Tanzania - Smallholder Tea Development Project

X CIRCULATING COPY R loi . RESTRICTED TO BE RETURNED TO REPORTS DESK Report No. P-1009 FILE COP Y This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A SMALLHOLDER TEA DEVELOPMENT PROJECT January 5, 1972   INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE UNITED REPUBLIC OF TANZANIA FOR A SMALLHOLDER TEA DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed credit to the United Republic of Tanzania for the equivalent of US$10.8 million on standard IDA terms to help finance a Smallholder Tea Develop- ment Project. PART I - THE ECONOMY 2. An economic and preinvestment studies mission visited Tanzania, Kenya and Uganda during October and November 1970, with the principal ob- jective of reviewing recent economic developments and preparing a program of preinvestment studies to provide a firm basis for the investment pro- grams of the three countries and the East African Community. Volume I of the mission's report (No. AE-16), dealing with economic developments, was distributed to the Executive Directors on July 16, 1971. Volumes II-V (No. AE-16a), dealing with preinvestment studies, were distributed on August 30, 1971. Basic data on the Tanzania economy are given in Annex II. 3. Soon after attaining independence in 1961 Tanzania declared its intention of establishing a socialist society. In pursuit of this aim, the Government has steadily enlarged the scope of the public sector with a view to enhancing the State's ability to control the development of the economy. The extension of the public sector has inevitably eroded the role of private enterprise in many activities. The Government is aware that its nationalization measures and the establishment of new parastatal agencies to be responsible for various economic enterprises and functions have had some disrupting effect on the economy in the short term, but it does not consider the price as too high when viewed against its broader socio-economic objectives. 4. In an effort to achieve greater social equality simultaneously with economic growth, the Government has taken several major steps to bring about a more equitable distribution of incomes. While wages of low-income workers have been allowed to rise in line with productivity increases, sal- aries of politicians, ministers and middle- and senior-level civil servants and other state employees have been cut. In addition, a code of conduct has been strictly enforced prohibiting persons in these categories from  -2- owning rental property, having shares or directorships in privately-owned companies or receiving more than one salary. Heavy taxation has also been imposed on expenditure on luxury consumer goods. Considerable emphasis has been placed by the Government on the need for self-help, self reliance and cooperative endeavor and for the careful use of- the country-s scarce financial resources. 5. For many years the Government has been particularly concerned to improve the living standard of the rural population. This has not been easy, since Tanzania is a large country and the majority of the people live on scattered holdings on the periphery. The absence of population concen- trations makes it difficult to provide social or economic services, such as health services, education,, extension services, water supplies and feeder roads. To help remedy this situation, the Government launched a program of village settlements in the mid-1960's aimed at bringing about a regrouping of the rural population.. This program, which was capital-intensive, proved too expensive and was soon abandoned. 6. During the. past few years the Government has formulated an ambi- tious but very different program to encourage the rural population to live in newly formed villages. These villages, known,as Ujamaa villages, are to be established voluntarily and run by the villagers themselves. Ujamaa villages are based on the extended family principles which have for long governed traditional African life and require that members of the group per- form such tasks as. constructing dwellings, clearing and cultivating land and harvesting within a cooperative framework and share the goods held-in common. Apart from extending socialist ideas and organization to the countryside, Ujamaa villages provide an economic and, perhaps, the only means of bring- ing a variety of essential services to the rural population. The Government is endeavoring to support this program by initiating projects to expand agri- cultural output based on smallholder production. 