Journal Issue
Share
Article

A decade of reform and progress: Tanzania looks to further boost growth, intensify poverty reduction efforts

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
August 2003
Share
  • ShareShare
Show Summary Details

During 1996-2002, Tanzania translated several major achievements on the policy front into impressive economic progress. The country boosted average annual real GDP growth for the period to about 5 percent—roughly doubling the average rate recorded for the preceding five years. From 1999 onward, annual inflation dipped to roughly 5 percent—a sharp decline from the nearly 30 percent a yearinflation experienced during 1990-95 (see table below).

What has accounted for the country’s marked turnaround? Clearly, sustained liberalization efforts, in particular in the agricultural sector, helped invigorate the economy, as did the start-up of large-scale gold mining and tourism projects. Also, construction and manufacturing activities picked up in response to the government’s efforts to improve the business environment.

On the fiscal side, budgetary restraint was central to achieving macroeconomic stabilization. Tanzania’s adjustment and reform program also drew strong donor support, which provided sizable financial assistance that all but eliminated the government’s domestic financing needs (a major source of inflationary pressure in the past). In addition, tightened expenditure controls—notably the adoption of a centralized payment system and limiting spending to cash availability—further improved public finances.

Despite considerable achievements on the macroeconomic (including growth) and debt fronts, poverty has remained pervasive.

In parallel with these reforms, the government undertook a wide range of measures designed to replace remnants of Tanzania’s socialist economy with a more market-oriented economy that could help stimulate private sector activity. In this context, the trade regime was liberalized, with the maximum tariff lowered to 25 percent from 40 percent and the number of tariffs reduced from six to three. Tanzania also made substantial progress with privatization. Over the past 10 years, the country has privatized two-thirds of all units slated for divestiture. Most of these companies were small and medium-sized enterprises with limited employment, but some strategic enterprises were also privatized—notably the fixed-line telecommunications company, the national airline, the harbor terminal, and the National Bank of Commerce.

Tanzania’s macroeconomic position continues to strengthen
PreprogramESAF/PRGFProjections
1990-95111996-9922000-0232003-064
(percentage change, unless otherwise specified)
Real GDP growth (percent)2.74.15.56.1
Gold production (thousand troy oz.)54.4806.01,471.5
CPI (end of period)29.912.34.94.1
Real effective exchange rate (index: 1990=100)95.3135.7141.8
(million U.S. dollars)
Exports of goods and services1,049.01,197.01,435.01,953.0
Imports of goods and services1,893.02,142.02,173.03,115.0
Receipts from tourism95.3135.7141.8
(percent of GDP)
Total revenue12.512.112.314.0
Total expenditure17.916.918.622.2
Development expenditure3.54.03.94.8
Overall balance before grants-5.9-5.0-6.3-8.2
Overall balance after grants-3.1-1.2-1.8-2.6
Primary balance5-1.30.7-1.6-3.6
External current account balance6-10.4-9.9-8.7-10.8
Data: Tanzanian authorities; and IMF staff estimates

Total revenue through primary balance, fiscal years 1991/92 through 1995/96.

Total revenue through primary balance, fiscal years 1996/97 through 1999/00.

Total revenue through primary balances, fiscal years 2000/01 through 2002/03.

Projections under new PRGF Arrangement with IMF for total revenue through primary balance; fiscal years 2003/04 through 2006/07.

Calculated as overall balance minus grants and foreign-financed development expenditures; increase reflects increase in program.

Excluding grants.

Data: Tanzanian authorities; and IMF staff estimates

Total revenue through primary balance, fiscal years 1991/92 through 1995/96.

Total revenue through primary balance, fiscal years 1996/97 through 1999/00.

Total revenue through primary balances, fiscal years 2000/01 through 2002/03.

Projections under new PRGF Arrangement with IMF for total revenue through primary balance; fiscal years 2003/04 through 2006/07.

Calculated as overall balance minus grants and foreign-financed development expenditures; increase reflects increase in program.

Excluding grants.

Achieving sustainable debt

In addition to making considerable progress in reestablishing a sound macroeconomic environment, improving fiscal prospects, and fostering a more inviting business climate, Tanzania also benefited from considerable debt relief from bilateral and multilateral donors. In November 2001, it became the fourth country to reach the completion point under the enhanced framework of the Heavily Indebted Poor Countries (HIPC) Initiative sponsored by the IMF and the World Bank. Total external debt-service relief under the initiative is expected to amount to approximately $3 billion. Debt-service payments have been cut substantially—dropping to an average equivalent to 7.7 percent of government revenue from the 19 percent that debt service had absorbed before HIPC assistance took effect. Lower debt-service obligations have also allowed the government to substantially increase its spending on priority sectors. Expenditures on education, health care, and agriculture rose from 8.8 percent of GDP in 2001/02 to 10.2 percent of GDP in 2002/03 and are projected to reach 11.5 percent of GDP in 2003/04.

