Tight Monetary Policy Threatens Tanzania Economic Growth

Monetary policy should be eased to address the tight liquidity situation and support credit to the private sector.

From Left: Tanzania Finance and Planning Minister, Dr. Philip Mpango. and Central Bank Governor Prof. Benno Ndulu.

From Left: Tanzania Finance and Planning Minister, Dr. Philip Mpango. and Central Bank Governor Prof. Benno Ndulu.

 

By TZ Business News Staff.

 

The projection Tanzania’s Gross Domestic Product will grow by 7.2% in 2017 is in danger, a consequence of tight monetary policy. Policy makers had earlier projected the Tanzania economy to grow by 7.2% during 2016/17 fiscal year, up from 7.0% during 2015/16, when the growth was led by mining, construction, financial services and the telecommunications sectors. The projected target is now elusive.

The International Monetary Fund (IMF), which constantly reviews performance of the Tanzania economy  because it has a working relationship with the country, has said in a statement  it has seen danger this year’s growth targets may not be reached because  the tight monetary stance maintained in the economy is jeopardizing growth.

The atmosphere is attributable to shortfall in development assistance, reluctance to borrow from external sources and slack in revenue collection, according to local information sources. The Government has consequently delayed infrastructure spending, resulting in a persisting cash crunch in the economy. The Tanzania economy grew 6.2% in the third quarter of 2016, compared with 6.3 percent in the same quarter of 2015. The IMF has advised the Tanzania Government to loosen its monetary policy to avert problems.

“Monetary policy should be eased to address the tight liquidity situation and support credit to the private sector.  The Bank of Tanzania’s steps in this regard are appropriate, but will need to be fine-tuned when the planned fiscal spending materializes. The increase in international reserves recorded since the beginning of the fiscal year is a welcome step to gradually rebuild buffers,” the  IMF has said in their statement. (Read Related Story Here).

Media reports quote the Tanzania  Finance and Planning Minister, Dr Phillip Mpango, as recently revealing  that the government  had slightly fallen  behind its budgetary targets amid concerns tax collection had also  fallen behind targets–and all this happening amid deliberate plans to scale down dependence on foreign aid.

When  President John Pombe Magufuli assumed the Tanzania presidency  a little over a year ago, he announced intentions to focus more on local sources of development financing instead of over-reliance on foreign aid.  Media reports quote the Finance and Planning Minister as saying the government has not been able to borrow externally fearing high interest rates.

The Government has  now decided it will  borrow at least TSh 2.2 trillion domestically to plug a gap of about 20 per cent of its target to fund projects. Media reports quoted  the Bank of Tanzania as revealing  that development expenditure for October 2016  which was planned to be TSh.713.7 billion  received only TSh380.2 billion.

The Tanzania government outlined revenue sources in the 2016/17 budget to include tax revenue (Tsh.10.17 trillion), non tax revenue (Tsh 967.2 billion), local Govt Authorities (LGA) (Tsh. 344.1 billion), which was projected to bring  a total  of Tsh 11.4813 trillion according to an analysis by FB Attorneys.

The 2016/17 budget anticipated grants and concessional loans at Tsh. 2.32 trillion from Development Partners with Actual amount received as grants and concessional loans at Tsh. 1.15 trillion.

Government domestic borrowing was projected at Tsh 3.94 billion with foreign borrowing in which the Government had concluded arrangements with  the African Development Bank (AfDB) for a  USD 674.3 million loan to finance transport sector projects( Dar Bus Rapid Transport) and Arusha water and sanitation project.

On the expenditure side, the Government released the figures Tsh. 16.86 trillion out of which Tsh. 13.65 trillion would be for recurrent expenditure, and  Tsh 3.21 trillion for development expenditure.

The budgeted development projects  to be financed through domestic sources were planned to include rural electrification; construction and rehabilitation of roads and bridges; rehabilitation of the central railway line; construction of Kinyerezi I and II power generating plants; and the supply of water in urban and rural areas.

growthOn January 9, 2017, the Executive Board of the International Monetary Fund (IMF) completed the fifth review of Tanzania’s economic performance under the program supported by a three-year Policy Support Instrument (PSI).  The Board’s decision was taken on a lapse of time basis, the IMF statement said.

In completing the review, the Board also granted waivers for the non-observance of the end-June 2016 assessment criteria on the overall fiscal deficit and the non-accumulation of domestic expenditure arrears on the grounds that the slippages were minor. The PSI for Tanzania was approved by the Board on July 16, 2014 (see Press Release No. 14/350).

Tanzania’s macroeconomic performance remains strong. Economic growth was robust during the first half of 2016 and is projected to remain at about 7 percent this fiscal year. Inflation came down below the authorities’ target of 5 percent and is expected to remain close to the target, while the external current account deficit was revised down on account of lower imports of capital goods.

Nevertheless, there are risks that could adversely affect economic growth going forward, arising from the currently tight stance of macroeconomic policies, the slow pace of credit growth that may become protracted, slow implementation of public investment, and private sector uncertainty about the government’s new economic strategies.

Program performance was broadly satisfactory and most assessment criteria for June 2016 and all indicative targets for September 2016 were met.

While progress in structural reforms identified under the program has been generally slow, the authorities have recently stepped up efforts to advance them. These include measures taken to strengthen public financial and debt management, modernize the monetary policy framework, and improve monitoring of parastatal enterprises. The authorities have committed to further reforms in these areas. The current tight macroeconomic conditions should be addressed by loosening the short-term policy stance, in line with program targets. After recording a small fiscal surplus in July-September, the government is committed to stepping up budget implementation, particularly in public investment, including by mobilizing external financing.

Monetary policy should be eased to address the tight liquidity situation and support credit to the private sector.  The Bank of Tanzania’s steps in this regard are appropriate, but will need to be fine-tuned when the planned fiscal spending materializes. The increase in international reserves recorded since the beginning of the fiscal year is a welcome step to gradually rebuild buffers.

The authorities are implementing an ambitious development and reform agenda over the medium term, as described in their recently-released second Five-Year Development Plan.

The strong drive against corruption and tax evasion has led to higher fiscal revenues, which, if sustained, will provide a good foundation for the envisaged scaling up of infrastructure investment, starting with the 2016/17 budget.

The Plan also envisages a significant structural transformation of the economy by nurturing human development. Full involvement of all stakeholders in policy design and implementation—including importantly the private sector—will be crucial.