Tanzania - Structural Adjustment Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-7 127-TA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE fNTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 93.2 MILLION OF WHICH SDR 2.8 MILLION HAVE BEEN ALLOCATED FROM IDA REFLOWS TO THE UNITED REPUBLIC OF TANZANIA FOR A STRUCTURAL ADJUSTMENT CREDIT PROJECT May 7, 1997 Country Department for Tanzania Macroeconomics 2, AFTM2 Africa Region 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.  GOVERNMENT FISCAL YEAR July 1 - June 30 (FY96 or 1995/96 = July 1, 1995 to June 30, 1996) CURRENCY EQUIVALENTS Currency Unit = Tanzanian Shilling (T Sh) Interbank Market mid-rate: US$ 1.(00 = T Sh 605 (February 28, 1997) ABBREVIATIONS AND ACRONYMS BOT Bank of Tanzania CAS Country Assistance Strategy DEO District Education Officer DMO District Medical Officer ESAF Enhanced Structural Adjustment Facility GDP gross domestic product IMF International Monetarv Fund LPG liquified petroleum gas MOU Memorandum of Understanding NASACO National Shipping Agencies Corporation NBC National Bank of Commerce O&E Organizational and Efficiency (Review) PER Public Expenditure Review PSRC Parastatal Sector Reform Commission RPFB Rolling Plan and Forvard Budget SAC Structural Adjustment Credit TCFB Tanzania Central Frcight Bureau THA Tanzania Harbours Authority TIPER Tanzanian Italian Petroleum Refinery Company TPDC Tanzania Petroleum Development Corporation TRA Tanzania Revenue Authority TRC Tanzania Railways Corporation TTCL Tanzania Telecommunications Company Ltd. Vice President : Callisto Madavo Director James W. Adams Technical Manager : Roger Grawe Task Team Leader : Shahid Yusuf Economists : Zafar Ahmed, Albert Agbonyitor, Allister Moon  FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 93.2 MILLION OF WHICH SDR 2.8 MILLION HAVE BEEN ALLOCATED FROM IDA REFLOWS TO THE UNITED REPUBLIC OF TANZANIA FOR A STRUCTURAL ADJUSTMENT CREDIT CONTENTS SUMMARY ........................................ I. INTRODUCTION ................................ I 11. RECENT ECONoMIC Di EVELOPIENITS ..........2.. .... ........... ..... .......................... 2 Policy Priorities .............................. 3 III. PROPOSED SAC PROGC)RAM ........................... 5 Public Expenditure Management .............................. 6 Social Sector Issues .............................. 7 Parastatal Sector Reform ....... ..................... . ..... 1. Banking Sector Reforms ....................... .......... 1 3 Petroleum Sector Liberalization. ................................... 16 IV. DISBURSEMENT ................................ 16 V. COFINANCING. ................................ 17 VI. SAC BOARI) AND) TRANCiHF CONDITIONS ................................... 17 Tranche Conditions ................................... 17 VI. BENEFITS AN) RISKS ................................ 20 VII. RECOMMENDATION ................................ 21 Annex A: Policy Matrix Annex B: Letter of Development Policy Annex C: Tanzania - Social Indicators Annex D: Tanzania at a Glance Annex E: Tanzania - Key Economic Indicators Annex F: Tanzania - Key Exposure Indicators Annex G: Tanzania - Balance of Payments Annex H: Tanzania - Status of Bank Group Operations This operation was prepared by a team led by Shahid Yusuf (Lead Specialist and Task Tean Leader), AFTM2 and including Albert Agbonyitor, Zafar Ahmed, Sandra Hadler, Allister Moon, Anna Muganda, Kathryn Rivera (AFTM2); Gerard Byam (AFTP 1); Charles Griffin (AFTHI); Minneh Karanja Kane (LEGAF), Paul Vandenheede, Soheyla Mahmoudi (LOAAF); Luke Haggarty (PRDFP); Eric Daffern (IENOG); Andrew Feltenstein (Consultant); Khaled Sherif (EC2CO). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   UNITED REPUBLIC OF TANZANIA STRUCTURAL ADJUSTMENT CREDIT Credit Summary Beneficiary: United Republic of Tanzania Project Task ID: TZ-PE-2821 Implementing Agency: Ministry of Finance IDA Amount: SDR 93.2 million (US$128.9 million equivalent) of which SDR 2.8 million have been allocated from IDA reflows. Terms: Standard IDA terms: 40 years maturity with a 10-year grace period. Co-financing: Kingdom of Norway (NOK 25 million). Disbursement: The proposed Credit will be disbursed through the Bank of Tanzania. The initial tranche of SDR 38.95 million including the allocation from IDA reflows will be available upon Credit effectiveness once specified actions have been taken. Background: The Structural Adjustment Credit is based upon the Government's Policy Framework Paper, distributed to the Board in November 1996, and the related Letter of Development Policy which set out the Government's medium term strategy. This strategy seeks to reduce poverty through macroeconomic stabilization and the acceleration of economic growth. The principal objectives of the SAC are to induce greater efficiency in the use of fiscal resources, focus the activities of the state while enlarging the role of the private sector, and continue the process of price and market liberalization. The medium term benefits of such measures would be higher growth and a resumption of the trend reduction in poverty. This strategy is in line with IDA's Country Assistance Strategy Update presented to the Board on May 16, 1996 and also with the FY97 CAS submitted to the Board with this operation. Description: The SAC will support the efforts of the government elected in November 1995 to achieve macrostability, growth and poverty reduction through a reform of public expenditure policies, efficient provision of social services, accelerated privatization of parastatals, a resolution of the problems facing the National Bank of Commerce (NBC), and measures to remove distortions in the  ii pricing and marketing of petroleum. These actions, once fully implemented, should result in budgetary savings, and contribute to a sharp reduction in inflation, an acceleration in the growth to more than 6 percent per annum over a four-year period, and reflecting improved delivery of social services, a substantial decline in poverty. Rationale for IDA Involvement: The SAC addresses policy areas that build on intensive work done in the context of several recent operations such as the Financial Institutions Development Project and the Parastatal and Public Sector Reform Project. The SAC will capitalize upon and extend the agreements reached through the PFP/ESAF negotiations. The SAC emphasizes policies, whereas capacity building and detailed institutional engineering is being done as a part of several other ongoing operations. Government Commitment: Over the past year significant progress has been made with the new government showing a readiness to intensify policy measures and to engage with the Bank on a serious dialogue regarding future measures. The Government's resolve has been underscored by the successful completion of an IMF staff- monitored Program in June 1996 and an agreement with the Fund on an ESAF program, which was approved by the Fund's Board on November 8, 1996. Benefits: Implementation of the reform program will permit an increase in real growth to 5-6 percent a year, by improving macrostability, resource mobilization and allocative efficiency. These will help to reduce poverty further. Risks: The chief risks faced by the program are a weakening of the Government's commitment and its inability to mobilize the needed implementation capacitv.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 93.2 MILLION OF WHICH SDR 2.8 MILLION HAVE BEEN ALLOCATED FROM IDA REFLOWS TO THE UNITED REPUBLIC OF TANZANIA FOR A STRUCTURAL ADJUSTMENT CREDIT I. INTRODUCTION 1. This memorandum seeks approval to extend a SDR 93.2 million Structural Adjustment Credit (SAC) to Tanzania. The SAC would support the efforts of the Government elected in November 1995 to achieve macrostability, growth and poverty reduction through a reform of public expenditure policies, the efficient provision of social services, accelerated privatization of parastatals, a resolution of the problems facing the National Bank of Commerce (NBC), which dominates the banking sector, and measures to remove distortions in the pricing and marketing of petroleum. These actions, when fully implemented, could result in improved allocative efficiency that could raise growth to more than 6 percent per annum over a four-year period, and as a result of faster growth and improved delivery of social services, bring about a substantial decline in poverty. They will also relieve budgetary pressures and further dampen inflation. Proceeds from the Credit would go towards filling external financing gaps, wvhich will remain even after the recent Paris Club debt rescheduling, and expected disbursements from existing and new pledges of aid from donors. 2. The preparation of this project commenced in 1994 with an identification of the key components. However, in early 1995 it was decided to defer further preparatory work until the Government was able to delineate fully its reform proposals and confirm its commitment to their implementation. During the past 16 months significant progress has been made, with the new government beginning to implement a well formulated program that should enable the country to pursue vigorously its economic and social goals. The measures taken thus far include: restructuring of the NBC, including reduction of staff and branch closures, together with public confirmation of the Government's intent to divide the bank into three entities and aggressively pursue options for divestiture; divestiture of about 150 parastatals, retrenchment of 60,000 civil servants; initial steps to decentralize the provision of social services, improvement in revenue effort following the creation of the Tanzania Revenue Authority (TRA); and progress towards harmonizing the tariff regime between Mainland Tanzania and Zanzibar. 3. The Government's resolve to pursue reforms with determination was underscored by the successful completion of an International Monetary Fund (IMF) staff-monitored program covering January to June 1996, that reversed the deterioration in key macroeconomic indicators. This served as the background for the agreement with the Fund on an Enhanced Structural Adjustment Facility (ESAF) program through FY99, approved on November 8, 1996. The IMF's midterm review of the first annual arrangement of the ESAF program in March/April 1997 confirms that performance remains on track. In several respects, the Government has met the targets with comfortable margins. Real GDP growth has risen to almost 5 percent, inflation has declined to 14 percent as against 23 percent in June 1996, gross official reserves had risen to 16 weeks of imports by end-December 1996, and there was a stronger than programmed tightening of the fiscal stance.  2 Tanzania SAC The successful outcome of the Paris Club debt rescheduling in January 1997, corroborates international endorsement of the program. II. RECENT ECONOMIC DEVELOPMENTS 4. In early 1986, the Government of Tanzania embarked on an adjustment program to dismantle the system of pervasive economic controls and encourage more active participation of the private sector in the economy. The program included a comprehensive package of policies, which reduced the budget deficit and improved monetary control, substantially depreciated the overvalued exchange rate, liberalized the trade regime, removed most price controls, eased restrictions on the marketing of agricultural products, and liberalized interest rates. The Government also launched programs to rehabilitate transport infrastructure (roads, railways and ports) and to strengthen agricultural research and extension services. The economy responded positively during the second half of the 1980s to the reform program and the accompanying increased availability of external resources, with an acceleration of GDP growth, higher production of food, some increase in the exports of traditional crops and a surge in nontraditional exports. However, the evidence accumulating in the first half of the 1 990s, pointed to a flagging of the earlier momentum and the need to broaden and deepen reforms efforts. 5. In the first half of the 1990s, Tanzania recorded an average GDP growth rate of about 4 percent, largely on account of continuing recovery in agricultural production that started in the mid-I 980s. However, the gains in poverty reduction that were achieved in the late 1980s have not been sustained and, in fact, there are signs of slippage. The latest surveys indicate that 51 percent of the rural population lives below the poverty line. This is largely because population increase has remained high at close to 3 percent, agricultural investment is low and the supply of productivity promoting social services has stagnated. 6. Between FY92 and FY95, Tanzania faced serious fiscal problems arising from the gap between stagnant revenues and public expenditures swollen by large outlays on administration. The quasi-fiscal deficit generated by problems and inefficiencies affecting the parastatal sector and weaknesses in the banking system aggravated the situation. The fiscal deficit, after grants, rose to 5.8 percent of GDP in FY95. However, by FY96 it had fallen to 3.3 percent of GDP. The tighter fiscal stance and a slower growth of the money supplv have significantly reduced inflationary pressures. 