7. The formation of Ujamaa villages proceeded slowly at first but has lately been gathering momentum. Some 3,000 villages have now been estab- lished with a total population of around one million. The response to the Ujamaa miovement has not been uniform throughout the country; progress has been particularly slow in areas where peasant farmers are already engaged in the production of well-established cash crops and hence often do not feel the necessity to change to a new and untried way of life. While the Government is anxious to speed up the formation of Ujamaa villages, it recognizes that the movement will gain ground and be successful only if the principle of vol- untary association is preserved. The process of bringing the bulk of Tan- zania's rural population into Ujamaa vil:ages will take a long time and it is still too early to assess the full significance of the movement for agricul- tural production. However, there is some evidence that the program could in due course have a considerable impact on the rural sector.  -3- 8. In furtherance of Tanzania's socialist philosophy, legislation was enacted in April 1971 empowering the President on behalf of the State to acquire any rented residential or commercial property, the construction cost of which was over 100,000 Tanzanian shillings ($14,000). The list of properties to be acquired under this legislation, and the proposed terms of compensation, are presently under consideration by the Government. 9. Tanzania's economy is closely linked to those of Kenya and Uganda through the East African Community, under which the three countries operate several activities jointly, particularly in transport and communications, and with certain limited exceptions maintain free trade among themselves. The Community passed through a difficult period during the past year fol- lowing the military coup in Uganda in January 1971 and Tanzania's refusal to recognize the new Ugandan regime. While day-to-day operations of the Community corporations and other regional activities were largely uninter- rupted, action was delayed on a number of major Community matters requiring the cooperation of the three partner states. In November 1971, however, Tanzania and Uganda reconciled their differences on outstanding Community issues. As a result, the situation in the Community is now much improved. 10. In its external relations Tanzania has pursued a 'non-aligned' policy and has good relations with both western countries and centrally planned countries in Europe and Asia. The major proportion of external assistance to Tanzania has been and continues to be provided by western countries. At the same time, small amounts of aid have been obtained from Russia and other countries in eastern Europe. In addition, a large pro- ject to establish a rail link between landlocked Zambia and the Tanzanian port of Dar es Salaam is being financed by the People's Republic of China, which has also provided finance for other projects in Tanzania. 11. Tanzania embarked on comprehensive development planning soon after independence and in 1964 began its first Five-Year Plan. During this Plan the growth in Gross Domestic Product (GDP) at constant factor cost averaged about 5.4 percent a year. This was below the target of 6.7 percent, prin- cipally due to adverse weather during the latter part of the period, a severe drop in sisal prices, shortages of skilled manpower and disruptions caused by the radical institutional changes which were implemented during the period. 12. The annual growth rate for the Second Five-Year Plan, 1969-74, was set at 6.5 percent. The actual growth rate achieved during the first two years of the new Plan changed little from the preceding years, despite an impressive growth in gross fixed investment which has increased both in absolute terms and as a proportion of GDP. The increased investment was not reflected in a higher growth rate partly because it was heavily concen- trated on social and economic infrastructure, including the Tanzania-Zambia Railway and other communication links with Zambia, the full benefits of which will not be seen for some time. The growth rate was also affected by under- utilization of some past investments, particularly in industry.  13. During the 1960's the lack of skilled manpower to plan and im- plement projects was perhaps the major factor limiting development in Tanzania but, though the manpower problem is still important, particularly in agriculture, the Government and the public sector have now significantly expanded their capacity to execute these functions. As a result, the Second Plan expected that a shortage of financial resources might become the principal constraint. In the event, both domestic and external finan- cial bottlenecks have occurred sooner and more severely than expected. Government revenues and private savings have been below target owing to the slower than planned growth rate in GDP and exports (with the notable excep- tion of tea and tobacco). The situation has been made worse by a number of special factors such as unrecorded imports and illegal capital flight. In addition, although the inflow of foreign assistance has increased appreciably, it has not been as high as expected. 