1

Budget Strategy in a Changing Macroeconomic

Environment

Presentation to the GBS Annual Review – 2008

Ministry of Finance and Economic Affairs

2

Outline

The Context – national development goals

Macroeconomic framework

The Challenges

The Macro-fiscal Strategy

3

The Context

4

Vision 2025The Tanzania Development Vision 2025 projects that, by 2025, Tanzania will have five major attributes:

High quality livelihood. Peace, stability and unity. Good governance. A well-educated and learning society. A competitive economy capable of producing sustainable

growth and shared benefits.

Overarching description: Middle Income Country

5

Medium Term Strategies They define medium term priorities in

implementing the Vision

PRS 1 (2001 – 2004)

MKUKUTA (2005/06 – 2009/10)

Millennium Development Goals (MDGs)

6

The Annual Government Budget

a description of short term (one year) priorities towards the long term development goals.

exploits available opportunities

must respond to immediate challenges and threats

7

Macroeconomic Framework

8

The economy is growing, and accelerating

Real GDP Growth: 199 - 2008

4%

5%

5%

6%

6%

7%

7%

8%

8%

9%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Growth based mostly on impact of structural reforms and corresponding improvement in resource use.

Economy still vulnerable to shocks, including weather and external shocks.

Benefits reaching a wider population

9

InflationInflation Developmenerts (Monthly)

3.0

4.05.0

6.0

7.08.0

9.0

10.011.0

12.0

10

Exchange Rate [TZS/USD]

1,100

1,150

1,200

1,250

1,300

1,3502-

Jan-

08

2-F

eb-0

8

2-M

ar-0

8

2-A

pr-0

8

2-M

ay-0

8

2-Ju

n-08

2-Ju

l-08

2-A

ug-0

8

2-S

ep-0

8

2-O

ct-0

8

2-N

ov-0

8

TZ

S/U

SD

11

Exchange Rate Daily Changes

-3%-2%-2%-1%-1%0%1%1%2%2%3%

1/2

/2008

2/2

/2008

3/2

/2008

4/2

/2008

5/2

/2008

6/2

/2008

7/2

/2008

8/2

/2008

9/2

/2008

10/2

/2008

11/2

/2008

Exchange rate has been fairly stable over the past year

Exceptions in April (oil prices) and October (global financial meltdown)

12

Interest Rates

Interest Rate Structure of Treasury bills Jan 2007 to May 2008

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Wei

ghed

Ave

rage

Yie

ld to

Mat

urity

182-day T. bills 364-day T. bills

13

Exogenous Global financial markets’ turmoil

Global recession

Oil and other commodity prices

Threatening short term variables and medium term growth

14

The Challenges Going Forward

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Restoring Price Stability Fiscal policy to compliment monetary policy

more strongly: reduced liquidity injection by the Government address high cost of production

Monetary policy interventions Contain growth of (M2 and M3) money supply Maintain market determined interest and

exchange rates, with interventions to smooth their path

16

Growth Scenarios vis-à-vis Vision 2025

Current level of growth is below the trajectory required for achieving the Vision 2025

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

GD

P P

er

Cap

ita (

US

$)

8% Grow th Middle Income Status (Low ) 10% Grow th12% Grow th Middle Income Status (High)

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Implications of Insufficient Growth

Reversal of gains in social services

Peace, stability and unity

Significant regional implications

18

Needs Strategies - Not Just Endowments

Mauritius

15441

3084

Cote d'Ivoire1624

1606

05

00

01

00

00

150

00

1960 1970 1980 1990 2000year

PPP adjusted, 1996 international $Income per capita

Botswana

8936

984 Zambia902

1167

02

00

04

00

06

00

08

00

01

00

00

1960 1970 1980 1990 2000year

PPP adjusted, 1996 international $Income per capita

•Ivory Coast and Mauritius are both coastal and resource poor countries.

•They pursued very different development paths.

•with very different outcomes.

•Zambia and Botswana are neighbours, both landlocked and resource rich.

•Pursued different approaches to managing resource rents.

•To very different results.

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Constraints to Growth

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Energy Costs and Power Outages

Figure 3.3

Energy costs and power outages

0

10

20

30

40

50

60

Kenya Uganda Tanzania Zambia Senegal Benin Morocco China

Energy, % of firm costs (average) Power outages, % output lost (average) Source: World Bank Enterprise Surveys, 2001-2005

21

22

Quality and Cost of Labour

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Predictability of the Medium Term Budget Framework

Improving domestic revenue collection.

Challenges remain in relation to external financing

Baskets and Project funding main culprits

Variable performance by individual GBS donors

24

Predictability of External Financing

0

2

4

6

8

10

12

14

16

Total 07/08 0 0 3 5 4 3 6 9 3 3 3 3 3 4

Total 06/07 5 8 4 4 3 3 3 8 4 3 4 3 3 3

Total 05/06 3 15 3 4 3 3 3 7 4 3 4 3 4 6

Total 04/05 0 15 6 3 4 7 5 3 4 3 3 10 3 3

ADB CIDA Denmark EU Finland Ireland Japan KfWNetherla

ndsNorw ay Sw eden

Sw itzerland

UKWorld Bank

25

The Macro-fiscal Strategy

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Recap

Significant challenges from the global economic environment

Domestic inflation pressures calling for fiscal (and monetary) policy response

Need to scale up the rate of growth, toward Vision 2025 targets

Infrastructure and skills emerging as the centre pin of forward strategy

27

Macro-fiscal StrategyMacro stability: Strengthening macro modelling capacity Need to limit expenditures that enhance aggregate demand I the economy Scale up food production and marketing

Growth: MKUKUTA II ought to be “The Tanzania Medium Term Growth Strategy” Macro modelling to include growth scenarios and poverty analysis Scale up investment in infrastructure and labour skills Improve project selection (MPIP)

Poverty Reduction: Incorporate “opportunities to create wealth”, not just Government handouts (except

for the very vulnerable) Sustain quality of services delivery Address inequality in service standards Value for money (audits, expenditure tracking, PETS)

MTEF reliability: Sustain growth of domestic revenue Limit growth of inflexible expenditures DPs to increase aid predictability

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Implications for the Budget

Increased domestic revenue collection, complemented by growing external financing

Increasing share of pro-growth (infrastructure) budget, particularly on high import content projects

Contain growth of the inflexible budget, including wage bill

Predictability of medium term external financing essential

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Expenditure Efficiency

Improving expenditure planning at central and MDAs’ level

Strengthening oversight for VFM

Strengthening procurement capacity