Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-7 127-TA

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

fNTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

OF SDR 93.2 MILLION

OF WHICH SDR 2.8 MILLION HAVE BEEN ALLOCATED

FROM IDA REFLOWS

TO

THE UNITED REPUBLIC OF TANZANIA

FOR A

STRUCTURAL ADJUSTMENT CREDIT PROJECT

May 7, 1997

Country Department for TanzaniaMacroeconomics 2, AFTM2Africa Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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GOVERNMENT FISCAL YEAR

July 1 - June 30 (FY96 or 1995/96 = July 1, 1995 to June 30, 1996)

CURRENCY EQUIVALENTS

Currency Unit = Tanzanian Shilling (T Sh)Interbank Market mid-rate: US$ 1.(00 = T Sh 605 (February 28, 1997)

ABBREVIATIONS AND ACRONYMS

BOT Bank of TanzaniaCAS Country Assistance StrategyDEO District Education OfficerDMO District Medical OfficerESAF Enhanced Structural Adjustment FacilityGDP gross domestic productIMF International Monetarv FundLPG liquified petroleum gasMOU Memorandum of UnderstandingNASACO National Shipping Agencies CorporationNBC National Bank of CommerceO&E Organizational and Efficiency (Review)PER Public Expenditure ReviewPSRC Parastatal Sector Reform CommissionRPFB Rolling Plan and Forvard BudgetSAC Structural Adjustment CreditTCFB Tanzania Central Frcight BureauTHA Tanzania Harbours AuthorityTIPER Tanzanian Italian Petroleum Refinery CompanyTPDC Tanzania Petroleum Development CorporationTRA Tanzania Revenue AuthorityTRC Tanzania Railways CorporationTTCL Tanzania Telecommunications Company Ltd.

Vice President : Callisto MadavoDirector James W. AdamsTechnical Manager : Roger GraweTask Team Leader : Shahid YusufEconomists : Zafar Ahmed, Albert Agbonyitor,

Allister Moon

FOR OFFICIAL USE ONLY

REPORT AND RECOMMENDATION OF THE PRESIDENT OF THEINTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE

DIRECTORS ON A PROPOSED CREDIT OF SDR 93.2 MILLIONOF WHICH SDR 2.8 MILLION HAVE BEEN ALLOCATED FROM IDA

REFLOWS TO THE UNITED REPUBLIC OF TANZANIAFOR A STRUCTURAL ADJUSTMENT CREDIT

CONTENTS

SUMMARY ........................................

I. INTRODUCTION ................................ I11. RECENT ECONoMIC Di EVELOPIENITS .......... 2.. .... ........... ..... .......................... 2

Policy Priorities .............................. 3III. PROPOSED SAC PROGC)RAM ........................... 5

Public Expenditure Management .............................. 6Social Sector Issues .............................. 7Parastatal Sector Reform ....... ..................... . ..... 1. Banking Sector Reforms ....................... .......... 1 3Petroleum Sector Liberalization. ................................... 16

IV. DISBURSEMENT ................................ 16V. COFINANCING. ................................ 17VI. SAC BOARI) AND) TRANCiHF CONDITIONS ................................... 17

Tranche Conditions ................................... 17VI. BENEFITS AN) RISKS ................................ 20VII. RECOMMENDATION ................................ 21

Annex A: Policy MatrixAnnex B: Letter of Development PolicyAnnex C: Tanzania - Social IndicatorsAnnex D: Tanzania at a GlanceAnnex E: Tanzania - Key Economic IndicatorsAnnex F: Tanzania - Key Exposure IndicatorsAnnex G: Tanzania - Balance of PaymentsAnnex H: Tanzania - Status of Bank Group Operations

This operation was prepared by a team led by Shahid Yusuf (Lead Specialist and Task TeanLeader), AFTM2 and including Albert Agbonyitor, Zafar Ahmed, Sandra Hadler, AllisterMoon, Anna Muganda, Kathryn Rivera (AFTM2); Gerard Byam (AFTP 1); Charles Griffin(AFTHI); Minneh Karanja Kane (LEGAF), Paul Vandenheede, Soheyla Mahmoudi(LOAAF); Luke Haggarty (PRDFP); Eric Daffern (IENOG); Andrew Feltenstein(Consultant); Khaled Sherif (EC2CO).

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

UNITED REPUBLIC OF TANZANIA

STRUCTURAL ADJUSTMENT CREDIT

Credit Summary

Beneficiary: United Republic of Tanzania

Project Task ID: TZ-PE-2821

Implementing Agency: Ministry of Finance

IDA Amount: SDR 93.2 million (US$128.9 million equivalent) of which SDR2.8 million have been allocated from IDA reflows.

Terms: Standard IDA terms: 40 years maturity with a 10-year graceperiod.

Co-financing: Kingdom of Norway (NOK 25 million).

Disbursement: The proposed Credit will be disbursed through the Bank ofTanzania. The initial tranche of SDR 38.95 million including theallocation from IDA reflows will be available upon Crediteffectiveness once specified actions have been taken.

Background: The Structural Adjustment Credit is based upon theGovernment's Policy Framework Paper, distributed to the Boardin November 1996, and the related Letter of Development Policywhich set out the Government's medium term strategy. Thisstrategy seeks to reduce poverty through macroeconomicstabilization and the acceleration of economic growth. Theprincipal objectives of the SAC are to induce greater efficiency inthe use of fiscal resources, focus the activities of the state whileenlarging the role of the private sector, and continue the processof price and market liberalization. The medium term benefits ofsuch measures would be higher growth and a resumption of thetrend reduction in poverty. This strategy is in line with IDA'sCountry Assistance Strategy Update presented to the Board onMay 16, 1996 and also with the FY97 CAS submitted to theBoard with this operation.

Description: The SAC will support the efforts of the government elected inNovember 1995 to achieve macrostability, growth and povertyreduction through a reform of public expenditure policies,efficient provision of social services, accelerated privatization ofparastatals, a resolution of the problems facing the National Bankof Commerce (NBC), and measures to remove distortions in the

ii

pricing and marketing of petroleum. These actions, once fullyimplemented, should result in budgetary savings, and contributeto a sharp reduction in inflation, an acceleration in the growth tomore than 6 percent per annum over a four-year period, andreflecting improved delivery of social services, a substantialdecline in poverty.

Rationale for IDAInvolvement: The SAC addresses policy areas that build on intensive work done

in the context of several recent operations such as the FinancialInstitutions Development Project and the Parastatal and PublicSector Reform Project. The SAC will capitalize upon and extendthe agreements reached through the PFP/ESAF negotiations. TheSAC emphasizes policies, whereas capacity building and detailedinstitutional engineering is being done as a part of several otherongoing operations.

GovernmentCommitment: Over the past year significant progress has been made with the

new government showing a readiness to intensify policy measuresand to engage with the Bank on a serious dialogue regardingfuture measures. The Government's resolve has beenunderscored by the successful completion of an IMF staff-monitored Program in June 1996 and an agreement with the Fundon an ESAF program, which was approved by the Fund's Boardon November 8, 1996.

Benefits: Implementation of the reform program will permit an increase inreal growth to 5-6 percent a year, by improving macrostability,resource mobilization and allocative efficiency. These will help toreduce poverty further.

Risks: The chief risks faced by the program are a weakening of theGovernment's commitment and its inability to mobilize the neededimplementation capacitv.

REPORT AND RECOMMENDATION OF THE PRESIDENT OF THEINTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE EXECUTIVE DIRECTORSON A PROPOSED CREDIT OF SDR 93.2 MILLION

OF WHICH SDR 2.8 MILLION HAVE BEEN ALLOCATEDFROM IDA REFLOWS

TO THE UNITED REPUBLIC OF TANZANIAFOR A STRUCTURAL ADJUSTMENT CREDIT

I. INTRODUCTION

1. This memorandum seeks approval to extend a SDR 93.2 million Structural AdjustmentCredit (SAC) to Tanzania. The SAC would support the efforts of the Government elected inNovember 1995 to achieve macrostability, growth and poverty reduction through a reform ofpublic expenditure policies, the efficient provision of social services, accelerated privatization ofparastatals, a resolution of the problems facing the National Bank of Commerce (NBC), whichdominates the banking sector, and measures to remove distortions in the pricing and marketing ofpetroleum. These actions, when fully implemented, could result in improved allocative efficiencythat could raise growth to more than 6 percent per annum over a four-year period, and as a resultof faster growth and improved delivery of social services, bring about a substantial decline inpoverty. They will also relieve budgetary pressures and further dampen inflation. Proceeds fromthe Credit would go towards filling external financing gaps, wvhich will remain even after the recentParis Club debt rescheduling, and expected disbursements from existing and new pledges of aidfrom donors.

2. The preparation of this project commenced in 1994 with an identification of the keycomponents. However, in early 1995 it was decided to defer further preparatory work until theGovernment was able to delineate fully its reform proposals and confirm its commitment to theirimplementation. During the past 16 months significant progress has been made, with the newgovernment beginning to implement a well formulated program that should enable the country topursue vigorously its economic and social goals. The measures taken thus far include:restructuring of the NBC, including reduction of staff and branch closures, together with publicconfirmation of the Government's intent to divide the bank into three entities and aggressivelypursue options for divestiture; divestiture of about 150 parastatals, retrenchment of 60,000 civilservants; initial steps to decentralize the provision of social services, improvement in revenue effortfollowing the creation of the Tanzania Revenue Authority (TRA); and progress towardsharmonizing the tariff regime between Mainland Tanzania and Zanzibar.

3. The Government's resolve to pursue reforms with determination was underscored by thesuccessful completion of an International Monetary Fund (IMF) staff-monitored program coveringJanuary to June 1996, that reversed the deterioration in key macroeconomic indicators. Thisserved as the background for the agreement with the Fund on an Enhanced Structural AdjustmentFacility (ESAF) program through FY99, approved on November 8, 1996. The IMF's midtermreview of the first annual arrangement of the ESAF program in March/April 1997 confirms thatperformance remains on track. In several respects, the Government has met the targets withcomfortable margins. Real GDP growth has risen to almost 5 percent, inflation has declined to 14percent as against 23 percent in June 1996, gross official reserves had risen to 16 weeks of importsby end-December 1996, and there was a stronger than programmed tightening of the fiscal stance.

2 Tanzania SAC

The successful outcome of the Paris Club debt rescheduling in January 1997, corroboratesinternational endorsement of the program.

II. RECENT ECONOMIC DEVELOPMENTS

4. In early 1986, the Government of Tanzania embarked on an adjustment program todismantle the system of pervasive economic controls and encourage more active participation of theprivate sector in the economy. The program included a comprehensive package of policies, whichreduced the budget deficit and improved monetary control, substantially depreciated the overvaluedexchange rate, liberalized the trade regime, removed most price controls, eased restrictions on themarketing of agricultural products, and liberalized interest rates. The Government also launchedprograms to rehabilitate transport infrastructure (roads, railways and ports) and to strengthenagricultural research and extension services. The economy responded positively during the secondhalf of the 1980s to the reform program and the accompanying increased availability of externalresources, with an acceleration of GDP growth, higher production of food, some increase in theexports of traditional crops and a surge in nontraditional exports. However, the evidenceaccumulating in the first half of the 1 990s, pointed to a flagging of the earlier momentum and theneed to broaden and deepen reforms efforts.

5. In the first half of the 1990s, Tanzania recorded an average GDP growth rate of about 4percent, largely on account of continuing recovery in agricultural production that started in themid-I 980s. However, the gains in poverty reduction that were achieved in the late 1980s have notbeen sustained and, in fact, there are signs of slippage. The latest surveys indicate that 51 percentof the rural population lives below the poverty line. This is largely because population increasehas remained high at close to 3 percent, agricultural investment is low and the supply ofproductivity promoting social services has stagnated.

6. Between FY92 and FY95, Tanzania faced serious fiscal problems arising from the gapbetween stagnant revenues and public expenditures swollen by large outlays on administration.The quasi-fiscal deficit generated by problems and inefficiencies affecting the parastatal sector andweaknesses in the banking system aggravated the situation. The fiscal deficit, after grants, rose to5.8 percent of GDP in FY95. However, by FY96 it had fallen to 3.3 percent of GDP. The tighterfiscal stance and a slower growth of the money supplv have significantly reduced inflationarypressures.

7. These are encouraging developments. Nevertheless, Tanzania's overall growth rate doesnot adequately mirror the level of aggregate investment, at about 30 percent of GDP, this is highcompared to other low and middle-income countries. This investment reflects the large volume offoreign capital Tanzania receives from the donor community through and outside the budget thatfinances public investment. When juxtaposed with Tanzania's growth performance, it highlightsthe following areas of concern. First, the paucity of public investment in infrastructure hasdepressed the productivity of private and donor financed investment. Second, counterpart fundsare being spread over too many projects, slowing implementation across the board. Third, returnson investment have been reduced even further by high real interest rates and resource misallocationarising from the problems afflicting the banking sector and the chronic inefficiency of the publicutilities and remaining parastatal enterprises. Fourth, persistent inflation and some lingering pricedistortions have compounded the problems of resource misallocation and discouraged thedevelopment of the private sector. Finally, the economy has registered no significant gains inproductivity. Hence, the growth and poverty-reducing opportunities inherent in the convergence of

Tanzania SAC 3

Tanzania's sectoral productivity levels closer to those of more developed countries, remain to berealized.

Policy Priorities

8. This brief assessment of Tanzania's economic performance underscores five priorities,which must define policy actions during 1996-98. These are:

(i) achieving fiscal balance, improving the management of budgetary expenditures,and taking steps to change the mix of these expenditures so as to favor priorityprojects, particularly those in the social sectors and infrastructure;

(ii) increasing the involvement of local stakeholders and the private sector in theprovision of social services;

(iii) divesting parastatal enterprises at an accelerated pace and preparing the publicutilities for pivatization or other contractual arrangements involving the privatesector in order to increase efficiency and service delivery levels;

(iv) strengthening the banking sector;

(v) completing the process of market liberalization that commenced a decade ago.

9. Fiscal balance. Steps to regain fiscal balance are essential for macroeconomic stability.This calls for a two-pronged effort to augment revenues and trim administrative expenses.Tanzania is strengthening tax administration with funding and technical assistance from the Bank,the Fund and various donors. It has established the TRA and given it full support: since it wasestablished in July 1996, TRA has consistently met the monthly revenue targets set for it. It is alsoeliminating a number of tax loopholes. If successful, this should push the revenue/GDP ratio fromthe 15 percent in FY96 to 16.9 percent in FY99. An effort to contain current expenditures hasbeen underway for almost two years. The Civil Service has already effected a substantialreduction in numbers. A second round of downsizing for FY97 is ongoing and an extensive O&Ereview of the central ministries will be completed by October 1997. Although the immediatebudgetary gains are modest, the O&E study will guide the rationalization of the ministerialstructures and salaries so as to achieve greater control over administrative costs. Strengtheningbudgetary management and information systems will also contribute to the efficiency with whichfiscal resources are utilized. In addition, a reduction in the public sector borrowing requirementtogether with lower interest rates will reduce domestic debt servicing obligations that currentlyabsorb a sizable proportion of revenues.

