Tanzania - Country assistance strategy

Report No. 20728 TA MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE UNITED REPUBLIC OF TANZANIA June 30, 2000 Country Department for Tanzania Macroeconomics II, AFTM2 Africa Region  GOVERNMENT FISCAL YEAR: July I - June 30 Currency Equivalents Cunency Unit = Tanzanuia Shilling (T Sh) US$1 = T Sh 797 (April 2000) ACRONYMS AND ABBREVIATIONS APL Adjustable Project Loan BEMP Basic Education Master Plan CAE Country Assistance Evaluation CAS Country Assistance Strategy CDF Comprehensive Development Framework CG Consultative Group COMESA Common Market for Eastern and Southern Africa EAC East Africa Community ESAF Enhanced Structural Adjustment Facility DAWASA Dar es Salaam Water and Sewerage Authority FIAS Foreign Investment Advisory Service HIPC Highly Indebted Poor Countries ICRG International Country Risk Guide Index IDA International Development Association EFC International Finance Corporation IMF International Monetary Fund LGRP Local Government Reform Program MIGA Multilateral Investment Guarantee Agency MTEF Medium Term Expenditure Framework NBC National Bank of Commerce NMB National Microfinance Bank NGO Non-Governmental Organization NPES National Poverty Eradication Strategy OCAG Office of the Controller and Auditor General OED Operations Evaluations Department OEG Operations Evaluation Groups PFP Policy Framework Paper PRGF Poverty Reduction and Growth Facility PRSP Poverty Reduction Strategy Paper PSAC Programmatic Structural Adjustment Credit PER Public Expenditure Review PERC Public Expenditure Reform Credit SADEC Southem African Development Community SEMP Secondary Education Master Plan SMEs Small and Medium Enterprises TAS Tanzania Assistance Strategy TASAF Tanzania Social Assistance Fund TANESCO Tanzania Electric Supply Company Ltd. TIC Tanzania Investment Center TTLC Tanzania Telecommunications Company Ltd. UNAIDS United Nations AIDS Program WBI World Bank Istitute IDA IFC Vice President: Callisto E. Madavo Assaad Jabre Country Director: James W. Adams Cesare Calari Task Team Leader: Miria Pigato James Emery  MEMORANDUM OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGYOF THE WORLD BANK GROUP FOR THE UNITED REPUBLIC OF TANZANIA CONTENTS Executive Summary ............................... i I. Political, Social and Economic Context .1 A. Political, economic and private sector development issues .1 B. Poverty, social and governance issues .2 II. Macroeconomic Performance and Prospects .6 A. Recent economic performance .6 B. Macroeconomic prospects, external environment and risks .7 [II. The Government's Strategy .9 A. Overview. .9 B. Creating higher growth and economic opportunities for the poor .10 C. Building capabilities .1 D. Empowerment and accountability .12 IV. The Bank Group Assistance Strategy .13 A. Consultations ..13 B. Lessons from past experience ..14 C. The strategy .................................. 17 D. Description of the lending program ..20 E. Non lending services ..22 F. WBI and MIGA .24 G. Portfolio issues 24 H. Benchmark indicators for Government/Bank . .25 I. Risks 25 J. Concluding remarks .............. 26  MEMORANDUM OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE UNITED REPUBLIC OF TANZANIA CONTENTS (cont'd) CHARTS CHART I ............................................................... 3 CHART 2: TANZANIA: SELECTED ECONOMIC INDICATORS ............................................................... 7 TEXT BOXES Box I: THE DEVELOPMENT VISION 2025 (1998) AND THE ............................................................... 10 Box II: CAS CONSULTATIONS WITH CIVIL SOCIETY: KEY FINDINGS ....................................................... 14 Box III: OED's AND OEG's FINDINGS AND RECOMMENDATIONS .............................................................. 16 Box IV Triggers for High Case Scenario Box V The Need to Scale Up the Fight Against HIV/AIDS TEXT TABLES TABLE 1. TANZANIA: PAST RESULTS AND MACROECONOMIC PROJECTIONS FOR 2000-03 ........... ............... 9 TABLE 2. A FRAMEWORK FOR DEVELOPMENT PARTNERSHIP ............................................................... 18 TABLE 3. TANZANIA CAS- LENDING PROGRAM FYO1-03 (US$ MILLIONS) .............................................. 19 ANNEXES ANNEX I ................................................................ 27 ANNEX II ...... .......................................................... 28 ANNEX III...... . 29 ANNEX IV ....... 33 Annex V Standard Annexes Map Tanzania - IBRD 27941  MEMORANDUM OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE UNITED REPUBLIC OF TANZANIA Executive Summary 1. Economic reforms in Tanzania began in 1986 and by the early 1990s household surveys indicated that higher economic growth was reducing poverty. However, in the mid 1990s Tanzania's reform program fell off track, resulting in high budget deficits, increased inflation and low economic growth. In parallel, corruption increased significantly. Reflecting this situation, long-standing donor support for Tanzania came under threat. As summarized in the "Report of the Group of Independent Advisors on Development Cooperation Issues Between Tanzania and its Aid Donors" (The Helleiner Report) in June 1995: 'With the current macroeconomic situation lagging behind expectations and the continuing malaise in aid relationships, the major progress of the past nine years is now at significant risk". 2. Approximately six months after the report was published, elections were held and a new Government, led by President Benjamin Mkapa, came to power. In its early pronouncements on the economic situation, the Government committed itself to a renewed effort at economic reform and expressed its determination to re-establish more positive relations with its donors and partners in development. The last Country Assistance Strategy (CAS), presented in 1997 during the initial period of the Mkapa Govermnent, focussed on supporting this effort at renewal. Three related themes were central to that CAS: (i) the critical link between economic growth and poverty reduction; (ii) the priority of supporting and reinforcing the growth oriented macroeconomic reforms introduced by the new Government; and (iii) the need to respect and foster Government ownership of both its macroeconomic reforms and investment programs. 3. In parallel to the work on this CAS the Government is preparing the Tanzania Assistance Strategy (TAS) and the Poverty Reduction Strategy Paper (PRSP). The TAS provides a development framework to organize donors assistance around strategic priorities and to increase the share of aid, currently as low as 40 percent, accounted for by the budget. The PRSP work is focussing on specific policies and institutional changes for reducing poverty and improving living standards in the short and medium term. The focus of this CAS is on higher growth, poverty reduction and institutional reforms to improve governance and service delivery. The CAS shares the main strategic directions of the TAS - adherence to macro stability, a renewed emphasis on rural development, improved governance and increased private sector participation in the economy. It also supports the Government's desire to enter into new relationships with partners, based on the phased switching from projects to programs for a more effective and efficient use of aid resources. The preparation of the CAS has been participatory, involving wide consultations with civil society and a large number of stakeholders. It also reflects the lessons learned by OEG and OED in their recent reviews. 4. The CAS presents three scenarios. In the base-case scenario (within which the Bank is currently operating), lending would rise from US$200 million a year (in the last CAS) to US$260 million. This assumes that objectives for the PRSP and the Poverty Reduction and Growth Facility (PRGF) would be met, consistent with anticipated schedules. In this scenario, macroeconomic stability and structural measures in the areas of governance, financial  management, tax reforms and improvement of the business environment would be implemented and social sector programs would be strengthened. The adoption of the low-case scenario (lending program of US$100 million a year) would result from significant delays in the implementation of PRSP and PRGF, as well as from slippage in the expected timing for the HIPC completion point. 