Tanzania - Multisector Rehabilitation Project

Docuormt of The Wor'd Bank FOR OFFICIAL USE ONLY Report No. 10796 PROGRAM PERFORMANCE AUDIT REPORT TANZANIA MULTISECTOR REHABILITATION CREDIT (CREDITS 1741-TA AND A-24-TA) JUNE 26, 1992 MI CROFICHE COPY Report No. 10796-TA Type: (PPR) NAMISATO, / X31678 / T9105/ OEDD2 .ons Evaluation Department has a restricted distribution and may be used by recipients only in the performance of luties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Tanzania Shilling (TSh) Rate as of January 31, 1991 TSh 1 = US$0.0051 US$1 = TSh 196.6 ABBREVIATIONS AND ACRONYMS BOT = Bank of Tanzania CCU = Chama Cha Upinduzi (political party, formerly TANU) CG = Consultative Group ERP = Economic Recovery Program ESAP = Economic and Social Action Program ESW = Economic and Sector Work GDP = Gross Domestic Product IMF = International Monetary Fund IRTAC = Industrial Rehabilitation and Trade Adjustment Credit KfW = Kreditanstalt fur Wiederaufbau LDC = Less Developed Country MRC = Multisector Rehabilitation Credit ODA = Overseas Development Administration OED = Operations Evaluation Department OGL = Open General License PCR = Project Completion Report PPAR = Program Performance Audit Report PSAP = Priority Social Action Program SAP = Structural Adjustment Program SDRs = Special Drawing Rights SIDA = Swedish International Development Agency SFA = Special Fund for Africa SJF = Special Joint Financing TANAA = Tanzania Agricultural Adjustment Program TANU = Tanzania African National Union (political party, currently CCU) FISCAL YEAR July 1 - June 30 FOR OFFICIAL USE ONLY THE WORLD SANK Washington. D.C. 20433 U.S.A. Office of Diectaoeeral Operatki Cvaluatin June 26, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Program Performance Audit Report on Tanzania - Multisector Rehabilitation Credit (Credits 1741-TA and A-24-TA) Attached, for information, is a copy of a report entitled "Program Performance Audit Report on Tanzania - Multisector Rehabilitation Credit (Credits 1741-TA and A-24-TA)," prepared by the Operations Evaluation Department. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PROGRAM PERFORMANCE AUDIT REPORT TANZANIA MULTISECTOR REHABILITATION CREDIT (Credits 1741-TA and A-24-TA) T&LE OF CONTENTS Pape No. Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic Data Sheet . . . . . . . . . . . . . . . . . . . . . . . . . .111 Evaluation Summary . . . . . . . . . . . . . . . . . . . . . . . . . v PROGRAM PERFORMANCE AUDIT REPORT I. INTRODUCTION.............. ..... . . . . .1 Background............. ...... . . . . 1 The Specifics of the MRC......... ..... . . 4 The Results of the MRC........ ..... . . . . 6 II. OVERALL ASSESSMENT AND SUSTAINABILITY. .......... . . 9 Overall Assessment........... ..... . . . 9 Sustainability........... ..... . . . . . 9 III. ISSUES AND LESSONS ARISING FROM THE AUDIT. ....... . . ..10 Lessons Learned.......... ..... . . . . . 13 TABLE 1. Projected vs Actual Indicators for MRC. ........ . . . 8 ANNE 1. Letter of Development Policy ............ . . . 15 PROJECT COMPLETION REPORT PART I - PROJECT REVIEW FROM THE BANK'S PERSPECTIVE.... . . . . . . 29 A. Scope of the Government's Economic Rehabilitation . . . . . 29 Introduction............ ...... . . . . 29 Economic Background........... .... . . . 29 The Economic Recovery Program (ERP).... . . . . . . . 31 B. The Role of the Bank......... .... . . . . . . . 32 C. Accomplishments of the ERP and Justification for Sank Support 33 External Sector Policies........ ..... . . . 33 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (cont'd) Page No. Project Copletion Report (cont'd) Fiscal and Monetary Policies . . . . . . . . . . . . . . 35 Parastatals . . . . . . . . . . . . . . . . . . . . . . 35 Agriculture . . . . . . . . . . . . . . . . . . . . . . 36 Industry . . . . . . . . . . . . . . . . . . . . . . . . 36 Transport . . . . . . . . . . . . . . . . . . . . . . . 37 Impact of the MRC . . . . . . . . . . . . . . . . . . . 37 Sustainability . . . . . . . . . . . . . . . . . . . . . 38 Assessment of Risks . . . . . . . . . . . . . . . . . . 39 Lessons Learned for Subsequent Adjustment Programs . . . 39 D. Implementation and Monitoring....... ..... . . . . 40 Compliance with Covenants..... .... . . . . . . . 40 Procurement . . . . . . . . . . . . . . . . . . . . . . 40 Disbursement . . . . . . . . . . . . . . . . . . . . . . 40 Supervision............ .... . . . . . . . 41 PART II - PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE . . . . . . 42 Financial Assistance........... .... . . . . . . 42 Disbursements and Implementation Experienced. ... . . . . . 42 Conclusion................... .... . . . 45 PART III - STATISTICAL DATA SUMMARY Table 1: Key Macroeconomic Indicators. ...... . . . . . . 47 PROGRAM PERFORMANCE AUDIT REPORT TANZANIA MULTISECTOR REHABILITATION CREDIT (Credits 1741-TA and A-24-TA) PREFACE 1. This is a Program Performance Audit Report (PPAR) on the Multisector Rehabilitation Credit (MRC). The first two initial credits in the amounts of US$50.5 million (IDA Credit 1741) and US$46.2 million (Special Fund for Africa- SFA, Credit A-24) were approved in November 1986. This financing was followed by a supplemental IDA credit of US$30.1 million and a supplemental SFA credit of US$26.0 million. Together, these totalleC US$152.8 million. Associated grants from various donors (Germany, Switzerland, United Kingdom (ODA 1-2), Canada (SIDA), Netherlands, Saudi Arabia, Italy, Norway), in the amount of US$159.3 million, were also provided under the Special Joint Financing (SJF). The total of credits and grants was US$312.1 millon equivalent. Some of the cofinancing came after approval of the initial financing. The objective of the MRC was to support the Government's medium-term economic recovery program (ERP), which was begun in June 1987. The IDA-credits were fully disbursed and closed on December 31, 1989. 2 The PPAR consists of the Program Performance Audit prepared by the Operations Evaluation Department (OED) and the Project Completion Report (PCR) prepared by the Country Operations Division of the Southern Africa Department. The PPAR is based on the attached PCR, the President's Report, and the credit documents. 3. The PCR provides a very good account and assessment of the program experience and discusses the performance of the Bank and the Borrower. The Government's reactions to the text .re also included in the PCR. The PPAR concludes that the MRC was a successful and sustainable operation, viewed as part of Tanzania's volte-face from socialism to transition to a market-based economy. The PPAR suggests developments prior to the MRC, notably a Bank-imposed lending hiatus, were important in precipitating Tanzania's ideological shift and in improving implementation of some reforms in the MRC. It also examines the completeness of the MRC's approach to adjustment; the importance of the whole reform package as opposed to certain parts of it only and whether certain reforms or reform considerations were omitted from the MRC. Two significant omissions were a lack of consideration of factor market reform--really improving the allocation of labor--and the need for a more rapid pace of adjustment. Finally, the PFAR examines the extent to which there was Government "ownership" of the MRC. 4. The draft PPAR was sent to the Borrower for comments but none were received. - iii - PROGRAM PERFORMANCE AUDIT REPORT TANZANIA MULTISECTOR REHABILITATION CREDIT (Credits 1741-TA and A-24-TA) BASIC DATA SHEET CREDIT POSITION (Amounts in US$ Million) As of April 30, 1992 Credit Origir.al Disbursed Cancelled Regaid Outstanding 1741-0 50.00 54.48 -- -- 56.59 1741-1 30.00 30.12 -- -- 30.3 A024-0 46.20 48.04 -- -- 52.20 A024-1 26.00 25.39 -- -- 26.86 GMWUATIVE ESTIMATED AND ACTUAL DISBURSEMENTS EY_Z FY88 FY89 FY90 9:. Appraisal Estimate (US$M) 75.0 96.2 -- -- -- Actual (US$M) 61.3 117.5 153.0 158.0 158.0 Actual as % of Appraisal (%) 81.7 122.1 100.0 100.0 100.0 Date of Final Disbursement: January 25, 1991 PROJECT DATES Suplemental Orizinal Actual Credit Dates Initiating Memorandum 07/15/86 07/15/86 Letter of Development Policy 10/29/86 10/29/86 Negotiations 10/06/86 10/13/86 Board Approval 11/11/86 11/20/86 01/19/88 Signing 11/21/86 11/21/86 02/05/88 Effectiveness 11/25/86 11/25/86 02/19/88 Credit Closing 12/31/89 12/31/89 12/31/89 - iv- STAFF INUT (staffweeks) FY81 VY82 M3 FY84 FY85 FY86 FY87 E88 PY89 FY90 FY91 JUM - Preappraisal .2 .4 71.9 2.1 6.9 91.2 16.9 189.5 Appraisal 3.5 54.1 57.6 Negotiations 16.8 16.8 Supervision 37.5 17.2 7.7 11.2 6.4 80.0 Other 9.0 9.0 Total 3.7 .4 71.9 2.1 6.9 31.2 134.4 17.2 7.7 11.2 6.4 352.9 MISSION DATA No. of No. of Staff Date of Month/Year Weeks Persons Weeka Report Preparation 03/86 2 2 4 04/10/86 Appraisal 07/86 3 9 27 08/15/86 Supervision I 12/86 2 6 12 01/12/87 Supervision II 03/87 2 1 2 04/03/87 Completion 03/90 2 1 2 04/17/91 OTHER PROJECT DATA Borrower/Executing Agency: United Republic of Tanzania Follow-on Project(s): Project: Industrial Rehabilitation and Trade Adjustment Credit No.: 1969-TA Amount: US$157.80 Board Date: 12/13/88 Project: Agricultural Adjustment Credit No.: 2116-TA Amount: US$227.40 Board Date: 03/29/90 4v PROGRAM PERFORMANCE AUDIT REPORT TANZANIA MULTISECTOR REHABILITATION CREDIT (Credits i741-TA end A-24-TA) EVALUATION SUMMARY Background 1. The Multisector Rehabilitation the stage for renewed leriing by the Credit (MRC--Credit 1741-TA) and asso- Bank, IMF and other donors. After a ciated credits and grants was a series delay, Tanzania was able to reach of adjustment operations and grants agreement with the IMF on a SDR 64 totalling US$312.1 million equivalent. million Standby in August 1986 a.i to It was the first significant adjust- agree witi the Bank on the MRC in ment operation following the 1981 December 1986. The IMF program was a Bank-imposed lending hiatus or cessa- standard one stressing significant tion of lending commitments. Tanzania devaluations of the Tanzanian shilling had experienced fairly widespread and (TSh) and limits on the budget d rapid development during the period balance of payment deficits and _n from independence in 1961 to the early expansion of domestic credit. 