7. These are encouraging developments. Nevertheless, Tanzania's overall growth rate does not adequately mirror the level of aggregate investment, at about 30 percent of GDP, this is high compared to other low and middle-income countries. This investment reflects the large volume of foreign capital Tanzania receives from the donor community through and outside the budget that finances public investment. When juxtaposed with Tanzania's growth performance, it highlights the following areas of concern. First, the paucity of public investment in infrastructure has depressed the productivity of private and donor financed investment. Second, counterpart funds are being spread over too many projects, slowing implementation across the board. Third, returns on investment have been reduced even further by high real interest rates and resource misallocation arising from the problems afflicting the banking sector and the chronic inefficiency of the public utilities and remaining parastatal enterprises. Fourth, persistent inflation and some lingering price distortions have compounded the problems of resource misallocation and discouraged the development of the private sector. Finally, the economy has registered no significant gains in productivity. Hence, the growth and poverty-reducing opportunities inherent in the convergence of  Tanzania SAC 3 Tanzania's sectoral productivity levels closer to those of more developed countries, remain to be realized. Policy Priorities 8. This brief assessment of Tanzania's economic performance underscores five priorities, which must define policy actions during 1996-98. These are: (i) achieving fiscal balance, improving the management of budgetary expenditures, and taking steps to change the mix of these expenditures so as to favor priority projects, particularly those in the social sectors and infrastructure; (ii) increasing the involvement of local stakeholders and the private sector in the provision of social services; (iii) divesting parastatal enterprises at an accelerated pace and preparing the public utilities for pivatization or other contractual arrangements involving the private sector in order to increase efficiency and service delivery levels; (iv) strengthening the banking sector; (v) completing the process of market liberalization that commenced a decade ago. 9. Fiscal balance. Steps to regain fiscal balance are essential for macroeconomic stability. This calls for a two-pronged effort to augment revenues and trim administrative expenses. Tanzania is strengthening tax administration with funding and technical assistance from the Bank, the Fund and various donors. It has established the TRA and given it full support: since it was established in July 1996, TRA has consistently met the monthly revenue targets set for it. It is also eliminating a number of tax loopholes. If successful, this should push the revenue/GDP ratio from the 15 percent in FY96 to 16.9 percent in FY99. An effort to contain current expenditures has been underway for almost two years. The Civil Service has already effected a substantial reduction in numbers. A second round of downsizing for FY97 is ongoing and an extensive O&E review of the central ministries will be completed by October 1997. Although the immediate budgetary gains are modest, the O&E study will guide the rationalization of the ministerial structures and salaries so as to achieve greater control over administrative costs. Strengthening budgetary management and information systems will also contribute to the efficiency with which fiscal resources are utilized. In addition, a reduction in the public sector borrowing requirement together with lower interest rates will reduce domestic debt servicing obligations that currently absorb a sizable proportion of revenues. 10. Social services and private sector investment. An acceleration of the growth rate, which will require significant gains in factor productivity, calls for increased involvement of the private sector. To induce this, the Government must intensify measures initiated in the latter half of the 1 980s to provide an environment more conducive to private investment. For instance, the increase in agricultural yields and off-farm activities is a function of investment in education, rural roads, power, agricultural research and extension services. Without advances in agricultural technology, returns to education are likely to be low. Likewise, the commercialization of farming, planting of cash crops, the spread of export-oriented horticulture, and greater use of modem inputs is linked to the development of a good marketing and communications infrastructure.  4 Tanzania SAC 11. Substantial resources will be required to attain these goals and part of these must come from the public sector. Greater private sector participation is crucial in view of the fiscal constraints facing Government and the proposed reduction in the size of government and scope of public sector activities. Employment by the private sector will become far more important, which makes it essential to ensure that the provision of education is geared to demand, and at the same time the goals of poverty alleviation are given due priority. This entails a bigger role for the private sector in the area of secondary and tertiary schooling, with the Government putting more effort into improving the quality of primary education through decentralization and greater local involvement in financing as well as in monitoring. 12. Parastatal divestiture. The potential fiscal benefits to be derived from the continued divestiture of public enterprises and the creation of a competitive environment will be of equal importance. The gains can take four forms: there are the upfront receipts from the sale of assets; where the enterprises liquidated or privatized are incurring losses, there are benefits from the decline in claims on the budget and calls on the banking sector-or other public bodies-that translate into quasi-fiscal deficits; divestiture can also improve economic efficiency by freeing up idle or underutilized assets and directing them to more productive parts of the economy; and increasing competition in areas such as telecommunications, can improve the quality of services, reduce costs and stimulate the efficiency of publicly owned entities. Where outright sale is infeasible and the liquidation of a loss-making enterprise is the only option, this must be pursued just as vigorously. 13. The above measures will have the additional advantage of helping Tanzania to generate public savings. Comparative experience suggests that the public sector can play a significant role in mobilizing resources during the early stages of development. It is apparent from Tanzania's recent performance that the limited supply of development finance from the central government has been one of the major reasons for the modest pace of growvth 14. Banking reform. Both savings mobilization as well as the efficient allocation of capital, will be helped by a continued restructuring and deepening of the banking system. Arriving at an effective solution to NBC's long-standing problems has the highest priority. This publicly owned bank accounts for 63 percent of deposits and 60 percent of total bank lending. It is the basis of Tanzania's nationwide settlement system and is the main source of commercial banking services in the rural areas. Until recently, two-thirds of NBC's portfolio was non-performing, mainly because of past lending to parastatals and cooperatives. The bank was also incurring operating losses in spite of substantial reductions in staff, closing of several branches, and large spreads between rates on loans and deposits. While losses have been stemmed as a result of drastic measures taken over the past year, the bank's condition remains unsustainable. 15. NBC's problems have placed additional burdens on the economy. First, the losses incurred by the bank and the cost of restructuring have direct and quasi-budgetary implications. Second, the interest rate spreads that serve to bolster NBC's current finances-and widen the margins of other banks-greatly increase the costs of banking services, apart from depressing private investment. Third, NBC's plight has deleterious consequences for the growth of financial savings and their efficient allocation even allowing for some recent financial broadening. Weaknesses in the financial sector, coupled with the inadequacy of skills, have contributed to the slow growth of the productive sectors of the economy, especially manufacturing, during the first half of the nineties. It has also limited access to credit in the farming sector, which reduces the probability that agriculture can maintain recent growth rates of 5 percent or more.  Tanzania SAC 5 16. Market liberalization. Although substantial progress has been made in liberalizing prices and markets, there is still room for additional gains, particularly in the petroleum sector. State control over prices and imports of petroleum products, together with the maintenance of a small- sized refinery (50 percent owned by the Government and 50 percent by AGIP (Rome), which also manages the operation), have been the source of sizable distortions, the removal of which will eliminate subsidies to the refinery and the costs imposed by the existing arrangement on all consumers. III. PROPOSED SAC PROGRAM 17. Objectives and link with the FY97 Country Assistance Strategy (CAS). The SAC will be building on a second round of reforms that commenced in the early 1990s but have yet to be fully implemented. The Government did begin strengthening the banking infrastructure needed for rapid development with the support from an IDA credit but has not succeeded in creating a viable NBC. Recognizing the problems and inefficiency of the parastatal sector and the concomitant budgetary drain, it began to restructure and privatize state-owned enterprises in 1993 with encouraging results. More recently, President Mkapa's Government has broadened and intensified the scope of reforms focusing increasingly on the large public utilities. In addition, the Govemnment has demonstrated a strong commitment to progressively improve the delivery of social services to augment the supply of human capital and reduce the level of poverty. The principal objectives of the SAC are to support greater efficiency in the use of fiscal resources, to more narrowly focus the activities of the state, while enlarging the role of the private sector, and to continue the process of price and market liberalization. These goals are also central to the CAS for Tanzania over the medium term. The full and effective implementation of the SAC conditions are necessary for the countrv to accelerate growth, reduce the incidence of poverty and move to a higher growth scenario. 18. Scope and design of the SAC. The proposed SAC will concentrate on five areas which conform to the priorities outlined in the CAS update presented to the Board in April 1996 and elaborated in the FY97 CAS that is being submitted concurrently with this operation. These are: (a) public expenditure management (b) social sector rationalization (c) divestiture of parastatals (d) banking reforms (e) petroleum sector issues. 19. The SAC will comprise five tranches. The first tranche of SDR 36.15 million together with Tanzania's FY97 IDA reflow allocation of SDR 2.8 million will be released when the cross- sectoral conditions of effectiveness are met. The remaining four will be floating tranches to be released when specified sectoral conditions are met for: (i) development expenditures and the social sector program (SDR 18.1 million); (ii) divestiture of NBC (SDR 18.1 million); (iii) parastatal reform (SDR 10.85 million), and (iv) petroleum sector liberalization (SDR 7.2 million). 20. Macroeconomic framework. The actions proposed under the SAC, if implemented, would change the overall budget balance after grants from a deficit of 3.3 percent of GDP in FY96 to a surplus of 1.6 percent of GDP in FY99 and substantially improve allocative efficiency throughout the economy. The analytical work done in connection with the SAC indicates, that each of the measures proposed will increase medium term growth by one half to one percent.  6 Tanzania SAC Cumulatively, the effects of greater development spending, banking reform and increased allocative efficiency should gradually raise GDP growth rates to 6 percent or more by the year 2000. Public Expenditure Management 21. The Government's fiscal position strengthened during the second half of FY96 as a result of improved revenue collection and enhanced expenditure control. The trend has continued during the first half of FY97 under the ESAF program. The recurrent expenditures/GDP ratio declined by 2 percent to nearly 16 percent in FY96 and is projected at 14.6 percent in FY97. Retrenchment of 4,000 civil servants, in addition to the 60,000 already removed from the payroll, was completed by end April 1997. As a condition of Board, the Government will maintain its fiscal stance as reflected in an overall fiscal balance of 0.9 percent of GDP (after grants) for FY97 on an annualized basis as derived from Treasury Flash Reports (para. 71a). 22. The areas where future action is needed to enhance the efficiency of fiscal management can be broadly classified under three headings. First, there are issues relating to the level of aggregate expenditure. Second, there is the composition of expenditure. Third, in order to sustain improvements in both of these areas, there is need for improvements in the budget process and in budgetary management. 23. Aggregate budget management. The overall deficit before grants amounted to 4.9 percent of GDP in FY96 and is projected at 2.3 percent in FY97. Further cuts in the level of the deficit are necessary for three reasons: (i) to sustain the decline in inflation, which had fallen to 14 percent in the third quarter of FY97; (ii) to reduce interest rates that will have growth stimulating effects; (iii) to lessen dependence on external financing of the Government expenditure that is evidently not sustainable in the longer term. Therefore, the Government intends to trim the overall budget deficit before grants to 1. I percent in FY99 in line with the ESAF program. 24. Part of the reduction in the overall deficit will be achieved through growth in domestic revenue. Implementation of plans to further strengthen tax administration and introduce the VAT (Value Added Tax) in 1998 should make it possible to achieve a revenue/GDP ratio of 17 percent by FY99. 25. In order to achieve its budgetary targets, several expenditure rationalization measures have been identified in the Public Expenditure Review (PER) completed in FY97 and these will be implemented during the course of the next two years, reinforcing actions taken as part of the SAC. They include: (i) consolidation of the recurrent and the development budgets; and (ii) measures to contain the growth of the wage bill by phasing in a system for auditing the payroll. The SAC, in tum, will focus on the budget process and trimming the development portfolio. 26. Misallocation at the sectoral level has arisen partly in budget preparation, but also in budget implementation, as excessive spending has been permitted on some budgetary items, often further skewing the distribution of resources away from a pattern consistent with overall objectives. To correct the mix of expenditures, the Government will include provisions for protecting priority expenditures. 27. Budget process. Recent steps to improve budget management at the aggregate level have included the introduction of a cashflow management regime, whereby monthly expenditure is limited with reference to the previous month's revenue receipts. To be sustainable and consistent  Tanzania SAC 7 with development of medium term budgetary planning, the present cashflow management system will evolve further, with improvements in cashflow forecasting, better coordination between fiscal and monetary authorities, and identification of appropriate guidelines for short term expenditure adjustment. 