5. The CAS envisions a move to the high-case scenario by the third year if specific triggers (mostly on governance and public sector management) are met. This scenario would add US$200 million to the base-case lending scenario, and more importantly, move away from traditional project financing towards budgetary support through the instrument of a Public Expenditure Reform Credit (PERC). The PERC would focus on poverty and environmentally sustainable rural development issues and would be utilized by the Bank to systematically address cross-sectoral issues of poverty reduction identified in the PRSP. 6. Tanzania is vulnerable to external shocks, commodity price changes and droughts. But the sources of foreign exchange earnings are becoming increasingly diversified, and the current level of international reserves offer sufficient cushion against external shocks. Domestically, revenue shortfalls or increased government spending could endanger the adjustment efforts. Domestic support for the reforms could be undercut if higher growth and poverty reduction are not achieved. Finally, worsening governance and increased corruption may alienate the support of key aid partners and reduce investment. 7. These risks, however, are manageable. Tanzania is politically stable and ethnic friction is minimal. The newly created East African Community and similar regional arrangements provide the basis for greater policy and economic coordination in the area. The FHPC debt relief will enable the country to free up substantial resources to enable an increase in spending for poverty focussed programs. For the Bank, the greatest risk is that of overestimating the Government's implementation capacity. Thus, we will have to pay great attention to project design, to undertake effective capacity-building initiatives, to be vigilant and disciplined in supervision, and to have a strong monitoring and evaluation feedback system. This will be vital to track programs, draw lessons and adjust learning in real time. 8. The following issues are suggested for Board discussion: * Does the Board agree with the strategic priorities for Bank Group support? Given the success and strength of our dialogue on macroeconomic issues should we now pursue the broader range of initiatives suggested in this CAS? * Is the proposed level of lending, and large share of program aid, consistent with the expected progress in budget management and governance? Are the conditions for shifting towards program support specific enough? * Are CAS implementation risks realistic and acceptable? ii  MEMORANDUM OF THE PRESIDENTOF THE INTERNATIONAL DEVELOPMENT ASSOCIATION AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE UNITED REPUBLIC OF TANZANIA I. POLITICAL, SOCIAL AND EcoNoMIc CONTEXT A. Political, economic and private sector development issues 1. Democracy is evolving peace.flly. Tanzania is one of the few countries in Africa with a long record of political and civic stability, in which citizens share a strong sense of national identity. Nearly 15 years into its transition from a socialist to a free market economy, and five years since the adoption of multiparty elections, the United Republic of Tanzania' is steadily moving towards a fully democratic society. Besides the party which has ruled since Independence (the Chama Cha Mapinduzi, CCM), there are five political parties which have been active in Parliament and will be contending the next elections, to be held in October 2000. The process of transformation has been slow - partly because of CCM's control of the political institutions inherited from the socialist one-party state - but peaceful and extensive. Civic organizations are developing, the media are becoming stronger and increasingly give voice to different opinions. However the political situation in Zanzibar has been tense, with accusations of electoral irregularities in 1995 not having been satisfactory resolved. 2. Macroeconomic stability and growth have re-emerged. Since the last CAS the Government of Tanzania has continued its stabilization program and has introduced deep institutional and structural reforms. Growth has averaged about four percent during the last four years. This is a strong result considering the severe weather conditions and reflects strengthened macroeconomic and structural fundamentals as well as a greater flexibility of the economy in responding to shocks. A large number of the distortions that existed in the 90s have been dealt with - markets are freer and the public sector is smaller. The foreign exchange market and the trade regime have been liberalized. Though slowly, privatization has proceeded and more than half of the 400 public enterprises have been privatized. 3. Since the 1994-95 crisis, the fiscal situation has improved dramatically. But this has implied large cuts in government expenditure, under-funding of social sectors and deteriorating public services. However, in the past two years the Government has identified a number of sectors with a large impact on poverty - education, health, water, rural roads and more recently agriculture and the judiciary. Funding for these sectors has been protected and monitored under participatory Public Expenditure Reviews (PERs). The process has been supported by donors through the creation of a Multilateral Debt Fund2 (MDF) which has assisted in servicing debt to multilateral agencies. The related budgetary savings have been used to protect expenditures earmarked for these priority sectors. 4. Private sector development remains limited. Tanzania has largely shifted from a socialist to a market economy but significant obstacles to private sector development remain. The Since April 26, 1964, the United Republic of Tanzania consists of former Tanganyika (mainland) and the People's Republic of Zanzibar. 2 The MDF, supported by bilateral donors, is aimed at assisting the Government in meeting multilateral debt service obligations. The relief, tied to the budget, is conditional to the Government's commitment to sustain budgetary allocations to the priority sectors - education, health, water, rural roads, agriculture and the judicial system. 1  restructuring and privatization of public utilities and large parastatal monopolies is just starting and the poor quality of public services represent a high cost to the private sector. In 1999, only 13 percent of the road network was in good condition. Electricity is available to only 7 percent of households and tariffs are high. Frequent power cuts makes it necessary for enterprises to invest in backup generators. Telephone service remains inadequate, with long waiting times for new telephone connections, though new private cellular services in urban areas are developing fast. Transport costs are high, and delays are common in ports and railways. 5. The financial sector is now virtually under private sector management, while in 1995 more than 70 percent of the banking system's assets were state owned. In 1997, the National Bank of Commerce (NBC), the largest bank, was split into the National Microfinance Bank (NMB) and the NBC. The NMB was put under private management in August 1999, with IFC assistance and the NBC was privatized in December 1999. A framework for micro-finance has been established with the aim of increasing access to financial services by the poor. Banking supervision has improved significantly in recent years and prudential regulations have been based on intemationally accepted guidelines. In spite of recent transformations, the ratio of credit to GDP is low, 4.7 percent of GDP relative to an average of 14 percent in Sub-Saharan Africa. Financial penetration (the ratio of deposits to GDP) is also low, 15 percent. The large banks maintain relatively high lending and low deposit rates to enhance their profitability and are conservative in their expansion strategies. Non-bank financial institutions are insufficient to provide significant alternatives and competition to the banking sector. The rural population has limited access to financial services. Other problems remain, including the inaccuracy of financial data reporting, and weaknesses in accounting standards. Despite the creation of a regulatory framework for the securities market and the establishment of the Dar es Salaam Stock Exchange, capital markets remain largely under-developed, and constrained by limitation on foreign participation. 