Tanzania - Program Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 2452 FILE Cn" PROGRAM PERFORMANCE AUDIT REPORT TANZANIA - PROGRAM CREDIT (CREDIT 688-TA) April 4, 1979 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PROGRAM PERFORMANCE AUDIT REPORT TANZANIA - PROGRAM CREDIT (CREDIT 688-TA) TABLE OF CONTENTS Page No. Preface i Basic Data Sheet ii Highlights -- PROGRAM PERFORMANCE AUDIT MEMORANDUM I. Introduction 1 II Timing of the Credit 1 - 3 III. Amount of Bank Financing and Its Use 3 - 4 IV. Policy Package 4 - 5 V. Summing up 5 - 6 Annexes: I. Tanzania: Government Operations, 1973/74-1977/78 7 II. Tanzania: Functional Classification of Government Expenditure and Net Lending, 1973/74-1977-78 8 III. Tanzania: Producer Prices and Ratios of Producer Prices to Export and Import Unit Values, 1972-78 9 IV. Tanzania: Value, Volume, and Unit Value of Principal Exports, 1968-77 10 Attachment: Program Completion Report Introduction 11 Program Data 11 The First Program Loan (Loan No. 1063-TA of 1974) 11 - 12 Background to the Program Credit 12 Objectives of the Program Credit 13 Balance of Payments Developments 13 - 14 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. -2- Page No. (Cont.) Attachment: Program Completion Report Import Controls and Capacity Utilization 14 Tanzania: Import License Allocations 15 Budget Control 16 Other Policy Measures 16 Disbursement Procedures 16 - 17 Summary 17 PROGRAM PERFORMANCE AUDIT REPORT TANZANIA - PROGRAM CREDIT (CREDIT 688-TA) PREFACE This report presents a performance audit report on a Program Credit (Credit 688-TA) for US$15 million to Tanzania; this credit represented the second program financing operation by the Bank Group in Tanzania, the first being a program loan of US$30 million in December 1974, on which an audit report (SecM76-817) was issued in December 1976. The program credit was approved in March 1977, was made effective in May 1977, and was closed, fully disbursed, in March 1978. The memorandum is based on the attached Program Completion Report (PCR) prepared by the Bank's Eastern Africa Regional Office, discussions with Bank staff and review of Bank files. It deals with the time taken between conception and approval of the credit and the factors responsible for it, and supplements the PCR in respect of progress in implementation of policy understandings reached at the time of approval of the two program lending operations. No comments on the draft PPAR were received from the borrower.  PROGRAM PERFORMANCE AUDIT REPORT TANZANIA - PROGRAM CREDIT (CREDIT 688-TA) BASIC DATA SHEET Amounts (in US$ million) As of 1/31/79 Original Disbursed Cancelled Repaid Outstanding Credit 688,TA 15.0 15.0 - 15.0 Cumulative Credit Disbursement 1977 June Jul August September Actual - 13.50 13.50 15.00 Project Data Actual or Original Plan Estimated Actual Conception in Bank Late/75 Late/75 Board Approval 6/76 3/15/77 Credit Agreement 6/76 3/24/77 Effectivenesq 8/76 5/03/77 Credit Closing 6/77 3/31/78 Mission Data Month, No.of No. of Year Weeks Persons Manweeks Date of Report Identification 5/75 - - - - Preappraisal 11/75 3 3 9 2/22/77 Sub-Total 3 3 9 Supervision I 11/77 - - - Supervision II 4/78 1 1 1 Completion Rep. dated 8/30/78 t - iii - PROGRAM PERFORMANCE AUDIT REPORT TANZANIA - PROGRAM CREDIT (CREDIT 688-TA) HIGHLIGHTS This was the second of two program lending operations by the Bank in Tanzania; the first was a program loan of US$30 million approved in 1974, and the one under review a program credit of US$15 million approved in March 1977, both being intended to help the country tide over difficulties primarily caused by droughts in 1973 and 1974 and, to a smaller extent, the rise in oil prices in the same years. The main policy objectives of the program credit were achieved: the credit provided quick-disbursing funds, disbursement being completed within a period of 10 months from the date of effectiveness; the credit helped safeguard, and re-orient, Tanzania's development program; and the Government of Tanzania continued implementation of an economic reform package, agreed to and initiated at the time of the first program loan. There was a substantial deferral by the Bank in the approval of the program credit, arising mainly out of the need for a standby agree- ment between the Government of Tanzania and the IMF (paras. 4-6 of the PCR and 2.05-2.07 of the PPAM). The deferral, however, was not crucial to Tanzania due to a marginal improvement in the country's balance of trade in 1976-77 owing to an unforeseen, but transient, rise in coffee prices. Other points of interest are: - revisions in producer prices of agricultural products, particularly foodgrains, to bring the into greater consonance with import prices (para. 18 of the PCR and paras. 4.04 and Annex II of the PPAM); and - setting up, and implementation of, a system to review implementation of Bank projects with the country (para. 4.08 of the PPAM).  - 1 - PROGRAM PERFORMANCE AUDIT MEMORANDUM TANZANIA - PROGRAM CREDIT (CREDIT 688-TA) I. Introduction 1.01 The Bank approved a program credit for US$15 million to Tanzania in March 1977. The credit became effective in May 1977, and was fully disbursed by March 1978. 