1970s, mainly as a result of a colo- nial legacy of market-based incentives The SRecifics of the MRC and the heavy focus on agriculture. Beginning in 1967, the new president 3. The MRC was "piggybacked" onto and the political party, CCU, began to this and stressed three macro reforms: redirect the economy toward socialism. liberalization of Tanzania's foreign This ideological shift, coupled with exchange allocation, trade and price massive resettlement for villagiza- control regimes, and micro reforms to tion, some other economic shocks and a the agricultural, industrial and tran- change in economic emphasis away from sport sectors. Of this latter, the agriculture and toward the social most complete were for the agricultur- sectors and industry, caused develop- al sector and included price increases ment of the economy to falter. During and institutional reforms to free up the 1970s and early 1980s, the country output marketing and input distribu- was getting more and more aid but tion. Parastatal price increases and performing progressively more poorly cutbacks in budgetary subsidies were economically so that it was experienc- the major micro reforms for the indus- ing a serious problem of aid dependen- trial and transport sectors. The cy. totality of these reforms was support- ed by US$312.1 million equivalent, 2. The Bank-inspired 1984 lending credits and grants, the IDA components hiatus, Dr. Nyerere's decision not to of which were released in three continue as president and his public tranches depending on the extent of granting to the new president of a policy implementation. The credit was "free hand" to change the economy, set for BOP support only. Disbursement - vi within each tranche was limited only was probably low. However, the MRC by a negative list of prohibited im- initiated a new developmental approach portables, mainly defense and luxury and adjustment program, both of which items. are clearly and fundamentally sustain- able. The M4RC, therefore, deserves The Results of the MRC considerable recognition. 4. The MRC, including precipitat- Issues and Lessons Arising from the ing antecedents such as the Bank's Audit 1984 lending hiatus, coincided with a significant turning point in Tanzania 6. Several issues arose from the toward a transition from a socialist audit of the MRC. The audit suggests to a market-based economy. The opera- that developments prior to the MRC tion was accompanied by significant itself, notably a Bank-imposed lending increases in growth in GDP and ex- hiatus, were important in precipitat- ports. The Government implemented the ing Tanzania's ideological shift and troika of price, trade and foreign in improving implementation of some of exchange allocation reforms with vary- the reforms in the MRC. The audit ing amounts of success, with the most also suggests that the MRC's approach successful reform having been in the to adjustment was somewhat incomplete. area of price decontrol, and the least Certain parts of the reform package successful having been in the area of were important, others were not. In foreign exchange allocation. The addition, certain reforms or reform micro reforms in the MRC, particularly considerations were omitted from the those in the agzicultural sector, seem NRC. Two significant omissions were a to have been the most completely im- lack of consideration of factor market plemented and to have had the most reform--really improving the alloca- impact. The agricultural sector re- tion of labor--and the need for a more bounded well, across a broad spectrum rapid pace of adjustment. Finally, of activities. In addition, the na- the audit suggests that there was ture of the credits and grants--as little Government "ownership" of the balance of payment support--meant that policy package supported by the NRC. they could be and were used to in- Increased efforts to improve owner- crease capacity utilization in all ship, including greater attention sectors, but particularly in transport prior to the loan to EST and strategy and industry. In addition, sectoral formulation, would have improved the price increases and significant cut- NRC and subsequent operations. backs in fiscal subsidies to para- statals improved the finan'tal situa- 7. Three main lessons emerged tion at the enterprise as .ell as the from this audit of the NRC. One con- macroeconomic level. cerns the usefulness of the lending hiatus- -it appears to have been an Overall Assessment and Sustainability important element in Tanzania's embar- kation on the road to a market-based 5. By the usual indicators, the economy. The second concerns the MRC wns a successful operation. It importance of continued, or even in- accompanied a developmental volte-face creased, ESW and strategy formulation by the Tanzanian Government and im- for adjustment lending. Greater effort provRd the domestic economy. Sustain- rather than less was needed in order ability of the NRC, taken in isolation to improve the design of adjustment - vii - loans and their ownership by the Gov- more complete range of reforms, in- ernment. The third lesson concerns cluding reforms to factor markets, as the need to insure that a strategy and well as more rapid pace of adjustment, adjustment approach exists into which must be considered in each of a series all of the proposed adjustment opera- of adjustment loans. tions will fit. This means that a PROGRAM PERFORMANCE AUDIT REPORT TANZANIA MULTISECTOR REHABILITATION CREDIT (Credits 1741-TA and A-24-TA) LAZY PEOPLE AND SOCIALISM OF THE B;G MEN (WW1iv na Ujamas va Nabvana MaXuba) In Tanzania in the 1960s and early 1970s in Ujamaa villages each village would have "management" meeting. in which the yavive or lazy settlers were forced to sit separately frem the rest of the settlers. It was expected that the stigma would make them work harder thereafter in order to avoid having to be singled out at the next meeting. Tho Idea did not work. For example, at one i.tially quite successfui tobacco village in the Iringa area, the number of wavyM grew steadily. By the early 1970s, all the settlers were designated as wavivu. In addition, tobacco output from the village fell drastically. When asked why this haJ occurred, one farmer, Sampson Kilosa, who had been an extremely hard working and successful farmer in the 1960s scid the following: We all used to be fiercely independent farmers who sought to provide fo. ourselves and to gain extra wealth in order to share wit' others in our extended families. By sharing with others, especially the young and the old, I became a Big Man (bwana mkubwa) in the eyes of my clan and even outside nf it. I also built up a network of obligations with others nearby so that if I and my family experienced trouble these other people would be Big Men and take care of us. When Ujamaa and Tanu came, things changed. Tanu took our surpluses and they, not we, distributed the surpluses to others. We could no longer be Big Men and we could no longer count on others to bc Big Nen also. As a result, we stopped producing enything extra. Now, we only produce subsistence (poaho) and ve hope that Tanu will take care of us if there is trouble. I. INTRODUCTION Background 1. After independence, during the 1960s and early 1970s, the Tanzanian economy experienced solid, broad-based development, essentially along the lines established during the colonial period. This meant that the economy was a "mixed" one, primarily focused on the development of agriculture. There was a fair amount cf administrative intervention into the economy but the interventions were consistent with the emergence of free-market incentives. However, the post- independence government of Dr. Julius Nyerere increas4gly intervened to alter the economy in order to implement a socialist syst4.,. By the late 1960s the Tanzanian shilling had become non-convertible and all foreign exchange had to be surrendered to the Central Bank at a fixed, increasingly unreali.tically high exchange rate. Domestic prices were controlled in order to make them low, and -2- wages were aitificially supported. The Government essentially "took over" the economy. This meant that it became heavily engaged in marketing and investment. Normal incentives were suppressed and large numbers of people were resettled in communal villages in order to encourage development of the industrial and social service (education and health) sectors. 2. The result, during the mid-1970s and early 1980s was increasingly poor economic performance, both at the macro level and particularly in the agricultural sector. At fir:;, exports stagnated and imports grew. As a result, Tanzania b-gan to run large annual current account deficits on the BOP, usually equal. to over 10 percent of GDP. Annual budget deficits were also high, usually ranging between 5 percent and 15 percent of GDP each year. Much of the new government investment was concentrated in the social service or the manufacturing areas and was expensive and required continual recurrent subventions or subsidies in order to finance large amounts of imported inputs and personal emoluments. Matters were made even worse by Tanzania's provision of military support for anti-Amin ferces in Uganda. 3. By 1982, the situation was seen by outsiders, including Senior Bank Management, as being unsustainable and delegations were sent to tell Dr. Nyerere this. Tanzania had been receiving large, generally "unincumbered" aid flows. However, it was clear that even maintaining the status quo would require larger and larger amounts of grants or concessional aid. Inflation was becoming a problem for the first time, even though the inflation rates (between 5 and 30 percent) seemed relatively tame by other standards. Growth in GDP essentially ceased, averaging 0.4 percent per year for the 1978-82 period. In addition, the value of exports was declining precipitously. 4. The Tanzanian Government reacted to the malaise by introducing a relatively comprehensive St.ructural Adjustment Program (SAP), but it appeared to have been done primarily in order to attract more aid, rather than to fundamentally adjust the domestic economy. From the start, the SAP was poorly implemented. There was almost no domestic commitment to the program by the civil servants and, perhaps more importantly by Dr. Nyerere and Tanzania's only political party Chama Cha Upinduzi (CCU). As a result, the SAP did not adjust the domestic economy nor did it assuage mounting doubts by formally lenient donors. 