6. Improving the environment. Tanzania is recognized globally for its highly bio-diverse natural heritage. Nearly 40 percent of the land area is covered by wood and forests and 23 percent has been established as protected areas. The main issues concerning the environment include: (i) threats to bio-diversity and loss of wildlife habitats stemming from overgrazing, illegal hunting, poaching, and overfishing; (ii) deforestation of high forests, the result of unregulated expansion of the timber industry and the agriculture sector; (iii) environmental pollution, particularly in urban areas, the result of inadequate waste collection and the lack of an effective regulatory framework to limit industrial pollution. The government adopted a National Environmental Policy in November 1997, widely recognized as inadequate for environmnental protection and management. Since then studies and efforts have been carried out to improve the institutional and legal framework for environmental management. The process has relied on extensive consultations and involvement of communities. A new and encouraging Forest Policy was adopted in 1999. The Government is currently formulating a bio-diversity conservation policy and a national plan to combat desertification. B. Poverty, social and governance issues 7. Poverty is widespread. Despite its potential and rich resource endowment, Tanzania is one of the poorest countries in the world with a per capita GNP of about US$240 in 1999. Official estimates suggest that over half of its 31 million population is poor and 36 percent is very poor. Poverty is essentially a rural phenomenon: almost 61 percent of the rural population is poor 2  Chart 13 Tanzania: Social and Governance Indicators Gmss Piinmzy Bumlmnent Ratio HIV infection rates among blood (percent) dDnors (percent) 30 100 20 - . female 501ol_________- ____-- __________ 10 - [male 1980 1985 1990 1995 1997 1 199 Life expectancy at birth Governance Indicators (years) (xu~e =0.6 6= 1sorrupt. betterlure of la.) 55 ~~~~~~~~~~6 rule of law 55 4- 452 2 0 1980 1997 1994 1995 1996 1997 1998 compared to 39 percent of the urban population. Income distribution is uneven. In the 1998 rural survey the lowest quintile accounted for only 7 percent of mean expenditures. Paucity of consistent and reliable data make it difficult to assess recent trends in both poverty and inequality. 8. Lack of economic growth and of income opportunities for the poor,4 particularly in the rural areas, are at the root of the poverty problem. In turn, the ability of the poor to benefit from growth has been impaired by their low human development and lack of access to productive assets, inputs and credit. The rural poor are concentrated in subsistence agriculture and employed in crop production and livestock. In urban areas the poor are underemployed in the informal sector or are unemployed. This analysis reinforces the point that sustaining macroeconomic reforms and generating higher levels of economic growth remains critical to the policy agenda in Tanzania. While the solid performance of the past four years is an improvement on the mid- ' Data on gross enrollment ratio and life expectancy at birth are from 2000 World Development Indicators, World Bank. Enrollment data from national sources differ and are genemlay higher. Governance indicators are from the International Country Risk Guide Index. 4See: Narayan D. (1997), "Voices of the Poor - Poverty and Social Capital in Tanzania", World Bank Working Paper; REPOA (1998), "Perspectives on rural poverty profiles: results from the rural survey of three regions of mainland Tanzania"; World Bank(1996), Tanzania: The Challenges of Reforms: Growth, icomes and Welfare, World Bank, Washington D.C. 3  1990s, even higher rates of growth will be required to have a significant impact on reducing poverty levels. 9. Social indicators have deteriorated. Many indicators of human development, which in the past were higher than in many low-income countries, have deteriorated. This trend is long- standing and can be traced back to the early 1980s, when the economic crisis showed that the sizable investments made by the Nyerere regime in education and health were not sustainable. Falling real expenditures on social programs throughout the late 1980s led to significant declines in service delivery which are only now beginning to be effectively addressed. Ensuring real expenditure increases on social sector services on a sustained basis is a key objective of the present Government. However, it will take time to achieve improvements in social indicators. 10. Tanzania's ranking in the Human Development Index declined from 126 in 1992 to 156 in 1997. The infant and under-five mortality rates, 85 and 136 per thousand respectively, are high and reportedly are much higher for the poor. Communicable diseases (malaria, diarrhea and AIDS) account for most of the deaths in Tanzania. Among the factors contributing to ill health of the poor, is the limited access to safe water (48.5 percent and 68 percent in rural and urban areas respectively). Forty percent of the rural water supply system is malfunctioning or completely inoperative. As regards sanitation, more than 90 percent of households in urban and rural areas use traditional pit latrines. The sewerage infrastructure in Dar es Salaam has not been maintained over the last decade and is subject to frequent failures. 11. The tragedy of HIV/AIDS. Life expectancy in Tanzania has declined to 48 years as a result of the AIDS epidemic. As of 1997, HIV prevalence among the population aged 15-49 was estimated at 9.4 percent. About 50 percent of hospital beds are already occupied by patients with HIV/AIDS related illnesses. Chart 1 shows HIV infection rates among blood donors5. They have increased significantly between 1992 and 1998 and are higher for women. Infection rates are four times higher among young girls compared to young boys. The Country Economic Memorandum indicates that without policy actions, GDP in Tanzania could be 15-20 percent lower by 2015 (with respect to a non AIDS scenario). The number of orphans as a consequence of AIDS could reach one million by 2015. On the positive side, data from a 1999 survey6 suggest that almost all Tanzanians have heard of AIDS. Moreover, 56 percent of women and 71 percent of men (up from 39 percent and 55 percent respectively in 1996) mention condom use as a means of preventing the spread of HIV. 12. The crisis in education. Children's educational attainments are dismal. suggesting a crisis situation in the education sector. Primary school net enrollment rates are currently less than 50 percent, down from more than 80 percent in the 1980s7. Admission rates to grade 1 are reasonably high but survival rates to the end of the cycle (grade 7) are low (54 percent). Children enroll late, at around 9 years of age. The primary school examination pass rate is 26 percent for boys and 14 percent for girls. Entry rates to secondary education are only 15 percent. Parental confidence in the education system is low. 13. Progress in the health sector. In health the Government has been more effective in establishing overall priorities, in working cooperatively with a broad range of health providers (in the religious and NGO communities in particular) and in beginning to produce some improvement in service delivery. The sector wide program developed by the Government has 5Data refer to patients' relatives (94 percent) and to institutional donors. Since 1990 all hospitals which provide blood transfusion services in the country are screening blood for HIV antibodies prior to transfusion. Tanzania (1999): "Reproductive and Child Health Survey", Prelimninary Report. These numbers are taken from World Bank databases. National sources indicate higher gross and net enrollment rates. 4  been firmly supported by the donor community. While many problems remain, there is an emerging and consistent view that the additional resources being provided to the health sector are being more productively managed and that this should lead, over time, to real improvements in the health status of the population. 