IMF sounds alarm over Tanzania economy Wednesday, 04 May 2011 22:58 By Al-amani Mutarubukwa The Citizen Reporter Dar es Salaam. The International Monetary Fund (IMF) is concerned about Tanzanias increasing borrowing for recurrent spending. Presenting a report titled Regional Economic Outlook: Sub-Saharan Africa yesterday in Dar es Salaam, IMF senior resident representative John Wakeman-Linn urged the government to immediately review its fiscal policy to curb high debt levels taking into consideration the fact that food and fuel prices are rising and are likely to harm the economy. For the last five years, Tanzania has increasingly borrowed to finance recurrent expenditure while tax revenues have stagnated, he said. Without a change in the fiscal policy, debt levels will rise rapidly. The government budget for 2010/2011 was Sh11.1 trillion. Of the amount Sh6 trillion was to be raised from domestic revenue and the rest from domestic loans and external grants and credit. However, the IMF noted that it would be judicious for the government to hire more teachers, health care and agricultural workers. Economists and financial gurus are worried that increased government borrowing from commercial banks will have a crowding out effect, meaning a reduction in private consumption or investment that occurs because of a rise in government spending. This is the case because more government borrowing to finance its spending would increase interest rates, leading to a reduction in private investment. I think there is a need for the government to tighten the expenditure discipline, and one way could be to re-introduce cash budgets. Otherwise, the increasing borrowing is really threatening the economy, Infotech chief executive officer Ali Mufuruki told The Citizen. Meanwhile the IMF has lowered Tanzanias economic growth forecast by one per cent this year to six per cent due to rising food and fuel prices and problems of power generation, caused by delayed rains. The IMF forecast growth in 2011 and 2012 to be 7.2 and 7.5 per cent respectively. But Mr Wakeman-Linn said yesterday that the continued power shortage and other global phenomena like high oil and food prices had prompted the fund to revise its economic forecast for Tanzania. We anticipate a fall in activity early this year thus the growth is projected to be six per cent. However, solid growth prospects are projected for the years ahead if the recommended fiscal adjustments are made. He said the government might need to quickly seek immediate solutions to curb the increasing rising food and fuel prices, which are clearly having an impact on poverty, inflation, and would have an impact on GDP. In its latest monetary policy statement, the Bank of Tanzania reported that it would cushion the economy from effects of higher crude oil prices and chronic energy shortages. It targeted the economy to grow at 7.1 per cent this year. The Bank of Tanzania will... take additional measures to curb the effects of the above cost-push factors on domestic prices, and ensure that the growth of monetary aggregates remains within targets for the year ending June 2011, noted the statement. East Africas second biggest economy grew by seven per cent in 2010, due to strong performance in agriculture, construction, manufacturing, transport, communications, fishing and real estate. However, analysts have warned that the economy faces some downside risks driven by the recent rises in global oil prices, high domestic electricity tariffs and power outages. Although the situation has not reached alarming levels, they say urgent measures should be taken to check the situation. Such steps should include reducing oil taxes and coming up with a lasting solution to power problems. The state-run Tanzania Electric Supply Company raised tariffs by 18.5 per cent in January, two months after it introduced power cuts, mainly because drought caused water levels to fall abysmally low at hydropower stations.