10. Social services and private sector investment. An acceleration of the growth rate, whichwill require significant gains in factor productivity, calls for increased involvement of the privatesector. To induce this, the Government must intensify measures initiated in the latter half of the1 980s to provide an environment more conducive to private investment. For instance, the increasein agricultural yields and off-farm activities is a function of investment in education, rural roads,power, agricultural research and extension services. Without advances in agricultural technology,returns to education are likely to be low. Likewise, the commercialization of farming, planting ofcash crops, the spread of export-oriented horticulture, and greater use of modem inputs is linked tothe development of a good marketing and communications infrastructure.

4 Tanzania SAC

11. Substantial resources will be required to attain these goals and part of these must comefrom the public sector. Greater private sector participation is crucial in view of the fiscalconstraints facing Government and the proposed reduction in the size of government and scope ofpublic sector activities. Employment by the private sector will become far more important, whichmakes it essential to ensure that the provision of education is geared to demand, and at the sametime the goals of poverty alleviation are given due priority. This entails a bigger role for theprivate sector in the area of secondary and tertiary schooling, with the Government putting moreeffort into improving the quality of primary education through decentralization and greater localinvolvement in financing as well as in monitoring.

12. Parastatal divestiture. The potential fiscal benefits to be derived from the continueddivestiture of public enterprises and the creation of a competitive environment will be of equalimportance. The gains can take four forms: there are the upfront receipts from the sale of assets;where the enterprises liquidated or privatized are incurring losses, there are benefits from thedecline in claims on the budget and calls on the banking sector-or other public bodies-thattranslate into quasi-fiscal deficits; divestiture can also improve economic efficiency by freeing upidle or underutilized assets and directing them to more productive parts of the economy; andincreasing competition in areas such as telecommunications, can improve the quality of services,reduce costs and stimulate the efficiency of publicly owned entities. Where outright sale isinfeasible and the liquidation of a loss-making enterprise is the only option, this must be pursuedjust as vigorously.

13. The above measures will have the additional advantage of helping Tanzania to generatepublic savings. Comparative experience suggests that the public sector can play a significant rolein mobilizing resources during the early stages of development. It is apparent from Tanzania'srecent performance that the limited supply of development finance from the central government hasbeen one of the major reasons for the modest pace of growvth

14. Banking reform. Both savings mobilization as well as the efficient allocation of capital,will be helped by a continued restructuring and deepening of the banking system. Arriving at aneffective solution to NBC's long-standing problems has the highest priority. This publicly ownedbank accounts for 63 percent of deposits and 60 percent of total bank lending. It is the basis ofTanzania's nationwide settlement system and is the main source of commercial banking services inthe rural areas. Until recently, two-thirds of NBC's portfolio was non-performing, mainly becauseof past lending to parastatals and cooperatives. The bank was also incurring operating losses inspite of substantial reductions in staff, closing of several branches, and large spreads between rateson loans and deposits. While losses have been stemmed as a result of drastic measures taken overthe past year, the bank's condition remains unsustainable.

15. NBC's problems have placed additional burdens on the economy. First, the lossesincurred by the bank and the cost of restructuring have direct and quasi-budgetary implications.Second, the interest rate spreads that serve to bolster NBC's current finances-and widen themargins of other banks-greatly increase the costs of banking services, apart from depressingprivate investment. Third, NBC's plight has deleterious consequences for the growth of financialsavings and their efficient allocation even allowing for some recent financial broadening.Weaknesses in the financial sector, coupled with the inadequacy of skills, have contributed to theslow growth of the productive sectors of the economy, especially manufacturing, during the firsthalf of the nineties. It has also limited access to credit in the farming sector, which reduces theprobability that agriculture can maintain recent growth rates of 5 percent or more.

Tanzania SAC 5

16. Market liberalization. Although substantial progress has been made in liberalizing pricesand markets, there is still room for additional gains, particularly in the petroleum sector. Statecontrol over prices and imports of petroleum products, together with the maintenance of a small-sized refinery (50 percent owned by the Government and 50 percent by AGIP (Rome), which alsomanages the operation), have been the source of sizable distortions, the removal of which willeliminate subsidies to the refinery and the costs imposed by the existing arrangement on allconsumers.

III. PROPOSED SAC PROGRAM

17. Objectives and link with the FY97 Country Assistance Strategy (CAS). The SAC willbe building on a second round of reforms that commenced in the early 1990s but have yet to befully implemented. The Government did begin strengthening the banking infrastructure needed forrapid development with the support from an IDA credit but has not succeeded in creating a viableNBC. Recognizing the problems and inefficiency of the parastatal sector and the concomitantbudgetary drain, it began to restructure and privatize state-owned enterprises in 1993 withencouraging results. More recently, President Mkapa's Government has broadened and intensifiedthe scope of reforms focusing increasingly on the large public utilities. In addition, theGovemnment has demonstrated a strong commitment to progressively improve the delivery of socialservices to augment the supply of human capital and reduce the level of poverty. The principalobjectives of the SAC are to support greater efficiency in the use of fiscal resources, to morenarrowly focus the activities of the state, while enlarging the role of the private sector, and tocontinue the process of price and market liberalization. These goals are also central to the CAS forTanzania over the medium term. The full and effective implementation of the SAC conditions arenecessary for the countrv to accelerate growth, reduce the incidence of poverty and move to ahigher growth scenario.

18. Scope and design of the SAC. The proposed SAC will concentrate on five areas whichconform to the priorities outlined in the CAS update presented to the Board in April 1996 andelaborated in the FY97 CAS that is being submitted concurrently with this operation. These are:

(a) public expenditure management(b) social sector rationalization(c) divestiture of parastatals(d) banking reforms(e) petroleum sector issues.

19. The SAC will comprise five tranches. The first tranche of SDR 36.15 million togetherwith Tanzania's FY97 IDA reflow allocation of SDR 2.8 million will be released when the cross-sectoral conditions of effectiveness are met. The remaining four will be floating tranches to bereleased when specified sectoral conditions are met for: (i) development expenditures and thesocial sector program (SDR 18.1 million); (ii) divestiture of NBC (SDR 18.1 million); (iii)parastatal reform (SDR 10.85 million), and (iv) petroleum sector liberalization (SDR 7.2 million).

20. Macroeconomic framework. The actions proposed under the SAC, if implemented,would change the overall budget balance after grants from a deficit of 3.3 percent of GDP in FY96to a surplus of 1.6 percent of GDP in FY99 and substantially improve allocative efficiencythroughout the economy. The analytical work done in connection with the SAC indicates, that eachof the measures proposed will increase medium term growth by one half to one percent.

6 Tanzania SAC

Cumulatively, the effects of greater development spending, banking reform and increased allocativeefficiency should gradually raise GDP growth rates to 6 percent or more by the year 2000.

Public Expenditure Management

21. The Government's fiscal position strengthened during the second half of FY96 as a resultof improved revenue collection and enhanced expenditure control. The trend has continued duringthe first half of FY97 under the ESAF program. The recurrent expenditures/GDP ratio declined by2 percent to nearly 16 percent in FY96 and is projected at 14.6 percent in FY97. Retrenchment of4,000 civil servants, in addition to the 60,000 already removed from the payroll, was completed byend April 1997. As a condition of Board, the Government will maintain its fiscal stance asreflected in an overall fiscal balance of 0.9 percent of GDP (after grants) for FY97 on anannualized basis as derived from Treasury Flash Reports (para. 71a).

22. The areas where future action is needed to enhance the efficiency of fiscal management canbe broadly classified under three headings. First, there are issues relating to the level of aggregateexpenditure. Second, there is the composition of expenditure. Third, in order to sustainimprovements in both of these areas, there is need for improvements in the budget process and inbudgetary management.

23. Aggregate budget management. The overall deficit before grants amounted to 4.9percent of GDP in FY96 and is projected at 2.3 percent in FY97. Further cuts in the level of thedeficit are necessary for three reasons: (i) to sustain the decline in inflation, which had fallen to 14percent in the third quarter of FY97; (ii) to reduce interest rates that will have growth stimulatingeffects; (iii) to lessen dependence on external financing of the Government expenditure that isevidently not sustainable in the longer term. Therefore, the Government intends to trim the overallbudget deficit before grants to 1. I percent in FY99 in line with the ESAF program.

24. Part of the reduction in the overall deficit will be achieved through growth in domesticrevenue. Implementation of plans to further strengthen tax administration and introduce the VAT(Value Added Tax) in 1998 should make it possible to achieve a revenue/GDP ratio of 17 percentby FY99.

25. In order to achieve its budgetary targets, several expenditure rationalization measures havebeen identified in the Public Expenditure Review (PER) completed in FY97 and these will beimplemented during the course of the next two years, reinforcing actions taken as part of the SAC.They include: (i) consolidation of the recurrent and the development budgets; and (ii) measures tocontain the growth of the wage bill by phasing in a system for auditing the payroll. The SAC, intum, will focus on the budget process and trimming the development portfolio.

26. Misallocation at the sectoral level has arisen partly in budget preparation, but also inbudget implementation, as excessive spending has been permitted on some budgetary items, oftenfurther skewing the distribution of resources away from a pattern consistent with overallobjectives. To correct the mix of expenditures, the Government will include provisions forprotecting priority expenditures.

27. Budget process. Recent steps to improve budget management at the aggregate level haveincluded the introduction of a cashflow management regime, whereby monthly expenditure islimited with reference to the previous month's revenue receipts. To be sustainable and consistent

Tanzania SAC 7

with development of medium term budgetary planning, the present cashflow management systemwill evolve further, with improvements in cashflow forecasting, better coordination between fiscaland monetary authorities, and identification of appropriate guidelines for short term expenditureadjustment.

28. The Government has also taken several initiatives in the area of budget management. TheRolling Plan and Forward Budget (RPFB) initiated in 1993 is an ambitious exercise in mediumterm budgetary planning, aiming to develop three-year expenditure projections based on a mediumterm macroeconomic framework disaggregated by sector, with some linkage to sector policies andobjectives. Such exercises can be valuable in securing commitment to sector expenditure plansconsistent with realistic aggregate expenditure ceilings and providing a reliable basis for moredetailed planning of public expenditure at the sector level.

29. Development portfolio. Some reduction in the number of development projects wasachieved in the Rolling Plan and Forward Budget of FY96. However, this trend has not beencontinued in the current budget, although it is clear that the development program is seriouslyoverextended and development spending in FY97 is falling short of targeted levels. During FY98,the Government will cut the number of donor-funded as well as other projects in the developmentbudget using criteria specified in the Budget Guidelines for FY98. It will also fully satisfy thebudgetary needs of priority projects.

30. SAC measures. The SAC will support two measures in order to address the concernsdescribed above.

(a) First, the Government will work with donors to screen the project portfolio andreduce the number of projects from 1,400 down to 800 or less, and within thisidentify those projects that will be funded fully during FY98. This will be acondition for the release of the tranche associated with social sector reform(para 74a).

(b) Second, the Government will include a development spending target from domesticsources of T Sh 20 billion (excluding the Road Fund) for priority sectors, i.e.,health, education, water, power and transport, as a part of the framework for theFY98 budget. This is consistent with the ESAF guidelines. Adequate provisionin the Cabinet-approved proposals for development spending will be aneffectiveness condition (para. 73a).

Social Sector Issues

31. Social sector expenditures. The social sectors account for a large share of allgovernment activities and employment but have produced disappointing results since the early1980s. Recurrent expenditures for education and health have averaged 27 percent of total publicrecurrent spending from FY90 through FY95 (or 36 percent, net of debt repayments), which isequivalent to about 4.3 percent of GDP. If private spending is included, the share of GDPabsorbed by the social sectors doubles to about 8 percent. Teaching and health staff numbered112,488 and 42,769, respectively in FY95 (a 16 percent increase since 1988, when staff levelswere 101,042 and 32,650). Social sector workers (especially teachers) comprise the vast majorityof local government employees and account for over half of the total civil service. Although civilservice salaries are considered to fall below a "living wage", they absorb 92 percent of central

8 Tanzania SAC

government spending on primary education and 60 percent of spending on health centers anddispensaries.

32. Social sector outcomes and indicators. In spite of outlays on social services that are ahigh share of spending relative to Tanzania's neighbors, and with spending allocations that tend tofavor basic services, education and health outcome indicators have been, at best, stagnant for thepast 15 years. After many years of decline, the gross primary enrollment ratio stood at 77.6percent in 1995 (corresponding to a net enrollment rate-the share of children in ages seven to 13in primary school-of only 55.4 percent). While secondary school enrollment rates have increasedslowly over the past decade, the gross enrollment rate in 1995 was about 7 percent, one of thelowest in the world. Infant, child and maternal mortality, life expectancy, and control of the majorcommunicable diseases have shown little or no improvement over the past decade. Unlessreversed, these trends will jeopardize Tanzania's grovuth prospects and impede gains in welfare.

33. Strategy for change. Budgetarv stringency in the short and medium term will not permita large increase in central government spending on social services, and the real possibility existsthat central spending on social services will not even keep up with population growth.Consequently, the Government faces severe problems in the social sectors that will have to besolved through intrasectoral shifts in spending, a scaling down of the administrative infrastructure(particularly at the regional level), and decentralization of responsibilities that transfers some of themonitoring, fiscal, and managerial functions to the local level and helps promote the efficientutilization of available resources. Thus, the government's strategy in the social sectors must havetwo objectives: to increase the allocative efficiencv of government funding in the social sectors;and to improve the operating efficiency of government-owned and operated schools, clinics, andhospitals. At all levels, because of budgetary constraints, the contributions of users will have torise, which will require that the Government: (a) give facility level managers the freedom tomanage resources to better serve users; (b) create mechanisms which give users a greater voice inthe provision of local services and their quality; and (c) target available funds to better protect thepoor and vulnerable. Taken together, not only will these changes improve outcomes and equity inthe social sectors, but they are also consistent with Government policy as enunciated in the sectorspecific documents it has produced over the past few years, and with its broader Social SectorStrategy.

34. Many of these proposals are being piloted in Government schemes under variousprograms. With support from the Netherlands and Denmark, the Government has begun to test thedevelopment of district-based education plans and their implementation. With support from IDA,the Government has developed a pilot program for school-based management by providing amatching grant to primary schools to implement their school plans, above and beyond regularrecurrent allocations to the schools. This program is active in 135 schools and is slated to expandto at least 350 schools by 1999. At the secondary level, the Ministry has designed and has begunto implement a scholarship program to assist girls from poor families to attend lower secondaryschool. The girls are chosen at the village level, which has created greater awareness aboutopportunities for secondary schooling and the importance of educating girls. About 690 girls arenow supported under the program. This will rise to about 2,500 girls by 1999. Apart from theeffort to develop a village-based scholarship program for girls, this pilot is also giving thegovernment experience in monetizing and targeting its support to secondary education. In addition,the National Education Trust Fund has been functioning for the past five years with Norwegianfunding. It provides a source of grant funds to assist non-government secondary schools to expand

Tanzania SAC 9

or rehabilitate their physical facilities. The Government expects to enlarge this program over thenext few years to increase capacity in lower secondary education.

