TANZANIA'S ECONOMIC RECOVERY PROGRAMME

Tanzania’s most critical economic problem is the fact that foreign exchange income from the export of goods is less than one third of her minimum import requirements. As a result, imports have been ruthless1y cut back and part of the remainder has had to be financed by external grants and loans, which are increasingly difficult to negotiate. External debt amounts to 3.5 billion dollars, or nearly 70% of the gross domestic product. By March 1986 external payments arrears stood at 700 million dollars and total debt service obligations* were already the equivalent of about 60% of export earnings. This very grave situation was brought about by a combination of influences – the toll on foreign exchange reserves exacted by the war in Uganda, the effects of the oil price shock of 1979-80, the world recession, adverse terms of trade in Tanzania’s exports, a series of drought years and above all the decline in agricultural and industrial performance caused by the need to cut back on imports of essential spares and inputs, with cumulative effect on the economy. In the middle seventies Tanzania’s economy was strong and malleable enough to recover from the first oil price shock and the effects of the severe drought of 1974- 75, but the combined effects of the fresh blows sustained at the turn of the decade proved too much for Tanzania’s frail economy. The result was a downward spiral of economic performance. Escape from this trend was bound to be both difficult and costly and to require the active co-operation of international organisations and friendly countries over a substantial period of time.

The protracted negotiations of Tanzania with the International Monetary Fund (IMF) have often been referred to in the ‘Bulletin’. These discussions have extended over a period of more than seven years and until 1986 they have led to no lasting agreement mainly for four reasons. First, Tanzania feared a violent and perhaps uncontrollable rise in inflation as a result of the drastic devaluation demanded by the Fund, bringing with it the risk of civil disorder. Secondly, Tanzania saw the Fund’s proposals as a potential threat to the country’s political ideals. Thirdly, it was calculated that the short term nature and relatively high cost of Fund facilities were bound to impose impossible burdens just at the moment of tentative recovery. Fourthly, IMF finance alone was adequate neither in amount, nor in duration, to fund a recovery programme, The experience of the aborted IMF agreement in 1980 showed that a Fund programme did not automatically open the door to complementary external finance. The Fund’s record elsewhere in the ‘Third World’ was not reassuring. Moreover, Fund support was terminable automatically if Tanzania failed to deliver on the Fund’s performance criteria, leaving the economy in the lurch.

In May 1986, provisional understanding with the IMF was finally reached. This outcome was understood to have been made possible by the presence of the World Bank during negotiations, which introduced a moderating voice into the discussion, emphasizing the need to safeguard Tanzania’s potential for development. Moreover, the participation of the Bank held out the hope of Bank and bilateral support for structural adjustment on soft terms. The approach of the Fund and the Rank in tandem to the problems of the least developed countries during recent years reflects a growing realisation in America and elsewhere that the Fund, with its primary concern for measures needed to restore balance to foreign exchange accounts and the severely restrictive nature of its prescriptions, was not a suitable instrument for dealing alone with the problems of poor countries. This new approach was later described by the US Secretary to the Treasury, James Baker, as “adjustment with growth”.

The negotiations involved from the outset both the Fund and the Bank and on their successful conclusion a so-called Consultative Group Meeting was summoned in Paris on 1Oth and 11th June, at which representatives of the Tanzanian Government were able to explain their proposals for economic regeneration to representatives of the Bank, the IMF, 18 bilateral donor countries, the African Development Bank, the Commission of the European Communities and other bodies. The object of these meetings was to consider how the shortfall in resources to meet a minimum import bill of 1,205 million dollars was to be funded in the first year of the Economic Recovery Programme.

The result was agreement in principle for the first year of a three year programme on an IMF standby credit of 45 million dollars and an IMF structural adjustment facility of 24 million dollars , drawn on the IMF Trust Fund. At the same time the Rank undertook to negotiate a structural adjustment loan of 50 million dollars in the first year of a five year programme and a drawing on the sub-Saharan facility in the same amount, both on ‘soft’ terms**. It was expected that these agreements would facilitate debt rescheduling, thus making possible a resumption of imports with the resources now becoming available as well as reducing the annual debt service burden. Initial negotiations on the debt position are to be held in Paris in mid-September.

