© 2003 Intel-national Monetary Fund January...INTERNATIONAL MONETARY FUND TANZANIA Staff Report for the 2002 Article IV Consultation, Fifth Review Tinder the Poverty Reduction jmd

© 2003 Intel-national Monetary Fund January 2003IMF Country Report No. 03/1

Tanzania: 2002 Article IV Consultation., Fifth Review Under Ihe Poverty Reductionand Growth Facility and Request for an Extension of the Arrangement and Waiverof Performance Criterion—Staff Report; Public Information Notice and News Briefon the Executive Board Discussion; and Statement by the Executive Director forTanzania

Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usuallyevery year, In the context of a combined discussion of the 2002 Article IV consultation with Tanzania, fifth revieivunder the Poverty Reduction and Growth Facility and request for an extension of the arrangement and waiver ofperformance criterion, the following documents have been released and are included in this package:

• the staff report for the 2002 Article IV consultation, fifth review under the Poverty Reduction andGrowth Facility and request for an extension of the arrangement and waiver of performance criterionprepared by a staff team afthe IMF, following discussion? that ended on September 20,2002 withthe officials of Tanzania on economic developments and policies. Based on information availableat the time of these discussiims, the staff report was completed on November 4, 2002. Theviews expressed in the staff report arc those of the staff team and do not necessarily reflect the viewsof the Executive Board of the IMF.

• the Public Information Notice (PIN) and a News Brief summarizing the views of the ExecutiveBoard as expressed during the November IS, 2001 discussion of the staff report that concludedthe Article IV consultation and fifth review under the Poverty Reduction and Growth Facility andrequest for an extension of the arrangement and waiver of performance criterion, respectively.

• a statement by the Executive Director for Tanzania.

The documerit(s) listed below have been or will be separately released;

Selected Issues and Statistical Appendix

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INTERNATIONAL MONETARY FUND

TANZANIA

Staff Report for the 2002 Article IV Consultation, Fifth Review Tinder thePoverty Reduction jmd Growth Itacilily Arrangement, Jind Requests for

Extension nf the Arrangement and Waiver of Performance Criterion

Prepared by the African Department

(Tn consultation with the Fiscal Affairs, Legal, Monetary and Exchange Affairs,Policy Development and Review, Statistics, and Treasurer's Departments)

Approved by Jose Fajgenbaum and Michael T. Hadji michae!

November4, 2002

Tanzania continues to enjov political and economic, stability Its performance under the programsupported by the Poverty Reduction and Growth Facility (PRGF) has been positive, evidenced byeconomic growth of 5-6 percent a year, low single digit inflation, and a comfortable level of foreignexchange reserves Tari/anm is receiving large and steady support from :he donor community, includingthrciLo.li sizeable debt relief following Hie completion point under the HIPC' Initiative in November 2001.Structural deficiencies, however, particularly as regards rcvatuo mobilisation and financiali[i'îined.:at:oi:. hunt '['u!i7.ti:iia"s ability to become less dependent on donoi support and constrain itsgnmth prospects,

Discussions Ibr the 2002 Article IV consultation and the tilth review under :he PRGF arrangement wereheld in 1 )ar cs Sslaam and Zanzibar during September 5-20, 2002 :iy si staff team comprisingMr. ReiLuuuer (brad), J/:. ^luclitL, Mi, Nassau Mr, Bhundia (all AHO. Ms. J-'cdclmo (~ AJJ),Mr. Iluasain (PDH), Mr. ALxli (Senior Resident Rcprcscnlnlivc) iindMr. Mt;yrmrd (Staff Assistant-Alv?; Thti mission was rcaaved by PrtsideciL Mkapu and met witli Qje Mmistei' Ibi1 Finance(Mi. \lrainba). the Governor of the Dank of Tanzania ^Mr. Ballali), and senior officials from these andother gcvermnejil depiirhnents, The rni^sion also me: wilh representatives of Lhu business and bankingcommunities, trade unions, and NGUs. Ms. Mugs.n.da4 Advisor to the Executive Director for Tanzania,pariicipaled in the policy discussions. The missi.or. coUaboratcd closely \\ith Wor:d Bank staff.

Completion of the fifth review tinder the PRGF arrangement y.ill en'.iLle Tanzadti to a disbursement ofSDR 20 uiilLun (Table I ) . TT.e government's letter of intent (LOI) rclaujig to this review is presented inAppendix I: it contains ixxjUEjsts tor fln cxttmsimi of the arrangement Tn allow time for the final rc^cw tobe completed and lor the waiver ol'a perloiTiiaiiue ciiLmiun. Oilier appeLiLliês suimnûzt Tari/aiiia'srelations with the Fund acid the World Bank Group, discuss statistieal issiiiea and the goverrunent'supdated poverty analysis., and present social and demographic indicators,

b concludiny the lust Article IV i;onsullation on September 24, 200 ]. l^xcuutive Direulors eoiiunundedthe TimxiLnian a^hunTics for tliCLr sound macrocconomic and structural policies, which, if sustained,would help Tanzania achieve the poverty redaction Ltrgels envisaged in Us Poverty Reduction StrategyPdper. In view ofranzania's heavy reliance OQCxtemii] fmaucLng., Dirctlors c^.tcurag?d lhe iiulhuritiesto make a more determined revenue effort, b}' widening the tax base, reducing exemptions, andimproving tax admini stratum. Tliey welcomed the planned publication of quarterly budget executionicptu Ls. Diieutois endorsed a lightening of monetary policy in light of the sharp incLease in breadmoney, and supported the maintenance of a iluxib] i: rxcniinp.c rnrc regime


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Contents Page

Executive Summary .. .- .- 4

1. Recent Economic Developments 5

U, Recent Performance Under the Program 7

ILL Medium-Term Outlook and Policy Challenges 8A. Macro economic Framework 9B. The Poverty Reduction Strategy 9C. Fiscal Policy "10D. Monetary Policy and Financial Sector Reform 12E. Other Structural Reforms and Governance Issues 13F. External Sector Issues. _ _ I 5

IV. Program Monitoring 17

V. Technical Assistance, Data Issues, and Safeguards Assessment 17

VI. Staff Appraisal IS

Boxes

1 Structural Conditionally 202. Implementation Status of Actions to Strengthen Tracking of

Poverty-Reducing Public Spending 213. Soundness of the Banking Sector 234 Status of Microfmance 24

Figures

1. GDP, Savings, and Investment, 1999-2004.... 252. Prices and Interest Rates, January 1997-September 2002 263. Central Government Finances, 1997/98-2002/03 274. 91-Day Treasury Bill Market Indicators, January 1999-Scptcmber2002 285. Exchange Rates, January 1997-July 2002 29

Tables

1 Phasing of Performance Criteria, Reviews, and DisbursementsUnder the PRGF Arrangement, 2000-03 30

2. Selected Economic and Financial Indicators, 1999-2003 .3 !3. National Accounts, 2000-2005 324. Central Government Operations, 1999/2000-2003/04 33


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Contents Page

5. Central Government Revenue and Expenditure, Quarterly, 2002/03 356. Central Government Expenditure on Priority Sectors, 2000/01-2002/03 367. Monetary Survey, 2001-03 37S. Balance of Payments, 2000-07 389. Disbursements of Program Assistance, 2001/02-2002/03 3910. External Debt Indicators, 2001/02-2020/21 40

Appendices

1. Letter of Intent 41Table 1 . Quantitative Performance Criteria and Benchmarks

Under the Poverty Reduction and Growth Facility Arrangement,March-June 2002 5fi

Table 2. Structural Performance Criteria and BenchmarksUnder the Poverty Reduction and Growth Facility Arrangement,May-October 2002 57

Table 3. Quantitative Performance Criteria and BenchmarksUnder the Poverty Reduction and Growth Facility Arrangement,September 2002-June 2003 58

Table 4, Structural Performance Criteria and Benchmarks Under thePoverty Reduction and Growth Facility Arrangement, November 2002-March2003 59

11. Relations with Ihe Fund 60Til. Relations with the World Bank Group 63IV. Statistical Issues - 68V. Updated Poverty Analysis 72VI. Social Indicators - 75


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EXECUTIVE SUMMARY

Since the mid-1990s, Tanzania has made substantial progress in macroeconamii:stabilization and structural reform Real growth has been on a rising trend; it hasaveraged more than 5 percent since the inception of the current PROF-supportedprogram in early 2000, resulting in a small increase in per capita incomes, whileinflation has declined to below 5 percent.

Tanzania's performance under the PRGF-supported program has been broadlyon track. All the qualitative performance Criteria through end-June 2002 wereobserved, but quantitative benchmarks on reserve money., extrabudgetaryexpenditure, and the accumulation of domestic budgetary arrears were not met. Onestructural performance criterion, relating to the amendment of legislation to tightenapproval procedures for incurring or guaranteeing new foreign borrowingj was notobserved; however, comparable action is expected lo be taken by end-February 2003.

Fiscal consolidation has been central to the success in macroeconomicstabilization. As donors have provided sizable financial assistance in support ofTanzania's reform program, the government's domestic financing needs have all butbeen eliminated. Fiscal performance in 2001/02 (July-June) was broadly in line withthe program.

Monetary developments in recent years were characterized by strong monetaryexpansion, as large inflows were not fully sterilized and the demand for broad moneyexpanded with the gradual deepening of the financial system. So far in 2002,increases in reserve money and broad money have been exceeding programprojections by wide margins, but as yet have not had much discernible impact oninflation.

The program for 2002/03 aims at maintaining macroeconomic stability, as wellas enhancing revenue collection through reforms of tax policy and of taxadministration, particularly as regards tax exemptions. Expenditure managementwill be strengthened through tightening expenditure controls further to prevent theemergence of arrears and by improving the planning and execution of poverty-reducing programs

The 2002/03 budget foresees an increase in the allocations for poverty-reducingmeasures in line with the priorities spelled out in the poverty reduction strategy.Tn this regard, the program allows for a widening of the deficit, which will be fullyfinanced by grants and concessional loans.

In view of the perceived strong increase in the demand for money, the monetaryprogram for 2002/03 envisages an upward revision of monetary aggregatesrelative to earlier projections. Achieving the revised targets will require anintensification of the Bank of Tanzania's sterilization operations through additionalsales of liquidity paper, and, possibly, sales of foreign exchange


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1. RECENT ECONOMIC DEVELOPMENTS

1. Since the mid-1990s, Tanzania has made substantial progress inniacroeconomic stabilization and structural reform. Real GDP growth has been on arising trend; it has averaged more than 5 percent since the inception of the current PRGF-supparted program in early 2GOQ. resulting in a small increase in per capita incomes,while inflation has declined to below 5 percent (Table 2 and Figure 1) Higher realgrowth in the agricultural sector (which accounts for almost half of GDP) has beenaccomplished through the liberalization of production and marketing structures, as wellas of agricultural prices and the foreign exchange regime In addition, the mining andconstruction sectors have experienced strong growth, reflecting the commencement oflarge-scale gold mining operations and new tourist projects (Table 3)

2 Real GDP grew by 5.6 percent in 2001 and is expected to grow by almost6 percent in 2U02. The 12-month rate of nonfood inflation rose from 1.5 percent inDecember 2001 to 7.2 percent in September 2002, largely as a result of a sharp increasein electricity tariffs in April1, however, the overall inflation rate continued to decline to4,4 percent by September 2002, as favorable developments in agricultural output helpedcontain increases in food prices (Figure 2).

3. Fiscal consolidation has been central to the success in niacroeconomicstabilization. In support of Tanzania's reform program, donors have provided sizablefinancial assistance, which all but eliminated the government's domestic financing needs(Table 4 and Figure 3). Expenditure management has been strengthened by the adoptionof a centralized payment system and (he limitation of spending to cash availability. At thesame time, the composition of expenditure has improved in favor of allocations forpoverty-re due ing programs, as the wage bill has declined following the reduction in thesize of the civil service, and interest payments have fallen on account of lower financingrequirements and debt relief provided by donors. Revenue mobilization, however, hasimproved only marginally, owing to weaknesses in tax administration, the proliferation oftax exemptions, and a gradual move of the tax base from a large, easy-to-tax public sectorto a predominantly informal private sector in the course of the divestiture of manyparastatals.

4 Fiscal performance in 2001/02 (July-June) was in line with the program(Tables 4 aiid 6). The overall deficit before grants was about 1.7 percent of GDP lowerthan budgeted, owing to lower recurrent expenditures, which did not, however, affectpriority areas (see the authorities' letter of intent (LOT) in Appendix I, para 5), Thisexpenditure outturn, together with a revenue performance broadly in line withprojections, resulted in a significant build up ofgovernment deposits with the Bank ofTanzania (BoT).

1 The increase in electricity tariffs explains about 80 percent of the step increase in non-foodinflation.

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5 Monetary developments in recent years were characterized by strong monetaryexpansion, as large foreign inflows were not fully sterilized and the demand for broadmoney expanded with the gradual deepening of the financial system. Primarily reflecting thelack of suitable lending opportunities, the banking system developed an increasingly largestructural liquidity surplus which triggered an excess demand for treasury bills and,consequently, a decline in interest rates on bills and deposits. Interest rates on loans,however, remained high, reflecting high costs and still weak competition in the bankingsystem, although in the first half of 2002 banks exercised growing flexibility in their lendingrates in order to deploy excess funds (Figure 2). The BoT has been slow in mopping upexcess liquidity—be it through higher sales of foreign exchange (out of concern over adverseeffects on Tanzania's competitiveness from an appreciation of the shilling) or through a moreaggressive issuance of treasury bills (out of concern over rising interest rates and the costs ofthe mopping-up operations).

6. So far in 2002, increases in reserve money and broad money have been exceedingprogram projections by wide margins, but as yet have not had much discernible impacton inflation.2 Although the monetary authorities stepped up the issuance of treasury bills,sold some foreign exchange, and engaged in repurchase operations to absorb some of theexcess liquidity, the benchmark ceiling on reserve money for end-June was not observed(Table?), In the third quarter of 2002. the BoT decelerated its mopping-up operations again,and the resulting excess demand for treasury bills led to a significant decline in Interest rates(Figures 2 and 4),

7. Since early 2001, the shilling has depreciated against the U.S. dollar by about15 percent, reflecting the larger-than-anticipated monetary expansion (Figure 5) Theensuing real effective depreciation has now fully compensated for the real appreciationduring 2000, but is still leaving agricultural producers to face the impact of lowerinternational prices for coffee and cotton. Tanzania has accepted the obligations of ArticleVIII and maintains an exchange system that is free of restrictions on payments and transfersfor current international payments.

8. Structural measures have focused on the reform and privatization of parastatals,as well as the creation of a market-oriented regulatory framework. Since 1992, abouttwo-thirds of all state-owned companies have been privatized, including large enterprises,such as the container port, part of the telecommunications company, and the National Bankof Commerce. Meanwhile, the divestiture of strategic enterprises in the utility andtransportation sectors is only slowly gaining momentum. In parallel to the privatizationprocess, the government has begun to establish new regulatory agencies, with a view toestablishing and enforcing appropriate operational and safety standards for all marketparticipants. In addition, the government has taken measures aimed at strengtheningeconomic governance, especially in public expenditure management, and at improving theinvestment climate, with the recently created Investors' .Roundtable serving as an importantforum in which to identify impediments to investment

" la addition to continued strong foreign inflows, this expansion reflected also a number ofspecial factors, as detailed in the authorities' LOI, para 10.


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9, Following discussions among the Tanzanian government, the British supplier,, and theInternational Civil Aviation Organization (ICAO); Tanzania has proceeded with the purchaseof ail air traffic control system Meanwhile, the supplier has offered to provide freetechnical assistance to the Tanzanian airport authority regarding the operation of this system.Also, the Ministry of Finance is planning to convene a meeting of interested parties on howto implement the technical and financial recommendations made by the I.CAO in its recentreport on the radar system.

10. Tanzania's balance of payments position has strengthened substantially inrecent years (Table 8) The external current account deficit (including official transfers)narrowed sharply—from the equivalent of 9.2 percent of GDP in 1999 to 5.4 percent in2001—as a result of growth in nontraditional exports and a steady flow of foreign assistance,together with the debt relief under the Initiative for Heavily Indebted Poor Countries, thisresulted in a large increase in international reserves. There has also been progress in tradereform. In the 2001/02 budget, the number of nonzero tariff bands was reduced from four tothree,1 and, in the context of regional integration, all tariffs on imports from Tanzania'spartners in the East African Community (namely, Kenya and Uganda) were reduced by SOpercent. Several import surcharges (so-called suspended duties) that had been imposed in2001 were substantially reduced in the budget for 2002/03, and a plan for their completeelimination over a six-year period was announced.

11 Thus far in 2002, Tanzania's balance of payments position has strengthenedfurther. Total exports have improved, largely on account of higher-than-expectcd goldprices, even though traditional exports have declined, reflecting continued low commodityprices and a consequent fall in export volumes. Imports have declined slightly on account ofLower imports of consumer goods, possibly reflecting the real depreciation of the shilling.Meanwhile, gross official reserves of the BoT increased to US$1.3 billion at end-September2002, equivalent to seven months of import cover.

IL RECENT PERFORMANCE UNDER THE PROGRAM

12. All quantitative performance criteria and the quantitative benchmark on centralgovernment revenue for end-June 2002 were observed, (LOT, para 3 and LQI, Table 1),New domestic payment arrears in the form of unmet utility bills are estimated to have run uptc about T Sh 9 billion, but measures have now been taken to prevent the recurrence ofsucharrears (LOI, para. 29) The government also incurred extrabudgetary expenditure on thepurchase of a new air traffic control system totaling US$19 million during 2001/02; theauthorities indicated that these extrabudgetary expenditures would be regularized in the

3 Prior to the budget for 2001/02, the four tariff bands were 5, 10, 20, and 25 percent. In thatbudget, the 5 percent rate was eliminated and the 20 percent rate reduced to 15 percent.

"* Before the latest changes to the trade regime. Tanzania had an overall trade reslrictivenessrating of 5.


course of fiscal year 2002/03, while other rcallocations would be made within the budget for2002/03

13. With regard to structural reform, the end-May 2002 performance criterion on theclearance of all audited domestic arrears accumulated during July-December 2000 wasobserved, as was the end-July performance criterion with respect to the gradual eliminationof import surcharges (LOI. para. 3 and LOI, Table 2; sec also Box 1). The performancecriterion on the submission to parliament of legislation thai would make the government'sincurring or guaranteeing of foreign debt subject to cabinet approval upon recommendationby the Minister for Finance was not observed, partly because the government changed itsapproach with respect to this measure following the adoption of the new National DebtStrategy in May 2002 Instead of introducing the relevant legislative changes inOctober 2002, as originally planned, the government now intends to submit lo parliament allamendments to the Loans, Guarantees, and Grants Act emanating from the National DebtStrategy in February 2003, including the requirement that only the Minister for Finance hasthe authority lo contract debt on behalf of the government,

14 The mission expressed concern about the delay in tightening the approvalprocedures for foreign borrowing and the authorities' intention to vest final approvalauthority with Ihe Minister for Finance rather than the full cabinet, as the governmentcommitted itself to do in its memorandum of economic and financial policies of March 29,2002. The authorities explained that aggregate new debt incurred for budget financingalready required cabinet and parliamentary approval in the context of established budgetprocedures This, coupled with the intended mandatory approval by the Minister for Financeof specific loan proposals, provided sufficient assurance against any imprudent anduncoordinated foreign borrowing. The mission deferred to this view and agreed to supportthe authorities* request for a waiver for the nonobservance of the respective performancecriterion.

15. Three structural benchmarks were observed on time, and a fourth with one-monthdelay (LOI, Table 2} Meanwhile, the publication of individual and consolidated quarterlyrevenue and expenditure accounts for local governments has been deJayed by six months,owing to delays in producing the reports at the local government level,3 The publication of areport on the implementation of ministerial anticorruption plans has been delayed by threemonths, and the harmonization of the treatment of banks' loan loss provisions by twomonths.

TIT. MEDIUM-TERM OUTLOOK AND POLICY CHALLENGES

A. Macroeconomic Framework

16 The authorities' macroeconomic framework, as presented at the annual publicexpenditure review consultations with stakeholders in May 2002, projects real GDP growth

' As of end-September 2002, the accounts of 111 oul of 114 local governments had beenreceived and their consolidation had begun

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of 6 percent a year over the medium term. The sources of this projected growth are continuedstrong activity in tourism, construction, and the mining sector, and a further improvement ofperformance in the agricultural sector, A key component of the government's growth strategyis the implementation of the agricultural development strategy, which should translate intogrowth of above 5 percent in agriculture.t: Notwithstanding a deterioration of the outlook forthe terms of trade of traditional agricultural products, real GDP growth in 2002 is projected at59 percent, owing to a rebound in tourism, the impact on agriculture of favorable weather in2001, and further growth in mining activities following the entry into the field of new miningcompanies and the expansion of output from existing mines In 2003, GDP is expected togrow by at least 6 percent, while inflation is targeted to remain below 5 percent.

17 Tn support of the authorities1 poverty reduction strategy, Tanzania expects to receiveadditional donor inflows over 2003-2006, including assistance under the H1PC initiative.While a further increase in donor funds as well as the envisaged increase in revenue of 1percentage point of GDP over the period may obviate the need for domestic financing., itwould still support a trend increase in the overall budget deficit, which could furtherexacerbate the overshooting of monetary targets and rekindle inflationary pressures, Toaddress this risk, the staff considers that coordinated action to tighten both monetary andfiscal policies IK necessary. In view of the pressing expenditure needs for poverty reduction,the tightening of fiscal policy should be predominantly effected through greater revenuemobilization,

18. As the presently envisaged increase in revenue appears modest in light of theauthorities" efforts al lefurmmg tax administration and tax policy fLOi, para.26)T the staffconsiders a more ambitious increase in fiscal revenue of about 2-3 percentage points of GDPfrom 2003 to 2006 to be appropriate. Higher revenue collection would reduce Tanzania's aiddependency and make it less vulnerable to a possible decline in foreign aid. It would alsomitigate the need for sterilizing actions by the monetary authorities which could result inupward pressure on the exchange rate and adversely affect competitiveness. Consequently,the pursuit of monetary targets would be less affected by considerations of competingobjectives.

B. The Poverty Reduction Strategy

19. Tanzania's poverty reduction strategy is oriented toward achievement of theMillennium Development Goals, with abroad range of output and outcome indicatorsspecified for three-five years into the future in the poverty reduction strategy papers, andannual PRSP progress reports. Financial policies aim at maintaining macroeconomic

c The Agricultural Sector Development Strategy has been designed with the objectives ofincreasing profitability and productivity of agriculture and Livestock as a means of reducing ruralpoverty through improvement of farmers' incomes and promotion of food security. Mainelements of the agricultural development strategy arc discussed in the Tanzania—PovertyReduction Strategy Paper Progress Report 2000/M1, August 14, 2001 (hilp://www.irnf.org) andassessed in the Tanzania—Poverty Reduction Stragegy Paper—Progress Report—Joint StaffAssessment, November 2, 2001 (http://www.imf.org).


hilp://www.imf.org

http://www.imf.org

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stability. with an emphasis on mobilizing additional government revenue; structural reformsseek to remove impediments to growth; and the forthcoming implementation plan for theagricultural development strategy targets an area of crucial importance in the fight againstpoverty and the development of a moie dynamic and private sector-led growth.

20. The authorities expect to present the second nnnuHl PRSP progress report by theend of November 2002. It will report on the measures and targets laid out in the firstprogress report and f i l l gaps identified in the joint staff assessment of the earlier report,notably by presenting a comprehensive poverty analysis. Results of the 2000/01 householdbudget survey are now available and allow a comprehensive assessment of poverty inTanzania.7 The second PRSP progress report will also draw on the Poverty and HumanDevelopment Report of June 2002, which presents an overview of the status of the mainpoverty indicators and includes a detailed analysis of various aspects of poverty, focusingparticularly on vulnerabil i ty. The PRSP progress report will benefit from a number of recentstakeholder meetings held to review progress in local government reform, the reform ofprimary education, and the implementation of the road infrastructure improvement program;a meeting was also held to assess the process of annual public expenditure reviews.