14. The Government is aware of these problems and has acted promptly to deal with them. The Government plans to shift the pattern of investment to more directly productive projects, paying particular attention to the pro- motion of agricultural and other exports. In the shorter term, the 1971-72 development budget has been cut back and steps (including exchange controls) have been taken to stop illegal capital outflows. 15. A Bank economic mission visited Tanzania in August/September 1971 and its report is expected to be distributed to the Executive Directors soon. The mission concluded that the Government's proposed economic pol- icies and investment priorities are generally sound. Its findings also in- dicate, however, that in view of the emergence of increased financial pre- sures in Tanzania and the relatively limited prospects for the principal ex- port crops, foreign donors should be prepared to increase their share in the financing of total investment. In practice this means increased local ex- penditure financing of projects that are suitable for external financial as- sistance. If such increased foreign financing is forthcoming, Tanzania should be able to maintain a reasonable investment rate and an average annual growth rate of around 5 percent. 16. In the past a large proportion of external aid to Tanzania has been on concessional terms and the current external debt service ratio is around 7 percent. As indicated above, although the Government has succeeded in raising considerable amounts locally to finance development, Tanzania will require increased external finance in future if the momentum of its develop- ment is to be maintained. The practice of providing most assistance on concessional terms should continue in order to help ensure that the exter- nal debt service burden remains manageable.  PART II - BANK GROUP LENDING TO TANZANIA 17. Tanzania joined the Bank Group as an independent member in 1962. Beginning with an IDA credit for education in 196Q, it has so far received ten credits and three Bank loans amounting to 4l09.4 million. In ad- dition, Tanzania has been a beneficiary of six loans totalling $162.8 million which have been extended for the development of common services operated on a regional basis by Tanzania, Kenya and Uganda through their association in the East African Community. Sumiary statements of the Bank's and IDA's lending to Tanzania and the East African common services are in Annex I. 18. Taking account of the lending for the East African common services, about half of the Bank Group assistance to Tanzania has so far been for the improvement of transportation, including railways, highways and harbors. Lending for the agricultural sector has included a beef ranching development project and agricultural credit and tobacco projects. The remainder of the Group's support has been directed towards the development of education, power and telecommunications. A large part of the lending to Tanzania, both di- rectly and through the corporations of EAC, has occurred in the past three years. 19. IFCGs only investments in Tanzania to date, totalling $4.4 million, were made in Kilombero Sugar Company in 1960 and 1964. This company en- countered financial difficulties and in 1969 IFC and other investors sold their interest in the company to the Government. 20. Although delays have occurred from time to time in the execution of Bank and IDA projects in Tanzania, performance has for the most part been satisfactory. Because of its tight budgetary position the Government has recently proposed a rephasing of the secondary school construction program being carried out under the Second Education Project (Credit No. 149 TA). There is a possibility that, as a result, the completion of the project may be delayed by about one year. IDA is in consultation with the Government on this matter. 21. In July 1970 the Government requested IDA to help finance a major extension of the smallholder tea development program which has been initiated during Tanzania's Second Development Plan period (1969-74). The project was prepared by consultants employed by the Government and financed by the United States. It was appraised in the field in February 1971. Negotiations were held in Washington in September 1971. The Tanzanian Government was repre- sented by Mr. T. Apiyo, Principal Secretary, Ministry of Agriculture and Co- operatives; R. Korosso, Senior Assistant Secretary, Ministry of Finance; H.R. Shekilango, Chief Executive, Tanzania Tea Authority (TTA); P. Soria, Financial Controller, TTA; L. McGinnes, Engineer, Ministry of Communications, Transport and Labour (COMWORKS); P. Magani, General Manager, Tanzania Rural  - 6 - Development Bank (TRDB); and J.E. Borneo, Tanzania Legal Corporation. The Norwegian Agency for International Development (NORAD) was repre- sented by Mr. G. Mjaugedal in view of the interest of Norway in financing part of the project (see paragraph 36 below). 