Press Release No. 99/6

Press Release: IMF Approves Third Annual ESAF Loan for Tanzania

February 8, 1999

The International Monetary Fund (IMF) approved the third annual loan for Tanzania under the Enhanced Structural Adjustment Facility (ESAF),¹ providing the equivalent of SDR 58.76 million (about US$82 million) to support the government’s 1998/99 program. The loan, which has been augmented by SDR 20 million (about US$28 million), is available in two equal semiannual installments.

Background

Tanzania’s economic reform and stabilization efforts regained momentum in 1996 following the election of a new government and its economic performance has improved substantially in recent years. On November 8,1996, the IMF approved a three-year ESAF arrangement (see Press Release No. 96/55). Policy performance under the first two ESAF annual arrangements was generally good. Real GDP expanded by 4 percent in 1996/97 and 3.4 percent in 1997/98, and overall inflation in the 12-month period ended June 1998 was 12 percent, although above the target of 9.5 percent, it was substantially lower than the previous year and the lowest rate in 20 years. On the agricultural front, the 1996/97 drought was followed in 1997/98 by El Niño floods. The heavy rains had mixed effects on agriculture—food crops were generally less affected than export crops. The strong fiscal stance of 1996/97 was maintained in 1997/98, with government savings remaining above 1 percent of GDP. The shortfall in revenue was more than offset by a compression in expenditures. The country continued to make progress with structural reforms, although some delays were encountered, especially in the financial sector.

Medium-Term Strategy and the 1998–99 Program

The Tanzanian government’s medium-term development strategy aims to consolidate macroeconomic stability, reduce inflation, and attain sustainable high economic growth that will reduce poverty and raise the overall living standards of the population. The government will continue to center macroeconomic policies on rigorous fiscal management and prudent monetary policies. The macroeconomic objectives for 1998/99-2000/01 are: achieve real GDP growth of at least 4 percent in 1998/99, rising to 6 percent in 2001; reduce the annual rate of inflation to 7.5 percent in 1998/99, dropping to about 4 percent in 2001; build gross international reserves to four months of imports of foods and services by June 2000, and maintain that level thereafter; and achieve an external current account deficit that is sustainable in terms of external assistance and long-term private inflows.

For 1998/99, the principal macroeconomic objectives are designed to achieve the following: increase real GDP growth to 4.3 percent in 1998; reduce the inflation rate from 12 percent to 7.5 percent; limit the current account deficit to 14.1 percent of GDP while increasing gross international reserves to 3.7 months of imports of goods. To back these objectives, Tanzania will deepen and accelerate economic reforms in strategic areas. Fiscal policy will be supportive of growth by releasing substantial financial resources for credit to the private sector within the context of a prudent monetary policy. Government savings will be maintained, and there will also be an increase in outlays for infrastructure repair and the social sector. Expenditure control mechanisms are being enhanced, and a comprehensive tax reform package focusing on eliminating exemptions and simplifying the system will be introduced.

Structural Reforms

The government’s agenda of structural reforms is designed to achieve sustained rates of economic growth and to improve living standards. Over the next year, the restructuring and privatization of public utilities will receive the highest priority. Work is ongoing for the privatization of the Tanzania Telecommunications Company and the Dar es Salaam Water and Sewerage Authority, while consultants are carrying out a study for the sale of port operations under the Tanzania Harbors Authority. At the same time, the government has developed a medium-term strategy for public service reform. Government resources will remain highly constrained in the medium term, but there is an imperative to improve the quality of public services. Financial sector reform will continue, with the aim of fostering competition and efficiency, narrowing the spread between lending and deposit interest rates, and strengthening the mobilization and allocation of financial resources.

Social Issues

Tanzania’s social and demographic indicators are slightly more favorable than the average for sub-Saharan Africa. The government is implementing a policy-based sector development approach in the social sector. The key aspects here include further development of plans for a substantial transfer of resources and responsibility to local governments. Progress on educational reform (unlike health services) was disappointing until recently, but is now moving ahead. The education, hiring, and deployment of teachers is to be rationalized under a program being developed with the World Bank and the European Union. A national environmental policy was adopted in November 1997, and is now being applied; an environmental management framework for the mining sector is expected to be ready shortly.

The Challenge Ahead

The various adjustment measures taken so far point to a strong commitment on the part of the Tanzanian authorities to implement the reforms envisaged under the program. The country continues to face risks in its adjustment effort. It remains vulnerable to climatic fluctuations and changes in commodity prices. On the policy side, problems continue in areas such as taxexemptions and the delay in privatization. Nonetheless, by now Tanzania has established a strong record in macroeconomic policy implementation. The authorities should continue to implement its adjustment programs with determination.

Tanzania joined the IMF on September 10, 1962. Its quota² is SDR 146.9 million (about US 205 million). Tanzania’s outstanding use of IMF financing currently totals SDR 190 million (about US 265 million).