C. Fiscal Policy

21. The medium-term challenges in the fiscal policy area center on two key issues:the need (i) to increase domestic revenue mobilization by broadening the tax base in anequitable way, and (ii) to improve expenditure management, so as to ensure that higherspending on poverty-'educing programs is being used effectively, including at the localgovernment level

22 In 2002/03, the overall deficit (before grants) is projected to widen to almost10 percent of GDP, against an actual deficit of 5,6 percent of GDP in 2001/02 (Table 4).This large increase driven by an expansion in priority expenditure programs (sec beJow)—is expected to be financed mainly Ihrough higher external assistance, while the government'snet domestic financing is projected at 0.7 percent of GDP, compared with 0.4 percent in theoriginal program.

23 Kxpemliture in 2002/03 is targeted at 22.2 percent of GDP. more than 4 percentof GDP higher than the outcome of 2001/02 (Table 4). This increase, which should be seenagainst the large underspending in 2001/02 relative to the program, is due to (i) a large rise inforeign-financed project expenditure, (ii) an increase in nonwage priority outlays, and (iii) anincrease in the wage bill in line with the medium-term civil sendee reform.8 Foreign-financedproject expenditure will increase by 24 percent of GDP relative to the recorded outturn for

Appendix V presents some of the findings of the household hudget survey

Cf ^

The civil service reform, now at an advanced stage, aims at improving the quality of publicservices and raising salary scales, so as to narrow the large gap to salaries paid in the privatesector The reform is being supported by the World Bank and other donors. Progress inimplementing the reform has been broadly satisfactory

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2001/02, mainly owing to a large new project (the Songas fuel project, equivalent to about1.3 percent of GDP) and better recording in the budget of the existing stream of projects(about 1.1 percent of GDP).y

24 The 2002/03 budget targets an increase in the revenue-to-GDP ratio of0*2 percentage point to 12.3 percent. Tn support of this target, the authorities areimplement ing the series of revenue-enhancing measures detailed in paragraphs 25 and 26 ofthe letter of intent, including, among others, changes to I he iiicLirne tax regime, a tighteningin the administration of selected exemptions, and the elimination of import duty and exciseexemptions for government institutions.111

25 The recently adapted act on export processing /ones (EPZ Act) is not consistentwith the thrust of this revenue policy. In the view of the staff, generous tax incentives(including income tax holidays) for EPZs could lead to leakages from the existing revenuebase The authorities explained that the EPZ Act was intended to favor only new foreigndirect investment—with consequent employment and wage tax gains —with specificemphasis placed on the export opportunities offered by the U.S. African Growth andOpportunity Act (AGOA) and the European Union's Everything But Arms import policyThe mission held that because of the very broad eligibility provisions of the EPZ Act, it maynot be possible to exclude even existing businesses from gaining EPZ status. The EPZ Actalso committed the government to providing costly infrastructure and to fast-tracking TorEPZs many reforms that had long been awaited by the business community at large Tnresponse, the authorities agreed to delay the coming into effect of the EPZ Act, and to reviewits provisions so as to target benefits more narrowly to the intended purposes

26 Following the continued—alheii small—accumulation pi'domestic arrears in2001/02, the government has decided to further tighten expenditure controls To thisend, new procedure? for the payment of utility bills were put in place as of July 2002 (LOI.para. 29) The planning and execution of poverty-reducing programs will be facilitatedby the identification of budgetary codes for priority sector expenditure for consistent useacross the PRSP, budget, and budget execution reports. A critical first step in this directionwill constitute a structural performance criterion for end-February 2003 (LO13 Table 4). The

Tn 2002, the authorities, working closely with demurs, initiated a database of foreign-financedprojects, according to which the actual volume of these projects substantially exceeded budgetedamounts. Although work on this database is ongoing, evidence so far suggests that theunderestimation of budgeted amounts in the past was due to lower recorded levels ofprqjectgrants-, project htarvi^ meanwhile, were already channeled through the budget and, therefore,captured in the debt stocks.

Since 1999, donors have been supporting the authorities' efforts at modernizing taxadministration through a World Bank-led project with a total volume orus$73 million. Theproject's objective is to raise tax revenue by broadening the tax base and improving the TRA'seffectiveness. Also, in October 2002 a FAD revenue administration mission took place,

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status of additional measures identified in the context of the Assessment and Action Plan(AAP) for tracking poverty-reducing expenditure is presented in Box 2U

27. To prepare the ground for greater fiscal decentniliziilion. the authorities artplanning specific measures to harmonize taxes and levies at the local government level.The wide disparity and multiplicity of local taxes have been identified as hindering thedevelopment of the agricultural sector, including in the context of the Investors' Roundtable.The authorities intend to issue guidelines to local governments on tax harmonization (astructural benchmark for end-February 2003; LOI, Table 4).

D. Monetary Policy and Financial Sector Reform

23. The main challenges in the area of monetary policy and financial sector reformare posed by the pervasive overshooting of money supply targets and the need toestablish an institutional and regulatory framework conducive to bank lending. TheBoT has so far been reluctant to address higher-than-targeted monetary growth, out ofconcern that sales of foreign exchange might lead to an undesirable appreciation of theexchange rate, and that large sales of liquidity paper at rising interest rates may become toocosily. Al the same liine, various structural impediments in bank lending are constraininginvestment by the private sector and contributing to the creation of a structural liquiditysurplus in the financial sector, thereby putting downward pressure on interest rates,

29. In view of the perceived strong increase in the demand for money, the monetaryprogram for 2002-03 provides for an upward revision of monetary aggregates relativeto earlier projections (Table 7). During the policy discussions, the authorities argued for acontinued strong monetary expansion, including to minimize the exchange rate appreciationstemming from large inflows of donor support and foreign direct investment. The missionheld that the risk of rekindling inflation was real, and consequently advised a more cautiousapproach and stricter adherence to the reserve money target. As a result of the discussions,broad money (M3, including foreign currency deposits) was programmed to increase by21 percent during 2002, compared with an earlier indicative target of 12 percent and anactual increase of almost 25 percent over the 12 months ended August 2002. The authoritiesexpect to be able to reduce M3 growth significantly further during the first half of 2003,

30r Achieving the revised targets for M3 will require an intensification of fheBoTssterilization operations. To this end, the authorities started in August 2002 to convert thegovernment's large stock of ntmmarketable debt to the BoT into securities with maturitiesranging up to seven years (LOI, para. 11), The mission welcomed this conversion but advisedthe BuT that additional sales of liquidity paper wi l l be needed in order to restore positive realinterest rates, an essential prerequisite for further financial deepening. So as not to rule out alarger absorption of liquidity through sales of foreign exchange than is currently foreseen, theprogram tloor under the BoT's net international reserves through mid-2003 has been

11 The AAP was agreed with the authorities and the World Bank during an October 200]mission, this mission was part of a wider initiative to assess the ability of 24 HJPC countries totrack poverty-reducing expenditure.


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established below its projected levels, this floor, however, is still consistent with the goal ofmaintaining a comfortable reserve cushion.L2

3 J The authorities will continue their efforts to strengthen the financial sector, inparticular by addressing various impediments to bank lending. In this connection, thegovernment is preparing measures to unblock the use of land as collateral for bunk loans,including a. possible amendment of the Land Act which would be presented to Parliamentduring the February 2003 session This would be complemented by judicial reforms,including the strengthening of the commercial court, with a view io keeping the averagecase resolution period below six months Furthermore, the authorities have requested that anassessment under the Financial Sector Assessment Program (FSAP) be conducted in the firsthalf of 2005. In light of the recent pickup in credit to (lit: nongovernment sector and theincrease in the risk assets of the banking sector, the FS A? mission will seek to assess thehealth of individual hanks and their ability to cany out proper risk analysis. Currently, thebanks" ability to assess borrowers' credit worthiness is hampered by the absence of a creditinformation bureau. Box 3 discusses indicators of banking sector soundness.

32. The government confirmed its intention to encourage microfmancc by submitting adraft law establishing the legal, regulatory, and supervisory framework for microfmanceoperations to Parliament in February 2003 (1,01, para 33). The authorities* efforts toprivatize the National Microfmance Bank suffered, however, further delays, and the bank isnow expected to be brought to the point of sale only in the first half of 2003, Box 4 describesthe present status of microfinance in Tanzania. To further strengthen the availability offinancing lo the agricultural sector, the authorities have established an export creditguarantee scheme under the management of the Bank of Tanzania The BoT agreed tomodify the regulations for this scheme to ensure that it does not lead to excessive exposureby the authorities or weaken credit assessment by financial institutions.

E. Other Structural Reforms and Governance Issues

33. Key challenges on the structural reform front are to complete the privatizationagenda and to take further steps to promote an environment conducive to investment.While most of the smaller public enterprises have already been privatized, the privatizationof large strategic enterprises in the utility and transportation areas is proving more difficult.Given the fragile financial situation of many of these companies, their successful divestiturewould enhance the reliability and accessibility of services, thus raising economic efficiencyand improving living standards/' Furthermore, notwithstanding the improvements in past

n The mission suggested that, in order to reduce the risk of excessive fluctuations of theexchange rate in the wake of BoT interventions, the BoT should announce quarterly targets fornet sales iruo ihe foreign exchange market

: The staff suggested that poverty and social impact analyses (PSIAs) could be useful inascertaining the impact of privatization on vulnerable segments of the population and indesigning possible safety net measures. The World Bank indicated that preparations for thePSIAs were currently only at an in i t i a l stage, and first results might not be available until early2004.

13


- 14-

years, the investment environment remains difficult, and further substantial measures in theareas of institution-building and administrative and legal reform will be neuessary to achievehigher growth.

34 The authorities are continuing the privatization of public enterprises. Followingdelays in arriving at a draft concession agreement, the concessioning of the water utilityDAWASA is expected to be completed by end-2002. The financial performance of theelectricity utility TANESCO has improved following the takeover of the company'smanagement by a new management team from the private sector A partial privatization (49percent) of Air Tanzania and the concessioning of the Tanzania Railway Corporation areexpected to be finalized later this year or early next year

35 The divestiture of shares of the telecommunications company, TI'CL, is beingblocked by a protracted dispute between the government and foreign investors over paymentof the second tranche under the purchase agreement for 35 percent of the company's equity.The contract foresees that the amount of the second tranche depends on the results of afinancial audit of the company's accounts for 2000. However, a dispute over the quality andaccuracy of these accounts has so far prevented an agreement between the government andthe investors. Failure to resolve the conflict may result in the departure of the foreigninvestors and damage Tanzania's image as an investment location.

36. The retrenchment of employees remains a crucial problem affecting the pace ofprivatization. The commencement of the management contract for the electricity utilityTANESCO in May 2002 was delayed by a dispute between the government and workers overthe benefit package for retrenched workers. Although the management team eventually beganits work, an agreement on the retrenchment package has yet to be reached- Disputes of thisnature may also arise during the privatization uf other parastatals. The authorities haverestated their policy of limiting any budgetary support for retrenchment pay to statutorybenefits only, while permitting companies with sufficient own resources to pay higherbenefits (LQI, para.38), The mission advocated a uniform policy on retrenchment benefits, asthe financial strength of the company depended Itself on previous government policy andunequal treatment of retrenched employees could lead to delays in the privatization process

37 In cooperation with donors, the government is continuing its efforts at fightingcorruption and improve governance. Although the publication of the report on theimplementation of ministerial anticorruption plans has been delayed until December 2002;

owing to capacity constraints in the Prevention of Corruption Bureau (13CB), a consultant'sreport on the state of corruption in Tanzania will soon be made available to the public.Recent efforts to promote good governance include the adoption of ethics and accountabilityprograms at key institutions, in particular the police and local magistrates. The authoritiesindicated thai requests for such programs were expanding, and that more reports on corruptbehavior were being brought to the attention of the police. They also stressed that thegovernment's anticorruption program focused primarily on institutions of particularimportance to the poverty reduction program, such as the education and health care sectors.

38. The government is continuing its dialogue with the business community onproblems affecting the investment climate The Investors' Roundtable inaugurated in July2002 has identified the following key areas for attention: land ownership; labor policy and


- 15-

legislation; tax administration; the judiciary, the licensing of business activities, the qualityof road transport; and issues affecting the agricultural sector. The July roundtable produced apolicy matrix: of short-term actions that will be reviewed at the next meeting, in January 2003in Zanzibar

39. During discussions in Zanzibar, the Zanzibar! officials noted that, in the aftermathof political stabilization, economic activity had begun to pick up, notably in the tourism andtransportation sectors. While illegal trading had been clamped down upon, customs revenuehad not yet improved, The government of Zanzibar has recently shifted its accounts from thePeople's Bank of Zanzibar (PBZ) to the Zanzibar branch of the BoT The privatization of thePBZ is complicated by its large negative capital position, equivalent to about T Sh 13 billion.Zanzibar! officials expressed an interest in greater technical assistance from the Fund.

F. External Sector Issues

40 The medium-term balance of payments projections indicate that the currentaccount deficit (excluding grants) will remain under 10 percent of GDP (Table 8).Exports are projected to increase at an annual average rate of 7.3 percent, based on acontinued strong growth in nontraditional exports in line with the expected increase in goldproduction, a rebound in manufacturing, and a gradual recovery in the volume of traditionalexports through the implementation of the agricultural sector development strategy.Projections of the current account deficit and the amortization (after debt relief) of foreigndebt indicate continuing substantial financing requirements in the medium term which areexpected to be ftjlly covered by anticipated external grants and concessional loans. Officialforeign assistance is expected to stay roughly unchanged, at slightly above US$1 billion peryear in nominal terms, over the next five years; the amount expected for fiscal year 2002/03includes more than US3400 million in the form of program assistance (Table 9),

41, The external current account deficit (excluding official transfers) is expected tonarrow slightly in 2C02t to 8.9 percent of GDP. Underlying this improvement is a strongerperformance of nontraditional exports (mainly gold), which are expected to grow by18 percent in U.S. dollar terms, as well asapickup in tounsm receipts. Meanwhile,traditional exports arc expected to decline reflecting adverse developments in the terms oftrade, notably for coffee, cotton, and cashew nuts. Imports of consumer goods arc expected togrow very little, partly because of the recent depreciation of the shilling, while imports ofcapital goods remain strong, as mining sector activity continues to grow.

42. The receDt real depreciation of the shilling has almost fully offset adverse effectsof the real appreciation during 1997-2000 on the export sectors competitiveness(Figure 5). Nevertheless, the volume of traditional exports rebounded only slightly asdepressed world prices for coffee, cashew nuts and cotton constrained the supply response toa more competitive exchange rate. As projected large aid and investment inflows as well asstrong gold exports cart be expected to put further upward pressure on the real effectiveexchange rate, structural reforms aimed at creating an environment conducive to investmentand strengthening (he manufacturing sector will have to be accelerated to help improve andmaintain Tanzania's competitiveness. Moreover, as most of the foreign assistance ischanneled into the economy through the budget, the Hal should design a transparent foreignexchange sales strategy that minimizes the impact of aid inflows on the exchange rate.


-16-

43. The authorities are committed to regional integration in the context of the EastAfrican Community (EAC) and the Southern African Development Community(SADC) The EAC countries (Kenya, Tanzania, and Uganda) have agreed in principle toimplement a common external tariff and establish a customs union in 2004. Discussions onthe structure of the common external tariff are continuing, in particular with respect to the toptariff rate. In the meantime, Tanzania is committed to maintaining the SO percent reduction mtariffs for EAC imports, and to not imposing any new surcharges (suspended duties) onimports from the EAC 14

44. Tanzania's external debt appears to be sustainable, following the HIPC debtrelief approved at the completion point in November 2001. The revised net present value(NPV) of debt-to-export ratio at end-June 2002 was lower than the 150 percent target underthe HIPC Initiative (Table 10) The NPV of debt was updated by including newdisbursements of US$296 million during 2001/02 (July-June), which were significantly lessthan the USS415 million projected in the completion point document for the same period l5

This lower-than-expected level of new disbursements reduced the NPV of debt stock at end-JuTie 2002 by about US$32 million. At the same time, exports of goods and non-factorservices are estimated to have beerv higher (by about US$23 million) than was projected for2001/02 in the completion point document. Consequently, the NPV of debt-to-exports ratiofor 2001/02 slightly declined to 127.8 percent from the 130.8 percent predicted in theprevious debt sustain ability analysis (DSA).16 For the projections, the main assumptionsunderlying the revised debt indicators (e.g., economic growth, export growth, anddisbursement of new loan?) are the same as were used in the DSA of the completion point.The revised debt indicators show that Tanzania's public and publicly guaranteed externaldebt is sustainable, provided the debt relief assistance under the enhanced HEPC Initiative isfully delivered As can be seen in Table 10, the ratio of the NPV of debt to exports remain?well below the enhanced HIPC Initiative sustainability target of 150 percent throughout theprojection period.

45 The government is in the process of concluding bilateral agreements with ParisClub creditors* So far, agreements have been signed with Austria, the United States,Canada, and Italy, and debt to the United Kingdom has been cancelled. Reaching agreement

1-1 Currently, about 17 categories of imports from the EAC member states are subject to a20 percent import surcharge (after application of the 80 percent general tariff preference for EACimports),

15 The shortfall reflects in part delays in meeting conditions for program loans by the WorldBank and African Development Bank. The NPV of new disbursements in 2001/02 was based onthe same parameters (e.g., discount rates and exchange rates) as in the completion pointdocument (EBS/01/185; 11/9/01).

L6 However, owing to a larger-than-expected depreciation of the shilling, government revenueand GD? in U.S. dollar terms were lower than projected. As a result, the NPV of debt-to-GDPand NPV of debt-to-revenue ratios are slightly higher starting in 2002/03.


- 17-

with non-Paris Club bilateral and commercial creditors has been problematic:, butprogress has been made in discussions with Kuwait which confirmed its willingness toprovide debt relief on IIIPC terms. Also, Libya, a major creditor of Tanzania, has recentlyannounced its participation in the HIPC Initiative. To encourage the delivery of debt relieffrom non-Paris Club creditors, the authorities have recently established an account at the BoTearmarked for eventual debt-service payments to non-Paris Club creditors, into which thegovernment will transfer USS5 million during (he fiscal year 2002/03 (LG1, para. 16), Theauthorities have requested the assistance of the Fund and the World Bank in encouraging theparticipation of non-Paris Club creditors in the HIPC Initiative

IV. PROGRAM MONITORING

46 As indicated in the authorities' letter of intent, implementation of the program will bemonitored with the help of quantitative and structural performance criteria and benchmarks([.Oil, fables 3 and 4). The structural measures focus on the areas of tax policy andadministration, expenditure management, public debt management, and financial sectorreform. These measures and targets are complemented by structural measures monitored bythe World Bank (Box 1). In addition, the African Development Bank (AfDB), the EuropeanUnion, and bilateral donors provide extensive budget support in the areas of civil servicereform, budget management, tax reform, legal and judicial reform, private sectordevelopment, the reform of parastatals, rural development, and general capacity building.The last semiannual review under the current PRGF arrangement is expected to be completedin April or May 2003, and, to this end, the authorities are requesting an extension of thecurrent PRGF arrangement of three months to end-June 2003. The form of fiitureFundsupport for Tanzania will be influenced by the forthcoming review of Fund assistance to lowincome countries. The Tanzanian authorities have requested an early discussion of theoptions available to Tanzania.

V. TECHNICAL ASSISTANCE, DATA ISSUES, AND SAFEGUARDS ASSESSMENT

47. Tanzania has been receiving substantial technical assistance from multilateraland bilateral donors The Fund's technical assistance has been focusing on improvementsin public expenditure management, tax administration and policy, monetary policy, and dataqualily. The implementation of recommendations from technical assistance missions hasbeen generally good but it has suffered from capacity constraints and the departure ofqualified staff from the civil service.

48 Notwithstanding the considerable technical assistance in the statistical area,Tanzania's database remains weak. The national accounts provide a basis for assessingmovements in output; however, the lack of transparency in the relationship between theexpenditure side of the national accounts and available statistics on government finances andthe balance of payments hampers the estimation of the savings-investment relationship.Also, the basket underlying the consumer price index needs to be updated in light of theresults of the new household budget survey Following a balance of payments mission by theFund's statistics department, the authorities are preparing a survey of foreign directinvestment (FDT) for 2000 and 2001 in order lo ascertain the realism of the large increase inFD1 recorded in the earlier survey and the need to revise the balance of payments data Amission for a ROSC data module visited Tanzania in October.


- 18 -

49. Under its current arrangement with the Fund, Tanzania is subject tu the transitionalprocedures of the Fund's safeguards assessment policy and is required to demonstrate thatthe BoT publishes annual financial statements that are independently audited in accordancewith internationally accepted standards. While the BoT recognizes the need for rotation ofthe external auditor, its current policy allows the same firm tu be reappointed for a secondthree-year term following the expiry of a first term. Should the same firm have served as theauditor for a period of six years, however, it is only eligible to be appointed as auditor after afurther three years. The BoT points to the limited capacity in the Tanzanian accountingprofession as the explanation for this policy of rotating external auditors.

VI. STAFF APPRAISAL

50. The Tanzanian authorities are to be commended for the continued pursuit of soundrnacroeconomic policies and structural reforms, notwithstanding serious capacity constraintsand a sometimes adverse external environment. Improved expenditure management hasbrought larger allocations to poverty-reducing expenditure programs and regular reporting onbudget implementation- The adoption of a new debt strategy has laid the foundation for amore effective management of domestic and external debt. These efforts have ensured thatTanzania's overall fiscal performance has remained in line with program projections

51. While impressive progress has been made in the areas of expenditure reform andtransparency, tax reform and revenue mobilization clearly lag behind. As a result, fiscaldeficits are tending TO rise, and inflows of donor assistance have become an important factorin explaining the overshooting of monetary targets. This calls for corrective action by iheauthorities to prevent the rekindling of inflationary pressures. In the view of the staff, atightening of both fiscal policy (through a greater mobilization of domestic revenue) andmonetary policy (by stepping up the absorption of excess liquidity) will be necessary. Astronger emphasis on fiscal policy in dealing with the expansion of liquidity emanating frumdonor inflows is all the more desirable, as sterilizing actions by the monetary authorities thatinvolve sales of foreign exchange could put upward pressure on the real exchange rate fromits present broadly appropriate level As sales of foreign exchange will nevertheless benecessary to manage liquidity and release donor inflows into the market, the monetaryauthorities should seek to moderate their effects on the exchange rate by announcingindicative quarterly targets of foreign exchange sales Subject to this recommendation, and inthe continued presence of large donor inflows, the staff considers Tanzania's exchange ratepolicy as appropriate.

52. Tn light of the need for more determined action by the monetary authorities to mop upexcess liquidity and restore positive real interest rates, the staff welcomes the securitizationof nonmarketable government debt as enhancing the flexibility of the monetary authorities inconducting monetary operations. However, the amount available for securitization should notbe a limiting factor in determining the size of liquidity operations, and these operationsshould not be constrained by concern over their interest cost.

53. There has not been enough action to reduce tax exemptions, although the measuresannounced in the budget for 2002/03 to better administer existing exemptions are welcomeand should help in limiting revenue Jeakages. The recently approved EPZ Act poses risks to


- 19-

the soundness of the revenue collection system, as loose eligibility criteria for companies inexport processing zones could make control of these zones difficult, while generous incentivepackages may weaken the payment discipline of other taxpayers. The staff welcomes theauthorities' commitment to review ihe Law, with the aim of minimizing revenue losses andfocusing the law narrowly on the new opportunities for access to export markets in theUnited Slates and Europe

54, The removal of impediments to bank lending should be accelerated, The staffwelcomes the authorities' commitment to engage in a consultative process with the bankingcommunity, with a view to determining the scope of any amendments to the Land Act thatmay be needed. A strengthening of the judiciary would be an important complement to theactions aimed at fostering an environment conducive to lending and investment.

55, The recently adopted National Debt Strategy needs to be fully implemented tofacilitate an efficient management of Tanzania's external and domestic debt and preserve thecountry's long-term debt sustain ability. In this regard, tight controls on new borrowing andappropriate prioritization of new projects will be necessary

56, Based on the authorities1 continued record of good program implementation and theircommitments made in the attached Letter of Intent, the staff recommends that the ExecutiveBoard grant a waiver for the nonobservance of the structural performance criterion on theapproval procedures for foreign borrowing and complete the fifth review under the currentPRGF arrangement 'The staff also recommends that the current PRGF arrangement beextended by three months to end-June 2003

57 The staff recommends that the next Ankle IV consultation with Tanzania be held onthe 24-month cycle, subject to the provisions of the decision on consultation cycles approvedon July 15,2002.