5. In 1984, changes began to occur which led to the MRC. The Bank quite abruptly stopped all lending commitments for 1984. This was accompanied by other donor cutbacks and by increasingly unified demands by donors for change. internally there were increasing calls for change as well. Tanzanian citizens and the civil servants or "the Government" were calling for change. Although these sentiments were not openly shared by Dr. Nyerere and the political party, CCU, it was clear that the President, at least, was listening. As a result, these dev,elopments led, several months prior to October 1984, to Dr. Nyerere's announcement that he would not run for re-election, a position he had held since independence. Tanzania needed to change, but Dr. Fyerere had become too closely - 3 - associated with a socialist path which was clearly not working. When the new president was sworn in, Dr. Nyerere made a simple but eloquent speech in which he said that the new president had a "free hand" to make economic changes. 6. The change in presidents was accompanied by a relaxation of ideological fervor and a move to get back in good graces with the Bank and the IMF. Dr. Nyerere did not resign as head of CCU, however, and his and CCU's opposition to radical change were well known. Change was thus possible, and in fact mandated by the October 1984 election. However, Dr. Nyerere's continued position as head of CCU made it essential that the change would be carefully and deliberately managed so as to prevent a complete and rapid overthrow of socialist principles. 7. The events of 1984, including donor aid cutbacks and increased receptivity to change following the installation of the new president, resulted in both Tanzanians and other donors looking toward the Bank to provide more developmental guidance. Although there were some expectations that Nyerere's "free hand" speech would suffice to re-open aid flows, the Bank held firm to its insistence that an agreement with the IMF and a new program involving greater change -was needed. The result was that after some delay the Government produced its Economic Recovery Program (ERP) which was not only comprehensive but, this time, endorsed, at least to a limited extent by Dr. Nyerere and CCU. 8. The ERP was drafted with Bank help and stressed four objectives as follows: a) To increase the output of food and export crops by providing appropriate price and non-price incentives for production, improving marketing structure, and increasing budgetary and foreign exchange resources available to agriculture; b) To direct investment resources toward rehabilitating the physical infrastructure of the country in support of directly productive activities; c) To increase capacity utilization in industry through the allocation of scarce foreign exchange to priority sectors and firms; and d) To pursue prudent fiscal, monetary and trade policies to restore domestic and external equilibrium, to insure that production incentives are not eroded and the efficiency of resource allocation is approved. The first three of these are supply-oriented with a heavy emphasis on making full use of rather than changing the existing productive base. This was to be accomplished mainly by allocating relatively more of the credit increase and intermediate imports towards the agricultural, transport and industry sectors. The fourth objective, (d), is the primary concession to the need for strtsctural adjustment. The phrase "production incentives" means that Tanzania agreed to embark on a transition from a socialist to a market-based economy. Further detail on the ERP, is reflected in the Government's Letter of Development Policy, attached as Annex 1 to this audit, and in the PCR. 9. Commitment to fundamental reform, as set out in the ERP, was strengthened by the lackluster economic performance in 1985 and 1986. GDP growth averaged about 2.7 percent per year, much higher than for the previous three years (0.5 percent p.a.), but still low both by historical standards and by comparison to Tanzania's rapid population growth (2.9 percent p.a.). In addition, it was recognized that the improved growth was mainly due to better agricultural conditions, mainly improved rainfall, and to an unsustainable surge in imports. Inflation suddenly shot up to 30 percent per year, an unheard of rate in Tanzania. Both the current account and the budget deficits were unsustainable at over 10 percent of GDP. As a result, the period following the Bank's imposition of the lending hiatus seemed agonizingly long, but served the important purpose of engendering more broad-based commitment for change amongst Tanzanians, particularly within the political party, CCU. The Specifics of the MRC 10. The delays and deliberations following the 1984 "free hand" speech led to an IMF Standby, for SDR 64 million, in August 1986. This was followed four months later, in December 1986, by the MRC. The MRC was "piggybacked" onto the Standby so that the two operations complemented each other. The Standby focused mainly on exchange rate alignment, reduction in the BOP and fiscai deficits and on control of domestic credit creation. Under the Standby, the exchange rate was to be administered downward, following an initial devaluation of the Tanzania shilling from TSh 26 to TSh 40 per US dollar. The expectations were that the rate would creep -ownward thereafter as warranted. This, indeed, occurred. The rate finally ended up at TSh 195 per US dollar by December 1989, when the MRC was closed. In real terms, this meant that the exchange rate fell from twice to one-half its real 1980 level. Under the Standby, administrative procedures were established to limit the BOP and fiscal deficits and a specific, allowable increase in domestic credit, measured as a percentage of GDP, was targeted. In addition, a limit on the increase in credit allocable to the fiscal deficit was established. 11. The MRC subsumed these IMF conditions and focused on a troika of macro reforms to Tanzania's foreign exchange allocation, trade and price control regimes. In addition, the MRC focused on incentive and institutional reforms in the agricultural, industrial and transport sectors--thus its multisectoral orientation. The credits were to be disbursed in three tranches, depending on progress in policy reform. However, within each tranche, expenditures of the MRC, as well as associated credits and grants, was unhindered. That is, virtually any importable could be financed with the credits and grants except for a small, negative list of commodities such as arms and luxury goods. It was - 5 - recognized and accepted that this sort of unincumbered BOP support would be utilized mainly for imports of intermediates needed to increase capacity utilization. 12. Of the troika of macro reforms the most detailed policy proposal concerned foreign exchange allocation. The MRC took the approach that until the allocation of all foreign exchange was accomplished according to market principles separate approaches could be used, depending on whether foreign exchange earnings were already in peoples' possession (own funds) or earned from exports and either "retained" or surrendered to the Bank of Tanzania (BOT). Own funds and retained foreign exchange could be relatively freely used for imports. These imports had recently increased in value until they averaged about 25 percent of import totals. They were to continue to be allowed under the MRC, although certain unevenly applied restrictions on the foreign exchange retention scheme were to be removed. Concerning the foreign exchange earnings which were to be surrendered to the BOT, the MRC contained proposals for continuing to administratively allocate them, but using procedures which would improve the efficiency of foreign exchange use somewhat. In particular, productive activities requiring foreign exchange such as small-scale enterprises, high value added enterprises and enterprises with low DRCs (i.e. high rates of return) were to be favored in the allocating process in order to reverse the tendency to allocate foreign exchange according to past precedent. This process had resulted in the least efficient enterprises getting most of the foreign exchange because their "need," which was established when foreign exchange was more plentiful, was the most severe. Most of these recipients were also parastatal enterprises. 13. Price liberalization and trade reform were covered in less detail in the macro conditions of the MRC, although price reform was also covered in the sectoral components of the MRC. At the macro level, price liberalization was to consist essentially of shifting items from a price "controlled" to an "uncontrolled" status. At the time the MRC went to the Board, there were about 400 items on the "controlled" list. This number was to be progressively reduced under the MRC and subsequent operations. At the sectoral level, price reforms (really price increases), to improve producer incentives, mainly in agriculture, and improve the financial viability of enterprises, mainly in industry and transport, were stressed in the MRC. 14. The need for trade reform was to be acknowledged under the MRC, primarily by a study. No actual policy changes were to be implemented. This was probably fitting given the extent to which protection was granted by the foreign exchange allocation procedures rather than by the trade regime. 15. There were others in addition to price and trade reforms. In the agricultural sector, which had suffered two decades of neglect but which still showed tremendous potential, the structures of output marketing and input distribution were to be improved. Less specific detail and intention was devoted to industry and transport. However, both the IMF Standby and the MRC stressed that budgetary subsidies to parastatals were to be reduced as part of a general - 6- rationalization and reorganization of the parastatal sector. It was agreed that this parastatal sector was too large and too inefficient. 