TANZANIA AND THE INTERNATIONAL MONETARY FUND

Tanzania’s central problem is the shortage of foreign currency to pay for her imports. As a result of this shortage, industry cannot renew machinery, is starved of raw materials and is working at less than half capacity; transport is increasingly decrepit and cannot rely on supplies of petrol, tyres, or spare parts; agriculture is suffering from shortages of fertiliser and difficulties with the movement of crops; the University is desperately short of books; health services lack essential drugs and equipment; and administration is hampered by sheer difficulties of achievement. The shortage of these necessary foreign funds is caused by the greatly increased prices of imports, especially of oil, the low prices earned abroad by most exports and a flagging production of most export crops on which Tanzania mainly relies to pay for her imports.

Apart from the continuing economic decline that this situation is causing, Tanzania is exposed to high inflation. The retail price index for wage earners based on a 1969 Household Budget Survey appears to be rising at about 25% per annum, but the true rate is difficult to measure owing to the fitful availability of some items and the existence of a black market. Increasing budget deficits caused by falling revenues and rising prices are one reason. Another potent cause is the high and increasing costs brought about by the deterioration of vehicles, roads and machinery and by low industrial activity. Fixed overheads have to be carried by a falling output, so prices have to go up.

To escape from this vicious circle of falling production, stagnant exports and high inflation, Tanzania urgently needs external support and this is the reason why it has turned for help to the International f10netary Fund. Tanzania genuinely wants the help of the Fund and is doing its utmost to secure it. It needs this help, not only to provide relief from the severe downward pressures on the economy, but also to restore its credit standing in the eyes of the outside world. Until this happens, Tanzania is likely to be denied access to a much needed Structural Adjustment Loan from the World Bank and will find it increasingly difficult to attract bilateral support from individual donor countries. In the opinion of the Brandt Commission, and as will appear in more detail below, ‘this is an unfortunate sequence, effectively relegating supply-side adjustment issues to a secondary place in policy formation, given the Fund’s current approach to conditionality. (1)

Far from being a welcome step, resort to the Fund is an ineluctable necessity. There is no realistic alternative. But the Fund imposes strict and often onerous conditions on the facilities that it offers. Moreover, the duration of these facilities is short – three years at the most – and repayment is required within a maximum of ten years, often sooner. The severity of its conditions reflects the Fund’s estimation of the corrective measures needed to restore equilibrium to the foreign exchanges sufficient to ensure repayment within the allotted period and when, as at present, funds are scarce in relation to global needs, there is a danger that conditions may be all the more exacting. The paradox is that, for reasons shortly to be explained, there are probably no short-term measures, however, severe, that can effectively safeguard Tanzania’s ability to repay within the period envisaged by the Fund. Thus, Tanzania is caught between the Scylla of continuing decline and the risk of increasing political instability and the Charybdis of conformity to the Fund’s conditions, with all the serious risks that they entail. (2)

The Fund’s conditionality has acquired a bad name in the Third World. Conditions must, of course, be imposed and the Fund has a duty to safeguard the rotation of its resources. Evidence before the Brandt Commission, however, claimed that the Fund ‘concentrated excessively on a monetary approach to balance of payments analysis, that it did not give countries adequate time to adjust, that political realities were insufficiently considered.’ The Commission added that recent studies had reinforced these concerns and pointed to others. ‘The Fund’s concentration on demand control, devaluation and credit ceilings as the main instruments of policy minimises the importance of other measures: those on the supply side, for example, not least where the supply of goods for export are in question. (3)

Un fortunately, the IMF is the victim of its own history. It is not, and was never intended to be, an organisation to promote Third World development. It was created in July, 1944, at Bretton Woods to prevent the world slipping back into the restrictive trade practices, which had done so much damage during the Great repression of the thirties. It was charged with the promotion of exchange stability and a multilateral system of payments and with providing resources under adequate safeguards to enable countries to correct maladjustments in their balance of payments without resort to damaging tariffs and other restrictive practices. Support for development was left to the World B3.nk, or the International Bank for Reconstruction and Development as it was properly called, and other international bodies.

This division of labour had some justification in the context of the Fund’s industrial customers during the period of post-war reconstruction. Economies that pressed forward too fast and became over-heated could be restored to equilibrium by internal adjustments and the Fund was able to supply useful advice and interim support while it took place. There was no question of halting the general trend towards ‘reconstruction and development’.