14. Gender issues. Women are often poorer than men, own less land and livestock and have fewer years of schooling. There is roughly gender equality in access to primary schools, though imbalances exist in completion rates and access to secondary schools. Gender imbalances are rooted and sustained by traditional and cultural values. In 1990 the Government established the Ministry of Women Affairs and Children with a view to promote gender equality. A Gender Budget committee has been created to ensure that sectoral investments respond to the priority needs of both men and women. The new land legislation has represented an encouraging step towards securing the right of women to own, dispose of and inherit land. 15. Labor standards. Tanzania's labor laws and regulations have changed little in the past two decades. Forced labor is punished, and workers have the right to freely organize themselves and strike. In 1994 the Govermment and the ILO signed a Memorandum of Understanding to prohibit, restrict and regulate child labor progressively, under the International Program on the Elimination of Child Labor. Provisions in the labor laws include measures on minimum wages, maximum working and overtime hours, housing, leave, medical and pension allowances. In the downsizing that has resulted from civil service reform and privatization, adequate separation packages have been given to redundant staff. Nevertheless, there is no efficient system to handle industrial relations and labor disputes can endure for months. While labor laws are often inadequate to support a modem private sector, the majority of workers in the informal and in the rural sector enjoy little protection. Children work in agriculture from a young age. In the urban informal sector children below 15 may represent up to 50 percent of the workforce.' 16. Good governance remains an important goal. The fight for good governance is still to be won in Tanzania. The graph in Chart 1 shows the behavior of two components of the International Country Risk Guide (ICRG).9 The first measures the strength of the 'rule of law', the second measures the degree of corruption in business transactions.10 The rule of law index has improved in the late 1990s. By contrast, the corruption index has worsened during the late 1990s. Other indices seem to confirm that corruption has been on the rise." Serious cases of corruption were documented in the 1995 Report of the Presidential Commission of Inquiry Against Corruption-the Warioba Report. As in other developing and transition economies, corruption has increased where liberalization has occurred in a weak institutional context, offering opportunities to public officials to exploit their privileged access to information for private gain. But it is also possible that the process of liberalization has increased the perception of corruption, which is now reported more frequently. 8 See ILO (1999), "Findings Ways to Fight Child Labor in Tanzania", World of Work, February. 9The ICRG reflects the opinions of banks, multinational companies and other institutional investors. ' Both range from 1 to 6 with higher scores indicating sounder institutions and less corruption respectively. The "rule of law" is defined as the degree to which the citizens of a country are willing 'to grant to the established institutions the authority to make and implement laws and adjudicate disputes'. The corruption index indicates that "high-ranking govenuneut officials are likely to demand special payments" and "illegal payments are generally expected throughout lower levels of government in the form of bribes connected with import and export licenses, exchange controls, tax assessment, policy protection or loans" (see S. Knack and P. Keefer (1995), "Institutions and Economic Performance: Cross Country tests using alternative institutional measures", Economics and Politics, 7). 1 Transparency International's 1998 and 1999 surveys give Tanzania a score of 1.9, within a range of 0 (hghly corrupt) and I 0 (highly clean). 5  17. There is, however, progress. President Mkapa has personally been leading efforts to improve governance and fight corruption. Earlier political inertia and apparent unwillingness to prosecute corrupt high level civil servants is receding. Cases of corruption are increasingly being brought to the courts and institutional reforms are now being accelerated. In May 1999 the Government presented a new Plan to combat corruption with measures to improve the legal framework and restore transparency and accountability in public procurement of works, service and supplies. II. MACROECONOMIC PERFORMANCE AND PROSPECTS A. Recent Economic Performance 18. Growth has increased. Over the last four years Tanzania has established a record of successful stabilization and structural adjustment. Real GDP growth has reached 4 percent in 1996-99, driven by improved resource allocation and capacity utilization, and inflation has fallen from 28 percent in 1995 to 6.3 percent in early 2000, the lowest in 25 years. External reserves have strengthened to 18 weeks of merchandise imports. Performance under the arrangement supported by the IMF Poverty Reduction and Growth Facility (PRGF) has been satisfactory. The success in stabilization reflects a policy of monetary restraint, which has kept real interest rates positive, and a tight fiscal policy. The adoption of a cash budget system and of sector budget ceilings has allowed the Government to address the large fiscal imbalances of the mid 90s and to repay domestic debt. 19. Private investment and agriculture have responded slowly to reforms. The share of private investment has remained at around 10-12 percent of GDP during the 1990s. Reasons include a poorly functioning legal framework, administrative and regulatory complexities and poor infrastructure. Average growth in the agricultural sector has barely reached 3 percent since the early 1990s, just above the population growth rate. Much of the poor performance during 1995-98 can be attributed to adverse climatic conditions and to the overvaluation of the exchange rate, which has affected exports. But the implementation of reforms has also been partial. Input prices have increased substantially with price liberalization, due to the removal of subsidies and lack of competition. At the same time output liberalization has been incomplete and many distortions remain, thus limiting the benefits of the reforms. 20. Tanzania is cautiously moving towards regional and global integration. The maximum tariff rate is 25 percent and the trade weighted average tariff is 14 percent. Tanzania is a member of the East Africa Community (EAC), The Southern African Development Community (SADEC) and the Cross-Border Initiative, but it has withdrawn from the Common Market for Eastem and Southern Africa (COMESA), in part due to opposition to its aggressive program of tariff reductions on intra-regional trade. Foreign direct investments have increased substantially, from $20 million four years ago to the current $183 million per annum. The Government is taking advantage of the 'Integrated Framework Initiative', 2 to prepare for the next WTO round. Exchange rate stability has been achieved but during 1993-98 currency devaluation has failed to keep pace with the excess of domestic over world inflation. In 1999 however, the real exchange rate depreciated steeply, offsetting much of the increase it made in the past three years. 12 The Integrated Framework for the provision of trade-related technical assistance for LDCs was created in 1996 by six multilateral agencies - IMF, ITC, UNCTAD, UNDP, World Bank and WTO. Tanzania prepared its own assessment of trade-related technical assistance needs in 1997 and was committed financial assistance equaling US$1.4 million. As provided in the Integrated Framework, the Government held a Consultation on Trade-Related Assistance in Dar es Salaam on October 1999. The support from donors will facilitate the development of export financing and guarantee schemes, measures to enhance competitiveness and institution building. 