16. Overall a most significant expectation of the MRC was that short run improvements in production were to result from the infusion of credit and imported inputs in order to increase capacity utilization. This approach would automatically minimize any social costs of adjustment, thus obviating the need to focus specifically on this problem. In fact, it was reasoned that few of the proposed reforms would cause onerous social costs. Instead, the program was viewed as likely to be accomplished with very low social costs, which would be overwhelmed by the short-term gains from increasing capacity utilization. 17. Although the MRC became part of a longer run strategy of transforming Tanzania from a socialist to a market-based economy, it is not clear that this was recognized at the time. It does not appear to have been a part of a pre- conceived, well-thought out adjustment strategy for Tanzania. This follows primarily from the fact that ESW and strategy formulation work was held in abeyance after the onset of the lending hiatus. The MRC, with its focus on the troika of price, trade, and foreign exchange allocation reforms was a fairly "standard" adjustment operation for the 1980s, which appears to have been essentially "taken off the shelf." The credit is nearly unique, however, in that it followed a year long Bank-imposed lending hiatus. In addition, this "standard" adjustment operation was fairly unique for countries, such as Tanzania, with socialist economies in which Government ownership and control were pervasive. In general, this type of adjustment operation had been developed for, and utilized much more frequently in "mixed" or more market-based economies. The credit was, therefore, untested in socialist circumstances such as Tanzania. The Results of the MRC 18. The MRC, including precipitating antecedents such as the Bank's 1984 lending hiatus and Dr. Nyerere's resignation, coincided with a significant turning point in Tanzania. With the MRC, the country began what is now, after events in Eastern Europe and Russia, referred to as the "transition from a socialism to a market economy." The transition has not been as rapid or chaotic as in Eastern Europe and Russia. Also, it still has a long way to go. However, the accompanying social costs have been lower in Tanzania than in Eastern Europe and Russia. In Tanzania, total wage employment has continued to rise although very slowly, whereas it has declined in Eastern Europe and Russia. In addition, the slower pace of change in Tanzania has been consistent with the reality that Dr. Nyerere, the architect of Tanzania's socialist path, remained at the head of CCU until 1990. Although Dr. Nyerere sanctioned change, he counseled patience. The MRC, probably not by design but by happenstance, seemed essentially to fit the bill at the time it was introduced. Thus, in Tanzania, the transition toward a market economy which was initiated by the MRC has progressed at a pace which has avoided either of two possible negative reactions by CCU. One was a sudden reversal of the transition; the other was a steady stone-walling of reforms, generated by a stitained and determined opposition to the transition. - 7 - 19. The specific results of the MRC are set out by policy category in pages 5 through 9 of the attached PCR. In terms of the troika of macro reforms, implementation has been uneven and the impact of the reforms somewhat disappointing. The exchange rate was significantly devalued, from TSh 26 to TSh 195 per US dollar during the three-year MRC period. The number of item categories listed as subject to price controls was reduced from 400 to 12. Procedures for foreign exchange allocation were streamlined somewhat, although not as envisaged in the NRC. Most foreign exchange earnings must still be surrendered and allocated administratively according to priorities rather than according to DRC or rate of return criteria. A study of trade reform, really one for unifying nominal tariff rates, was undertaken and this study, coupled with other elements of a trade reform program, are being implemented under a separate credit operation. 20. Perhaps the most dramatic results of the MRC stem from its micro or sectoral reforms, particularly those in the agricultural and parastatal sectors. The micro reforms to agriculture (see PCR, p. 7) were not very "costly" in terms of increased credit and foreign exchange requirements. However, the reforms, along with those in an adcitional adjustment operation (the Agricultural Adjustment Credit, March 5, 1990) have rejuvenated the sector. It is this rejuvenation which has essentially accounted for much of the "real" success of the MRC or its impact on increasing growth in GDP and exports. The financial adjustments under the MRC were significantly influenced by the fiscal/parastatal reforms targeted in the Standby and the NRC, particularly those aimed at reducing current subsidies to government corporations. These current subsidies were reduced to zero in 1989. 21. The policy reforms agreed to in the MRC were supplemented by significant amounts of credit and grant inflows to be used for imports to increase capacity utilization. This use of the credits and grants occurred as expected and resulted in significant increases in GDP and exports (see Table 1). - 8 - Table 1 - PROJECTED vs ACTUAL INDICATORS FOR MRC 1986 1987 1988 1989 1990 (1) GDP Growth (%) Projected 3.0 3.8 4.0 4.0 4.0 Actual or Estimated 3.6 4.0 4.8 4.4 4.5 (2) Real Export Growth (%) Projected 5.3 12.8 14.2 13.3 2.0 Actual or Estimated -4.8 16.7 6.2 9.2 10.5 (3) Real Import Growth (%) Projected 20.4 2.5 0.3 0.7 -0.7 Actual or Estimated 6.1 0.7 0.9 5.5 2.7 (4) Current A/C Balance (US$ 'm) Projected -596 -656 -660 -652 -652 Actual or Estimated -397 -742 -744 -683 -758 (5) Gross Investment/GDP Projected 16.4 14.6 14.5 14.5 14.5 Actual or Estimated 18.0 20.9 18.5 23.3 21.0 (6) Inflation (% p.a.) Projected 30 20 15 15 10 Actual or Estimated 32 30 28 23 13 Source: Various President's Reports and the PCR. The improvements in GDP growth and exports indicated in the table are directly due to improvements in the agricultural sector, but indirectly the result of increasing capacity utilization elsewhere, so that resources became available for expanding agricultural production. 22. The policy content of the MRC and the credit and grant flows associated with it, were supplemented, in the agricultural sector by important institutional changes to the marketing of agricultural output and the distribution of agricultural inputs. These changes consisted mainly of removing Government and/or party (CCU) controls--in effect, moving the country toward a more market- oriented way of doing things. Because these institutional changes in the agricultural sector were so broadly based and explicit, they were closely watched by Tanzanians to see if they were applicable to other sectors of the economy. - 9 - The relative success of these changes, even if they were not as dramatic or fundamental as they might have been, is an important reason why the Government and particularly CCU have accepted the inevitability of the transition to a market-based economy. CCU has, as a result, gone along with subsequently proposed reforms. II. OVERALL ASSESSMENT AND SUSTAINABILITY Overall Assessment 23. By the usual indicators, the MRC was a successful operation. It accompanied a developmental volte-face by the Tanzanian Government, and later on, by the political party CCU. It advocated policy and agricultural institutional reforms which were consistent with the country's transition to a market-based economy. Disbursements of credits from the MRC and of credits and grants from associated sources increased capacity utilization and, therefore, caused greater growth in GDP and exports. Sustainability 24. Sustainability of the MRC, taken in isolation, was probably low. Its main emphasis was on improving rather than reducing government and/or political intervention into the economy. In addition, it emphasized using credit and grant inflows to increase capacity utilization rather than to undertake new, more efficient investments. Neither of these elements is consistent with sustaining the transition from a socialist to a market-based economy. Improved or enlightened intervention would help improve things for a while, but their effectiveness deteriorates over the longer run and frustrates true adjustment. In addition, use of credit and grant inflows for increasing capacity utilization, though it will certainly give the economy a short-term boost, will thwart true adjustment, or the movement of resources toward more efficient productive endeavors. 25. To say that the MRC in isolation was probably unsustainable is not to imply that the program and the approach initiated by the MRC were unsustainable. On the contrary, the transition initiated by the MRC, and its preceding events, though not well articulated at the time, redirected Tanzania toward a more sustainable course of development. The MRC, including the lending hiatus and political events accompanying it, initiated Tanzania's transition toward a market-based economy. The transition has probably been slower and more tentative than it needed to be. But at the time, the MRC took a very risk-averse approach in a fairly recalcitrant political situation. Thus, a clearly unsustainable situation of aid dependency, which existed prior to the lending hiatus and the initiation of the MRC, is now in the process of being reversed. - 10 - III. ISSUES AND LESSONS ARISING FROM THE AUDIT 26. It is difficult to determine the extent to which the MRC caused success or simply accompanied it. It is likely that the answer is some of both. Clearly some prior events, notably the lending hiatus, had a beneficial impact. In addition, some elements of the MRC's "policy package" seemed essential, but others could well have been "excess baggage" or "window dressing" in the operation. The credit had a predictable impact because it financed increased capacity utilization, but this use of credits may well have reduced the amount of credit available to finance more adjustment-oriented undertakings--the type which re-employ resources in more efficient endeavors. The credit was also a "standard' adjustment operation used in the mid-1980s. It was essentially taken off the shelf and rushed into use without appreciable prior Economic and Sector Work or strategy formulation. If more preparation had been done, how much better might the operation have been? Finally, although the President's Report and other documents stress the collaborative nature of the MRC, the PCR (para. 45) suggests, with justification, that program "ownership" by the country was low. This raises questions regarding how "ownership" might have been increased and if accomplished, how this would have affected the essence and success of the MRC and subsequent operations. 