1.02 This was the second program financing operation by the Bank in Tanzania, the first one being a program loan for US$30 million approved in December 1974. A performance audit report (SecM76-817) was issued on the program loan on December 1, 1976. II. Timing of the Credit 2.01 Program operations are particularly justified where there is a need to provide quick-disbursing funds to a country to enable it to safe- guard the development process during a period of economic strain caused by exceptional balance of payments difficulties. A necessary corollary of the efficacy of such financing is that preparation and negotiation of such loans is done in an expedituous manner. 2.02 Tanzania's economic difficulties began with droughts in 1973 and 1974 which led to a balance of trade deficit in 1974. The oil price rise in 1973-74 accentuated the balance of paymentscrisis. In this situation it was envisaged, as early as at the stage of the first program loan, that program financing may continue to be needed for Tanzania. The start of discussions for a second program financing operation in May 1975 (Annex IV, President's Report on the Tanzania Program Credit, Report No. P-1781a-TA) was in accordance with this assessment of Tanzania's financing needs. 2.03 However, the discussion and the negotiation process for Bank financing took almost two years to complete, and the program credit was approved only in March 1977 and made effective in May 1977. A small part of the time interval was accounted for by a ministerial re-organization in Tanzania. However, the main factor making for the delay was the waiting involved in IMF approval for Tanzania's eligibility for a second credit tranche from IMF. This led to an interval of about a year between appraisal mission and negotiations (November 1975 and March 1976, respec- tively) and actual Board approval (March 1977). In view of the extent of the delay and its potential serious repercussions on the country's economy, the causes making for the long interval between initial discussion and Board approval are examined below. - 2 - 2.04 The President's Report for the First Program Loan (Report No. P-1517a-TA) had provided an analysis of the medium-term projection of Tanzania's balance of payments deficit and had referred to the possibility (para. 49) that "....the Tanzanian authorities may approach the Bank for a second program loan in the course of 1975." Initial discussions on a second program operation started with the Bank in May 1975, and a Bank appraisal mission visited Tanzania in November 1975. With the continued poor performance of exports in 1975, Tanzania's balance of payments posi- tion remained weak in 1975. In January 1976, the Bank considered the time table for a second program operation for Tanzania. It was expected that this program operation would be negotiated in April 1976, approved by May 1976, and be fully disbursed by December 1976. 2.05 However, it was first necessary to establish that Tanzania had exhausted other available sources of finance. In particular, the Bank was concerned that "our assistance should not substitute for IMF facilities" (para. 41, President's Report No. P-1781a-TA). While Tanzania had taken full advantage of IMF facilities in 1974 and 1975, and had negotiated a standby agreement for a second credit tranche in 1975/76, the agreement had been breached because of excessive Government borrowing from the banking system. 2.06 In addition, the Bank's position was that unless conditions for short-run stability were established--and IMF conditions for second tranche eligibility were one measure of such establishment--a program loan could not serve the basic purpose of safeguarding the development process in Tanzania. For both of these reasons, the decision was made in the Bank to delay the presentation of the program credit until Tanzania had renegotiated a second credit tranche with the IMF. 2.07 An IMF mission visited Tanzania in August 1976, but came away without reaching an agreement on establishing conditions for a second tranche. Another Fund mission went to Tanzania in December 1976, and an agreement was then reached on a drawing by Tanzania under the increased first tranche availability. The IMF mission did not negotiate on a second tranche, however, as Tanzania's balance of payments position had improved. The Bank felt that the balance of payments projections on which the IMF decision to proceed with the balance under the first credit tranche was made, did not allow for adequate liberalization of imports needed to stimulate production and investment, and that further balance of payments support would be required. At the same time the Bank decided that the agreement between Tanzania and the IMF under the increased first tranche was sufficient evidence of compliance with the IMF's requirements to justify going ahead with the program credit. 