IMF Praises Tanzania’s Macro-Economic Performance

IMF Director for Africa, Antoinette Monsio Sayeh (R) in group picture with Tanzania Finance Minister Saada Salum Mkuya during her Dar es Salaam visit October, 2014

IMF Director for Africa, Antoinette Monsio Sayeh (R) in group photo with Tanzania Finance Minister Saada Salum Mkuya during her Dar es Salaam visit in October, 2014

The International Monetary Fund (IMF) has described  the East African region as  “among the most robust economies” in Sub-Sahara Africa.

In this exclusive  interview with Jaston Binala, The IMF Director for Africa, Antoinette Monsio Sayeh, also praises Tanzania for a successful macro-economic performance over time, describing the country’s  4% depreciation of the shilling  during 2014 as “quite modest.”  But Tanzania is lagging a bit behind on some indicators of doing business – the World Bank and IFC’s doing business indicators– she said.

The World Bank and IFC suggest that the environment for private sector investment and private activity could be improved.  The Interview follows:

 

Jaston Binala:   What are the highlights from the International Monetary Fund’s (IMFs) Regional Economic Outlook (REO) for sub-Saharan Africa? What are the implications of the outlook for the East African Community sub-region?

Antoinette Sayeh: Our overall assessment is of good prospects for SSA and we expect growth rates to be comparable to what the region has achieved in the course of the last decade and a half. For 2014, we project 5 percent growth rate for the region as of SSA a whole. In 2015, we expect the growth rate to accelerate to 5¾ percent. So it is growth that is still robust.

Some parts of the region are not doing as well as that average that I just cited– in particular countries affected by the Ebola virus in West Africa. That is, the three countries of Guinea, Liberia and Sierra Leone, whose economies have been severely affected by the virus. And there are some other countries in the region that are also not doing as well as the 5% average I cited because of domestic and global factors.

One country that is notable in this regard is South Africa, where we expect growth to reach 1.4 percent this year, from 1.9 percent last year. South Africa is affected by electricity shortages, and difficult industrial relations at least through the middle of this year as well as weak demand from Europe which is a major partner for the country. There are other countries in the region that were also not doing as well because of domestically induced difficulties—fiscal difficulties—one of them being Ghana. And a number of countries are also affected by security and conflict—the Central African Republic and South Sudan. For East Africa, the countries in the region are among the most robust economies in SSA, many of them growing at 5, 6 and/or 7 percent. And yes indeed, Tanzania included.

But as with the rest of the region, one of the things that our projections speak to is the risk for SSA at this juncture from being integrated with the global economy and from some of the current trends in the global economy. The prospects of slower growth in the emerging markets including China, which is one of the most important destinations for SSA exports. The impact of that lower growth on commodity prices that can impact on the region – that is one of the risks that we see.

For frontier economies, a number of them in East Africa, there is also the potential impact of the winding down of the unconventional monetary policies in the United States of America—that is the second set of risk. And I think that for East Africa, of course, with robust growth and success in a couple of countries at least in accessing international capital markets, the message from all this is the need for these countries to work hard in order to safeguard their success and to mitigate the risk by increasing their fiscal buffers – and the external buffers – in order to withstand downturns and risks that I spoke about if they indeed occur. In East Africa of course, if buffers are stronger, they will be able to do better.

Antoinette-Monsio-Sayeh

Antoinette Monsio Sayeh

 

Jaston Binala: Can you provide us with a short explanation of buffers? What would we need to do?

Antoinette Sayeh:: What we mean by the process of re-building buffers is prudent policy that gradually improves the fiscal position. By doing so, the authorities would create some room for maneuver to react in case external shocks materialized.

Well, we certainly would want to look very carefully at the justification for spending,   say increase unanticipated revenues on a particular investment  that there may be forces in a particular country to spend on those; but perhaps based on closer analysis those investments are not seen as the highest priorities or giving the most returns to a country over time, whereas in those circumstances  rather than spending those revenues a country could have done better by not doing it and having those revenues available–by having that fiscal space available to actually spend on things that were already anticipated.

Jaston Binala: What has been the economic impact of Ebola on the most affected countries? Has the IMF done anything in response?

