Republic of Tanzania: Second Review Under the Policy Support Instrument-Press Release; Staff Report; and Statement by the Executive Director for United Republic of Tanzania

KEY ISSUES Tanzania's macroeconomic performance remains strong. Real GDP grew by about 7 percent in 2014 and inflation is now slightly below the authorities' 5 percent target. Growth is projected to remain strong and inflation moderate. Program performance since the last review has been uneven. All end-2014 assessment criteria were met, though the indicative target on tax revenue collection was missed. Good progress was made on structural benchmarks. Shortfalls in domestic revenue continued in early 2015 and delays were incurred in mobilizing external financing and adjusting expenditure in the context of the mid-year budget review. Monetary policy was loosened unexpectedly in late 2014 and interventions in the foreign exchange market increased. These developments, together with shortfalls in external program financing, led to the end-March 2015 targets on net domestic financing and international reserves being missed. The authorities intend to maintain a prudent fiscal policy in 2015/16. Expenditure measures were taken to adhere to the 2014/15 target for the overall deficit and the authorities are committed to a deficit (excluding arrears clearance) of 3.5 percent of GDP next year, consistent with a medium-term fiscal anchor of a deficit slightly below 3 percent of GDP. Discussions focused on measures that would allow a realistic but ambitious increase in revenue, to make more space for priority expenditure and reduce the risk of further arrears accumulation. The program allows for the settlement of existing arrears to suppliers and pension funds. Monetary policy has been tightened recently. This will help address the excess liquidity situation, which likely contributed to disorderly conditions on the foreign exchange market and pressures on international reserves. The recent depreciation of the shilling against the U.S. dollar reflects to a large extent the strength of the dollar and should not be resisted. Staff recommends completion of the second PSI review and modification of assessment criteria on net international reserves (NIR) and net domestic financing (NDF) for end- June 2015.