2.08 The Bank had recognized the urgency of Tanzania's need for foreign currency resources, and was urging Tanzania to liberalize imports to increase its output. Tanzania had reached, under the first program loan, an understanding with the Bank on a policy package of economic measures, considered by the Bank appropriate also for the proposed credit, which the Government of Tanzania had been implementing to the Bank's satisfaction. - 3 - 2.09 It would be a hypothetical exercise to analyze the implications of the delay in the Bank's approval of the credit on Tanzania's economy. For in 1976 and part of 1977, prices of coffee, one of Tanzania's staple exports, rose sharply so as to relieve Tanzania's foreign exchange shortage. However, the increase in export earnings--and reduction in imports of food- grains owing to good harvests--was not such as to enable Tanzania to increase its essential imports, including those of intermediate and capital goods. In this sense, the delay in Bank approval denied Tanzania an import capability which would have helped it to increase its production and production potential in the immediate future. 2.10 Under an earlier program loan to Tanzania, further program financ- ing had been envisaged. The country had taken steps to put into effect a memorandum of understandings with the Bank under that loan. The Bank was satisfied with the actions taken, but deferred the present credit until the IMF had released to the country the balance amount under the first tranche. III. Amount of Bank Financing and Its Use 3.01 Given Tanzania's balance of trade situation and the stringent cutbacks in the imports it had made, the Bank had proposed in 1975 an amount of US$30 million, to be made available in equal amounts from IDA and the Bank. In January 1976 it was proposed, in agreement with the country, that the whole amount would be found from IDA resources. 3.02 As time elapsed, a stringency in IDA resources, as well as uncertainty about the exact gap in its balance of payments, required that the amount available to Tanzania from IDA would be only US$15 million. Simultaneously, the fact that the IMF had made available the balance of the resources under the first credit tranche led to a Bank decision to consider Bank financing of US$30 million in two equal tranches, the second tranche being "independent" of the first. Ultimately, this was changed to a position of approving in the first instance a program credit of US$15 million, with a willingness to consider further program financing in the light of evolving circumstances, including IMF consideration of a second tranche. 3.03 During the period of Bank consideration of program financing, Tanzania continued to maintain stringent control on its imports. The relief provided by the rise in earnings from coffee exports was expected to be, and in fact proved, transient. 3.04 The program credit was disbursed within 5 months of its becoming effective. Between 1976/77 and 1977/78, Tanzania increased its import license allocation by T sh 1,765 million, with the largest amounts of increases occurring under the heads "capital equipment and spares" (+ T sh 951 million) and "raw materials" (+T sh 641 million). While Tanzania has maintained curbs on its imports, especially those of food and petroleum, the availability of the program credit, combined with the improved export performance, has helped Tanzania increase its imports of goods essential to development. IV. Policy Package 4.01 No specific policy package was worked out for the credit, as it was considered that the earlier policy package, agreed in a memorandum of understanding at the time of the approval of the first program loan, should continue to form the basis of the second program operation. Under the policy understanding, the Government of Tanzania agreed (i) to increase allocations to directly productive sectors in its public investment, (ii) to review producer prices for agricultural products, particularly cash crops, and to improve implementation of agricultural projects, (iii) to increase productivity in the industrial sector and, particularly the working of the parastatals, and to stimulate exports, (iv) and to restrain private consumption and to slow the rate'of growth of recurrent public expenditures. In addition, the President's Report (paras. 22-31) had identified parastatal efficiency and capacity utilization, export policy and budget control as major issues for the future. Paragraphs 4.02-4.07 below deal briefly with each of these five subjects. 4.02 Annex I provides a statement of Government revenues and expen- ditures for the years 1973/74 to 1977/78. The overall deficit was sharply reduced from T sh 1,979 million in 1975/76 to T sh 882 million in 1976/77 and is projected to remain at that level in 1977/78. Expenditures under both the recurrent budget and the development budget have continued to rise, and it was mainly the sharp increase in revenue from the progres- sive coffee export tax and additional tax effort by the Government that has helped to keep the budgetary deficits under control. 4.03 Annex II gives a functional classification of Government expen- diture for the years 1973/74 to 1977/78. It shows that the largest rise budgeted for 1977/78 was for economic services. 