22. Reflecting the central place of agriculture in the Tanzanian economy and the heavy emphasis placed by the Government on the development of the rural sector, it is expected that our assistance to Tanzania in the coming years will to an increasing extent be aimed at raising agricultural production. In addition to the proposed Smallholder Tea Development Pro- ject, a cotton project and a second livestock project for which Bank Group assistance will probably be requested are under preparation by the Govern- ment with help from our Permanent Mission in Eastern Africa (PMEA). Apart from such directly productive projects, we expect that our operations in other sectors will also be largely geared to assisting agriculture and rural development. 23. In addition to these national projects, we plan to continue our support of East African Community projects. Before the end of the current fiscal year I expect to present to you a loan to the East African Develop- ment Bank, a Community institution. Community Corporations are also pre- paring further port, railway and telecommunications projects for possible Bank financing. PART III - THE PROJECT The Agricultural Sector 2h. As already indicated, although Tanzania has made considerable pro- gress during the ten years since independence in broadening the base of its economy, the country remains primarily a rural society, deriving about ho percent of GEP and around three-quarters of its exports from agriculture. About 90 percent of the population are dependent upon agriculture for their livelihood; the majority live in small, isolated communities and obtain a meagre existence for their families and themselves from peasant farming. The Government recognizes that the sector will continue to be the main source of employment. Faced with these circumstances, it has been trying to devise a strategy which will bring about some improvement in the living conditions of this large segment of the population. 25. The policy for agricultural and rural development which has emerged from these deliberations, and which has been adopted as a central part of Tanzania's Second Five-Year Plan, has two principal features. First, as described in paragraphs 6 and 7 above, the Government is trying to persuade people in the rural areas to regroup themselves into cooperative villages of a viable size, so that inter alia they can be provided with essential infrastructure and social and economic services more easily. These villages seem well suited to some of the new areas being opened up for development and to crops which require particularly careful planning, such as tobacco and tea.  - 7 - 26. Secondly, the Government is endeavoring to prepare and imple- ment sound programs for the expansion of output of commodities which have favorable market prospects. These programs, where possible, are based on smallholder activity in order to maximize their employment impact. Traditionally Tanzania has depended heavily upon three cash crops - cotton, coffee and sisal - and these three commodities together still account for a large proportion of the country's foreign exchange earnings, although sisal's contribution has declined substantially. In recent years, how- ever, the Government has had some success in diversifying agricultural output and exports, and despite delays in implementing some programs, a number of other commodities, notably tea, tobacco and livestock, have be- come more important. 27. The Flue-Cured Tobacco Project (Credit No. 217 TA), which was approved by the Executive Directors in October 1970, is a good example of the fruits of the Government's endeavors to promote agricultural and rural development along the above lines. This project involves settling about 15,000 new tobacco growers in approximately 150 new village-communities and will increase Tanzania's tobacco production by about 20 million lbs to 45 million lbs by 1978, principally for export. The project is now in the early stages of implementation. 28. Good progress has also been made in expanding production of tea, another commodity which Tanzania has shown that it can grow and market successfully. Tea output in Tanzania rose from 3.7 million to 8.5 million kilograms between 1960 and 1970, mainly due to large-scale plantings by private estates.during the 1950's and the use of more fertilizer and better planting materials. Large estates, which presently produce over 90 per- cent of all tea grown in Tanzania, are not expected to expand much further. Under the Second Development Plan, however, the Government has embarked on a major program to encourage tea-growing by smallholders. This program has already met with striking success. At the end of FY69 about 4,600 small- holders were growing tea in Tanzania. Their numbers have since doubled and the rate of recruitment of.new growers continues to be high. The Association has provided about $1.6 million for smallholder tea development in Tanzania under the $5.0 million Agricultural Credit Project (Credit No. 80 TA) of January 1966. This finance was used principally for the purchase of planting material and fertilizer. 