28. The Government has also taken several initiatives in the area of budget management. The Rolling Plan and Forward Budget (RPFB) initiated in 1993 is an ambitious exercise in medium term budgetary planning, aiming to develop three-year expenditure projections based on a medium term macroeconomic framework disaggregated by sector, with some linkage to sector policies and objectives. Such exercises can be valuable in securing commitment to sector expenditure plans consistent with realistic aggregate expenditure ceilings and providing a reliable basis for more detailed planning of public expenditure at the sector level. 29. Development portfolio. Some reduction in the number of development projects was achieved in the Rolling Plan and Forward Budget of FY96. However, this trend has not been continued in the current budget, although it is clear that the development program is seriously overextended and development spending in FY97 is falling short of targeted levels. During FY98, the Government will cut the number of donor-funded as well as other projects in the development budget using criteria specified in the Budget Guidelines for FY98. It will also fully satisfy the budgetary needs of priority projects. 30. SAC measures. The SAC will support two measures in order to address the concerns described above. (a) First, the Government will work with donors to screen the project portfolio and reduce the number of projects from 1,400 down to 800 or less, and within this identify those projects that will be funded fully during FY98. This will be a condition for the release of the tranche associated with social sector reform (para 74a). (b) Second, the Government will include a development spending target from domestic sources of T Sh 20 billion (excluding the Road Fund) for priority sectors, i.e., health, education, water, power and transport, as a part of the framework for the FY98 budget. This is consistent with the ESAF guidelines. Adequate provision in the Cabinet-approved proposals for development spending will be an effectiveness condition (para. 73a). Social Sector Issues 31. Social sector expenditures. The social sectors account for a large share of all government activities and employment but have produced disappointing results since the early 1980s. Recurrent expenditures for education and health have averaged 27 percent of total public recurrent spending from FY90 through FY95 (or 36 percent, net of debt repayments), which is equivalent to about 4.3 percent of GDP. If private spending is included, the share of GDP absorbed by the social sectors doubles to about 8 percent. Teaching and health staff numbered 112,488 and 42,769, respectively in FY95 (a 16 percent increase since 1988, when staff levels were 101,042 and 32,650). Social sector workers (especially teachers) comprise the vast majority of local government employees and account for over half of the total civil service. Although civil service salaries are considered to fall below a "living wage", they absorb 92 percent of central  8 Tanzania SAC government spending on primary education and 60 percent of spending on health centers and dispensaries. 32. Social sector outcomes and indicators. In spite of outlays on social services that are a high share of spending relative to Tanzania's neighbors, and with spending allocations that tend to favor basic services, education and health outcome indicators have been, at best, stagnant for the past 15 years. After many years of decline, the gross primary enrollment ratio stood at 77.6 percent in 1995 (corresponding to a net enrollment rate-the share of children in ages seven to 13 in primary school-of only 55.4 percent). While secondary school enrollment rates have increased slowly over the past decade, the gross enrollment rate in 1995 was about 7 percent, one of the lowest in the world. Infant, child and maternal mortality, life expectancy, and control of the major communicable diseases have shown little or no improvement over the past decade. Unless reversed, these trends will jeopardize Tanzania's grovuth prospects and impede gains in welfare. 33. Strategy for change. Budgetarv stringency in the short and medium term will not permit a large increase in central government spending on social services, and the real possibility exists that central spending on social services will not even keep up with population growth. Consequently, the Government faces severe problems in the social sectors that will have to be solved through intrasectoral shifts in spending, a scaling down of the administrative infrastructure (particularly at the regional level), and decentralization of responsibilities that transfers some of the monitoring, fiscal, and managerial functions to the local level and helps promote the efficient utilization of available resources. Thus, the government's strategy in the social sectors must have two objectives: to increase the allocative efficiencv of government funding in the social sectors; and to improve the operating efficiency of government-owned and operated schools, clinics, and hospitals. At all levels, because of budgetary constraints, the contributions of users will have to rise, which will require that the Government: (a) give facility level managers the freedom to manage resources to better serve users; (b) create mechanisms which give users a greater voice in the provision of local services and their quality; and (c) target available funds to better protect the poor and vulnerable. Taken together, not only will these changes improve outcomes and equity in the social sectors, but they are also consistent with Government policy as enunciated in the sector specific documents it has produced over the past few years, and with its broader Social Sector Strategy. 34. Many of these proposals are being piloted in Government schemes under various programs. With support from the Netherlands and Denmark, the Government has begun to test the development of district-based education plans and their implementation. With support from IDA, the Government has developed a pilot program for school-based management by providing a matching grant to primary schools to implement their school plans, above and beyond regular recurrent allocations to the schools. This program is active in 135 schools and is slated to expand to at least 350 schools by 1999. At the secondary level, the Ministry has designed and has begun to implement a scholarship program to assist girls from poor families to attend lower secondary school. The girls are chosen at the village level, which has created greater awareness about opportunities for secondary schooling and the importance of educating girls. About 690 girls are now supported under the program. This will rise to about 2,500 girls by 1999. Apart from the effort to develop a village-based scholarship program for girls, this pilot is also giving the government experience in monetizing and targeting its support to secondary education. In addition, the National Education Trust Fund has been functioning for the past five years with Norwegian funding. It provides a source of grant funds to assist non-government secondary schools to expand  Tanzania SAC 9 or rehabilitate their physical facilities. The Government expects to enlarge this program over the next few years to increase capacity in lower secondary education. 35. Private sector role. Private sector providers of social services can offer more cost- efficient service of higher quality, closely tuned to the market. Since the liberalization of service provision by private secondary schools (access to public secondary schools was historically rationed), the supply response has been impressive, helping to raise by several percentage points Tanzania's extremely low secondary school enrollment rate. Private schools currently account for more than half of all secondary students (public school places have also expanded). Furthermore, recent pilot projects initiated by the Government, which provide public resources more directly to the users of social services rather than through the provision of facilities, are showing encouraging results. 36. Links to poverty reduction. Reducing poverty calls for better and efficient social services to the poor, who are predominantly in the rural areas. The evidence indicates that the poor are characterized by having lower educational attainment, particularly secondary education, and that education, specially for girls, has important externalities by increasing the impact of other social sector interventions, such as family planning and nutrition programs. Furthermore, the strategy to increase overall GDP growth depends on increasing productivity in farm and off-farm activities, which are affected by the quality and quantity of human capital. 37. Primary education. For years, there has been a broad consensus in Tanzania that the system of primary education suffers from inadequate and poorly maintained infrastructure, fails to capitalize on the potential of parents and teachers to reinvigorate the system, and limits opportunities for students to advance beyond the primary level. The Government has completed the Basic Education Framework and is in the process of finalizing the Basic Education Master Plan, which comprehensively address problems in primary education. Based on a review of sectoral analysis prepared over the past few years, the Government, assisted by donors, will implement these policy changes. The changes are expected to create a more innovative, decentralized, efficient primary school system that broadens opportunities for young Tanzanians. (a) Allocative efficiency, equity, and government allocations. Within the context of constant overall per capita education expenditures, the Government will implement the Five-Year Budget Plan in the Basic Education Master Plan to reallocate central government funding so that primary schools gradually increase their share of recurrent funding from the total education budget. This was approximately 50 percent during FY90-FY95 and 60.4 percent in FY96. As a first step towards this goal, the allocation will be increased to 64 percent in the FY98 budget framework. This will be a condition for effectiveness (para. 73b). (b) Deployment of teachers and improving the quality of instruction. The Government will undertake a study, which will include a concrete, timebound action plan for implementation, addressing the recruitment, training, deployment, redeployment, upgrading, and incentives for teachers. The plan will include details of programs for mapping out the distribution of various grades of teachers (shifting resources and teachers from districts, where enrollments are high, to deficit districts), future teacher requirements by regions and districts, and it will draw up budgets for the remuneration of teachers. This will be a condition for the social sector tranche release (para. 74b (i).  10 Tanzania SAC (c) Improving the efficacy of the primary school system. The proposed change in expenditure patterns by the central government to favor primary education will only have limited impact because of the meager resource base from which the reallocation will take place, the huge and growing stock of children waiting to go to school, and the damage done by years of underinvestment at the local level to maintain and expand infrastructure, furniture, books, and equipment. Reversing the decline in the sector will, therefore, also depend on whether parents can raise their contributions to their local schools. For substantial improvements at the local level to take place, the Government must quickly begin the much-delayed process of implementing stated government policies to decentralize primary education and empower teachers and parents to turn the system around. The Govermment will complete the process of shifting responsibility for the management of primary schools to the district authorities during the FY98 budget year. Prior to tranche release, the District Education Officer (DEO), subject to approval by the ministry responsible for education, and teachers, will be recruited and employed by the District Council in at least 20 pilot districts; and Central Government subsidies for education will be converted from line items to block grants for salaries and all other expenses, in the selected districts based on a formula agreed upon between the Government and IDA. Also, prior to tranche release, the Government will prepare a time-bound program to decentralize and transfer the management of primary schools to legally constituted school committees. Specific areas to be addressed by such a plan will include: (i) ownership of primary schools will be shifted to the local authority; (ii) revised guidelines will be issued for democratically constituted school committees; and (iii) approval of school plans and/or a school charter will be sought from parents. These will be conditions for social sector tranche release (paras. 74b (ii) and (iii). 38. Tertiary and higher education. Tertiary education (including technical and higher education) consumes a large share of the education budget with disappointing outcomes in terms of the number of graduates, the quality of training, and poor efficiency as reflected in teacher-student ratios, poor capacity utilization, large commitments to student boarding and welfare and large wage bills (despite low salaries) due to overstaffing. In particular, the subsector is saddled with numerous training institutions attached to various government ministries and agencies, including the parastatal organizations. The Government has recently completed a review of technical and higher education and training, which is expected to lead to actions to rationalize the sector and improve its financing, and to release additional resources for basic education. Prior to the release of the social sector tranche, the Government will complete an action plan for the reform and rationalization of higher education and technical training (para. 74b (iv). 