-20-

Box 1, Tanzania: Structural Conditionality

Coverage of structural eondidoniility in the current program

The KlruuUuaJ performance criteria and bencEunarks proposed as conditionality for the seventhdisbursement under the current PRGt" arrangement (LOl, Table 4) support the iiiacroccunoiiuvobjectives of the program by underscoring the government's intention to improve

• las policy and administration adopting a. centralized motor vehicle registration system, andintroducing a treasury voucher system for administering exemptions applying to nonrehgiousnongovernmental organizations and motor vehicle purchases by eligible public servants;

• fiscal decentralization by issuing guidelines to local councils for the harmonization of taxes,icvics and licenses;

• expenditure management by requiring spending agencies to submit quarterly reports on theirutility bills and amonnrs paid, and identifying priority expenditures by budgetary code acrossPRSP, budget and budget execution reports,

• public debt management by submit ling to parliament amendments to the Loans, Guaranteesand Grants Act and establishing a National Debt Management Committee, and

• fiiiiintial seclur reform by submitting LO parliament the draft Jaw establishing the legal andregulatory framework for microfhiance operations.

Status of structural conditionality under the PKGJ'-supportcd program

The structural performance criteria and benchmarks applicable to (he sixth disbursement focused onbroadly the same areas, with an additional emphasis on trade policy. The performance criteria relating tothe clearance of all audited domestic arrears and the announcement of a timetable for die elimination ofthe suspended duties were observed A third performance criterion on the submission to parliament orlegislation that makes the government's incurring or guaranteeing of foreign debt subject to cabinetapproval upon recommendation by the Minister for Finance was not observed because of a change oflhegovernment's approach following the adoption of the National Debt Strategy. Benchmarks on Lhepublication of local government accounts and of the second report on the implementation of ministerialanticorruption plans were not observed, primarily owing to capacity constraints. The harmonination oftreatment of loan loss provisions by tanks for prudential requirements and taxation purposes has beendelayed until December 2002, as ths consideration of available options is taking longer than anticipated.

Structural areas covered by World Bank lending and condilionality

IDA is currently providing adjustment lending through a programmatic structural adjustment credit(PSAC I) consisting of one tranche thai was disbursed on effecrivene^s and four floating tranches., ofwhich, three tranches remain undisbtirsed. One of them depends on action to relax restrictions on foreignportfolio investment in equity instruments. Disbursement of the final tranches hinges on bringing theDar es Salaam Water and Sewerage Authority (D AWASA) to the point of concession, which is expectedto be done by cnd-20027 and reforming the regulatory framework for infrastructure services, expected formid-2003 The World B;mk is preparing a Poverty Reduction Support Credit (PRSC), which will supportthe implementation of thy PRSP and is expected to be submitted for approval by the World Bank'sExecutive Board in May 2001V ConditionaliTy under this credil is linked to measures in the areas, ofinstitution building, and debt and financial management.


l-JI

: Box 1. Tanzania: Implementation Status of Actions to Strengthen Trucking of Poverty-Reducing Public Spending

Actions

Actions lo Mrengthcn tmcUjit fonmilaliem

1 Identify poverty -reducing items in budget

2 Improve nccountinj> lor external disbursements

3 Include table showing poverty-reducing expenditures in2(102/03 bud^l

4 Exlcnd Government Finance Statistics (GFS)-basedeconomic classification to subventions, rîuiis, anddevelopment budgel

5 Apply GFS-hfissd functional clas&i fication to recurrentand develop] iicnl budget

6 Strengthen rasdiuiii-wnn expenditure fimuuworfc(MTEF) process, and nidnde nvo-year projeclioiii; in2CU3/04 budget

Actions to strengthen budget execution

7 Transfer clcctromcitlL)1 (LFMS) accounting database forfive remaining votes to ACGEN*s office

Timing Status Dale Comments(S/M)1 (n/ll>NSf Achieved

Under implciiifiJtliUion. Siniclural performance crilerion forS II end-Februaiy2QU3.

New database on donor disbursements created at Mhrislryof Fiiumce, updated regularly jointly with donors;

s r. accounting of do nor -funded projects llirough IFMS mid^rimpl amenta! ion al [lie Accountant General's (ACGEN)Office.

This measure can be implemented only after adoption ofS NS men sure 1.

Implemcntcd for the regions in the 2002/03 budget; to beimplemenled for subventions ;n(d development budgel in

11 2003/04 budgel.

Tculuiical assislancc front the Fund piovided in Qciober-Novemher 2002, impJememiiiion by March 2HO:i

M II MTEF under implementation.

Dnc to security reasons, dedicated phone- lines to beS II installed to allow connectivity wiEh ACGEN office.

Implementation by .hjiiiiary 200;">.

m

m ii


I

1010

I

Box 2. Tanzania: Implementation Status of Actions to Strengthen Tracking pFPovtrty-Reducing Piiblk Spending

Actions Timing Status Date Comments: : - - • . : " : • : • • : : . . . -(S/M)1 . (FI/II/ISSJ* Achieved • . : . . . . - ; . . . .

X.

9

10

11

12

13

14

15

](S

Institute reporting system on arrears for submission to <-ACGEN hy accounting officersSCreiigUieu intcninl iindit with (hree measures (definitionof responsibilities of internal auditors, inclusion ofinternal audit Junctions in Ib'M.S, and training of internalauditors)Finalize terms of reference for expenditure tracking ^surveysDesign template for local governments' iLG) reporting c _,T

i rl

Irisuc circular requiring LC quarLerly njpwLsS FT

Train for and enforce titnelv submission of LG rcportsS II

Compile quarterly reports on poverty-reducingcxpcndimrc; bused on IF MS S l\

Compile fiscal accounts of genera] government . , „

Strengthen external audit with three measures (capacitybuildiap,, IT de\-eTopment, and training in computer- Vf IFiissisted niidit techniques)

S^ Short -term nclion, M=uKXliiun-tcnn nction.-5

FI=fully impicmenled. II=iuipleineiitation initiaterl, NrK~not sT;irted

New procedure fnr reporting of arrears related Lo utilitypayments msliuiLcd us of .Inly 2002.

TeclmicaJ assistance being provided in the nreas of Iniininj?and JT development,

Under impleirientjilinn.

> r^^, Circular to LGs sent in Jaimarv 2002Jan. 2002

Circular Lo LGs sent in Jiimiary 2002. Consolidated reportsJan 2002 being prepared [to be completed bv December 2002)

In-house training ongoing, Technical assistance beingSOIlgllT

The TFMS is capable of gene ru Ling swell reports^ oncemeasure 1 has been implemented.

Tills meditim-lerm measure is nol yet iinpleniEiitcd.

Technical assistance is being provided to develop IFMS-bascd audil module, strengthen capacity, and Lrainiii^ incomputer-based audit techniques.

m

s ii

ii

ss ii

nm ns

1

2


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Hox 3. Tanzania: Soundness of the Banking Sector

Financial indicators presented in Uie (able below point to a steady improvement in Ihe ôirndness of Tanzania'sbanking system P;utly as a resull of strengthened on-site and off-site surveillance, prudential norms underexisting legislations have been ejifbrced more effectively. The capital adequacy ratio of the banks has increasedfrom 10.7 percent at end-1998 to 17.4 percent al end-June 2002, although it declined from ils eni-2000 level,mainly due to ;m increase in risk assets. Earnings and profikinilily of the banking sector have also recoveredfrom the trough of l'»9 brought about by the rcmovaJ of nonperforniirm loans from the balance sheet of theNational Dank of Commerce and the subsequent recapitalization, The operations of the Dclphis Bank, whichexperienced a nm triggered by a crisis of confidence following the sudden death of its owner remain weak, butgiven the small size of its balance sheet and prompt intervention by the BoT, it poses no systemic risk to thebanking system as a whole. An in-depth assessment of tlie health of individual banks will be undertaken by ihcFSAP mission, which is expected 10 be fielded in March 2003.

Tanzania; Banking Sector Soundness Indicators, [998-20G2(Ratios in percent)

199S 1999 2000 2001 2002June

Capita] adequacyRegulatory capital to risk -weighted usseis ]/ L0.7 4,3 IS.2 1C.7 17.4Regulatory tier I capital to risk-\veighteJ assets 10 1 6/J 18.1 16-5 17,2

Assets qualityNonpcrforming loans to tota, gross loans 22.9 25.2 17.3 12.0 9-3

Earnings and profitabilityReturn on assets 2.7 0,1 1.6 1.5 0,9Return on equity 2f B6.8 2,1 37.6 35.2 19.9Interest margin to gross income 3/ 37.2 41,4 41.9 43.4 426Nonkiterest expenses lu gros> income 45.1 54.2 46.3 57.3 566

LiquidityLiquid assets ta tola] assets (jquid n.ssel5 ratio) 62,4 66,5 65.2 70.7 69.6Liquid assets to short-term (demand) liabilities 4/ 11^.7 118,1 133.5 130.6 128..1

Personnel expenses toijoiimuyesl expenses 45.1 31.6 41.5 37.9 44.0

Source; Bank of Tanzania (BoT),

I / Regulatory capital = tier I + tier II capital,2/ Shareholders equity includes paid-up capital, share premium, capital grants, and retained earnings.3/Net interest income/(gross interest income + nnninterest income (excluding loan loss rôvcrics}).41 Demand liabilities include savings deposits.


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Box 4. Tan/ania; Status ol1 Microfinnnce

Background. Tanzania's agriculture- and livestock-based mraJ economy accounts lor about lialf of GD? andalmost two-thirds of foreign exchange earnings, and provides employment to more than SO percent of theproductive workforce. Its ftuthcr development is held back, among other things, by poor access to creditfacilities commercial blinks fmd it expensive to serve small ;rnd widely dispersed customers, while the latterfind the transaction costs, accessibility, and coudilions for borrowing frtuii formal financial insdlutionsprohibitive, In the absence of commercial banks, microfinance institutions (Mb'ls) such as savings and creditcooperative societies (SACCOS). savings and credit associations [S ACAS), and nongovernmental organizationsfill the void These community-based institutions are generally very small (on average, membership ranges from20 lo 200), ;md often without professional staff. Lending members handle very limited operations on a voluntarybasis, struggle to raise capital from members in the form of membership fees and share capital., ;md to a verylimited extent mobilize financial savings for on-lending, mostly, however, they are nol capable of maintainingaccounts and drawing up a balance sheet.

In 2002, the commercial bjink CRDB, with support from the Danisli International Development Agency(DAN1D A), lias started a pilot project aimed at providing training for the MFTs to manage their own lendingoperations and assess lending risks. The goal is to extend a credit line to selected S ACCOS lor on-3ending totheir members, while the CRDB does off-site and on-site monitoring. Other commercial banks are planning toestablish microfinancing units, but, so far, this constitutes only a small part of their loan portfolios owing to alack of appropriate outreach technology, know-how, and a legal, regulatory and supervisory framework foriiiicrofinaiice operations.

Ineffectiveness of existing operating framework for MFIs, Lack of a unified regulatory and supervisoryframework prevents effective supervision of MFIs, SACCOS are registered under the Cooperative Societies ACLof 199 L and are supervised by the Cooperative Department of the Ministry of Cooperatives and Marketing,while SACAS are regisrered by the Ministry of Home Affairs font supervised by the Ministry of CommunityDevelopment, Women and Children's Affairs, thus leaving them outside any effective supervisionFurthermore, poor record keeping and lack of regular and adequate reporting Irmdiuip any attempt atsupervision.

Status of the issuance of new microEnance regulations In an effort to establish an enabling environment forthe development of microfinance, the authorities approved a National Microfinancc Policy in May 2000 and setup a task force for the preparation of a legal, regulatory, and supervisory framework for microfinanceoperations. "Hie task, divided into three ptiases, wai contracted to a consultant, who started work in July 2002The first pha&e is aimed al developing an appropriate legal framework for rmcroTinance operations. A draftreport on the findings and recommendations for amendments to the Banking and Financial Institutions Act1991, Bank of Tanzania Act 1995, Co-operative Act 199L and other related legislation was submitted to theauthorities in September 2002 The second phiise, which is expected to be completed in early November 2002.involves the development of an effective regulatory framework for micrafinance operatians, includingappropriate accounting principles and reporting guidelines. The third phase of the project concentrates on (hedevelopment of a harmonized supervisory framework for microfinance operations. The final product is expectedlo be submitted for parliamentary approval in February 2003 and issued in May 2003.


- 2 5 -

Figure 1. Tanzania: GDI1, Savings, and Investment, 1999-2004

SuLjrcst>: Tajuanian authorities: and staff estimates and projections.


-26-

Figuve2. Tanzania: Prices and Interest Kales.January 1997-Septernber 2002

Source: Tanzanian authorities.


Figure 3. Tanzania; Cental! Government flounces, 1997/98-2003/04 I /(In percent of GDP)

Sources: Tanânian amhoriLies: and Fiuid staff listJmalns and projections.If Fiscal years -i"1^ &um Ju ly lu June: CApcndiliii'e data excJuduujj, statistical discrepancy andKCajpilaUnation cxpeiLditiire.

- 2 7 -


Figure 4. Tanzania: 91-Day Treasury Bill Markel Indicators, January 1999-September20Q2(Monthly average of weekly auctions)

ir-jCOi


-29-

Figure 5, Tanzania: Exchange Rates, January 1997-July 2002(1995-100; foreign currency per Tanzania shilling)

Sources: Tiinânian aulhuriiks; and 1MF+ Information Notice System.


-30 -

Table 1. Tanzania: Phasing of Performance Criteria, Reviews, andDisbursements Under the PRGF Arrangement, 2000-03

Expected Disbursements

FApetited D^

Mu:d_2CCO

Marsh 20CO

July 2000

September 2000

M;uvh 200 1

March 200 !

September 2001

September 2W]

Mav2n02

June 2002

November 2CC2

Millions

ul'SDRs

20,0(disbursed)

--

200(disbursed)

--

20.0

(disbursed"]

-

20.0[disbursed'i

-

200

(disbursed.)

20.0

Percent F.ventol'Qunla

10. 1 Board approval <jf PRGF anan&uinciiL

Test date for quantitative performance criteria for first review I/

1 0. 1 Completion of iirsl review

Yesi date for quantitative performance criteria lor second review I/

10.1 Completion of second review

Tcsl date IDJ quantitative pcifoniiaiice crjtena tbi thijd review I/

10, 1 Completion of third review

Test date Jbr qujj:Lita'.ivc pcrt'orrnance criteria for fourlli review I/

10 1 Complain in nl ' fbiirib R:VIC\V

Test date for quantitative performance criteria for Hfth review 1 /

10 1 Hoard consideration of fifth iz\r>^t\' and leanest for extension of

I / Structural pcribrniaiun: crjlt-Tia liad ur will nave l^bt caltra at or nâi tliu same J.̂ .:̂ us quanIllative perlbrniancs criteria.

PROt iiiTaiigeineni

1 Dcccmhor Z.002 — — Test dntc fnr qiMiiritp.'ivc piTr'himjmcic orilena Lbr îxlh review If

May 2003 15.0 7.5 Board consideration of j;xtli review

Tr>tal n.i.O 679


-31 -

Table 2. Tanzania: Selected liconomic and Financial Indicators, 1S99-20Q3

National in.crrme and [i rices

Nominal C1DJ1 [billion o: Tanzania shillings)

Real GUI' growth

Real GDP per capitaCousjmei prices (period average)

CiwJitier price? fend of period)

Ex'emiil we torExpoiT, f.C'.l* (iii U 3. dullais)ImjMwis, c.i.f f:n 17.?. drJUrs)

lixporT -v illume

[mpon valuine

Terms cf trade

Nommol effective exchange ra:B (end of period)Real effective exchange rate [depredation -)

Public finance 1.'

Revenue (excliitlini; .grants)Tuta: Mji en Jit me

CU".tIli C7i.pCLlt1i.[ULC

Develop nicrrl esyienilLtHre. and net lending

Mcnsy arid credit

Brtuu muneyNet fomjiji assets

Ncl dnnicslic- assets

Credit ID nn-ngnvernmcni sector

Vclnci'y of money (CJLirAO; iivcrnge)Trsa-iiin' hill inlcicst rale (in pwiKciTt; cnj if neiijd) 2/

]W9

rti'i^47

'1679

7.0

543.3

-1J72.7

-17.61.5

13 .5-10,1-5.6

12,026,522.9

43.2

18.635.66.6

25.55.7

15.5

2000

(AimudJ pcrt^nldg/r

7,?.C.7

4.9L.7

5,f5.5

S633

-1.5M.7•J5S

-2.?.-2.7y,j

12-4

20. 33.5

22.2-las

H.849.6

-16.29.45.65.7

i^'JOl

Plug.

th4n.ii;, uiJcss

7,»2S.IZ.45 J4.3

771.SJ-1.725.3

36.7l?.4-K.2-y.fi-7.5

10. '122.726.73.0

[7.136.7

.14.1LS.S5.33.9

EM.

ofliL-nvist indicated)

8,1665.C,2.95.24.V

77^.1-1,714.7, -I

%S12. t.8.7-9.B-7.5

12 21*U1R.T

1.8

17.136.7

-14.118. 85.43.9

2002 20Q3

['rojcctions

,̂039

5.9I.*4.fi4.S

850.1

S72».«

4.21.64.^

12.435.429.S

101.1

21.029.3-0.1

32.05.0

CJ,«6

6.0^.44.13.y

910.2-1,929.0

3.49.6-V*

12.04.6

13,0-17.0

10.Z7.6

18.529.8

4.8

(!n |:c:ccut of GDP, mjeas (itlioiwist inJiâtcJJ

Public imamsRev«nue (excluding gran la J

Iota] grantsExpendiiurs

Cn.'crJt balan:e (ircludiiig pants)Domestic iinancinp 3.'1

Sak'ujâ ar.J Jivesti:iîl

S.e«jiirtc gap

ln\TSTlllCilTGcvrnuiieni

MiHiÔVCmnicr.l

Gmss dnirwti^ MT-ings

External sector, public eteK sntl debt aer*iccCmrenL jccaunt balance (excluding current C'ffiiial trarigfersj

Curren: account balance (including curreTit offloial iiansforej

EXtemaJ debt serw=e due Cbefore debt isiief; in petc-ent

of ergons of aoadi and nonfacior service)

Balance of payments turrtnl amount baLuii;; [c.'iulutbig granls; deficit -)

Ovaall bilance of payment (dsfici: •]

<3io« Dflkp.1 [Eaei\'ts

InmOnth!; of impons of gOdds anil nCjUfactnii services

1 1.34.5

18,3-3.3D.I

-12.715.53.1

L2.4

2.8

-13.1-9.2

2C.T

I.U-U-67.97TS.6

4.4

12.03.7

17 J

-1.50.0

-S.417.6

3.J14_3

9.2

-9.4-5.1

31.8

(In milliara of L'.S.

-!3W90.2

&74.-15,1

1-5.25.0

iy.>--z.i0.&

-9115.93.3

12.26.S

29,6

12.14.-i

I K . ]-1.1-U.3

-8.617.03.7

13.3S.4

-9.3-5.4

30.2

1235.7

??..?.

-4.1

L'.7

-8.1

17.-1

4.013.1

Sf.3

-S.9

-^.1

25.8

12.64.9

71 1-.i.<i2.0

-9.017.94.2

13.78.9

-9.3-4_f,

LS.5

dollars, lilllesg OlherMBe indicated)

-858,0

9.9I J W 6

5.5

-875.1

9-6I;l5r;.(5 1

6-1

-834.124 8 rV

hS0.1.7

7.1

-im.o223.1

3.719..1

7.5

&1111U3: Ta/i7a™an iUtlioritics dTld Fundfllaft"cslimalcs flndpiTfijcctinns.

1' Fitcal veats (Jiilv-Juae), hegjiuitng in rli« yeif iaditaiedin the taJiinm header.2f WdghKd-avcragcyi;ldof 1>1-, 132-. and 364-diy lrcasnr>- bills.3.' t-xdudingncwdt;b( issue J Lo rut;apiLalia: mntmniunl-ow-ned banks.


-32-

iSble 3. Tanzania: National Accounts, 2JUCI-CI5

31iaici 2000

pIXIO, In

percent)

2001RnL

2002 2003 2^(H 200f

PrajectiOnf

(In units si jndi^led)

OvrailOnP

Nominal (in hillionh ot"['an74nia shillings)Ltcal (percentage change)Deflator (percentage change)

7,267

4,57,i

8 IS6

5,6f i 6

^,U3iJ

5.94.6

y.usfts.o4.2

(Annual peiOTiiaÊ change in real terms. unkss otherwise indiSecloial components cf GDP

Apiculture

Industry

Mining

M.i n uf acturing

I'.lccirtcity and water

CJmwlnitlicn

Services

Trade, holds, and restaurantTransport and cfnnrtiLliticaihnS

Financial and business strawsPublic adnuiustrjlxin and ulhsr services

Demand components frf (5DP

C.Pii sump [inn

Liovcmrr.cn I

Oilier seniors

Investment

GovernmentOther saclora

Foreign balance 1''ExportsImparts

Natiuml saving anil invcslinciiL

QuvciiunaLt

3a\'iiig

TnvislmtcKBalance

Ncngovenuneni settoraSaving

bivestmeniBalance

All nectarsSaving

Ofwrih-.il \ ilnnitnlit saving

Ln<cstiiiciil

Fnrcign savings (-) ?.'

Ctinaumplion

Public

Private

48.2 3,4

Lil 6.7•j.i n.yO 4.81.7 S.'J

J.B V,(J

35.4 ti.416M 6.5

5.4 «,[

J.9 4,07.7 7.9

037,2

-02

7514, -1

59

3.518, 4

0,1

55

6.011 5

5.0H.J5.S

5.36.76,32,35,5

.V76.03.2

3.8]6.9

3,2

i.a]7,B

8.1

5.3

?.S1?..]6.25.14.2

6.57.97.75.21.5

3f,

4,610,5

5.914,7

3-6

-1.1

-15.1

U

5,4

6.9100

fi.S

6.06..(

6.27.07.04.92.8

T.-7

4.28.5

9.0L2.08.0

-3.1

2.1LO.*

10,53J

6.D

3.8

caitii)

5,4

6.S^ j r i<1.9^-0^.j

6.26.35.3

4.?9.2

rt.rt3.B6.5

7.410.26.6

-1.46.47.2

IL^Kl

5.05,7

6,2

6.63.07.06.05.5

5.46,36.34.9

-4.1

f,A

3.T

7-i

^.3S55.6

-162.55.7

(In ppresii: of QDP)

1 7

34-1.7

14.514 .3

0,2

16,29 2

17.6-1 5

yo.sC.'J

34, 1

7^-5

3.7-1.^

]3.C13.3

-OJ

isr;a.4

iro-1.5

91-66.3

BJ.3

-n.44-0

-4.3

16.S

:3.43.4

16.4P3

174•rj.9

VC'.V&.i

S1.5

(1.5

4.2-3 S

J5913.7

2,2

W.SE 9

179• 1 5

y i . ie,4

B1.7

17.4,4

-].2

12713 K

-1,1

15 PS 7

13 1-7.7.

snj6,4

B-l 9

1.+4.5

-1.1

12613.7

-12

l«.tf87

183-7.1

S/l.J

6.7ff-i.S

Kourccs: TarâtiiBn authorities: and Fund siall ^liiruLies and jroje^tiura.

l/FKUrtsKpresantti6t(Mitribiili{Miof tl»t cliangeki ihefoieigji balance tor;a!GDP growth.2.' Esiemal cijncnc account, including grants (juieiesi paymenia on a cash basis).


