Tanzania: Fiscal Challenges                  IGC Growth Week, 20 September 2011Christopher Adam – Oxford and IGCStephen A....
Fiscal TensionsUnwinding ESF / Action Plan       • Deteriorating external conditions –food and fuel prices       • Declini...
Tanzania: Government Operations and Financing                                      2001-2012               Total Expenditu...
Fiscal Deficit and Financing14%12%                                                                                        ...
Fiscal sustainability• Growth in recurrent spending is worrisome when projected into the future  only to the extent that s...
Fiscal sustainability• How does donor fiscal stringency on prospective aid flows?• Do the favorable terms Tanzania is curr...
Recurrent cost implications: some back of theenvelope calculations•    Public Output :                                    ...
East African Community: Pre-conditions    for an effective monetary union                    Dick Durevall    Internationa...
Outline Four types of pre-conditions   Current economic structure (Optimum Currency    Area arguments)   Political and ...
Current economic structure   Monetary stability (see Figure 1)     Governments have a history of weak monetary disciplin...
-10                           -5                                        10                                             15 ...
100                                           150                                                 200                     ...
20                                                                           40                                           ...
Political and institutionalpre-conditions Political will to form a monetary union crucial Need for supranational institu...
Convergence criteria   Stage II (2011-2014)    Primary Criteria   a) Overall Budget Deficit to GDP Ratio (excluding gran...
Convergence criteria Several problems with the criteria   Definitions and measures not defined (prices, dates, sustainab...
Fiscal policy rules Fiscal policy and free-rider problem   Without rules, fiscal policy is too expansionary     Bailout...
Conclusion Many potentially positive effects of a monetary union   Rwanda, a small landlocked country, should benefit M...
Table 1. Indicators of economic    structure                                                   Kenya Rwanda Tanzania Ugand...
20                                                                  40                                                    ...
100                                    200                                          300                                   ...
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Growth Week 2011: Joint Country Session – Rwanda/Tanzania

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The topic of the joint Country Session of Rwanda and Tanzania was 'Toward Monetary Union in East Africa'. It focused on the progress and challenges of progress towards creating an East African monetary union. The presentations in this slideshare are from Christopher Adam and Dick Durevall.

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Growth Week 2011: Joint Country Session – Rwanda/Tanzania

  1. 1. Tanzania: Fiscal Challenges IGC Growth Week, 20 September 2011Christopher Adam – Oxford and IGCStephen A. O’Connell (Swarthmore)Peter J Montiel (Williams)
  2. 2. Fiscal TensionsUnwinding ESF / Action Plan • Deteriorating external conditions –food and fuel prices • Declining donor flows • ‘Flattening’ revenue mobilization • => need for fiscal consolidationExpenditure priorities (TNDV2025) • Demographic pressures on recurrent budget • Meeting current MDG obligations • Recurrent implications of public investmentKey question • How much fiscal space?
  3. 3. Tanzania: Government Operations and Financing 2001-2012 Total Expenditure and Net Lending Domestic Revenue Grants Net Foreign Financing Net Domestic Financing35%30%25%20%15%10%5%0% 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11p 2011/12b 3-5%
  4. 4. Fiscal Deficit and Financing14%12% 1.1% 1.0%10% 1.5% 1.8% 1.0% 1.2% 1.0% 5.4% 3.2% 5.0%8% 3.3% 3.3% 3.9% 3.7% 3.6% 4.6%6% 1.4% 1.2%4% 6.9% 6.4% 6.4% 5.3% 6.0% 4.4% 4.8% 5.0% 5.1% 4.6%2% 3.9%0% -0.4% -0.9% -0.6% 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 -1.5% 2007/08 2008/09 2009/10 2010/11p 2011/12b-2%-4% Grants Net Foreign Financing Net Domestic Financing 4
  5. 5. Fiscal sustainability• Growth in recurrent spending is worrisome when projected into the future only to the extent that such spending is not productive and is not offset elsewhere by reductions in unproductive development spending or by increased revenues.• How much of the recent stagnation in the revenue-to-GDP ratio is due to the effects of the international recession and to purposive countercyclical measures on the part of the government?• What prospects are there for raising the revenue ratio, through tax reforms and increased administrative measures, and what constitutes an appropriate level of ambition on enhancing tax effort?
