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Budget Strategy in a Changing Macroeconomic Environment

Budget Strategy in a Changing Macroeconomic Environment. Presentation to the GBS Annual Review – 2008 Ministry of Finance and Economic Affairs. Outline. The Context – national development goals Macroeconomic framework The Challenges The Macro-fiscal Strategy. The Context. Vision 2025.

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Budget Strategy in a Changing Macroeconomic Environment

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  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. Vision2025 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

  21. Quality and Cost of Labour

  22. 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

  23. Predictability of External Financing

  24. The Macro-fiscal Strategy

  25. 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

  26. 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

  27. 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

  28. Expenditure Efficiency • Improving expenditure planning at central and MDAs’ level • Strengthening oversight for VFM • Strengthening procurement capacity

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