29. Two other major commodities with excellent prospects for expansion are cotton and livestock. The type of cotton produced in Tanzania is in good demand internationally and the Second Plan provides for an expansion in cotton output from 00,000 bales in 1969 to around 700,000 bales in 1975. A project to expand cotton production, which would be based principally on the use of more fertilizer and insecticides and better varieties, is now being prepared by the Government for possible financing by the Association.  30. Livestock is one of the most important elements of the agri- cultural sector, accounting for about one fifth of the value of recorded output. Tanzania has a large herd but most of this is in the traditional sector and commercial offtake has so far been small. A major program l;o tap the considerable potential of the sector, particularly for exports, is being ptepared and is expected to be submitted to the Association for its consideration. A start in assisting livestock development in Tanzania has already been made under the Beef Ranching Development Project of October 1968 (Credit No. 132 TA). 31. Several other commodities also have scope for expansion. These include dairy and horticultural produce, for which Tanzania is still de- pendent on imports; cashew nuts, which is already a valuable export earner; pyrethrum and forestry. 32. A problem in Tanzania as in many other developing countries is a shortage of qualified personnel to assist with the identification and prep- aration of agricultural projects. The Bank, principally through PMEA, and other international and bilateral aid ag6ncies are giving assistance with this task. It is hoped that the Bank's recent report on a program of pre- investment studies in Tanzania, referred to in paragraph 2 above, will help to ensure that necessary preinvestment work, particularly in the agricultural sector, is carried out in good time; several aid agencies have indicated willingness to assist in financing these studies. The Government is en- deavoring to encourage initiative in the formulation of small-scale projects at the village and district level and has set up a Regional Development Fund for this purpose. The Tanzania Rural Development Bank (see paragraph 41 below) has also recently been established partly to help support local in- itiative of this kind. The Project 33. An appraisal report entitled "Smallholder Tea Development Project - Tanzania" is being circulated separately. It was prepared before the recent currency adjustments were agreed and hence the cost estimates contained in it require some revisions. These revisions are reflected in the figures given in this report and in the Credit and Project Summary provided in Annex III. 34. The project, which would have significant employment benefits, is part of the Government's endeavor to diversify agricultural output and ex- ports through an increase in smallholder production. It comprises: (a) the planting by 14,000 smallholders of about 8,300 hectares of tea in the four areas of Bukoba (about 1,600 ha), Rungwe (about 3,700 ha), Lupembe (about 2,300 ha) and West Usambara (about 700 ha);  9- (b) the construction of about 300 km of all-weather tea roads in these four areas and provision for their maintenance, including training of Tanzanian personnel; (c) the construction, expansion and equipping of five factories for processing leaf produced by smallholders; (d) the provision of extension and leaf collection services for project growers; (e) the establishment of nurseries to provide planting material; and (f) the strengthening of Tanzania Tea Authority (TTA) by the provision of technical services, additional staff -and accommodation, training and other related facilities. 35. The total cost of the project is estimated at $16.5 million, of which the foreign exchange component is $6.4 million. The high proportion of local currency expenditure, which is normal for tea projects in East Africa, is chiefly accounted for by the large provision for necessary ex- tension staff and locally-procured planting materials. 36. About $2.0 million or 12 percent of total project costs, including $1.6 million of foreign exchange expenditures, is expected to be provided on grant terms by Norway, which has been requested by the Tanzanian Government to help finance the construction of the tea roads in the Rungwe and West Usambara districts as part of a broader feeder road program in these two areas; finance for this feeder road program was approved by the Board of the Norwegian Agency for International Development in June 1971 and has also now been approved by the Norwegian Cabinet and Parliament. The Norwegian- assisted roads, though an integral part of the project, would be treated for financing purposes as a separate component which would be financed by Norway and Tanzania. The draft Development Credit Agreement for the proposed IDA Credit provides that the completion by Tanzania of arrangements satisfactory to the Association for the construction of the Rungwe and West Usambara roads would be a condition of effectiveness of the IDA Credit. 