But does this substantial reduction in the debt-service burden now provide a sustainable level of debt that will allow the country to go forward and tackle poverty more effectively? While there has been considerable debate over how debt sustainability is determined and over the role played by fiscal policy, Tanzania’s debt-service ratios are projected to remain well below acceptable thresholds over the medium term. Also, an IMF staff analysis demonstrates that Tanzania’s projected fiscal stance should be consistent with debt sustainability as long as the government continues to have access to substantial donor financing on concessional terms at the current levels (4-5 percent of GDP). If donors were to gradually withdraw grant support, however, expenditures would have to be cut or revenues increased for the country to pursue a sustainable fiscal policy. This underscores the need for vigilance in the fiscal area, in particular the need to mobilize more revenue. In light of enhanced prospects for donor assistance, though, these risks appear rather remote at the moment.

More progress needed on poverty

Despite considerable achievements on the macroeconomic (including growth) and debt fronts, poverty has remained pervasive. As a 2001/02 household budget survey documented, the share of Tanzanians falling below the basic needs poverty line declined only 3 percentage points from 1991/92 to 2000/01 (dropping to 36 percent from 39 percent). And progress was uneven, with poverty rates showing virtually no decline in rural areas but dropping by 10 percentage points (to 18 percent from 28 percent) in Dar es Salaam.

The authorities are aware that if its social and economic goals are to be met, and the benefits of these goals are to be shared more widely, Tanzania must now take steps to further accelerate growth, contain inflation, enhance services, and generate income opportunities for the poor. There is thus a substantial reform agenda still to be taken up.

Increased donor assistance is expected to play a critical part in accomplishing these objectives, which are detailed in the country’s Poverty Reduction Strategy Paper (PRSP). But increased aid will require additional reforms, chiefly to improve the country’s absorptive capacity and the quality and effectiveness of its institutions (notably in providing reliable services and ensuring the rule of law). In addition, macroeconomic policies will have to be adapted to guard against possible upward pressure on the real exchange rate that will likely result from high aid flows.

Under the newly approved PRGF program with the IMF, the Tanzanian authorities seek to address these issues through a three-pronged strategy designed to mobilize revenues over the medium term, implement ambitious structural reforms, and further liberalize the trade regime.

Increase revenue. If Tanzania is to increase the robustness of its macroeconomic stability and limit the extent to which higher aid inflows increase liquidity, it will have to increase the amount of revenue the government collects. In this regard, the Tanzanian authorities have proposed a number of reforms to their tax system. A key one will be to integrate tax administration along functional lines rather than by type of tax. This should enhance the ability to crosscheck taxpayer records and facilitate auditing.

Tanzania must now take steps to further accelerate growth, contain inflation, enhance services, and generate income opportunities for the poor.

The efficiency of tax administration is also expected to improve with initiatives to increase the threshold for the value-added tax and, in parallel, reform presumptive taxation for taxpayers below the threshold. In addition, self-assessment—one of the reforms included in a new income tax law that is to be submitted to parliament in October—could help free up administrative resources currently devoted to verifying the accuracy of submitted records and strengthen compliance over time.

Implement additional structural reforms. The principal aim of the next round of reforms will be to strengthen the domestic supply response, notably by improving the business environment. Measures will center on improved access to bank lending and financial sector reform, better governance, and streamlined procedures for business licensing. By October, the government intends to submit to parliament amendments to the Land Act aimed at removing obstacles to lending and facilitating access to bank credit for a much wider range of borrowers. The government also intends to adopt an action plan to reform and simplify the system for licensing businesses and take a number of steps to strengthen governance and improve transparency, including by publishing the names of individuals, nongovernmental organizations, and companies that are exempt from taxes.

Further liberalize the trade regime. The overall intent of greater trade liberalization is to expand the availability of imports and reduce upward pressure on the exchange rate, but progress will depend, at least in part, on policies adopted by Tanzania’s partners in the East African Community (EAC). The EAC’s recent adoption of a common external tariff of 25 percent—a level significantly lower than Kenya’s previous highest tariff—shows that progress is being made in this area as well. And Tanzania, for its part, is showing its commitment to further liberalization, notably by moving to eliminate or lower import surcharges on a number of imports from the EAC.

Tanzania’s impressive progress over the past decade places it among the best-performing countries in Africa. Whether over the coming decade it can make poverty reduction and higher living standards for a broader share of the population a reality will depend importantly on its ability to implement a range of structural reforms. And, given the strong willingness of Tanzania’s development partners to provide more aid to support these efforts, reforms will need to be complemented by efforts to improve absorptive capacity and build effective institutions.

Tanzania’s impressive progress over the past decade places it among the best-performing countries in Africa.

Other Resources Citing This Publication