6  Chart 2: Tanzania: Selected Economic Indicators Growth In Real GDP and Real GDP Inflation and Interest Rates per Capita (percent) (percent) 7 6 Real GDP 30- 5- Inflation Rate O20 1- ~~~~Real GDP Per Capita RelDbqntRt -1- ~~~~~~~~~~~~~~~~~0- 1995 1997 1999 2001 2003 1995 1996 1997 1998 1999 2000 2001 2002 Cunnnt Account and Fiscal Balances Real (after grants, in percent of GDP) Exchange Rate Index 2 {(1992 = 100) -2- -4- -6 - ~~~~~~~~~~~~~~~~140 -8- -2 ~~~~~~~~~~~~~~~~~~~~~~Increase = Appreciation 1995 I96 1997 1998 199 2000 2001 2002 2003 90 MCUarentAccamt nFicalBalance 1995 1996 1997 1998 1999 2000 2001 2000-2003: Projections B. Macroeconomic prospects, external environment and risks 21. With macroeconomic stabilization substantially complete, the Government of Tanzania can now focus its attention on creating the conditions for accelerated growth and poverty reduction. The projections for 2000-2003 presented in Table 1 (our base case scenario) reflect the ongoing dialogue between the Government, the Bank and the IMF and are consistent with the scenario prepared in the context of the HIPC (Heavily Indebted Poor Countries) Initiative and the PRGF. A low case scenario is presented in Annex I. 22. Annual GDP growth is projected to increase to 6 percent by 2002-03. Monetary policy will be geared to a decline of the inflation rate to about 4 percent, a rate compatible with that of Tanzania's main trading partners. Gross official reserves would cover at least 4 months of imports of goods and non-factor services. The Govermment will refocus public spending on poverty reduction priorities. Revenues will increase through a containment of tax evasion, 7  reduction of exemptions, and tax simplification. The cash budget system is expected to be phased out within the CAS period. The HIPC Initiative 23. In April 2000 the IMF and World Bank agreed to support a comprehensive debt reduction package for Tanzania under the enhanced HIPC Initiative. Total relief will translate into debt service relief over time of US$3 billion (or US$2.1 billion in NPV terms). This implies a 54.7 percent reduction in the debt of multilateral and bilateral creditors outstanding at end-June 1999.'3 Paris Club creditors will provide their share of assistance with a reduction of about 90 percent of eligible debt. The Govemment intends to target additional resources coming from debt relief to the sectors that have the largest impact on poverty and human development and to specific poverty initiatives. The Medium Term Expenditure Framework for 2000/2003 (currently being finalized), has added to the traditional priority sectors (health, education, water, agriculture and lands, roads and the judicial) energy and the Office of the Controller and Auditor General. The additional resources coming from debt relief would allow to meet about 60 percent of requirements in<fthese sectors. Within each sector, poverty priorities are being specified in the context of the PRSP. External environment and risks 24. Tanzania is vulnerable to external shocks, commodity price changes and droughts. For instance tourism revenues may be affected by the spillover effects from conflicts in neighboring countries. But the sources of foreign exchange eamings are becoming increasingly diversified, and the current level of international reserves offer sufficient cushion against extemal shocks."4 In addition agricultural output is becoming more diversified. Domestically, revenue shortfalls or increased expenditures could endanger the adjustment efforts. Moreover, domestic support for the reforms including a backlash against privatization and foreign investment could be undercut if higher growth and poverty reduction are not achieved. Finally, worsening governance and increased corruption may alienate the support of key aid partners and lower investment. 25. A number of positive circumstances facilitate the realization of the Government's economic objectives. Tanzania is politically stable and ethnic friction is minimal. The EAC and similar regional arrangements provide the basis for greater policy and economic coordination in the area. The HIPC debt relief will enable the country to free up substantial resources from servicing multilateral debt and increase spending for poverty focussed programs. The economy's ability to cushion against exogenous shocks has improved, as shown by the resilience in growth performance despite the adverse weather over the past three years. Finally, the strong record in stabilization has created the conditions for a revamping of private sector growth. ' At end-June 1999, Tanzania's external public debt amounted to US$6.9 billion in nominal terms (including US$1.6 in arrears) and US$5.1 billion in present value terms (as much of it is on concessional terms), or 439 percent of the three-year average of exports. MF assistance (US$152 million) will be delivered over a 10-year period, and will cover on average 58 percent of debt-service obligations to the Fund. The debt relief provided by IDA (of US$1.2 billion) will be spread over a period of 20 years, covering 69.1 percent of Tanzania's debt-service obligations to IDA. '4 Two scenarios have been simulated for 2001. First, an 18 percent decline in export prices (equivalent to the largest price fall that happened during the last 10 years). Other things being equal, the value of the shortfall would be around US$148 million. Assuming that no additional grant would be available, the level of foreign reserves would go down from 4.3 to a still safe level of 3.5 months of imports. Second, tourism revenue would go down from 8 percent of GDP (the 1997 value) to zero. This would represent a shortfall of US$338 million, which, again, could be easily paid out of reserves (reserves would go down from 4.3 to 2.6 months of imports). 8  Table 1. Tanzania: Past Results and Macroeconomic Projections for 2000-03 Actual Projections FY95 FY96 FY97 FY98 FY99 FYOO FYO1 FY02 FY03 Real growth of GDP(%) 2.6 4.3 4.0 3.8 4.3 5.0 5.4 6.0 6.1 Per capita real GDP growth(%) -0.4 1.4 1.2 0.9 1.5 2.2 2.6 3.2 3.3 CPI (annual av.%) 28.0 21.0 16.1 12.8 7.8 5.2 4.1 4.0 4.0 (% of GDP) Gross domestic saving 2.0 3.6 5.4 3.1 2.6 3.1 4.6 5.8 5.8 Gross domestic fixedinvestment 21.9 18.0 15.7 14.9 14.3 17.1 19.2 20.8 20.0 Current Account balance Before grants -21.1 -15.9 -12.0 -14.4 -15.3 -16.0 -15.4 -14.3 -14.0 After grants -10.5 -6.1 -2.2 -6.1 -7.0 -6.9 -7.2 -6.6 -6.5 Government Finance: Domestic Revenue 12.5 13.2 13.5 12.0 12.4 12.6 12.8 13.0 13.1 Expenditure 18.3 17.6 15.1 15.2 16.9 18.0 18.1 18.0 18.1 Fiscal balance (before grants) -5.8 -4.4 -1.6 -2.8 -4.5 -5.4 -5.3 -5.0 -5.0 Fiscal balance (after grants) -2.7 -0.8 1.0 1.0 -0.3 -0.7 -0.5 -0.2 -0.2 Memo Items: Foreign Reserves (months of imports) 1.4 1.4 2.8 2.9 4.0 4.2 4.3 4.3 4.3 HIPC relief IDA and IMF (% of GDP) - - - - - 0.2 0.6 0.5 0.6 HIPC relief IDA and IMF (US$ Mil) - - - - - 14.0 57.7 65.8 67.5 III. THE GOVERNMENT'S STRATEGY A. Overview 26. The Government of Tanzania is currently working on the Tanzania Assistance Strategy (TAS) and the PRSP. The TAS breaks new grounds in the relationship between Tanzania and its donors. First, it provides a clear framework to organize donors assistance around the priorities decided by the Government. Second, it provides directions for increasing the percentage of aid going through the budget (currently estimated to be only around 40 percent). The PRSP, which is being prepared with the active involvement of civil society (recent consultations were held across Tanzania) will introduce short and medium term targets on poverty reduction and human development, as well as the required budgetary allocations. Both the TAS and the PRSP work are firmly rooted in the "Development Vision 2025" which specifies the country's long term development goals and in the National Poverty Eradication Strategy (NPES), which discusses how far the Vision can be advanced in the period through 2010 (see Box I). 