35. Private sector role. Private sector providers of social services can offer more cost-efficient service of higher quality, closely tuned to the market. Since the liberalization of serviceprovision by private secondary schools (access to public secondary schools was historicallyrationed), the supply response has been impressive, helping to raise by several percentage pointsTanzania's extremely low secondary school enrollment rate. Private schools currently account formore than half of all secondary students (public school places have also expanded). Furthermore,recent pilot projects initiated by the Government, which provide public resources more directly tothe users of social services rather than through the provision of facilities, are showing encouragingresults.

36. Links to poverty reduction. Reducing poverty calls for better and efficient socialservices to the poor, who are predominantly in the rural areas. The evidence indicates that the poorare characterized by having lower educational attainment, particularly secondary education, andthat education, specially for girls, has important externalities by increasing the impact of othersocial sector interventions, such as family planning and nutrition programs. Furthermore, thestrategy to increase overall GDP growth depends on increasing productivity in farm and off-farmactivities, which are affected by the quality and quantity of human capital.

37. Primary education. For years, there has been a broad consensus in Tanzania that thesystem of primary education suffers from inadequate and poorly maintained infrastructure, fails tocapitalize on the potential of parents and teachers to reinvigorate the system, and limitsopportunities for students to advance beyond the primary level. The Government has completedthe Basic Education Framework and is in the process of finalizing the Basic Education MasterPlan, which comprehensively address problems in primary education. Based on a review ofsectoral analysis prepared over the past few years, the Government, assisted by donors, willimplement these policy changes. The changes are expected to create a more innovative,decentralized, efficient primary school system that broadens opportunities for young Tanzanians.

(a) Allocative efficiency, equity, and government allocations. Within the context ofconstant overall per capita education expenditures, the Government will implementthe Five-Year Budget Plan in the Basic Education Master Plan to reallocatecentral government funding so that primary schools gradually increase their shareof recurrent funding from the total education budget. This was approximately 50percent during FY90-FY95 and 60.4 percent in FY96. As a first step towardsthis goal, the allocation will be increased to 64 percent in the FY98 budgetframework. This will be a condition for effectiveness (para. 73b).

(b) Deployment of teachers and improving the quality of instruction. TheGovernment will undertake a study, which will include a concrete, timeboundaction plan for implementation, addressing the recruitment, training, deployment,redeployment, upgrading, and incentives for teachers. The plan will includedetails of programs for mapping out the distribution of various grades of teachers(shifting resources and teachers from districts, where enrollments are high, todeficit districts), future teacher requirements by regions and districts, and it willdraw up budgets for the remuneration of teachers. This will be a condition forthe social sector tranche release (para. 74b (i).

10 Tanzania SAC

(c) Improving the efficacy of the primary school system. The proposed change inexpenditure patterns by the central government to favor primary education willonly have limited impact because of the meager resource base from which thereallocation will take place, the huge and growing stock of children waiting to goto school, and the damage done by years of underinvestment at the local level tomaintain and expand infrastructure, furniture, books, and equipment. Reversingthe decline in the sector will, therefore, also depend on whether parents can raisetheir contributions to their local schools. For substantial improvements at thelocal level to take place, the Government must quickly begin the much-delayedprocess of implementing stated government policies to decentralize primaryeducation and empower teachers and parents to turn the system around. TheGovermment will complete the process of shifting responsibility for themanagement of primary schools to the district authorities during the FY98 budgetyear. Prior to tranche release, the District Education Officer (DEO), subject toapproval by the ministry responsible for education, and teachers, will be recruitedand employed by the District Council in at least 20 pilot districts; and CentralGovernment subsidies for education will be converted from line items to blockgrants for salaries and all other expenses, in the selected districts based on aformula agreed upon between the Government and IDA. Also, prior to trancherelease, the Government will prepare a time-bound program to decentralize andtransfer the management of primary schools to legally constituted schoolcommittees. Specific areas to be addressed by such a plan will include: (i)ownership of primary schools will be shifted to the local authority; (ii) revisedguidelines will be issued for democratically constituted school committees; and(iii) approval of school plans and/or a school charter will be sought from parents.These will be conditions for social sector tranche release (paras. 74b (ii) and(iii).

38. Tertiary and higher education. Tertiary education (including technical and highereducation) consumes a large share of the education budget with disappointing outcomes in terms ofthe number of graduates, the quality of training, and poor efficiency as reflected in teacher-studentratios, poor capacity utilization, large commitments to student boarding and welfare and largewage bills (despite low salaries) due to overstaffing. In particular, the subsector is saddled withnumerous training institutions attached to various government ministries and agencies, includingthe parastatal organizations. The Government has recently completed a review of technical andhigher education and training, which is expected to lead to actions to rationalize the sector andimprove its financing, and to release additional resources for basic education. Prior to the releaseof the social sector tranche, the Government will complete an action plan for the reform andrationalization of higher education and technical training (para. 74b (iv).

39. Primary and preventive health services. In the health sector, as in education, there isscope for improving the health of the whole population through measures that raise allocativeefficiency. The Ministry of Health has developed a reform strategy that addresses issues infinancing, liberalization of the sector, decentralization, and reallocation of budgets toward publicand preventive health services. The Government will also undertake the following actions toincrease cost recovery and local participation in the provision of health services:

(a) At district level hospitals and above, a program will be implemented tofinance the full cost of pharmaceuticals delivered to hospitals, prior to the

Tanzania SAC 11

social sector tranche release (para. 74c (i). This will be done by setting up ahospital-based revolving fund that is based on a combination of cost sharing andcentral government and donor subsidies, with patients covering at least 50 percentof the cost. This will complement the Government's plan to extend user fees forcurative services at dispensaries and health centers.

(b) The Government will shift responsibility for the management of district levelservices to the district authorities prior to the social sector tranche release(para. 74c (ii). The District Medical Officer (DMO), with the approval of theMinistry of Health, and the district level health staff, will be recruited andemployed by the District Council in at least 20 districts. The budget for healthcenters and dispensaries will be transferred as block grants to the DistrictCouncils.

(c) The Government will prepare an Action Plan, prior to the social sectortranche release, to reduce the life years lost to malaria (para. 74c (iii).

Parastatal Sector Reform

40. Privatization. The Government has had notable success in the privatization of publicenterprises. To date, it has divested approximately 150 enterprises and by the end of 1997 shouldhave privatized an additional 25 firms. Thus far, divestiture of seven large parastatal enterpriseshas been inhibited in some instances for want of a policy decision on enterprise debt. This iscurrently being resolved. The enterprises in question are:

Mbeya CementSugar Development CorporationSouthern Paper Mills (SPM)Morogoro PolyesterNational Milling Corporation (NMC) - all mills to be soldTanzania Tea Authority (TTA) - all commercial activities to be soldTanzania Sisal Authority (TSA) - all commercial activities to be sold

41. The Government is committed to resolving the debt issue and divesting its holdings inthese large public enterprises as a condition of the parastatal tranche release (para. 75a).Divestiture will involve going beyond Memorandum of Understanding (MOU) to a point of sale.

42. In addition, the Government will press ahead with its plans to divest the remaining smallerparastatals. Again, the emphasis will be on full divestiture rather than the use of managementcontracts or leases.

43. Public utilities. Over the 1996-98 period, the Government intends to implement majorrestructuring programs for each of the major utilities. The objective is to stimulate efficiency ofthe public enterprise sector by increased private sector involvement and requiring parastatals tooperate on the same terms as private sector enterprises. These programs are tailored to the specificsituations of each of the enterprises and include such actions as the divestiture of functions andincreased contracting out of activities to the private sector. In addition, the Government willrequire parastatals to remain current on their existing obligations and to repay any outstandingarrears owed to the Government or other public enterprises over the next three years.

12 Tanzania SAC

44. Tanzania Telecommunications Company Ltd. (TTCL). TTCL is presently the onlyprovider of basic telephone services in Tanzania. In spite of its monopoly position, TTCL'sfinances are weak and it has been unable to make the investments necessary to improve the qualityand range of services delivered. This calls for an increase both in TTCL's efficiency and the levelof competition in telecommunication services. IDA has been working with the Government on asector program to liberalize the telecommunications sector as well as to raise the accountability ofTTCL's management, restructure the enterprise so as to promote efficiency, and open the companyto new shareholders. The Government has made some progress in this regard by entering into ajoint venture arrangement for cellular services, and allowing other competitors in this area. It hasalso permitted private provision of Internet services and data transmission.

45. The Government initially moved cautiously on the issue of divestiture, while it reviewedprivatization experience and strengthened the regulatory regime for telecommunications. However,it has now announced its decision to privatize TTCL and planning for the transaction is nowunderway. Prior to effectiveness, the Government will prepare a comprehensive competitionpolicy for the telecommunications sector (para. 73c). Furthermore, prior to the parastataltranche release the Government will: (a) complete any consultations necessary to privatize,including those with Japanese and Swedish donor agencies that have provided assistance tothe telecommunications sector; (b) select key advisors to carry out the divestiture operation;and (c) prepare and distribute the Information Memorandum and offer for sale and call for afirst round of bids (para. 75b).

46. Tanzania Harbours Authority (THA). THA is responsible for operating the port of Dares Salaam, which handles the bulk of Tanzania's trade as well as the trade of several landlockedcountries. Historically the efficiency of the port has been quite low, but over the past five years,the performance of the port has improved considerably, particularly with regard to containerizedtraffic, although bottlenecks in freight handling continued to hamper port operations. TheGovernment intends to commercialize TEIA and contract out services as much as possible, therebyattracting private capital and management expertise to increase port competitiveness and level ofservices. THA has recently finalized a commercialization study and the Government has agreed tothe "Landlord" port concept, which basically means commercialization or concessioning for allbusiness activities. The THA has emphasized the need to proceed with privatization in stages toallow for the upgrading of the various business units in preparation for sale in order to maximizerevenues from private leasing and operation of the facilities. Given the current high performanceof the container terminal, the TIA has decided to begin with this, seeking operators who will investprivate capital in the development of the terminal. Under the terms of the SAC, the Governmentwill: (a) prior to effectiveness, enter into a contract with consultants to prepare detailedproposals on the different concession arrangements, including their duration (para 73d); and(b) prior to tranche release, award concession for the container terminal (para. 75c).

47. National Shipping Agencies Company Ltd. (NASACO). NASACO, which was createdin early 1973, effectively holds the monopoly on shipping agent services to all ships calling atTanzanian ports. NASACO's monopoly position has led to poor service, high prices, unwarranteddiversification and financial mismanagement. For these reasons, the shipping lines have found itnecessary to employ their own staff (within the NASACO organization and at additional cost to thelines) to look after their interests in order to achieve acceptable levels of operational efficiency.Under the terms of the SAC, the Government will, prior to the parastatal tranche release,revoke the current monopoly and entry licensing restrictions for shipping agency services andallow these services to be open to international competition (para. 75d).

Tanzania SAC 13

48. Tanzania Central Freight Bureau (TCFB). TCFB was established and came into fulloperation in 1983. The Bureau allocates cargo on any ocean going vessel in respect to goodsshipped from or to any port in Tanzania and regulates the activities of freight forwarders. TCFB'smonopoly has led to complaints from the entire sea trade market, including the shippers and theshipping lines, that see the TCFB as an unnecessary burden and a high cost bureaucracy ratherthan an organization facilitating free trade and transport. In addition, the fee charged (between2.5-5 percent of freight plus US$10-15 for each bill of lading) is essentially an export tax, whichreduces the incentive to export. The behavior and monopoly position of TCFB is at odds with thespirit of liberalization that has taken root in Tanzania over the last few years. Prior to trancherelease, the Government will amend the relevant Acts so that neither TCFB nor any otheragency has the exclusive authority to negotiate freight rates or allocate cargo across shippinglines (para. 75e).

49. Tanzania Railways Corporation (TRC). TRC has been undergoing restructuring andcommercialization since 1989, but its financial condition remains precarious because of the mix ofservices it provides and the structure of operations. Prior to Board, the Government will sign aperformance contract with TRC which will include compensation to TRC for unprofitablebranch lines, passenger services and the marine services and an explicit agreement to allowTRC to close any or all other such unprofitable services (para. 71b). Furthermore, prior totranche release, TRC will also complete a divestiture plan for its loss-making Marine ServicesDivision (including all maintenance and repair shops), which is a separate autonomous entitywith its own financial statement, reach an agreement with the Parastatal Sector ReformCommission (PRSC) and call for bids (para. 75f).

Banking Sector Reforms

50. Starting in 1991, the Government of Tanzania introduced a number of banking reformsincluding the liberalization of interest rates, passage of the Banking and Financial Institutions Act,which permitted the entry of private banks, the introduction of a treasury bill auction as part ofBank of Tanzania's (BOT) efforts to rein in the growth of the money supply through the use ofindirect methods of monetarv control, and the creation of a mechanism for expeditiously recoveringoverdue debts. The program also included recapitalization, through the provision of cash andbonds, of the government-owned NBC and two smaller government-owned commercial banks.

51. The program's major accomplishment was to deregulate and liberalize the banking system.More than 10 private banks have been licensed since 1993 and have increased their market share to30 percent of deposits. However, the initial attempts to restructure the government banks were notsuccessful. This had two major implications: the first was that the banking industry remainslargely unable to address the borrowing needs of most Tanzanian businesses; and second, BOT'sattempts to use indirect methods of monetary control to reduce excess liquidity were underninedbecause NBC continued to operate on minimal spreads, to incur large operational losses (through1995) and to dictate both interest rate and exchange rate movements.

52. Although the implementation of the restructuring programs of the People's Bank ofZanzibar and NBC is incomplete, the SAC would focus on the resolution of problems pertaining toNBC since it is the main impediment to the development of the sector.

53. NBC restructuring. The Government's recapitalization of the bank was not completed.Much of the recapitalization (T Sh 119 billion) was in the form of bonds and some of the interest

14 Tanzania SAC

on those bonds was not paid. NBC made significant progress with recovery of loans which wereprovisioned and covered by the recapitalization bonds, thus compensating for unpaid interest.Although the NBC Act was amended to allow for sale of 40 percent of government shares, therewas no time-bound strategy to privatize the bank, and experience elsewhere suggests that withoutsuch a strategy, it would be difficult for a bank like NBC to meet capital adequacy requirements.

54. NBC's restructuring failed for three reasons: (i) slow progress in the reform of theparastatal sector, which contributed to a deterioration of NBC's portfolio; (ii) NBC's managementcontinued to make new, or to roll-over existing, loans to non-performing borrowers, thus incurringeven greater losses; and (iii) organizational improvements slowed during 1993. Thus, despite therecapitalization of 1992/93, NBC remained undercapitalized, with approximately 77 percent of itsportfolio non-performing.