4.04 Progress on producer prices for agricultural products has been considerable, the main focus being on foodgrain prices. Producer prices for foodgrains have been raised during the last four years, bringing them near to parity with import prices. The ratio of producer price to import unit value for maize was raised progressively from 37% in 1974 to 79% in 1976, that for rice from 27% in 1974 to 76% in 1977, and that for wheat to above parity (106%). Producer prices for export (non-foodgrain) crops have, on the other hand, lagged behind export values, sisal being the only exception for employment reasons. Annex III indicates the trends in producer prices for agricultural products, with import unit values, for the years 1972 to 1978. - 5 - 4.05 Apart from managerial aspects, the efficiency of parastatals is closely linked with capacity utilization, and, therefore, with imports of raw materials. After stagnating in 1973-75, manufacturing output increased by 7% in 1976-77, mainly on account of increases in output of a few consumer items. As the PCR (paras. 13-14) explains, the increase in import licensing had still not been reflected in actual imports, and these in turn in actual production. Capacity utilization rose marginally in some industries, but declined, due to management problems, in the textile industry in 1977. 4.06 Trends in public expenditure are referred to in paras. 4.02-4.03 above. As the PCR (para. 18) notes, the policy of wage restraint has continued. 4.07 Of the issues on which special attention was sought to be foscussed, those relating to parastatal efficiency and capital utiliza- tion, referred to earlier (para. 4.05 above), are linked and would take time to work out. Export performance has been affected adversely by low producer prices and fall in output of agricultural goods due to drought in 1974-75. Cotton production and exports suffered as a result of Govern- ment emphasis on maize production to achieve self-sufficiency in foodgrains. The increase in coffee exports was mainly due to price rise (which also helped Government revenues), with quantities remaining constant. Annex IV shows trends in exports for 1973-77. The Government is setting up a Board of Export Trade to promote export research and disseminate advice on export markets. 4.08 During its discussion on the program credit, the Board had expressed concern at the slow pace of implementation of Bank projects in Tanzania. As a result of this and other developments in implementation, the Bank has set up a system of project implementation review in Tanzania, with participation of representatives of the Government, to review progress on on-going projects and to analyze bottlenecks in implementa- tion to expedite implementation of projects. V. Summing up 5.01 Tanzania ran into balance of payments difficulties mainly owing to droughts and these were accentuated by the oil price rise. The Govern- ment sought to meet the situation by reducing imports. The development program was modified to increase the share of productive investment, and it took measures to curb private and public consumption, and improve the working of parastatals. It thus satisfied Bank criteria for eligibility for program financing. - 6 - 5.02 An examination of events leading to the Board approval of the program credit shows that there was a deferral of one year, caused mainly by the delay in agreement between Government of Tanzania and IMF on a standby agreement. At it happened, a rise in coffee prices in 1976-77 helped Tanzania tide over its balance of payments difficulties in that year. Tanzania's immediate need for a program credit became less urgent in 1977; however, the approval of the credit (albeit smaller than originally envisaged) encouraged Tanzania to liberalize its import alloca- tions with a view to increasing its production potential and helped the Bank to continue its dialogue on medium-term policy changes intended to accelerate its development tempo. Moreover, with a weakening of coffee prices later in 1977, as the PCR (para. 12) states, "the resources provided by the program credit were not unneeded, simply premature." 5.03 Tanzania maintained adequate control on its imports and has used the availability of additional foreign exchange to increase alloca- tion for imports of raw materials and capital goods. It has taken measures in keeping with the policy understandings reached with the Bank. The credit thus fulfilled its basic objectives of making available foreign exchange for essential imports and for safeguarding the develop- ment process. Operations Evaluation Department April 4, 1979 - 7 - PROGRAM PERFORMANCE AUDIT REPORT ANNEX I TANZANIA - PROGRAM CREDIT (CREDIT 688-TA) TANZANIA: Government Operations, 1/ 1973/74-1977/78 (In millions of Tanzania shillings) 1973/74 1974/75 1975/76 1976/77 1977/78 Budget Proj. Total revenue and grants 3,23417 446 983 6,897 7,210 Revenue 3,020 3,739 3,887 5,218 5,424 6,050 Tax revenue (2,594) (3,272) (3,399) (4,768) (4,839) (5,400) Nontax revenue (426) (467) (488) (450) (585) (650) Grants 214 578 579 765 1,473 1,160 Total expenditure 4,142 56915 6,4 6,865 9,102 8,140 Recurrent budget2/ 2,686 3,931 3,526 4,399 5,180 5,450 Developuent budget2/ 1,510 2,043 2,102 2,239 3,496 2,620 Net lending2/ 160 224 201 255 426 320 Extrabudgetary expendi- ture (net) 18 20 15 60 - -- Conversion to cash basis3/ -232 -303 601 -88 -- -250 Overall surplus/deficit (-) -908 -1 7598 -882 2,205 -930 .Financing 908 1,598 1,979 882 2,205 930 Foreign financing (net) 425 620 528 745 1,097 860 Drawings (467) (663) (567) (778) (1,137) (900) Amortization (-42) (-43) (-39) (-33) (-40) (-40) Domestic financing (net) 483 978 1,451 137 1,108 70 Banking system (net) (277) (681) (1,160) (-170) (700) (-330) Other (net) (206) (297) (291) (307) (408) (400) Sources: The Appropriation Accounts, Revenue Statements, Accounts of the Funds and Other Public Accounts of Tanzania, 1973/74 through 1975/76; Financial Statement and Revenue Esti- .mates, 1977/78; Estimates of Public Expenditure, 1977/78; Economic and Operations Report, 3ak .of Tanzania, June 1977; and IMF. 1/ On cash basis. 