39. Primary and preventive health services. In the health sector, as in education, there is scope for improving the health of the whole population through measures that raise allocative efficiency. The Ministry of Health has developed a reform strategy that addresses issues in financing, liberalization of the sector, decentralization, and reallocation of budgets toward public and preventive health services. The Government will also undertake the following actions to increase cost recovery and local participation in the provision of health services: (a) At district level hospitals and above, a program will be implemented to finance the full cost of pharmaceuticals delivered to hospitals, prior to the  Tanzania SAC 11 social sector tranche release (para. 74c (i). This will be done by setting up a hospital-based revolving fund that is based on a combination of cost sharing and central government and donor subsidies, with patients covering at least 50 percent of the cost. This will complement the Government's plan to extend user fees for curative services at dispensaries and health centers. (b) The Government will shift responsibility for the management of district level services to the district authorities prior to the social sector tranche release (para. 74c (ii). The District Medical Officer (DMO), with the approval of the Ministry of Health, and the district level health staff, will be recruited and employed by the District Council in at least 20 districts. The budget for health centers and dispensaries will be transferred as block grants to the District Councils. (c) The Government will prepare an Action Plan, prior to the social sector tranche release, to reduce the life years lost to malaria (para. 74c (iii). Parastatal Sector Reform 40. Privatization. The Government has had notable success in the privatization of public enterprises. To date, it has divested approximately 150 enterprises and by the end of 1997 should have privatized an additional 25 firms. Thus far, divestiture of seven large parastatal enterprises has been inhibited in some instances for want of a policy decision on enterprise debt. This is currently being resolved. The enterprises in question are: Mbeya Cement Sugar Development Corporation Southern Paper Mills (SPM) Morogoro Polyester National Milling Corporation (NMC) - all mills to be sold Tanzania Tea Authority (TTA) - all commercial activities to be sold Tanzania Sisal Authority (TSA) - all commercial activities to be sold 41. The Government is committed to resolving the debt issue and divesting its holdings in these large public enterprises as a condition of the parastatal tranche release (para. 75a). Divestiture will involve going beyond Memorandum of Understanding (MOU) to a point of sale. 42. In addition, the Government will press ahead with its plans to divest the remaining smaller parastatals. Again, the emphasis will be on full divestiture rather than the use of management contracts or leases. 43. Public utilities. Over the 1996-98 period, the Government intends to implement major restructuring programs for each of the major utilities. The objective is to stimulate efficiency of the public enterprise sector by increased private sector involvement and requiring parastatals to operate on the same terms as private sector enterprises. These programs are tailored to the specific situations of each of the enterprises and include such actions as the divestiture of functions and increased contracting out of activities to the private sector. In addition, the Government will require parastatals to remain current on their existing obligations and to repay any outstanding arrears owed to the Government or other public enterprises over the next three years.  12 Tanzania SAC 44. Tanzania Telecommunications Company Ltd. (TTCL). TTCL is presently the only provider of basic telephone services in Tanzania. In spite of its monopoly position, TTCL's finances are weak and it has been unable to make the investments necessary to improve the quality and range of services delivered. This calls for an increase both in TTCL's efficiency and the level of competition in telecommunication services. IDA has been working with the Government on a sector program to liberalize the telecommunications sector as well as to raise the accountability of TTCL's management, restructure the enterprise so as to promote efficiency, and open the company to new shareholders. The Government has made some progress in this regard by entering into a joint venture arrangement for cellular services, and allowing other competitors in this area. It has also permitted private provision of Internet services and data transmission. 45. The Government initially moved cautiously on the issue of divestiture, while it reviewed privatization experience and strengthened the regulatory regime for telecommunications. However, it has now announced its decision to privatize TTCL and planning for the transaction is now underway. Prior to effectiveness, the Government will prepare a comprehensive competition policy for the telecommunications sector (para. 73c). Furthermore, prior to the parastatal tranche release the Government will: (a) complete any consultations necessary to privatize, including those with Japanese and Swedish donor agencies that have provided assistance to the telecommunications sector; (b) select key advisors to carry out the divestiture operation; and (c) prepare and distribute the Information Memorandum and offer for sale and call for a first round of bids (para. 75b). 46. Tanzania Harbours Authority (THA). THA is responsible for operating the port of Dar es Salaam, which handles the bulk of Tanzania's trade as well as the trade of several landlocked countries. Historically the efficiency of the port has been quite low, but over the past five years, the performance of the port has improved considerably, particularly with regard to containerized traffic, although bottlenecks in freight handling continued to hamper port operations. The Government intends to commercialize TEIA and contract out services as much as possible, thereby attracting private capital and management expertise to increase port competitiveness and level of services. THA has recently finalized a commercialization study and the Government has agreed to the "Landlord" port concept, which basically means commercialization or concessioning for all business activities. The THA has emphasized the need to proceed with privatization in stages to allow for the upgrading of the various business units in preparation for sale in order to maximize revenues from private leasing and operation of the facilities. Given the current high performance of the container terminal, the TIA has decided to begin with this, seeking operators who will invest private capital in the development of the terminal. Under the terms of the SAC, the Government will: (a) prior to effectiveness, enter into a contract with consultants to prepare detailed proposals on the different concession arrangements, including their duration (para 73d); and (b) prior to tranche release, award concession for the container terminal (para. 75c). 47. National Shipping Agencies Company Ltd. (NASACO). NASACO, which was created in early 1973, effectively holds the monopoly on shipping agent services to all ships calling at Tanzanian ports. NASACO's monopoly position has led to poor service, high prices, unwarranted diversification and financial mismanagement. For these reasons, the shipping lines have found it necessary to employ their own staff (within the NASACO organization and at additional cost to the lines) to look after their interests in order to achieve acceptable levels of operational efficiency. Under the terms of the SAC, the Government will, prior to the parastatal tranche release, revoke the current monopoly and entry licensing restrictions for shipping agency services and allow these services to be open to international competition (para. 75d).  Tanzania SAC 13 48. Tanzania Central Freight Bureau (TCFB). TCFB was established and came into full operation in 1983. The Bureau allocates cargo on any ocean going vessel in respect to goods shipped from or to any port in Tanzania and regulates the activities of freight forwarders. TCFB's monopoly has led to complaints from the entire sea trade market, including the shippers and the shipping lines, that see the TCFB as an unnecessary burden and a high cost bureaucracy rather than an organization facilitating free trade and transport. In addition, the fee charged (between 2.5-5 percent of freight plus US$10-15 for each bill of lading) is essentially an export tax, which reduces the incentive to export. The behavior and monopoly position of TCFB is at odds with the spirit of liberalization that has taken root in Tanzania over the last few years. Prior to tranche release, the Government will amend the relevant Acts so that neither TCFB nor any other agency has the exclusive authority to negotiate freight rates or allocate cargo across shipping lines (para. 75e). 49. Tanzania Railways Corporation (TRC). TRC has been undergoing restructuring and commercialization since 1989, but its financial condition remains precarious because of the mix of services it provides and the structure of operations. Prior to Board, the Government will sign a performance contract with TRC which will include compensation to TRC for unprofitable branch lines, passenger services and the marine services and an explicit agreement to allow TRC to close any or all other such unprofitable services (para. 71b). Furthermore, prior to tranche release, TRC will also complete a divestiture plan for its loss-making Marine Services Division (including all maintenance and repair shops), which is a separate autonomous entity with its own financial statement, reach an agreement with the Parastatal Sector Reform Commission (PRSC) and call for bids (para. 75f). Banking Sector Reforms 50. Starting in 1991, the Government of Tanzania introduced a number of banking reforms including the liberalization of interest rates, passage of the Banking and Financial Institutions Act, which permitted the entry of private banks, the introduction of a treasury bill auction as part of Bank of Tanzania's (BOT) efforts to rein in the growth of the money supply through the use of indirect methods of monetarv control, and the creation of a mechanism for expeditiously recovering overdue debts. The program also included recapitalization, through the provision of cash and bonds, of the government-owned NBC and two smaller government-owned commercial banks. 51. The program's major accomplishment was to deregulate and liberalize the banking system. More than 10 private banks have been licensed since 1993 and have increased their market share to 30 percent of deposits. However, the initial attempts to restructure the government banks were not successful. This had two major implications: the first was that the banking industry remains largely unable to address the borrowing needs of most Tanzanian businesses; and second, BOT's attempts to use indirect methods of monetary control to reduce excess liquidity were undernined because NBC continued to operate on minimal spreads, to incur large operational losses (through 1995) and to dictate both interest rate and exchange rate movements. 52. Although the implementation of the restructuring programs of the People's Bank of Zanzibar and NBC is incomplete, the SAC would focus on the resolution of problems pertaining to NBC since it is the main impediment to the development of the sector. 53. NBC restructuring. The Government's recapitalization of the bank was not completed. Much of the recapitalization (T Sh 119 billion) was in the form of bonds and some of the interest  14 Tanzania SAC on those bonds was not paid. NBC made significant progress with recovery of loans which were provisioned and covered by the recapitalization bonds, thus compensating for unpaid interest. Although the NBC Act was amended to allow for sale of 40 percent of government shares, there was no time-bound strategy to privatize the bank, and experience elsewhere suggests that without such a strategy, it would be difficult for a bank like NBC to meet capital adequacy requirements. 54. NBC's restructuring failed for three reasons: (i) slow progress in the reform of the parastatal sector, which contributed to a deterioration of NBC's portfolio; (ii) NBC's management continued to make new, or to roll-over existing, loans to non-performing borrowers, thus incurring even greater losses; and (iii) organizational improvements slowed during 1993. Thus, despite the recapitalization of 1992/93, NBC remained undercapitalized, with approximately 77 percent of its portfolio non-performing. 55. In 1994 the Government reconstituted NBC's Board of Directors and revised its strategy for NBC's restructuring. Given the bank's economic dominance, liquidation was ruled out. The revised strategy entailed constraining NBC's operations until it was able to meet prudential requirements, and placing qualified commercial bankers in key, senior managerial positions (including Chief Operating Officer) to ensure that there was a change in NBC's banking culture. NBC was directed to cease lending to non-performing borrowers, a ceiling was imposed on outstanding loans (irrespective of any subsequent write-offs), 800 staff were retrenched, and a consulting firm was recruited to undertake a detailed diagnostic evaluation (including a portfolio review). 56. The diagnostic evaluation revealed that the extent of NBC's financial difficulties was worse than envisaged. NBC continued to operate only by mobilizing large sums of deposits, which were then used to pay expenses. This realization led the new government to focus on the cost containment and managerial improvement elements of its strategy and to begin preparing plans to privatize NBC. Consequently, the Ministry of Finance, as the shareholder, entered into a MOU with NBC, which required the bank to attain break-even status on a six-month cumulative basis by the end of June, 1996 and to improve credit performance. The MOU called for a reduction of NBC's core operating expenses by 40 percent and substantial efforts to improve loan collections. Lending to non-performing borrowers was terminated. The remedies in the event of non- compliance were: (1) NBC would be required to cease and desist all lending operations; (2) BOT would intervene directly in the management of the bank to safeguard depositors' funds; and (3) all or a portion of NBC's operations would be put up for sale. 57. NBC's compliance with the MOU was reviewed in August, 1996. The review noted substantial improvements in NBC's operating procedures, and the bank's concerted efforts to reduce costs and improve loan recoveries. But the review also raised substantial concerns about NBC's ability to resume lending to new borrowers and underlined the urgency of pressing ahead with reorganization and divestiture. 