouraged continued efforts to improve governance and combat corruption.
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Tanzania: Selected Economic and Financial Indicators, 2013/14–2019/20 |
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|
2013/14 |
2014/15 |
2015/16 |
2016/17 |
2017/18 |
2018/19 |
2019/20 |
||
|
Prog.1 |
Proj. |
Proj. |
Proj. |
Proj. |
Proj. |
|||
|
(Annual percentage change, unless otherwise indicated) |
||||||||
|
Output, prices and exchange rates |
||||||||
|
Real GDP |
7.1 |
7.0 |
7.0 |
7.1 |
7.2 |
7.0 |
6.8 |
6.6 |
|
GDP deflator |
6.4 |
5.8 |
5.1 |
6.0 |
5.3 |
5.1 |
5.0 |
5.0 |
|
CPI (period average) |
6.3 |
5.4 |
6.3 |
5.9 |
5.0 |
5.0 |
5.0 |
5.0 |
|
CPI (end of period) |
6.4 |
6.1 |
6.1 |
5.0 |
5.0 |
5.0 |
5.0 |
5.0 |
|
Core inflation (end of period) |
3.1 |
2.8 |
… |
… |
… |
… |
… |
… |
|
Terms of trade (deterioration, -) |
-3.1 |
8.5 |
6.5 |
10.5 |
-0.2 |
-4.6 |
1.8 |
-0.1 |
|
Exchange rate (period average, TSh/US$) |
1,615 |
1,764 |
... |
... |
... |
... |
... |
... |
|
Real effective exchange rate (end of period; depreciation= -) |
0.8 |
-9.5 |
... |
... |
... |
... |
... |
... |
|
Money and credit |
||||||||
|
Broad money (M3) |
15.8 |
13.1 |
16.0 |
16.0 |
14.5 |
13.7 |
13.6 |
13.4 |
|
Average reserve money |
13.7 |
10.8 |
13.4 |
13.4 |
12.5 |
12.2 |
12.0 |
11.8 |
|
Credit to nongovernment sector |
21.4 |
21.0 |
14.1 |
19.0 |
15.0 |
12.6 |
12.4 |
12.2 |
|
Treasury bill interest rate (in percent; end of period) |
12.7 |
10.0 |
… |
… |
… |
… |
… |
… |
|
Broad money (M3, as a percent of GDP) |
23.4 |
23.4 |
24.4 |
23.9 |
… |
… |
… |
… |
|
Non-performing loans (end of calendar year, percent of total loans)2 |
6.8 |
7.9 |
… |
… |
… |
… |
… |
… |
|
(Percent of GDP, unless otherwise indicated) |
||||||||
|
Central government budget |
||||||||
|
Revenues and grants |
15.6 |
14.0 |
15.9 |
15.4 |
17.2 |
16.7 |
16.8 |
17.0 |
|
Of which: grants |
2.1 |
1.2 |
1.3 |
1.0 |
1.3 |
1.2 |
1.1 |
1.0 |
|
Expenditures |
18.5 |
17.1 |
21.2 |
18.7 |
21.8 |
21.2 |
21.3 |
21.6 |
|
Current |
13.7 |
12.8 |
14.8 |
13.6 |
12.1 |
12.4 |
12.6 |
12.7 |
|
Development |
4.9 |
4.4 |
6.3 |
5.1 |
9.6 |
8.8 |
8.7 |
8.9 |
|
Unidentified expenditure measures3 |
… |
… |
-1.1 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Overall balance4 |
-3.3 |
-3.3 |
-4.2 |
-3.3 |
-4.6 |
-4.5 |
-4.5 |
-4.5 |
|
Excluding grants4 |
-5.4 |
-4.3 |
-5.5 |
-4.2 |
-5.9 |
-5.7 |
-5.6 |
-5.6 |
|
Including net accumulation of arrears |
-4.2 |
-4.4 |
-3.4 |
-2.3 |
-3.1 |
-4.5 |
-4.5 |
-4.5 |
|
Public debt |
||||||||
|
Public gross nominal debt5,6 |
31.4 |
35.4 |
38.8 |
37.5 |
39.2 |
40.3 |
41.4 |
42.4 |
|
of which : external public debt6 |
23.7 |
27.6 |
30.5 |
29.0 |
30.7 |
31.5 |
32.5 |
33.4 |
|
Investment and savings |
||||||||
|
Investment |
30.6 |
30.8 |
31.4 |
29.4 |
33.8 |
33.2 |
33.2 |
33.5 |
|
Government |
5.0 |
4.7 |
5.6 |
4.2 |
9.6 |
8.8 |
8.7 |
8.9 |
|
Nongovernment7 |
25.6 |
26.1 |
25.7 |
25.2 |
24.2 |
24.4 |
24.5 |
24.6 |
|
Gross domestic savings |
18.5 |
22.3 |
23.6 |
21.8 |
25.6 |
25.1 |
25.3 |
25.7 |
|
External sector |
||||||||
|
Exports (goods and services) |
19.1 |
19.3 |
21.7 |
21.2 |
20.9 |
21.4 |
21.3 |
21.2 |
|
Imports (goods and services) |
29.9 |
27.7 |
29.0 |
28.8 |
29.2 |
29.5 |
29.2 |
29.1 |
|
Current account balance |
-10.7 |
-8.6 |
-8.3 |
-8.6 |
-9.1 |
-8.8 |
-8.6 |
-8.5 |
|
Excluding current transfers |
-11.6 |
-9.2 |
-8.4 |
-8.7 |
-9.4 |
-9.1 |
-8.9 |
-8.7 |
|
Gross international reserves |
||||||||
|
In billions of US$ |
4.6 |
4.3 |
4.6 |
4.2 |
4.7 |
5.1 |
5.7 |
6.2 |
|
In months of next year's imports |
4.2 |
4.0 |
4.0 |
3.6 |
3.6 |
3.7 |
3.8 |
3.9 |
|
Memorandum items |
||||||||
|
GDP at current market prices |
||||||||
|
Billions of Tanzanian shillings |
75,336 |
85,291 |
94,867 |
96,806 |
109,278 |
122,833 |
137,709 |
154,206 |
|
Millions of US$ |
46,636 |
48,353 |
43,968 |
44,895 |
48,347 |
52,660 |
57,304 |
62,293 |
|
GDP per capita (US$) |
1,008 |
1,024 |
913 |
932 |
984 |
1,051 |
1,121 |
1,195 |
|
Population (million) |
46 |
47 |
48 |
48 |
49 |
50 |
51 |
52 |
|
Sources: Tanzanian authorities and IMF staff estimates and projections. |
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|
1 From the third review under the Policy Support Instrument. |
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|
2 E.g., calendar year corresponding to 2014/15 is 2015. |
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|
3 These are the spending adjustments needed to achieve the budget deficit targets. |
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|
4 Actual and preliminary data include adjustment to cash basis. |
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|
5 Net of Treasury bills issued for liquidity management. |
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|
6 Excludes interest payments due on external debt under negotiation for relief, and domestic unpaid claims. |
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|
7 Including change in stocks. |
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1 The PSI is an instrument of the IMF designed for countries that do not need balance of payments financial support. The PSI helps countries design effective economic programs that, once approved by the IMF's Executive Board, signal to donors, multilateral development banks, and markets the Fund's endorsement of a member's policies (see http://www.imf.org/external/np/exr/facts/psi.htm). Details on Tanzania’s PSI program are available at www.imf.org/tanzania.
2 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
3 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
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