2/ On checks issued basis. 3/ Includes the difference between checks issued and checks paid in the same fiscal year -and unrecorded cash outlays; see Appendix Table IV. - 8 - PROGRAM PEPFORMA-NCE AUIT REPORT ANNEX II TANZANIA - PROGRAM CREDIT (CREDIT 688-TA) TANZANIA: Functional Classification of Governnent Expenditure and Net Lending,1/ 1973/74-1977/78 (In millions of Tanzania shillings) 1973/74 1974/75 1975/76 1976/77 1977/78 Budget General public services 747 994 945 1,350 1,600 Defense 494 730 780 1,080 1,170 Education 543 757 830 950 1,270 Health 294 426 420 520 680 Other social services 184 251 265 280 300 Economic services 1,860 2,630 2,070 2,120 3,467 Interest 164 214 303 356 355 Other 70 196 216 237 260 Total 9,102 Sources: Annual Plan, 1977/78; Estimates of Public Expenditure; and IMF staff estimates. 1/ On checks issued basis. Tanzania: Producer Prices and Ratios of Producer Priceal to Export and Import Unit Values, 1972-78 1972 1973 1974 1975 1976 1977 1978 Export crops Producer prices (Tanzania cents per kilogram) Coffee: Arabica, mild (Grade I ) 395 320 ... 600 1,200 1,h00 ... (Grade II) 55 60 ... 300 600 Cotton (need): AR 113 113 150 200 200 230 240 BR 60 60 65 100 100 115 120 Sisal 102 195 319 302 262 387 ... CashewnutR (standard grade) 95 95 105 105 110 115 130 (undergrade) 75 75 95 95 95 100 115 Tobacco: Flue-cured 585 585 585 700 7h0 710 740 Fire-cured 213 240 255 300 150 520 520 Tea (green leaf) 50 55 55 65 TO 110 150 Pyrethrum (Grade 1) 321 421 h21 650 650 650 650 a Food crops Cereals: Maize 26 33 50 75/80 80 85 85 Paddy 56 57 65 100 100 120 120 Wheat 57 57 77 100 120 125 125 ' ,'4 Cassava (makopa) ... 31 36 40 50 6o 65 k P Oilseeds: Groundnuts 115 115 150 200 250 400 oo ia 1 Sunflower (Jupiter) 57 55 75 100 110 150 150 4, Castorseed 55 55 70 75 75 100 100 n 0 Sesame 200 250 300 300 .4 Export Ration Exeort crops Ratio2f producer price to export unit vILlue Coffee (Grade 1) 56. 38.9 ... 67.5 511.2 30.8 Cotton (AR) 21.7 20.A 15.6 25.6 18.0 19.1 20.5 Sisal 107.8 99.8 6h.3 101.5 92.3 137.7 Cashewnuts (standard grade) 71. 73.9 60.9 57.8 55.7 51.3 36.1 Tobacco (flue-cured) 66.5 6h.2 58.6 53.3 13.6 116.2 11.7 Tea 8.5 9.6 Tr.I 8.3 1.; P.8 6.2 Pyrethrum 2.4 3.5 3.1 1.6 3.8 Food crops Ratio4f producer price to import unit value Maize 53.3. 55.3 36. 6 1. (9.0 Rice 75.0 69.3 26.6 41.2 53.h 75.8 Wheat 110.8 ... h8.2 68.9 77-. 106.3 Sources: The Economic Survey. 1976-77; ministry of Agriculture, Crop Production in Ta nani Vol IT: Fod Cr(!piz; and TKF. 1. / Crop years. 2ee footnote 1 of Table 3 for corretponding periois. 2/ In per cent. 3/ C.I.F. - 10 - PROGRAM PERFORMANCE ALDIT REPORT ANNEX IV TANZANIA - PROGRAM CREDIT (CREDIT 688-TA) TANZANIA: Value, Volume, and Unit Value of Principal Exports, 196E-77 1968-72 1973 1974 1975 1976 1977 1. Average Coffee Value (SDR millions) 59.2 43.7 53.9 132.6 207.2 Volume (thou. tons) 46.7 60.3 41.0 54.5 57.9 44.: Unit value (SDRs/ton) 981.8 1,065.9 989.0 2,290.2 4,698.- Cotton Value (SDR olllions) 39.8 57.3 33.1 63.4 58.8 Volume (thou. tons) 59.9 60.0 49..1 38.3 55.3 47.2 Unit value (DRs/ton) 663.: 1,167.0 864.2 1,146.5 1,245.q Sisal Value (SDR m.llions) 26.1 54.2 33.7 24.7 23.3 Volume (thou. tons) 178.4 113.4 93.4 103.1 89.6 80.: Unit value (SURs/ton) 233.7 580.3 326.9 275.7 290.5 Cashewnuts Value (SDR millions) 20.8 28.3 24.6 21.4 26.2 Volume (thou. tons) 89.6 109.9 113.9 101.3 72.5 143.6 Unit value (SDRs/ton) 189.3 248.5 242.8 295.2 182.5 Tobacco Value (SDR millions) 6.6 10.2 9.7 19.4 29.8 Volume (thou. tons) 5.2 6.1 8.8 6.6 11.1 18.0 Unit value (SDRs/ton) 1,082.0 1,159.1 1,469.7 1,747.7 1,655.6 Tea Value (SDR millions) 6.5 8.0 9.0 13.9 25.1 Volume (thou. tons) 7.7 9.5 9.6 10.4 12.0 12.9 Unit value (SDRs/ton) 684.2 833.3 865.4 1,158.3 1,945.7 Source: IMF 1/ Provisional. - 11 - TAZAN TA Completion Ve-port Progrin Crndit (Credit 688-TA) In troduc tion 1. This report is based on the findings of appraisal ard' completion missions, the President's Report, the Loan Agreement, and discussions vith the Goverxment. A Basic Econoric Report (No. 1616-TA, dated December, 177) contains a detailed analysis of Tanzanian economic performance. Progrnm Data Borrower: United Republic of Tanzania Credit Amount: US$ 15 million Date of Credit Agreement: March 24, 1977 Effective Date: May 3, 1977 Terms of Credit: Standard IDA terms Amount Disbursed: $15 million Closing Date: March 31, 1978 Rate of Exchange: US$1 - TSi. 8.3011* The First ProRram Loan (Loan No. 1063-TA of 1974) 2. In 1974 Tanzania suffered a severe deterioration in the balance of payments, Agricultural production hiad been advcrsely affecLad by institutional changes in rural areas and two years of drouphit so that export volume fell and extraordinarily large imparts of food grains were required. Tn addition there was a sharp rine in import pric:!s. As a result the deficit on goods and services increased from $139 mrtlll.cn in 19731U to $317 million in 1974. In responze to this crisia a progrEim loan of $30 million was negotiated and apprved in December 1974. 