58 The present strategy. The strategy for the reorganization and privatization of NBC has recently been approved by the Government. The strategy entails creating three subsidiaries of NBC tentatively titled: Trade Bank with a network of approximately 10 branches, whose customers would consist largely of exporters, importers and large corporations; Regional Bank with one branch in each region to focus on medium to large companies; and Micro-Finance Bank specializing in small and microenterprise financing and deposit mobilization, principally in the rural areas. All three institutions would be required to meet capital adequacy requirements (8  Tanzania SAC 15 percent of risk adjusted assets) and also would be expected to have sufficient capital to absorb projected losses before being fully licensed. Capital would be sought from non-governmental investors for all institutions. Investors in Micro-Finance Bank could include donors, who would contribute to the costs of training, software/hardware, management and other start-up costs that would be characterized as equity. 59. The reorganization of NBC will occur in two phases. In the first phase the banks will be constituted as subsidiaries of a newly created holding company. They will operate under a new MOU. The proposed management teams of the institutions will be given intensive training, and processes will be improved. The Government will also create a fourth subsidiary to hold those assets, operations and people that should not be allocated to the three banks (e.g., the NBC Training College). In the second phase, the subsidiaries will be declared autonomous institutions following their recapitalization by private investors (and/or in the case of Micro-Finance bank, donors) and the issuance of stock to the public. 60. The strategy entails soliciting the interest of investors in the operations and assets of NBC. Selected investors will be asked to express interest in one or more of the subsidiaries and to propose the terms and conditions. Investors would be told that consideration would be given to reasonable alternatives to the proposed reconfiguration. In the event that investors do not express interest, the subsidiaries will continue their restructuring under the MOU, building a track record of profitability over two to three years before safely issuing shares to the public. 61. The Government has appointed a project team to manage the implementation of the strategy and has also provided donors with details of the strategy. TORs and Letters of Invitation to engage consultants, who will prepare for the solicitation of the investors, were agreed between the Government and IDA and have been issued. 62. The next steps in this process, to be supported by a SAC tranche release, would include: (a) Dissolving NBC and transferring its assets to the three new banks created out of NBC or their holding company, prior to effectiveness (para. 73e). (b) Publishing NBC's audited FY95-96 Financial Statements, prior to Board (para. 71c). (c) Distributing an Investment Memorandum and calling for bids, prior to tranche release (para. 76). Petroleum Sector Liberalization 63. Background. Tanzania annually imports about 530,000 metric tons (MT) of crude petroleum and 435,000 metric tons of white petroleum products. Imported crude oil is refined at the Tanzanian Italian Petroleum Refinery Company (TIPER), jointly owned by the Tanzania Petroleum Development Corporation (TPDC), a government parastatal, and AGIP (50/50 percent). TIPER's production meets about 50 percent of the market requirements of petroleum products. 64. Marketing and pricing arrangements. The Government currently fixes the retail prices of petroleum products. There is no price competition and, because of infrequent adjustment of the  16 Tanzania SAC pricing formula, the prices do not fully reflect changes in international prices or exchange rate movements. Until January 1997, TPDC had a monopoly on imports of crude oil and finished products. The private oil marketing companies were not permitted to import directly to meet their market requirements. These arrangements have allowed the operation of TIPER to continue, which, because of its small size, old age, simple technical structure and operational inefficiencies, is not competitive with imports. The cross-subsidization of the refinery amounts to about US$15- 25 million annually (more in some years, depending on the number of days the refinery was not operating and on international petroleum prices and margins). 65. Since January 1997, the Government has partially liberalized imports making it possible for any of the marketing companies, including TPDC, to submit tenders. However, the Government has retained partial price control and TIPER continues to operate. A regulatory body to monitor the new arrangements was established on April 1, 1997 66. Immediate and full liberalization of petroleum imports is constrained by infrastructural bottlenecks, which are now being addressed. There is adequate capacity for LPG imports with the recent installation of a new pipeline, and some of the constraints on the discharge of refined products at the main Kurasini Jetty, imposed by the need to simultaneously handle imports of edible oil, will be removed by October 1997 once a new coastal jetty has been completed. By June 1998, after the Kurasini Jetty has been fully repaired and outfitted, it will be able to handle 2.2 million tons of petroleum products annually, well in excess of the combined requirements of Tanzania and Zambia. 67. As part of the SAC petroleum sector tranche release condition, prices and imports of all petroleum products will be liberalized. In addition, the Government will remove tax differentials between different products (para. 77). 68. The reform process, to be supported by the SAC, will include a program calling for the divestiture of the TIPER refinery. A review of options for the future will be initiated as part of the refinery study to commence in May 1997. Privatization will be undertaken provided that a commercially viable, nonsubsidized role is identified, either as an operating refinery, a storage depot, or some other option. IV. DISBURSEMENT 69. Disbursement arrangements will follow the simplificd procedures approved by the Board on February 1, 1996. The Borrower shall open, prior to furnishing to the Association the first request for withdrawal from the Credit Account, and thereafter maintain in the BOT a deposit account in US dollars on terms and conditions satisfactory to the Association. All withdrawals from the Credit Account shall be deposited by the Association into the Deposit Account. If after deposit in this account, the proceeds of the credit are used for ineligible purposes (i.e., to finance items imported from non-member countries, or goods in the standard negative list), IDA will require the Borrower to either: (a) return that amount to the account for use for eligible purposes; or (b) refund the amount directly to IDA, in which case IDA will cancel an equivalent undisbursed amount of the loan. Although a routine audit of the account will not be automatically required, IDA reserves the right to require it.  Tanzania SAC 17 V. COFINANCING 70. Two cofinanciers have participated in the SAC operation. The Swiss Government provided a consultant to work on financial sector reform. The Kingdom of Norway will supplement the SAC with Fifth Dimension resources. VI. SAC BOARD AND TRANCHE CONDITIONS 71. Board conditions. (a) The Government has achieved an overall fiscal balance of 0.9 percent of GDP (after grants) for FY97 on an annualized basis. This is derived from the latest Treasury Flash Report (see para. 21). (b) The Government will submit evidence to IDA indicating that a Performance Contract has been signed with TRC, which includes compensation payments for those unprofitable marine services, passengservices and branch lines that the Government wishes TRC to operate and an cxplicit agreement to allow TRC to close any or all other such unprofitable services (see para. 49). (c) The Government will provide IDA with the published versions of NBC's audited FY95 and FY96 financial statements (see para. 62b). Tranche Conditions 72. Prior to effectiveness of the proposed SAC operation, evidence should have been received by IDA that the monitorable conditions for release of the first tranche have been met. Thereafter, release of the four floating tranches will be predicated on IDA receiving evidence of fulfillment of the specified monitorable conditions. 73. Effectiveness. (a) In its proposed budget for FY98, the Cabinet has, in accordance with the development program set forth in para. 16 of the Letter of Development Policy, made the budgetary allocations for its health, education, water, power and transport sectors, set out in such paragraph (see para. 30b). (b) In its proposed budget for FY98, the Cabinet has, in accordance with the social sector reform program set forth in para. 21 of the Letter of Development Policy, made the budgetary allocations for recurrent expenditures for primary education, set out in such paragraph (see para. 37a ). (c) The Government has prepared a telecommunications sector competition policy in accordance with the parastatal reform program set forth in para. 23 of the Letter of Development Policy (see para. 45). (d) In connection with the concession of the container terminal at Dar es Salaam Port belonging to the Tanzania Harbours Authority (THA), the Government has  18 Tanzania SAC furnished evidence to IDA that contracts have been awarded to consultants to prepare detailed proposals for different concession arrangements (see para. 46). (e) In accordance with its banking sector reform program (paras. 24-25 of the Letter of Development Policy), the Government has dissolved NBC and has transferred NBC's assets and liabilities to the three new banks to be created out of NBC or to their holding company (see para. 62a). 74. Social sector tranche. (a) In accordance with the public expenditure management program (paras. 17-19 of the Letter of Development Policy), the Government has reduced the number of projects in the public sector development portfolio to 800 or less using guidelines and criteria set out in para. 18 of the Letter of Development Policy (see para. 3 0a). (b) In accordance with the education and training policy referred to in paras. 20-21 of the Letter of Development Policy, the Government has: (i) adopted an action plan (with specific budgetary proposals), agreed upon by the Government and IDA, for the recruitment, training, upgrading, deployment and redeployment of primary school teachers (see para. 37b); (ii) issued a ministerial circular (A) providing for District Education Officers and teachers to be recruited and hired (subject, in the case of District Education Officers, to approval by the ministry responsible for education) by the District Councils in at least 20 pilot districts; and (B) transferring all subsidies for primary education in such pilot districts to the District Councils as block grants to cover salaries and other expenses based on a formula agreed upon between the Government and IDA (see para. 37c); (iii) prepared an action plan, agreed upon by the Government and IDA, for transferring the management of primary schools to local school committees (see para. 37c). (iv) The Government has prepared an action plan, agreed upon by IDA and the Government, for the reform of higher education and technical training (see para. 38). (c) In accordance with the health sector reform program in the Letter of Development Policy (para. 22), the Government has: (i) implemented a program to finance the full cost of pharmaceuticals delivered to hospitals within the framework of a hospital-based revolving fund, which involves cost sharing and subsidies, with patients covering at least 50 percent of the costs (see para. 39a); (ii) issued a ministerial circular: (A) providing for District Medical Officers and district-level health staff to be recruited and hired (subject, in the case of District Medical Officers, to approval by the Ministry of Health) by the  Tanzania SAC 19 District Councils in at least 20 districts; and (B) transferring the budget for health centers and dispensaries in such districts to the District Councils as block grants to cover salaries and other expenses (see para. 39b); (iii) prepared an action plan to reduce the life years lost to malaria (see para. 3 9c). 75. Parastatal sector tranche. (a) The Borrower has taken all steps within its control to bring all seven large enterprises to the point of sale (see para. 41). The seven public enterprises are: (i) Mbeya Cement (ii) Sugar Development Corporation (iii) Southern Paper Mills (SPM) (iv) Morogoro Polyester (v) National Milling Corporation (NMC) - all mills to be sold (vi) Tanzania Tea Authority (TTA) - all commercial activities to be sold (vii) Tanzania Sisal Authority (TSA) - all commercial activities to be sold. (b) The Government has taken all steps within its control to bring TTCL to the point of sale (see para. 45). (c) The Government has awarded the concession for the container terminal at Dar es Salaam Port (see para. 46). (d) The Government has abolished NASACO's monopoly for shipping agency services and permitted free international competition under minimum standards agreed with IDA (see para. 47). (e) The Government has amended the relevant Acts so that neither TCFB nor any other agency will have the exclusive authority to negotiate freight rates or allocate cargo across shipping lines (see para. 48). (f) The Government has completed a divestiture plan for TRC's Marine Services Division (including all maintenance and repair shops) and has called for bids (see para. 49). 76. Banking sector tranche. The Government has distributed the Investment Memoranda for the three subsidiaries of the NBC holding company, has issued a call for bids, has evaluated them and invited successful bidders for negotiations (see para. 62c). 77. Petroleum sector tranche. (a) The Government has issued ministerial orders so as to permit the full liberalization of petroleum prices and product imports (see para. 67).  