27. It is interesting to question how important the lending hiatus was, relative to the MRC, in moving Tanzania toward its transition from a sociali'st economy. The lending hiatus was a heavy hammer to wield. In the case of Tanzania, its impact was intensified by the fact that it unified formally diverse, even competing donors so that they fell in line behind the Bank. It :'so galvanized weak voices in Tanzania. The lending hiatus itself was, therefore, an important reason for the MRC's success. 28. The fact that there was a cessation of lending did not guarantee that the MRC would be successful. If the lending hiatus had been followed immediately, in early 1985, with the MRC, a large credit focused on increasing capacity utilization, the transition process would probably have been short- circuited because the lending process would not have conveyed the need to adjust. As it was, the Bank and IMF delayed and deliberated for nearly two years following the lending hiatus, thus allowing the severicy of Tanzania's situation to become apparent both among other donors and within the country. This led the Government to more appropriately implement the MRC's conditions, particularly the sectoral ones affecting agriculture and the subsidized losses of parastatals. 29. Another issue concerns the importance of MRC's policy package as a whole, as opposed particular refnrm conditions within the package. In fact, it appears that several of the conditions in the policy package were neither necessary nor effective. Thus, the significance of the troika of the macro reforms is not obvious. Trade reform was not heavily emphasized anyway and reforms which occurred to the foreign exchange allocation system were only vaguely along the lines envisaged in the MRC. Price decontrol was well - 11 - implemented. however; the list of price controlled categories was reduced from 400 to 12 during the three-year MRC period. But this reform seems to have made little actual difference; changes to producer signals either did not occur or were not reacted to. Instead, the reforms with the most impact were those which were accompanied by "official attention" in the form of associated institutional reforms or infusions of technical expertise, credit, foreign exchange, etc. Thus, the sectoral reforms, particularly the price increa-3es and institutional reforms in agriculture, and the price increases and subsidy reductions in the parastatal sector seem to have had the greatest impact. 30. The emphasis in the MRC on financing imports to increase cap city utilization caused a jump in output and exports and prevented the occurrence of social costs of adjustment. However, financing increases in capacity utilization was a risky strategy given Tanzania's past poor investments and its obvious dependence on aid inflows. Financing increases in capacity utilization can cause short-term expansion in exports and GDP but it can also lead to continued entrenchment or acceptance of inefficient production processes. Thus the MRC was walking a very fine line in allocating credit and foreign exchange for increasiqg capacity utilization while advocating policy reforms which would result, over the longer run, in allocating these scarce resources elsewhere. This conflict does not appear to have arisen with respect to agricultural reform. In that sector, reforms, many of them in the MRC, started the sector on the road to adjustment. Things appear to have been different in industry. This sector was a major recipient of MRC funds but it has undergone little adjustment to date. 31. Two other, related issues arising from the MRC concern the appropriate breadth and pace of adjustment. This is essentially a question of the Bank's adjustment strategy for Tanzania and of the design of adjustment operations. As noted earlier (para. 16), the MRC was not really the product of a deliberate, well-reasoned strategy for transforming a socialist economy. Instead, there was little supporting ESW or strategy formulation prior to the MRC. The MRC was essentially a quick, quite standard reaction to an opportunity created by the lending hiatus. It is, therefore, possible to question whether more intense ESW and strategy formulation prior to the MRC might have resulted in a more appropriately designed operation. A tentative answer to this question is "yes." 32. The design of the MRC seems particularly deficient in two respects. The operation pays almost no attention to what would generally be called "factor market reform"- -really reform of the mechanisms of factor allocation where factor markets do not exist. Tn addition, the MRC lacks a concern for the pace of adjustment. The issue concerning how best to improve the mechanisms of factor allocation has yet to be addressed in adjustment operations in Tanzania. True adjustment, in a more market-oriented economy, will usually be accompanied by increased unemployment of factors of production or, enterprise closures and restructurings and increased unemployment of labor. The increased unemployment of labor, in particular, gives rise to significant social costs of adjustment, but, in a market economy, leads to improved work performance and a reallocation of labor. Without factor markets, improved allocation and performance of factors * 12 - of production cannot automatically be assured to occur as a result of adjustment operations. 33. Instead, the adjustment strategy and one or more adjustment operations, must explicitly address the factor allocation issue, most probably by proposing administrative procedures which approximate the workings of factor markets but which are consistent with the emergence of competitive factor markets. The MRC contains some recognition of the need to administratively influence the allocation of capital. It advocates Government use of DRCs and rate of return criteria for allocating foreign exchange and credit. However, these were proposed in the context of increasing capacity utilization rather than for increasing the efficiency of capital use. Furthermore, no mention is made of the need to intervene in order to improve labor use by insuring that unemployed labor is re-employed in more productive processes. Given the absence of factor markets in Tanzania, the attempt in the MRC to minimize social cost of adjustment in order to avoid the need to deal with these labor reallocation ise -s was a significant shortcoming of the operation. 34. Issues concerning the appropriate pace of adjustment were not considered in the MRC but have been raised in subsequent adjustment operations (see the Agricultural Adjustment Credit of March 5, 1990). In terms of the MRC, the question concerns whether leisurely-paced reforms, particularly the troika of price, trade and foreign exchange reforms, should have been included in the MRC. The probable answer is "no." Studies and observations from elsewhere in the world suggest that rapid, even sudden implementation of macro reforms often increases their impact or effectiveness.- Suddenness changes expectations by convincing people that behavioral changes with respect to how they earn their income must be made. A more leisurely-paced reform, on the other h&nd, tends to engender skepticism and reduce the policy credibility of the Government. This leads to a blunting of the incentive impact of the reforms and/or to maneuvering to nullify the potential impact of the changes by stimulating off-setting developments. Pace issues arise in the MRC mainly because of the troika of macro reforms included in the MRC. As noted above, these reforms did not end up being particularly important. However their inclusion, of questionable usefulness given the associated leisurely time horizon, they have reduced the impact of the introduction of an appropriately-paced troika of reforms later on. 35. To say that the MRC would have been a better cperation if it had not included a leisurely-paced troika of macro reforms is really a retrospective observation. At the time the MRC was designed, in mid-1986, the issue of the pace of reform was not generally recognized as being very important. As the importance of the issue emerged, subsequent operations in Tanzania have shown an increasing preoccupation with the issue. It is likely the MRC's menu of reforms, but more rapidly paced, could have been adopted in Tanzania in 1986, given Dr. y Although, in some cases, the dislocation caused by dramatic reforms can lead to popular and political resistance. - 13 - Nyerere's position as head of CCU and given the party's recalcitrance regarding the need for reforms. 