55. In 1994 the Government reconstituted NBC's Board of Directors and revised its strategyfor NBC's restructuring. Given the bank's economic dominance, liquidation was ruled out. Therevised strategy entailed constraining NBC's operations until it was able to meet prudentialrequirements, and placing qualified commercial bankers in key, senior managerial positions(including Chief Operating Officer) to ensure that there was a change in NBC's banking culture.NBC was directed to cease lending to non-performing borrowers, a ceiling was imposed onoutstanding loans (irrespective of any subsequent write-offs), 800 staff were retrenched, and aconsulting firm was recruited to undertake a detailed diagnostic evaluation (including a portfolioreview).

56. The diagnostic evaluation revealed that the extent of NBC's financial difficulties wasworse than envisaged. NBC continued to operate only by mobilizing large sums of deposits, whichwere then used to pay expenses. This realization led the new government to focus on the costcontainment and managerial improvement elements of its strategy and to begin preparing plans toprivatize NBC. Consequently, the Ministry of Finance, as the shareholder, entered into a MOUwith NBC, which required the bank to attain break-even status on a six-month cumulative basis bythe end of June, 1996 and to improve credit performance. The MOU called for a reduction ofNBC's core operating expenses by 40 percent and substantial efforts to improve loan collections.Lending to non-performing borrowers was terminated. The remedies in the event of non-compliance were: (1) NBC would be required to cease and desist all lending operations; (2) BOTwould intervene directly in the management of the bank to safeguard depositors' funds; and (3) allor a portion of NBC's operations would be put up for sale.

57. NBC's compliance with the MOU was reviewed in August, 1996. The review notedsubstantial improvements in NBC's operating procedures, and the bank's concerted efforts toreduce costs and improve loan recoveries. But the review also raised substantial concerns aboutNBC's ability to resume lending to new borrowers and underlined the urgency of pressing aheadwith reorganization and divestiture.

58 The present strategy. The strategy for the reorganization and privatization of NBC hasrecently been approved by the Government. The strategy entails creating three subsidiaries ofNBC tentatively titled: Trade Bank with a network of approximately 10 branches, whosecustomers would consist largely of exporters, importers and large corporations; Regional Bankwith one branch in each region to focus on medium to large companies; and Micro-Finance Bankspecializing in small and microenterprise financing and deposit mobilization, principally in therural areas. All three institutions would be required to meet capital adequacy requirements (8

Tanzania SAC 15

percent of risk adjusted assets) and also would be expected to have sufficient capital to absorbprojected losses before being fully licensed. Capital would be sought from non-governmentalinvestors for all institutions. Investors in Micro-Finance Bank could include donors, who wouldcontribute to the costs of training, software/hardware, management and other start-up costs thatwould be characterized as equity.

59. The reorganization of NBC will occur in two phases. In the first phase the banks will beconstituted as subsidiaries of a newly created holding company. They will operate under a newMOU. The proposed management teams of the institutions will be given intensive training, andprocesses will be improved. The Government will also create a fourth subsidiary to hold thoseassets, operations and people that should not be allocated to the three banks (e.g., the NBCTraining College). In the second phase, the subsidiaries will be declared autonomous institutionsfollowing their recapitalization by private investors (and/or in the case of Micro-Finance bank,donors) and the issuance of stock to the public.

60. The strategy entails soliciting the interest of investors in the operations and assets of NBC.Selected investors will be asked to express interest in one or more of the subsidiaries and topropose the terms and conditions. Investors would be told that consideration would be given toreasonable alternatives to the proposed reconfiguration. In the event that investors do not expressinterest, the subsidiaries will continue their restructuring under the MOU, building a track recordof profitability over two to three years before safely issuing shares to the public.

61. The Government has appointed a project team to manage the implementation of thestrategy and has also provided donors with details of the strategy. TORs and Letters of Invitationto engage consultants, who will prepare for the solicitation of the investors, were agreed betweenthe Government and IDA and have been issued.

62. The next steps in this process, to be supported by a SAC tranche release, wouldinclude:

(a) Dissolving NBC and transferring its assets to the three new banks created outof NBC or their holding company, prior to effectiveness (para. 73e).

(b) Publishing NBC's audited FY95-96 Financial Statements, prior to Board(para. 71c).

(c) Distributing an Investment Memorandum and calling for bids, prior totranche release (para. 76).

Petroleum Sector Liberalization

63. Background. Tanzania annually imports about 530,000 metric tons (MT) of crudepetroleum and 435,000 metric tons of white petroleum products. Imported crude oil is refined atthe Tanzanian Italian Petroleum Refinery Company (TIPER), jointly owned by the TanzaniaPetroleum Development Corporation (TPDC), a government parastatal, and AGIP (50/50 percent).TIPER's production meets about 50 percent of the market requirements of petroleum products.

64. Marketing and pricing arrangements. The Government currently fixes the retail pricesof petroleum products. There is no price competition and, because of infrequent adjustment of the

16 Tanzania SAC

pricing formula, the prices do not fully reflect changes in international prices or exchange ratemovements. Until January 1997, TPDC had a monopoly on imports of crude oil and finishedproducts. The private oil marketing companies were not permitted to import directly to meet theirmarket requirements. These arrangements have allowed the operation of TIPER to continue,which, because of its small size, old age, simple technical structure and operational inefficiencies,is not competitive with imports. The cross-subsidization of the refinery amounts to about US$15-25 million annually (more in some years, depending on the number of days the refinery was notoperating and on international petroleum prices and margins).

65. Since January 1997, the Government has partially liberalized imports making it possiblefor any of the marketing companies, including TPDC, to submit tenders. However, theGovernment has retained partial price control and TIPER continues to operate. A regulatory bodyto monitor the new arrangements was established on April 1, 1997

66. Immediate and full liberalization of petroleum imports is constrained by infrastructuralbottlenecks, which are now being addressed. There is adequate capacity for LPG imports with therecent installation of a new pipeline, and some of the constraints on the discharge of refinedproducts at the main Kurasini Jetty, imposed by the need to simultaneously handle imports ofedible oil, will be removed by October 1997 once a new coastal jetty has been completed. By June1998, after the Kurasini Jetty has been fully repaired and outfitted, it will be able to handle 2.2million tons of petroleum products annually, well in excess of the combined requirements ofTanzania and Zambia.

67. As part of the SAC petroleum sector tranche release condition, prices and imports ofall petroleum products will be liberalized. In addition, the Government will remove taxdifferentials between different products (para. 77).

68. The reform process, to be supported by the SAC, will include a program calling for thedivestiture of the TIPER refinery. A review of options for the future will be initiated as part of therefinery study to commence in May 1997. Privatization will be undertaken provided that acommercially viable, nonsubsidized role is identified, either as an operating refinery, a storagedepot, or some other option.

IV. DISBURSEMENT

69. Disbursement arrangements will follow the simplificd procedures approved by the Boardon February 1, 1996. The Borrower shall open, prior to furnishing to the Association the firstrequest for withdrawal from the Credit Account, and thereafter maintain in the BOT a depositaccount in US dollars on terms and conditions satisfactory to the Association. All withdrawalsfrom the Credit Account shall be deposited by the Association into the Deposit Account. If afterdeposit in this account, the proceeds of the credit are used for ineligible purposes (i.e., to financeitems imported from non-member countries, or goods in the standard negative list), IDA willrequire the Borrower to either: (a) return that amount to the account for use for eligible purposes;or (b) refund the amount directly to IDA, in which case IDA will cancel an equivalent undisbursedamount of the loan. Although a routine audit of the account will not be automatically required,IDA reserves the right to require it.

Tanzania SAC 17

V. COFINANCING

70. Two cofinanciers have participated in the SAC operation. The Swiss Governmentprovided a consultant to work on financial sector reform. The Kingdom of Norway willsupplement the SAC with Fifth Dimension resources.

VI. SAC BOARD AND TRANCHE CONDITIONS

71. Board conditions.

(a) The Government has achieved an overall fiscal balance of 0.9 percent of GDP(after grants) for FY97 on an annualized basis. This is derived from the latestTreasury Flash Report (see para. 21).

(b) The Government will submit evidence to IDA indicating that a PerformanceContract has been signed with TRC, which includes compensation payments forthose unprofitable marine services, passengservices and branch lines that theGovernment wishes TRC to operate and an cxplicit agreement to allow TRC toclose any or all other such unprofitable services (see para. 49).

(c) The Government will provide IDA with the published versions of NBC's auditedFY95 and FY96 financial statements (see para. 62b).

Tranche Conditions

72. Prior to effectiveness of the proposed SAC operation, evidence should have been receivedby IDA that the monitorable conditions for release of the first tranche have been met. Thereafter,release of the four floating tranches will be predicated on IDA receiving evidence of fulfillment ofthe specified monitorable conditions.

73. Effectiveness.

(a) In its proposed budget for FY98, the Cabinet has, in accordance with thedevelopment program set forth in para. 16 of the Letter of Development Policy,made the budgetary allocations for its health, education, water, power andtransport sectors, set out in such paragraph (see para. 30b).

(b) In its proposed budget for FY98, the Cabinet has, in accordance with the socialsector reform program set forth in para. 21 of the Letter of Development Policy,made the budgetary allocations for recurrent expenditures for primary education,set out in such paragraph (see para. 37a ).

(c) The Government has prepared a telecommunications sector competition policy inaccordance with the parastatal reform program set forth in para. 23 of the Letterof Development Policy (see para. 45).

(d) In connection with the concession of the container terminal at Dar es Salaam Portbelonging to the Tanzania Harbours Authority (THA), the Government has

18 Tanzania SAC

furnished evidence to IDA that contracts have been awarded to consultants toprepare detailed proposals for different concession arrangements (see para. 46).

(e) In accordance with its banking sector reform program (paras. 24-25 of the Letterof Development Policy), the Government has dissolved NBC and has transferredNBC's assets and liabilities to the three new banks to be created out of NBC or totheir holding company (see para. 62a).

74. Social sector tranche.

(a) In accordance with the public expenditure management program (paras. 17-19 ofthe Letter of Development Policy), the Government has reduced the number ofprojects in the public sector development portfolio to 800 or less using guidelinesand criteria set out in para. 18 of the Letter of Development Policy (see para.3 0a).

(b) In accordance with the education and training policy referred to in paras. 20-21 ofthe Letter of Development Policy, the Government has:

(i) adopted an action plan (with specific budgetary proposals), agreed uponby the Government and IDA, for the recruitment, training, upgrading,deployment and redeployment of primary school teachers (see para. 37b);

(ii) issued a ministerial circular (A) providing for District Education Officersand teachers to be recruited and hired (subject, in the case of DistrictEducation Officers, to approval by the ministry responsible for education)by the District Councils in at least 20 pilot districts; and (B) transferringall subsidies for primary education in such pilot districts to the DistrictCouncils as block grants to cover salaries and other expenses based on aformula agreed upon between the Government and IDA (see para. 37c);

(iii) prepared an action plan, agreed upon by the Government and IDA, fortransferring the management of primary schools to local schoolcommittees (see para. 37c).

(iv) The Government has prepared an action plan, agreed upon by IDA andthe Government, for the reform of higher education and technical training(see para. 38).

(c) In accordance with the health sector reform program in the Letter of DevelopmentPolicy (para. 22), the Government has:

(i) implemented a program to finance the full cost of pharmaceuticalsdelivered to hospitals within the framework of a hospital-based revolvingfund, which involves cost sharing and subsidies, with patients covering atleast 50 percent of the costs (see para. 39a);

(ii) issued a ministerial circular: (A) providing for District Medical Officersand district-level health staff to be recruited and hired (subject, in the caseof District Medical Officers, to approval by the Ministry of Health) by the

Tanzania SAC 19

District Councils in at least 20 districts; and (B) transferring the budgetfor health centers and dispensaries in such districts to the DistrictCouncils as block grants to cover salaries and other expenses (see para.39b);

(iii) prepared an action plan to reduce the life years lost to malaria (see para.3 9c).

75. Parastatal sector tranche.

(a) The Borrower has taken all steps within its control to bring all seven largeenterprises to the point of sale (see para. 41). The seven public enterprises are:

(i) Mbeya Cement(ii) Sugar Development Corporation(iii) Southern Paper Mills (SPM)(iv) Morogoro Polyester(v) National Milling Corporation (NMC) - all mills to be sold(vi) Tanzania Tea Authority (TTA) - all commercial activities to be sold(vii) Tanzania Sisal Authority (TSA) - all commercial activities to be sold.

(b) The Government has taken all steps within its control to bring TTCL to the pointof sale (see para. 45).

(c) The Government has awarded the concession for the container terminal at Dar esSalaam Port (see para. 46).

(d) The Government has abolished NASACO's monopoly for shipping agencyservices and permitted free international competition under minimum standardsagreed with IDA (see para. 47).

(e) The Government has amended the relevant Acts so that neither TCFB nor anyother agency will have the exclusive authority to negotiate freight rates or allocatecargo across shipping lines (see para. 48).

(f) The Government has completed a divestiture plan for TRC's Marine ServicesDivision (including all maintenance and repair shops) and has called for bids (seepara. 49).

76. Banking sector tranche. The Government has distributed the Investment Memoranda forthe three subsidiaries of the NBC holding company, has issued a call for bids, has evaluated themand invited successful bidders for negotiations (see para. 62c).

77. Petroleum sector tranche.

(a) The Government has issued ministerial orders so as to permit the full liberalizationof petroleum prices and product imports (see para. 67).

20 Tanzania SAC

(b) The Government has removed the tax differentials between various petroleumproducts (see para. 67).

VI. BENEFITS AND RISKS

78. Raising the growth rate in Tanzania to a least 6 percent per annum and substantiallyreducing the incidence of poverty will require steady gains in allocative efficiency. The investibleresources are at hand but they are being used inefficiently. The policy measures supported by theSAC should help bring about a sustainable acceleration in growth in the medium term, that willsteadily whittle away the overhang of povertv.

79. By securing macrostability, strengthening the financial sector and improving the supply ofessential services, the reforms proposed will inject dynamism into the private sector and promoteoutward oriented, productive activities. The recently regained reform momentum and theGovernment's apparent determination to implement reforms suggests that the actions proposed as apart of the SAC program will be implemented on schedule and will yield the desired economicresults. However, a number of macro and micro level risks remain. Tanzania's past track recordwith reforms is uneven and its implementation capacity, while improving, remains weak. Aslackening of reforms because of political opposition, the inability of policymakers to keep theGovernment on a difficult course, administrative shortcomings and the lack of technical skills atthe local level, is certainly a risk, though at this stage the likelihood is small. The fiscal situation isunder control but will remain fragile for a number of years. Revenue effort and strict expendituremanagement must remain priorities for the foreseeable future in order to hold inflation at bay andlessen the overwhelming reliance on foreign capital. The attempt at improving delivery, as well asthe financing of social services through decentralization, will be a significant shift from theGovernment's past approach. Unless local government capacity is augmented sufficiently,accountability is enforced and all stakeholders put in the required effort, the sought after gains inschool enrollment and public health will not materialize.