20 Tanzania SAC (b) The Government has removed the tax differentials between various petroleum products (see para. 67). VI. BENEFITS AND RISKS 78. Raising the growth rate in Tanzania to a least 6 percent per annum and substantially reducing the incidence of poverty will require steady gains in allocative efficiency. The investible resources are at hand but they are being used inefficiently. The policy measures supported by the SAC should help bring about a sustainable acceleration in growth in the medium term, that will steadily whittle away the overhang of povertv. 79. By securing macrostability, strengthening the financial sector and improving the supply of essential services, the reforms proposed will inject dynamism into the private sector and promote outward oriented, productive activities. The recently regained reform momentum and the Government's apparent determination to implement reforms suggests that the actions proposed as a part of the SAC program will be implemented on schedule and will yield the desired economic results. However, a number of macro and micro level risks remain. Tanzania's past track record with reforms is uneven and its implementation capacity, while improving, remains weak. A slackening of reforms because of political opposition, the inability of policymakers to keep the Government on a difficult course, administrative shortcomings and the lack of technical skills at the local level, is certainly a risk, though at this stage the likelihood is small. The fiscal situation is under control but will remain fragile for a number of years. Revenue effort and strict expenditure management must remain priorities for the foreseeable future in order to hold inflation at bay and lessen the overwhelming reliance on foreign capital. The attempt at improving delivery, as well as the financing of social services through decentralization, will be a significant shift from the Government's past approach. Unless local government capacity is augmented sufficiently, accountability is enforced and all stakeholders put in the required effort, the sought after gains in school enrollment and public health will not materialize. 80. Lastly, divestiture on the scale being attempted in Tanzania is a difficult, highly complex undertaking with no guarantee of success. It constantly risks being subverted by political opposition, and there is always the possibility that suitable buyers for parastatals and publicly owned banks will not be forthcoming because of technical flaws in preparation or execution of divestiture or the relative unattractiveness of the economic environment. 81. We have assessed these risks carefully taking into account both Tanzania's past record, its current capabilities and the changing attitudes towards reform in the Region. As always, there is the possibility that some reform measures might falter or be implemented at a slower pace. But on balance, we are convinced that this program has the domestic backing and the ingredients that will ensure success.  Tanzania SAC 21 VII. RECOMMENDATION 82. Recommendation. I am satisfied that the proposed Credit would satisfy the Articles of Agreement of the Association and recommend that the Executive Directors approve it. James D. Wolfensohn President By: Gautam Kaji Managing Director Attachments Washington, D.C. May 7, 1997   TANZANIA: STRUCTURAL ADJUSTMENT CREDIT POLICY MATRIX Objectives and Policies Actions Taken Strategies and Measures Timing/Benchmark PUBLIC EXPENDITURE MANAGEMENT Reduce the fiscal deficit to a TRA launched and operational. Achieve overall budget balanec after grants (checks Prior to Board sustainable level. issued) of 0.9 percent of GDP for FY97 on an Complied with ESAF program annualized basis using data from Treasury Flash targets up to March mid-term Reports. review. Rationalize development O&E reviews of ministries to Include in the Cabinet-approved budget proposals for Prior to effectiveness spending and ensure adequate rationalize structure, increase FY98 development spending targets of at least T Sh financing of priority projects. efficiency and reduce expenditures 20 billion for priority sectors (excluding the Road are underway. Fund), consistent with the ESAF program, and ensure that sectoral allocations reflect development priorities in health. education, water, transport and power sectors Introduced cash management Review the investment program with donors to prune Prior to tranche release system. and consolidate projects down to 800 or less (these (social sector program) would include non-donor projects) SOCIAL SECTOR REFORMS Increase share of primary Prepared Basic Education Include in the Cabinet-approved budget proposals for Pnor to effectiveness school spending. Framework and finalized Basic FY98 an increase in the share of central recurrent Education Master Plan. education expenditure for primary education to 64 percent of total. an__  Objectives and Policies Actions Taken Strategies and Measures Timing/Benchmark Rationalize deployment of Adopt action plan for training, upgrading, Prior to tranche release teachers and improve the recruitment, deployment and redeployment of (social sector program) quality of instruction. teachers. Decentralize the primary Pilot programs undervay. Shift responsibility for recruitment of the DEO and Prior to tranche release school system in the interests teaching staff to District Councils and transfer all (social sector program) of efficiency. subsidies for primary education as block grants to 20 selected districts. Prepare an action plan for transferring responsibility Prior to tranche release for school management to legally constituted school (social sector program) committees. Reform technical and higher Completed review of technical and Prepare an action plan for the reform of technical Prior to tranche release education. higher education. and higher education. (social sector program) Improve health sector planning Finance the full cost of pharmaceuticals delivered to Prior to tranche release and financing. district level hospitals and above through a (social sector program) combination of government and donor subsidies and user fees, with patients paving at least 50 percent. Decentralizc management of Shift responsibility for recruitment of DMO and of Prior to tranche release district-level health services. district-level health staff to District Councils. (social sector program) Transfer the budget for health centers and dispensaries as block grants to 20 selected districts. Prepare action plan to reduce mortality from malaria. Prior to tranche release (social sector program) P;  Objectives and Policies Actions Taken Strategies and Measures Timing/Benchmark PARASTATAL SECTOR REFORMS Complete divestiture of large All enterprises under preparation Divcst all seven large enterprises or put into Prior to tranche release public enterprises. by PSRC. liquidation. (parastatals) THA (Conicession of container THA has adopted "landlord" port Award contract to consultants to preparc detailed Prior to effcctiveness terminal), conccpt proposals for concession arrangcments. Award concession for THA container terminal. Prior to tranche relcase (parastatals) NASA('O Abolish monopoly for shipping agencv services and Prior to tranchc release permit free international competition under minimum (parastatals) standards to be agreed with IDA TC FB Amcnd relevant Acts revoking TCFB's authoritv to Prior to tranche rclcase negotiate freight rates and allocate cargo across (parastatals) shipping lincs TRC Draft perfomiance contract Sign performiianicc contract w-ith TRC'. whlch will Prior to Board prepared. includc payments for non-economic services. Preparation of TOR for consultants Prcparc comprehensive divestiturc plan for Marinc Prior to cffectiveness in progress Services Division (including port facilities maintenance and repair facilities) TTCL Govermnent has allowed Prepare policy statement on compctition in the Prior to cffectiveness lntcrnet/cellular and datalink telecommunications sector. serviccs. Bring TTCL to point of sale. Prior to tranche release (parastatals) aQ  Objectives and Policies Actions Taken Strategies and Measures |Timing/Benchmark FINANCIAL SECTOR REFORMS Restructunrng and divestiture Government publicly announced its Publish NBC's audited FY95-96 financial Prior to Board of NBC. strategy for reorganizing and statements. privatizing NBC. Policy statement issued by Minister of Finance to Dissolve NBC and transfer assets and liabilities to its Prior to effectiveness NBC's Board defining their role subsidiaries or holding company. during the transition period. Distribute Investment Memorandum and call for bids Prior to tranche release Project team appointed to manage and invite successful bidder(s) for negotiations. (NBC) implementation of strategy. Consultants appointed to prepare for solicitation of investors. PETROLEUM SECTOR REFORMS Import and price liberalization, Announced end of TPDC Complete liberalization of petroleum prices and Prior to tranche release monopoly which permits private product imports. (petroleum) companies as well as TPDC to import petroleum products. Remove differential taxes on refined petroleum Prior to tranche release products. (petroleum) Set up regulatory body for petroleum sector. Abolished rationing of petroleum products among companies according to market share. 4wt, >  Annex B Page 1 of 9 The Treasury P.O. Box 91 11, Dar es Salaam. THE UNITED REPUBLIC OF TANZANIA THE MINSETER FOR FINANCE May 2, 1997 Mr. James D. Wolfensohn President The World Bank Washington, D.C. Dear Mr. Wolfensohn: LETTER OF DEVELOPMENT POLICY 1. I am writing to request, on behalf of the Government of the United Republic of Tanzania, a Credit of US$125 million equivalent from the International Development Association (IDA) in support of our structural adjustment program. The proposed Credit will reinfcrce our efforts to augment public resources and improve the effectiveness and management of public expenditure by raising allocative efficiency, and stimulate poverty- reducing growth while maintaining overall fiscal sustainability. It would promote private sector-led growth, broad-based agricultural development and support the achievement of our main goal of poverty reduction. The program is consistent with the Policy Framework Paper (PFP) recently formulated jointly by the Government, with the collaboration of the staffs of the World Bank and the IMF. Proceeds from the Credit would go towards filling Tanzania's external financing gaps and would support our budgetary needs through FY99. BACKGROUND AND RECENT DEVELOPMENTS 2. Since 1986, the Government of Tanzania has been engaged in a broad ranging reform effort to reduce economic controls and encourage more active participation of the private sector in the economy. Over the past decade, we have freed exchange controls, liberalized the trade regime, removed most price controls, eased restrictions on the marketing of agricultural products, and eliminated controls on interest rates. The Government has also launched programs to rehabilitate and improve maintenance of key infrastructure (roads, railways and ports) and to strengthen agricultural research and extension services. These efforts were supported by resources from our donors, including IDA and the IMF. The results in terms of growth have been heartening. Surveys we have undertaken indicate that liberalization was associated with impressive growth in per capita  Annex B Page 2 of 9 income from 1984 through 1990, and the incidence of rural poverty declined from about 65 percent in 1983 to 51 percent in 1991. 3. However, between 1992 and 1995, Tanzania faced serious fiscal problems arising from the gap between stagnant revenues and high public expenditures. The quasi-fiscal deficit generated by the loss-making parastatal sector and a weak banking sector further aggravated the situation. The large budgetary deficit was the principal cause of double- digit inflation and the rapid growth of domestic debt. 4. The significant macroeconomic imbalances, which had persisted since 1992/93 (July/June), are now being addressed. These imbalances had been generated, inter alia, by major weaknesses in fiscal performance that arose in the course of implementing the recommendations of the Presidential Tax Commission in 1992/93. The Commission recommended, among other things, reductions in a number of tax rates aimed at increasing tax collections through improved compliance. However, tax rates were reduced without corresponding strengthening of tax administration. Revenue collections were also undermined by widespread customs exemptions and continued tax evasion. Furthermore, weak administration of expenditure control exacerbated the fiscal problem, particularly the inadequate management of the Government's wage bill, which included a large number of wage scales and the unsystematic introduction of a wide range of allowances. 5. The Government has taken vigorous steps to address these problems starting with the verification and collection of tax arrears and marked reduction of fiscal exemptions. The fiscal position strengthened during the second half of FY96 and during FY97 as a result of improved revenue collection (aided by the operationalization of the Tanzania Revenue Authority) and enhanced expenditure control. This has served to dampen inflation. Based on the performance under an IMF staff-monitored program during January-June 1996, Tanzania entered into a three-year ESAF program with the IMF in November 1996. A mid-term review of the first annual arrangement under the ESAF- supported program ascertained that most ESAF targets and benchmarks were met with comfortable margins. The Government also obtained debt relief on Naples Terms from the Paris Club creditors in January 1997. 