9  27. Th sratgi dretioso he TopAsi OS andthePRPae ndlnewth cmimnst e ineaioaDevelopment gol. hyenopastreorortes craig ihe rwt n ecooei opaportunitiges frtheapor anniia bu02ildin capnabil ities oiii inrased eenmpowutie,rmlenad imroe awpacceunability adui~. Vlenth formally a ilot coute fo sthen ComprehlumensiveDvelopmnt Frainework CDFTaznoiasiuba ednevelopmet tategy is fim i~tni rlnissne wtD objectaivets.f B. 2 C reatn Highersa Gro~wt endEctonomic Opporaictuitie forthfieray Poes or pia at car Te aGoveyqmounet'sver-ervidigrort for rt~uiedul cin pvrt s to safttai g nde eqa hghrlond term susteina tgth rateB E side ma intaii m emic stalty y atheGom 's ctraeegy rests fon shre pllas: developin and hd suimplndelmeninga newf envirtomnenalyssaial asegy; 2a ov ser 2010 in the Povrna r icptuan3n trstegi 29 ___.ev uelpn anSQenw ronmt y ~ rentalyssanbylte ruralsr 20adeaategyTi has highes proiyear mot _fth _oorelcae -m ruivral aremasyeuait~ and ar nae naric~ulure. Th sitratey wil have pielicent; eipan comeralizin ~ ~ gg agiutrpn aigi oerdnai and p~roductivse; acces to i inratsing~( likaes ihra areast creteincome opportunitinesefryot ands tunsmployed management at theas envipro ent and at raisigaaeeso sustaisabl use of nauralresourcs i Thseobj4ercties wil b2e prsudthroug:rducin aterade brirs acros rtegibns; altionahzing taxes; pivatzinth ~~~~~~~~~~~~~~~~ X 27. The strategic directions of the TAS and the PRSP are in line with commitments to key international development goals. They encompass three priorities: i) creating higher growth and economic opportunities for the poor; ii) building capabilities; iii) increased empowerment and improved accountability. While not formally a pilot country for the Comprehensive Development Framework (CDF), Tanzania's development strategy is finnly in line with CDF objectives. B. Creating Higher Growth and Economic Opportunities for the Poor 28. The Government's over-riding priority for reducing poverty is to attain a higher long term sustainable growth rate. Beside maintaining macroeconomic stability, the Government's strategy rests on three pillars: 1) developing and implementing a new enviromnentally sustainable rural strategy; 2) promoting private sector investments and participation; and 3) investing in infrastructure . 29. Developing an environmentally sustainable rural strategy. This has highest priority as most of the poor are located in rural areas and are engaged in agriculture. The strategy will have three objectives: i) conserving the depletable natural resources on which the poor depend for their livelihood; ii) commercializing agriculture and making it more dynamic and productive; and iii) increasing linkages with urban areas to create income opportunities for youth and unemployed migrants.'5 The Government will continue implementing policies aimed at the conservation and management of the environment and at raising awareness on sustainable use of natural resources. 15 These objectives will be pursued through: reducing trade barriers across regions; rationalizing taxes; privatizing the remaining parastatal farms; strengthening input and output markets; implementing the new Land Laws; improving agricultural service provision with a view of getting tem closer to small farmers; and developing a firamework for micro-finance and raral financial institutions to address lack of credit. 10  30. Increasing private investment and private sector participation. The Government intends to enhance the role of the private sector in order to accelerate growth, decrease unemployment, particularly in urban areas, and provide income opportunities for the poor through: (i) privatization. About 80 percent of the remaining public enterprise sector (in terms of employment and tumover) will be privatized by 2004, including all major utility and infrastructure public enterprises (ports, railways, electricity, telecommunications and mining); (ii) strengthening the regulatory framework in key markets to increase competition and enhance transparency. Privatization will be accompanied by the development of competitive regulatory frameworks and new institutional arrangements;'6 (iii) improving the business environment, to expand private and foreign investments; and (iv) increasing the efficiency of the financial sector and financial services for small businesses. Detailed measures in these areas are in Annex B9. 31. Improving crucial infrastructure - energy and roads. In the energy sector, the Govenmment's objectives are to improve the security of power supply and to increase access to electricity. The Tanzania Electric Supply Company (TANESCO) would be unbundled and privatized. A new regulatory framework for the petroleum sector will be approved in 2000 making provisions for a liberalized market. In the gas sector, the Government will encourage the development of domestic gas markets under private ownership. The Government is developing a long-term transport sector strategy. In the short and medium term the focus will be in improving maintenance and rehabilitation of existing trunk roads and rural feeder roads. Funding for recurrent road maintenance costs is to be ensured via a Roads Fund through targeting revenue from user charges. C. Building Capabilities 32. A central objective of the Government's strategy is building up the assets of the poor through better health, education, and improved access to public services. In health, the Government will implement the ongoing Health Sector Reform Program, which started in 1994. A three year Program of Work and a one year Plan of Action have been prepared to implement the reform under a sector wide approach (SWAP).'7 To address major causes of mortality, the Government will implement individual action plans for malaria, increase immunization coverage and contraceptive prevalence. An AIDS plan includes measures to change behavior and raise public awareness. To this end, the Government will establish a strong national body responsible for implementing the third Medium Term Plan for Prevention and Control of HIV/AIDS which has been supported by the UNAIDS and other donors. 33. Education. Higher growth requires the accumulation of high level technical and entrepreneurial skills. Over the years, Tanzania's ability to mobilize the skills required by new businesses and reap the benefits from technological progress worldwide has been weakening. In the primary education sector, the Government will update the 1997 Basic Education Master Plan"8, and develop district based plans for improving school and teaching conditions at the 16 Two multi-sectoral regulatory institutions are being created - the Tanzania Public Utility Regulatory Authority (dealing with electricity, telecom, water, post and natural gas) and the Tanzania Transportation Regulatory Authority (dealing with maritime and ports, roads, railways and aviation). Each of the sectors will then re-examine and amend the relevant sectoral legislation to ensure a coherent and competitive legislative framework. 17 Priority areas include: (i) strengthening the delivery of cost-effective primary health services, particularly at the district level, through decentralization and capacity building; (ii) development of national capacity and systems through program support and streamlined implementation arrangements; and (ui) improvement in health care fnacing through better targeting of government resources and diversifying fiancing mechanisms. i8 The Plan aims to secure an 85 percent gross enrollment rate for primary schooling and 80 percent completion rate; to reduce the salary/non salary ratio in the primary education sector from 93:7 to 80:20 and the completion of institutional reforms by 2002. 11  primary level. The Government will articulate and implement the Secondary Education Master Plan (SEMP), with the objective of improving quality and raising enrolment rates in secondary education schools. A plan to rationalize a number of underutilized and inefficient tertiary education institutions will also be implemented. 