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 2025 The 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  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 Inflation

10 Exchange Rate [TZS/USD]

11 Exchange Rate Daily Changes  Exchange rate has been fairly stable over the past year  Exceptions in April (oil prices) and October (global financial meltdown)

12 Interest Rates

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

15 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

17 Implications of Insufficient Growth  Reversal of gains in social services  Peace, stability and unity  Significant regional implications

18 Needs Strategies - Not Just Endowments 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.

19 Constraints to Growth

20 Energy Costs and Power Outages

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22 Quality and Cost of Labour 

23 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

25 The Macro-fiscal Strategy

26 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 Strategy Macro 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

28 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

29 Expenditure Efficiency  Improving expenditure planning at central and MDAs’ level  Strengthening oversight for VFM  Strengthening procurement capacity