36. The PRC (para. 47) questions the extent of "ownership" of the reforms in the MRC. This is appropriate. The Tanzanians had little idea where the reforms being proposed by the Bank and the IMF were taking them. On the Bank side, the lending hiatus was accompanied by very stilted Bank/country dialogue, a near cessation of ESW and strategy formulation and a rush to formulate and process the MRP. As a result, time was not taken to develop and carefully explain what adjustment really entailed. The MRC was essentially successful because it "financed" Tanzania's shift onto a path toward a market-based economy. However, as with the pace of adjustment issue, there is strong reason to believe that if more attention had been paid to the country's ownership of the MRC and to the adjustment strategy, the adjustment elements of the MRC would have been more successful. Lessons Learned 37. Three main lessons emerge from the MRC experience. One concerns the usefulness of the lending hiatus. A second concerns the importance of continued or even increased ESW and strategy formulation during a lending hiatus. The third relates to the need to insure that each adjustment operation fits comfortably together in an overall adjustment strategy so that time and effort are not wasted undoing, in a subsequent loan, what was done in a previous one. 38. One lesson from the MRC experience is that the Government will be more receptive to adjustment advice if the receipt of additional credit and grant flows is uncertain, ar even better, inexorably linked to the successful use of previously extended credits and grants. This lesson emerges from the impact that the 1984 lending hiatus had on the Government's receptivity to implementation of the MRC. Prior to the lending hiatus, significant amounts of credits and grants flowed to Tanzania no matter how wastefully earlier flows were used. The certainty and the "costlessness" of the flows led Tanzania to relax its development efforts. It was only after the lending hiatus that renewed emphasis on the need to reduce aid dependency--to pay more attention to the policy and institutional needs of development--occurred. 39. A second lesson concerns the usefulness of being prepared for the resumption of operations after a lending hiatus. The Bank pulled back and cut down after the onset of the lending hiatus. This was a budgetary move, to save money, as well as a reaction to the Government's lower receptivity to Bank ESW missions. However, the Bank should have capitalized on the opportunity provided by the hiatus to undertake basic economic analysis and co .ceptual work without ESW missions, if necessary. More, not less, ESW and strategy formulation work should have been done during 1984 and 1985 so as to have been prepared to provide the full menu of adjustment advice once Tanzania's receptivity had been raised. - 14 - 40. The third lesson concerns certain gkps or inadequacies in the adjustment strategy or advice conveyed via the MRC. The credit may have reinforced certain "bad habits" through its inattention to both the need to reform factor allocation mechanisms and the need for rapidly-paced reforms. These shortcomings were rationalized, in the MRC, through the provision of financing for increased capacity utilization. This would, per force, obviate the occurrence of resource reallocation and social costs of adjustment. These omissions from the MRC limited the beneficial impact of the operation and, to some extent, of subsequent operations. It engendered doubt regarding the Government's policy credibility and a feeling in Tanzania that even more surprises were due in the future. - 15 - OCT.31 'TP ic ' WORLD 9*N< TANZANIA DAR-ES-SALAM ae 1o Page 1 of 12 TO IWAM. PA lbd 911L th as SUAANa TMU REIRo aJJC OF TANZAmA 7M MUM= 1R FIWANCM ECONOMIC AFPAIRS AND PLANNM TYC/B. 40/76 29th October, 1986 Mr. B. Conable, President, Internati,nal Development Association, 1818 H Street, W WASHInaTON 1C 204i. Dear Mr. Conable, IETTER OF h).ELOPM= POLICY The Government of Tanzania (GOT) rexests the International Develolment Assoointion (IDA) to provide an IDA oredi;'in the amount of US 50 million, an African Facility Credit in the amount of US$ 46.2 million, and will seek a Special Joint Financing Facility Credit in an amount of US$33.8million in a"pyort of the Covernmont'n econoAe recovery programme. The requested crolits would enable the Government to intensify its ufforts towards restruc- turing the economy, to continue with various measures of adinatment already started and to undertake new initiativeso 2. The Government has already reached an understanding with the International Monetary Fund (IMF) on the major macro economic policies and it is the Government's hope that additional resources from the World Bank and other multilateral and bilateral agencies will complement and hasten the pace of economic recovery now set in motion. I wish also at this juncture to commend the World Bank for convening'the Consultative Group Neeting for Tanzania in Paris on 10th and 11th June# 1986 where Tanzania's Recovery Programme was discussed and appropriate support given. I believe that the role of the Bank as a close partner in development will continue and be enhanced. 16- ANNEX I OCT.31 'IP If* WORLD BP< TP4ZI4A DFR-E-SAW Page 2 of 12 St 2 St 3, Since 1978v followtng the secon4,wave of oil price ahooks global recesaion the coll Ass of commodity Ie dro* ht and the effect7of the break-up oF the last rionn Community, the economic and financial situation of Tanzania has deteriorated and the country is presentaly experiencing its worst economic crisis since indeendence in 1961. Production has declined steadily in a1 the major sectors leading to a decline in per cpita incomes and a deterioration in the country'e social and physical infrastructure. The rate of inflation remains i foreign exchange has beoome increas ±nily scarces he country hAs accumulated substantial external payments er;ers feed and basio consumer items are in great eortage, and the quality of ssential ervices had declined sharply. The effects of large fiscal defitto, rapid monstary expranion, high rates of inflation, and balance of payments deficits have accelerated since 1979. The general economic decline rasulta from a combination of external and domestic factors. But, -owever caused, a country's economic problems are piimarily its responsibility and the Govern- ment of Tanzania is determined to undortake the measures needea to reverse tm dealluw in Jiv.zAg aandawds and in the country's productivo copacity. It is in this spirit that in June 1982, the Government adopted a three year Structural Adjustment Prograxme (SAP) to restructure future economic activity through better incentive systems, to rationalize production structures, and to improve planning and Control mechaniams. These policies were further roinforced with the measures adopted with the 1984/85 budget. 4. As a result of the above policies, initially the Government was successful in increasing the resources available to agriculture, raising producer incentives, and cutting expenditures. But chronic shortages of foreign exchange continued to exist, production continued to alacken and growth remained inedequate, Experience so far gained has shown that more actions and increased efforts is required to redress the imbalances in the economy. Thus, there is the nee, to intensify end complement . ..../3 -17 - ANNEX I OCT.31 *P 1*1 AORLD BAN< TAZANIA DAR-ES-SALAM Page 3 of 12 the recovery measures undertaken under the SAP and with the 1964/85 budget. These measures, which had been developed in the contet of a medium-term recovery pro amme ad have been initiated with the introduction of h 1986/87 budget, are described below. OrervietW the. Ren0er .rnarame 5. The recova pogramme representa a continuation of the structural adjustment effort which wL11 enable Tanzania to achieve sustained growth-in real incomes, through increased output of food and export crops, rehabilitation of the physical infrastructure, increased capacity utilization, and appropriate pricing, fisical, monetary and exchange and trade policies. The programme envisages that the Tanzanian economy would gadually attain positive growth rates in per capita iCome, a sustainable external balance of payments position, and an acoeptable low rate of inflation by the end of a medium-term period of 5-7 years. To these ends, the major emphasia will be to improve the efficiency of resource use by ensuring their allocation to the most productive aeotors, and by providing those users with the necessary incentives to employ them in the most efficient manner. Accordingly, within the present socio-politioal framework chosen by the people of Tanzania, greater attention will be paid to establishing correct price signals in the economy, and greater weight will be placed on people's initiatives and cooperative efforts to mcrease the production and marketing of goods and services. Furthermore such price signals would be accompanied by approprIate fiscal and monetary policies. Given the inevitable time lag between the establishment of policies and the resulting effects in production, and given the above-mentioned time-frame for growth and balance of payment adjustment, it will be important that key corrective policies are initiated within a relatively short period - i.e. within two years. 6. Within the medium-term established, the Government has identified these corrective policies as well as the time frame for their implementation. As elaborated in the Economic Recovery Progae document and measures already announced in the 1986/87 budget, the important arears are in producer prices, exchange rate adjustment, - 18 - ANNEX T OCT.31 'SW 19V WORLD BANK TANZANIA DAR-ES-ALAM Page 4 of 12 s: 4 :: trade regime and fiscal and monetary policies, Other areas are institutional reforms improvement of public sector operations and economic management. These policies will be continued, reinforced and accompanied by suitable institutional, policy and rehabilitation measures in the key sectors of agriculture, industry and transport. 7. The success of the above medium-term programme will depend crucially on the provision of necessary inputs to rehabilitate the productive sectors and to sustain their recovery. While the proposed measures should increase the capabilities of the Tan2anian economy to generate additional domestic resources and foreign exchange, this process would inevitably be slow in the iLtial phase of the programe and i4l1 therafere need to be supported by additional excepLional, balance of payments assistance. It is expected that such require- ments of exceptional assistance will be relatively high in the first three years of the programme period, but should taperaCf by the end of the medium-term recovery period. External Sector Polices S. As stated earlier exchange rate policy is being accorded crucial impo;4ance in the recovery programme and by mid 1988 the Government intends to establisl an equilibrium exchaige rate. As, a major step in this direction, the Tanzanian shilling has been depreciated to US$1 m TSh.40 as of June 19, 1986. It is the Government's intention to make periodic adjustments in the rate in order to remove the overvaluation with the overall objective of attaining an equilibrium rate by mid 1988, As an equilibrium exchange rate is achieved the Government also intends to progressively move away from quantitative restrictions and toward greater use of tariffs and other indirect economic levers. 