'-I -1- .tj -

Tablt4 rânia; Ccrrtul GuwmnunL Operations, LÎWOtJiJ-'J'-lO.-^ 'J

IVlAl rCVtniw;Tu:-t ivvjnje

;-njior_ diitjctVdW-addtJ ta>.(VAT]1 ;Tm«;i

hirotnc taxesfiller texts

KontLxrsvenue

Tn".iJ cx|.ic:)iliTiiiuRecurrent uxpcfirliiine

Wages and salantsIr.IcresLpavmenls

DomesticForeign

Goods ar.d *crvitcs and transfersClearance of don'.ejlic arrear;iBaiik and paraslalal vecapi'aliârior 2Dtvcl ;pmtnl. expsndi Lars

Domcaslically fnidiicedljlor:igti financed IV

Expenditure carryovci1

fJitiil lulled revenue (-)•' expend it lire I-] &

•LHcTall balance before pi a sits

GrarLsiPiocram (inducing Iwskct fiinding)FiojeclHIPfJ Iii_lialjvr jj,LAiiL relief

( jvcia l : h j j tan^c af'.r.t grants

FiiiancmaFortiLuifnei''

Foreitn !t-antP[Og]illIl

llrrjccr.j\mortizatirn

llonssijc (netjBjnk :lnan:m::>KWlrdiik JjiiKLicLng

liank and pnTdst.ilal vt.âDJtalizatLon 2/;\rtior.;zation ot'ii.iraBrala: dcbLPrivatization proceeds

Mccnifiiiiilum ilnns;Hunurj ' lialancu (cxeludin^ ..TiinlB andjorcign-tisantcii dtvebpineni txp^dilurei

l-,srpcadi:urt on defense ar.d raliorial ssivic*

I9WOO

772.1oî.y

83.7?2^S

B« ;205.1

S69SO, 5

I,?.1/?, ft

807.6235 j1270

M l 44.5. 6

?93.33,7

100,735^9

lO.i3*1.?

20.7

-14."

-S34.4

307.?94.3

207,55.5

-JZ7 1

227 1105/1191 2

SS 2l.l.').0

-85.89,L

-27.435,5

IOC] . 7n.o

12.0

-S7.L)•il 7

?[hH).'(H

ej^.ri«27.S

3S.t>502.0134.S

194.0SI i

10I.S

1 33S.29W-f*:^'in. i12S. 1?7.S50.4

?50.4

-17-129.3

2S6.335.1

5.J1.2?i 4

•2.0

-+l(f.7

TS^.l114.0l^.t43.7

-L±4.5

!24.-ii?0.4

i7Z945.^

I27.fi-H?.^

-^.J

-IS. 716.?y. sri.o

26.7

-JI.3

L05.3

20S1-Pru^.

lln billiL-n:.

l.Oid.lM32S

S7.H355.91S.I.8225.5

K ^ ) 75.a."i

i.em.51,249.?

--,4f,f,I'N.566,357,7

77S Sfi?rt

D.O2!K.D

50,224'-, 63i.l

iJ t l

-615/1

423.5l^d187.0•s-1.5

- S 9 L . 9

iy L ?;M."l o^q:42.2576

-65?i',77

6? 70.&0 0

-105( ) [ )

-246.311? ?

•'32Act-jol

fflO'i1

1'rog.'(J,f

Rev j.'rofF.20ii:vri).L

U'TO| .

•if Tan^f.nia slnllinssl

!.042,993 S 5

^S.9?52?1776228,4

& L aJ04.5

L^fi (j1.J71 •-!

J4iOm i6465fi 5

70S 359 16 0

^91 35(i.2

2 A } . \3U 1

335

-1795

3K5.21S3.014-0 2630

-94.3

943I I K fl«7.it86 *

itxj y-SS9-226-592Sfit0.0

-1.60.0

-117.3112.3

1.157-2J.(W3r9

1 3 0 138L27.14 K

257.3100.C93.3

l ,«5?tiK44S.5

411.5119. 155.3C,4l

yi7>»0.00.0

404.167.2

?36y0.0

0.0

-^9^ ">

i02.622S.12340

L5.J

-192.S

192, S154.3234.71M.7

K 2 ^ <-¥0,235,33S.3

(lil( I I I

15 UI S O

-239 «

IJll 2

IJ '̂-.'1.066,:'

i09.J394.5?.[>•*. y;iii>/.»1 1 «._ilU5.-i

2J&6.1L520.4

411. Si?i.eS7.474.2

>>77.3D.I)O f )

5859«57

4^11200

0.0

-!>"i.9

^J-1 ,2?6741!>S5733

-:w.7

30? i3:5.0443.0151,329 K7"

- ['J^-H63.751.79.0iXO

-10.0I S O

-•n i14^.0

l , 1 1 7 < i

L . L ^ d . a

'.G3.?.•IfiS.i2 30. d2C9.S13 D.I113.?

7.156.11,717.5

4Sl).^

!23,y54.ft59.3

i/.n.f0.['C I S

47S,ft

105.0?735

0 0

n o

-SS3.5

!17.3233 I213 2

70. y

-366.2

? W 215'.) 02S5.ft125.216C.4

.135.0211) A21 11.6

0.0L).0

-11020.0

-3S&-]


- 3 4 -Table 1. I'anzariia: Central CJnvcrnmcnt Ops ra-ions, ] S99/2000-2003/0 I ].' (concluded^

19Kl.'(XP 2JOLV01 ^CXUll1 . '

Frag .\taml200 2/Q i

Prog^ Rev, Prog.

21K1.VH4

Proi.

(In percent of GDP. unless otherwise indicated]

Tula! revenueTa>[ ICVC1ILKT

Import jiilLcsValue-added IHX f VAT)li seises

Income taxcaOilier laxea

Kor.las revenue

Tuul expenditureR^ iinenl expenditure

Wages and aslanesInlcrc&l payments

Dnme^ti;Foreign

Goods and services and transfer*Clemaace of domestic arrearsHank and paja&ataL recapitalization 2'Net lendingDevelopment espe-nditjre

Dunitstlually Jinafltjjdl-nrcigii finance J 3:'

MxpCTuLture uarryuver

Vnal totaled revenue (+j/cxpnidi(.urc (-) 4/

Overall hftlmwe bc-forc grains

GrantsProgram (jn eluding haskd fuadina}

ProjectHTPC Initiative grant relief

Overall balance nftcr prank

FinancingFureijjji Jiiet)

Foicijirl loansProgramPrnjccl

Amortize 1 ionDomestic (nclj

Batik financingKor.bwik Jmanoing

Bank sad parast&ta? rccjpliaJiralJun 7.'Amortization of parastatal debtPrivatization proceeds

[VlcciuranJoin items.Piiujai-y baltuiue feKsJudm^ grarts ICK)

for t i. til i'LuiJiîid developmiint. eXpeuditure)

ExpcnditUiv ur\ Jefanse dad niiliunul struts

Kuruinul GDP (mmket prices, tiliions of Tanzanifl shillings)

11 1101

1 , 23 2).?j .f ;1.31.2

1K.9

ll.S4, 21.91.20.7S.K0.1i.fC.O5J0.3S.ti0.3

-O.i

-7. a

4.51.43.00.1

-3.3

3.31.52.*0.31.9

-1.30.1

-1X40.5

1.2O D0.2

-]0]?

G3850

12-010.7

1 2J.!>2 02.51.11.3

i7.31 2.84.01.7

1.00.77.10.4U.I0.03.70.53,30.3

0.0

-5.3

\71.5i. a0.5

-1.6

1.61-22.20.61.7

•1.10.0

-0.7IJ.^0.10.00,3

-0.41.4

7,72?

]2.21L1

U432.2181.1IJ

19.514,34.11.50.80,7930.7

0.0t).03.50.62.9D.4

0.0

-7.3

*.D2.32.2P-S

-2.T

2.31.52.11.7(1.7

-o.so.so.s0.0

0.0-ai0.0

-2.91.3

S,4P2

12,1109

1,0412.1271.11.2

1S.113,64(11.40,3O.T8.20,7O.ti<>,03.4o.t2.S0.4

0.4

-5.6

45211.6(1 7

-1 1

1 11.42.21.01.2

-0.80.3

-0.7OA0.00.00.0

-1.4

1.38.613

12.5l l . ' f

1/2^.12.32.S1.11.0

20.015.6441.1().<!

0.79,30.50,[i0,04.40.7.l.fi0.0

0,0

•7.5

5.42.52.70.2

-2.1

2.11.72 51.5o.y

-0.30,40.4o.c0.0

-0.20,2

•'261,4

9,7-W

12.311 .2

].24 ?

2.12 s

1.21.1

22.216.0431,40.6

O.fi10-3O.tO.C0,06.21.0520.0

0,0

-58

:."?7-S2.L0.8

-4.!

4.13.34.7l.t3.1

-1.30.70.Ô.IO.C-0.10.2

"3.11.5

S,4f5 A

L2.611. 51.04.57.22.6

1.21.1

21.;16.4

4.61.2CJC_7

1C. 7li.Ol!.D0.04.71.03.70.0

0.0

•S.5

4.52.22.00.7

-5.6

3.61.32.81.21.6

-1..12.02.00.0L'.O

-0.1I). 2

-3.7

10,-1<I1

.Sources. Minibtr} ui'F iiiania:: midFund staff project tens.

If FUcal vesrs run ftoni luLylc June.

2/'Bonds isa-iiedlorecapiraliê governiricnt-owticd hark.? and parastowls and llic tonv^nion into bones of interest arreara owed to llir Bank of rsmznikia,For program -mod luring purposes, such boiyJs Ait cxtUkkd li'um domestic financing.

J' AlLhnugh Ibrcipn-fiTianacri (kvclrtpmeni espeaditiire ;s included in the voted budget, actual sficudi^g is no: fully Captured iii todêt exeiMiion reports.

4^ Stahslicr;! d:s;i~cpanL;y bul^-utai HsCwI and mOntliuy data.


- 3 5 -

Tablc 5. Tanzania: Central Government Revenue and Expenditure. Quarterly, 2002/0? I/(Cumulative, in billions of Tanzania shillings)

2002/03September December

Prog. Prog

Total revenueTax revenue

Import dutiesValue-added tax (VAT)ExcisesIncome raxesOther taxes

Nontax revenue

Total expenditureRecurrent expenditure

Wages and salariesInterest payments

DomesticForeign

Goods and services and transfersClearance of domestic arrearsNet lendingDevelopment expenditure

Domestic financedForeign financed 2f

Expenditure carryover

Overall balance (before grants)

Memorandum items:Primary balance (excluding grants and

foreign-financed development expenditure)

260.5246.926.895. S48.151.624.522.6

490.2343.7

93.027.315.611.7

22340.00.0

146 .52 3 9

122.60.0

-220.7

-709

5590510.3

54.4191.6101.6109.3

53.448.8

1,057.0764.1205.267.630.836.7

491.40.00.0

292.947.8

245.10.0

-49S.O

-1853

MarchProg

862.4788.0

SI 1294.7153,2175.383.874.3

1,620.31,180.9

308.394844.850.0

777.8O.U0.0

439,471,7

367.70.0

-757.9

-295 5

JuneProg

U72.31,066,9

1094394,3203.92409118.3105.4

2,106.21,520.4

411.5ni . f i

57.474.2

9773U.On o

5B5.995.7

490.20.0

-333.9

-312.1

Sources: Ministry ofFinancc; and Fund staff projections.If Fiscal year runs from July to June2f Although foreign-financed development expenditure is included in the voted budget, actual spendingis not hilly captured in budget execution reports.


- 3 6 -

Tsble6. Tanzania: Omlril Government Gxpaiditurc an Priority Sectors. 1000/01 - 2002/03 1'(In billions of Tanzania shillings, unless dtherwfcQ indicated)

Tola; expenditure in priority1 sectoisfin peiceiitofGDP)

(in percent of total expenditure)

Education1 Icattli

WaterAgriculture (research and extension)I , and. 3

RoadsJudiciary

TACAIDS 2'

Hccurrcni -ixpetidLture in priori^ sectors(in percent pf GOP)(in nereenr of Mai recurrent ^xpoidiiure)

EducationHealthWaterAgncuMum [r«ssqr(Ji and extension)

LumJsReads

JudiciaryTACAIDS 2/

[Icvdopmcnt expenditure m priority sectors

(in petvcnl of UDP)(in percent of total devsjopnier.1 expenditure)

BducalionHealthWalsr

Agricullurt: (research and cxtensioi'.}Lauds

RoodsJudiciary

TACAIDS V

MeirLorandwin items:Tolal expsrdiUjrc 3,'

liecMrreiit ex|»stidiiure

Development exper-dilur?HIPC Iniiiatii-'c d^bi rîcf

(in percenl ui'GDPI

GDP [market prices)

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4W.76.5

3?,3

254.9ID0.7

18.319.1

5 1

925•320 0

351.7

rl.6

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183.2703

8.110 .;i4.2

60.7

8,80.0

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51,7

65,73CI4

10.1

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3L7U 40.0

1,272.89SS.6

286.3111.2

l . S

7.727

2001/02

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501.6

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3.2S9.9

62.250.7

16.914.60.7

112.97.00.0

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294.91172

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344.9J42.]

32.5

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179.6

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497.5

5.8•12.5

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264,2

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113,94.Do_n

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I' Fiscal year? run from .Inly to June.2v Onvcnuncnf ajjcncy crâ.Lkid i:i 200 1 U> coordinate AIDS-relatcd irtcrvcntinns

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Table 9- Tanzania: Disbursements of Program Assistance. 2l)ni/U2-2DIJ2 l '(>3 \>

(In millions otU S doilarV]

Trirml-s

Multilateral 2j

LUF11135 support

ELJ grants for atre&p' clearanceBilateral

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Netherlands

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SiveJtai

S-w] Lie: .anJUiiitecIK.ing.Hniu

r.nnrs.

Mul'jla'.cra]

ft'wlc BinkAfrican Development Bank

Materal

Total prc-gram sssJslanHCumulative from beprcur.g of fiscal yea:

iOQL

At!.03

264

78

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7.7

77

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0.0O.i J

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0."1 1ss

37.1?J / .V

37.7-10C.D

64164,1

2002ACLQ^

703

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0.0•19.8

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1 1

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70.2134.3

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753

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41.5

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0,00.04.200

10017300.05.2

50.55-: 55C.5

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67.1

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144

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117.1?•>! 4

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2i.l12.5

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29.?280.9

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149

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&0.0000.0

247.6267. S

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77

144

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11 31.6

11 9

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13.0

92.2

92.2

92.2

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27 J.I

36,4Slid

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130.012.B145

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0.6

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57

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7315

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429,1

UJ•o

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Table I U . Tanzania: External Debt Indicators. 2001/02-2011 ' I 3(Art dr enhanced i-WC UuLial=vL- assis^jinte)

310 1«23s)imaie

20G2'0" 3003/OI 2CO1'05 SC'()5fl6 7.fllTfi,fl7 SOTT'-CR 2DQS/0>1 iiJJWHt ?.oirvH :OI: JL:

[Tri jierccitODebt indicators at the tlLPC etrmplctjijn pcunr 2/

Nel present v^Jucd dclX-la-CD? rati.3Net f-teaenlViihiemfdebt-tn-c^poilMaLiG^.'^'Nt( [-idseiit value of debt- ta-icvenTJC ratios/Dcbticjv:w-ti--pvtmi3rarich $'

Debt aeiYWc-lo-revcjiLM: IH/.IU 5.'

T Ipiiaic J êbL irulicaUsis 7/

Net present Tohie of Jc'^t-tivrrDP Miij

'N-cL pcsdii vahiccf dcM-M-exporu nti^ 1' *Nelpresftnl value- u/iHe ft. -to -revenue raiio 5?Debt .service -lo-cxportsjaliu &/Debt service-! o-revenjc ratii; 5i'

Dclrt i™lir;atua £km. the aitthoriiiK' DSA 6/

Met preser.i value of debt to G"H»? ratio

Nc-J FtvannJ vdkir i>t iJ&bi -Is -exports ratioXst presort value o; debl4n-rcvcDuc ratio

\krH'?rar|JLirn Hdrm

Nel srcsfeit vskc nl Jell sflci îiJian-isd HIPCInitiitivs assist an ccDcbl service dike tnhan«d HIPC IiLtiativeossisunccC-DPRicpnrtji of poods and setv:&es

LKporta w( utMjds arid services (3-year mv?. svg)Govfirnmen' revcnitrProjected disbicsenienlaoj'ncft liidiis

Net p7e.>;nl value -( debt tier enhanced I-1LPCItitiiitivc .is^xtîice (fuiiri.BbjAijI'Taniania)('roiecicd disbursements or new loans ifiaiu Bc.TJ

17 fi

I3'-'.K156.5

6.7S.3

IK.3127.8155.3

6.6S.3

18 S

131. 5159. 9

176T.-5.21-503

S T7,8

1=!?,13;,^1533

6.5

83

200

1J7SIfiS.S

1751571i*Q

K , !3,2

19.113? 7I.*./ L

7.9

1(10

2f]4142.2168,5

171!35^1«Q

3 &

9.7

18.9?%?IS-i'-i

B.4m';

50 •{

144,i1^8,1

1^?lis_B136.7

7.88.S

]K712S6147 a

7.?

9.6

7.1 fi

]4d4

165.5

K.;S13U6132.0

7.077

is.e-12S.6UJ.9

6.33.^

s: i143 5: f f i 2

(ln.milli.cms vt U.S

L.763

^.^. S.o55

1.439l,Wt,;38

l.32il

I.P»

Irtl

.H.UZ31,5331,4551.203

•1J&

5.nfu1>|4

'J.W-S

150l i i ; 3 i l

l.64i1.539!,259

^;q

2,189SlW

?,157

15011.4-SE

j.vasJ.055J,422

41il

2,39215fi

1310

15012^75

1.9541.79ft

1.J63452

2.594573

2.4 7&

146

li^27

2.IJ4] 91?l.VZJ

4*ci

2.SI2594

16.5133.2U8.1

6.4715

:S412^01-1C5

5,5S.O

21 2

1425161 9

Jo 11*: s)

2.M'J

l_^

14.35S2,3182 135J.Sffi)

4 El

3.C43ti!6

1&.4:26,31234

5 9t- H

1S.317-1 3132.1;

•3-17?

21 3141 S1546

;;,ra

154

I5,4fi72,507

2,3?n2,1:7

507

3.ZS5)542

16.Z1Z4 11190

62fi-1

1M.O

1157

123,6

S,27.1

71 1W I . 3151.7

l.OOS

i£7

IS.fifHi2.7112,^12

1340M4

3,543669

15.9122.31 11.0

6.0

f u

17.3117?

!2d4i»rt.S

31 1141.)34S.S

3,203

174

1 7.,9fi6

2,y2H2,7162,57i

563

3.831C59S

] 3 BIII 7i m >

535 f i

1771173

]22.dM5,7

2! 4

141 SH-'i

l-i *q

iol19,3743,1 4f2,92i<2,51 =

594

4.1*3T:?

Soul.t^ T-uiiiaiiMJi HLJlhoiihes; aijj Fund staC"cat]mat-es aid pmj&zlirris

I/All cebi indicators Tefertrpuhlit and niiMi-lv^^rantced debt and are defined after rescheduling, unless r,[hc^v;sii incJicaeci. Allyeors on July-Jmc bans2/=iliir_atedinNavember2'JOL aascd en cmJOmit- 5:101 Jebi Jdii1' Brand on A ilire* -year jwerage of exports (C,£,t eXpint J\'CfjgC cv-W I955AJO-20C1,'<JS fcx Met present volue ol'dcbl-to-c.iijiiiT:. rn l i a in 200l.-'02>1/AssaeuRg full del s\-ciyfirHrPCTniliahv« assistance aianc June, itejl.5/Rjevetiue is defuied as centra! iox-«rrancnt levrmiB, sxduding g iihis6-r liescd r^n ciarrein-yiiar exports.7/Estbiat&d in. October 2M2 ha-a;J onttuWtiiie 20D1 debt data, new disbursements in financial JJ?ar 2001 fl2, and Mhcrnruicroeoanomicd'CvoJopijicms in ?.iXll,'01

S/ Bans, of ranzania has earned oul a dcW 5înability andiîs VT;S A) based on end-^ne 2l<3^ debt dsia Tlicst Ln-Sieawrs are from ihe baseline scenario whichaisiimesliill Atil'rftff of enhanced HIPC Irmuvc assncwTM Itals^ H9îirn^5 inr.iichhighsrle^'elofprqeelenlnt^v br-Ti<"^-i£

JÔ


-41 - APPENDIX I

Dar es Salaanrr November 02, 2002

Mr Horst KdhlerManaging DirectorInternational Monetary FundWashington, DC. 20431U.S.A.

Dear Mr. Kohler:

1. Tanzania is implementing its programme for poverty reduction with the support ofthe IMF through a three-year arrangement under 1he Poverty Reduction and GrowthFacility (PRGF) extending to March 2003. The fourth review under the arrangementwas cone uded by the Executive Board of the IMF in April 2002; this letter requestscomp etion of the fifth review under the PRGF arrangement. To this end, itdiscusses progress in implementing the programme since mid-2001 and sets out thegovernment's policy intentions and targets through June 2003. The finaldisbursement under the current PRGF arrangement is subject to a review expectedto be completed in May 2003, To give time far this review, the government requeststhat the arrangement be extended by three months until end-June 2003.

THE UNITED REPUBLIC OF TANZANIA

THE MINISTER FOR FINANCE

THE TREASURY,P.O. Box 9111,DARES SALAAM,

TANZANIA,

Telephone: 2112854

Fax: 2117790

In reply please quote,

Rcf No:


-42- APPENDIX 1

1 RECENT ECONOMIC PERFORMANCE AND POLICY IMPLEMENTATION

A. Macroeconomic Developments

2 Tanzania's macroeconomic performance continued to improve in 2001/02. TheGDP growth rate increased to 5.6 percent in 2001 and is projected 1o rise to 5,9percent in 2002 despite a substantial deterioration in the terms of trade. Growth in2001 stemmed from relatively strong performances in agriculture, mining, wholesa eand retail trade, as well as manufacturing. The agriculture sector grew by 5.5percent in 20Q1 up from 3.4 percent in 2000, with most of the growth emanating fromfood crop production and fishing. The growth of the mining sector remained strongat 13.2 percent and its contribution to GDP increased to 2.5 percent. Wholesale andretail trade (including tourism) rose by 7 percent in 2001, Industrial output rose by 5percent. The 12-month rate of inflation declined further, from 5.5 percent inDecember 2000 to 4.5 percent in June 2002. Gross official reserves of the Bank ofTanzania (BoT) rose to above six months of imports of goods and services.

B. Performance Under the Program

3. All quantitative performance criteria for end-June 2002 were observed (Table 1).Among the quantitative benchmarks, that on government revenue was observed;benchmarks with respect to extra budgetary expenditure, the accumulation ofbudgetary arrears and reserve money were not observed. With regard to thepayment for the air traffic control system, there was an extrabudgetary expenditureof Tsh, 18 billion during the year 2001/02- This will be regularized through asupplementary budget allocation for 2002/03. Some budgetary arrears wereaccumulated during 2001/02 on payments for utilities, but the measures described inparagraph 29 should help prevent recurrence of such arrears in the future. Thereasons for the nonobservance of the benchmark with respect to reserve money areexplained in paragraph 10. The structural performance criteria with respect to trieclearance of audited domestic arrears and the timetable for the elimination of triesuspended duties were observed. The structural performance criterion onsubmission to Parliament of legislation that makes governments incurring orguaranteeing of foreign debt subject to Cabinet approva upon recommendation bythe Minister for Finance was not observed. Following discussion in Cabinet of thenew national debt strategy, the Government has determined that severalamendments to the existing Loans, Guarantees and Grants Act of 1974 will beneeded but can be submitted to Parliament only in February 2003. The scope ofthese amendments is described in paragraph 34, On this basis, we request a waiverfor non-observance of this structural performance criterion. The June 2002benchmark on publication of individual and conso idated quarterly revenue andexpenditure accounts for local governments will be delayed until December 2002owing to capacity constraints at the locaf government level. Publication of the


^ 4 3 - APPENDIX!

second report on the implementation of the ministerial anticorruption plans was alsodelayed and is now expected for December 2002.

C. Fiscal Developments

4. Government revenue during fiscal year 2001/02 was Tsh. 1,043 billion, slightlyabove the estimate of Tsh. 1,025 billion. The better than projected performance canbe largely attributed to higher than budgeted collections on income taxes, whichbenefited from the establishment of the Large Taxpayers Department within theTRA, and on customs revenue as a result of the special marking of petroleumproducts. Higher than projected collections from parastatal dividends alsocontributed to the strong revenue performance in 2001/02.

5 Government expenditure for the fiscal year 2001(02 was Tsh. 1,556 billion, 5percent below the budget estimate of Tsh. 1,642 billion. The lower than plannedexpenditure was mainly due to shortfalls in foreign budget support (loans and grants)and delays in government procurement of goods and services on account of slowadaptation to the new Public Procurement Act 2001. The shortfall in budget supportwas approximately USD 178 million compared to budget estimates, or USD 76million relative to the revised programme agreed in January 2002. Notwithstandingthe shortfa I, priority sectors received full quarterly allocations throughout the year inline with the respective cash-flow requirements. In addition, the population andhousing census and HIV/AIDS priority interventions through the TanzaniaCommission on AIDS (TACAIDS) were fully funded. Adequate provision was alsomade to clear audited budgetary arrears. In 2001/02 net domestic financing of thegovernment resulted in net repayment of Tsh. 23 billion, partly due to lower debtservice on account of the enhanced HIPC Initiative debt relief.