80. Lastly, divestiture on the scale being attempted in Tanzania is a difficult, highly complexundertaking with no guarantee of success. It constantly risks being subverted by politicalopposition, and there is always the possibility that suitable buyers for parastatals and publiclyowned banks will not be forthcoming because of technical flaws in preparation or execution ofdivestiture or the relative unattractiveness of the economic environment.

81. We have assessed these risks carefully taking into account both Tanzania's past record, itscurrent capabilities and the changing attitudes towards reform in the Region. As always, there isthe possibility that some reform measures might falter or be implemented at a slower pace. But onbalance, we are convinced that this program has the domestic backing and the ingredients that willensure success.

Tanzania SAC 21

VII. RECOMMENDATION

82. Recommendation. I am satisfied that the proposed Credit would satisfy the Articles ofAgreement of the Association and recommend that the Executive Directors approve it.

James D. WolfensohnPresident

By: Gautam KajiManaging Director

AttachmentsWashington, D.C.May 7, 1997

TANZANIA: STRUCTURAL ADJUSTMENT CREDITPOLICY MATRIX

Objectives and Policies Actions Taken Strategies and Measures Timing/Benchmark

PUBLIC EXPENDITURE MANAGEMENT

Reduce the fiscal deficit to a TRA launched and operational. Achieve overall budget balanec after grants (checks Prior to Boardsustainable level. issued) of 0.9 percent of GDP for FY97 on an

Complied with ESAF program annualized basis using data from Treasury Flashtargets up to March mid-term Reports.review.

Rationalize development O&E reviews of ministries to Include in the Cabinet-approved budget proposals for Prior to effectivenessspending and ensure adequate rationalize structure, increase FY98 development spending targets of at least T Shfinancing of priority projects. efficiency and reduce expenditures 20 billion for priority sectors (excluding the Road

are underway. Fund), consistent with the ESAF program, andensure that sectoral allocations reflect developmentpriorities in health. education, water, transport andpower sectors

Introduced cash management Review the investment program with donors to prune Prior to tranche releasesystem. and consolidate projects down to 800 or less (these (social sector program)

would include non-donor projects)

SOCIAL SECTOR REFORMS

Increase share of primary Prepared Basic Education Include in the Cabinet-approved budget proposals for Pnor to effectivenessschool spending. Framework and finalized Basic FY98 an increase in the share of central recurrent

Education Master Plan. education expenditure for primary education to 64percent of total. an__

Objectives and Policies Actions Taken Strategies and Measures Timing/Benchmark

Rationalize deployment of Adopt action plan for training, upgrading, Prior to tranche releaseteachers and improve the recruitment, deployment and redeployment of (social sector program)quality of instruction. teachers.

Decentralize the primary Pilot programs undervay. Shift responsibility for recruitment of the DEO and Prior to tranche releaseschool system in the interests teaching staff to District Councils and transfer all (social sector program)of efficiency. subsidies for primary education as block grants to 20

selected districts.

Prepare an action plan for transferring responsibility Prior to tranche releasefor school management to legally constituted school (social sector program)committees.

Reform technical and higher Completed review of technical and Prepare an action plan for the reform of technical Prior to tranche releaseeducation. higher education. and higher education. (social sector program)

Improve health sector planning Finance the full cost of pharmaceuticals delivered to Prior to tranche releaseand financing. district level hospitals and above through a (social sector program)

combination of government and donor subsidies anduser fees, with patients paving at least 50 percent.

Decentralizc management of Shift responsibility for recruitment of DMO and of Prior to tranche releasedistrict-level health services. district-level health staff to District Councils. (social sector program)

Transfer the budget for health centers anddispensaries as block grants to 20 selected districts.

Prepare action plan to reduce mortality from malaria. Prior to tranche release(social sector program)

P;

Objectives and Policies Actions Taken Strategies and Measures Timing/Benchmark

PARASTATAL SECTOR REFORMS

Complete divestiture of large All enterprises under preparation Divcst all seven large enterprises or put into Prior to tranche releasepublic enterprises. by PSRC. liquidation. (parastatals)

THA (Conicession of container THA has adopted "landlord" port Award contract to consultants to preparc detailed Prior to effcctivenessterminal), conccpt proposals for concession arrangcments.

Award concession for THA container terminal. Prior to tranche relcase(parastatals)

NASA('O Abolish monopoly for shipping agencv services and Prior to tranchc releasepermit free international competition under minimum (parastatals)standards to be agreed with IDA

TC FB Amcnd relevant Acts revoking TCFB's authoritv to Prior to tranche rclcasenegotiate freight rates and allocate cargo across (parastatals)shipping lincs

TRC Draft perfomiance contract Sign performiianicc contract w-ith TRC'. whlch will Prior to Boardprepared. includc payments for non-economic services.

Preparation of TOR for consultants Prcparc comprehensive divestiturc plan for Marinc Prior to cffectivenessin progress Services Division (including port facilities

maintenance and repair facilities)

TTCL Govermnent has allowed Prepare policy statement on compctition in the Prior to cffectivenesslntcrnet/cellular and datalink telecommunications sector.serviccs.

Bring TTCL to point of sale. Prior to tranche release(parastatals)

aQ

Objectives and Policies Actions Taken Strategies and Measures |Timing/Benchmark

FINANCIAL SECTOR REFORMS

Restructunrng and divestiture Government publicly announced its Publish NBC's audited FY95-96 financial Prior to Boardof NBC. strategy for reorganizing and statements.

privatizing NBC. Policy statementissued by Minister of Finance to Dissolve NBC and transfer assets and liabilities to its Prior to effectivenessNBC's Board defining their role subsidiaries or holding company.during the transition period.

Distribute Investment Memorandum and call for bids Prior to tranche releaseProject team appointed to manage and invite successful bidder(s) for negotiations. (NBC)implementation of strategy.

Consultants appointed to preparefor solicitation of investors.

PETROLEUM SECTOR REFORMS

Import and price liberalization, Announced end of TPDC Complete liberalization of petroleum prices and Prior to tranche releasemonopoly which permits private product imports. (petroleum)companies as well as TPDC toimport petroleum products. Remove differential taxes on refined petroleum Prior to tranche release

products. (petroleum)

Set up regulatory body forpetroleum sector.

Abolished rationing of petroleumproducts among companiesaccording to market share.

4wt,

>

Annex BPage 1 of 9

The TreasuryP.O. Box 91 11,

Dar es Salaam.

THE UNITED REPUBLIC OF TANZANIATHE MINSETER FOR FINANCE

May 2, 1997

Mr. James D. WolfensohnPresidentThe World BankWashington, D.C.

Dear Mr. Wolfensohn:

LETTER OF DEVELOPMENT POLICY

1. I am writing to request, on behalf of the Government of the United Republic ofTanzania, a Credit of US$125 million equivalent from the International DevelopmentAssociation (IDA) in support of our structural adjustment program. The proposed Creditwill reinfcrce our efforts to augment public resources and improve the effectiveness andmanagement of public expenditure by raising allocative efficiency, and stimulate poverty-reducing growth while maintaining overall fiscal sustainability. It would promote privatesector-led growth, broad-based agricultural development and support the achievement ofour main goal of poverty reduction. The program is consistent with the Policy FrameworkPaper (PFP) recently formulated jointly by the Government, with the collaboration of thestaffs of the World Bank and the IMF. Proceeds from the Credit would go towards fillingTanzania's external financing gaps and would support our budgetary needs through FY99.

BACKGROUND AND RECENT DEVELOPMENTS

2. Since 1986, the Government of Tanzania has been engaged in a broad rangingreform effort to reduce economic controls and encourage more active participation of theprivate sector in the economy. Over the past decade, we have freed exchange controls,liberalized the trade regime, removed most price controls, eased restrictions on themarketing of agricultural products, and eliminated controls on interest rates. TheGovernment has also launched programs to rehabilitate and improve maintenance of keyinfrastructure (roads, railways and ports) and to strengthen agricultural research andextension services. These efforts were supported by resources from our donors, includingIDA and the IMF. The results in terms of growth have been heartening. Surveys we haveundertaken indicate that liberalization was associated with impressive growth in per capita

Annex BPage 2 of 9

income from 1984 through 1990, and the incidence of rural poverty declined from about65 percent in 1983 to 51 percent in 1991.

3. However, between 1992 and 1995, Tanzania faced serious fiscal problems arisingfrom the gap between stagnant revenues and high public expenditures. The quasi-fiscaldeficit generated by the loss-making parastatal sector and a weak banking sector furtheraggravated the situation. The large budgetary deficit was the principal cause of double-digit inflation and the rapid growth of domestic debt.

4. The significant macroeconomic imbalances, which had persisted since 1992/93(July/June), are now being addressed. These imbalances had been generated, inter alia, bymajor weaknesses in fiscal performance that arose in the course of implementing therecommendations of the Presidential Tax Commission in 1992/93. The Commissionrecommended, among other things, reductions in a number of tax rates aimed at increasingtax collections through improved compliance. However, tax rates were reduced withoutcorresponding strengthening of tax administration. Revenue collections were alsoundermined by widespread customs exemptions and continued tax evasion. Furthermore,weak administration of expenditure control exacerbated the fiscal problem, particularly theinadequate management of the Government's wage bill, which included a large number ofwage scales and the unsystematic introduction of a wide range of allowances.

5. The Government has taken vigorous steps to address these problems starting withthe verification and collection of tax arrears and marked reduction of fiscal exemptions.The fiscal position strengthened during the second half of FY96 and during FY97 as aresult of improved revenue collection (aided by the operationalization of the TanzaniaRevenue Authority) and enhanced expenditure control. This has served to dampeninflation. Based on the performance under an IMF staff-monitored program duringJanuary-June 1996, Tanzania entered into a three-year ESAF program with the IMF inNovember 1996. A mid-term review of the first annual arrangement under the ESAF-supported program ascertained that most ESAF targets and benchmarks were met withcomfortable margins. The Government also obtained debt relief on Naples Terms fromthe Paris Club creditors in January 1997.

6. The Government has also been making significant progress in other areas ofstructural reforms. These have included:

7. Banking reform. Faced with a near crisis situation in the financial sector, theGovernment in the early 1990s committed itself to creating a financial system that wouldoperate on market-oriented principles, efficient in mobilizing and allocating resources, andeffective in fostering long-term economic growth. The banking system was deregulatedand liberalized and a significant number of new foreign and domestic private banks haveentered the sector. However, the National Bank of Commerce (NBC), which remains in apoor financial condition, is still dominant, although the situation is much changed from itsnear-monopoly position only a few years back. We have been pursuing a vigorousrestructuring plan to stem losses at NBC with branch closures, consolidation of regionaloffices into zonal offices, and the retrenchment of staff Fees and commissions have been

Annex BPage 3 of 9

raised to competitive levels and substantial efforts have been made to improve thecollection of overdue loans. We believe that we are now ready to go ahead with thedivestiture of NBC.

8. Civil service reforms. To address the problems of an overstaffed, underpaid,poorly motivated civil service, and to contain and eventually reduce the budgetary outlayson administrative expenses, the Government has formulated and is implementing anintegrated action plan for civil service reform covering personnel control, salary audits,O&E (Organizational and Efficiency) reviews, pay reform, retrenchment andredeployment. In addition, the Regional Administration has been reorganized and localgovernment is being strengthened. A total of over 60,000 civil servants have beenretrenched since 1993 (in addition to removing about 20,000 ghost workers from thepayroll), reducing the total number of government employees at end-1996 to about285,000. The O&E reviews are nearly complete for all ministries Beginning in FY97, apay reform program has been introduced to streamline the grading structure, consolidatemost non-incidental allowances into basic pay, and improve control over wage billexpenditure. The implementation of the program is on track.

9. Parastatal reforms. To date, the divestiture program has handled some 150transactions out of 383 commercial parastatals, or about 40 percent. At the beginning ofthe current fiscal year (FY97), 96 transactions had reached the Memorandum ofUnderstanding (MOU) stage (i.e., investors had negotiated with the Parastatal SectorReform Commission (PSRC) or the line ministry, and signed a preliminary agreement topurchase, lease, or manage assets). The action plan for enforcing a hard budget constraintprovides for the removal of preferences and the elimination of subsidies for commercialparastatals and a ban on lending to uncreditworthy parastatals by the NBC is in place. Thenext stage is to focus attention on the public utilities

10. Social sectors. Tanzania faces severe problems in the health and educationsectors. Social sector indicators are low and stagnant, and even declining in some cases(as with primary school enrollments). The quality of service is also poor. In March 1995,the Government adopted a new Education and Training Policy and a Health SectorReform Program. Both documents envisage greater liberalization of the social sectors,increased government subsidies for basic education and health services, decentralization ofgovernment operations, and greater use of alternatives to government funds for nonbasicservices. These programs are consistent with the Government's Social Sector Strategy of1994, The Government has reduced restrictions on nongovernment suppliers of educationand health services and has developed pilot projects to test new approaches to financingbasic health and education services. These measures are expected to increaseaccountability of such services to clients by putting control over public subsidies closer tohouseholds. The Government has also completed a review of post primary education withthe objective of rationalizing and improving its financing

Annex BPage 4 of 9

MEDIUM TERM POLICY FRAMEWORK

11. While continuing the quest for macroeconomic stability, the Government will nowsharpen its focus on policies that aim to reduce poverty by accelerating growth by raisingthe efficiency of resource use. Consistent with this objective, we will limit the directinvolvement of the public sector in productive activities, and enhance domestic andexternal competitiveness. Financial sector reform will facilitate the mobilization ofdomestic savings and the more efficient allocation of available resources. Specialemphasis will be placed on strengthening macroeconomic management, particularly withrespect to the implementation of fiscal policy and the mobilizing of public resources. Thedevelopment of human resources and improvements in the social and physicalinfrastructure will continue to form critical components of the development strategy.

12. Against this background, the overall macroeconomic objectives for FY98-FY99are: (i) a real GDP growth rate of 5 percent in FY98, rising to 6 percent or more byFY99; (ii) a reduction in the average rate of inflation to 7.5 percent in FY98, and 5percent in FY99; (iii) central government savings of 1.6 percent of GDP in FY98, and 2.5percent of GDP in FY99; and (iv) a fall in the external current account deficit (excludinggrants) to 9.2 percent of GDP in FY98 and 8.6 percent of GDP in FY99, whilemaintaining gross official reserves to the equivalent of three months of imports.

13. To achieve these objectives, we will maintain the present liberal investment policy,which is aimed at invigorating private investment. Both domestic and foreign investorswill be free to acquire enterprises divested under the Government's privatization program.Public expenditure will be oriented increasingly toward strengthening the required physicaland social infrastructure, particularly in the high priority areas of basic health care, primaryeducation, water and sewage, power, the transport system, and support for agriculturethrough extension and development of rural infrastructure. These improvements in theinfrastructure will, in turn, provide a more conducive environment for expanded privateinvestment. The civil service reform-which is aimed at rationalizing the structure andimproving the efficiency of the civil service-will be completed during the period, buildingon the critical pay reform component which has been initiated.