37. The proposed IDA financing of $10.8 million would cover about 65 percent of total project costs and about 75 percent of the portion of the project (that is, the project excluding the Norwegian-assisted roads) for which it would be used. The credit would finance the foreign exchange com- ponent of that portion ($4.8 million) and $6.0 million of local expenditures. The case for local currency financing was discussed in paragraph 15 above.  - 10 - 38. The provision of the remaining $3.7 million or 23 percent of total project costs not covered by the proposed IDA and Norwegian fi- nancing would be the responsibility of the Tanzanian Government. Part of this amount is expected to be provided by the International Coffee Organization (ICO), which is expected to lend about $1.2 million to Tan- zania from its Coffee Diversification Fund towards financing the purchase by growers of planting and related materials; the Diversification Fund finance, which would be on soft terms, would be in local currency and would be derived from Tanzania's contribution to the Diversification Fund. 39. On that basis the financing plan for the project would be as follows: Amount Percentage ($ million) IDA 10.8 65 Norway 2.0 12 ICO 1.2 7 Tanzania 2.5 16 Total _ 100 40. The project is a continuation of an ongoing program. For pur- poses of cost calculations, expenditures incurred since July 1, 1971 have been included in the project estimates- this is the beginning of the fis- cal year for both TTA and the Government. Retroactive financing amounting to $580,000 is proposed on expenditures since July 1, 1971 on the following urgently-needed items: (a) vegetatively propagated (VP) cuttings costing about $420,000 which had to be purchased by TTA and planted in its nurseries by around December 1971 in order to be ready for sale to growers for the 1972-73 planting program; and (b) leaf collection vehicles, together with vehicles for and salaries of extension staff, costing about $160,000. 41. Funds provided under the IDA Credit for loan's to growers through their cooperatives for on-farm development and to TTA for equipment and facilities would be channeled through the Tanzania Rural Development Bank. This recently-created institution is also the channel for finance under the Agricultural Credit Project (Credit No. 80 TA) and Flue-Cured Tobacco Pro- ject (Credit No. 217 TA), a function which it took over with. the Association's agreement from the National Development Credit Agency with effect from May 1, 1971. TRDB has the capability to assume its responsibilities under the pro- posed project. 42. The proceeds of the IDA Credit to be administered by TRDB wiould be lent to TRDB by the Government under a Subsidiary Loan Agreement, the exe- cution of which would be a condition of effectiveness of the Credit. Interest would be 4 percent and the principal would be repaid in 28 years including 8 years of grace. The Subsidiary L6an Agreement, in conjunction  with the Project Agreement with TRDB, would provide inter alia that TRDB would charge interest of 8-1/2 percent on its loans to tea cooperatives and TTA. Interest and principal on loans to cooperatives would be col- lected by a levy of 20 cents per kilogram on the proceeds of the sales of green leaf by the cooperatives to TTA; under this arrangement the loans would be repaid in 13-15 years after an effective grace period of 3-5 years. Loans to TTA would be repaid in 28 years, with an eight-year grace period. 43. TTA would.have the main responsibility for carrying out the proposed project. Its principal functions would be to purchase, own and operate the facilities required for leaf collection, processing and marketing; to provide the necessary extension services, with staff se- conded from the Ministry of Agriculture and Cooperatives; to recruit and instruct smallholder growers in modern tea production techniques; and to develop its nurseries so as to ensure that growers will be able to ob- tain adequate good-quality planting material. TTA would also be respon- sible for collecting the levy of 20 cents per kilogram on sales of green leaf by cooperatives referred to in 'the previous paragraph. 44. Although TTA has been well managed since it was established in 1969, its headquarters staff requires early strengthening to enable it to perform its greatly expanded functions under the project. Experienced managers are also urgently needed for TTA's factories, particularly to ensure that the quality of Tanzanian tea is maintained. It has there- fore been agreed that, prior to effectiveness of the IDA Credit, TTA would appoint persons with experience and qualifications satisfactory to IDA to the posts of Chief Marketing Officer and Planning Economist on its head- quarters staff, and to the post of manager at each of its three existing factories. Before Credit effectiveness TTA would also make arrangements acceptable to the Association for technical guidance to be provided to these factories for at least two years by firms experienced in tea processing acting as consultants. 