Executive Summary
- Tanzania’s macroeconomic performance has remained strong. Real growth rose to 6.3 percent in 2004, with annual inflation below 5 percent. However, given its low economic base and capacity constraints, Tanzania will need to sustain high growth, low inflation, and a steady pace of structural reforms for many years to come in order to reduce poverty significantly.
- Program objectives for the remainder of 2004/05 are fully achievable, but modest risks remain, particularly the vulnerability of the economy to unpredictable rainfall and pressures for more direct intervention by the government to address poverty alleviation, particularly in the run-up to the October 2005 elections. Tanzania is also subject to terms of trade shocks (e.g., agricultural products) which can have magnified effects on the poor.
- Tanzania’s fiscal strategy remains focused on enhancing domestic resource mobilization and the quality of spending to support its poverty reduction goals. The authorities are pushing ahead with significant reforms of revenue administration, budget transparency and accountability, and public expenditure management. The program for 2004/05 allows for higher spending in priority areas and for higher investment.
- The principal challenge for monetary policy continues to be liquidity management in the face of high foreign aid inflows to the budget. The BoT has consistently met liquidity targets, but with some difficulties, including pressure on interest and exchange rates.
- A comprehensive financial sector action plan, tied to the Financial Sector Assessment Program (FSAP) recommendations, is nearing completion and has been well received by stakeholders. It focuses on key structural impediments in the financial sector, which has grown rapidly in recent years but still plays a relatively small role in the economy. The strengthening of central bank autonomy and bank supervision (key measures to ring-fence progress leading up to the elections) are already well advanced. The authorities intend to implement their new Development Finance Guarantee Facility (DFGF) with strong governance and appropriate risk-sharing.
- The authorities are finalizing the National Strategy for Growth and Reduction of Poverty (NSGRP), their second poverty reduction strategy paper. It adopts an outcome-oriented approach (e.g., growth and income poverty reduction) and addresses such key issues as a lack of access to credit, structural impediments to agriculture and exports, and poor infrastructure.
- The staff supports the authorities’ requests for a waiver for the nonobservance of the end-September performance criterion on net international reserves due to the temporary one-off nature of the shortfall and continued adequacy of reserves, for a modification of structural performance criteria related to amendments of banking laws, and for completion of the third review under the current PRGF arrangement.
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