3. The first program loAn aimed both to provide amnrgency balance of paymants assistance and to support a cctaprcheusi-.e resLruc,,urin'.' program. Although the drought end Sharp price rises had agravted the balance of paments problem, it was recognized that sevel long-ter economic 1trends had undermined the balacnce of pamcents a well. Agricul. tural production had labged for ey.=s, the growh rate of mazerial production had fallen, productivity in iduSyr hofd declined, the ein.- rate had fllen, exorl s ha striaLe, za in.ports h.d g:ow raidl.ye A comprer iv prora waer w a tc r tc revrri these trn9. Th Govrtnt tighten d inor. Ionlo , raised r tiCUcura producer prices an $0 metliol iric 3 of b andsc NcusLuif, s ply ancppcred the sDiembre of SAverae rte for disbrscmqnt pnriod (third euarL m e 1b77) - 12 - investment going to directly prodtctivo utivities, ad fro.e :-ger.:e onlaris. The Eank approved this policy progrza., bnc - t wa..: that rany of the measures would only L-e eilec-. o--r a lcr.-: peri.d r. that additional program esitance MiI'be needed to support l restructuriug. Background to thz Pro7rar Credit 4. Despite an increace in agricultural product-on in I975 of 6.6., the balance on goods and services,continued to deterlorte. F:,jd prcdution increased in 1975 in response to good weather rud -overnment ;-,-icier., b,: a high leval of food imports was still requir6O for rcstuckir. Mc-e'r agricultural export pr1ces Trll and the production of some m:je: c::ort crops (especially cotton) also fell due to the disru#pt.on of villagraLoS.. L. a result the deficit on goods and services inccased from $317 -illic-n i. 1974 to $343 million in 1975. In spite of increased forcign assistAnce, reserves continucd to decline and Tanzania requested a prograv. credit Of $30 million in late 1975. S. A special Bank mission visited Tanzania in November 1975, to asbess the adequacy of the Covernment's restructuring pro7ram zn:d the nee for further assistance. In April 1976, a progvir. credit was .gotietd. However, further procezrine of the credit was ther d3layed for evo relatd reasons: concern about a rrnwing problem of bIud&tary ccntral an a.conarn that Bank program assistance should not subsLitite for the use o I: faclitiez. 6. Budgetary imbalance and excessive Goverr.unt borrowin' from the banking system threatened to undernine the considerable progres' ihich had been made in implementing the rentructuring program. Ar attemp: to reduce recurrent expenditure in 1975/76 was circumvented by extra-budget.4ry cutlays with the result that Government borrowing from the banking sybtem increased from an already inflationary level of Shs. 681 million in 1974/75 to Shs. 1,160 million in 1975/76. This level of Government borrowing from the banking system far exceeded the ceiling agreed with the I!F as cne of the conditions for a second credit tranche drawing in 1975/76 and as a result the standby agreement was nullified. Following prolonged discu5sions wit.i the IMF a new agreement was reached in January 1977, for drawings of the remainder of the first credit tranche plus truct fund. The agree:i::nt eatablished new ceilings on public spending and credit expansion. The Treasury had clso previously taken several steps to bring the bud.n under control, including the dismissal of 10,000 Government :orkers in L!hrch 1976, and the institution of an early uarning syste. to monitor regional 6nd ministry expenditures. Thus it appeared that the new agrcenz:1 r-i-h the IF marked the successful ossertion of budget control. In adition, the agreement renove,d the dauger thrt the progran credit ';vuld nC_-aZ3tute for the use of 11F rasource-. With the removal of these tv.-o ccrue, Br.nk staff :-oved quickly -t rCAssess Tanzahia's bil.-ce of pay;ets prospact3 _.nd th? need for program assistance. Ca the bi.:ds of this revs.ssent, a prog&rm crcdOt oC $15 millica vt. propo-ed in February 1977. - 13 - Obcctives of the Program Credic 7. Although economic conditions had coz.tinued to improve during 1976, there was still ar. apparent need for Bnk program nrsislance at the beginning of 1977. A second year of good rains plus the ccntinuir-7 effects of higher prolucer prices and other policy changes railcd agricultural produc:-ion by 7.3% in 1976. Export volume also increar.ed as cotton peoduction recovered. Finally, ircreased coffe p-lcts rn±rd the value of exportu substantially. The co-.bined effect of thes. chan>.s reduced the deficit on goods and services from $343 million in 1S75 to $147 million in 1976. However, part of this improveent in the ba]lnce of payments steamed from the tighLenin- of already strict import contrcls. Imports of non-fuel intermediate gonds de:lined from $252 rilion to $233 million. In real terms the level cf noni-fuel inte-mediate imports was only 70% of the 1973 level and surveyt- of tha industrial sector shoxed that shortages of imported raw materizl and spare parts were partially responsible for the considerable underutilized industrial capacity whicr. had emerged since 1973. 