Antoinette Sayeh:  Indeed it is a very difficult situation in those three West African countries—Guinea, Liberia and Sierra Leone. And our projections for growth in those three countries have been reduced. We have reduced our initial growth estimates for this year and for 2015 for those three economies. In the case of Guinea, our baseline projections are about 1.5 % lower than we initially had for this year. For Liberia and Sierra Leone even worse about 3.5 percent to 3.75 percent, a shaving off of growth as a result of the crisis. A very, very difficult situation. And that is on the assumption that the epidemic is contained by the middle of next year, which is what we hope very much to be the case. We are encouraging all of the international donors concerned to really move forward to accelerate their assistance to this region in particular to provide budget support that will help the countries safeguard the investments that they had expected to make in the face of significantly declined revenue that these countries are currently experiencing. So the IMF has very much tried to do its part – we were at our Executive Board, less than a month ago, toward the end of September, proposing additional funding, above what we were already providing to those countries. And so our board approved additional funding of $130 million for those three countries that we disbursed very quickly and these funds are helping the countries to support their immediate budget needs.

Jaston Binala: If I may interject. Are these funds being given as loans?

Antoinette Sayeh: These are loans from the IMF’s concessional window. They are part of the IMF’s Poverty Reduction and Growth Trust Fund (PRGTF) that allows us to provide concessional financing with no interest payments and so these are the loans —that we are providing to these countries. Of course, we continue to say that ideally, countries would really benefit from more grants. The IMF does not have the mandate to do grant, but we think that donors should be providing grant budget support; that would really contribute to countries’ ability to sustain the expenditures that will be important to mitigating the impact of Ebola on the economy.

Jaston Binala: An additional question on the Ebola: Do you foresee any regional spill-overs?

Antoinette Sayeh:  On the basis of our baseline projections as I said, we see this significant impact on those three countries themselves. We already see also, an impact on neighbouring countries that are very dependent on tourism for example. And one of them is the Gambia; that has seen significant cancelations of reservations that had been made for the upcoming winter tourism season. The panic that is being created about Ebola by people outside of SSA is having an impact on such sectors in some of the neighbouring countries.

The Gambia is already suffering from that. We see some impact also, not as significant, but some impact on the Senegalese tourism industry as well. There is also some evidence of a reduction in hotel reservations in transit capitals like Accra, and possibly Nairobi. We think that if the epidemic is contained between now and the middle of next year as our baseline assumes, these will be temporary and there will be very little spill-overs to the rest of the region.

But if it takes much longer to contain the epidemic, and if it spreads beyond those three countries, then the impact will be more significant, which underscores the need for the international community to do all it can to avoid that being the case.

Jaston Binala: Tanzania has made tremendous economic gains. This is no longer a secret the way I see it. The economic gains we see today such as the single digit inflation, and the GDP growth rates above 5% is an outcome of IMF suggested policies started in 1986.  That is the way I look at it. How has Tanzania faired in the implementation of IMF policy guidelines?

Antoinette Sayeh: Let me first say that your statement that Tanzania’s success has been the result of IMF advice is in fact, not a complete statement. Of course we’ve advised Tanzania, but first and foremost, the benefits of what Tanzania has achieved is due to the work done by Tanzanians. And Tanzania had made a decision to embark upon a reform path that indeed generated significant returns to the country in the course of the years. And Tanzania has been a very strong performer and has certainly achieved significant results. Tanzania has had a close partnership with the IMF for many years, this is true, and we continue to have a good dialogue with Tanzania as we provide policy advice in the context of the existing program that Tanzania has with the Fund. And that program is supported by an instrument we call a Policy Support Instrument (PSI) which allows us to give focused advice to Tanzania on the challenges that it faces across the key macro-economic issues – of course on the fiscal and monetary policy and also with regard to the financial sector. We shall continue to work with the Tanzanian authorities and people, underscoring the need to protect the good record that it has had over the years, and to invest in those areas that will allow it to make its growth more inclusive.

Jaston Binala: Is there any guideline the IMF feels should have been given, or maybe done differently? Something you feel you could have done differently about Tanzania?

Antoinette Sayeh:  Nothing comes to mind that I particularly see as a misjudgment that we had made and that we would advise on differently. We base our advice of course on a serious review of the particular country’s circumstances. We also bring to the table lessons that we have gotten from our engagement with countries across the globe, and lessons that we think are pertinent to the particular issue that country is facing. And I think together, that makes for relatively good advice that countries, given their own circumstances, may have issues with, in terms of the pace or the time frame over which they implement a certain acts or not. And that is the subject of dialogue as a good partnership always allows for.

