Press Release No. 03/128

Press Release: IMF Completes Sixth and Final Review Under Tanzania's PRGF Arrangement and Approves US$21 Million Disbursement; IMF Also Approves a New Three Year, US$27 Million PRGF Arrangement

July 28, 2003

The Executive Board of the International Monetary Fund (IMF) completed the sixth and final review of Tanzania's economic performance under the Poverty Reduction and Growth Facility (PRGF) arrangement (see Press Release No. 00/25). As a result, Tanzania will be able to draw the equivalent to SDR 15 million (about US$21 million) under the arrangement immediately, which will bring the total amount drawn under the arrangement to the equivalent to SDR 135 million (about US$189 million).

In completing the review, the Executive Board granted a waiver for the non-observance of the end-February 2003 structural performance criterion on the submission to parliament of the amendments of the Loans, Guarantees, and Grants Act and reviewed the second annual progress report of Tanzania's Poverty Reduction Strategy Paper (PRSP) and considered it a sound basis for IMF concessional assistance.

The Executive Board also approved a new three-year PRGF arrangement in an amount equivalent to SDR 19.6 million (US$27 million). The arrangement will be effective on August 16, 2003 and the first disbursement equivalent to SDR 2.8 million (US$4 million) will be available on that date.

The PRGF is the IMF's concessional facility for low income countries. The PRGF-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 PRSP. This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annul interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

After the Executive Board's discussion on Tanzania, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, stated:

"The Tanzanian authorities are to be commended for their strong implementation of sound macroeconomic policies and structural reform under the Tanzania's three-year program launched in 2000. These policies have substantially boosted Tanzania's economic growth, raised average per capita incomes, and reduced inflation. Moreover, the authorities' policy record has helped Tanzania obtain debt relief under the enhanced HIPC Initiative, thus allowing the country to reach debt sustainability and support higher social sector spending. The external sector is strong, with steady foreign assistance and direct investment supporting privatization and economic diversification.

"Nevertheless, the persistence of poverty in Tanzania, especially in the rural areas, is cause for concern. The range of measures outlined in the latest PRSP progress report in education, health, road construction, and agriculture, should, when implemented with the expected strong support from Tanzania's development partners, go a long way in helping the authorities to tackle poverty.

"The authorities are embarking on a further three-year program, which will emphasize higher revenue mobilization through reforms of tax administration and tax policies. These reforms will be crucial for enhancing the robustness of the macroeconomic stability, and for sustaining priority-sector spending over the medium term.

"Tanzania is also taking welcome steps to improve the business climate. Measures are planned to address investor concerns, including with respect to local government taxation, business licensing, impediments to bank lending, and infrastructure. Along with continued progress with the privatization program, as well as intensified efforts to fight corruption and enhance governance, full implementation of these measures should significantly improve Tanzania's standing as an investment destination.

"The Fund urges the non-Paris Club creditors that have not yet done so to provide their share of debt relief under the HIPC Initiative on terms comparable to those given by the Paris Club. It calls on Tanzania and its creditors to reach agreements as quickly as possible.

"The new three-year arrangement under the Poverty Reduction and Growth Facility will provide the necessary framework for the authorities' continuing reform efforts. Much of the outstanding reform agenda falls within the Fund's core areas of expertise. The continued engagement of the Fund is intended as an endorsement of the authorities' commitment to sound economic policy. It should facilitate disbursements of assistance by other donors and help achieve the government's objectives for growth, poverty reduction, and social progress," Mr. Sugisaki stated.

ANNEX

Recent Economic Developments

Under IMF-supported programs, Tanzania has achieved considerable macroeconomic and structural adjustment since the mid-1990s. Real GDP growth averaged 4.6 percent during 1996-2002 against 2.7 percent during 1990-95; at the same time, inflation fell to below 5 percent from about 30 percent. Fiscal imbalances have been reduced, expenditures reoriented to the social sectors and the external position substantially strengthened. Moreover, Tanzania reached the completion point under the Heavily Indebted Poor Countries (HIPC) Initiative in 2001. Nevertheless, poverty remains pervasive, particularly in the rural areas.

Program Summary

The new PRGF-supported program for 2003-06 aims to contain inflation at about 4 percent and raise real GDP growth further, to above 6 percent. Growth will be underpinned by substantial investments in physical infrastructure as outlined in the Poverty Reduction Strategy Paper. The current account deficit is projected to decline steadily, given robust growth in exports and a modest increase in imports.

To facilitate these objectives, Tanzania will pursue a three-pronged strategy, aimed at:

• mobilizing revenue, in order to strengthen domestic savings and reduce aid dependency;
• further liberalizing the trade regime in order to enhance efficiency and strengthen the tradables sector; and
• improving the economy's supply response by removing key impediments to growth , including measures to improve the efficiency of the financial sector and promote private sector development.

Thus the reform agenda focuses on key areas within the core mandate of the Fund, notably steadily increasing the revenue to GDP ratio in order to bolster macroeconomic performance and reduce reliance on foreign aid, and improving the effectiveness of the financial system to improve economic efficiency and attract investment.

In support of the program's medium-term revenue target, the authorities are taking a range of measures to bolster tax administration substantially, including adoption of a new medium-term corporate plan for the Tanzania Revenue Authority, refocusing of management and administrative resources that will facilitate a broadening of coverage of large taxpayers; a revamp of the administration of VAT and presumptive taxation, and actions to broaden the tax base through curtailing exemptions.