8. The principal objective of the proZra:a credit was to provide the means for a relaxation of import controla in order tc stimulate economic activity. A secondary objective was to provide support for the ongoing restructuring program initiated at the time of the first progra= lowi.. The IW agreemient wis to provide SuffiCent external resources fr, tht comilg year assuming that tight import controls were mnintai-ed; the prograr. credit was designed to provide part of the additional external resources which would be required ir import controls on necessary maintenance imports were relaxed. The estimate of additioual resources required over and itbove the IMF progrrm was $30-40 million. The program credit was for $15 million on the assumption that the remainder of the gap could be covered by bilateral program assistance. Balance of Payments Developments 9. The program credit of $15 million was based on the premise that at least that amount of quick-disbursing foreign exchange would be needed to finance the surge of imports of raw materials a::d spare parts which would result from the relaxation of import ::ontrols. This pres:mption turned out to be wrong on two counts: first, foreign exchange receipts in 1977 were far higher than forccast and, secondly, imports did nGt increase as much as projected. If exports and imports for calendar year 1977 had been forecast more accurately, the program credit: ;?ould undoubtedly not have been proposed. 10. The most important ungnticipatud developeent in 1977 was the continued rise in coffee prices. At the ;:nd of 1976 the Bank's coiraodity price forecasts project,d a slight fall in averae coffee pri=os durin- 1977. By April 1977, it waa cli-r that avcr=,3. cnffec rices, vilch had doubled in 1976, ware tgoin,: to be much hi.her aga.n in 11377 that in 1976. In1 the event, the averi-r piice per ton of Tanzanian coffee ,-as 80.17 higher in 1977 than in 1976. As a result cf !:his unanticipted wiM.'rll Tautanit.n exports increoned Ly $,7.3 millirn in 1977 copared to th-. $41.7 million incresue projtcted in th Prci'dmnt' aeport on the progrr.m oclit. - 14 - 11. ImtpCorts aso interensed . . thIn projected in 1'7. Th actIal incrence wa3 $96.9 million compa-rcd Zo t projected inCrease of $.!.9 million. T1iiR vas due in lcrf.e part to delays nd cod icoti:.; i:: rac:, import controls. This is discussed in wore dctail below. 12. In runa;.ary, the balance of tr.de was projected to deter..t b about $100 mil.ion in 1977 whereas in actuallty there !w.7 lost nch!:se. As rot.Ld tibovc, the prograr cr;dit would probably not have been p:.npoedc if balance of paymenrs deve]opmence hed been correcti- f'oreseen. 111C docte r.ot mein, however, thAt the prorram credit wLs necGsariL.y a 7:irt.i. The progrt credit d-d achieve its priaary objective %:ich .:,s to enacour&ge: the Government to relax import controls in order to ex?nd produc.:ion. The Goverraent hac. been c:rremely nervous about the conssquencec.of raLaxiiC Import controls; the program credit provided the necessary asEuran.! and inducement to init-iate such a process. Moreover, the resources p-ovidee by the program credit were not unneeded, aimply prenature. By lace 1977 coffee prices had fallen again and in early 1978 the Tanzanian Go,;Crncent requested IMP assistance to finance continuation of the imftport li-rUlization protrz:!. Aj a result of this request negotiaticns for an Extend. Fund Facility plus SupplL;x-ntary Fund Facility will begin in August 1978. Inort Cotrtrvls and Caacity Utilization 13. import license allocations were incteasad soon after the progrc7 credit went iitLo effect. As shown in the table below, liccnse allrcations were increased by 24% in the 12--.nth period irmedirtely JolIovin: the progra credif.. Over 90X of the increave went to rai materials ced capitel equipm.cat and spares. Tne allocation for raw macerials inc7cacec by 66%. The. al.loc.tion for consumer goods Increased by 147% but this was from a tiny bLse. The increased license allocations d.d not lerd Lo a commensuratz increase in imports, however. There were three reasons for this failure. First, rherewerealways lags between the allocation of licenses and the ordering and arrival of imports. Lecause of thcs: lags many liccnsc must be renewed and the total allocaticn usually exceods total use. Secondly, some importers did not have sufficient own resources or credit in domaatic currency to make use of their import licenses. The State NoLor Corporation, for example, was unable to import motor vehicle spare .parts for this reason. Finally, both of these problems were aggravzted by the cumbercome system of confinenent under which fi:. may nlot iTport raw materials directly but must go through a spcified state trading corporation to order imports. 14. As a result of there problems both imports a-.d caracity '.tiization expanded lecr quickly than enticipated. Figur-s ar-z only availab"= for calendar year 1277 so that the full effects o-1 import e7pannion rccd. not be ex-acted to have been realized, but it is clear th:t progr:s h;-i beel. modc.;t. It,,porLs of "othzr IntermediaTE goods" (e:JudIng buildin .n, construction maLeiJ,15 but iucludinc snare P4a:rt incrCa.e.d LY 1C. in currcat prfce in czlendar Year 1977 a%l total v-.LuC UddCd i increzced by only 5.42 in rcel terms. EosL ineuctrles using imprttd input- exrndcd ermacity utiiz-ation to !oe c't.ent, bu! cnpacity 1t.JizV- tion in th large textile industry (dependcnt on inported chemical. und 8park-.) 