Fiscal Policy and Fiscal Rules in Tanzania

In the fiscal arena, Tanzania has performed well over much of the past decade, as was noted by the IMF in its 2011 discussion of revenue mobilization in developing countries, where it gave Tanzania (along with El Salvador and Vietnam) as one of its three examples of “strong performers”. Revenue performance, measured by the ratio of revenue to GDP, improved rapidly; and a combination of prudent macroeconomic policy and debt relief ensured that the country had some fiscal room for manoeuvre, or in the modern jargon, “fiscal space” or a “fiscal buffer”. With the advent of the global financial crisis in 2008, some of this space was used up, partly as a consequence of automatic impacts, for example on revenue collections, and partly as a consequence of deliberate policy choices, such as the “rescue plan” announced in the budget speech of 2009.

Subsequently, after the peak of the crisis had passed, revenue performance seemed to have flattened out, raising concerns as to whether this was temporary or marked a fundamental change. More recently, revenue growth (relative to GDP) has resumed, and it is expected that that will continue, though at a more modest pace than hitherto. There was also a sharp increase in the budgeted deficit, raising concerns about the sustainability of fiscal policy. Steps have been taken to address this.

Over the longer run, Tanzania faces substantial challenges in finding ways to finance large infrastructure programmes, as well as large social sector programmes, in ways that do not threaten future fiscal sustainability. This paper finds that domestic revenues are likely to continue to grow relative to GDP, albeit at a slower rate than in the mid-2000’s. The future of concessional financing is unclear, but it seems highly likely that it will continue to taper off relative to GDP, with the uncertainty being about how fast this tapering will be.