34. Water and sanitation. The Government's objective is to ensure accessible and adequate water supply and sanitation services to the majority of the population in both rural and urban areas. This will be achieved through: i) creation of decentralized financially autonomous water boards; ii) subcontracting of the Dar es Salaam Water and Sewerage Authority (DAWASA) management to a private operator and allowing community groups to assume ownership of water supply schemes; iii) introducing sound pricing; and iv) developing local planning and operational capacities. Removal of water subsidies in urban areas will free resources for the rehabilitation of supplies in rural areas. Emphasis in rural areas will be on rehabilitation and upgrading of existing schemes. D. Empowerment and Accountability 35. Poverty reduction is likely to be achieved faster and to be sustainable if the poor are given a voice in the design and implementation of poverty alleviation measures. Good governance is also a necessary condition for sustainable private sector development. Empowerment, accountability and improved governance are key objectives of the Govermnent, to be realized through (i) improved management of public resources; (ii) decentralization; (iii) implementation of anti-corruption and financial accountability measures. 36. The Government is stepping up efforts to improve the management of public resources and put the process of institutional reform on solid ground. Important building blocks of the strategy are: i) the rationalization of the role and functions of the State; ii) the establishment of a credible and transparent budget process through the extension of the Integrated Financial Management System (now covering the central Government) to all ministries and regions and the implementation of the performance management system; '9iii) restoring ethical conduct and standards of performance for all public servants; and iv) improving the structure and level of civil service salaries. 37. Tanzania has recently embarked on a process of political decentralization through a Local Government Reform Program (LGRP), with the aim of improving accountability and the quality of public services. Implementation of the LGRP20 started in 1999 with around one third of the districts participating and will be phased in by 2004. With the reform, the city, municipal, town and district councils will be democratically elected. They will be fully responsible for: (i) service delivery in education, health, water, roads and agriculture; (ii) social development, and (iii) maintenance of law and order. Financial support to local governments is provided through block grants, based on the costs of delivering minimum standards of services that have to be attained by each local authority in the sectors of health, education, water, roads and agriculture.2' Local authorities are accountable for their spending, and the central government plays the role of auditor. Local governments are empowered to collect "own revenues" from local taxes and fees. i9 Implementation of the performance management system is carried out through two important tools piloted since 1998 - Performance budgeting and the Medium Term Expenditure Framework. 20 The LPRG is coordinated by the Ministry of Regional Administration and Local Government. The LGRP is supported by seven international assistance agencies (EU, Netherlands, Denmark, U.K., Ireland, Finland, and Norway) and by budgetary allocations from the government. 2iThe principles for setting of national minimum service delivery standards are: being financially quantifiable, fundable, achievable, compatible with sector plans, and measurable. 12  38. Anti-corruption strategy andfinancial accountability. Success with institutional reforms holds out prospects for improved governance. However, it requires a fundamental change in the values and attitudes on the part of those who, in many cases, are benefiting from the status quo. Corruption in the public sector is still widespread and represents one of the main constraints for effective utilization of domestic resources. In 1999 the Government developed a National Anti- Corruption Strategy and Action Plan, and sectoral plans are now being prepared. Diagnostic surveys in a number of ministries and agencies will be undertaken to monitor the implementation of the Plan. In addition, the Government will: review procurement law and regulations, publicize all contracts and tender results, and amend the Public Leadership Code of Ethics Act. Second, the government will strengthen financial accountability. The Office of the Controller and Auditor General (OCAG), which monitors the proper use of public funds and investigates incidents of corruption, will be reinforced and adequately funded. Finally, the Government will implement the Legal Sector Reform Program to strengthen the judicial system, particularly the primary magistrate courts. 39. Combating corruption requires a long and sustained fight. The Government has put in place a program of institutional reforms and specific measures that is adequate. But ultimately the outcome will depend on political commitment, particularly at the top level, and a willingness to prosecute and convict alleged crimes. In addition, it is critical that citizens believe they can refuse to pay bribes, denounce corrupt practice, and not be penalized for this. IV. THE BANK GROUP ASSISTANCE STRATEGY 40. This CAS has been informed by the strategic priorities defined in the TAS and in the PRSP, consultations with the Government, the donor community and civil society and the results from the last Client Feedback Survey (see Annex IV). Lessons from OEG and OED's Reviews have been largely incorporated. There are no areas of disagreement between the Bank and the Govermnent in the development agenda and in the major priority areas. A. Consultations 41. This CAS mirrors and supports the Government's vision of a society free of poverty, and its development agenda, as discussed in the previous sections.22 At a very early stage (June-July 1999) the Bank arranged consultations with a large cross section of Tanzania civil society. Key priorities such as accelerating growth and improving delivery of public services were largely shared. People also manifested a strong desire for 'law and order' in a society free of corruption (see Box II). Three rounds of consultations were undertaken in October 1999, January and April 2000 to discuss with Government and various stakeholders the role of the CAS within the TAS and the PRSP. 22 The Govermment's ongoing reform program has been supported by the ESAF program of the IMF, the Structural Adjustment Credit of IDA, the SAL of the African Development Bank, the fifth rescheduling with the Paris Club and the Multilateral Debt Fund agreement. 13  B. Lessons from past experience 42. What worked Sice the last CAS there have been significant successes on the economic front. Gove.ment ownership of the program has increased significantly. Since 1998 the annual Public Expenditure Review (PER) and the closely linked Medium Tern Expenditure Framework (MTEF) have been carried out in a highly participatory manner - under governmtent 23 Including: small farmers and entrepreneurs in formal and informal sectors, industry and trade representatives, NGO representatives, jourhnsts, acadeics, social service providers (teac health care workers, etc.), govermfent officials and elected representatives (from village chairmen to Members of Parliament). 1 4  leadership. The formulation of the TAS is the latest example of how seriously the Government is taking charge of its own development strategy. * There are new productive relationships with donors based on active cooperation. Since 199524 the Government and donors have agreed on improved aid coordination and integration of aid within Tanzania's development priorities and budget (see Annex II). There is now greater transparency in aid delivery and accountability for its use. Donors participate in regular macro and sector-wide meetings under government leadership. * Implementation of Bank projects has improved dramatically. About 90 percent of the Bank portfolio is now rated satisfactory (see Annex III). * IFC has made important contributions to private sector development through financing. IFC support for privatization has been critical for key transactions, such as NBC. Other investments in the financial sector have helped introduce new products and services, and increase competition. IFC has also supported small and medium enterprises (SMEs) across a range of sectors, with financing and capacity building. * Our country dialogue has been strengthened, in the last couple of years, by the Bank- Government collaborative production of analytical reports. Joint Economic and Sector Work (ESW) ensures