D. Progress in Public Financial Management Reform

6 Progress in public financial management reform was reviewed last year as part ofthe Country Financial Accountability Assessment (CFAA). The findings of the reviewwill be incorporated in a revised Public Financial Management Reform Programme,currently underway. A priority expenditure tracking study was conducted last year aspart of the PRSP/HIPC process, and it revealed that Tanzania met 8 of the 15benchmarks and had made encouraging progress on the remaining 7 benchmarks.The remaining benchmarks will be met in the next three years. A fiscal transparencyreport (ROSC) was also prepared and published The government has continued topublish quarterly budget execution reports drawn from the Integrated FinancialManagement System (IFMS); it has started publishing quarterly public debt reportsas well as information on budget resource transfers to Ministries, Departments andAgencies (MDAs), as well as focal governments. This year has seen even furtherincreased transparency and political debate in the media on budget proposals for2002/03 submitted to the Parliament on June 13th, 2002. A Public Service Act waspassed by Parliament in April 2002, which will enable implementation of


- 44 - APPENDIX I

performance management systems and better enforcement of sanctions anddisciplinary measures against non-compliance with financial and procurementregulations, the aim being to improve public service delivery.

E. Implementation of the Poverty Reduction Strategy

7. Tanzania is in its second year of implementing its Poverty Reduction Strategy(PRS), The Government is preparing the second annual progress report on theimplementation of the PRS, The progress report is a synthesis of inputs generatedunder the Poverty Monitoring Master Plan developed by the government in 2001.The second progress report, which is now expected to be completed by November2002, includes a description of the poverty status, development of new povertybaselines, and a review of poverty indicators and targets, on the basis of the fullresults of the 2000/01 Household Budget Survey (HBS) and Integrated Labour ForceSurvey (ILFS).

8 The second PRS progress report also draws on the draft Poverty and HumanDevelopment Report (PHDR) prepared under the poverty monitoring system ThePHDR, the first of its kind in Tanzania, informs and advises the government on theimplementation of various aspects of the poverty reduction strategy. It presents anoverview of the status of the main poverty indicators and includes a detaileddiscussion of key aspects of non-income poverty. The Government has alsolaunched a participatory poverty assessment (PPA) programme as part of thepoverty monitoring framework The second PRS progress report will also includeinputs generated from a number of related participatory processes, including thePublic Expenditure Review process.

9. In addition to an analysis of the poverty status, the PRS progress report 2002 willfocus on implementation of the primary education development programme andprogress in implementing the agricultural sector strategy, as well as on the status ofimplementation of the other priority sector strategies.

F. Monetary and Financial Sector Developments

10 During 2001/02, the performance criteria on net domestic assets, net financing ofthe government, and net international reserves were observed by wide margins.However, owing to unanticipated market conditions and external developments,reserve money and the broad money aggregates M2 and M3 grew more rapidly thanprogrammed. Thus; M2 grew by 21.3 percent against the programme target of 12.2percent. The stronger than programmed expansion in reserve money and broadmoney is attributable to ordinary as well as extraordinary developments. There wasa rapid growth in liquidity in the economy because of deposit mobilization by banks,as the new banks continued to open branches outside the capital city of Dar esSalaam, and a continued decline in dollar cash holdings in the economy However,most of the increase in reserve money and broad money occurring during the


- 45 - APPENDIX I

period January - June 2002 was a result of extra-ordinary developments: (1) thetransfer of funds from government deposits at the Bank of Tanzania to accounts ofacal governments in commercial banks; as a consequence, the government's netposition at the Bank of Tanzania was reduced and the stock of money increased bythe same amount; (2) two non-bank institutions merged and converted to a fullyfledged commercial bank, and as a consequence the deposits in this bank becamepart of the money stock; (3) a newly established international bank brought in sizablecapital investment to begin its operations in Tanzania; (4) there was a large inflow ofprivate capital for mining and other investment projects as well as a large amount offoreign exchange inflow connected with two large embassy buildings currently underconstruction.

11 Given the unanticipated nature and unusual sources of liquidity creation, theordinary instruments available to the Bank of Tanzania were not adequate to mop upthe excess liquidity, As the liquidity buildup continued, the Bank of Tanzania had tolook for alternative means of bringing down the rate of monetary expansion. As afirst step, the Government agreed with the Bank of Tanzania to securitize TZS 40billion of a hitherto dormant government obligation held by the Bank of Tanzania.The securitization took the form of a new 35-day treasury bill which is beinggradually converted into a long term Treasury bond being traded on the StockExchange. We are aware that the TZS 40 billion is inadequate to reduce the growthin the money stock to the level targeted in the programme. Therefore, it is theintention of the Government to allow an additional securitization of up to TZS 80billion to help meet the monetary targets of the program.

12. The commercial banks' weighted average lending and deposit rates fell during2001/02, the former partly on account of lower rates for prime borrowers. Lendingrates declined from 19.6 percent in June 2001 to 16.4 percent in June 2002, whilesavings deposit rates fell from 4.2 percent to 3,5 percent. The lending rates for primeborrowers averaged about 11 percent in mid-2002. The interest rate spread wasthus significantly reduced, but the remaining wide spread points to continuedpresence of legal and structural rigidities, high perceived risks of business, andinadequate borrower information. Measures to address these impediments areoutlined in paragraph 32.

G. Public Debt Management

13 Public debt developments were broadly on track. A revised National DebtStrategy was approved by Cabinet in August 2002. The strategy enunciates theimportance of fiscal sustainability of public debt through improved management ofrisks, development of local financial markets, and a strengthening of the legal andinstitutional arrangements for borrowing and debt management The strategy alsopresents options for dealing with the likely fiscal implications of the debt arisingfrom the parastataJ privatisation process.


-46- APPENDIX!

14. Domestic debt market developments were particularly favourable. Encouragedby the successful floatation at the slock exchange of the 5-year Treasury bond inFebruary 2002, the government launched a 7-year fixed rate Treasury bond inAugust 2002. The new 5 and 7 year bonds are expected to be an important test forthe ongoing efforts to convert unsecuritized debt into marketable securities.

15. As regards external debt, there has been some progress in concluding bilateralagreements under Paris Club VII. To dats agreements have been signed withAustria, Ihe United States, Canada, and Italy, The United Kingdom has notified thegovernment of Tanzania that it is providing total debt cancellation and that there istherefore no need for a bilateral agreement. Recognising the genuine difficultiesfaced by the government in expediting the process, the creditors, through the ParisC ub Secretariat, have agreed to extend the deadline for bilateral agreements toNovember 1, 2002.

16. The government has been consistently appealing to the Non-Paris Club officialand commercia creditors to extend debt relief on terms comparable to those underthe enhanced HIPC framework, but there has been ittie progress. So far, onlyKuwait has indicated wi lingness to provide debt relief in the HIPC framework. Chinahas stated her readiness to provide debt re lef as and when payments fall due. Inaddition, some dialogue has been initiated with Iraq, Iran and Libya but nocommitment has been made yet. To underscore its strong commitment to reachingagreement with these creditors, the government has recently established a foreigncurrency escrow account managed by the Bank of Tanzania into which it isdepositing this fiscal year US$5 million, equivalent to 12.5 percent of the estimateddebt service due to these creditors after application of the enhanced HIPC debt reliefterms. In this regard the government would appreciate the assistance of the Fundand the Sank in encouraging participation of the non-Paris Club creditors in the debtrelief initiative.

H, External Sector

17. During 2001/02, the external current account deficit improved to 8,9 percent ofGDP (excluding current official transfers) from 9,4 percent of GDP a year earlier.Non-traditional exports, gold in particular, performed well during most of 2001/02.However, traditional exports recorded their worst performance in recent years mainlydue to lower export prices in the world market for coffee, cotton and cashewnuts.Imports increased only slightly, largely on account of capital and intermediate goods.However, there was a significant decrease in imports of consumer goods, inparticular food stuffs, owing to favourable weather conditions. There has also been adecline in official grants during the year under review compared to 2000/01. Grossexternal official reserves rose to USD 1,212,0 million at the end of June 2002.equivalent to more than six months of imports of goods and non-factor services,


- 47 - APPENDIX T

18. Exchange rate developments reflected the unusual pattern of foreign exchangeflows in 2001/02 as well as higher-than-programmed monetary growth. Instead ofthe usual decline in foreign exchange holdings during January to June, there was abuild up in such holdings at both the BOT and commercial banks. On a monthlyweighted average basis, the exchange rate moved from Tsh. 888.9 in June 2001 toa low of 980.2 per US dollar in May 2002, before appreciating in June 2002; theannual (transaction) weighted average was Tsh 931.1 per US dollar for 2001/02,representing a nominal depreciation of 12.5 percent from the previous year, Theexchange rate is market determined, subject to BOT interventions to smoothenshort-term fluctuations and to lean against upward pressure on the exchange ratestemming largely from capital Inflows.

II POLICIES FOR FISCAL YEAR 2002/03

A. Poverty Reduction Strategy

19. Tanzania is committed to the goal of eradicating abject poverty set out rn thedevelopment vision 2025. The framework for achieving this goal is articulated in theNational Poverty Eradication Strategy (NPES - 1997): the Poverty ReductionStrategy Paper (PRSP 2000), and the Zanzibar Poverty Reduction Plan (2002). In2002/03, the government will seek to achieve the targets and outcomes specified inthe first annual PRS progress report, and will maintain policy interventions, includingbudgetary allocations that reflect these priorities. Central to the PRS are themaintenance of macroeconomic stability, acceleration of pro-poor growth, andcreation of employment.

B. Macroeconomic framework

20. Policies for 2002/03 will be geared towards preserving domestic and externalstability and implementation of the key sector strategies as presented in the PRS. Inlight of good weather, the resumption of growth in tourism, and the sustenance ofinvestment, real GDP is projected to grow by 5.9 percent in 2002, and 6.3 percent in2003. At the same time, building on the government's commitment to maintain andimprove the fiscal and monetary policy stance, the inflation target for end-June 2003is put at 45 percent. The balance of payments outlook is projected to remainfavourable despite the continuing deterioration in the terms of trade mainly becauseprices for agricultural commodities continue to fall. In the 2002/03 budget, the overalldeficit (after grants) of Tsh. 393 billion is expected to be covered mainly byconcessional financing including debt relief under the enhanced HIPC Initiativeframework, Recourse to domestic financing will be limited to Tsh. 64 billion,


- 48 - APPENDIX I

21. The government's medium-term pro-poor growth strategy lies in theimplementation of the agricultural sector and rural deveopment programmes, andfurther strengthening of the investment climate to attract private capital andtechnology, to lift productivity in agriculture and industry, particulary through smalland medium-size enterprises. In this connection, the government will seek toachieve sustainable improvement in infrastructure, notably in transport,communications and energy. At the same time we are committed to removingremaining weaknesses in the regulatory framework, law and order, taxadministration, corruption and public administration.

C. Fiscal Policy and Budgetary Reform

22 The focus of 2002/03 fiscal policy is to enhance government revenue andimprove public expenditure management in line with the poverty reduction strategy.Given that the poverty reduction programme requirements are higher than availableresources, the government seeks to strengthen revenue collection efforts, and touse resources more efficiently through implementation of the Public FinancialManagement Reforms.

23. Total expenditure is budgeted at 22.3 percent of GDP in 2002/03, representingan increase of 4 2 percentage points from the previous year. In the context of thecivil service pay reform, we have raised the average wage by 15 percent, which willallow, for professional and senior staff, a further reduction in the gap relative to theprivate sector. We are also expanding the Selected Accelerated SalaryEnhancement (SASE) scheme to ten ministries. In addition, the non-wage budgetallocation for the priority sectors has been increased by 30 percent in 2002/03. Thebudget also includes a provision of Tsh 13 billion for the possible cost ofretrenchments in Air Tanzania Corporation, Tanzania Railway Corporation and theDar es Salaam Water and Sewerage Authority (DAWASA). We will continue toenhance expenditure control through the commitment control system within IFMS toensure that no new budgetary arrears accumulate.

24. In the 2002/03 budget, the projected foreign financing of development projects issignificantly higher than in 2001/02. This increase is partly explained by theimprovement in the reporting and recording system for donor assistance This hasbeen achieved through the establishment of a centralized database updatedregular y jointly with donors. Henceforth, consolidation of reports will be centralizedat the Accountant General's system at the Treasury The increase in thedevelopment budget for 2002/03 is also due to the start of a number of large newprojects, such as the Songas Project and the Primary Education DevelopmentProgramme, which attracted substantial foreign finance commitments for 2002/03.

25. The large size of the informal economy including the dominance of peasantagriculture, coupled with the high level of poverty, in large part, explain the narrow


- 49 - APPENDIX I

revenue base. Higher economic growth combined with measures to streamline taxpo icy and tax administration, have generated improvements in revenue in the pastfive years, However, the revenue yield relative to GDP remains low. Enhancingmobilization of revenue is a top priority for the government. The government, in the2002/03 budget, announced measures intended to reduce revenue leakage, curb taxevasion, improve voluntary compliance and expand the lax base.

26, Specifically, the 2002/03 budget includes the following revenue measures:

26.1 The PAYE band structure was resigned to allow lax relief to employeesearning less than Tsh 50,000 per month. In order to neutralize the resultingrevenue loss, the marginal tax rates on higher tax bands were slightlyadjusted upwards.

26.2 We have changed the income tax treatment of capital expenditure to be inline with prudent tax accounting practices. Suspended duties imposed in2001/02 to curb dumping and under invoicing of imports have been reducedby 20 percent on average, and a timetable has been announced fore iminating all suspended duties. In addition, we have introduced a tax onmobile phone air service.

26.3 We have abolished customs and excise duty exemptions on purchases bygovernment and its agencies, following abolition of the respective VATexemption a year ago. A treasury voucher system will be introduced inJanuary 2003 for administering the indirect tax exemption applying to non-religious NGQs and imports of motor vehicles and motor cycles by eligiblepublic servants. This system wili be extended to other statutory exemptions ifit proves viable. We have revoked the excise duty exemption for miningcompanies and introduced, instead, a system of refund whereby eligiblecompanies will be refunded excise duty paid on fuel after scrutiny. With effectfrom January 2003, the government will publish in the print media, on aquarterly basis, the names of individuals, companies, and institutions thathave been exempted from paying taxes.

26.4 The government has undertaken a comprehensive study on the operations ofthe Tanzania Revenue Authority (TRA), and is now considering therecommendations of the study to determine appropriate actions for improvinglax administration. The government intends to conduct further studies during2002/03. A review of the local government tax system is underway, aimed atputting in place a tax regime that provides a conducive climate for the ruralpoor to engage fully in productive activity, and an environment that promotesinvestment in the rura areas A strategy to this end has been developed. Thestrategy envisages reduction of the number of taxes, rationalization of tax


- 50 - APPENDIX I

rates, simplification of tax collection, encouraging voluntary compliance andreducing the burden to farmers.

27, The government is committed to enhance the revenue base in the medium-term through a number of additional measures, including the following.

• The amendment made in the 2002 Finance Bill relating to capitalexpensing will be redrafted to clarify the grandfathering provisions forTIC certificate holders as applying only to benefits expressly granted inthe certificate. The redrafted amendment would be submitted toPar iament in November 2002.

• An Act on export processing zones (EPZ) was enacted by Parliamentearly this year. However to avoid the possibility of revenue leakages infuture: the government is reviewing this legislation with a view tofocusing it to taking advantage of export markets under the UnitedStates' AGOA and the European Union's Everything-But-Arms, In thisregard, the implementation of the EPZs will start on the basis ofregulations that focus on access to AGOA and EU only, while therequired amendments to the Act are being processed.

• The government intends to review tax aws, starting with the incometax legislation with a view to rationalizing them to enhance the taxyield.

• We will continue to review the remaining exemptions with a view tocutting them back in order to enhance the tax base.

• The government will review the tax contribution of the high-growthsectors such as mining, and explore the possibility of raising theapplicable royalty rates to enhance revenue

• A centralized motor vehicle registration system will be adopted byDecember 2002.

28. The Government intends to pursue further reforms to enhance publicexpenditure management. In order to allow better tracking of outlays to prioritysectors, the government will harmonize the presentation of priority expendituresbased on uniform budgetary codes across PRSP, budget, and budget executionreports, starting with the budget guidelines for 2003/04. The identification ofbudgetary codes for priority expenditures and their application in the budgetguidelines for 2003/04 will constitute a performance criterion under the programfor end-February 2003. The recording and reporting of donor-funded projectexpenditure continues to be strengthened in collaboration with the development


- 5 1 - APPENDIX I

partners. As in the last year public financial management policies for 2002/03are focusing on supervision, and enforcement of expenditure discipline Theprovisions of the Public Finance Act and the Public Procurement Act (both of2001) will continue to be enforced. The procurement regulations will be reviewedto facilitate efficiency improvement in government procurement. The IFMS,which is now operations in all ministries and departments, will be strengthenedin the regions to ensure that expenditure and revenue reports are captureddirectly by the system. Due to unpredictable flows of foreign grants andconcessional financing, the government maintains the cash budget system, byallocating funds on quarterly basis to the priority interventions earmarked forpoverty reduction and growth. Other sectors will continue to receive funds on amonthly basis, Expenditures for all votes in the 2002/03 budget include provisionfor payment of all taxes, The government is taking measures to harmonise andclassify local government budgets into the GFS classification.

29. Starting this financial year, the government has put in place a systemdesigned to ensure that all utility payments are provided for in Ministries,Departments, and Agencies (MDAs) expenditure projections and settled whendue. Towards this end a circular was issued recently to all Accounting Officersdescribing the future treatment of utility payments. Under the new procedure, theTreasury commits into IFMS the amounts budgeted for utilities from totalreleases to MDAs. Thus, resources available for distribution by the MDA are lessby the amounts of utility funds already committed by the Treasury. When MDAsreceive bills/invoices for utilities, they are at that point able to access thecommitted utility funds to settle the bills. On a quarterly basis, MDAs are requiredto report to the Treasury on utility bills received, and payment of utilities made, inthat period. Such reports contain information relating to amounts committed,utilities paid as well as balances available. Where, due to underbudgeting, theamount committed falls short of actual bills, the MDAs are required to seekauthority for reallocation from the Treasury, which wi I be sourced from items ofexpenditures of the MDAs for which there is a saving,

30. In order to increase transparency and accountability, we have required localgovernments to start publishing their fiscal accounts on a quarterly basis, startingwith the first quarter of 2002. Unfortunately, the publication of these accountswas delayed due to a multitude of administrative and logistical problems. The firstpublication of these quarterly fiscal accounts will be effected by end-2002.Finally, the fiscal year of local governments will be brought in line with that of thecentral government by 2004/05


- 52 - APPENDIX T

D. Monetary Policy and Financial Sector Reform

31 Price stability remains the main objective of monetary policy with reservemoney serving as the operating target. In view of the recent rapid increase in thedemand for money, the monetary program envisages a 21 percent increase inbroad money (inc uding foreign currency deposits) during 2002, backed by asimilar increase in reserve money. Treasury bill auctions will remain the mainmonetary policy instrument, supplemented by repurchase operations withcommercial banks and the issue of newly-securitized government debt. Aided byseasonal factors, monetary conditions will be tightened during the first half of2003

32. In order to promote financial intermediation and further development of thefinancial sector, the government is taking measures to remove impediments tobank lending and help reduce the large spread between deposit and lendingrates. The measures would include a possible amendment of the 1999 Land Actto ensure that land can effectively be used as collateral for bank lending Ifdeemed necessary, the amendment to the Land Act would be submitted toParliament before June 2003, Other measures in this area wili aim at improvingthe [and registry, and enhancing the capacity of the commerctal court, includingby employing and training more judges, with a view to keeping the average caseresolution period below six months,

33. In the light cf lack of bank credit to agriculture and given the importance ofpromoting agricultural exports, the government has established an export creditguarantee scheme, which will be initially managed by the Bank of Tanzania. Thescheme will during its initial stages, provide guarantees to commercial banklending for crop marketing. The scheme will gradually build capacity of itsoperational staff, especially in risk management to reduce dependence on banks'credit assessment of borrowers. The draft law establishing the legal, regulatory,and supervisory framework for microfinance operations will be submitted toParliament in February 2003, and regulations governing such operations will beissued by end-May 2003,

E. Debt Sustainability

34. The government has started implementing the key recommendations of therecently approved National Debt Strategy. The improved procedures will beformalized by an amendment of the Government Loans, Guarantees and GrantsAct, 1974, and will consist of the following revisions: (I) vesting authority to raisemoney by loan, to issue guarantees and to accept grants on behalf of thegovernment solely with the Minister for Finance; (ii) establishment of theNational Debt Management Committee (NDMC), which replaces the current DebtCoordination Committee (DCC), to advise the Minister for Finance; (iii)


-53- APPENDIX 1

publication of a public debt statement as part of the annual budget process; and(iv) amendment of laws of parastatal bodies and corporations to withdraw suchinstitutions' power to borrow without approval of the Minister for Finance.Submission to parliament of the amendments to the Loans, Guarantees andGrants Act will constitute a performance criterion under the program for end-February 2003. As part of the budget process, the Minister for Finance willcontinue to submit to the Cabinet the funding plan for each fiscal year, so as toobtain an overall approval for borrowing during the year. The Minister willhenceforth report to the Cabinet on a quarterly basis the status of borrowingduring the period, the debt service payments made, and generally theimplementation status of the National Debt Strategy. In terms of borrowingstrategy, external financing is restricted to concessional financing of high priorityprogrammes, such as education, energy and infrastructure and for direct budgetsupport.

35. On domestic debt, the government continues to implement its policy of non-accumulation of arrears. The conversion of un-securitized domestic liabilities intomarketable securities is ongoing. The menu of instruments available for thepurpose of this conversion has already been expanded considerably with thelaunch of the 5 and 7 year Treasury bonds - also listed on the Dar es SalaamStock Exchange. The government has followed this up with the launch of a 10-year Treasury bond in October 2002. This will among other benefits help institutea meaningful benchmark for the pricing of private sector long-term debts in theeconomy as well as expand activity in theDar es Salaam Stock Exchange.

36. In light of a large stock of parastatal debt, the government plans to conduct astudy with the aim of getting a dearer understanding of the maturity profile ofthese contingent liabilities, as well as suggesting ways to fund repayment of thesame when need arises. The study is expected to commence before the end of2002 and be completed by June 2003.

F. Other Structural Reforms

37. The government continues to demonstrate strong commitment to withdrawfrom economic activities and create an enabling environment for private sectorinvestment. The paraslata reform programme continues to make progress witha focus now on privatization of large utilities and banks - including the TanzaniaElectric Supply Company (TANESCO), Air Tanzania Corporation (ATC), the Dares Salaam Water and Sewerage Authority (DAWASA), Tanzania RailwaysCorporation (TRC)t the Tanzania Harbours Authority (THA) and the NationalMicrofinance Bank (NMB). The government sold 35 percent of its shares in theTanzania Telecommunications Company (TTCL) last year to foreign investors,but a dispute has arisen over the closure of accounts and payment by theinvestors of the second tranche of the investors' equity. The government and the


- 54 - APPENDIX I

investors are negotiating a resolution of the conflict. The transfer of DAWASA loa private operator which was delayed from the initial schedule, is now at anadvanced stage, and is expected to be completed by end-2002. The process ofunbundling TANESCQ into autonomous commercial entities before privatizationis ongoing A private management company, which look over in April 2002, hasbegun to improve the finances of TANESCO. Privatization of TRC and ATC areat an advanced stage. The government budget for 2002/03 has made adequateprovisions for payment of retrenchment benefits to employees who may beretrenched in the process of restructuring or privatization of these public entities,

38. Current government policy on parastatal retrenchment packages is asfol ows. Public corporations which have own funds sufficient to pay retrencheesover and above statutory obligations, are allowed to do so provided they executevoluntary contracts through legally recognized procedure. For the publiccorporations, which have not accumulated sufficient profits to affordretrenchment payments, the government budget would provide for the statutoryobligations through its budget,

39. Consistent with the poverty reduction strategy, the government has continuedto make progress in the promotion of good governance, incuding the fightagainst corruption. The various reform programmes in the area of goodgovernance are ongoing, progress of which will be presented in the 2002 PRSprogress report. To provide a solid basis for these reforms, the Commission forHuman Rights and Good Governance has been appointed and members havetaken their oath. The Government is in the process of publishing the secondreport on the implementation of the ministerial anti-corruption plans.

