Tanzania - Second Programmatic Structural Adjustment Credit Project

Report No. PID8877 Project Name Tanzania-Programmatic Structural Adjustment... Credit II Region Africa Sector Public Sector Management Project ID TZPE2822 Borrower(s) Government of the United Republic of Tanzania Implementing Ministry of Finance; Bank of Tanzania; Agencies Civil Service Department; and Public Sector Reform Commission guided by the Planning Commission, Dar es Salaam, Tanzania Environmental Category C Date of Initial PID July 1999 Date of this PID March 31, 2000 Project Appraisal Date March 24, 2000 Project Negotiated March 30, 2000 Projected Board Date June 15, 2000 Country Background 1. Over the past four years, the Tanzania Government intensified macroeconomic policy reforms with the aim to create a more stable macroeconomic environment for sustained growth and poverty reduction. As a result, Tanzania has gained significant ground towards reestablishing macroeconomic stability. Growth has averaged nearly four percent, inflation has come down from levels in excess of 30 percent in 1995 to the current 6.3 percent, foreign reserves coverage of imports has tripled from one and half to four months and a half, and the overall fiscal deficit including grants has been in surplus for three years now. While it is imperative to ensure that such stability is sustained in order to firmly root the confidence of investors and other economic agents, relatively more effort needs to be directed to deepening complementary structural and institutional reforms for sustained growth and broad sharing of benefits from growth. Increased private sector investment and business efficiency is a pivotal part of scaling up growth of the Tanzania economy. 2. In spite of improved macroeconomic stability growth remains low and insufficient to uplift significantly the livelihood of about half of  Tanzania's population living under poverty conditions. One of the less impressive outcomes of reforms has been the rather weak response of private sector investment to the measures taken so far. Private investment as a proportion of GDP remains at 13 percent which is low even by African standards. Without a robust investment response, the productive capacity of the economy will remain stagnant and high growth can neither be achieved nor sustained. A good part of the recorded investment has been rehabilitative in nature and hardly keeps up with the continued decommissioning of public enterprise capacity, as these get weaned off budgetary subventions. Part of the foreign investment outside mining and tourism has financed transfer of ownership in the privatization process rather than adding capacity. Furthermore, efficiency of investment still remains low in spite of recent improvements and certainly can not compensate for the inadequate expansion of the productive capacity. 3. Since coming into power in 1995 the new government has shown a readiness to introduce far reaching policy measures and to engage with the Bank on a serious dialogue regarding future measures. The most recent Policy Framework Paper (1998/99-2001/02) contains the intended actions for deepening the reform process and tackling the more difficult institutional and governance issues. The Interim PRSP for Tanzania contains a description of policy reforms the country intends to pursue for the three years ending 2002/03. The Government's resolve has also been underscored by the successful implementation of an IMF-supervised three - year ESAF Program and recent agreement with the Fund for further support under a three-year Poverty Reduction and Growth Facility. Project Objectives 4. The proposed Programmatic Structural Adjustment Credit is based upon the Government Policy Framework Paper, distributed to the Board in January, 1999 and the Letter of Development Policy attached to this MOP, which sets out the Government's medium term strategy for policy and institutional reforms aimed at supporting private sector development in Tanzania. This strategy seeks to reduce poverty through accelerating economic growth more generally and private sector development more specifically. The specific commitments for a reform program to promote private investment and reduce the cost of doing business are underpinned by a Medium Term Framework for Private Sector Development (2000/01 - 2003/04) contained in a Letter Development Policy prepared for - 2 -  this proposed operation. This framework integrates several components of ongoing programs into a cohesive framework for supporting private sector development. The framework aims at sustaining macro stability through pursuing measures to promote a viable fiscal regime, improving the business environment, completing the privatization of key infrastructural services and setting up a fair and transparent regulatory framework to foster competition. 