The total sum required to close the gap between the minimum import bill and export earnings in the first year was estimated to be 550 million dollars. With debt rescheduling providing some postponement of foreign debt obligations, it was calculated that, after taking into account the contributions from the multilateral organisations, some 260 million dollars would be necessary from bilateral sources. In the event, bilateral commitments of about 150 million dollars *** made at the Paris conference fell short of the desired total by about 100 million dollars As a result, an import bill of 1,100 million dollars is now being assumed for purposes of planning and resource allocation.

Amongst he bilateral donors, the United Kingdom offered $10 million in the first year as so-called ‘programme aid’ to provide foreign exchange for essential imports from the United Kingdom, A further £10 million would be available in 1987-88 subject to continued implementation of the agreed programme. In addition, 255 million of untied aid would be available in 1987-88 in association with the World Bank’s Special Facility for Africa.

These agreements were based on the Tanzanian Government’s Economic Recovery Programme, details of which were disclosed during the budget speech of 19th June 1986. This programme drew on the advice of the Presidential Commission on Exports under the chairmanship of Hon. Amir Jamal MP, whose report was submitted in August 1985, by making a radical adjustment of the exchange rate and by further increasing producer prices. The price of the shilling had already been adjusted downward from Tshs 17.7 to the dollar in 1985 to Tshs 29.4 to the dollar in early June 1986. On 20th June the value was fixed at Tshs 40 to the US dollar, or roughly 60 shillings to the pound. Devaluation in successive steps rather than a single mighty jump suggests that with Bank support, Tanzania’s policy of stepwise adjustment had prevailed over the Fund’s preference for a single drastic reduction in shilling values. The Tanzanian approach was held to provide the best means of keeping inflation under control. Henceforth the rate is to be adjusted monthly in line with Tanzanian inflation and at the end of July a rate of Tshs 42 to the dollar had been reached. Devaluation may mike some Tanzanian exports more competitive on world markets, except in those cases where prices are fixed internationally, or quantities determined by quota, but it will also increase the shilling price of imports, thus immediately triggering substantial price rises, the amount varying in accordance with the import content of particular commodities. Only in the longer run, as production levels in industry rise from the present average capacity utilisation of between 20% and 30% and as economic infrastructure, notably roads, railways, vehicles, fuel and spares, is improved, will downward pressures on the price level gather strength. Mercifully, the fall in oil prices has recently brought some relief.

The prices paid to producers of Tanzania’s exports were substantially raised in the 1984 budget, but now further increases took place in amounts varying from 80% for coffee to 30% for cotton and tobacco. In general, it is planned to maintain producer prices at 60% to 70% of export prices at the Tanzanian port, The Government also plans where possible to limit the increases in price of agricultural equipment and inputs by changes in taxation and by encouraging new investment. To cushion to some extent the inevitable sharp rise in the cost of living, allowances will be paid to teachers amounting to 25% of salary, while civil servants will be given allowances ranging from 30% of gross earnings on the minimum wage to 2.5% on salaries in excess of shs.6,000 per month, pending the recommendations of the Nsekela Commission on public sector salaries at the end of 1986 At the same time the rates of income tax will be revised downwards. Hitherto, tax has been collected at rates varying from 25% to 95%, but henceforth rates will range from 20% to 75% The combined results of these changes in salary and income tax will be an increase in monthly earnings ranging from 30% for minimum wage earners to 14.4% for those earning more than Tshs. 6,000 per month, Without departing from the general redistributive function of income tax, the intention is to give the maximum relief to the poorest and at the same time to provide additional incentives for those in the middle and upper salary ranges. The incomes of those outside the civil service are expected to rise in similar fashion.

