On April 25, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Tanzania and completed the third and final review of the country’s performance under an economic program supported by a Standby Credit Facility arrangement (see Press Release No. 14/182).

Economic growth in Tanzania is projected to remain strong at 7 percent next year and in the medium term. Inflation is at 6 percent, gradually converging 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. Fiscal revenue shortfalls and overruns in domestically-financed spending led the deficit to rise to 6.8 percent of GDP in 2012/13. Revenue shortfalls in 2013/14 compared to the budget approved by parliament have prompted the authorities to undertake expenditure cuts during the fiscal year in an effort to meet their 5 percent of GDP deficit target. Based on the debt sustainability analysis, Tanzania remains at low risk of debt distress. A major opportunity for the long term, not yet incorporated in the baseline projections, relates to sizable finds of offshore natural gas that, if confirmed as commercially viable, could generate significant exports and government revenues during the 2020s.

Executive Board Assessment²

Executive Directors commended the skilful macroeconomic management that has delivered rapid growth, falling inflation, and continued poverty reduction in the context of Fund-supported economic programs. Noting risks to the outlook and remaining vulnerabilities, Directors encouraged the authorities to consolidate the gains so far by stepping up efforts to improve the policy frameworks, reconstitute buffers, and push ahead with structural reforms in a variety of areas.

To safeguard the sustainability of the public finances, Directors recommended containing public spending within the limit of the mid-term budget review, while addressing poverty alleviation and the large infrastructure deficit through careful expenditure prioritization. They also encouraged the authorities to intensify revenue mobilization, including through accelerated VAT reforms. More broadly, Directors agreed that the achievement of fiscal targets would benefit from further improvements in public financial management, which would prevent the recurrence of arrears and facilitate their resolution. It would also be important to improve the quality and dissemination of fiscal data.

Directors commended the Bank of Tanzania for reducing inflation to the mid-single digits and preserving financial stability. Looking ahead, they advised to further strengthen prudential oversight, including as regards the regime against money-laundering and the financing of terrorism. Directors also welcomed the central bank’s intention to transition to an interest rate-based monetary policy framework, and encouraged a review of the foreign exchange market to promote greater transparency and efficiency.

Directors took note of the staff’s assessment that the Tanzanian shilling appears to be somewhat overvalued in real effective terms, but agreed that Tanzania’s ongoing structural transformation amplifies the uncertainty surrounding such assessment. They nonetheless considered that the persistently high external current account deficit points to the need to boost external competitiveness through enhanced exchange rate flexibility as well as additional reforms to reduce implements to trade, promote financial deepening, and improve the business climate.

Noting that the recent offshore discoveries of natural gas could present a major opportunity for Tanzania, Directors recommended establishing over the medium-term transparent institutional frameworks for natural gas taxation and wealth management with a view to fostering good governance and inter-generational equity.