Jaston Binala: I know you were not here in the 1990s, but being from the IMF you must have facts about us. Are you proud of the depth of privatization in Tanzania?

Antoinette Sayeh:  Well, I know for sure the private sector has had a significant part to play in the achievements that Tanzania has had in contributing to growth. And so I think there is certainly a significantly important role of the private sector. One thing that we’ve had some dialogue with the authorities on is in fact that–relative to other countries– that Tanzania is lagging a bit behind on some indicators of doing business – the World Bank and IFC’s doing business indicators. They suggest that the environment for private sector investment, private activity, could be improved. And that is certainly part of the dialogue we have for the government to work on improving —further improving the environment for private activity. Now Tanzania continues to have a significant number of public enterprises. Government should always make sure they evaluate the performance of those enterprises to make sure they are well managed and if there are considerations of privatizing them, that should of course be made carefully by government and stakeholders in that country, discussing pluses and minuses, making sure public enterprises that remain in the public sector are well managed to make their contribution to the welfare of all Tanzanians.

Air Tanzania Company Limited: An instance of a Tanzania state owned enterprise

Air Tanzania Company Limited: An instance of a Tanzania state owned enterprise

 

Jaston Binala: Now the population in Tanzania is almost 48 million people. There are politicians complaining the debt burden has become too big in the country, with every citizen having a foreign debt of about $500. What is your assessment of Tanzania’s current fiscal performance?

Antoinette Sayeh:  We currently have a mission on the ground in discussion with the authorities to evaluate the performance of the PSI with the view of completing the review – as we call it, the review of the PSI program – which will enable us to say that Tanzania has met the conditions agreed to. That mission is just beginning. Of course we’ll be in a position to give an assessment at the conclusion of the mission and as you know this will include engagement with civil society and there will be a press release at the end of that mission. At that time we’ll be able to say more concretely how Tanzania has performed on the fiscal side. It is too early in the work of the mission for me to tell you that.

Jaston Binala: The Tanzania shilling is a bit weak and maybe even unstable. What is your advice to the Tanzania government on macro-economic performance? And particularly on the stability of the shilling?

Antoinette Sayeh:  The depreciation of the Tanzanian shilling since the beginning of the year has been gradual and quite modest at about 4 percent. Exchange rate fluctuations are a normal and appropriate response to changes in demand and supply of foreign exchange. An important benefit from the modest depreciation is that this will help Tanzanian exports of agricultural and manufacturing goods become more competitive. If Tanzania’s inflation were to remain higher than its trading partners for a long time with a fixed exchange rate, then Tanzanian exports would become unattractive for foreigners to buy. It is also encouraging that the Bank of Tanzania continues to have a strong foreign reserve position. So the IMF fully supports the central bank’s commitment to a flexible, market-determined exchange rate that will help the economy adjust to external developments.

Jaston Binala:  What do you see as the foremost economic challenges facing sub Saharan Africa as well as East Africa?

Antoinette Sayeh:  Sustaining growth continues to be the highest priority for the vast majority of countries in the region. Policymakers should continue to emphasize growth-enhancing measures. This includes targeting public spending toward infrastructure investment and other development spending to address the more structural type potential bottlenecks to growth, but also boosting fiscal revenue mobilization to ensure appropriate public resources. As I said, efforts to improve the business climate are also essential.

At the same time, it will be important to pay heed to macroeconomic constraints. Increasingly, this will require striking the right balance between scaling-up investment and infrastructure and other development objectives and avoiding an unsustainable public debt build up. In particular, it will be essential to avoid over-relying on volatile capital flows for those countries tapping international markets, and preventing the emergence of macroeconomic imbalances of a permanent nature. In a few countries, these have emerged, as evidenced by large fiscal deficit, sharply rising recurrent spending, and overextended budgets. In these cases, fiscal consolidation is necessary.

Sustaining growth is also necessary to foster job creation and reduce poverty. We have also been advocating the importance of social safety nets as a way to ensure inclusiveness. And even in countries where budgets have become overextended and financing constraints have emerged, fiscal consolidation should be pursued as much as possible in a way that protects poor and vulnerable groups.