14. Because poverty in Tanzania is primarily a rural problem, it can be addressedthrough liberalizing markets, greater integration of the rural economy into the monetizedeconomy through construction of feeder roads, better information for producers, andimproved marketing services. As women are the primary cultivators in rural Tanzania,they and their children can benefit from well targeted rural programs and market-orientedreforms that increase the returns to agricultural activities. Poverty is also associated withinadequate and ineffective investments in basic education, health, and family planning.Women and children benefit more from these programs when they are well financed andeffective.

Annex BPage 5 of 9

THE ECONOMIC REFORM PROGRAM

15. The economic reform program to be supported by the Structural AdjustmentCredit will focus on five areas which conform to the Government's priorities. These are:(a) public expenditure management; (b) reform of the social sectors; (c) parastatal sectorreforms; (d) banking sector reforms; and (e) reform of petroleum pricing and marketing.

A. Public Expenditure Management

16. Expenditure control was elusive in Tanzania in the past, but important progresshas already been made in dealing with some of the factors hindering its effectiveness.Building on the steps aimed at strengthening revenue collections and expenditure control,the Government has introduced arrangements for tightening expenditure control at thecommitment stage. Various ministries are now organized to closely monitor budgetarycommitments to ensure that they match the available resources. Progress made in thisarea will be consolidated and extended in the period ahead. The budgetary process, whichwas adopted in the preparation of the FY97 budget and which is by and large inconformity with the requirements of Financial Orders of Tanzania, will be developed asthe cornerstone of the Government's improved expenditure control procedures. Asexpenditure control improves, adherence to these procedures, as well as other expenditurecontrol initiatives, will allow the eventual phasing out of the cash managementarrangements. The Government will continue to ensure that its priority activities are fullyfunded and that areas of lower priority are either eliminated or postponed. TheGovernment intends to allocate T Sh 20 billion in the FY98 budget (exclusive of the RoadFund) to development spending in the priority sectors of health, education, water,transport and power.

17. To improve the efficiency of public investment, the Government has identified acore investment program as part of the Rolling Plan and Forward Budget (RPFB), withthe goal of focusing the Government's expenditures in the development budget on highpriority projects. To ensure that counterpart funding is available for the high priorityprojects, immediate attention will be given to reviewing the development budget andreducing the number of projects from about 1400 to less than 800 during FY98. Donorswill participate in this exercise. Also, a donor review of externally funded projects will beundertaken to ensure the completeness of budget information and, together with thedonors, a mechanism will be established to monitor actual project expenditures anddisbursements. The Government will also ensure that budgeted amounts for prioritydevelopment expenditures are released fully in a timely manner to maximize the impact ongrowth and poverty reduction.

18. The criteria that will be used in screening the projects are part of our FY98-FY2000 RPFB guidelines. These are as follows:

Projects without standard project documentation will not be funded.

Annex BPage 6 of 9

* Projects which have been under implementation for over 10 years will not befunded. They will be reappraised.

* Projects which are recurrent in nature will be canceled or transferred to therecurrent budget.

* Commercial projects will not be funded.* Similar activities which are currently listed as projects will be consolidated

into single projects.

* Projects with foreign funding will be included in the government budget onlyif there is firm commitment for disbursements, before end of March of eachyear. Other-wise, they will be considered in the subsequent plan year.

* Similar projects which are currently inmplemented by more than one agencywill be consolidated (e.g., rural water supply projects).

* Projects with cross-conditionality will not be included in the governmentbudget due to uncertainty on disbursement of funds.

* All projects which are not reporting on donor funds will be excluded from thegovernment budget.

19. Parallel with the screening exercise, the allocation of development funds in FY98will be limited to the following areas: (i) economic infrastructure services (particularlyroads, communication, energy, land and water); (ii) social services (education, health andwater); (iii) environment; (iv) rationalization of government functions and capacitybuilding; and (v) law and order.

B. Reform of the Social Sectors

20. The Government will draw up plans to more eftectively deploy primary schoolteachers. It also intends to decentralize the recruitment of District Education Officers andprimary teachers by devolving responsibilities to the District Councils. Financing ofprimary education expenditures will be effected through block grants to District Councils.The Government has developed pilot projects to test new approaches to financing basichealth and education services that increase accountability of those services to clients byputting control over public subsidies closer to households. In this context, theGovernment foresees transferring responsibilities for primary schools to schoolcommittees.

21. As stated in the recent PFP, the Government is committed to increased spendingon primary education so that recurrent expenditures per pupil rise by 0.5 percent a yearduring each of the next three years relative to the budgetary allocations in FY97. The

Annex BPage 7 of 9

Government will increase the share of central recurrent education to 64 percent of thetotal in FY98. Most of the increase will be on nonsalary inputs. In addition to increasedspending per primary pupil, the Government's budget will reflect adequate resources tosteadily increase the Gross Enrollment Ratio from its current level. The Government iscommitted to higher spending on secondary education so that recurrent expenditures perstudent rise by 0.5 percent a year during each of the next three years relative to thebudgetary allocations in FY97. The Government will also make additional outlays so thatit can finance higher enrollments in government secondary schools, with the new studentsto be drawn from districts that do not have government secondary schools (or, have onlyone), with a special emphasis on underutilized government school buildings. In addition,spending on government secondary schools will be shifted from student board and welfareexpenses toward instructional purposes, so that student board and welfare consumeprogressively a smaller share of the secondary school budget to the year FY2000, so longas equity considerations and national priorities permit.

22. Starting with the FY98 budget, for the health sector the Government will beginmaking significant reallocations of resources from curative services to cost-effectivecommunity and preventive interventions with an emphasis on malaria control. These arein line with the PFP commitments. Within an overall framework of real spending onhealth rising by 0.5 percent a year over the FY97 levels of budgetary allocations percapita, the Government will increase spending on preventive services and programs to 20percent of recurrent expenditures over the period, while also increasing expenditures forhealth centers and dispensaries. To accommodate this shift in spending it will implement aprogram to finance the full cost of pharmaceuticals delivered to hospitals by setting uphospital-based revolving funds financed by central government and donor subsidies.Patients will contribute at least half of the total cost. We also plan to extend user fees forcurative services at health centers and dispensaries. 'The Government will increase theindependence of public sector hospitals in terms of management and budget, and beginestablishing the regulatory and institutional framework for health insurance for formalsector employees and for rural-based prepayment/insurance schemes. It also intends todecentralize the recruitment of District Medical Officers and district-level health staff, aswell as the management of district health facilities. Financing of health centres anddispensaries will be done through block grants to District Councils. Furthermore, it willincrease the efficiency with which current community, preventive, and curative servicesare delivered by promoting facility-based management of local government services andencouraging greater nongovernmental delivery of services.

C. Parastatal Sector Reforms

23. Reform of the parastatal sector is a key element of the Government's economicreform program. While the Government is committed to expanding its divestitureprogram, it also plans to speed up the privatization of remaining assets in the portfolio tostop any flows, direct and indirect, from the Treasury to the parastatals; to put the assetsback into productive use as quickly as possible and thereby generate economic activity andrevenue; and to forestall delays, which encourage asset stripping by either the company

Annex BPage 8 of 9

itself, or its workers, if it remains defunct for an extended period. The implementation ofa hard budget constraint still remains a top government priority. The Government remainscommitted to its work plan, which calls for more than 50 additional enterprises to beremoved from government control during 1997 through sale, lease, liquidation, ordivestiture. The next phase of the parastatal reforms will ensure that the restructuring andprivatization of the public utilities are accorded the highest priority. These will include theoperations of the Tanzania Harbours Authority, beginning with the container terminal.The Government intends to put this under a concession arrangement whereby a privateoperator will pay a pre-set fee to the Government for the right to carry out commercialport operations for a specified time. In the case of Tanzania Railways Corporation (TRC),the Government will enter into a Performance Contract with TRC, and divest TRC'sMarine Services Division. In the case of Tanzania Telecommunications Company Ltd.(TTCL), we plan to start with the preparation and adoption of a competition policy for thetelecommunications sector. We then intend to move quickly to divest TTCL. As part ofthe SAC, the Government will also bring a number of the large non-core public enterprisesto the point of sale. In the case of the National Shipping Agencies Company Ltd.(NASACO), we intend to abolish its monopoly for shipping agency services and permitfree international competition under minimum acceptable standards. With respect to theTanzania Central Freight Bureau (TCFB), the Government intends to revoke its exclusivepowers to negotiate freight rates and allocate cargo across shipping lines.

D. Banking Sector Reforms

24. The Government of Tanzania remains committed to financial sector reform and,in particular, to the ongoing restructuring of the NBC. Further restructuring will involveputting in place incentives to improve the governance of the bank so that it is moreresponsive to market forces. With this objective, the Government's strategy forreconfiguring and recapitalizing NBC has recently been clearly stated. The strategy wouldcreate three subsidiaries of NBC tentatively titled: Trade Bank with a branch networkcatering to the corporate business community including exporters and importers; RegionalBank with branches in each of the regions focusing on the banking needs of medium tolarge companies; and Micro-Finance Bank to address the banking needs of smallentrepreneurs, particularly in the rural areas. NBC would be dissolved and its assetswould be transferred to the three new banks created out of NBC or their holdingcompany. Common stocks/shares of these institutions will be offered to the public, whilepreference shares will be available to investors. It is expected that the investors wouldinclude donors in the case of the Micro-Finance Bank, whose contributions could includethe costs of training, software and hardware, management and other startup costs.

25. NBC will be reorganized in two phases. First, the three banks will be constitutedas subsidiaries of NBC and will operate under a MOU with the Ministry of Finance. Theproposed management teams of the institutions will undergo intensive training, andprocesses will be improved. As a next step, the subsidiaries will be recapitalized throughprivate investments and issuing stocks to the public, and will become autonomous entities.In the event that the subsidiaries are not divested, they will operate under strict MOUs.

Annex BPage 9 of 9

E. Reform of Petroleum Pricing and Marketing

26. While marketing arrangements were liberalized some years back for almost allcommodities and prices decontrolled, the liberalization of the petroleum subsector wasinitiated only recently. The Government has announced that the private sector is free toimport refined petroleum products starting in May 1997, initially up to 50 percent of totalrequirements. Immediate and full liberalization of petroleum imports is constrained byinfrastructural bottlenecks, including the oil jetty at the port, petroleum pipelines andstorage capacity, that need to be addressed. Once necessary repairs and new installationsare completed, the physical capacity to meet Tanzania's entire current need for importedrefined products will be in place by June 1998. At that point, the Government will fullyliberalize prices and imports as agreed under the ESAF program. The Government is alsoundertaking a study of options for the TIPER refinery, owned jointly by the Governmentand AGIP. Following the study, the Government will, by June 1998, come to a decisionregarding TIPER's future role in a liberalized environment.

CONCLUSION

27. Tanzania is at a threshold. Since the inception of the Third Phase Government,efforts have been directed towards rapidly reducing the levels of poverty of Tanzaniancitizens through the pursuit of broad-based and sustainable growth policies. TheGovernment believes this growth can only come through the unleashing of the motivationsand incentives possible only in a market-based economy led by private sector initiative.The Government's role would be one of supporting this effort by creating and maintainingthe economic, physical and social infrastructures, and maintaining a stable macroeconomicenvironment conducive to these activities by private agents.

28. The Government is committed to strengthening and accelerating these processes ofchange under the structural adjustment program. The Government views the partnershipwith IDA, particularly through the proposed Structural Adjustment Credit, as acontinuation of your institution's support in this effort.

Yours 'incet}y .

DMnicl N. Fo(l)Miniiste for Finansc

Anex CPage 1 of 2

Tanzania,Weert Samue awineo n NMr

__t__single_year ,ryer s hitherUMit of anSnte Saharn Low. incene

Irdicator mecrurc 1970.75 1980-85 1989-94 Africa income 7roup

Priority Poverty IndicatorsPOVERTYUpper poverry line local curr. ..

Headcount index % of pop.Lower povery line local curr. ..

Headcount index - 9 of pop. ..

GNP per capital USS 170 290 90 500 390 1,670

SHORT TERM INCOME INDICATORSUnskilled urban wages local curr. ..

Unskilled rural wagesRural terms of trade

Consumer price index 1987=100 8 58 591 .. ..

Lower income

Food'iUrban .. 57 '337 .. .

Rural

SOCIAL INDICATORSPublic expenditure on basic social services % of GDP .. ..

Gross enrollment ratiosPnmarv % school age pop. 53 75 70 71 105 104MaJe " 62 76 71 77 112 105Female 4.4 74 69 64 98 101

MortalWiyInfant mrality per thou. live births 125 98 84 92 58 36Under 5 mortality 1.. .. 34 161 101 47

ImmunizatonMeasles % age group *- 66.0 75.0 51.4 86.2 77.4DPT - 67.0 79.0 53.5 89.1 S' 0

Child malnutrnon (under-5) ' *- 28.0 38.2Life expectancyTotal years 46 51 51 52 63 67Female advantage 3.2 3.5 2.8 3.5 2.4 6.4

Total fertility rate births per woman 6.8 6.7 5.8 5.9 3.3 27Matemal mortality rte per 100,000 live births .. 370 748

Supplementary Poverty IndicatorsExpendlitures on social security % of total gov't exp. 0.5 0.7Social secunrty coverage % econ. active pop. .. ..

Access to safe water total % of pop. 39.0 52.6 52.1Urban 88.0 88.0 75.0Rural -36.0 42.0 46.4

Access to health care -. 73.0 93.0

Population growth rate GNP per capita growth rate Development diamondb(average annual. percent) 10+ (avetage annual, percent) Lfe expectacy

42I ~~~~~~~~~~~GNP A \\Gross

-~~~ per primary

capita enroUlmenti

4 .101-2 | 1; 0 =pr& 4 >|prs

1970-75 1980-85 1989-94 1970D75 1980-85 1989-94 Access tosafe water

G Tanzania - Taania- Low-income - Low-income

r See the technical notes. p.387. b.7'he development diamond. bsed on four key indicators shows the aveng level of development in the coe:ranycompared with its income group. See the introduction.