45. The rate of new plantings proposed for the project is rapid and contemplates the recruitment of almost 9,000 new growers in 1972. As al- ready indicated, recruitment of farmers for the smallholder tea development program has so far been highly successful and TTA already has lists of po- tential recruits to the program well in excess of the numbers needed. How- ever, the possibility of delays in the planting schedule cannot be entirely ruled out. If these should occur, expenditure on new processing facilities would be rephased accordingly. 46. It is proposed that the tea roads in Bukoba and Lupembe would be constructed by two units which would be established in the Ministry of Com- munications, Transport and Labour (COMWDRKS) using departmental forces and  - 12 - with equipment and materials purchased with IDA funds. Qualified per- sonnel would be obtained from consultants for a period of at least two years to supervise and coordinate the construction and subsequent main- tenance of the tea roads in the two areas and to train local staff. The units 'so established would also subsequently be available to construct and maintain other feeder roads in these areas. These arrangements, which would create a permanent feeder road construction and maintenance capability in the two areas, are similar to those incorporated in the recently-approved Third Highway Project for the betterment of feeder roads in the Mara and Geita agricultural districts in Northern Tanzania. The same general approach is also expected to be adopted for the Norwegian- assisted tea roads in Rungwe and West Usambara. 47. Contracts for the procurement of tea factories, vehicles and of equipment and materials required for the tea roads in Bukoba and Lupembe would be let after international competitive bidding in accordance with Bank/ IDA procurement guidelines. Procurement of fertilizer would also be by in- ternational competitive bidding but with a margin of preference of 15 per- cent or equivalent to the import duty, whichever is the lower, for local manufacturers. Contracts for the construction of staff houses and for the procurement of the limited amount of office equipment to be financed under the project would be awarded after local competitive bidding. Both these items involve small amounts and are not likely to attract foreign bids. Cuttings and related materials for nursery development, which are unsuited to bidding, would be purchased locally under negotiated contracts. 48. At full maturity in 1984 the acreage planted under the project would-produce an estimated 9.5 million kilograms of tea. By that time total Tanzanian tea output should amount to around 22 million kilograms, more than double the present level. The bulk of this additional pro- duction would be exported. Despite this prospective substantial increase in Tanzanian exports, no major difficulty is expected in marketing the higher crop. It is estimated that in the early 1980ts Tanzania will still account for only about four percent of total world exports. In addition, in common with tea produced elsewhere in East Africa, Tanzanian tea is pop- ular with blenders because of its quality; prices obtained by Tanzanian tea at the London auctions have recently been among the highest paid for tea from all producing countries. The steps being taken by TTA to maintain quality should ensure that demand for Tanzanian tea remains strong. 49. The main benefits of the project in addition to increased and more diversified exports would be increased cash incomes and employment for the 14,000 participating smallholders and their families. The over- all economic rate of return on the project is estimated at about 17 per-' cent, with the return in each of the four areas concerned ranging from about 24 percent in Rungwe to about 8 percent in West Usambara. The re- turn for West Usambara is acceptable for an agricultural project in Africa, particularly a project of this kind which will provide a significant amount of employment and should inter alia help to reduce migration to the towns.  - 13 - PART IV - LEGAL INSTRUMENTS AND AUTHORITY 50. The draft Development Credit Agreement between the United Republic of Tanzania and the Association, the draft Project Agreement between the Association and the Tanzania Tea Authority and the Tanzania Rural Development Bank, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement and the text of a Resolution approving the proposed Development Credit are being distributed to the Executive Directors separately. The draft Agreements conform to the normal pattern for credits for agricultural projects. 51. I am satisfied that the proposed Development Credit would com- ply with the Articles of Agreement of the Association. PART V - RECOMMENDATION 52. I recommend that the Executive Directors approve the proposed credit. Robert S. McNamara President Attachments Washington, D.C. January 5, 1y'72  !  