9. In the interim period before the establi shmert of an equilibrium exchange rate, the Government will need to continue with a number of measures to ensure better resource allocation. On the imports side the ... ./5 - 19 - ANNEX I OCT.31 '96 Ktll WORLD BANK TANZANIA DMR-CS-SALpe Page 5 of 12 "own-funds" imports scheme using "own-runds" and proceeds from export retention has been expanded and now covers a very wide variety of produots. On the exports side, the e2port retention scheme is being retained but will be reviewed by March 1987 to oncurs that it enhances efflolent prnduction tad uv,nrrm& with thA eb$ectyes of the Eoonomio Recovery Programme. The review will cover the impact of the scheme on not foreign exchange earnings and on foreign exchange available for central allocation, the appr-opriateness of the overall retention rates and %ne exiects of differentiala buLwen rates. in1 view of the fact that tariffs will increase in importance as the exchange rate becomes more realistic, the Government will carry-out an overall review of the present tariff structure and will be making appropriate changes in the structure during the ERP period. 10, For the present the Government needs to maintain a system for administrativv allocation of foreign exchange, but the existing system will be improved. The system will embrace all foreign exchange li)ely to be available to Tanzania including export earnings, multilateral and bilateral ld end commercial credit. Estimates of total foreign exehange availability and demand will be made quarterly as well as annually. In addition the criteria used in determining the priorities for use of foreign exchange will take greater account of the importance of economizing on foreign exchenge and the overall economic efficiency of operations of the proposed users. This will involva increasing the share of foreign exchange going to the agr.-culture and tronsport sectors. 11. Tanzania's difficult foreign exchange position has meant that the country has been able to service only a fraction of its debts. Tanzania's total foreign debt outstanding is estimated at US$ 3.2 billion; the external debt service ratio has risen from about 17 per- oent in 1980 to nearly 55 percent in 1985; or total external paymonts arrears (public and private, as of end-March 1986, are eatimated to amount to USI 700 mllion. It is the Government's intention to settle the bulk of - 20 - ANNEXI OCT.31 '9 19 - WORLD BANK TANZANIA ARP-ES-SALAM Page 6 of 12 St 6 :3 these arrears by seeking rescheduling arrangemento with creditors in the framework of a general aeement on debt relief, and by some cash payments. In view of the limited prospects for foreign exchange earnings in the near futuro, the Government will also pUrsul A Vry cautious foreign borrowing policy in 1986 and 1987. Filgal, MoMtaQ=._PrWgg_and DAMtribution Pq.l.es 12. As part of the economic recovey programme the Government intenda to reduce substantially the fiscal deficit, while improving the quality of public expenditures. To this end, the 1.986/77 budget aims to reduce the overall budget deftoit (excluding debt amortization) to TSh. 17 million or 12 percent of estimated GDP through a combination of revenue enhancing measures and restraints on expenditures. The new tax measures, which are designed both to raise additional receipts and improve the elasticity in the revenue system, include increases in import duties from 20 to 25 percent, conversion In various specific duties on beer, spirits, soft drinks, and cigarettent to an ad valorem basia and increases in sales taxes on some pvL'uleum products, On the orponditure aide recurrent expenditures (excluding amortization) in 1986/87 is estimated to increase by 50 percent, while development expenditure will rise by 80 percent. A substantial part of the increase, especially for development expenditures, reflects the adjustments consequent upon the exchange rate depreciation and the accompanying price adjustments. But the Government is undertaking active steps to reduce operational costs and to increase productivity and efficiency in public administration. 13. As regards development expenditurest the Government in the 1986/87 budget has incorporated measures aimed at ensurirg that resources are being used where they can be of greatest value in terms of the rehabilitation of the economy. In the coming year, the Government will be working closely with the World Bank on a medium- term strategy for public expenditures, covering both recurrent and development outlays and institutional mechanisms for yltwunuh4 and co-ordination. In addition - 21 - ANNEX I ocT.31 *R; ltr-r- WO BAN< TANZANIA DAR-ES-SALFV Page 7 of 12 :s 7 as the Government will undertake, together with the World Bank, a detailed assessment of the parastatal sector. This assessment will include proposals for rehabilita- ting or restructuring specific enterprises. All of these activities should help greatly both in clarifying the future role and responsibilities of the publio sector and in ensuring that these responsibilities are carried out more efficiently than in the past. 14. The Goveriment will implement a monetary and credit policy which is consistent with strengthening the balance of payments and reducing the inflation rate, and which will meet the credit needs of the public and private sectors respectively. To attain these objectives, the maximum total credit expansion in the fiscal year 1986/87 will be limited to 12 percent and the expansion in broad money to 11 percent, compared to an expected increase of about 34 percent in nominal gross domestic product. Seperate credit ceilings are also being established for the public and private: sectors and there will be quarterly limits on credit expansion to seven specified marketing boards tcoffee, cotton, sisal# cashewnuts, tea, tobacco, and the National Milling Corporation). The Government also intends to make the interest rate structure positive in real terms within two years and as a major step in this direction recently announced that the treasury bill rate would be increased to 9.5 percent, the 12 months saving deposits rate would increase to 15 percent, the highest lending rates would be increased to 21 percent, and there would be corresponding increases in all other interest rates. 15. In recent years, there has been a significant reduction in the number of products subject to price control and it is Government policy to continue this process. Accordingly, except for 12 cat dories of commodities, all the remaining controlled commodities will be decontrolled over a period of three years. For the specific items where price controls will remain either during or after this transitional period, frequent price adjustments will be made to ensure =at relevant enterprises are able to avoid imbalances in their cost- price relations. The Government also intends to deconfine - 22 - ANNEX I OCT.31 'FK 1* T .ORLD BAW TANZPNIA DAR-ES-SAM Page 8 of 12 1s 8 :s the domestic distribution of goods aR and when price controls are removed. MAQ91lt1ak d til 16. The recent output stagnation and the decline in export earnings are primarily attributale to the poor performance of the agricultural sector (the mainstay of the Tanzanian economy), which in turn is attributable, intgr aLA to a sharp decline in world commodity prices and real producer prices, Given the central role of agriculture in the recovery programe, and the important role of producer prices in the overall incentive package for agriculture, the Government intends to set producer prices at a level equivalent to 60-70 percent of F.O.B. prices, or to ensure.an annual increase of at least 5 eroqnt in real terms which ever is higher. For 986/87, as a first sop toward meeting that objective, the producer price of coffee has been raised by 80 percent, of cocoa end cardamon by 60 percent, of tea and cashews by 55 percent, of tobacco and cotton by 30 percent, over those prevailing for the 1985/86 season. Regarding domestic food crops, the Government has already eliminated all budgetary subsidies. Presently, the administered producer price for maize is the minimum guaranteed price bythe N. The NMC, in turn, will price its sale of maize and maize flour in such a way as to avoid any trading losses on these commodities. All other commodities traded by the NMC will also be.priced in such a way as to avoid any subsidies, 17. For 1987/88 the Government intends to introduce further improvements in producer price incentives and will reviewing the proposed levels of producer prices with the World Bank. The ratio of producer prices to F.O.B. prices will be increased by further reducing real marketing costs in 1987/88 and hence passing through the maximum possible share of shilling gains arising from the exchange rate changes to farm level prices. Efforts will also be made to increase the incentives to farmers to increase the quality of production by substantially widening the quality margine to better reflect quality margins on the world maricet. 18, The Gcvernment recognizes that further increases in producer prices and the transfer of a larger proportion of export earnings to the producer depends on major improvements in the efficlency of agricultural marketing. WkiL 8 ANNEX I - 23 - Page 9 of 12 :: 9 :: In recent years cooperatives have been reintroduced as the primary agents for.crop procurement, storage and delivery and marketing boards have inherited the marketing responsibilities of the old crop authorities; but these institutional changes are still new and it may be solue time before they have an effect on unit costs of marketing and processing. In the coming year the Government intends to expand the role of cooperatives by permitting cooperative unions to become involved in exporting agricultural products and importing agricultural inputs either directly or through agents. The Government will also be undertaking a major review of the relative responsibilities of marketing boards, cooperatives and other private institutions with a view to further expanding the role of cooperatives and other private institutions, and limiting the role of marketing boards. 