Annex CPage 2 of 2

TanzaniaMost Satm .rce Vzme group sail

_hiess sincle ear_ rcseg hi gherUn it of estimate S4tharn Lnow incoeo

Indicator measur* 1970-75 1980485 1989-94 Africa income ProU

Resources and ExpendituresHUMAN RESOURCESPopulation Imre=1994) thousands 15.900 21.797 28.817 571.902 _.1g2.221 1.096.881Age dependency rauo ratio 1.01 0.98 0.94 0.94 0.66 0.63U'ban * of pop. io 1 17 6 23.7 30.6 28.3 55.9Populauon growth te annuail % 3.0 3.2 2.9 2.8 1.7 1.3

Urban 10.0 6.5 6.0 4.9 3.2 217Labor force thousands 8.347 11.208 14.796 254.250 1.590,533 48S.647Agnculture % of labor force 88 85 84 65 67 36Industry 4 5 5 9 14 26Female 50 50 49 41 39 40Labor participauon ratesTotal % of pop. 52 51 51 44 50 45Female 26 26 25 37 41 36

NATURAL RESOURCESArea Lhou. sq. km 945.09 945.09 945.09 24,273.83 40,391.42 40,594.43Density pop. per sq. kn 16.82 23.06 29.63 22.90 77.44 26.66Agnculiura. land % of land area 42.75 42.90 43.57 50.61 52.42 41.05Change in agncultural land annual % 0.03 0.03 0.00 0.01 0.16 -1.38Agricultural Land under irigauon % 0.14 0.34 0.39 0.86 17.84 11.40Forests and woodland Lhou. sq. km 379.36 335.55 5.323.14 7,632.00 5,969.25DeforestaLion (net) 5o change. 1980-90 .. , 1.22

INCOMEHousehoid income

Share of top Zo0% of households %o of income 53 .. 45Share of bottom 40% of households 14 IS .. ..

Share of bottom '0% of households 5

EXPENDITUREFood % of GDP 55.0

Staples .. 27.4 ..

Meat, fish, milk. cheese. eggs '. 9.4 .. .. ..

Cereal imports thou. metric tonnes 461 412 215 14.051 36.922 68,936Food aid in cereals 148 125 35 5.079 8.516 5,771Food production per capita 1987 100 103 106 86 102 115 102Fertilizer consumpuon kg/ha 0.8 1.0 13 5.3 58.5 46.3Share of agncuiture in GDP' % of GDP .. 45.9 52.0 19.5 27.6 14.0Housing % of GDP .. 6.9 ...

Average household size persons per household .. .. ..

Urban .. .. ..

Fixed investment: housing % of GDP 2.1 1.7 ..Fuel and power % of GDP .. 2.2 ..Energy consumpuon per capiut kg of oil equiv. 52 35 34 251 373 1.602Households with electricity

Urban % of households .. .. ..

Rural . ..

Transport and communaication % of GDP ., 1.8 ..Fixed investment trnsport equipment 3.7 2.5 .,Totla road length thou. km 40 82 88

INVESTMENT IN HUMAN CAPITALHealthPopulauon per physician persons 22J40 28,271 .. .. .. 3,064Populauion per nurse 3,403 7,988 ..Population per hospiutl bd .. 768 981 1.316 1.034 592Oral rehydyraEion therapy (under.5) % of cas .. .. 83 37 38Education

Gross enrollment rAtiosSecondary % of school age pop. 3 3 5 24 48 63Female 2 2 5 23 42 62

Pupil-teacher ratio: primary pupils per teacher 54 34 37 40 39Pupil-teacher rtio: secondary 20 19 19 .. 20Pupils reaching grade 4 % of cohort 91 89 87Repeater rate: pnmary % of total enroll 0 1 5Illiteracy * of pop. (age 15+) *- *- 32 53 35Female %of fen. (age 15+) .. .. 43 54 46

Newspaper circulation per thou. poE. 4 5 S 12 .. 236

World Bank lntemational Economies Depanment. April 1996-Dau cover mainland Tanzania only.

Annex DPage I of 2

Tanzania at a glanceSub-

POVERTY and SOCIAL Saharan Low-Tanzania Africa income Development diamond'

Population mid-1995 (millions) 29.6 589 3.1t8GNP per capita 1995 (USS) 130 490 460 Life expectancyGNP 1995 (billions USS) 3.8 289 1.466

Average annual growth. 1980-95

Population (%) - 2.9 2.8 1. GNP 8GssLabor force (%) 2.8 2.8 1.9 e I / \ (mar

per prinaryMost recent estimate (latest yearavailablie since 1989) Icapita enroiment

Poverty- headcount tndex (% of populatfon) 50 S ) rUrban Population (% of total popuLatSon) 24 31 29 -

Life exoeciancy at birth (years) 51 52 63Infant mornality (per 1,000 Irvs births) 83 92 58 Access to safe waterChild mainutntion (% ofchildren undIr) 28 38Access to safe water (% ot populatIo) 49 47 75Illiteracy (% ofpopulatbon age 1-5+) 32 43 34 - TanzaniaGross primary enroliment (% of school-age populaboni 70 7t 105

Male 71 77 112 Low-vtcomegrsupFemale 69 64 98

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1975 1985 1994 1995

GOP (billions LSS) 2. 6 5.5 3.4 40 Economic raOosGross domestic investment/GOP 21.1 17.7 31.3 31.0Exorts of goodsand non-factor seiviceslGDP 1918 7.7 23.8 28.0 Openness cf economyGross comestic savings/GOP 8.6 8.7 3.3 4 7Gross national savings/GDP 9.8 12.0 9.1

Current account balanceiGOP .13.0 -9.3 -26.7 -15.2Interest payments/GDP 0.5 .7 4.6 3.8 Savings InvestmentTotal debUtGOP 33.6 76.1 213.2 203.2Total debt ser-viceexports 73 38.8 23.0 32.9Present value of debt/GDP 160.5Present vawue of debt'exDorts 634.6 Indebtedness

1975-84 1985-94 1994 1995 1996-04(average annuat growth) - anzaniaGOP 1.7 4.0 3.7 39 48 Low-income groupGNP per capita L-oe_

Exporns of goocs and nfs

STRUCTURE of the ECONOMY -

1975 1985 1994 1995(% o GDP) Growth rates of output and invesUtent (%)Agriculture 41.2 52.1 56.9 56.8 S -industry 22.0 12.0 16.5 16.8 4i

Manufacturing 10.4 7.9 7.8 7.8Services 36.8 35.9 26.3 26.3 2t

o!Pnvate consumption 74.1 74.9 88.4 85.1 90 91 u2 93 9w 95

GeneraJ government consumption 17.2 16.4 8.3 10.3 _ 0 GOPImports of goods and non-tactor services 32.3 16.8 51.8 54.4 G

1975-84 1985-94 1994 1995(average annual growth)Agriculture 2.0 5.4 3.5 4.0Industry -0.6 6.8 2.9 4.3

Manufacturing -0.8 2.8 -0.9 4.5Services 2.4 1.3 4.1 4.1

Private consumptionGeneral government consumptionGross domestic investment 4.4 27.3 3.7 2.9Imports of goods and non-factor servicesGross national product 4.1 4.9

Note: 1995 data are preliminary estimates.'The diamonds show tour key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will

be incomplete.1/ Commitment basis.

Tanzania

Annex DPage 2 of 2

PRICES and GOVERNMENT FINANCE1975 1985 1994 1995 1

Domestic pnces 1 Inflation (%)(% change) g0Consumer prices 26.1 33.3 30.2 34.7 aoImplicit GCP deflator 15.3 22.8 22.8 34.0 40

Govemment finince a 20T

(% ot GOP) oCurrent revenue 24.4 18.5 15.0 14.5 ! 93 94 95Current budget balance -1.2 -2.3 -3.4 -4.3 - GOP det. -- cPiOverall surplus/deficit -1.6 -7.8 -8.0 -11.5

TRADE1975 1985 1994 1995

(millions USS) Export and import levels (mill. USS)Total exoons (fob) 379 326 486 600 2.000

Coffee 66 119 90 177 TCotton 43 27 92 . 85 i.oooManutactures 74 33 89 79

Total imDons (cif) 775 999 1,589 980 1°000 1FOod ~~~~ ~~~ ~~~ ~~137 78 130 18 o

Fuel and energy 92 223 149 15Capital goods 241 434 729 394 a

Export price index (1987=100) 96 126 | 9 90 91 92 93 94 95Imoort price index (1987s100) .. 85 122 .C Exports 2 ImportsTerms of trade (1987=100) .. 114 103

BALANCE of PAYMENTS1975 1985 1994 1996

(millions JSS) Current account balance to GOP ratio (%)Exoorns of gooos and non-factor services 482 445 855 1.072 __-

lmons of goods and non-factor services 811 1.016 2.068 2.013 as ao 91 i 92 93 94 95 1Resource oaiance -329 -571 -1,213 -941 j

Net factor income -3 -93 -154 -139 ,o ;Net current transfers 12 148 465 437 I

Current account balance. .20before official transfers -321 -516 -902 -644

Financing items (net) 306 531 892 611Changes in net reserves 15 -14 10 33 30

Memo: Reserves including gold (mill. USS) 65 16 306 255Conversion rate (localUUSS) 7.4 17.9 477.6 624.1

EXTERNAL DEBT and RESOURCE FLOWS1975 198B5 1994 1995 1

(millions USS) 1 Composition of total debt. 1995 (mill. USS)Total deot outstanding and disbursed 1.264 4,206 7,442 7,802

IBRD 80 266 114. 87 G AIDA 81 568 1,998 2,182 G0C 87

Total debt service 36 173 174 195 181 2182IBRD 5 40 42 43454 21IDA 3 7 25 28

Composition of net resource flowsOfficial grants 128 267 564 620 COfficial creditors 248 55 160 148 2Private creditors 5 46 12 51 DForeign direct investment 0 14 0 27 I E 504Portfolio equity 0 0 0 0 3291

World Bank programCommitments 40 45 183 11 A - IBRO E -BilateralDisbursements 60 46 183 160 8-IOA D Other multilateral F - PmrtePrincipal repayments 3 27 44 46 C -IMF G - Short-termNet flows 57 18 139 114

Interest payments S 20 24 25Net transfers 52 -1 115 89

International Economics Oepartment and AF2CO staff estimates 8120/96

Note: Economic data refer to mainland Tanzania only.a. Government finance fiscal year (July to June).

Annex EPage 1 of 3

Tanzania - Key Economic Indicators

Actual Estimate Projected

Indicator 1991 1992 1993 1994 1995 1996 1997 1998

National accounts(as % GDP at currentmarket prices)

Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Agriculturea 49.8 49.9 50.2 50.2 53.0 53.2 53.2 53.0

Industry' 13.5 14.6 15.2 14.8 12.9 11.5 11.4 11.4

Services" 25.2 25.7 26.2 26.7 24.9 25.3 25.0 25.2

Total Consumption 90.4 96.0 97.5 98.3 95.8 90.8 90.3 90.1Gross domestic fixed 29.7 28.9 28.4 25.7 23.9 23.2 22.4 21.7investment

Govemment investment 3.0 2.8 3.7 4.1 3.8 3.7 3.8 3.8Private investment 29.6 28.9 27.7 24.6 22.8 22.2 21.3 20.6

(includes increase instocks)

Exports (GNFS)b 12.3 13.6 18.0 23.0 24.0 19.8 19.9 20.4

Imports (GNFS) 35.3 41.3 46.9 50.1 46.3 36.4 35.4 34.9

Gross domestic savings 9.6 4.0 2.5 1.7 4.2 9.2 9.7 9.9

Gross national savingsc 19.4 13.3 11.1 8.0 6.9 8.7 8.1 8.6

Memorandum itemsGross domestic product 3644 3415 3153 3280 3974 5134 5431 5773(US$ million at currentprices)Gross national productper 105.0 130.0 155.0 145.0 130.0 130.0 150.0 150.0capita (US$, Atlas method)

Real annual growth rates(0%, calculated from 1991prices)Gross domestic product at 5.7% 3.8% 3.9% 3.5% 4.5% 4.4% 4.0% 4.0%market pricesGross Domestic Income 3.7% 2.9% 5.8% 3.6% 2.4% 4.6% 3.9% 3.9%

Real annual per capitagrowth rates (%/o, calculatedfrom 1991 prices)

Gross domestic product at 2.5% 0.7% 0.9% 3.5% 1.5% 1.4% 1.0% 1.1%market pricesTotal consumption -0.7% 2.0% 2.0% 0.3% -3.4% 1.3% 0.8% 0.9%Private consumption -0.7% 2.3% 2.3% 0.7% -2.8% 1.3% 0.8% 0.8%

(continued)

Annex EPage 2 of 3

Tanzania - Key Economic Indicators

(Continued)

Actual Estimate Projected

Indicator 1991 1992 1993 1994 1995 1996 1997 1998

Balance of Payments(US$m)

Exports (GNFS)b 528.1 548.6 610.5 848.0 940.5 1017.3 1083.5 1177.0Merchandise FOB 393.6 414.1 411.4 485.9 592.9 658.0 696.1 757.3

Imports (GNFS)b 1569.3 1885.0 2017.2 2241.7 1817.6 1870.6 1921.3 2014.0Merchandise FOB 1174.1 1227.7 1250.9 1351.9 1283.2 1317.9 1341.9 1399.3

Resource balance -1041.2 -1336.4 -1406.7 -1393.7 -877.1 -853.4 -837.8 -836.9Net current transfers 407.7 456.4 463.2 465.0 416.6 443.0 501.7 510.0

(including official currenttransfers)Current account balance -458.3 -478.8 -621.8 -757.9 -398.7 -371.4 -291.7 -282.7(after official capital grants)

Net private foreign direct 10.0 15.0 61.7 63.0 67.3 70.0 75.0 80.0investmentLong-term loans (net) 60.7 45.9 -182.8 -150.7 -50.7 31.8 206.2 192.7

Official 173.4 262.1 95.1 159.5 0.5 46.3 224.8 166.6Private -112.7 -216.2 -277.9 -310.2 -51.2 -14.5 -18.7 26.1

Other capital (net, including 450.6 520.1 619.9 952.6 428.4 279.1 37.4 71.4errors and omissions)***

Change in reservesd -63.0 -102.2 123.1 -107.0 -46.3 -9.5 -26.9 -61.4

.Memorandum itemsResource balance (% of -28.6% -39.1% -44.6% -42.5% -22.1% -16.6% -15.4% -14.%

GDP at current marketprices)Real annual growth rates(1991 prices)Merchandise exports 3.2% 5.7% 11.4% 6.0% 24.1% 11.3% 4.7% 7.0%(FOB)

Primary 2.6% -14.4% 19.8% -10.2% 5.8% 17.7% 8.0% 12.3%Manufactures -29.9% -18.2% -16.7% -13.0% -9.1% -4.3% 2.5% 2.7%

Merchandise imports -0.4% 1.5% 1.5% 23.2% -21.2% 5.3% 3.9% 3.6%(CIF)

Public finance(as % of GDP at current

market prices)'Current revenues 16.7 17.1 12.8 19.1 16.8 15.0 16.0 17.3Current expenditures 16.9 16.0 18.8 17.0 17.6 15.8 14.8 15.7

(Continued)

Annex EPage 3 of 3

Tanzania - Key Economic Indicators

(Continued)

Actual Estimatt ProjectedIndicator 1991 1992 1993 1994 1995 1996 1997 1998

Current account surplus (+) -0.3 1.1 -6.0 2.1 -0.7 -0.9 1.2 1.6or deficit (-)

Capital expenditure 2.1 3.2 5.1 4.5 3.8 4.0 3.6 3.7Foreign financing 1.1 2.2 2.3 2.9 5.2 0.3 2.8 4.6