ANNEX I Page 1 TANZANIA Statement of Bank Loans and IDA Credits to Tanzania at November 30, 1971 Loan or (Amount in US$ million) Credit No. Year Borrower PupopB Bank IDA Undisbursed 45 TA 1963 Tanzania Education 4.6 48 TA 1964 Tanzania Roads i14.o 80 TA 1966 Tanzania Agricultural Credit 5.0 - 518 TA 1967 TANESCO Power 5.2 .5 115 TA 1968 Tanzania Supplementary Roads 3.0 .9 132 TA 1968 Tanzania Ranch Development 1.3 .5 1142 TA 1969 Tanzania Roads 15.5 .4 586 TA 1969 Tanzania Roads 7.0 7.0 149 TA 1969 Tanzania Education 5.0 4.5 217 TA 1970 Tanzania Tobacco 9.0 8.9 715 TA 1970 TANESCO Power 30.0 214.6 232 TA 1971 Tanzania Education 3.3 3.3 265 TA 1972 Tanzania Roads 6.5 6.5 Total now outstanding 142.2 67.2 Amount sold 0.1 Total now held by Bank and IDA 142.1 67.2 TotAl undisbursed 32.1 25.0 57.1  ANNEX I Page 2 Li Statement of Bank Loans for Common Services in East Africa at November 30, 1971 (Amount in US$ million) Loan No. Year Borrower Purpose Bank Undisbursed 110 EA 1955 East African Railways Corporation 2/ Railways 24.0 428 EA 1965 East African Railways Corporation 3/ Railways 32.4 1966 East African Harbours Corporation 3/ Harbors 5.6 - 483 EA 1967 East African Posts and Telecommunications Telecommuni- cations 13.0 1.1 638 EA 1970 East African Harbours Corporation Harbors 35.0 26.7 674 EA 1970 East African Railways Corporation Railways 42.4 40.8 675 EA 1970 East African Posts and Telecommunications Telecommuni- Corporation cations 10.4 10.3 Totsa (less cancellations) 162.8 of which has been repaid to Bank and others 18.4 Total now outstanding 144.4 Amount sold: 24. 4 of which has been repaid 18.1 6.3 Total now held by Bank 138.1 Total undisbursed 78.9 1/ Guaranteed jointly and severally by Tanzania, Kenya and Uganda. 2/ Loan made originally to East African High Commission and also guaranteed by United Kingdom. 3/ Loan made originally to East African Common Services Authority.  ANNEX II TANZANIA g BASIC DATA Areas 937,062 sq. kms. (including 53,1483 sq. kms. of water area) Population: (1971) 13.2 million Rate of Growth: 2.7 percent p.a. Population density: 1 i persons per square km. (land area) Average life expectancy at birth: 41 years Political Status: Independent since December, 1961 Union with Zanzibar since April, 1964 Member of Commonwealth and East African Conmunity National Income in current prices at factor cost (1970): Total GNP Sh 8205 million Total GDP Sh 8232 million Per capita GNP Sb 636 (-Us$89) Contribution of subsistence sector to National Income about 29 percent Anmual rates of growth in real terms 1964-1970 trend 1969 1970 Total GDP 5.4% 1.4% 5.2% Monetary GDP 6.0% 3.5% 5.9% Monetary agriculture 3.6% 7.9% 3.4% Non-Monetary agriculture 2.7% -5.5% 3.6% Manufacturing 12.9% 10.8% 6.2% Construction 14.1% -6.2% 7.3% Per capita GDP 2.7% -1.3% 2.5% Per capita consumnption 4.0% 1.4% 4.8% Private consumption 3.5% 0.5% 4.9% Relative sector contribution to GDP 19614 1970 Wgriculture lIY Manufacturing 5% 8% Mining 2% 2% Construction 3% 5% Transport, storage and communications 6% 8% A3l other sectors 35% 37% Percentage of Monetary GDP at current market prices 1964 1970 Groescapital formation (monetary sector) 11.1% 22.2% Total consumption ( " n ) 80.3% 84.2% Private consumption ( " " ) 66.7% 68.3% Government consumption ( " n ) 13.6% 15.9% Exports of goods and services 39.7% 33.2% Imports of goods and services 35.0% 38.6% Tax revenues 13.3% 19.6%  ANNEX II Page 2 Public Finance (Sh million) 1963/64 1971/72 Central Government current revenues 718 1,823 current expenditures 709 1,723 Surplus on Current Budget 9 100 capital expenditures 145 768 Externally financed portion of.. central Government capital expenditure 36% 49% Money and Credit (end of month) (Sh miUlion) June June 1970 1971 Total mnmey supply T,9 1 Time and savings deposits 741 855 Domestic credit 1,134 1,712 Foreign exchange 505 517 Balance of Payments (Sh million) 1968 1969 1970 Merchandise exports 1,606 1,583 1,675 Merchandise imports 1,836 1,738 2,315 Net invisibles 21 65 60 of which net factor income -28 -21 -50 Balance on current account -132 -11 -503 Commodity concentration of exports. Sisal 10% 10% 10% Cotton 18% 15% 14% Coffee 16% 16% 18% Diamonds 8% 11% 9% Cashew nuts 7% 7% 7% External Public Debt (US $ thousands) December December 1968 1969 Total debt outstanding Tanzania debt 212.1 276.9 One-third of EACSO debt 70.2 72.1 Total debt service Tanzania debt 9.0 15.8 One-third EACSO debt 11.4 5.4 Debt service ratio 7.1% 6.9% External Reserves December December December September 1 968 1969 1970 1971 Total value (US$ million) 77.5 80.2 65.o 7h.1 Months of commodity import 5.2 408 2.8 n,a.  ANNEX II Page 3 IMF Position (September 1971) (US$ million) Quota 42.0 Gold tranche 6.9 Drawings _ Allocation of SDR's 9.9 Holding of SDR's 6.3 Currency Eicchange Rate 1 Tanzania/Kenya/Uganda Shilling (Sh) = US$0.14 US$1 = Sh 7.14  ANNEX II Page a Selected Social Indicators 1960 l