that the analysis and the recommendations are shared and internalized 43. Wnat did not work * As discussed in previous sections, the benefits of growth have not reached the poor and social indicators and access to social services have deteriorated. Our macroeconomic dialogue has not been fully extended to adequately engage the Government and other stakeholders on the social consequences of adjustment and to provide sufficient support for measures to sustain social indicators. * The Bank has not managed to address the lack of good, reliable information, particularly in the social sectors, and their importance for constructing a welfare monitoring system. * The Bank has over-estimated implementation capacity, particularly in sector ministries. Equally, it has over-estimated the pace of institutional reforms and capacity building. * Collaboration between Bank and IFC staff has been effective at the project level but has not extended strategically to address private sector development (PSD) constraints. OED and OEG reviews 44. In 1999 both the OEG and the OED prepared evaluations of the Bank group operations in Tanzania (see Box III). This CAS fully shares the recommendations made by OED. The formulation of the CAS program has benefited from the insights of these analyses. Many of the recommendations of the OEG review have also shaped the preparation of the CAS, which is a joint exercise with IFC. Collaboration between Bank 24 In 1995 a report prepared by an independent group of consultants (the 'Helleiner Report') found that in the absence of a national framework donors had assumed, over-time, a greater role in defining and designing policies, thus creating little institutional capacity within Tanzania. Since resources were directly managed and controlled by donors, this gave rise to the creation of parallel financial systems. 15  and IFC staff will be facilitated by joint work in PSAC I and PSAC II; and by the creation of Joint Bank/IFC Global Practice Groups in Telecommunications, Mining, and Oil and Gas, all important sectors for Bank Group activity in Tanzania. 0000000000g4Bo-i00 III OED0's an O(EG'sFidig an Reoned ation '~~~~~A iLA ' <yge' 'i I~~~~~~~~~.. .. ... FTheC, Bank,s, Operation-s, Ealuation; Deatmet (,D prepare a Countr Assistance rag of;g-g issus Tw ae ; smrize below:ri e ; e-- 0'"'g'Y:k-g--i i - --W:S.OE.......... .. I Promoting e -termgro requiresthe delop.intand implementationof sttua reforr an gede -issues' F- insane suprii"ga trtegy.;"'for p'ivteaee000000- 0 0000000000tor..t de.opet il C~ ocrae rodcosit nc orrfcrn.jde.~iga u16tatg  C. The Strategy 45. Our mission in Tanzania is to help the Government reduce poverty through the promotion of higher growth, and interventions that build the assets of the poor, reduce their vulnerability and promote better govemance and accountability. The CAS fully recognizes the leadership of the Govemment in defining the development agenda. It supports the Govemment's desire to enter into more productive relationships with partners, based on the adoption of sector wide strategic approaches, on the phased switching from projects to programs and on greater control of budgetary and procurement functions. This new direction was explicit in recent speeches by 25 President Mkapa and is fully supported by donors. 46. Besides dialogue on macroeconomic and public expenditure management, the CAS proposes to focus lending and non-lending interventions in four areas of strategic importance. The choice has been informed by Government's preferences, a consideration of both the Bank and IFC comparative advantages, relative to that of other donors, and by the potentially large impact of these interventions in the economy. They include: * Private sector and infrastructure development, to support the Govemment's objective of making private sector the engine of growth; * Sustainable rural development, to improve the livelihood of the majority of the poor who live in rural areas; * Improved social infrastructure, to improve social indicators and enhance access for the poor to essential public services; and e Public sector reform and institution building, to increase the effectiveness of public service delivery and improve govemance. 47. This program does involve a broadening of our effort from the macroeconomic focus of the last CAS. This reflects judgment that such a broader effort is now essential to ensure that the benefits of the reforms are realized by the population, particularly the poor in the rural areas. However, considerable selectivity will be exercised in the choice of Bank interventions across these areas. The framework for this decision making will be based on Government preferences (ensuring that their ownership role is being enhanced through the process), the comparative advantage of the Bank, the relative areas of strength of the donor community, and, finally, on those areas where we feel impact on poverty will be greatest. In exercising this selectivity there are some areas of past activity where the Bank will not be involved. For example, the IDA program will involve virtually no parastatal investment except where necessary to support the entry of a private partner, such as in the Dar es Salaam Water Supply Project and in the Songo Songo Project. This directly reflects the movement to the private sector as the engine of growth and is a dramatic change from past programs where parastatal involvement was very broad. Second, we propose no multisectoral investment in district level projects - where we feel other members of the donor community have a comparative advantage. Third, there will be no IDA investment in the provision of credit - again reflecting the fact that this should be left to the private sector. 48. In addition to excluding certain areas in the program, selectivity will be exercised in the activities pursued within these four priorities. First, there is increased Government ownership in many areas (for example in the preparation of the Public Sector Reform Project). Second, the Bank should be prepared to relinquish leadership to other donors in areas which they have a 25 See President B.W. Mkapa (1999), "Tanzania's vision regarding partnership based co-operation", speech at the Workshop on Making Partnerships Work on The Ground, Stockholm. 17  specific interest to support. For example, the Bank did the initial study on corruption but the UNDP and the European Commission (EC) are now taking the lead in working with Government on its Action Program in that area. Third, there is increasingly joint execution of analytic work - for example in the case of the CEM. The UK and the EC have being leading the analytical work in the education sector, which is now an essential input into our proposed project work. Finally, the sector groups that are emerging are typically being led by bilateral donors but the Bank is playing an active role in supporting them. Overall we are confident that the proposed program both insures Bank involvement in key issues involving the poverty program but will be executed in a way that both ensures ownership and maximizes the efficient use of Bank and other partner resources. Table 2. A Framework for Development Partnership Creatmg higher Growth Buildin Capabilities Emwwerment and accountability Party Activity >~~~ v> M | bi 0 g :01 Little Focus njj Some Focus Significant Focus High Focus 49. The proposed lending program comprises (i) quick-disbursing, policy-based lending operations in support of ov,erall and sector reforms; (ii) high-priority specific investments, particularly those focussed on critical infrastructure, social services and environmental protection and (iii) institutional development operations in support of capacity-building and governance efforts.- In addition, assuming that sufficient progress is made on public expenditure management and governance, the Bank suggests moving toward budget support by the thiird year of the GAS cycle with an operation for poverty reduction and environmentally sustainable rural development through the instrument of a Public Expenditure Reform Credit (PERC). This would be justified on several grounds: first, the improvement in the macroeconomic environment and budget management would eliminate the ne~ed