This article is based on data and other material that has appeared in the press and in Ministerial statements and contains nothing that may have come to the author’s notice on a confidential basis during his recent service as consultant to the Tanzanian Treasury. It is, therefore, in no sense an official Treasury record or statement of the situation. Ed.
Until 1974 Tanzania had good relations with the IMF, perhaps because she had no need of its facilities. During the economic crisis of ’74 and ’75 Tanzania drew on IMF credits to meet costs of importing food. Since the problems were caused by events outside of Tanzania’s control (drought and the first round of oil price rises), these credits were offered with minimal conditions.
Over the next two years the boom in coffee prices enabled Tanzania to start to repay its borrowings, but imprudent relaxation of import controls in ’78 and the collapse of the coffee boom made another approach to the Fund necessary. This time there was disagreement over the conditions with the IMF pressing for a 25% devaluation. A small devaluation early in ’79 was matched by modest IMF credits. War with Amin und rising oil prices worsened Tanzania’s economic position but no agreement could be reached on further credit facilities and negotiations broke down dramatically in October.
In reply to Nyerere’s protests, the Managing Director of the IMF denied that the Fund had ideological biases or political motivation. New negotiations began this year with new teams of officials from both sides. There were strong pressures to reach an agreement. The IMF’s reputation had been damaged by the breakdown of talks with Tanzania and Jamaica while the Brandt Report had been highly critical of the Fund’s criteria, procedures and lack of sensitivity.
While Tanzania had demonstrated that it could hold out for a time without IMF support and several Governments had responded to its appeal for help, shortage of foreign exchange had drastically reduced manufacturing output, arrears on payments for commercial imports were rising to £100m and substantial repayments of earlier IMF loans would fall due in 1980/81.
The 1979 breakdown concerned eight points of principles
– Devaluations the IMF suggested 25%; Tanzania considered that any devaluation would only worsen matters. (1)
– Higher interest rates to be introduced in place of Tanzania’s system of credit control.
– Reduction in the real level of Government expenditure, especially on Health and Education.
– Wage freeze to be continued to reduce real value of wages.
– Price controls to be abolished.
– Relaxation of Import Controls to allow in more imports on a less selective basis.
– Economic efficiency to be improved. Obviously Tanzania favoured this, but there was a wide difference on what the words meant.
Whatever the Fund intended, the proposals would have meant dismantling planning and repudiating the strategy of transition to socialism. They would also have worsened the trade deficit by more than the Fund credit provided, accelerated inflation, increased inequality of income distribution and reduced marketed food production. hardly a recipe for economic recovery, even in orthodox capitalist terms.
The outcome of the 1980 negotiations can be deduced from Press statements and from Ministerial speeches in the National Assembly.
– There has been no devaluation.
– Credit control has remained and there have been no important changes in interest rates.
– The Budget, voted on before agreement was reached with the Fund, aims to reduce Government’s recurrent deficit, but not at the expense of Social Services.
– Price Controls have been retained and enforced more effectively.
– Import Controls remain central to planning, although additional foreign exchange has allowed larger allocations to reduce production and transport bottlenecks.
– Minimum wages have been increased by 26% for urban and 36% for rural workers. This increase was announced on the day the IMF team arrived. Salaries have not been increased.
– Economic efficiency: work began, on Tanzanian initiatives, in problem areas before the arrival of the IMF team, in particular in the re-organisation of the National Milling Corporation, which had been making massive losses, and the development of an export strategy.
The conditions which Tanzania has had to accept and which could cause difficulty are limits on Government borrowing, bank lending and arrears of external payments. As targets, these limits are probably close to those of the Tanzanian Government; problems can arise, because if the limits are exceeded, the IMF standby credit automatically stops. The limits are set for each quarter year, but Tanzania works on an annual budget and has big seasonal variations in government borrowing and foreign exchange income. However, it seems that the limits were not exceeded for the September quarter.
The total credits made available by the IMF come to about £100m. (2) Of this only 35 – 40% will actually be available to pay for additional imports, allowing an increase of 4%. The balance of the credits will be used to reduce the arrears of unpaid import bills and repayments of earlier IMF credits. It is not easy to forecast whether the agreement will provide sufficient help to see Tanzania out of its difficulties. Keeping within the quarterly limits will depend on world oil prices and inflation rates, the weather and food supplies. If the IMF limits cannot be kept, the question of the exchange rate is certain to be re-opened, with no prospect of either side changing their view.
Tanzania clearly regards the outcome of the 1980 negotiations as only an interim arrangement and not a real resolution of differences. The problems are not peculiar to Tanzania but originate in the structure of the IMF. It was therefore appropriate that Tanzania should be the host for the South-North Conference on the International Monetary System held on 30th. June to 3rd. July, 1980; this resulted in the ‘Arusha Initiative’, sharply critical of the Fund, proposing major interim changes and, in the longer term, total reconstruction. Minister of Finance Jamal was also able to use his position as Chairman of the 1980 Meeting of the IMF Governors to spell out the Third World’s criticism of the Fund and the changes which were required.
Reginald Herbold Green.
(1) It is well known that increased exports, particularly of primary products, depend on structural and technical changes within Tanzania and cannot be achieved in any marked degree by price manipulation in the short run. The effect of devaluation would therefore be to increase the cost of imports and hamper the changes and adjustments needed in the export industries without yielding any substantial benefits in increased export earnings. The IMF prescription of devaluation rests on the wholly erroneous assumption that export surpluses already exist that could readily be sold abroad if prices were lowered. Ed.
(2) The credit consist of a standby arrangement of SDR 179.6 million during the period to 30th. June, 1982, and a compensatory financing facility of SDR 15 million to help to meet outstanding import costs in the year ending 12th. March, 1980. The value of these credits is roughly £100 million and £8.5 million respectively. The outstanding obligation to the IMF amount to SDR 72.1 million, or roughly £40 million.