6. The Government has also been making significant progress in other areas of structural reforms. These have included: 7. Banking reform. Faced with a near crisis situation in the financial sector, the Government in the early 1990s committed itself to creating a financial system that would operate on market-oriented principles, efficient in mobilizing and allocating resources, and effective in fostering long-term economic growth. The banking system was deregulated and liberalized and a significant number of new foreign and domestic private banks have entered the sector. However, the National Bank of Commerce (NBC), which remains in a poor financial condition, is still dominant, although the situation is much changed from its near-monopoly position only a few years back. We have been pursuing a vigorous restructuring plan to stem losses at NBC with branch closures, consolidation of regional offices into zonal offices, and the retrenchment of staff Fees and commissions have been  Annex B Page 3 of 9 raised to competitive levels and substantial efforts have been made to improve the collection of overdue loans. We believe that we are now ready to go ahead with the divestiture of NBC. 8. Civil service reforms. To address the problems of an overstaffed, underpaid, poorly motivated civil service, and to contain and eventually reduce the budgetary outlays on administrative expenses, the Government has formulated and is implementing an integrated action plan for civil service reform covering personnel control, salary audits, O&E (Organizational and Efficiency) reviews, pay reform, retrenchment and redeployment. In addition, the Regional Administration has been reorganized and local government is being strengthened. A total of over 60,000 civil servants have been retrenched since 1993 (in addition to removing about 20,000 ghost workers from the payroll), reducing the total number of government employees at end-1996 to about 285,000. The O&E reviews are nearly complete for all ministries Beginning in FY97, a pay reform program has been introduced to streamline the grading structure, consolidate most non-incidental allowances into basic pay, and improve control over wage bill expenditure. The implementation of the program is on track. 9. Parastatal reforms. To date, the divestiture program has handled some 150 transactions out of 383 commercial parastatals, or about 40 percent. At the beginning of the current fiscal year (FY97), 96 transactions had reached the Memorandum of Understanding (MOU) stage (i.e., investors had negotiated with the Parastatal Sector Reform Commission (PSRC) or the line ministry, and signed a preliminary agreement to purchase, lease, or manage assets). The action plan for enforcing a hard budget constraint provides for the removal of preferences and the elimination of subsidies for commercial parastatals and a ban on lending to uncreditworthy parastatals by the NBC is in place. The next stage is to focus attention on the public utilities 10. Social sectors. Tanzania faces severe problems in the health and education sectors. Social sector indicators are low and stagnant, and even declining in some cases (as with primary school enrollments). The quality of service is also poor. In March 1995, the Government adopted a new Education and Training Policy and a Health Sector Reform Program. Both documents envisage greater liberalization of the social sectors, increased government subsidies for basic education and health services, decentralization of government operations, and greater use of alternatives to government funds for nonbasic services. These programs are consistent with the Government's Social Sector Strategy of 1994, The Government has reduced restrictions on nongovernment suppliers of education and health services and has developed pilot projects to test new approaches to financing basic health and education services. These measures are expected to increase accountability of such services to clients by putting control over public subsidies closer to households. The Government has also completed a review of post primary education with the objective of rationalizing and improving its financing  Annex B Page 4 of 9 MEDIUM TERM POLICY FRAMEWORK 11. While continuing the quest for macroeconomic stability, the Government will now sharpen its focus on policies that aim to reduce poverty by accelerating growth by raising the efficiency of resource use. Consistent with this objective, we will limit the direct involvement of the public sector in productive activities, and enhance domestic and external competitiveness. Financial sector reform will facilitate the mobilization of domestic savings and the more efficient allocation of available resources. Special emphasis will be placed on strengthening macroeconomic management, particularly with respect to the implementation of fiscal policy and the mobilizing of public resources. The development of human resources and improvements in the social and physical infrastructure will continue to form critical components of the development strategy. 12. Against this background, the overall macroeconomic objectives for FY98-FY99 are: (i) a real GDP growth rate of 5 percent in FY98, rising to 6 percent or more by FY99; (ii) a reduction in the average rate of inflation to 7.5 percent in FY98, and 5 percent in FY99; (iii) central government savings of 1.6 percent of GDP in FY98, and 2.5 percent of GDP in FY99; and (iv) a fall in the external current account deficit (excluding grants) to 9.2 percent of GDP in FY98 and 8.6 percent of GDP in FY99, while maintaining gross official reserves to the equivalent of three months of imports. 13. To achieve these objectives, we will maintain the present liberal investment policy, which is aimed at invigorating private investment. Both domestic and foreign investors will be free to acquire enterprises divested under the Government's privatization program. Public expenditure will be oriented increasingly toward strengthening the required physical and social infrastructure, particularly in the high priority areas of basic health care, primary education, water and sewage, power, the transport system, and support for agriculture through extension and development of rural infrastructure. These improvements in the infrastructure will, in turn, provide a more conducive environment for expanded private investment. The civil service reform-which is aimed at rationalizing the structure and improving the efficiency of the civil service-will be completed during the period, building on the critical pay reform component which has been initiated. 14. Because poverty in Tanzania is primarily a rural problem, it can be addressed through liberalizing markets, greater integration of the rural economy into the monetized economy through construction of feeder roads, better information for producers, and improved marketing services. As women are the primary cultivators in rural Tanzania, they and their children can benefit from well targeted rural programs and market-oriented reforms that increase the returns to agricultural activities. Poverty is also associated with inadequate and ineffective investments in basic education, health, and family planning. Women and children benefit more from these programs when they are well financed and effective.  Annex B Page 5 of 9 THE ECONOMIC REFORM PROGRAM 15. The economic reform program to be supported by the Structural Adjustment Credit will focus on five areas which conform to the Government's priorities. These are: (a) public expenditure management; (b) reform of the social sectors; (c) parastatal sector reforms; (d) banking sector reforms; and (e) reform of petroleum pricing and marketing. A. Public Expenditure Management 16. Expenditure control was elusive in Tanzania in the past, but important progress has already been made in dealing with some of the factors hindering its effectiveness. Building on the steps aimed at strengthening revenue collections and expenditure control, the Government has introduced arrangements for tightening expenditure control at the commitment stage. Various ministries are now organized to closely monitor budgetary commitments to ensure that they match the available resources. Progress made in this area will be consolidated and extended in the period ahead. The budgetary process, which was adopted in the preparation of the FY97 budget and which is by and large in conformity with the requirements of Financial Orders of Tanzania, will be developed as the cornerstone of the Government's improved expenditure control procedures. As expenditure control improves, adherence to these procedures, as well as other expenditure control initiatives, will allow the eventual phasing out of the cash management arrangements. The Government will continue to ensure that its priority activities are fully funded and that areas of lower priority are either eliminated or postponed. The Government intends to allocate T Sh 20 billion in the FY98 budget (exclusive of the Road Fund) to development spending in the priority sectors of health, education, water, transport and power. 17. To improve the efficiency of public investment, the Government has identified a core investment program as part of the Rolling Plan and Forward Budget (RPFB), with the goal of focusing the Government's expenditures in the development budget on high priority projects. To ensure that counterpart funding is available for the high priority projects, immediate attention will be given to reviewing the development budget and reducing the number of projects from about 1400 to less than 800 during FY98. Donors will participate in this exercise. Also, a donor review of externally funded projects will be undertaken to ensure the completeness of budget information and, together with the donors, a mechanism will be established to monitor actual project expenditures and disbursements. The Government will also ensure that budgeted amounts for priority development expenditures are released fully in a timely manner to maximize the impact on growth and poverty reduction. 18. The criteria that will be used in screening the projects are part of our FY98- FY2000 RPFB guidelines. These are as follows: Projects without standard project documentation will not be funded.  Annex B Page 6 of 9 * Projects which have been under implementation for over 10 years will not be funded. They will be reappraised. * Projects which are recurrent in nature will be canceled or transferred to the recurrent budget. * Commercial projects will not be funded. * Similar activities which are currently listed as projects will be consolidated into single projects. * Projects with foreign funding will be included in the government budget only if there is firm commitment for disbursements, before end of March of each year. Other-wise, they will be considered in the subsequent plan year. * Similar projects which are currently inmplemented by more than one agency will be consolidated (e.g., rural water supply projects). * Projects with cross-conditionality will not be included in the government budget due to uncertainty on disbursement of funds. * All projects which are not reporting on donor funds will be excluded from the government budget. 19. Parallel with the screening exercise, the allocation of development funds in FY98 will be limited to the following areas: (i) economic infrastructure services (particularly roads, communication, energy, land and water); (ii) social services (education, health and water); (iii) environment; (iv) rationalization of government functions and capacity building; and (v) law and order. B. Reform of the Social Sectors 20. The Government will draw up plans to more eftectively deploy primary school teachers. It also intends to decentralize the recruitment of District Education Officers and primary teachers by devolving responsibilities to the District Councils. Financing of primary education expenditures will be effected through block grants to District Councils. The Government has developed pilot projects to test new approaches to financing basic health and education services that increase accountability of those services to clients by putting control over public subsidies closer to households. In this context, the Government foresees transferring responsibilities for primary schools to school committees. 21. As stated in the recent PFP, the Government is committed to increased spending on primary education so that recurrent expenditures per pupil rise by 0.5 percent a year during each of the next three years relative to the budgetary allocations in FY97. The  Annex B Page 7 of 9 Government will increase the share of central recurrent education to 64 percent of the total in FY98. Most of the increase will be on nonsalary inputs. In addition to increased spending per primary pupil, the Government's budget will reflect adequate resources to steadily increase the Gross Enrollment Ratio from its current level. The Government is committed to higher spending on secondary education so that recurrent expenditures per student rise by 0.5 percent a year during each of the next three years relative to the budgetary allocations in FY97. The Government will also make additional outlays so that it can finance higher enrollments in government secondary schools, with the new students to be drawn from districts that do not have government secondary schools (or, have only one), with a special emphasis on underutilized government school buildings. In addition, spending on government secondary schools will be shifted from student board and welfare expenses toward instructional purposes, so that student board and welfare consume progressively a smaller share of the secondary school budget to the year FY2000, so long as equity considerations and national priorities permit. 22. Starting with the FY98 budget, for the health sector the Government will begin making significant reallocations of resources from curative services to cost-effective community and preventive interventions with an emphasis on malaria control. These are in line with the PFP commitments. Within an overall framework of real spending on health rising by 0.5 percent a year over the FY97 levels of budgetary allocations per capita, the Government will increase spending on preventive services and programs to 20 percent of recurrent expenditures over the period, while also increasing expenditures for health centers and dispensaries. To accommodate this shift in spending it will implement a program to finance the full cost of pharmaceuticals delivered to hospitals by setting up hospital-based revolving funds financed by central government and donor subsidies. Patients will contribute at least half of the total cost. We also plan to extend user fees for curative services at health centers and dispensaries. 