5. The principal objectives of PSAC are to encourage increased private investment; induce greater efficiency of the private sector by reducing the cost of doing business and enhanced competition; increase private sector participation in the economy through further divestiture of key public enterprises, particularly in infrastructure services; and improve the effectiveness in the delivery of supportive public services. This strategy is in line with the principal objective of the 2000 CAS, to support poverty reduction through accelerated growth and more effective public service delivery. Increased private sector investment and business efficiency is crucial for higher sustained growth. The CAS is being submitted to the Board together with this proposed operation. Project Description 6. PSAC I, the first phase of the Programmatic Structural Adjustment Credit will support the efforts by the Government to sustain macroeconomic stability and improve public service delivery; deepen the implementation of the privatization program; improve competitiveness and the transparency of key markets; strengthen the state legal and commercial apparatus for a more efficient and transparent business environment; and further reduce the barriers to international and domestic trade. It is the first of a two-phase overall reform program for creating conditions conducive to sustained private sector development in Tanzania. These actions, once fully implemented, will result in greater efficiency in business operations, higher private investment, reduced business risk, as well as more effective public service delivery. The impact from these actions will support accelerated growth in the medium term, raising it from the recent average of 4 percent to a range between 5 and 7 percent and spur faster poverty reduction as a result of faster growth and improved delivery of social services. 7. The proposed Credit is for an amount of SDR 141.8 million. In addition to the effectiveness tranche of - 3 -  SDR 22.4 million (US$ 30 million equivalent), four floating tranches are proposed, each worth SDR 29.85 million (US$ 40 million equivalent). The Credit will be on standard IDA terms with 40 years maturity with a 10-year grace period. The proposed closing date for the planned credit is June 2002. Links to IDA's Lending Program 8. The credit will galvanize the policy frame for actions to be taken under the recently approved IDA projects, including the Privatization and Private Sector Development Project (PPSD), Public Sector Reform Project (PSRP), the Tax Administration Project (TAP), Financial Institutions Development Project II, the Microfinance Project (a LIL) and the older Integrated Roads Project II (IRP). The project will also be directly responsive to the recommendations from the OED's Country Assistance Review and OEG's Country Impact Review for Tanzania conducted in 1999. Learning from the experience of SAC I, conditionality under the structural adjustment credit facility has strengthened the hand of the core policy institutions within the GOT over vested interests of sectors and institutions in making the necessary policy changes to realize the benefits from IDA supported projects. The extra leverage has made the difference in realizing the benefits from these projects. Furthermore actions under PSAC I will help to underpin support for poverty reduction provided under the enhanced HIPC operation. With higher projected deficits resulting from more aggressive and cost- effective poverty reduction expenditure programs, support from PSAC I will help fill financing gaps therefrom. Since poverty reduction is primarily being targeted via promoting growth, the proposed operation underpins a sustainable exit from the debt trap, raising the likelihood of achieving the objectives of the enhanced HIPC initiative. Project Benefits 9. Implementation of the reform program will permit an increase in real growth to 5-6 percent a year, by improving macroeconomic stability, resource mobilization and allocative efficiency. These will set the stage for a further reduction of poverty. By helping to diversify sector investment destinations, particularly through those sectors, which benefit the poor more directly (e.g. agriculture), it will also improve the situation of the disadvantaged directly. While the greater dynamism of the private sector will help to expand income earning opportunities for the poor, this initiative supplements the efforts by the Government to address poverty concerns more directly. -4 -  The Bank is supporting these efforts through: (i) the Public Expenditure Review process to restructure of expenditure allocation and accord higher priority to primary health, basic education, rural roads, agriculture research and extension, judiciary and water; (ii) the Public Service Reform Project to enhance effectiveness in the delivery of public services; (iii) SAC I and pilot TASAF support for decentralizing responsibility for the delivery of basic social services to local governments and communities; and (iv) participating with other donors in supporting social sector development programs. Project Risks 10. The chief risks faced in the operation are a weakening of Government commitment to reforms, particularly if there is a change in the top leadership of the Government following the general elections in October 2000. The more open and inclusive governance system now being developed may also slow down decisive action through the longer time it takes to build reform consensus. The pay- off-in this regard is avoidance of possible reversals as difficult issues are discussed upfront prior to implementation avoiding back-loaded dialogue. Although many of the proposed actions in this operation will benefit from technical assistance provided under IDA-supported projects, the overall capacity weaknesses for implementation remain a concern to be closely watched. Further risks may be faced if there are changes in the international environment or the global market as has been the case with East Asian Crisis or in the case of privatization if no suitable buyers or investors are available. Contact Points: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Task Manager Benno J. Ndulu WB Country Office Dar Es Salaam, Tanzania Note: This is information on an involving project. Certain components may not be necessarily included in the final project. -5-  Processed by the InfoShop week ending April 7, 2000. - 6 -