IMF Executive Board Completes Fourth PSI Review for Tanzania and Concludes 2016 Article IV Consultation

IMF News, July 20, 2016

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On July 18, 2016, the IMF Executive Board completed the fourth review of Tanzania’s economic performance under the Policy Support Instrument (PSI) and concluded the 2016 Article IV consultation.
The PSI for Tanzania was approved by the Executive Board on July 16, 2014.

Growth has remained close to 7 percent; Real GDP grew by 7 percent in 2015.
Inflation averaged 5.6 percent in 2015 and was 5.1 percent in April 2016 (authorities’ target: 5 percent).
The macroeconomic outlook is favorable but risks are tilted to the downside.
Sustaining high growth and implementing the development agenda while preserving fiscal and external sustainability requires a range of reforms.

The 2015/16 budget faced external financing shortfalls and carryovers from 2014/15; the revised budget targets a lower overall deficit of about 3.25 percent of GDP (original budget and program: 4.2 percent).
Available cash-basis information for the first three quarters suggests the revised deficit target is well within reach, reflecting a significant slowdown in capital expenditure execution.
The stock of expenditure arrears decreased during the third quarter of the fiscal year (January–March 2016) due to partial clearance of construction arrears.
Directors agreed that somewhat higher fiscal deficits could be sustained for a few years while keeping a low risk of debt distress, but emphasized the need to:
- raise additional domestic revenue,
- increase spending efficiency, particularly in public investment,
- prioritize and implement expenditures carefully under the 2016/17 budget to avoid domestic arrears accumulation,
- strengthen fiscal risk and debt management,
- better monitor and manage state owned enterprises.
The authorities intend to postpone the launch of two large investment projects until the next mid-year budget review confirms revenue availability.

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.
Surpluses in the capital and financial accounts narrowed because of lower donor support and reduced foreign direct investment related to natural gas exploration.
International reserve coverage is estimated to have declined to 3.6 months of prospective imports of goods and services in June 2016.
Directors welcomed the authorities’ intention to keep the exchange rate flexible and encouraged gradual rebuilding of international reserves to mitigate risks from rising recourse to international capital markets, ongoing liberalization of the financial account, and volatility in global commodity prices and financial conditions.

The banking system appears sound overall, with wide variation across institutions.
Financial development has improved gradually but remains low; further development would support higher growth and improve macroeconomic policy effectiveness.
Recommendations include:
- improving access to finance for businesses, particularly small and medium enterprises,
- reducing high borrowing costs,
- further developing interbank and government debt markets,
- accelerating modernization of the monetary policy framework.
The Bank of Tanzania’s strong commitment to monetary and price stability was welcomed, but faster implementation of monetary policy modernization reforms was emphasized.

Structural reform progress slowed during the transition to the new government.
The government’s second Five-Year Development Plan (FYDP II), published in June 2016, focuses on economic transformation through industrialization and human development, aiming to:
- provide critical infrastructure,
- create a business environment conducive to job creation,
- reduce poverty by improving social services (education, health, housing, water and sanitation),
- enhance income security and social protection.
Directors stressed the need to rekindle the reform agenda to achieve targeted high growth and structural transformation, including improving the business environment, access to finance and land, education and job training, and combating corruption.
Improving the financial sustainability of the public electricity utility, TANESCO, is critical for energy sector development.
Completion of the East African Community common market could benefit Tanzania.

Directors commended Tanzania’s strong macroeconomic performance (high growth and low inflation) and noted an overall favorable outlook despite downside risks and challenges.
Directors underscored the importance of preserving fiscal and external sustainability while implementing FYDP II and the need for a range of reforms to support this.

Real GDP (annual percent change): 2013/14: 7.1; 2014/15: 7.0; 2015/16: 7.2; 2016/17 (proj.): 6.8; 2017/18 (proj.): 6.6
CPI (period average): 2013/14: 6.3; 2014/15: 5.4; 2015/16: 5.9
Inflation April 2016: 5.1 percent
Current account balance (percent of GDP): 2013/14: -10.7; 2015/16 (proj.): -8.6; 2019/20 (proj.): -8.3
Gross international reserves (in months of next year's imports): 2013/14: 4.0; June 2016 estimate: 3.6; 2019/20 (proj.): 3.7
Public gross nominal debt (percent of GDP): 2013/14: 31.4; 2014/15: 35.4; 2015/16: 38.8; 2019/20 (proj.): 42.4
Revenues and grants (percent of GDP): 2013/14: 15.6; 2014/15: 14.0; 2015/16: 15.9; 2019/20 (proj.): 17.0
Expenditures (percent of GDP): 2013/14: 18.5; 2014/15: 17.1; 2015/16: 21.2; 2019/20 (proj.): 21.6
Overall balance (percent of GDP): 2013/14: -3.3; 2014/15: -4.2; 2015/16: -4.5
GDP at current market prices: Billions of Tanzanian shillings — 2013/14: 75,336; 2014/15: 85,291; 2015/16: 94,867; 2016/17 (proj.): 96,806
GDP at current market prices: Millions of US$ — 2013/14: 46,636; 2014/15: 48,353; 2015/16: 43,968; 2016/17 (proj.): 44,895
GDP per capita (US$): 2013/14: 1,008; 2014/15: 1,024; 2015/16: 913; 2016/17 (proj.): 932
Population (million): 2013/14: 46; 2014/15: 47; 2015/16: 48; 2016/17 (proj.): 49

Press Release No. 16/347, IMF Communications Department, July 20, 2016.