But the exchange problems of many Third World countries, including Tanzania, differ fundamentally from those of the industrial North. Whereas pressures on the exchanges of the industrial countries were largely the result of domestic policies and could be corrected by internal adjustments, the problems of Tanzania were triggered and largely caused by the impact of external influences, notably the eightfold increase in the price of oil, the fall in the prices paid for Tanzania’s exports and the general effects of the world recession.

That Tanzania’s difficulties are predominantly the result of this strongly adverse external environment is clear from the fact that before 1974, and again between 1975 and 1978, Tanzania ,maintained a rate of growth both of food production and of the national product in excess of 4% a year,(4) while avoiding external imbalance, high rates of inflation and recurrent budget deficits. The idea that perverse internal policies were the main cause, which has recently become a favourite theme in the press, clearly cannot stand up to examination. There were, of course, serious shortcomings and mistakes, now acknowledged, in the handling of villagisation and other issues, which may have made matters worse, but it would be a travesty to assign to them the dominant cause of decline.

It may be argued that the industrial countries have also suffered from the energy crisis and the recession. But in the context of her foreign exchanges external circumstances exercised a far more catastrophic influence on Tanzania’s frail economy than “,as the case with the countries of the North. This is well illustrated by the case of oil imports. In 1971, such imports took about 13% of the proceeds of Tanzania’s export sales, but by 1981 the proportion had risen to nearly 53%. And while the foreign exchange problems of the industrial economies can generally be corrected by a contraction of credit in the short term, the dislocation caused by external pressures on the foreign exchanges of Tanzania can only be remedied by an expansion of her export capacity in the medium and long term, involving changes in the entire pattern of the export sector.

For this kind of development programme the IMF is unsuited. First, the duration of its facilities is too short. A reorganisation of the country’s exports calls for changes on many fronts and cannot be effected within one to three years. Secondly, the initial dislocation caused by the Fund’s drastic remedies provides a poor starting point for progress in the export sector. In the words of the second Brandt Report, the Fund ‘should recognise more fully that, especially in poorer and less adaptable countries, if unsatisfactory policies have been in operation over a period of years, they cannot often be ‘put right’ by sudden about-faces, drastic devaluations overnight and the like.

Where difficulties are principally due to a harsh external environment, such an approach is even more misplaced. (5) Sudden, drastic devaluation (6) will immediately increase considerably the import costs of those industries, among others, that supply the export sector with fertilisers, transport facilities and other inputs. Eventually these costs will have to passed on to the farmer and if he is producing for export he will have benefited from the increased shilling earnings from his export sales. But the immediate effect of the shock will be considerable. So far as the farmer producing food for the home market is concerned, there will be no increased income from export sales and very limited chance of passing the cost on to the largely urban consumer already living dangerously near the margin. The effects on … working morale of any attempt to do so could be very serious.(7)

Tanzania’s central problem is not a simple matter of monetary adjustment, but of export growth. Tanzania has to face the world as it is, with its high cost of energy and industrial imports. It can only accommodate itself to this situation by increasing substantially its income from exports. It is, therefore, of great importance not only that the Fund should not impose on Tanzania burdens that will impede export recovery, but that a Fund facility should be quickly followed by a Structural Adjustment Loan and other facilities from the World Bank, for the most part on concessional terms.

Tanzania is among the least developed countries that have to rely almost entirely on earnings from the export of a narrow range of agricultural products. Demand has been flagging during the recession and global over-supply has led in many cases to serious falls in price. Tanzania’s immediate prospects, therefore, depend to a great extent on general recovery from the recession, though a production and export drive might enable Tanzania to recover ground lost to her competitors, or even to improve her relative position as a supplier.

But in the longer term progress depends on the prospects for diversification. This will not be easy and industrial growth of the kind enjoyed by Korea, Taiwan and Brazil must be regarded as still a long way away. But there are some possibilities that are emerging. The first is a large paper plant at Sao Hill, which is due to be completed late in 1984, or early in 1985. A second is the exploitation of natural gas from Songo Songo and elsewhere on the Tanzanian coast. The product is urea and ammonia, which will not only save import costs for nitrogenous fertilisers, but ”fill also provide a valuable export commodity. Taken together, exports of paper, urea and ammonia should by the late nineteen eighties total 200 million dollars, which may be compared with the recent annual exports of coffee for 150 million dollars. Tourism could become an appreciable earner of foreign exchange if conditions conducive to its development could be created. But fundamental though such developments are for the solution of Tanzania’s foreign exchange problems, they are not amenable to promotion by the IMF. It is, therefore, of added importance that the respite afforded by the IMF should not impair Tanzania’s ability to respond with vigour to such possibilities.