1actuAly fL!l ir calendar year 1977, thou?. this was AP;atiy duc *o noagemeot pro'lens rather thin a sho::age of imporLcd input3. - 15 - TANZANIA: Import License Allocations (Shs. million) 197 --77 19~7-78 Chr'ý'. T. C,r,n ge llicenst 240 2'4 +10 II. o 307 224 -27 III. Drug, c..d mcAicines 218 282 +29 IV. Ccn.umcr goods 100 247 +147 V. Petrolcum, 1256 1059 -16 VI. Ra,! macrals 1932 2573 +33 VII. C.:pitil tquipment and sparcs 1447 2398 +66 VIII. Execrrzily-aidcd imports 1314 1630 +28 IX. Government imports 267 279 +4 v. Contiugtncies 180 21 -86 Total 7261 9026 +24 S ur c: Data provided by Bank of Tanzania lZote: Totals may not add due to rrunding - 16 - 15. The Govarnmrnt has, ho-ver, takcn aditioIal 'SLeps to incr2ase the supply of imporrs. Followig 'approval of a cccdit for a. Tiucking Inductry Rehbl.Jitt:ion and Improvement ProJece in October 1977, laf., dealers wc!c permitted to ir;po:t t..otor v-IIIrle sp.re parts directly. ThiS has repor.tdly had a narked effect on thu availability nf spaies. In April 1978, the Govo.rauent took the much more cInificint sLp of ending confinament of moLt imporLed inductrial inputs. Ioports vil still be licensed but. fir-s may order d from ric.:1 sources. This reform should eliminate moit of the obstacles to cxpaviding mair-tcnance Sm.orts. Budget control 16. Progress in biAnging the budget under control was 1-UCh greater than L:xpectcd. The program negotiated with the IF in January, 1977, had called for governmcnt borrovin[ from the bankIng syster., to be -reduced from Sh:. 1,160 million in 1975/76 to Shc. 700 million in 1975/77. Actual governient borrwing in 1976/77 was negative; the Covernmcnt's dzbt to the barding system was rcduccd by Shs. 170 milli.n. This performance has continu:d Ir. 1977/78. Al.though final figuve, arz not available, overnment borro%ing from the banking system appears to havn 1.een ne.igible or even negative. 17. Part of the budretary improvement was due to increased coffee revenuas from the progressive coffee export tax, but othai tax incrzases elso contributed to the 34% increase in rcvcuuc In 1976/77 ,hile expendirure increased by only 7%. In 1977/7F total Governrant expenditure increaGed by about 20. but this increzse. ,:ar ratched by revailue growth and wan in line with prudenat long-term fiscal :.anage.a. Other Policy M,-Ieasures 18. A final objective of the pro-ram credit was to support the policy measurez initiated at the time of the first program loan. Most of those policics continued in force or have been strengthencd after the program credit was 4pproved. Most significantly, producer price policy and wage policy hLve follow?d the courpe snt in ths ':ake of the economic crisis. Producer prices have been revi.cwed annually urith sot: adjustments upward in the averege producer price lvel each year. Although no formAl inLmes policy has been ann-iunced, wege restraint hb continued; there has been no -enaral vaG i.mvce:ase since a cmall cost-of-living adjustment in mid- 1975. In the Lxdct Speech in June 1976, the MAinister of F.r.ance and Piano!rs- alro reco-r-nded the imediate aeop tion, herever possible,ol piece rat--o ba_-ed on work perfor=nce stLndarrds c;s a wa6e payment system. Dichaement Pcocedne~s 19. The credit was dec,r_d effc-riv.: cr ay 3, 1977. By the end of July 1977, $13.5 nillion had been disburced and tho tes.mining $1.5 millo:i ca diOhrsed by SeptmL_ber 1977. Foreign exhatge provided - 17 - under the credit v.s u-sed for agrerI cetcories of csoni i::prc of capital z.nl interr.3diate Coods Ocr Uouh LhL public a"d private coctorc. Disbursements for food, fuel, fertilizere, ai-d counurer -ood nct periiitte_d. Individuzl irmnort cxpenditures of ],:sa taa$,0 e er eligible for reimbur:cnt. 20. A special project account we opened by the rcak of Tanzania to which the Tanzantan shi1li2n &quive.eas of the importc fiac under the project were creditcd. The Gu Cvernnent :ar ztrhori Zd :-) ose these funds for Development Budmel projects not ozha:i!..z finpncp-, y external sources. Funds froom the ep(-cial projcct ecc.,t vire Ured LC' support development expenuiture by the mnisi:trizs of Nic.zl;e:4tion, Industi,a3, Corzunication and Trz:nspoit, Lnds, o d Ur'D p ment, HecOth, Natural Resourcep and Touricm, and Wo:ks. Summary 21. The objectives of the program credit uere to provid.? qu-ick- disbursing fcreign exchange to help expand capncity utiliz-ia o .ca Io prcvidc cupport for the long-term tectructuring progr:. initiFaed ;-t th. time of the prevIous program loan. The prcgra;i rreft wna r1,7- e '-,z, the Tanzani&n authorities -.eached an agrcerr.=nt wio t.i. cone.Ling budgetary control neacuren. The balance of paymt!nts a eitancu pret. by the program credit vaa not needed a3 urgently an anciclpated iue to unexpectedly high coffee prices. 'ouerer, coffee prices h:.ve a.ce fallen and it is unlikely that the Covarnmenr would have rola.rU MIperL controla without the back-up of the program Zredit and th, plicy dcus- ions a9sociated with it. The Governmant has altso contiud the n-io. policies begun under the first progrL! loca and has brought the budget under control since approval of the program crcdft. EACPIA August 30, 1978