G. External Sector Issues

40. The government will allow foreign participation in the Dar es Salaam StockExchange before end-December 2002. The Bank of Tanzania, in collaborationwith the Capital Market and Securities Authority, established modalities to guideforeign investors' dealings and has developed institutional arrangements formonitoring private capital lows, as well as instituting appropriate regulations thatwill provide the necessary safeguards.

41. The Government is committed to further trade liberalization, and isparticipating in regional integration processes within the East African Community(EAC) and the Southern African Development Community (SADC). Negotiationsleading to an EAC customs union are ongoing. Following the reduction in thenumber of non-zero customs tariff bands from four to three and a lowering of thelower bands in the 2001/02 budget, the government will make any furtheradjustments needed in the tariff structure only in the context of EAC CustomsUnion negotiations. The government is committed lo adhere to its timetable foreliminating suspended duties and will endeavour not to impose new ones.


-55- APPENDIX 1

42. The government is committed to avoiding multiple currency practices. To thatend, it will ensure that no occasion will arise at which the exchange rateguarantees contained in the liquidity facility agreement for the Songas projectand the power purchase agreement between TANESCO and an independentpower producer could be invoked.

43. The BOT, in conjunction with the Tanzania Investment Center (TIC) and theNational Bureau of Statistics (NBS) conducted a census of foreign investment inTanzania during 2000/01. The report concluded that private foreign investment inrecent years has been larger than the figures recorded in official statistics. In lightof this finding, the government is currently planning to conduct another survey toget new information for 2000 and 2001 that also covers Zanzibar in order to get abetter understanding of foreign investment in Tanzania. The survey will start inOctober 2002 and be completed by end-2003.

H. Concluding Remarks

44. The government of Tanzania will continue to provide the tMF with suchinformation as the IMF requires to assess Tanzania's progress in implementingthe policies described in this letter. Moreover, we will continue to consuit with theFund an Tanzania's economic and financial policies in accordance with the IMF'spolicies on such consultations. In this sphere we welcome the establishment inTanzania of the African Regional Technical Assistance Center that will startoperations in October 2002 and will provide to East Africa valuable technicalassistance in key areas of economic and financial management.

Sincerely,

/s/Basil Pesambili Mramba (MP)

Minister for Finance


- 5 6 - APPEND1XIATTACHMENT

Table 1 Tanzania: Quantitative Performance Crilerij) ;md Benchmarks Under the Poverty Reduction midGrowth Facility Arrangement, March-June 2002

2QQ2March

Benchmarks

JunePerformance Cr.lena

f'rng Aril us1 eri Art LJrog Adjusted Act.

Ne", domestic financing of the government of

Tanzania (ceiltrig] 1.' 1,'

Cenltr.1 government recurrent revenue

(Jlojr, brtichmark only] I/

Lxtoa budgetary expenditure(ceiling, benchmark only) I /

Accumulation of budgetary arrears

{ceiling, benchmark only) I/

Net domi-slic assets ofth;

Bank of Tajizariia (ceiling) 2/ 3/

Rssei^'e money (ceilLia., beiicl'jnaik utily) 3/

Nel inttiiiHlioual leseivra uf itie Bankof Tanzania Oloor) 4;

AÛLijnjlatioiiLif"exlETTial paymenlji iirrears (ceilmgj 5/

Contracting nc guaranteeing ot"c?rtcnial deal

r?n nonconCea&iOnal tfnns fceiling) If

Memorandum item

l'"orsign pr^grîn a,ssi?tanct ^grants and IrtanSj \i

31

754

D

fj

-62

55 G

701

(In billions of TanzaiiJa shillings; end of period)

35 -42 68

1.025

15

-A7 -ny -w

543 550 54^

(In millions of U S. dnllars^ cod of period)

692 773 675

144

1C

537

597

-27

UQ43

is

9

-127

573

784

25-? 251 .158 2ft 1

Note: For precise definitions of the aggregates shown and dccaiJs of tfie fldjuslmtni clauses, s^s (lit technical mtinoranduni of understanding fi'MU) attached to

1hc governnik;ii:'E letter of Augjst J 1,7001.

l/Cuiiirilalivc fioinllic Lie^liuiiiigor'the ([seal yeai (July 1).

2/ I'o be adjusted upward fnr 111? 'r'ariâniashilKng equivalent uf any shfirtf8.11 in foreign prtigraiF ISSistanoLi frum the arniiLinls shown in the incmi:randiini item

3; To be adjusted downwatd to the extent dial eligible bank reserves fall Elicit of 10 percent of commercial bank deposits,

•M To be adjusted downward for any shortfall in foreign program assistant: torn ihu amount sho\wi in ihc memorandum ilam.

5/ Continuous perrurruantL urileriuii; tfALlu.dtfs H[T«JK uu debl-tervice payiiKiits pending the cuiiclusiori of dsbt-iescheduliufc a.îceuiciits.

76A

ti

U

D n o o

0 0 0 0


- 5 7 - APPENDIX1ATTACHMENT

Table 1 Tanzania: Structural Performance Criteria and Benchmarks Under the PovertyReduction and Growth Facility Arrangement, May-October 2002

Measures

Public debt management

Adopt domestic debt strategy covering direu and contingent liabilities

Clear all audited domestic arrears accumulated during the period July-December 2000 (performance Criterion)

Submit to Parliament legislation Ehal makss the government's Incurringor guaranteeing of foreign debt subject to cabinet approval uponrecommendation by the Minister ("or Finance (performance criterion)

Tax policy and administration

Conduct a review of the administration of the VAT

Examine alternative options for administering exemptions fromindirect taxes

Financial transparency Jind good governance

Publish individual and consolidated quarterly revenue and expenditureaccounts of local governments starting with those for the first quarterof 2002

Publish second report on the implementation of the ministerialanucorrupuon plans

Trade policy

Announce timetable for the elimination of the suspended, duties (importsurcharges) imposed in the budget for 2001/02 on 13 product groups(peil'ormance criterion)

Financial sector

Harmonize the treatment of luan loss provisions by banks for prudentialrequirements and taxation purposes

Date ofImplementation(end of period)

May 2002

May 2002

Oct. 20U2

My 2002

Sep, 2002

June 2002

Scp, 2002

July 2002

Ocl. 2002

Implementation

Status

Observed.

Observed.

Not observed;modifiedapproachunder newNational DebtStrategy,

Completed inAugust 2002.

Observed.

Nol observed,expected forDecember2002.

Not observed:expected forDecember2002,

Observed

Not observed:expected forDecember2002.


- 58- APPENDIX IATTACHMENT

Table _V , an?,aTiia: Quantitative Performance Criteria and Benchmarks Under the Poverty Reduction andGruiA-'lL Facility Arrangement, Sejjteiub«H 20Q2-June2Q03

September

Est.

2002 2003Deveniler March June

Orip,. IndicativeBenchnmTks

PerformanceCriteria

[indicativeBenchmarks Benchmarks

[In billjous o± Tanzania shillings, end of psitod)

Net Joniestii; (inauîn^ tif this gtvej:ime:it ofTar.?ania (tciline.) 1 <' 2' 3/

Central government recurrent revcr.uc(iluor, benchmark only) L/

R>Llra.biidgetary expenditure(ceiling, benchrr.ark unlyj I-1'

Accumulation nf budgetary arrears[veiling, beiivliiiuirk unJy] I/

Net doncsTit isaets of the Bant ot"Tanzai:ia [cciliiiiij 2/4.'"

Rtisw VB inujitv (ceiling, benchjiiaik onJy) 4/

Nî international resen'es df the Bankof Tanzania [floor) 5/

Accuraulalioti or: external pa>ments arrears (ceiling) 6-'

Cwnllacting ur jj,iia.ra:]lcL-iiiy ijt cvtciiiiil Jtbt

on nonconccasions] lcnn.s (ceiling) I /

Memorandum items:Fuieijin pto^rum aiaistaiu;t (yranli arid loans) 1''Prograraii]ed tlcbt &cr\'icc paymcti;s

(in billions of Tanzania shillings) 1^

559 559

0 0

0 f.

-34 -144 -328 -384

7% 6]g 737 G6S

(In ;iijl]]O:iS ut U.S. Jullars, jjilcss otlierwJse inditated, «id ut'period)

900 839 1,020 1,020

16 64

862 1,172

0 0

0 0

-331

693

1,020

20 195

D

n

268

126

'J

4QG

L79

Note, 1'bj- precise definitions of the aggregates shewn and details cf the adjusiment clajsfs, seslhe tfohnical memorF.ndiim of understanding (TML'J attachedto the govarnment'sleiteT of August 31. 2001, subject to the addition afthe adjustment clause laid ûtin footnote 3 below.

\/ Cumulative from tbe beginning of the fiscal year (fury \}.2/ lo be adjimrd upward tqr the Tanzania sditlliiig equivalent of F.ny shortfall in foreign program assistance from the amounts shown in the memorandum i(c3/ To be adjusted dnwnward'upward to the extent that total debt-service paytnenls (ir.teresi, on foreign and domestic debt and amortizaiion of foreign debt)

lall sliort off'sxceed the amounts sh.o\vn in tne ineinorandurji item.4/To be adjusted downward ro the extent that eligible bank reserves fall sliortof 10 percent of commercial bank deposits,5; To be adjusted downward for c.uy shortfall in tbreign ura^rani assistanEe from the amounts shawn in the ineLiiorandum item.ft/ rontir,Li(!us performance criterion; excludes arrears on debt-service payments pending the conclusion of debt-rescheduling agreements.

20 n

0

o 0

0

0

429

239


- 5 9 - APPEND1X IATTACHMENT

Table 4. Tanzania: Structural Performance Criteria and Benchmarks Under thePoverty Reduction and Growth Facility Arrangement, November 2002-March 2003

Measure

Tax policy and administration

Adopt centralized motor vehicle registration system.

Introduce a treasury voucher system for administering the indirect taxexempt ion applying lo nonreligious nongovernmental orgitTii/alioni and toimports of motor vehicles by eligible public servants.

Issue guidelines to local councils for the harmonization of taxes, levies, andlicenses,

Expenditure management

Require spending agencies (\TDAs) lo submit lo the Accountant Generalquarterly reports on their utility bills and amounts paid, starting with a reportfor the first quarter of 2002/03 (July-June)

Identify the budgetary codes for priority expenditures and apply them in thebudget guidelines for 2003/04 (performance criterion; see para 28 of letterof intent),

Public debt management

Submit to parliament amendments tolheT-oans, Guarantees, and Grants Act(performance criterion; see para.34 of letter of intent).

Establish National Debt Management Committee under the National DebtStrategy.

Financial sector reform

Submit to parliament the draft law establishing the legal, regulatory, andsupervisory framework far micro finance operations

Date ofImplementation(End of period)

December 2002

January 2003

January 2003

November 2002

February 2003

February 2003

February 2003

February 2003


60 APPENDIX LI

Tanzania: Relations with the Fund(As of September 30T 2C02)

I,n.

in.

IV.

V.

VI.

Membership Status: Joined 09/10/62; Article V

General Resources Account:

Quota

Kind holdings of currency

Reserve position in Fund

SDR Department;

Net cumulative allocation

Holdings

Outstanding Purchases and Loans:

Enhanced Structural Adjustment Facility(ESAFV'Poverty Reduction and GrowthFacility (PROF)

Financial Arrangements;

Approval Expiration'1 ype dale dale

PRGF 04/04/2000 04/03/2003

ES AF/PRGF 1 1 /OS/ 1 996 02/07/2000

ES AF 07/29/ 1 991 07/28/ 1 994

III

SDR million

19890

188,92

9,98

SDR million

31.37

0,25

SDR million

282.23

Amountapproved

(SDR mil l ion}

135.00

181.59

181 90

% Quota

100.00

94.98

5.02

% Allocation

10000

0,80

% Quota

141.90

Amountdrawn (SDR

million)

10000

181,59

#5 60

Projected Obligations to Fund Under the repurchase expectations Assumptions(SUR million; based on existing use of resources and present holdings of SDRs).

Overdue Forthcoming

09/30/2002 2002 2003 2004

Principal G O O S 15 17

Charges/interest 0.00 0,88 2

Total 0.00 9,23 19

.42 27.50

.02 1.91

.44 2941

2005 2006

3832 4632

J .74 153

40,06 47.85


61 - APPENDIX II

V1L Implementation of HIPC Initiative:

Enhancedframework

Commitment of HIPC assistance

Decision point date 3/31/2000

Assistance commitled (NPV terms) end-June 1999Total assistance (USS million.) 2 026 00

Of \\-hich; Fund assistance (SDR million) gg 95

Completion point dale 11/21/01

Delivery of Fund assistance (SDR million)

Amount disbursed 96,40

Interim assistance 26,68

Completion point2 69.72

Amount applied against member's obligations (cumulative) 35.93

VTTT. Safeguards Assessments:

Under the Fund's safeguards assessment policy, the Bank of Tanzania (BoT) was subject10 the transitional procedures with respect to the current PRGF arrangement, approved onApril 04, 2000, which required a review of the BoT's external audit mechanism. Thisassessment, which was completed on April 03, 2001. determined thiit the BoT publishesannual financial statements that are independently audited in accordance withinternationally accepted standards, The assessment concluded that the BoT's currentexternal audit mechanism may not be adequate in specific respects and recommendationswere reported to the authorities in EBS/2/56. The recommendations have cither beenimplemented or the authorities have agreed to implement them within an agreedtimeframe.

IX. Exchange Arrangements:

The currency orTati/ania is the Tan/ania shi l l ing. The official exdianê rate is determinedon the basis of the rate established in the interbank market for foreign exchange The middlerate in terms of the U.S. dollar, the intervention currency, was T Sh shilling 969.6 per

" ISPV terms a I (.he decision point, under the enhanced framework

•̂

'Under the enhanced IHPC Initiative, the nominal amount of assistance disbursed willinclude an additional amount corresponding to interest on amounts committed but. notdisbursed during the interim period, calculated using the average return (during the interimperiod) on the investment of resources held by, or for. the benefit of the PRGF-1JIPC Trust.


-62- APPENDIX IL

U.S. dollar as of September 30, 2002. The exchange system is free of restrictions on themaking of payments and transfers for current international transactions.

X. Article TV Consultation:

The most recent Article IV consultation was concluded on September 24, 2001(EBS/OI/153),

XL Technical Assistance, 1999-2002:

Departments Timing Form PurposeFiscal Affairs 1998-99

October 1999October 2000March 2001May 2001

October 2001

2001-02

October 2002IMF Institute March I9W

Monetary and Since OctoberExchangeAffairs

Statistics

1998

Since November1998June July 1999March 200]October 2000May 2002

Long-term consultantMissionMJssionMissionShort-term consultant

Mission

Long-term consultant

MissionMission

Long-term consultant

Regional advisor

MissionMissionMultitopic missionMission

Expenditure managementNew duty drawback systemPublic expenditure managementFiscal decentralizationTranslation of governmentaccounts and operationalzation tothe standard classificationsConduct the ROSC fiscaltransparency module and preparean assessment and action plan forthe ability to (rack poverLy-rcducing expenditureStrengthening of macroeconomicfiscal analysis at ihe Ministry nfFinanceTax administrationFinancial programming and policycoursesFinancial svstem reform

Payments systems

Capital account liberalizationMonetary policy operationsMacro economic statisticsBalance of payments statistics

XII. Resident Representative;

Mr, Ali Abdi lias been Senior Resident Representative since October 2001


-63- APPENDIX III

Tanzania : Relations with the World Bank Group

Partnership in Tanzania's development strategy

The government of Tanzania's development strategy is set forth in its poverty reductionstrategy paper (PRSP) find rlirther refined in the first progress report, which was endorsed bythe Bank's Board on November 27, 2001. The ?RS? focuses on three main areas ofoutcomes and actions for realizing (hem. The first is a reduction in the breadth and depth ofincome poverty. The outcome targets include a reduction in basic needs poverty and foodpoverty, with a particular focus on rural areas, where poverty is most prevalent. The secondarea is that of improving the quality of life and social well-being. More specifically thisentails improving human capabilities, enhancing longevity and survival, social well-being(social inclusion and personal security), improving nutrition and containing extremev u l n e r a b i l i t y (mainly through safety nets). The third broad area is a sustained environmentthat is conducive to development. The environment encompasses macroeconomic stabilityand good governance.

The I Ml; is supporting Tanzania's poverty reduction efforts in the context of the three yeararrangement under the Poverty Reduction and Growth Facility (PRGF), Among externalpartners, the Fund lakes the- lead in the policy dialogue with the government onmacroeconomic policies, including overall fiscal and monetary policy. Under the PRGF, inaddition to macroeccmornic targets, the Fund has agreed with the authorities structuralperformance criteria relating to reforms in the areas of tax policy and administration, publicdebt management, financial transparency and good governance, trade policy, and financialsector development. As outlined more fally below, the Bank's support is complementing theFund's through a focus on sectoral reforms in the context of projects and analytic work andthe current programmatic adjustment credit (PSAC I) covering the areas of economicgovernance, business environment, regulatory improvements, and privatization

.Bank Group strategy

The current Country Assistance Strategy (CAS) for' Tanzania was approved by the Bank'sBoard on June 15, 2000 The next CAS will be presented to the Board by the end of 2003.The focus of the current CAS is on higher economic growth, poverty reduction andinstitutional reforms to improve governance. It conforms with the government's mainstrategy of adherence to macroeconomic stability, increased private sector participation in llieeconomy, a renewed emphasis on rural development and an improved delivery of socialservices It also supports the government's desire to enter into new relationships with itsdevelopment partners, based on the phased switching from projects to programs for moreeffective and efficient ui>e of aid resources.

IDA is currently providing adjustment lending through PSAC 1. This credit supports thegovernment's efforts to sustain macroeconomic stability and improve public service delivery,deepen the implementation of the privatization program, improve competitiveness and the


64 - APPENDIX III

transparency of key markets, strengthen the state legal and commercial apparatus for a moreefficient and transparent business environment, and further reduce the barriers tointernational and domestic trade. Progress in implementing the reform program issatisfactory. Two tranches of the credit have been already released. While most of theconditions have been met for the release of the remaining three tranches, remaining measuresto be completed are (i) bringing the Dar es Salaam Water and Sewerage Authority to thepoint of concession, (ii) relaxing restrictions on foreign portfolio investment in equityinstruments, and (in) reforming the regulatory framework for infrastructure services. Thefirst two measures are expected to be completed by the end of 2002, and the third measure isexpected to be completed by the middle of 2003. The implementation of policy reformsagreed upon under PS AC 1 is supported by a series of technical assistance and investmentprojects. These include project support to improve tax administration, to reform the publicsector, and to develop the financial sector, including rural finance, and microfinance.

The Bank is preparing a proposed Poverty Reduction Support Credit (PRSC), which willsupport the implementation of the PRSP. This operation will deepen the Bank's policydialogue in the areas of improving the business environment and strengthening publ icexpenditure management and public service delivery In addition, this operation will alsoentail policy dialogue related to scaling up pro-poor growth, especially through a focus onrural development, and to the operationalization of an appropriate monitoring and evaluationsystem to enhance the accountability for results and outcomes of sectoral programs. Theexpected Board date for PRSC 1 is May 2003.

In the social sectors., the Bank has approved an adjustment lending operation in support ofprimary education (US$150 million). The objectives of the program include improvingeducation quality, expanding school access, and increasing school retention at the primarylevel. After about 18 months of implementation, Bank support in this area has alreadyfacilitated a significant increase in primary school enrollment. The Bank contributes to thehealth sector multidonor "basket fund", which supports reforms of the sector and providesfunding for nonwage expenditures. A multi sectoral HIV/AIDS project supports Tanzania'sefforts to reduce HIV transmission and mitigate the adverse consequences of AIDS, in thewater sector, a project that will support technical, commercial and financial rehabilitation ofthe water supply and sanitation services in Dar Es Satam is under preparation.

In the agriculture sector, the Bank supports policy reforms through analytical work and thepolicy dialogue in the framework of PS AC 1 and the proposed PRSC- The Bank alsoprovides support to strengthen research and extension services. A Participatory AgriculturalDevelopment and Empowerment project is under preparation to support investments inappropriate technologies to reduce soil fertility decline.

Efforts to improve Tanzania's infrastructure are supported through projects in the road andrailway sectors, as well as an urban rehabilitation project. In the power sector, the Bank hashelped the government implement the Power Sector Restructuring Program. The Bank liasencouraged the government to develop the domestic gas market and to generate lower costpower through the Songo Songo Gas Development and Power Generation project.


- 65 - APPENDIX 111

During fiscal year 2002 (KY02), LDA's project for Forest Conservation and Management(worth US$.31 1 mil l ion) , Songo Songo Gas Development and Power Generation (US $183million), Lower Kihansi nnvirorrnieni (USS 6.3 million"), nnd Rural Water & Sanitation(worth USS 19 million), as well as a supplemental credit for Lake Victoria Environment(US$5 million), were approved by the Board

The IFC's portfolio includes investment?; in agriculture, agro-piocessing, banking andfinancial services, and tourism in the amount of US$37 million Over the next three years,potential investments in the magnitude of USS20-30 million in private infrastructure, andfinancial institutions, and to provide financing and capacity building support to small andmedium sized Tan/anian enterprises are expected. MIG/Vs current exposure in Tanzaniaincludes four guarantees in the infrastructure and telecommunications sectors totalingUS$175 million gross and US$70 miliion net exposure.

Tanzania joined the World Bank Group in 1962. Beginning with an IDA credit for educationin 1963r atotal of 124 credits and 27 loans, totaling US$4.35 billion (US$4 billion fromIDA) have been provided to Tanzania, Currently, the portfolio comprises 22 active projectswith commitments of USS 1.3 billion in all major sectors. As of August 31, 2002 iheundisbursed balance for the portfolio stood at US$744 million, Total disbursementsamounted to nearly US$3,4 bi l l ion as of August 31,. 2002 (>ome USS 3,089 million from IDAand USS355 million irorn IBRD).

Bank-Fund collaboration in specific areas

The IMF and World Bank staffs maintain a close collaborative relationship in supporting thegovernment's structural reforms. As part of its overall assistance to Tanzania-through[ending, country analytic work and technical assistance-the Bank supports policy reforms inthe following areas in collaboration with the Fund:

• Public expenditure management. Improvements in public expenditure managementhave been one of the top priorities of ihe Tan/aniun government since 1995. The Bank, theFund, and other donors have worked closely to provide government the needed support forinstitutional and policy reforms. While the Fund is leading the dialogue on fiscal policy, theBank is focusing on strategic resource allocation and operational efficiency of publicexpenditures. In the area of overall fiscal policy, the reduction of domestically financeddeficits has resulted in sustained macroecnnnmic stability over the past five years. Toenhance strategic resource allocation and operational efficiency, the Bank has joined agovernment-led, participatory Public Expenditure Review/MTEF process that has supportedthe strengthening and opening up of the budget process as well as the allocation of resourceslo pro-poor priority areas In addition lo process support and analytical work in this area, theBank is also supporting policy reforms through PSAC. Another area of Bank involvement isthe fiscal decentralization process where, in addition to ongoing analytical work, projectsupport is planned to start in 2004. The Bank and Fund collaborate closely to supportinstitutional budget and expenditure management reforms, A recent Country financial


- 66 - APPENDIX 111

Assessment Analysis (CFAA), carried out m a collaboration of the Bank, oilier donors, andgovernment, an IMF Report on the Observance ol" Standards and Codes (ROSC), and a jointBank/lMK assessment of capacity to track poverty-reducing expenditure have all noted Iheimprovements in public financial management and fiduciary systems in recent years.

