IMF Executive Board Approves Three-Year Policy Support Instrument for Tanzania

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Press Release No. 14/350
July16, 2014

The Executive Board of the International Monetary Fund (IMF) today approved a new three-year Policy Support Instrument (PSI) for Tanzania.1 The IMF recently concluded the final review of the country’s economic performance under a Standby Credit Facility (SCF) arrangement (See Press Release 14/182), together with the Article IV consultation with Tanzania on April 25, 2014 (See Press Release No. 14/227). The SCF expired on April 30, 2014.

The PSI for Tanzania aims to support the authorities’ medium-term objectives. These include: the maintenance of macroeconomic stability, the preservation of debt sustainability, and the promotion of more equitable growth and job creation.

Following the Executive Board discussion, Mr. Naoyuki Shinohara, Deputy Managing Director and Acting Chair, said:

“Tanzania is expected to sustain its recent positive macroeconomic performance over the medium term, leading to a gradual reduction relative to Gross Domestic Product (GDP) of its still large current account deficit. This positive outlook is predicated in part on the authorities’ intention to undertake further reforms to improve the investment climate and diversify the economic base.

“The current budget appropriately targets a smaller deficit than in the previous fiscal year. Going forward, the authorities will need to continue the fiscal adjustment underway while opening up room for badly needed spending on infrastructure and social services. Steps to mobilize additional revenues and improve public financial management, including by addressing domestic arrears, will be critical, in this regard. Although Tanzania remains at a low risk of debt distress, fiscal risks, including those arising from public enterprises and social security funds, need to be better monitored and managed.

“Tanzania stands to benefit from potential revenues from offshore extraction of natural gas, likely to start in the early 2020s. In approving the PSI, the IMF Executive Board stressed the need for a comprehensive framework to manage natural resource wealth. Such a framework should ensure full integration of resource revenues in the budget, and institutionalize the transparency and accountability of spending decisions.

“The authorities failed to provide accurate information to the Fund with respect to the accumulation of new external arrears by the government within the context of completion of several reviews under the recent PSI. The inaccurate reporting of arrears data, associated with a government-guaranteed lease contract with a public enterprise, also gave rise to a non-complying disbursement under the SCF arrangement. However, in light of the corrective measures taken by the authorities to improve external debt management, the Executive Board maintained its overall positive assessment of Tanzania’s program performance under the recent PSI and granted a waiver of non-observance of the performance criterion that gave rise to the non-complying disbursement under the SCF.”

ANNEX

Recent economic developments

Tanzania has enjoyed strong and stable real GDP growth, projected at 7 percent in 2014 and in the medium term. Inflation is at 6 percent, projected to gradually converge to the authorities’ 5 percent medium-term objective. The external current account deficit remains among the largest in the region, at 14 percent of GDP this year. The overall fiscal deficit in 2014/15 is projected at 4.9 percent of GDP. Based on the debt sustainability analysis, Tanzania remains at low risk of debt distress.

In the long term, the macroeconomic outlook remains favorable, based on the projected completion of a natural gas pipeline and adequate natural gas-fired power plants in 2014/15. The availability of cheaper energy is expected to benefit economic growth and the current account. Nevertheless, with continued strong domestic demand and sizable foreign direct investment, the current account deficit is projected above 10 percent of GDP in the medium term. Tanzania will need to maintain strong policies that preserve fiscal sustainability and deliver low, stable inflation, and undertake growth-enhancing structural reforms aimed at improving the business environment and the diversification of the export base.

Program Summary

Building on the achievements under the previous Fund-supported programs, Tanzania’s new PSI will support the authorities’ program to promote sustainable, broad-based high growth, price stability and poverty reduction. In the fiscal area, the focus will be on strengthening public finance management practices to improve efficiency and transparency of public spending, and on further broadening of the tax base, to mobilize revenues and reduce aid dependence. In addition, the PSI aims to strengthen the framework for monitoring and managing fiscal risks. Through these efforts, the program aims to provide the fiscal space to allow for infrastructure and priority social spending. The authorities have identified infrastructure, education, health, and essential social services as priority spending areas to foster inclusive growth. The program will support the authorities’ efforts to ensure that potential revenues from offshore natural gas—which are likely to accrue in the 2020s—benefit all Tanzanians.

The Bank of Tanzania (BoT) will maintain the current prudent monetary policy stance in order to preserve inflation in mid-single digits. The intended modernization of the policy framework envisages a gradual move toward the use of interest rates as the main policy tool. This is expected to strengthen the BoT’s ability to communicate with markets and to preserve price and financial stability. The program will also support reforms to the financial stability framework to ensure it keeps pace with rapid development in the sector, driven by the increasing sophistication of financial institutions, regional financial integration, and technological innovations such as mobile banking.

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