  6. 6. Fiscal sustainability• How does donor fiscal stringency on prospective aid flows?• Do the favorable terms Tanzania is currently able to secure on non- concessional borrowing reflect the continued engagement of donors?• If so, a contraction in donor flows may see the cost as well as the volume of non-concessional financing rise, requiring a sharper fiscal adjustment.• To the extent that continued donor engagement is influenced by concerns on fiscal performance, the balance of effort should be towards enhanced domestic revenue mobilization and improved expenditure efficiency rather than achieving deficit reduction by cutting back on productive recurrent expenditures.
  7. 7. Recurrent cost implications: some back of theenvelope calculations• Public Output : Q = Lθ K 1−θ• Cost of labour per unit of public capital: wL / K =incremental cost of labour per unit of public investment for K/L unchanged. Re-write : wL wL = .(r + δ )• K (r + δ ) K• Note wL θ = ≈ 1.5 (r + δ ) K 1 − θIf r + δ ≈ 0.10 => recurrent cost is 15 percent per dollar; at gross return of 0.20 the recurrent cost is 30 percent per dollar. Current fiscal arithmetic tends to book depreciation costs only +/- 5% per annum.
  8. 8. East African Community: Pre-conditions for an effective monetary union Dick Durevall International growth Centre and University of Gothenburg
  9. 9. Outline Four types of pre-conditions  Current economic structure (Optimum Currency Area arguments)  Political and institutional pre-conditions  Convergence criteria  Fiscal policy rules Conclusion
  10. 10. Current economic structure Monetary stability (see Figure 1)  Governments have a history of weak monetary discipline Asymmetric shocks (Figure 2 and 3)  Agricultural supply and terms of trade shocks The importance of exchange rate flexibility? Regional and international trade integration  Transaction costs Financial Integration Structural divergence
  11. 11. -10 -5 10 15 20 25 30 35 0 5 1998M01 1998M04 1998M07 1998M10 1999M01 1999M04 1999M07 1999M10 2000M01 2000M04 2000M07 2000M10 2001M01 2001M04 2001M07 2001M10 2002M01 2002M04Burundi 2002M07 2002M10 2003M01 2003M04 2003M07Kenya 2003M10 2004M01 2004M04 2004M07 2004M10 2005M01Rwanda 2005M04 2005M07 2005M10 2006M01 2006M04 2006M07Tanzania 2006M10 2007M01 2007M04 2007M07 2007M10 2008M01Uganda 2008M04 2008M07 2008M10 2009M01 2009M04 2009M07 2009M10 2010M01 2010M04 2010M07 2010M10 Annual inflation rates, 1998:1-2011:7 2010M13 2010M16 2010M19
  12. 12. 100 150 200 250 50 0 1990 1991 1992 1993 1994 1995 1996Uganda Burundi 1997 1998 1999 2000 KenyaRwanda 2001 2002 2003 2004 2005 Tanzania 2006 2007 2008 2009 100 150 200 250 50 0 1990 1991 1992 1993 Burundi 1994 1995 1996 1997 1998 Kenya 1999 2000 2001 2002 Rwanda 2003 2004 2005 2006 2007 Uganda 2008 2009 Terms of trade, UNCTAD left, World Bank right
  13. 13. 20 40 60 80 0 100 120 140 160 180 200 1998M1 1998M6 1998M11 1999M4 1999M9 2000M2 Burundi 2000M7 2000M12 2001M5 2001M10 2002M3 Kenya 2002M8 2003M1 2003M6Note: A decline is depreciation. 2005=100. 2003M11 2004M4 2004M9 Rwanda 2005M2 2005M7 2005M12 2006M5 2006M10 2007M3 Tanzania 2007M8 2008M1 2008M6 2008M11 2009M4 Uganda 2009M9 2010M2 Real effective exchange rates (1998:1-2010:12) 2010M7 2010M12
  14. 14. Political and institutionalpre-conditions Political will to form a monetary union crucial Need for supranational institutions  Require political will and needed when will is failing Legitimacy and acceptance of supranational institutions Institutional preparation  Prepare and ratify necessary legal instruments and set up institutions such as the East African Monetary Institute (EAMI)  Carry out technical preparatory work to create the operational and regulatory foundation for EAMU.  Customs Union ‘completed’ in 2010, Common Market in 2015. ECB (2010) report on EAMU: a lot of work is needed before it can be established
  15. 15. Convergence criteria Stage II (2011-2014) Primary Criteria a) Overall Budget Deficit to GDP Ratio (excluding grants) not exceeding 5%; and Overall Budget deficit to GDP Ratio (including grants) not exceeding 2%; b) Annual Average Inflation Rate of not more than 5%; c) External Reserves of more than 6 months of imports of goods and non-factor services. Secondary Criteria a) Maintenance of Market Based Interest Rates; b) Maintenance of high and sustainable rate of real GDP growth of not less than 7.0%; c) Sustained pursuit of debt sustainability; d) Domestic Savings to GDP Ratio of at least 20%; and e) Maintenance of sustainable level of Current Account Deficit (excluding grants) as % of GDP.
