by Arrad Tabandeh
Arrad is a TDT Volunteer currently studying at the London School of Economics and Political Science (LSE)
IMF approves more funding for Tanzania to deal with the effects of pandemic and war
In July the IMF Executive Board approved a forty month $1.05 billion extended credit facility (ECF) arrangement with Tanzania. This type of support is designed to provide financial assistance to countries with protracted balance of payments problems, and is part of a broader reform at the Fund to make their financial support more flexible and better suited to the needs of countries requiring more diverse assistance. It is seen as a major tool in providing medium-term support to Tanzania and its economic programmes aimed at stability and sustainability.
This follows the Fund’s emergency support to Tanzania in 2021, as overall financing since the start of last year is now equivalent to 300% of the country’s special drawing rights (the IMF’s own currency used as an international reserve asset and allocated between countries). The arrangement is expected to accelerate further bilateral and multilateral financial support.
The purpose of this ECF is to assist Tanzania with the spill-over effects from the war in Ukraine which is stalling the country’s gradual recovery from the pandemic. The programme draws from the key priorities of the government’s Five-Year Development Plan which commits to the improvement of living conditions through measures aimed at building a “competitive and industrial economy for human development”. The authorities will therefore use this additional funding in accordance with the Plan and invest in infrastructure, skills-training, as well as strengthen the business environment to facilitate private sector success. Contributions are also thought to be made towards scaling up vaccination efforts.
The IMF has forecasted Tanzania’s GDP to grow 4-5% each year from a base of about $65 billion in 2021, with the current account deficit floating around 4% of GDP. Therefore, while financing of $1 billion across nearly four years covers a relatively small amount of the deficit, it is still sufficient in driving reforms and building a sustainable base for future revenues and growth.
Speaking to “Daily News”, a cross-section of economists said they were optimistic that the credit will offset the rising prices of commodities. They also suggested that the fund should be used to provide subsidies on imported fertilisers, to reduce prices of the soil nutrient encouraging the country to become more self-reliant. It is hoped that this could go some way in alleviating the worsening cost of living crisis.
Mr. Bo Li, Deputy Managing Director at the IMF mentioned how executive directors “commended authorities for their economic response to the pandemic and the policies enacted to mitigate the spill-overs from the war in Ukraine”, but also referred to the “considerable development and reform challenges and external headwinds” that the country is facing. It is against this backdrop as well as “recognising Tanzania’s strong track record in reform implementation” that the directors supported the country’s request for an ECF arrangement.
The directors also highlighted the authorities’ continued work in “rebalancing expenditure towards social spending and improving its efficiency and execution.” They welcomed the progress made in establishing fiscal transparency in the nation alongside emphasising the importance of raising government revenue to address priority spending, including the containment of rising food and fuel prices. This can also help pave the way for a more sustainable fiscal policy in the country, freeing up room for longer-term development.
Plans are in place to pay out $150 million immediately. The financing is Tanzania’s first IMF policy-reform funding programme in a decade and comes after the Washington-based lender raised the country’s risk of debt distress to moderate from low last year. For now the fund has encouraged the implementation of Tanzania’s ambitious reform agenda, alongside stressing the need to continue to address climate risks.