To stimulate domestic saving, interest rates will be raised in stages until they reach a level commensurate with the market value of capital. Furthermore, strict national housekeeping and increased external resource flows will progressively reduce the budget deficit t o be financed by bank borrowing from Tshs. 5,200 million in the 1985-86 budget to Tshs 2,500 million in 1986-87. Budgetary control as a means of reducing inflation occupies a prominent place in the Economic Recovery Programme. Government financing of parastatal deficits will be ended and additional domestic finance will be available to them only through internal savings, or through the financial institutions. This objective, it must be said, has featured in successive budgets, but has not hitherto been achieved.

The Economic Recovery Programme has been planned over a period of three years. Total minimal foreign exchange resources required in 1986- 87 will be 1,205 million dollars, though, as already stated, finance for only 1,100 million dollars is expected to be forthcoming. In the second and third years the requirement will rise to 1,230 million dollars in 1987-88 and 1,300 million dollars in 1988-89. The hope is that this level of resources will enable Tanzania to increase her export earnings by 11.6% in 1987, 19% in 1988 and 19% in 1989, thus raising export income from an estimated 400 million dollars in 1986 to 632 million dollars in 1989, Even this will take Tanzania less than half way towards the goal of self-reliance in foreign trade. The target requirement of foreign exchange resources is, moreover, minimal and leaves little room for imports that are not essential to the Recovery Programme, or for the accumulation of contingency reserves.

The Minister of Finance has recognised that the attainment of self- sustained growth will be a long haul – he has suggested five to seven years – and steps are now being taken to work out a Second Union Plan covering a five-year period from July 1887, based on economic trends and future prospects. The future will also depend on the human reaction to measures now being taken. There is a good deal of evidence both in Tanzania and elsewhere that peasant farmers react sensitively to incentives and disincentives both in the volume of their marketed output and in their choice of crops. The budget seeks to provide incentives by increasing producer rewards, improving access to farm machinery and inputs, and increasing the supply of common consumption goods by restoring industry to reasonable levels of output. Improved performance within parastatal and private industry is encouraged by alterations in the income tax structure, an improved flow of foreign inputs and machinery spares and a stricter credit regime. But not all human incentives are amenable to financial manipulation and much depends on the quality of leadership given by the Government and the Party. People work hard irrespective of material gain when they believe in what they are doing.
Very grave dangers lie ahead. The initial inflation provoked by devaluation may prove to be much more serious than expected, causing damage to public morale and risks of urban disorder. Industrial regeneration relies on foreign purchases, which will only become possible when new external resources become available . Agriculture, on which the country mainly relies for increased exports, is unavoidably slow to respond to new planting, better husbandry, increased inputs and improved infrastructure. So there will inevitably be a substantial period of greatly increased costs and negligible gains before the benefits of the recovery programme take hold. This time lag will be damagingly increased if there is delay in the payment of donor contributions. Finally, the underfunding of imports by 100 million dollars is a matter of considerable concern. The future is, therefore, – full of uncertainties. It now remains to be seen whether by astute management the Tanzanian Government can survive the interregnum and use this limited opportunity to reverse the country’s economic decline.

J . Roger Carter.

*Of Tanzania’s debt outstanding in 1984, 80.3% was from official sources and largely at concessionary rates, while 19,7% was from private sources.

**’Soft’ terms are negotiated by the Bank’s affiliate, the International Development Association, and provide for a 50 year maturity and repayment beginning after 10 years. There are no interest payments, but a service charge of 0,75% on the disbursed balance and a commitment charge of 0.5% on the undisbursed balance are levied.

***Outright grants or loans or concessional terms.

1 Comment »

  1. Tanzanian Affairs » TA ISSUE 25 said,

    November 30, 2008 at 8:41 pm

    […] 25 featured Economic Recovery Programme Free Speech Tanzania After Nyerere (Conference) Tanzania in the International Media Tanzania and […]

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