In order to reduce inflation, the Fund recommends the abandonment of food subsidies to relieve pressure on the budget. Since early in 1980 Tanzania has removed subsidies on all foodstuffs except the staple sembe (maize meal) and with this exception prices are now at full cost with a 5% profit margin for the marketing bodies. There is also agreement in principle for the progressive reduction over three years of the subsidy on sembe . But the saving for the budget would be only marginal. At present the sembe subsidy costs the Treasury about shs.250 million, or 1.5% of total expenditure and further costs are offset against a special tax on sugar. Sembe now sells at shs.2-50 for a kilo in the official market: the IMF recommends an increase to between shs.8 and shs.11-50 a kilo. So drastic an increase would, however, cause grave destitution among urban consumers and the danger of civil disturbance unless a comparable increase in the minimum wage could be arranged. The IMF suggest an increase of 15% in the minimum wage, which contrasts starkly with its own estimate of a 50% rise in the cost of living resulting from the adoption of its programme and alternative official and independent estimates of 130 to 150%.

In many developing countries the conflict of interest between the farmer and the urban consumer cannot be bridged without intervention and various measures have been adopted by governments to mitigate gross urban poverty. The World Bank has considered a number of these and has recognised that food subsidies ‘are frequently the most effective way of reducing calorie and protein deficiencies among the poor who buy food, especially those in urban areas, and involve fewer administrative burdens than other fiscal outlays.(8) It seems essential that in relation to the sembe subsidy the Fund should leave it to the Government to decide what is equitable and politically possible and should not drive it to adopt measures that could cause grave destitution and foment riot, as has happened in Egypt, Sudan and elsewhere.

That agreement with the IMF is essential to Tanzania there is little room for doubt. But while the protracted dialogue 2ith the Fund has not been all counterproductive, the Fund still seems preoccupied with its traditional financial and fiscal devices without sufficient regard for the conditions necessary for export recovery. Mere reliance on money incentives for producers, important though they are, is a misreading of the Tanzanian situation. For the rehabilitation of key consumer goods industries is also essential if money incentives are to provide a real stimulus for exports and not merely to fuel inflation. But the Fund gives the impression of overlooking this when by its policy of drastic devaluation it merely places an added burden on these industries. The rehabilitation of the Tanzanian economy is much more complicated than that.

On the Tanzanian side a substantially greater measure of devaluation now seems inescapable, though not necessarily in the same manner or degree as demanded by the IMF; that remains to be negotiated. Equally important are the safeguards against unwelcome side-effects either on export potential, or on minimum urban living standards. The context of consultation with the Fund must be a careful disavowal of ideological dictation and a recognition that the basic laws of economics are a reflection of human nature and that though they can often be adapted to serve general policy objectives, they cannot be ignored. The Fund’s guidelines of 1979 themselves allow room for such modifications of the impact of economic forces as will have ‘due regard to the domestic , social and political objectives of member countries.’ This means that Tanzania’s endeavours to create a more equal society and to promote responsible human cooperation must be respected.

J. Roger Carter

(1) Common Crisis: the Brandt Commission Report, 1983: Fan Books Ltd.: p.63

(2) According to the Minister of Finance in his budget speech of 16th. June, 1983, Tanzania needs Sh8.5,000 million a year for three to five years from external sources to rehabilitate the economy, pay off all external intergovernmental and commercial debts, re-equip industry and finance important projects for the expansion and reinforcement of the economy.

(3) Common Crisis: p.62.

(4) World Bank statistics show an average growth rate of GDP of 5% between 1970 and 1978, the sixth highest among the 38 lowest income countries : World Development Report, 1980.

(5) Common Crisis: p.64.

(6) The IMF is asking for a devaluation from shs.9.7 to the dollar to between shs.25 and shs.35. On 3rd. June, Tanzania devalued the shilling by 20%, bringing its value to shs.12.2 to the dollar.

(7) The IMF propose a rise in producer prices for food crops of 25% and envisage passing on a considerable part of this to the consumer, who would suffer severely. The impact of the HIP proposals on inflation is estimated by them to be a 50% rise in the cost of living index, but the Bank of Tanzania and others calculate that the figure will be much nearer to 130 – 150%.

(8) World Development Report, 1981 : The World Bank: p. 106.

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