  16. 16. Convergence criteria Several problems with the criteria  Definitions and measures not defined (prices, dates, sustainability)  Too ambitious and not under the control of government (7% GDP growth)  Inconsistent (budget deficits with a without grants)  Use of absolute levels instead of relative levels (5% inflation)  The EAC has a criterion for the real exchange rate in Stage I; but there is no criterion for nominal exchange rates, and nothing in Stage II. Risk of costly short-term adjustment when EAMU formed Key issue for EAMU is the credibility of the monetary policy framework adopted by the EACB, and not big adjustment after unification.
  17. 17. Fiscal policy rules Fiscal policy and free-rider problem  Without rules, fiscal policy is too expansionary  Bailout, risk of bailout, and high inflation due to deficits Controversial issue, but not any longer  Beetsma and Giuliodori (2010) conclude there is a rationale for fiscal constraints Public debt and fragility of monetary unions  De Grauwe’s example, Spain and the UK How to design fiscal policy rules (without political union)  Must allow for countercyclical fiscal policy  Must allow for external shocks  How to enforce the rules  How to impose sanctions without worsening the debt  Suggestions: mechanic sanctions and stabilization fund, joint issue of Eurobonds, (national) rules for balanced budget over business cycle, independent fiscal policy authority, etc
  18. 18. Conclusion Many potentially positive effects of a monetary union  Rwanda, a small landlocked country, should benefit Major risks  Political will might be lacking in practice  Inadequate implementation and weak central bank  Short-run costs might generate discontent and public protest  Large political changes/upheavals  Cost of loss of exchange rate flexibility? Much work is needed to develop  supranational institutions to enforce decisions  legal framework and an institutional structure specifically for the monetary union  sensible convergence criteria (exchange rates, budget deficits)  fiscal policy rules
  19. 19. Table 1. Indicators of economic structure Kenya Rwanda Tanzania Uganda BurundiGDP per capita (current US$) in 2010 767 548 527 503 189GDP per capita, PPP (current international $) in 2010 1621 1194 1423 1249 399Industry, value added (% of GDP) in 2009 15.3 14.5 24.3 25.8 Manufacturing, value added (% of GDP) in 2009 8.7 6.4 9.5 8.0Agriculture, value added (% of GDP) in 2009 22.6 34.2 28.8 24.7Services, etc., value added (% of GDP) in 2009 62.1 51.3 46.9 49.5Trade (% of GDP) in 2010 63.5 40.9 58.4 58.0 57.7* Note: The source is World Development Indicators. * measured in 2006.
  20. 20. 20 40 60 80 0 100 120 140 160 180 200 1998M1 1998M6 1998M11 1999M4 1999M9 2000M2 2000M7 2000M12 2001M5 2001M10 2002M3 2002M8Note: A decline is depreciation. 2005=100. 2003M1 2003M6 2003M11 Nominal 2004M4 Rwanda (1998:1-2010:12) 2004M9 2005M2 Real 2005M7 2005M12 2006M5 2006M10 2007M3 2007M8 2008M1 2008M6 2008M11 2009M4 Nominal and real effective exchange rates in 2009M9 2010M2 2010M7 2010M12
  21. 21. 100 200 300 400 500 600 700 0 1990M01 1990M07 1991M01 1991M07 1992M01 1992M07 1993M01 1993M07 1994M01 1994M07 1995M01 1995M07 1996M01 1996M07 1997M01 1997M07 1998M01 1998M07 1999M01 tea (US cents per kg) 1999M07COFFEE_ARABIC 2000M01 2000M07 2001M01 2001M07 2002M01 2002M07 2003M01 2003M07TEA_MOMBASA 2004M01 2004M07 2005M01 2005M07 2006M01 2006M07 2007M01 2007M07 2008M01 2008M07 2009M01 World market price of Arabica coffee and 2009M07 2010M01 2010M07

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