Monetary indicatorsM2/GDP (at current market 19.9 22.0 25.2 28.1 32.8 25.0 23.3 23.3prices)Growth of M2 (%) 26.9 40.5 43.9 45.9 59.8 0.0 11.3 11.8Private sector credit growth / 63.7 -4784.7 49.3 158.8 -53.0 27.2 -55.9 -60.5total credit growth (%)

Price indices( 1991 =100)Merchandise export price 100.0 104.4 103.1 107.4 136.1 105.3 106.4 108.2indexMerchandise import price 100.0 105.6 100.8 88.7 117.8 104.3 102.2 102.9indexMerchandise terms of trade 100.0 98.8 102.3 121.1 115.5 101.0 104.1 105.2indexReal exchange rate 100.0 96.6 93.1 76.2 62.3 48.5 48.5 48.5

(US$/lCU),Real interest ratesConsumer price index 28.7% 21.8% 25.3% 30.2% 30.3% 19.0% 13.8% 7.2%(9% growth rate)GDP deflator 12.6% 22.6% 21.0% 26.4% 30.8% 25.7% 15.0°'o 7.5%(9o grov th rate)

* * Includes accumulation of arrears.

a. If GDP components are estimated at factor cost, a footnoote indicating this fact should be added.b. "GNFS" denotes "goods and nonfactor services."c. Includes net unrequited transfers excluding official capital grants.d. Includes use of IMF resources.e. Central government.f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

Annex F

Tanzania - Key Exposure Indicators

Actual Estimate Projected

Indicator 1991 1992 1993 1994 1995 1996 1997 1998

Total debt outstanding and 6688.6 6781.4 6962.5 7441.5 7428.5 7346.5 7631.2 7883.0

disbursed (TDO) (USSm)'

Net disbursements (US$m)' 133.4 283.9 170.2 161.6 -24.9 14.2 294.7 250.4

Total debt service (TDS) 207.8 236.9 218.0 168.9 338.9 474.3 381.2 342.7

(US$m)a

Debt and debt service indicators

(%)TDO/XGSb 1253.7 1219.9 1115.2 860.6 775.8 708.2 694.9 661.5

TDO/GDP 183.5 198.6 220.8 226.9 186.9 143.1 140.5 136.6

TDS/XGS 39.0 42.6 34.9 19.5 35.4 45.7 34.7 28.8

Concessional/TDO .. .. .. .. 62.2 63.4 65.5 66.2

IBRD exposure indicators (%)

IBRD DS/public DS 27.5 19.5 21.0 25.8 12.4 6.8 6.3 5.3

Preferred creditor DS/public 64.5 43.2 42.2 66.0 34.9 26.1 31.8 42.9

DS

IBRD DS/XGS 10.5 8.1 7.2 4.9 4.3 3.1 2.2 1.5

Share of IBRD portfolio

IFC (US$m) FY Approval year

Loans (commitment) 2.5 0.0 7.5 18.5 2.7 2.1 2.9

Equity and quasi-equity /c 0.3 0.0 2.1 7.9 0.0 0.0 0.0

MIGA

MIGA guarantees (US$m) .. .. .. .. .. 8.3 8.3 8.3

a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-

term capital.

b. "XGS" denotes exports of goods and services, including workers' remittances.

c. Includes equity and quasi-equity types of both loan and equity instruments.

Tanzania - Balance of Payments(USS millions at current prices)

Base-case (,,gosf likely) projeciion

Acttal kEstijiate Projection1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 20115

Total exports ofGNFS- 528.1 548.6 610.5 848.0 940.5 1017.3 1083.5 1177.0 1295.8 1426.4 2070.5Merchandise(FOB) 393.6 414.1 411.4 485.9 592.9 658.0 696.1 757.3 839.4 929.2 1323.1Nonfactorservices 134.5 134.5 199.1 362.1 347.6 359.2 387.4 4197 456.4 497.2 747.4

Total Imports of GNFS 1569.3 1885.0 2017.2 2241.7 1817.6 1870.6 1921.3 2014.0 2125.7 2244.9 3003.5Merchandise(FOB) 1174.1 1227.7 1250.9 1351.9 1283.2 1317.9 1341.9 1399.3 1470.2 1545.4 2041.4Nonfactor services 395.2 657.3 766.3 889.8 534.4 552.7 579.4 614.6 655.5 699.5 962.1

Resource balance -1041.2 -1336.4 -1406.7 -1393.7 -877.1 -853.4 -837.8 -836.9 -829.9 -818.5 -933.0

Net factor income -373.4 407.5 -436.9 -462.7 463.2 -471.5 -465.6 -465.7 -467.0 -471.1 -500.1Factor receipts 5.4 7.3 13.8 16.7 17.0 20.0 14.7 14.7 14.7 14.7 14.7Factor payments 378.8 414.8 450.7 479.4 480.2 491.5 480.3 480.4 481.7 485.8 514.8

Interest (scheduled) 190.8 194.4 177.9 164.0 155.3 116.0 103.1 101.3 100.6 102.4 119.0Total interest paidb 190.8 194.4 177.9 164.0 15S,3 64.2 81.5 45.8 66.1 102.4 119.0Net adjustmentstoschediled interest 0.0 0.0 0.0 0.0 0.0 51.8 21.6 55.5 34.5 0.0 0.0

Otherfactorpayments 188.0 220.4 272.8 315.4 324.9 375.5 377.2 379.1 381.1 383.3 395.8

Netprivatecurrenttransfers 407.7 456.4 463.2 465.0 416.6 443.0 501.7 510.0 518.0 520.0 573.2Current receipts, of which 427.7 476.4 483.2 485.0 436.6 463.0 521.7 530.0 538.0 540.0 593.2

Workers' remittances 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Current payments 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0

Net official cunrent transfers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Curnt account balance -1006.9 -1287.5 -1380.4 -1391.4 -923.7 -881.8 -801.1 -792.7 -778.9 -769.6 -859.9

Official capital grants 548.6 808.7 758.6 633.5 525.0 510.4 510.0 510.0 510.0 580.0 527.9

Privateinvestment(net) 10.0 15.0 61.7 63.0 67.3 70.0 75.0 80.0 90.0 100.0 100.0Dirertfbreigninvestment 10.0 15.0 61.7 63.0 67.3 70.0 75.0 800 90.0 100.0 100.0Portfolio investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

NetLTbofrowing 60.7 45.9 -182.8 -150.7 -50.7 31.8 206.2 192.7 203.7 180.0 867.4Disbursements' 279.0 385.3 227.3 262.6 211.0 371.5 499.7 418.0 395.9 376.2 503.9Repayments((scheduled) 150.7 142.5 356.4 361.3 322.3 335.0 255.0 198.0 190.0 204.0 1I2.7

Total principal repaid 62.1 -142.2 218.1 68.6 53.2 9S.2 241.2 142.5 131.2 204.0 182.7Netadjustmcntstoscheduledrepayments 88.6 284.7 138.3 292.7 269.1 236.8 13.8 55.5 58.8 0.0 0.0

Net otherLTinflows -67.6 -196.9 -53.7 -52.0 60.6 -4.7 -38.S -27.3 -2.2 7.8 546.2(continued)

a. Goods and nonfaetor savices.b. Historical data ftom Debt Reporting System (DRS); other data projected by country operations division staff.c. 'Lr denotes 'long-tern."

ID(IQCD

O

Tanzania - Balance of Payments (continued)(USS millions at current prices)

Base-case (most likely) projection

Actual Estimate Projection1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 200W

Adjustmentstoscheduleddebtservice 88.6 284.7 138.3 2927 269.1 288.6 35.4 111.0 93.3 0.0 0.0Debt service not paid 88.6 284.7 138.3 292.7 269.1 288.6 35.4 111.0 93.3 0.0 0.0Reduction in arrears/prepayments (-) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other capital flows 362.0 235.4 481.6 659.9 159.3 -9.5 2.0 -39.6 -23.6 -30.0 -561.9Net short-tern capital 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Netcapitalflows n.e.i.4 0.0 0.0 0.0 0.0 0.0 -18.3 85.7 47.8 78.6 64.8 26.8Errorsandomissions 362.0 235.4 481.6 659.9 159.3 8.8 -83,7 -87.4 -102.2 -94.8 -588.7

Change in net intemational reserves -63.0 -102.2 123.1 -107.0 -46.3 -9.5 -26.9 -61.4 -94.5 -60.4 -73.5(- indicates increase in assets)

Memorandum itemsTotal gross reserves, ofwhich 209.4 384.9 294.6 306.3 255.1 242.3 318.2 411.0 543.2 637.2 952.9

Total reserves minus gold 384.9 294.6 306.3 255.1 240.1 242.3 318.2 411.0 543.2 637.2 952.9Gold (at year-end London price) .. .. .. .. 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total gross reserves (in months' imports G&S') 1.3 2.0 1.4 1.4 1.3 1.2 1.6 2.0 2.5 2.8 3.3

Exchange ratesAnnual average (LCU/USS)r 219.2 297.7 405.3 509.6 574.8 584.0 660.3 694.5 727.7 761.2 972.8Atendyear(LCU/USS) 233.9 335.0 479.9 523.5 707.2 622.2 677.4 711.1 744.4 780.3 997.2Indexrealaverageexchangerate(1991 =100) 100.0 96.6 93.1 76.2 62.3 48.5 48.5 48.5 48.5 48.5 48.5

Current Account Balance as % GDP -27.6 -37.7 -43.8 -42.4 -23.2 -17.2 -14.8 -13.7 -12.6 -11.7 -9.6

d. "n.e.i." denotes 'not elsewhere included."e. "G & S" denotes 'goods and services."f. 'LCUI denotes "local currency units."g. The index of the real exchange rate reflects USS/LCU, so an increase is an appreciation at the real exchange rate.

CD

Annex HPage 1 of 2

STATUS OF BANK GROUP OPERATIONS IN TANZANIASTATEMENT OF BANK LOANS AND IDA CREDITS

As of March 31, 1997(US$ millions)

(Less Cancellations)Loan or Fiscal Undis-Credit No. Year Borrower Purpose Bank IDA bursed

Twenty-seven (27) Loans and eighty-one (81) Credits closed, 355.55 1,733.47 15.42of which SECALS, SALs and Program Loans/Credits: . (795.42)

Cr. 20950 1990 Tanzania Ports Modernization 37.00 13.34Cr. 20980 1990 Tanzania Health & Nutrition 47.60 24.29Cr. 21370 1990 Tanzania Educ. Planning & Rehab. 31.30 6.58Cr. 21490 1990 Tanzania Roads 1 180.40 52.18Cr. 22020 1991 Tanzania Petrol Rehab 44.00 37.64Cr. 22670 1991 Tanzania Railways Restructuring 76.00 43.07Cr. 23350 1992 Tanzania Forest Resources Man 18.30 5.94Cr. 24130 1993 Tanzania Financial & Legal Ma 20.00 9.57Cr. 24860 1993 Tanzania Telecom III 74.45 50.60Cr. 24890 1993 Tanzania Power VI 200.00 84.55Cr. 25070 1993 Tanzania Priv. Pub. Sect. Mgt. 34.90 17.00Cr. 25370 1994 Tanzania ASMP 24.50 13.44Cr. 25980 1994 Tanzania Roads II 170.20 156.10Cr. 26480 1995 Tanzania Mineral Sector Dev. 12.50 8.66Cr. 27710 1996 Tanzania Financial Inst. Dev. 10.90 8.35Cr. 28670 * 1996 Tanzania Urban Sector 105.00 100.00Cr. 28990 1997 Tanzania Nat. Ext. Proj. PH. II 31.10 28.78Cr. 29000 1997 Tanzania River Basin Mgm. Small 26.30 22.51Cr. 29080 1997 Tanzania Lake Victoria Env. 1.10 9.68

Total 355.55 2888.02 692.28of which repaid 311.92 102.90

Total held by Bank & IDA 43.63 2785.12

Amount sold 6.29of which repaid 6.29

Total Undisbursed 707.70* Not yet effective.

Annex HPage 2 of 2

TanzaniaSTATEMENTOF IFC's

Committed and Disbursed PortfolioAs of March 31, 1997

In Millions US DollarsCommitted Disbursed

--- --------IFC----------FC-----------FY Company Loan Equity Quasi Partic Loan Equity Quasi Partic

Approval

1989 TASCO .88 0.00 0.00 0.00 .88 0.00 0.00 0.001991 Mufindi Tea 1.30 0.00 0.00 0.00 1.30 0.00 0.00 0.001991 TPS Zanzibar 1.15 .16 .10 0.00 .86 .16 .10 0.001993/96 AEF Tanganyika 0.50 0.00 0.00 0.00 0.50 0.00 0.00 0.001993 TPS (Tanzania) 7.00 1.06 1.04 0.00 7.00 .87 1.04 0.001994 AEF Moshi Lthr 0.00 .25 0.00 0.00 0.00 .19 0.00 0.001994 AEF Nomad Safari .12 0.00 0.00 0.00 .12 0.00 0.00 0.001994 AEF Raffia Bags .50 0.00 0.00 0.00 .50 0.00 0.00 0.001994 Eurafrican Bank 3.00 .73 0.00 0.00 0.00 .73 0.00 0.001994 Tanzania Brewery 0.00 6.00 0.00 0.00 0.00 6.00 0.00 0.001994 ULC Leasing 3.00 .95 0.00 0.00 1.50 .57 0.00 0.001995 AEF MIC Tanzania .80 0.00 0.00 0.00 .80 0.00 0.00 0.001995 AEF Tan Leather 1.00 0.00 0.00 0.00 1.00 0.00 0.00 0.001995 AEF Tanbreed .90 0.00 0.00 0.00 .90 0.00 0.00 0.001996 AEF A&K Tanzania .38 0.00 0.00 0.00 .38 0.00 0.00 0.001996 AEF Contiflora .40 0.00 0.00 0.00 0.00 0.00 0.00 0.001996 AEF Milcafe .35 0.00 0.00 0.00 0.00 0.00 0.00 0.001996 AEF Zainab Grain 1.00 0.00 0.00 0.00 1.00 0.00 0.00 0.001997 AEF Aquva Ginner 1.50 0.00 0.00 0.00 0.00 0.00 0.00 0.001997 AEF Hort. Farms .80 0.00 0.00 0.00 .80 0.00 0.00 0.001997 AEF Pallsons .55 0.00 0.00 0.00 .55 0.00 0.00 0.00

Total Portfolio: 25.13 9.15 1.14 0.00 18.09 8.52 1.14 0.00

Pending Commitments1997 * AEF AQUVA 1.50 0.00 0.00 0.00

GINNER1995 * AEF-ONE EARTH .70 0.00 0.00 0.001995 * AEF-TRADECO .93 0.00 0.00 0.001996 * IHP LTD. 1.65 .60 0.00 0.00

Total Pending Commitment: 4.78 0.60 0.00 0.00

IMAGING

R:eport No.: P 7127 TAType PR