IMF staff concludes visit to Tanzania
A team from the International Monetary Fund (IMF), led by Mauricio Villafuerte, visited Tanzania from November 30 to December 12, 2017 and held discussions on the seventh review under the Policy Support Instrument (PSI) program that was approved on July 16, 2014 and on the macroeconomic policies and structural reforms that could underpin a successor arrangement.
At the end of the mission Mr. Villafuerte issued the following statement:
“Preliminary data for the first half of 2017 released by the authorities indicate that the economy grew at a still strong 6.8 percent. A good harvest should help support growth, but other macroeconomic indicators—lower-than-anticipated government spending and tax revenue collections, weak private sector credit growth and rising non-performing loans—suggest that there are downward pressures on growth. The team notes that the National Bureau of Statistics (NBS) is engaged in rebasing the GDP statistics, an exercise that is required of all EAC countries. In this context, the NBS will revisit its source data and compilation methodology, and the team looks forward to the revised data, which should help provide a clearer picture of economic growth.
“The good harvest earlier this year has improved significantly the availability of food, lowered food price inflation, and driven down the headline inflation rate to 4.4 percent in November, below the monetary authorities’ medium-term target of five percent. These developments, broadly stable commodity prices, and a prudent monetary policy stance, are expected to keep inflation within the authorities’ target range.
“Macroeconomic performance under the program has been broadly satisfactory. The overall fiscal deficit on a cash basis was lower than programmed at 1.5 percent of GDP as delays in securing financing for projects held back development spending. At the same time, however, domestic payment arrears continued to increase. Tax revenue collections in the 2016/17 budget year was slightly below the program target, notwithstanding substantially lower-than-expected VAT refunds which were delayed by the comprehensive audit of refund claims. International reserves have strengthened beyond the program target to over five months of import cover in the context of a sharp fall in Tanzania’s external current account deficit.
“In the banking sector, the ratio of nonperforming loans to total loans has increased markedly to 12.5 percent in September. The banking system as a whole remains well-capitalized, mitigating systemic risks, but there has been a sizable reduction in capitalization ratios in some small and mid-sized banks. Their high nonperforming loans have prompted banks to curtail lending and private sector credit growth has continued to be very low even as the Bank of Tanzania has lowered minimum reserve requirements, its discount rate and stepped up liquidity injection operations.
“The IMF staff team held discussions on how to address current macroeconomic challenges. It noted the importance of enhancing budget credibility. It emphasized the importance of realistic revenue projections to underpin implementable budget spending estimates. It noted that addressing financial sector vulnerabilities that have emerged should be a priority and welcomed the Bank of Tanzania’s efforts to resolve some unviable banks. The team also welcomed the progress towards a transition to an interest-rate based monetary framework.
“The team acknowledged that Tanzania has come a long way in the last two decades. At the same time, Tanzania faces significant challenges to meet its medium-term development objectives. With its population set to nearly double in the next 20 years, accelerating significantly the momentum for private sector job creation is a priority. To this end, improvements in the business environment—policy predictability based on a strong dialogue with the private sector, regulatory reforms, timely payment of VAT and other tax refunds, and eliminating domestic arrears—must be pursued with urgency. In this context, the IMF team welcomed the ongoing dialogue with the private sector initiated by the ministry of finance and encouraged its continuation going forward.
“The team had productive discussions on the elements of a successor arrangement and will continue the dialogue on them in the coming months. The IMF team wishes to thank the authorities for their hospitality and constructive dialogue.
“The team met with Minister Philip I. Mpango, Governor Benno Ndulu, and other senior officials of the government and the Bank of Tanzania.”