'The Government will increase the independence of public sector hospitals in terms of management and budget, and begin establishing the regulatory and institutional framework for health insurance for formal sector employees and for rural-based prepayment/insurance schemes. It also intends to decentralize the recruitment of District Medical Officers and district-level health staff, as well as the management of district health facilities. Financing of health centres and dispensaries will be done through block grants to District Councils. Furthermore, it will increase the efficiency with which current community, preventive, and curative services are delivered by promoting facility-based management of local government services and encouraging greater nongovernmental delivery of services. C. Parastatal Sector Reforms 23. Reform of the parastatal sector is a key element of the Government's economic reform program. While the Government is committed to expanding its divestiture program, it also plans to speed up the privatization of remaining assets in the portfolio to stop any flows, direct and indirect, from the Treasury to the parastatals; to put the assets back into productive use as quickly as possible and thereby generate economic activity and revenue; and to forestall delays, which encourage asset stripping by either the company  Annex B Page 8 of 9 itself, or its workers, if it remains defunct for an extended period. The implementation of a hard budget constraint still remains a top government priority. The Government remains committed to its work plan, which calls for more than 50 additional enterprises to be removed from government control during 1997 through sale, lease, liquidation, or divestiture. The next phase of the parastatal reforms will ensure that the restructuring and privatization of the public utilities are accorded the highest priority. These will include the operations of the Tanzania Harbours Authority, beginning with the container terminal. The Government intends to put this under a concession arrangement whereby a private operator will pay a pre-set fee to the Government for the right to carry out commercial port operations for a specified time. In the case of Tanzania Railways Corporation (TRC), the Government will enter into a Performance Contract with TRC, and divest TRC's Marine Services Division. In the case of Tanzania Telecommunications Company Ltd. (TTCL), we plan to start with the preparation and adoption of a competition policy for the telecommunications sector. We then intend to move quickly to divest TTCL. As part of the SAC, the Government will also bring a number of the large non-core public enterprises to the point of sale. In the case of the National Shipping Agencies Company Ltd. (NASACO), we intend to abolish its monopoly for shipping agency services and permit free international competition under minimum acceptable standards. With respect to the Tanzania Central Freight Bureau (TCFB), the Government intends to revoke its exclusive powers to negotiate freight rates and allocate cargo across shipping lines. D. Banking Sector Reforms 24. The Government of Tanzania remains committed to financial sector reform and, in particular, to the ongoing restructuring of the NBC. Further restructuring will involve putting in place incentives to improve the governance of the bank so that it is more responsive to market forces. With this objective, the Government's strategy for reconfiguring and recapitalizing NBC has recently been clearly stated. The strategy would create three subsidiaries of NBC tentatively titled: Trade Bank with a branch network catering to the corporate business community including exporters and importers; Regional Bank with branches in each of the regions focusing on the banking needs of medium to large companies; and Micro-Finance Bank to address the banking needs of small entrepreneurs, particularly in the rural areas. NBC would be dissolved and its assets would be transferred to the three new banks created out of NBC or their holding company. Common stocks/shares of these institutions will be offered to the public, while preference shares will be available to investors. It is expected that the investors would include donors in the case of the Micro-Finance Bank, whose contributions could include the costs of training, software and hardware, management and other startup costs. 25. NBC will be reorganized in two phases. First, the three banks will be constituted as subsidiaries of NBC and will operate under a MOU with the Ministry of Finance. The proposed management teams of the institutions will undergo intensive training, and processes will be improved. As a next step, the subsidiaries will be recapitalized through private investments and issuing stocks to the public, and will become autonomous entities. In the event that the subsidiaries are not divested, they will operate under strict MOUs.  Annex B Page 9 of 9 E. Reform of Petroleum Pricing and Marketing 26. While marketing arrangements were liberalized some years back for almost all commodities and prices decontrolled, the liberalization of the petroleum subsector was initiated only recently. The Government has announced that the private sector is free to import refined petroleum products starting in May 1997, initially up to 50 percent of total requirements. Immediate and full liberalization of petroleum imports is constrained by infrastructural bottlenecks, including the oil jetty at the port, petroleum pipelines and storage capacity, that need to be addressed. Once necessary repairs and new installations are completed, the physical capacity to meet Tanzania's entire current need for imported refined products will be in place by June 1998. At that point, the Government will fully liberalize prices and imports as agreed under the ESAF program. The Government is also undertaking a study of options for the TIPER refinery, owned jointly by the Government and AGIP. Following the study, the Government will, by June 1998, come to a decision regarding TIPER's future role in a liberalized environment. CONCLUSION 27. Tanzania is at a threshold. Since the inception of the Third Phase Government, efforts have been directed towards rapidly reducing the levels of poverty of Tanzanian citizens through the pursuit of broad-based and sustainable growth policies. The Government believes this growth can only come through the unleashing of the motivations and incentives possible only in a market-based economy led by private sector initiative. The Government's role would be one of supporting this effort by creating and maintaining the economic, physical and social infrastructures, and maintaining a stable macroeconomic environment conducive to these activities by private agents. 28. The Government is committed to strengthening and accelerating these processes of change under the structural adjustment program. The Government views the partnership with IDA, particularly through the proposed Structural Adjustment Credit, as a continuation of your institution's support in this effort. Yours 'incet}y . DMnicl N. Fo(l) Miniiste for Finansc   Anex C Page 1 of 2 Tanzania ,Weert Samue awineo n NMr __t__single_year ,ryer s hither UMit of anSnte Saharn Low. incene Irdicator mecrurc 1970.75 1980-85 1989-94 Africa income 7roup Priority Poverty Indicators POVERTY Upper poverry line local curr. .. Headcount index % of pop. Lower povery line local curr. .. Headcount index - 9 of pop. .. GNP per capital USS 170 290 90 500 390 1,670 SHORT TERM INCOME INDICATORS Unskilled urban wages local curr. .. Unskilled rural wages Rural terms of trade Consumer price index 1987=100 8 58 591 .. .. Lower income Food'i Urban .. 57 '337 .. . Rural SOCIAL INDICATORS Public expenditure on basic social services % of GDP .. .. Gross enrollment ratios Pnmarv % school age pop. 53 75 70 71 105 104 MaJe " 62 76 71 77 112 105 Female 4.4 74 69 64 98 101 MortalWiy Infant mrality per thou. live births 125 98 84 92 58 36 Under 5 mortality 1.. .. 34 161 101 47 Immunizaton Measles % age group *- 66.0 75.0 51.4 86.2 77.4 DPT - 67.0 79.0 53.5 89.1 S' 0 Child malnutrnon (under-5) ' *- 28.0 38.2 Life expectancy Total years 46 51 51 52 63 67 Female advantage 3.2 3.5 2.8 3.5 2.4 6.4 Total fertility rate births per woman 6.8 6.7 5.8 5.9 3.3 27 Matemal mortality rte per 100,000 live births .. 370 748 Supplementary Poverty Indicators Expendlitures on social security % of total gov't exp. 0.5 0.7 Social secunrty coverage % econ. active pop. .. .. Access to safe water total % of pop. 39.0 52.6 52.1 Urban 88.0 88.0 75.0 Rural -36.0 42.0 46.4 Access to health care -. 73.0 93.0 Population growth rate GNP per capita growth rate Development diamondb (average annual. percent) 10+ (avetage annual, percent) Lfe expectacy 42 I ~~~~~~~~~~~GNP A \\Gross - ~~~ per primary capita enroUlmenti 4 .101 -2 | 1; 0 =pr& 4 >|prs 1970-75 1980-85 1989-94 1970D75 1980-85 1989-94 Access tosafe water G Tanzania - Taania - Low-income - Low-income r See the technical notes. p.387. b.7'he development diamond. bsed on four key indicators shows the aveng level of development in the coe:rany compared with its income group. See the introduction.  Annex C Page 2 of 2 Tanzania Most Satm . rce Vzme group sail _hiess sincle ear_ rcseg hi gher Un it of estimate S4tharn Lnow incoeo Indicator measur* 1970-75 1980485 1989-94 Africa income ProU Resources and Expenditures HUMAN RESOURCES Population Imre=1994) thousands 15.900 21.797 28.817 571.902 _.1g2.221 1.096.881 Age dependency rauo ratio 1.01 0.98 0.94 0.94 0.66 0.63 U'ban * of pop. io 1 17 6 23.7 30.6 28.3 55.9 Populauon growth te annuail % 3.0 3.2 2.9 2.8 1.7 1.3 Urban 10.0 6.5 6.0 4.9 3.2 217 Labor force thousands 8.347 11.208 14.796 254.250 1.590,533 48S.647 Agnculture % of labor force 88 85 84 65 67 36 Industry 4 5 5 9 14 26 Female 50 50 49 41 39 40 Labor participauon rates Total % of pop. 52 51 51 44 50 45 Female 26 26 25 37 41 36 NATURAL RESOURCES Area Lhou. sq. km 945.09 945.09 945.09 24,273.83 40,391.42 40,594.43 Density pop. per sq. kn 16.82 23.06 29.63 22.90 77.44 26.66 Agnculiura. land % of land area 42.75 42.90 43.57 50.61 52.42 41.05 Change in agncultural land annual % 0.03 0.03 0.00 0.01 0.16 -1.38 Agricultural Land under irigauon % 0.14 0.34 0.39 0.86 17.84 11.40 Forests and woodland Lhou. sq. km 379.36 335.55 5.323.14 7,632.00 5,969.25 DeforestaLion (net) 5o change. 1980-90 .. , 1.22 INCOME Househoid income Share of top Zo0% of households %o of income 53 .. 45 Share of bottom 40% of households 14 IS .. .. Share of bottom '0% of households 5 EXPENDITURE Food % of GDP 55.0 Staples .. 27.4 .. Meat, fish, milk. cheese. eggs '. 9.4 .. .. .. Cereal imports thou. metric tonnes 461 412 215 14.051 36.922 68,936 Food aid in cereals 148 125 35 5.079 8.516 5,771 Food production per capita 1987 100 103 106 86 102 115 102 Fertilizer consumpuon kg/ha 0.8 1.0 13 5.3 58.5 46.3 Share of agncuiture in GDP' % of GDP .. 45.9 52.0 19.5 27.6 14.0 Housing % of GDP .. 6.9 ... Average household size persons per household .. .. .. Urban .. .. .. Fixed investment: housing % of GDP 2.1 1.7 .. Fuel and power % of GDP .. 2.2 .. Energy consumpuon per capiut kg of oil equiv. 52 35 34 251 373 1.602 Households with electricity Urban % of households .. .. .. Rural . .. Transport and communaication % of GDP ., 1.8 .. Fixed investment trnsport equipment 3.7 2.5 ., Totla road length thou. km 40 82 88 INVESTMENT IN HUMAN CAPITAL Health Populauon per physician persons 22J40 28,271 .. .. .. 3,064 Populauion per nurse 3,403 7,988 .. Population per hospiutl bd .. 768 981 1.316 1.034 592 Oral rehydyraEion therapy (under.5) % of cas .. .. 83 37 38 Education Gross enrollment rAtios Secondary % of school age pop. 3 3 5 24 48 63 Female 2 2 5 23 42 62 Pupil-teacher ratio: primary pupils per teacher 54 34 37 40 39 Pupil-teacher rtio: secondary 20 19 19 .. 20 Pupils reaching grade 4 % of cohort 91 89 87 Repeater rate: pnmary % of total enroll 0 1 5 Illiteracy * of pop. (age 15+) *- *- 32 53 35 Female %of fen. (age 15+) .. .. 43 54 46 Newspaper circulation per thou. poE. 4 5 S 12 .. 236 World Bank lntemational Economies Depanment. April 1996 -Dau cover mainland Tanzania only.  Annex D Page I of 2 Tanzania at a glance Sub- POVERTY and SOCIAL Saharan Low- Tanzania Africa income Development diamond' Population mid-1995 (millions) 29.6 589 3.1t8 GNP per capita 1995 (USS) 130 490 460 Life expectancy GNP 1995 (billions USS) 3.8 289 1.466 Average annual growth. 1980-95 Population (%) - 2.9 2.8 1. GNP 8Gss Labor force (%) 2.8 2.8 1.9 e I / \ (mar per prinary Most recent estimate (latest yearavailablie since 1989) Icapita enroiment Poverty- headcount tndex (% of populatfon) 50 S ) r Urban Population (% of total popuLatSon) 24 31 29 - Life exoeciancy at birth (years) 51 52 63 Infant mornality (per 1,000 Irvs births) 83 92 58 Access to safe water Child mainutntion (% ofchildren undIr) 28 38 Access to safe water (% ot populatIo) 49 47 75 Illiteracy (% ofpopulatbon age 1-5+) 32 43 34 - Tanzania Gross primary enroliment (% of school-age populaboni 70 7t 105 Male 71 77 112 Low-vtcomegrsup Female 69 64 98 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1975 1985 1994 1995 GOP (billions LSS) 2. 6 5.5 3.4 40 Economic raOos Gross domestic investment/GOP 21.1 17.7 31.3 31.0 Exorts of goodsand non-factor seiviceslGDP 1918 7.7 23.8 28.0 Openness cf economy Gross comestic savings/GOP 8.6 8.7 3.3 4 7 Gross national savings/GDP 9.8 12.0 9.1 Current account balanceiGOP .13.0 -9.3 -26.7 -15.2 Interest payments/GDP 0.5 .7 4.6 3.8 Savings Investment Total debUtGOP 33.6 76.1 213.2 203.2 Total debt ser-viceexports 73 38.8 23.0 32.9 Present value of debt/GDP 160.5 Present vawue of debt'exDorts 634.6 Indebtedness 1975-84 1985-94 1994 1995 1996-04 (average annuat growth) - anzania GOP 1.7 4.0 3.7 39 48 Low-income group GNP per capita L-oe_ Exporns of goocs and nfs STRUCTURE of the ECONOMY - 1975 1985 1994 1995 (% o GDP) Growth rates of output and invesUtent (%) Agriculture 41.2 52.1 56.9 56.8 S - industry 22.0 12.0 16.5 16.8 4i Manufacturing 10.4 7.9 7.8 7.8 Services 36.8 35.9 26.3 26.3 2t o! Pnvate consumption 74.1 74.9 88.4 85.1 90 91 u2 93 9w 95 GeneraJ government consumption 17.2 16.4 8.3 10.3 _ 0 GOP Imports of goods and non-tactor services 32.3 16.8 51.8 54.4 G 1975-84 1985-94 1994 1995 (average annual growth) Agriculture 2.0 5.4 3.5 4.0 Industry -0.6 6.8 2.9 4.3 Manufacturing -0.8 2.8 -0.9 4.5 Services 2.4 1.3 4.1 4.1 Private consumption General government consumption Gross domestic investment 4.4 27.3 3.7 2.9 Imports of goods and non-factor services Gross national product 4.1 4.9 Note: 1995 data are preliminary estimates. 'The diamonds show tour key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. 1/ Commitment basis. Tanzania  Annex D Page 2 of 2 PRICES and GOVERNMENT FINANCE 1975 1985 1994 1995 1 Domestic pnces 1 Inflation (%) (% change) g0 Consumer prices 26.1 33.3 30.2 34.7 ao Implicit GCP deflator 15.3 22.8 22.8 34.0 40 Govemment finince a 20T (% ot GOP) o Current revenue 24.4 18.5 15.0 14.5 ! 93 94 95 Current budget balance -1.2 -2.3 -3.4 -4.3 - GOP det. --cPi Overall surplus/deficit -1.6 -7.8 -8.0 -11.5 TRADE 1975 1985 1994 1995 (millions USS) Export and import levels (mill. USS) Total exoons (fob) 379 326 486 600 2.000 Coffee 66 119 90 177 T Cotton 43 27 92 . 85 i.ooo Manutactures 74 33 89 79 Total imDons (cif) 775 999 1,589 980 1