• Tax policy and administration reform. A relatively small and .stagnant domesticrevenue effort is a severe constraint on Tanzania's efforts to improve public serviceprovision The Bank and the Fund have over the past few years expended sianifleam effort toenhance the domestic revenue effort. While the Fund has taken the lead in reforms andadjustments of tax policy, the Bank has taken the lead in reforms to strengthen taxadministration. Recently a study has been commissioned by the PER working group toanalyze the causes of the persistent low revenue levels and to develop proposals forimprovements,

• Financial sector reforms. Tanzania has been engaged in far-reaching reforms of thefinancial sector, The Bank and the Fund have been working closely to support these policyreforms In addition to its contribution to the policy dialogue, the Bank has providedsignificant technical assistance for financial sector reforms. This includes two financialinst i tu t ion development projects that support respectively, the withdrawal of the governmentfrom banking and nonbanking financial institutions and the strengthening of financial sectorsupervision. Successful outcomes of these reforms include the privatization of Tanzania'slargest bank and tlie entry of a fairly large number of international banks into the Tanzania^market, Other areas of Bank involvement include the reform of the capital and securitiesauthority, reform of pension systems, and liberalization of capital accounts. Through aseparate project, the Bank supports the development of rural and microfmance services. Ajoint Bank/Fund Financial Sector Assessment is planned to start LJI FY 03,

• Public service reform and improved service delivery. In recent years, thegovernment of Tanzania, with support from the Bank and other donors, has launched anumber of major initiatives to improve performance and to foster greater accountability,transparency, and integrity in the public sector. These include (i) the Public Service ReformProgram, (PSRP) (ii) the Local Government Reform Program, ( i i i ) the Public FinanceManagement Reform Program, (iv) the National Anti-Corruption Strategy and Action Plansfor Tanzania, (v) the National Framework on Good Governance, delineating acomprehensive approach to improve governance, (vi) the establishment of a GoodGovernance Coordination Unit (GGCU) in the President's Office, and (vii) the launch of theLegal Sector Reform Program. Among these reforms, the PSRP plays a central role since itsobjective is to improve the accountability, transparency, and resource management of servicedelivery. The program is closely l inked wi th other major reforms in public finance anddecentralization. The PSRP aims at transforming the public service into a service that has thecapacity, systems, and culture for client orientation and continuous improvementCooperation between the Bank and the Fund covers those areas where public sector reformhas a direct impact on fiscal stability and public sector financial management.


-67- APPENDIX HI

• Trade reforms. The Bank and the Fund are working closely to assist Tanzania inestablishing a pro-growth trade framework. While the Fund is focusing on reforms of llietariff regime, the Bank is focusing on trade expansion though its regional trade facilitationproject. The Bank is also involved at the regional level in tlie dialogue on trade reforms inthe context of the East African Community.

A. Tanzania : Financial Relations with the World Bank Group

Statement of Loans and Credits(as of August 31,2002;

in millions of U.S, dollars)

Original principal

Cancellations

Disbursement todate

Repayments

Undisbursed

Exchangeadjustment

Borrower'sobligation

IBRD

361.03

5,47

355.55

349.15

0.00

441.52

6.75

IDA

3,991.90

226.33

3,089.50

244.36

744.29

0.00

2,798.70

TOTAL

4,352.93

231.80

3,445.00

593.51

744.29

441.52

2,805.50


- 68 - APPENDIX TV

Tanzania: Statistical Issues

Tan/ania's statistical infrastructure and economic database remain weak Tanzania hasreceived considerable technical assistance to alleviate these difficulties, and progress hasbeen made in some areas. The authorities are fully cooperative in providing available data tothe Fund in a timely manner. Tanzania has very few statistical publications and no fullyarticulated publication policy. The authorities arc committed to improving the production anddissemination of macroeconomic and sociodemographic statistics in the framework of theGeneral Data Dissemination System (GDDS). Tanzania is a participant in the ODDS, and itsmetadata were posted on the Data Standards Bulletin Board (DSBB) in July 2001 In October2000, a GDDS multisector statistics minion conducted a detailed assessment of Tanzania'sstatistical systems and used the framework of the GDDS to provide guidance on statisticalpractices and development in the areas of national accounts, price, foreign trade, balance of"payments, fiscal, monetary, and sociodemographic data. A mission to prepare the datamodule for a Report on the Observance of Standards and Codes (ROSC) was recentlycompleted (October 8-23, 2002),

National accounts

National accounts data are prepared by the National Bureau of Statistics (NBS) on the basisof data collected by its regional offices and by other government entities. The nationalaccounts data provide a basis for assessing movements in output, although many weaknessesremain, particularly with respect to data sources for the breakdown by expenditure category,deficiencies in external sector data, and the paucity of indicators to extrapolate benchmarkproduction levels. These deficiencies impede the accurate estimation of the savings-investment relationship. The recent revision of the data for crops and the new householdbudget survey are expected to improve the quality of the national accounts

Prices

Monthly consumer price data are collected by the NBS from 20 cities and regional centers..Since mid-May 1996, data have been reported within three weeks after the end of the month.The authorities intend to update the consumer price index weights (food currently has a71 2 percent weight) on the basis of the recent household budget survey data, and to expandthe producer price index series,

Government finance statistics

Although monthly data on central government revenue., expenditure, and financing areprovided to the Fund on a timely basis, concepts in use differ from the international standardsin the treatment of lending minus repayments, and iran&fcr payments Despite improvementsin the recording of government transactions., discrepancies remain between revenue andexpenditure data, on the one hand, and financing data on the other. This seems to be relatedto the different sources used for these data. There appears to be a different coverage of thecentral government sector in the fiscal and monetary data Following the creation by theMinistry of Finance with donor assistance of a database of donor-funded projects in 2001/02


- 69 - APPENDIX TV

(July-June), the amount of foreign-financed projects reported by and channeled through thebudget has increased significantly. No information is yet provided on the financial position oflocal governments, although the authorities stated plans to produce these reports.

The government has recently completed the computerization of its accounting system forbudgetary units, which the authorities indicate would allow resumption of reporting in theGovernment Finance Statistics GI*'S Yearbook. However, the computerized accountingsystem does not provide details of the nature of development expenditure, and has not yetbeen extended to cover the extrabudgetary units.

Monetary statistics

The GDDS multisector mission (October 11-24, 2000} determined that the quality ofmonetary statistics is compromised by various methodological problems, in particular thearbitrary application of the residency criterion by commercial banks, the exclusion of ruralbatiks and nonbank deposit-taking institutions from the coverage, the inadequate subdivisionof the resident sector data due to the misclassification of certain accounting data in monetaryaggregates, the lack of a separate identification of restricted deposits of closed banks andnonperforming loans of the banking system, the nontransparent treatment of repurchaseagreements, the inadequate sectorization of various accounts in the bank reporting system,the erroneous coverage of international reserves, the lack of market-based valuations offoreign securities, and, finally, the treatment of accrued interest in a highly aggregatedmanner.

To address these problems, the mission recommended that the Bank of Tanzania (BoT) (i)instruct commercial banks to classify accounts according to the client's properly determinedresidency status and use; (ii) extend the coverage of monetary statistics to all depositorycorporations, (iii) revise the bank report forms to allow for a more detailed scheme forsectorizing resident sector data, (iv) reclassify misclassified accounting data to facilitate anaccurate construction of monetary aggregates; (v) establish a separate identification ofrestricted deposits of closed banks and nonperforming assets of the banking system to ensurethat the resulting deposit and credit aggregates are meaningful for macroeconornic analysis;(vi) treat repurchase agreements with commercial banks as a new financial instrument forproviding or taking loans, (vii) modify the bank reporting system to emphasize appropriatesectoral distinctions between various accounts, and (viii) redefine the coverage ofinternational reserves to include ooly liquid foreign assets and a market-based value of goldassets, Based on these recommendations, the mission prepared tin action plan. The authoritiesintend to seek technical assistance to implement some of these recommendations A follow-up mission in monetary and financial statistics is envisaged that will review theimplementation of these recommendations and assist the authorities with the development ofa wider financial survey covering activities of all deposit-taking financial institutions

Balance of payments statistics

Foreign trade data are prepared by staff missions on the basis of customs data from the BoT.The foreign trade data are compiled by the Tanzanian Revenue Authority based on Customsrecords A recent balance of payments statistics mission (May 8-21, 2002) found that there


- 70 - APPENDIX IV

continued to be a significant unrecording of trade. Information on invisible transactions issparse. Tourism revenue is at present estimated on the basis of data records from theinternational exchange transactions reporting system (ITRS). Ho^vever, the authorities havemade si i one progress in improving the data for travel credits by gathering data from travelsurveys and plan to use- the survey-based data as the data source beginning in 2003.

Information on official grant and loan receipts is prepared by the staff on the basis of conlaavvhh official agencies. The data on current and capita! transfers (grants) are estimates, basedin part on data provided by the Ministry of Finance and in part on UNDP projections,However, the coverage, periodicity: and disaggrcgation of the data are inadequate and effortsare under way to achieve a complete coverage of data on grants disbursed.

Data an private capital flows arc very poor at present. Some information on private bankingsector flows can be derived from the monetary survey, other private capital flows are notadequately captured by the 1TRS records and thus are reflected only in the category "errorsand omissions7'. However, the authorities have made commendable progress in collectinginformation, for the first time conducting a survey in 2000 of private capital flows andstocks, particularly foreign direct investment transactions covering direct investment income,equity capital transactions—including the noiicash acquisition of equity—and intercompanyloans The authorities have also updated the registry of enterprises with foreign equitycapital. The 1999 data obtained from the 2000 survey of private capital flows, which showsignificantly higher levels of inward direct investment than indicated in the ITRS records,will be incorporated into the balance of payments statistics beginning in late 2002. Thesurvey of private capital flows will be conducted again in late 2002, covering data for 2000and 2001, and it is expected that the survey will be conducted on a regular basis in the future.

Data on the gross and net official reserves of the BoT are provided monthly with a short lagand more frequently on request Similarly, data on foreign assets and l iabil i t ies of thebanking system are provided with relatively short lags,

Significant progress was made in improving the quality of external debt data as a result of thereconciliation exercise undertaken in connection with the HIPC Initiative. At present,multilateral and bilateral Paris Club debts have been fully reconciled. These two categories ofdebts account for 80 percent of Tanzania's total external debt. However, little progress hasbeen made in reconciling the rest of the debts owed to non-Paris Club bilateral andcommercial creditors. Information on external debt not guaranteed by the public, mostlyprivate sector debt, is also limited and not captured in a timely manner.


Tanzania: Core Statistical Indicators(As of October 23, 2002)

Date of latestobservation

Dale received

Frequency of data j

Frequency ofreporting

Souitie nf darn

Mode of reporting "

ConiidKiiiality &

Frequency ofpublication *

ExchangeRattas

6/28/02

in 7/02

D

D

A

E

C

D

Infer-no tionalReserves

6/28/02

7/17/02

M

M

A

E

D

M

CentralBank

Ruin neeSheet

8/3 1/02

10/7/02

M

M

A

E

D

M

Reserve/"Rase

Money

8/3 1/02

10/7/02

M

M

A

C

D

M

BroadMoney

8/3 1/02

1 0/7/02

M

M

A

b

C

M

InterestRaios

8/31/02

10/7/02

M

M

A

C

C

M

Con-sumerPriceIndex

June2002

6/12/02

M

M

A

C

C

M

Exports/Imports

May2002

6/12/02

M

M

A

C

C

M

CurrentAccountBalutioe

2000

Apnl2nm

A

A

A

C

C

A

-OverallGovern

me ntBalance"

April2001

5/12/01

M

M

A

C

D

M

GDP/CrN?

2001

6/12/D2

A

A

A

M

C

A

ExtemaJI3eht/Debt

Service

Maroh2001

5/10/01

A

A

A

C

C

A

I/ Based on Bank of Tanzania dataIt Contains only partial information on the development budget.3/ Codes for frequency of data, frequency nf reporting, and frequency of publication are the following: D-tlaily. W-weekly; M-TnnniWy, Q-qiwrterly; A-aimually;and O-oPier.4/ Qxle f'oi source of data is A-direct repining by central bank. Ministry of Finance, or other official agency,5/ Codes for mode of reporting arc Lhi; ibllowirig: C-tahte or facsimile, F-clcctror.ic dnTn transfer: and M-mail.6/ Codes Loruonlldenlialirv arc the fotlowing1 C-for unrestricted use; anc U-embargoed for a specified period ond thereafter lor unrestricted use,

-j

%•U

5I—iXt—I<;

71741


- 72 - APPENDIX V

Tnn/.anLi: Updated Poverty Analysis

Background

A key deficiency of the 2000 poverty reduction strategy paper (PRSP) and the 2001 PRSPprogress report, as noted in the respective joint staff assessments (JSAs), was the absence ofa comprehensive poverty analysis to serve as a baseline for monitoring the effectiveness ofpoverty-reducing measures. The recently published 2000/01 household budget survey (HUS)provides a detailed assessment of poverty in Tanzania, improving on the earlier analysts inthe 1991/92 HBS by

• basing its analysis on a sample that is more than four times as large as that of theearlier survey and ensures a regionally balanced analysis through the availability ofresults for about 1000 households in each of mainland Tanzania's 20 regions;

• expanding the analysis through the use of several important new indicators, such ascurrent school attendance and literacy, and

• exercising better control of data quality through a number of data consistency checks.

The HBS establishes a poverty baseline along the lines of key indicators of the PRSP, It alsoprovides an analysis of trends in these indicators during the 1990s based on a comparison ofthe results of the 2000/0] HBS with those of the 1991/92 HBS. This appendix summarizeskey findings of the HBS, but does not intend 10 anticipate the analysis and conclusions of theforthcoming 2002 PRSP progress report.

Features of poverty in Tanzania

The IIJBS assesses poverty both in terms of food poverty and a broader concept of a'"basic needs" poverty line. Food poverty is measured based on I he price of it m i n i m u m loudbaskel necessary to provide 2,200 calories and on the consumption pattern of the poorest50 percent of the population. The basic needs poverty line additionally includes nonfoodconsumption

Some 36 percent of Tanzanians fall below (he basic needs poverty line, while 19 percentfall below (lie food poverty line. Although these results are slightly better than those of theearlier HBS, the decline is not statistically significant, Furthermore, the absolute number ofpoor increased over the 1990s because of population growth, Using population projections,there are now 11.4 million Tanzanians below the basic needs poverty line, compared with 9.5million in 1991/92.

Poverty in Tanzania is predominantly a rural phenomenon. Almost 40 percent of thepopulation below the basic needs poverty line lives in rural areas, while less than 20 percentof the population in Dar es Salaam falls below the poverty line. Furthermore, over the 1990spoverty declined most in Dar cs Salaam.


- 73 - APPENDIX V

Poverty is strongly correlated with education levels and type of economic activity. Some51 percent of individuals are poor if the head of the household has no education, comparedwith only 12 percent when the head is educated above the primary level Also, householdsthat depend on agriculture have somewhat higher levels of poveny than average.

One-fourth of Tanzanian adults have no education; this level rises to almost one-thirdin rural areas but I'aJls to below 10 percent in Dar es Salaam. Women are about Iwice aslikely as men to have no education. Rural women in particular have missed out, with 41percent unable to read or write. iNonelheless, gender is not an important factor in explainingdifferences in poverty: households headed by women are no poorer than those headed bymen. Some 60 percent of 7-13-year olds are enrolled in primary education Access to primaryeducation differs significantly between urban and rural areas: while 71 percent ofchi ldien inthis age group are enrolled in urban areas, only 56 percent are in rural areas. Enrollment insecondary education is much lower than in primary education: only 5 percent of 14-17-yearolds are enrolled; in rural areas the level is 2 percent,

TTeulth indicators show less pronounced differences between rural and urban areas. Inrural areas, some 28 percent were ill in the four weeks preceding the survey, compared with19 percent in Dar es Salaam. Some 69 percent of the individuals who had been ill reportedthat they hud consulted a health care provider In rural areas, 67 percent reportedCQrisuliation;; of some kind. Most households are reasonably close to primary health carefacilities: even in rural areas, over 90 percent reported being within 10 kilometers of adispensary or health facility.

There is? however, a significant difference in access to drinking water between urbanand rural areas. The urban population has much better drinking water supplies than tbcrural population. Some 53 percent of rural households depend on an unprotected walersupply, while 86 percent of households in Dai es Salaam have piped water of some kind.

Evolution of poverty indknlors aver the 1990s

The Assessment of the evolution of poverty in Tanzania over the past decade is hanipeied bythe lack of reliable estimates ibr most poverty indicators for periods during the decade.Notwithstanding the small decline in the percentage of the population below the poverty linebetween 1991 and 2000, it is therefore not possible to ascertain whether poverty remainedbroadly unchanged over this decade or if it followed some other pattern-

Nonetheless, I he HBS provides some indication that living standards may have generallyimproved. Household consumption rose by about 17 percent in real terms between 1991/92and 2000/01 The share of household spending on education and medical expenses increasedover lhal period, from about 1 to 2 percent of total spending. Furthermore, ownership of arange of consumer goods, such as radios and bicycles, rose during the 1990s, A few povertyindicators are shown in the following table.


-74- APPEKDIX V

Tanzania, Selected Income Poverty and Social Indicators in 1991/92 and 2000/01

Percent, of population below basic iieedspoverty line

Percent of adults with no education

Percent of children aged 7-13 in school

Percent of households wilh piped water

T)ar es Salaam

1991/92 2000/01

28 189 8

6& 76

93 8&

Rural

1991/92

412S

56

25

2001/01

3929

58

28

Total

1991/92

3925

57

36

2000/01

3625

61

39


- 7 5 - APPIiNDIX VI

Tanzania: Social Indicators

PopulationTotal population, midyear (millions)

Growth rate (annual average percent for period)Urban population (percent of population!Tolal fcn i l i iy ra'c (binhs per wwinsu])

PnvcrtyI Percent of population)NaliuniJ h&ldctiUnf index

Urban head count indexRural head count index

hiLnmctam sumption distributionUNlps r capita (U S. ddkra)Consumer price index (J 905^100}Pood pries index ( 1995=100)

Income/consumption distributionGini indexLowest quictile (percent of income or consumption)Highest qiiinlilc (percent of income or consumption)

Social iiidjcators

Public expenditureHealth (percent of GDP)Education (peiceut of GDP)Sotia.1 security and welfare (percent of GI3PJ

Net pnTiiar>p school enrollmeni rale(percent of age group)

Tcr.ulMalePcnmlu

Avceis to an innpToved water source(perceni; of populatinnj

TntalUrbanRural

Immunization rate(percent under !2 months)

MeaalesDPT

ChiJd inalrutrition [perceDt under 5 >eairs)Lift liXpBtiancy at birth(years]

TotalMateFemale

MortalityLibnl<pcr I.QOO live births)Under 5 (per 1,000 live birtn.sjAdulT(l.S59)

MaJc (per 1,000 population)Female (per 1,000 population)

MatenMJ (per 100,000 live birrha)Birth1; attended by stilted health ilalT (percent)

LaLehl single yeur

1970-75 1980-85 1W-OI

15.9 21.S 33.73.0 3.2 2.6

10.: I7.fi 27.86.R 6.5 5.J

35.023-538.C

270I 8 IS!

10 2,125

132.1

56 4K55 47

5fi 49

54SO42

29

43 < 1 4-146 49 4450 53 45

I1B 108 £3218 176 149

513 451 5624i9 370 521

1,1005S 35

fia-Tic niEjKHii'intoiHii gioup

Swl>Salisran

Africa

65R.92.6

Ji4452

4.70

13J1

2.41.6

558241

_S346

474547

9]162

504459

Lew[nc Pine

2,4-sy.a2.C

31,93.6

d i l l140

1.23.4

7fiS87U

5757

595860

76US

294261

Source: World Bank, World Development Indicslors. 2002 . Available on CD-ROM.

Note. Net enrollment ration exceeding 100 percent indicate discrepancies between the estimates ot'sdiuul-aye population and reported enrollment data


INTERNATIONAL. MONETARY FUND

TANZANIA

Staff Report for the 2002 Article IV Consultation, Fifth Review Under thePoverty Reduction and Growth Facility Arrangement, and Requests for

Extension of the Arrangement and Waiver of Performance Criterion

Supplementary Information

Prepared by the African Department

(In consultation with the Legal and Policy Development and Review Departments)

Approved by Jose Fajgenbaum and Michael T. Hadjimichael

November IS, 2002

1. Following the issuance of the staff report, the staff learnt of one Paris Club creditor'sclaim that Tanzania was in arrears on debt payments totaling US$735,784. Upon inquiry bythe staff, the Tanzanian authorities provided to the staff on November 13, 2002 copies of anexchange of messages between the creditor and Tanzania in early October 2002. In thisexchange, the creditor invoked a bilateral agreement of November 2001 in support of itsclaim. In their response, the Tanzanian authorities held that the various due dates claimed bythe creditor fell into the consolidation period of the Paris Club Agreed Minute of January 18,2002, under which the creditor and Tanzania had not yet concluded a bilateral agreement.However, in the course of their further analysis of the various amounts claimed, theTanzanian authorities found that an amount of US$3,596,89—described by the creditor as"principal and interest accrued under credits pre-oituff date" appeared in Tanzania'srecords as post-cutoff date debt

2, On the basis of agreement between Tanzania and the creditor concerned on theamount of this debt—although not on whether it is pre- or post-cutoff date debt the staffadvised the Tanzanian authorities to pay any amount that was due and not in dispute. OnNovember 15, 2002, Tanzania paid US$3,596.89 to the creditor concerned. Nonetheless, thissituation gives rise to nonobservance of the continuous performance criterion onnonaccumulation of external payments arrears. In the attached letter to the Fund datedNovember 18, 2002, the Tanzanian authorities provided an explanation of the case andrequested a waiver for the nonohservance of this performance criterion.


INTERNATIONAL MONETARY FUND

Public Information Notice

Pubfic Information Notice (PIN) Mo. 03/03FOR IMMEDIATE RELEASEJanuary 6, 2003

International Monetary Fund700 19lh Street, NWWashington, D. C. 20431 USA

IMF Concludes 2002 Article IV Consultation with Tanzania

On November 18, 2002, the Executive Board of the International Monetary Fund (IMF)concluded the Article IV consultation with Tanzania. '

Background

Since the mid-1990s, Tanzania has made substantial progress in macroeconomic stabilizationand structural reform. Real GDP growth has been on a rising trend; it has averaged more than5 percent since the inception of the current Poverty Reduction and Growth Facility (PRGF)-supported program in early 2000, resulting in a small increase in per capita incomes, whileinflation has declined to below 5 percent. A key factor contributing to a higher growthmomentum in agriculture has been the liberalization of production and marketing structures, aswell as of agricultural prices and the foreign exchange regime. Notwithstanding theseachievements, poverty remains pervasive in Tanzania, and its growth momentum has beenconstrained by structural impediments, notably governance-related problems and rigidities inthe financial sector and serious capacity constraints, Moreover, weaknesses in tax policy andtax administration limit the government's ability to mobilize revenue, leaving Tanzania highlydependent on foreign assistance.

1 Under Article iVof the IMF's Articles oi Agreement, the IMF hotds bilateral discussions withmembers, usually every year. A staff team visits the country, collects economic and financialinformation, and discusses with officials the country's economic developments and policies. Onreturn to headquarters, the staff prepares a report, which forms the basis for discussion by theExecutive Board. At the conclusion of the discussion, the Managing Director, as Chairman of theBoard, summarizes the views of Executive Directors, and this summary is transmitted to thecountry's authorities.

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Real GDP grew by 5.6 percent in 200-T. The 12-month rale of nonfood infation rose from 1.5percent in December 2001 to 7.2 percent in September 2002, largely as a result of a sharpincrease in electricity tariffs in April however, the overall inflation rate continued to decline to4.4 percent by September 2002, as favorable developments in agricultural output helpedcontain increases in food prices.

Fiscal consolidation was central to the success in rnacrosconomic stabilization. In support ofTanzania's reform program, donors provided sizable financial assistance, which all buteliminated the government's domestic financing needs, a major source of inflationarypressures in the past. Fiscal performance in 2001/Q2 (July-June) was broad y in ine with thebudget.

Monetary developments in recent years were characterized by strong monetary expansion, aslarge foreign inflows were not fully sterilized and the demand for broad money expanded withthe gradual deepening of the financial system. Primarily reflecting the lack of suitable lendingopportunities, the banking system developed an increasingly large structural liquidity surplus,which triggered an excess demand for treasury bilts and, consequently, a decline in interestrates on treasury bills and deposits. So far in 2002, increases in reserve money and broadmoney have been exceeding projections by wide margins, but as yet have not had muchdiscernible impact on inflation,

Since early 2001, the Tanzania shilling has depreciated against the U.S. dollar by about 15percent, reflecting the larger-than-anticipated monetary expansion. The ensuing real effectivedepreciation has nowfulfy compensated for the real appreciation during 2000, leavingagricultural producers to face, as before, the impact of lower international prices for coffee andcotton.

