Press Release No. 10/227

Press Release: IMF Executive Board Completes Seventh Review under Tanzania's PSI; Approves a Three-Year PSI, Completes Second Review Under the ESF and Approves US 29.1 Million Disbursement

June 4, 2010

The Executive Board of the International Monetary Fund (IMF) completed today the seventh review of Tanzania's economic performance under the Policy Support Instrument (PSI) and approved a new three-year Instrument¹. The previous PSI was approved by the Executive Board in 2007 (see Press Release No. 07/26) and has been extended until June 4, 2010.

The Board also completed the second review of Tanzania’s performance under an arrangement under the Exogenous Shocks Facility (ESF). The completion of the review will enable the third and final disbursement of SDR 19.89 million (US$29.1 million). The 12-month, SDR 218.79 million (US$320.6 million) high access ESF arrangement was approved on May 29, 2009 (see Press Release No. 09/190). On May 24, 2010, the Board extended the period of the one-year arrangement to June 18, 2010, to permit completion of the second review.

The new PSI for Tanzania aims at maintaining macroeconomic stability and supporting accelerated growth, creating additional fiscal space, including to finance infrastructure investment, while enhancing the return on public spending. It will also support the new poverty reduction and growth strategy (MKUKUTA II) covering 2010-15 that is expected to be approved in June.

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 (see Public Information Notice No. 05/145).

Following the Executive Board’s discussion on Tanzania, Mr. Murilo Portugal, Deputy Managing Director and Acting Chair, stated:

“The Tanzanian economy is emerging from a slowdown associated with the global crisis and natural disasters. The authorities’ macroeconomic policy response, including temporary and targeted fiscal stimulus measures and supportive monetary policy, helped mitigate the downturn. Inflation remained high throughout 2009, but has since abated to single digits. A stronger-than-envisaged current account and frontloaded donor assistance enabled maintenance of a comfortable reserve position. Progress under Tanzania’s poverty reduction and growth strategy is to be commended, with roughly half the Millennium Development Goals expected to be achieved by 2015. Continued prudent macroeconomic policies, progress on structural reforms, and improvements in the business climate will be important to sustain these achievements.

“The near-term policy challenge is to support the economic recovery, while gradually withdrawing the fiscal stimulus as growth strengthens. The central bank will need to monitor carefully the liquidity conditions to guard against the emergence of inflation or exchange rate pressures.

“The new three-year Policy Support Instrument will support implementation of the authorities’ new poverty reduction and growth strategy (MKUKUTA II), to be finalized shortly. The strategy reorients government spending toward infrastructure investment, while preserving priority social spending, in order to accelerate progress in reducing poverty.

“The authorities aim to create needed fiscal space through rationalizing nonpriority spending, further enhancing revenue collection, limited nonconcessional borrowing, and greater use of public-private partnerships. Debt sustainability analysis points to a low risk from this strategy, and reforms are underway to strengthen debt management, enhance strategic planning, and improve the business environment.

“The banking system is well capitalized. The authorities have developed an action plan to implement the recommendations of the recent FSAP. Although the global crisis had a limited impact on banks, measures to contain vulnerabilities and strengthen the crisis management framework have been undertaken,” Mr. Portugal added.

ANNEX

Recent Economic Developments

The Tanzanian economy is starting to emerge from a slowdown associated with the global economic crisis. Prudent fiscal policy in recent years provided Tanzania with sufficient fiscal space to implement a countercyclical fiscal response to the crisis that helped mitigate weaker external demand and a sharp slowdown in credit growth. Inflation rose into double digits during 2008–09, driven by supply-side shocks that pushed up food prices, but fell sharply in the first half of 2010 as these effects subsided. Growth is projected to reach 6.2 percent in 2010 from 5.5 percent in 2009, while monetary and fiscal stimulus will be withdrawn gradually in order to protect the still nascent recovery.

The medium-term outlook remains favorable. Looking forward, the fiscal deficit will remain higher than in the recent past to accommodate higher infrastructure spending. Spending will be reoriented to growth-enhancing projects, while preserving priority social spending. Monetary policy will seek to support stronger growth while maintaining low inflation without excessive volatility in the exchange rate. Growth is expected to accelerate to 7.5 percent by 2012/13, while inflation would stabilize at around 5 percent. Uncertainties for the growth outlook include the rate of return on public investment and the responsiveness of private sector activity, while the inflation path will remain vulnerable to external shocks—especially related to food supply and energy prices.

Program Summary

Tanzania's PSI will be guided by the objectives and policies outlined in the new Poverty Reduction Strategy to be approved in June 2010. Fiscal policy will seek to balance a gradual reining in of the stimulus while reorienting spending in line with the poverty-reduction objectives. For 2010/11, the deficit before grants will be reduced to 10.8 percent of GDP from 12 percent currently projected for 2009/10. Monetary policy will continue to provide a supportive environment for recovery, while carefully monitoring inflationary pressures to ensure that the reserve money target is consistent with emerging demand. The Bank of Tanzania also plans to maintain regular foreign exchange sales to meet systemic liquidity management objectives. The authorities are updating the CPI basket, and working with East Africa Community counterparts to develop a common core inflation index, which would serve as a better guide to the monetary policy stance.