NEGOTIATIONS WITH THE I.M.F.

NEGOTIATIONS with the I.M.F. and the RESIGNATION of the FINANCE MINISTER, EDWIN MTEI

The report in the Guardian of 9 November claimed that negotiations for an I.M.F. loan to Tanzania had broken down because the I.M.F. conditions were unacceptable to the Tanzanian Government. The Finance Minister, Edwin Mtei, had resigned apparently because he felt unable to take responsibility for the economy without the I.M.F. loan and the financial support requested from et number of western countries. This breakdown would probably mean that the other western countries from whom assistance had been requested would now be even more reluctant to help. Mtei had been replaced by a former Finance Minister, Amir Jamal.

Although there has been no official statement, this report seems to be substantially correct.

The following notes on the background to the negotiations are based on a briefing provided by Professor Reg Green.

Tanzania faces a very severe short term crisis. It needs over 1979-81 to obtain £200 million in soft loans. The Tanzanian economy survived the 1973/74 crisis (produced by two years of drought, the need to import grain and increased oil costs) by very firm controls on imports and incomes. Real output grew at between 4.5% and 6% between 1975 and 1978; food production increased over the same period by an average 4% p.a.; by 1977 external payments and receipts (including normal aid) were in balance.

The causes of the current crisis are complex. There is the continuing poor export performance and the excessive relaxation of import controls during 1977-78 (a policy introduced under pressure from the I.M.F. and I.B.R.D.). On top of these basic weaknesses have come:

a. the Ugandan invasion and its aftermath of support for Ugandan liberation (cost likely to be of the order of £250 million.)

b. major floods (losses due to flood damage – mainly crop losses, roads and bridges, calculated at approx. £40 m.)

c. oil price increases (amounting to £25m. per year)

d. Zambia’s inability to remit Tazara, port and goods payments (amounting to £30m.)

The short-term need is for foreign exchange. The uses would be general loosening of limits on key imports for keeping the economy going, (e.g. fertilizer, industrial raw materials, machinery and transport spares, drugs) and on materials for investment (e.g. structural steel, machinery). Project tied lending would be far too slow to meet the need. There is at present £25-£30 m. of aid reimbursement claims outstanding because Tanzania’s administrative machinery has difficulty in dealing with the procedure required by donor countries. Tanzania’s balance of payments deficit for the two years 1979/80 and 1980/81 is estimated at £620 m.

It is proposed to meet this amount by:
Import cuts of £300 m
Export increases of 20 m
Existing economic assistance 100 m
TOTAL £420 m
Special emergency loan £200 m
GRAND TOTAL £620 m

Without this emergency loan the import cuts required would reduce the economy to stagnation, since non-food consumer imports are already so low, further cuts would be concentrated an goods and materials which are essential to the basic working of the economy. There is nothing else left to cut. Such cuts would prevent production (exports or import substitutes) to reduce the gap. They would certainly greatly reduce Tanzania’s potential as an export market for at least a decade and halt domestic growth for several years. They could destroy the development dynamic built up over 1961-1973 and sustained over 1975-78. That result is in nobody’s interests.

The major western industrial countries and smaller countries with a record of supporting Tanzania have been approached; of these only Sweden has so far responded. The others appear to have been waiting for the result of negotiations with the I.M.F.

The I.M.F. team which visited Tanzania proposed a package of economic measures which, in effect, required an abandonment of the socialist policies followed since 1967. The measures included a substantial devalulation, removal of import restrictions, dismantling price controls, a general wage freeze but selective salary increases and a reduction of expenditure on services such as health and education. In the view of the Tanzanian Government, these proposals were unlikely to have the results hoped for by the I.M.F. and were, in any case, politically unacceptable.

The argument was not about how severe the measures needed to be. The restrictions proposed by Tanzania are stricter than the I.M.F. require. The real argument is about how imports can be contained at levels that Tanzania can afford, steep inflation avoided, and the priority which should be given to personal consumption as against social services and investment.

Throughout the negotiations, it seemed to Tanzanian officials that the I.M.F. experts had no real understanding of how the Tanzanian economy is operated and controlled.

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