Tanzania's balance of payments position has strengthened substantially fn recent years as aresult of growth in nontraditional exports and a steady flow of foreign assistance; together withthe debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative, thesedevelopments have resulted in a large increase in international reserves.

Structural reforms have focused on the reform and privatization of parastatals, as well as thecreation of a market-oriented regulatory framework. Since 1992, about two-thirds of all state-owned companies have been privatized, including large enterprises, such as the port containerterminal, part of the telecommunications company, and the National Bank of Commerce;meanwhile, the divestiture of strategic enterprises in the utility and transportation sectors isnow gaining momentum. The government has taken measures aimed at strengtheningeconomic governance, especially in public expenditure management, and improving theinvestment climate, with the recently created Investor Round Table serving as an importantforum to identify impediments to investment.


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Executive Board Assessment

Executive Directors commended the Tanzanian authorities for their steady pursuit of soundmacroeconomic and structural policies, which, despite serious capacity constraints and anoften adverse external environment, have resulted in high real GDP growth, low inflation, anda comfortable level of international reserves, and which have been supported by a steady flowof highly concessional assistance and debt relief from the international donor community.Directors considered that the main challenge for Tanzania is now to sustain high growth andreduce poverty while gradually lessening the dependence on external aid. In this regard, theynoted that good progress has been made in the implementation of the poverty reductionstrategy, and believed that with the continuation of sound policies Tanzania will be well on theway to achieving the targets set out in its Poverty Reduction Strategy Paper (PRSP)

Directors attached high priority to medium-term fiscal consolidation, but noted that Tanzania'slow revenue yield and concomitant heavy dependence on external assistance hinder theattainment of this abjective. They therefore welcomed the recent measures to increaserevenue collection, but stressed that further and more concerted efforts to widen the tax baseand improve tax and customs administration will be needed. Directors endorsed the decisionnot to introduce the Export Processing Zone Act until it has been reviewed, given the potentialfor revenue lasses

Directors commended the impressive progress made in the areas of expenditure reform andtransparency. However, they noted that domestic arrears have continued to accumulate, andurged the authorities to move quickly to strengthen expenditure control and to set up theinstitutional and legal framework needed to give effect to the recently adopted national debtstrategy. Directors welcomed the budget's increasing focus on education and health. Theybelieved that the effectiveness of expenditure in these sectors, especially at the localgovernment level, would be enhanced by the planned measures to improve the tracking ofpoverty-related spending Directors looked forward to the completion of the civil service reform,whfch should help attract qualified personnel, halt the departure of well-trained staff, andimprove Ihe quality of public service.

Directors emphasized the need to keep monetary developments under control in order tocontain inflation and to restore positive real interest rates. They therefore supported thedecision to convert the government's non-marketable debt to the central bank into securities.Directors considered that the flexible exchange rate regime has served Tanzania wetl, byfacilitating timely adjustments to changes in Tanzania's external environment. Nevertheless,they believed that Tanzania's competitiveness needed to be strengthened by structuralreforms to improve the investment climate and strengthen the productive sectors.

Directors considered privatization to be vitally important to the development of the privatesector and to the achievement of the authorities economic growth objectives. They applaudedthe governments accomplishments to date in this area, and encouraged the authorities topush ahead with the privatization of the large enterprises, especially those in the utility and


transportation sectors. Directors also stressed the importance of improving the businessenvironment and removing impediments to private investment, particularly through institution-building, and labor market administrative, ancf judicial reform. They looked forward to follow-up action on the policy matrix of short-term actions that had emerged from the recentInvestors' Roundtable Conference.

Directors regarded financial deepening as another crucial input into the expansion of theprivate sector in Tanzania, with microfinance development considered to be especiallyimportant. They noted the existence of structural impediments to bank lending and persistentlarge interest rate spreads, and called for an accelerated effort to remove these impediments,including an amendment of the Land Act to unblock the jse of land as collateral for bankloans Directors welcomed the authorities' request for an Financial Sector AssessmentProgram (FSAP) review.

Directors noted the strong country ownership that has allowed the PRSP to became the maininstrument for coordinating domestic poverty reduction programs between the authorities andthe international community. Directors also recommended that the linkage between the PRSPand the budget be strengthened to ensure that the poor benefit more fully from the resourcesfreed from the HIPC Initiative. They looked forward to receiving the second annua progressreport on PRSP implementation, and the joint staffs assessment of it.

Directors noted with satisfaction that Tanzania's public and publicly-guaranteed external debtburden remains sustainable after the HIPC Initiative completion point, They urged a cautiousexternal debt management strategy, with tightened approval procedures for foreign borrowing.However, Directors expressed concern that some non-Paris Club and commercial creditorshave failed to provide debt relief on terms comparable to those provided by the Paris C ub.They commended the authorities for establishing a special account earmarked for honoringdebt-service payments to these creditors, and supported the authorities1 request for Fundassistance in encouraging the participation of these creditors in the HIPC Initiative.

Directors looked forward to the publication of the second progress report on implementation ofa national anticorruption strategy. They urged the authorities to vigorous y enforce laws andregulations aimed al promoting good governance.

Directors observed that, notwithstanding considerable technical advice in (he statistical areaand generally good implementation of such advice, Tanzania's database remains weakbecause of capacity constraints. They recommended that priority be given to removing keydata weaknesses in the areas of the national accounts, the balance of payments, and theconsumer price index.

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Public information Notices (PINs) are issued, (i) at the request of a member country, following trieconclusion of the Article IV consultation for countries seeking to make known the views of the IMF to thepublic. This action is intended to strengthen IMF surveillance over the economic policies of membercountries by increasing the transparency of the IMF's assessment of these policies; and (ii) followingpolicy discussions in the Executive Board at the decision of the Board. The Staff Report for the 2002Article IV Consultation with Tanzania is also available,

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Tanzania: Selected Economic Indicators, 2000-2001

2000 2Q01

Domestic economy

Real GDP

Consumer prices (end of period)

(Annjal percentage change)

4.9 5 6

5,5 4 9

(In millions of UhS. delta's) 1/

External ononumy

Expots, f.o.b.

Impors, f.o r^-

Current accoun: (excluding official transfers)

(in percent of GDP)

Extent assistance £/

Puo'ic debt service paid

(in percent of exports o* goods and nonfartor services)

Gross officia reserves

(in mcrths of irrtports of goods and nonfactor services)

Change in real effective exchange -ate [in percent) 3/

Financial variables

Central government balance (Jncludrng grants} 4/

Change in brnad money (in percent)

Change in credit to the nongovernment sector (in percent)

Interest rate fin percent) 5/

663,3

1.337.2

-656,4

-9.4

1,135,3

194,1

14,6

9744

5,1

12,4

(In

-1.6

14. B

g.45.7

776,4

1,492,1

-&73.1

-9,3

633.3

103.4

7 1

1.1SG.G

6.1

-7.0

percen:orGDP) M

-1.1

17.1

1S.S

3.9

Sources; Tanzanian authcrtiis; and IMF staff estimates.

1/ Unless otherwise noted.

2/ Multilateral and bilateral c,ranis and loans (inducing IMF disbursements)

3V (-"-) - appreciation.

Ai Fiscal years beginning in July of year shov/n.

F/Weighted average of 3-, 6-, anc 12-month treasury bill rate, end of period

200001


I N T E R N A T I O N A L M O N E T A R Y F U N D

NEWSF O R I M M E D I A T E R E L E A S E

News Brief No. 02/115FOR IMMEDIATE RELEASENovember 19, 2002

International Monetary Fund700 19th Street, NW

Washington, D. C. 20431 USA

IMF Completes Fifth Review Under Tanzania's PRGF Arrangementand Approves USS27 Million Disbursement

The Executive Board of the International Monetary Fund (IMF) completedthe fifth review of Tanzania's economic performance under the PovertyReduction and Growth Facility (PRGF) arrangement. As a result. Tanzaniawill be able to draw up to SDR 20 million (about USS27 million) under thearrangement immediately.

The Executive Board also extended the arrangement until end-June 2003to allow time lor the final review to be completed, and waived Tanzania'snon-observance of the structural performance criterion on the approvalprocedures for foreign borrowing and the continuous performance criterionon non-accumulation of external payment arrears.

Tanzania's three-year PRGF arrangement was approved on April 4, 2000(see Press Release Mo. 00/25), for SDR 135 million (about JJS$169million). So far, Tanzania has drawn SDR 100 million (about US$134million) under the arrangement.

The PRGF is the IMF's concessional facility for fow income countries, it isintended that PRGF-supported programs are based on country-ownedpoverty reduction strategies adopted in a participatory process involvingcivil society and development partners, and articulated in a PovertyReduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework formacroeconomic, structural, and social policies to foster growth and reducepoverty. PRGF loans carry an annul interest rate of 0.5 percent and are

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repayable over 10 years with a 5 1/2-year grace period on principalpayments.

After the Executive Board's discussion on Tanzania, Shigemitsu Sugisaki,Deputy Managing Director and Acting Chairman, stated:

"The Tanzanian authorities are to be commended for their steady pursuitof sound macroeconomic policies which, notwithstanding serious capacityconstraints and an often adverse external environment, has resulted instrong economic performance. Economic activity remains buoyant,inflation is low, and international reserves are at a comfortable level owingto steady (lows of foreign assistance and direct investment. The fiscaldeficit in 2001/02 was less than budgeted on account of an expenditureshortfall in non-priority areas. However, the money supply exceededtargeted growth on account of the large foreign inflows, which calls for atightening of monetary policies to prevent a resurgence of inflationarypressures.

"The main challenge for Tanzania is now to sustain high growth andreduce poverty while gradually lessening the dependence on external aid.Good progress has been made in the implementation of the povertyreduction strategy, and with continued implementation of sound policies,Tanzania will be well on the way to achieving the targets set out in itsPoverty Reduction Strategy.

"The government's economic program for fiscal year 2002/03 seeks toconsolidate macroeconomic stability and continue to lay the foundationsfor sustained high economic growth and poverty reduction. Structuralreforms focus on improving tax policy and administration, strengtheningpublic expenditure and debt management, promoting private investment,and developing the financial sector.

"Crucial fiscal reforms will be the adoption of improved systems foradministering tax exemptions, enhancement of expenditure controls toprevent the accumulation of arrears, simplification and harmonization oflocal government taxation, and strengthening of procedures for contractingpublic debt. In the area of financial sector reform, the program foreseesthe removal of impediments to bank lending and the establishment of aregulatory and legal framework for microfinance operations. The programof privatization of parastatals will continue.

"Tanzania's public and publicly-guaranteed external debt burden remainssustainable after the HIPC completion point. However, some non-Paris

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Club and commercial creditors have yet to provide debt relief on termscomparable to those provided by the Paris Club. The Fund urges thesecreditors to participate in the HIPC Initiative for Tanzania, and to providetheir share of debt relief.

'The Government of Tanzania intends to complete a second annualprogress report on implementation of the Poverty Reduction StrategyPaper before the end of 2002. The report will include an updated povertyanalyses based on the recently completed household budget survey,"Mr. Sugisaki said.


Statement by Ismaila Usinan, Executive Director for TanzaniaNovember 18,2002

Key points:• Tanzania continues to pursue sound macro economic policies and to implement

structural reforms under the PRGF-supported program. The excellent performanceis a reflection of the commitment and dete?-mination of my authorities, including atthe highest political level, to move the country beyond the PRGF mods.

• Macroeconomic performance under the program remained very strong. Real GDPgrew by 5.6percent in 200f and is expected to grow by 6percent in 2002. Overallinflation rate continued to decline to 4.4 percent by September 2002 whileinternational reserves are recorded at a comfortable level of seven months of importcover.

9 The Bank of Tanzania is intensifying sterilization of operations through additionalsafes of liquidity paper in the amount ofTsh 80 billion, and securithation ofgovernment debt approximately Tsh 180 billion, In order to stem the excess liquidityand monetary expansion.

• Structural reforms are pursued with vigor as demonstrated by government'scontinuous withdrawal from economic activities heat led by the private sector, theestablishment of market-oriented regulatory framework, as well as other effortsgeared to improving the investment climate. Prudent financial policies havepreserved macroeconomic stability, while emphasis on fiscal transparency hasimproved public sector accountability.

• Implementation of the Poverty Reduction Strategy Paper (PRSP) is on target asreflected in budgetary allocations and other policy interventions. The authoritiesexpect Iv present the second annual PRSP progress report during November 2002which provides a comprehensive poverty assessment.

• Performance targets were broadly me!. My authorities have taken measures toaddress nonvhservance of quantitative benchmarks on the reserve money, extrabudgetary expenditure and accumulation of domestic arrears and structuralperformance criterion relating to the amendment of legislation to tighten approvalprocedures for incurring or guaranteeing new foreign borrowing


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Introduction

My authorities wish to express their appreciation to the Fund as well as other multilateralinstitutions and bilateral donors for their continued support. The strong support from theinternational community has played a catalytic role in ensuring a successful reform processand has truly underlined the concept of partnership in development. My authorities willcontinue to pursue sound macroeconomic policies and to push forward with implementationof the remaining structural reforms in order to enhance the investment climate, and topromote private sector development with a view to move the economy to a higher growthpath.

Recent Economic Developments and Prospects

Macroeconomic program objectives were broadly met during the period under review.Despite delays in some areas, my authorities have persistently pursued structural reforms.Real GDP grew by 5.6 percent in 2001 and is expected to accelerate to almost 6 percent in2002, notwithstanding a deterioration of the outlook for the terms of trade of traditionalagricultural exports. The overall 2001/2002 fiscal deficit before grants was about 1.7 percentof GDP lower than programmed due to lower recurrent expenditures without adverse impacton allocation of priority expenditures. The overall inflation rate declined, reaching4.4 percent in September 2002.

The external sector has strengthened considerably. The current account deficit (includingofficial transfers) narrowed sharply from the equivalent of 9.2 percent of GDP in 1999 to5.4 percent in 2001. on account of growth in nontraditional exports and a steady flow offoreign assistance coupled with H1PC debt relief. Although traditional exports are expectedto decline reflecting unfavorable terms of trade, particularly for coffee, cotton and cashewnuts, overall exports are projected to increase on account of continued strong growth innontraditional exports, mainly gold, as well as improvement in tourism receipts. Imports ofconsumer goods declined significantly partly because of the recent depreciation of theshilling, while imports of capital goods remained strong as mining sector activity continuesto grow. Meanwhile, gross official reserves of the Bank of Tanzania increased toUS$ 1.3 billion at end-September 2002, equivalent to seven months of import cover.

Performance Under The Program

Tanzania's performance under the program remains on track. All quantitative performancecriteria and quantitative benchmarks on central government revenue for end June 2002 wereobserved. A structural performance criterion nn submission to Parliament of amendments oflegislation relating to tightening approval procedures tor incurring or guaranteeing newforeign borrowing was not observed because Cabinet decision determined that the requisitemeasures should be implemented in the context of the revised National Debt Strategy (NUS).To this end, several amendments to the existing Loans, Guarantees and Grants Act of 1974will be submitted to Parliament in February 2003, when Parliament will be in session. In the


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interim, measures have been implemented to strengthen the process. Nonobservance of thereserve money which ted to higher-than-programmed expansion in monetary targets resultedfrom factors beyond the authorities* control as well as limited instruments available at theBiink of Tanzania and the economy to adequately mop up excess liquidity. The rapidincrease in liquidity was attributable to a number of factors including the following:(i) transfer of government deposits from Bank of Tanzania to accounts of local governmentsill commercial banks, (ii) merging and subsequently conversion of two non-bank institutionsto a fully fledged commercial bank, as a consequence, deposits in this bank became part ofmoney stock; (iii) establishment of a new international bank in Tanzania with a sizablecapital investment; (iv) a large inflow of private capital for mining, other investment projectsas well as a large amount of foreign exchange inflow related to construction of embassybuildings. In response to this unforeseen liquidity creation, the Bank of Tanzania hasintensified securitizauon of government debt to ensure observance of the monetary targets.To address the extra budgetary expenditures related to the air control system, the authoritieswill regularize the transaction through a supplementary budget during 2002/2003. Regardingthe accumulation of domestic budgetary arrears, the authorities have put in place amechanism through the existing IFMS to prevent recurrence of such arrears.

Fiscal Policy and Budgetary Reform

My authorities remain committed to maintaining fiscal discipline and transparency,enhancing government revenue mobilization, and improving public expenditure managementin line with poverty reduction strategy. They concur with staff on the need to broaden the taxbase, to strengthen revenue collection efforts and to improve expenditure management. Inthis regard, my authorities have accorded top priority to enhancement of revenuemobilization and have set in motion a process of addressing revenue enhancement issues.This process includes a recent request for a Fund mission to examine the cause for VAT'sweaknesses and the poor performance. Following the mission's recommendations, myauthorities will implement measures to enhance its collection. In the same vein, as part of therestructuring effort of tax administration supported by the World Bank, my authorities haveretained the services of a consulting firm to assist in strengthening of tax administration.

The 2002/03 budget targets an increase in revenue-to-GDP ratio of 12.3 percent To reachthis target, my authorities have identified a number of revenue enhancing measures(indicated on pages 53 and 54 of the Letter of Intent (L01) to be implemented in the courseof the 2002/03 budget and beyond. The measures will include, among others, abolition ofcustoms and excise duty exemptions, rationalization of tax rates, improvement in taxadministration, simplification of tax collection, review of tax laws and amendment of someof the existing tax incentives.

With regard to the export processing zones (EPZ) and the EPZ Act, my authorities havenoted StafFs concern pertaining to potential revenue leakage. To this end., rny authorities arereviewing the legislation with a view to targeting benefits that focus on access to AGOA andEU's import policy only.


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On expenditure management, my authorities will continue to strengthen public expenditurereform and transparency including through the mechanism of Integrated FinancialManagement Systems (1FMS). Furthermore, my authorities will harmonize presentation ofpriority expenditures across PRSP, the budget and budget execution reports, to facilitatebetter tracking of outlays to priority sectors. These procedures will be embedded in the2003/04 budget guidelines. The provisioning of such a mechanism with a view to ensuringfunding for priority sectors demonstrate my authorities' commitment to poverty reductionstrategy. My authorities will continue to enhance fiscal management and transparency at thelocal authority level as well in order to consolidate fiscal decentralization. In this regard,quarterly reports on fiscal accounts for local governments, on a consolidated and stand alonebasis will be published beginning end-2002.

Monetary policy and Financial Sector Reform

My authorities seek to maintain price stability as the main objective of monetary policy withreserve money as an indicative target. Given the recent rapid increase in demand for money,the monetary program envisages a 21 percent increase in broad money duri ng 2002compared to an earlier indicative target of 12 percent Despite the recent increase inmonetary expansion, my authorities are of the view that it is unlikely to put pressure on pricelevels because the increase largely emanates from the improvement of banking servicesdelivery to rural areas and reclassification of financial assets. Moreover, treasury bills andother government securities remain the key instruments of monetary policy, supplemented byrepurchase operations with commercial banks and the issue of newly-securiliêd governmentdebt to address monetary expansion.

In paragraph 28, staff raise an issue concerning Bank of Tanzania's perceived reluctance toaddress bigher-than-taryeted. monetary growth on account of potentially undesirableappreciation of the exchange rate and high cost of liquidity paper. The framework within\vhich my authorities are addressing the problem is indicated in the above paragraph. Inaddition, other measures are being taken including the process of securitizing aboutTsh 80 billion during the fourth quarter of 2002. At the same time, Bank of Tanzania hasincreased the quantum of its own liquidity paper. In the same paragraph, staffhighlight aconcern regarding various structural impediments to bank lending which constrain privatesector investment and contribute to the creation of a structural liquidity surplus in thefinancial sector. My authorities are cognizant of the structural impediments and concur onthe need to implement measures that would enhance bank lending. Tn this connection, myauthorities are already pursuing a number of meEisures including reviewing of the Land Actof 1999 with a view to amending it to facilitate use of land as collateral for bank lending.Other measures to facilitate financial intermediation include Bank of Tanzania's financialsupport lo enhance capacity of the commercial court. Other related measures includecomputerization of land registry, establishment of a credit information bureau, and judicialreforms to ensure enforceability of legal contracts.


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Debt Relief and Delivery

Regarding external debt, more progress is being made in concluding bilateral agreementswith commercial creditors. My authorities wish to express their gratitude to the UnitedKingdom for the grand gesture of debt cancellation and wish that the other creditors whohave indicated willingness to cancel will also do so. However, as indicated by staff, non-Paris Club and commercial creditors are continuing to pose some problems. In thisconnection, my authorities wish to reiterate their request for assistance of the Fund and theWorld Bank in finding a more permanent solution to the HIPC-HIPC and the non-Paris Clubbilateral and commercial creditors problem.

DebtSustainability

To ensure debt sustainability, my authorities approved a revised National Debt Strategy(NDS) in August 2002. The strategy underlines the importance of fiscal sustamabilitythrough improvement in procedures, selectivity of projects, risk management, andstrengthening of the legal and institutional framework with respect to borrowing andmanaging debt. The authorities have began implementation of the recommendations of theNDS.

Other Structural Reforms

The authorities continue to pursue privatization of public enterprises with a view topromoting private sector development. The privatization process is now focusing on publicutilities and large financial enterprises including the Uar-es-Salaam Water & SewerageAuthority (DAWASA), the Tanzania Railways Corporation (TRC), the Tanzania HarborsAuthority (THA), Air Tanzania Corporation (ATC) and the Tanzania Electric SupplyCompany (TANESCO) and the National Micro Finance Bank (NMB). The privatizationstatus of the various entities is as follows: the process of unbundling TANESCQ intoautonomous commercial entities before privatization is underway, the transfer of DAW AS Ais expected to be completed by end-2002 after a delay of a draft concession agreement.Privatization of ATC and TR.C is well advanced. Privatization of NMB is at an advancedstage and the investment memorandum is being sent to potential investors.

The divestiture of the 35 percent shares of the telecommunication company s TTCL, whichthe authorities sold to a foreign investor is being held by a dispute between the authoritiesand the foreign investor over the payment of a second tranche, which depends on thefinancial audit of the company's accounts for 2000. A dispute on the quality and accuracy ofthese accounts has thus far prevented an agreement between the authorities and the foreigninvestor. The authorities and the foreign investor are currently exploring possibilities of aconflict resolution mechanism,


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Poverty Reduction Strategy

My authorities will present the second animal PRSP progress report by the end of November2002. The report will draw on the poverty analysis resulting from the recently published2000/01 Household Budget Survey* The second annual report will also draw on the Povertyand Human Development Report of June 2002. which provides an overview of the status ofthe main poverty indicators and includes a detailed analysis of various aspects of poverty,focusing particularly on vulnerability. To complement the PRSP process, my authorities areputting emphasis on maintenance of macroeconornic stability, identifying sources of growththat would be poverty-reducing, and creation of employment

Technical Assistance

My authorities are grateful for the continued technical assistance (TA) support frommultilateral and bilateral donors covering a wide range of areas including balance ofpayments, revenue mobilization, public expenditure management and financial sectorstrengthening. While technical assistance is being effectively utilized, capacity constraintsstill remain a problem because of the loss of qualified staff from the civil service and .limited capacity in specific professions. In this regard, my authorities wish to underline theimportance of continued TA support and urge the Fund to give due consideration for TA inthe privatization of the People's Bank of Zanzibar.

Conclusion

While significant achievements have been made thus far, the road to prosperity remains avery long and arduous one. My authorities have successfully implemented the "firstgeneration" reform process, The challenge now is to move the economy beyond the reformprocess onto to a higher growth trajectory. Technical assistance as well as concessionalfinancing remain critical in complementing the limited and over-stretched human andfinancial resource capacity. Moreover, the main issue that the authorities are grappling withis the need to identify sources of growth that would lead Tanzania to a higher growth path.Furthermore, having successfully implemented the first generation reforms,, my authoritieswould wish to "graduate" from the PRGF approach and therefore wish to explorepossibilities of other instruments available in the context of Fund support. To conclude, myauthorities request the Board to grant waiver for nonobservance of the structural performancecriterion on the approval of procedures for foreign borrowing.


Documents

© 2003 Intel-national Monetary Fund January...INTERNATIONAL MONETARY FUND TANZANIA Staff Report for the 2002 Article IV Consultation, Fifth Review Tinder the Poverty Reduction jmd