19. The marketing system for specific crops is already evolving in these directions and will continue to evolve in the coming two to three years. In the case of food crops for example licensed private traders are now competing with the NMC and individuals are permitted to transport up to 500 kgs of grain between regions without a permit. The Government believe that as output increases given the measures taken the need for permits would cease. In the case nf coffee the Cooperative Unions and organized farmers would market directly on the coffee auction under the supervision of the Marketing Board in the case of tea all private estates are already permitted to export directly, the Tanzania Tea Authority will continue to market smallholder tea but a second payment system will be introduced as an incentive to farmers to improve quality. All private sisal estates are now exporting their product directly and the Government intends to restructure the Tanzania Sisal Authority such that state owned sisal companies will do the same. The Government also intends that cooperative unions concerned with cotton, cashewnuts and tobacco will be able to export directly or through agents. Our goal is to start implementing this policy during the 1987/88 crop year. 20. Improvements in the efficiency of agricultural input marketing are also being introduced. In the case of fertilizer and seeds the Tanzania Fertilizer Company and the Tanzania Seed Company will continue to be responsible for importation aside from imports under the "own funds" imports scheme, and will continue to make these inputs - 24 - ANNEX I OCT.31 OM V WO*LD BV< TANZRIA DAR-ES-SALM Page 10 of 12 t: 10 a: available at regional depots at controlled prices. The current practice whereby coo rative unions, ivate traders and individuals buy rtilizer from to regional depots and sell to farmers at market prices will continue. In the case of other inputs,.-If there are demostrated price advantages to the farmers agricultural implements, agricultural chemicals, and gunny bagf, the Government intends to permit cooperative unions (and other institutions) into the business of importation as well as domestic distribution and will ensure that such institutions have doess on a non-discriminatory basis to foreign exchange om the Bank of Tanzania to finance the imports of such inputs. 21. In addition to improvements in incentives, policies and the efficiency of agricultural institutions it is essential that the agricultural sector receives an adequate share of financial and foreign exchange resources. In this regard, the Government will ensure that the public expendi- ture and import programs adequately address the immediate agricultural input and transport requirements of the agricultural sector as well as the longer term need to improve agricultural research, extension and other support services. Industrial Polioie 22, Although the Government will be giving priority to agriculture and infrastructure during the recovery programme period, industry will continue to have a strong supportive (Ale in Tanzania's development. But efforts will be made 9reorientate the industrial sector by chanelling resources .owards productive enterprises at the expense of inefficient enterprises. In this regard, the exchange rate, trade, foreign exchange allocation and pricing measures alread outlined will be of 6reat significance and will be com le- mented by the follow measures. First deconfinemen. of the importation and domestic distribu ion of all industrial inputs will be further relaxed. Second, the Government will review the public investment programme for industry to ensure that all projects are economically viable. In the public sector only those industrial projects included in the 1986/87 Ann4al Plan will be implemented. The programme for 1;87/ will be reviewed with the World Ba as part of the overall public expendi- tures review. As part of ne parastatal review, Lhe Goverr- ment will also work closely with the World Bank on the identification of medium and large scale firms ir the - 25 - ANNaxl Pnge 11 of 12 OCT.g 41 I,Ir v 1 )-4 rl-1 ! h 'ft li,7'll 1 lq 100 0 a: 11 st industrxil aMctor in neot of rhnbilltation and restructuring T,j will wr, out fjrn.pacific measures to do so. 23. The Govirnment elso intends to improve the efficiency of foreign exchange alloation within the industrial sector. To thin effect, tho Government is designing specific guid- lines and oriterin to allocate foreign exchange to firms that are efficient, and are consistent with.Goveriment's ob4ectiven, whilo minimIring allocations to unproductive activities. Imuo%orp-ntntlon of then* Guidelines will begin before the 7nd of 1986. loajqrt Poikgg 24, Trinoportatlon i a major bottleneck for Tanzania' s economy and efforta to increase the carrying capacity of the exisiting syatcm and tu reduce operational ineffioiencies are being given high priority by th? Government. The port syatem is b-ing rehabiliated, a prograe to rehabilitate. the most importeant nnct -ns of thQ road system is underway and an emprg,ny relief programme fcr the railways is being prepared. The Govtrnment will also be endeavoring to improve the efficitnoy and viability of the transport systems the allocation )f foreian exchnSe to cooperative and private spctor operators will be increased, intra- regional, tuc,ing torif-1" and rail tarific for both freight and possonr ervices All be Inarmasod to reflect the full coeta o1 providing theso nervicen. The Government will also prepare by January 1987 a National Transport Policy Paper whIch will provide an additional vehicle for the analysis of efficIony issues and the formulation of new policies. ZoRiAop 25, In rcnt months, the Government ha! taken a number of major poli' -I as part of its economic iecovery prograwmc. But it in rcoiviized that these are only the initial ateps in a pro.rwmo thit will need to last several *,**/12 -26- ANNEX I OCT.31 tK 1643 W0a.D 2~ TMMS .Page 12 of 12 st 12 1: years and inolude futh*r pri"ing wid inatItutional reforms s well as provinion of quiok dtsbureing finanoial assistance to meet imedlate import requiLrements. In this context, we are counting on World Bank support and akng for a multiseotor rehabilitation oredit in rupport of our ecoonomla roeovery programe. Yourn einocrely D.MUa - 27 - PROJECT COMPLETION REPORT TANZANIA MULTISECTOR REHABLITATION (CR. 1741-TA AND CR. A24-TA) April 17, 1991 ry Operations Division -rn Africa Department Region - 29 - PROJECT COMPLETION REPORT TANZANIA MULTISECTOR REHABILITATION CREDIT (Credits 1741-TA and A-24-TA) PART 1 - PROJECT REVIEW FROM THE BANK"S PERSPECTIVE A. Scope of the Government's Economic Rehabilitation 1. The Multisector Rehabilitation Credit (MRC), approved by the Board of Executive Directors in November 1986, was in support of the first phase of the Government's medium - term economic recovery program (ERP) which was begun in June 1986. In its original form, the financing package for the MRC included SDR41.3 million (about US$50.0 million equivaient) from IDA, SDR 38.1 million (about US$46.2 million equivalent) from the IDA administered African Facility and about US$33.8 million equivalent Special Joint Financing from the Federal Republic of Germany, Switzerland and the United Kingdom. In January of 1988, the Board approved SDR 22.5 million (US$30.0 million equivalent) and SDR 19.6 million (US$26.0 million equivalent) supplementary financing from IDA and the African Facility, respectively, to which the Saudi Fund and the United Kingdom added another US$- million. Subsequently, the MRC attracted additional cofinancing from the Government of Norway, NK20 million, the Government of the Netherlands, FL 50 million; Italy, Lire 70 billion, and SIDA SK 48 million. These funds are now fully disbursed. Economic Background 2. In the first six years after Tanzania achieved independence in 1961, its economic policy objectives stressed growth in per capita income and national self sufficiency in skilled manpower, relying mainly on market forces. The economy, which was predominantly dependent on subsistence agriculture and a few estate crops, registered rapid growth. However, the country continued to depend on external financing, made little improvement in income distribution and did not diversify its economic structure. Disappointed with this situation, in 1967 the Government introduced sweeping changes and embarked on a new epoch of economic management. 3. The new priorities, as enunciated in the Arusha Declaration, were directed towards establishing a socialist society with emphasis to be given to broad-based rural development, self reliance in development effort, and the development of an educational system geared to the needs of the people. The state was to play a leading role, especially in the reform and creation of new institutions. This led in the late 1960s and early 1970s to the nationalization of large-scale industry, commerce and finance, the formation of Ujamaa (communal villages), and the replacement of farmers' cooperatives with state-run crop marketing authorities responsible for marketing Tanzania's main export crops. The Government also embarked on - 30 - an ambitious program of industrialization based on import substitution and the creation of heavy industries. 4. Despite the abrupt major institutional changes, Tanzania managed to achieve improvements particularly in the social sectors, during the 1960s and 1970s. Significant results were achieved in the areas of education and improvements in literacy, general health care an i infant survival. By the end of the 1970s, the Government had made substantial progress towards achieving its social and equity objectives through the development of social services. The enrollment rate in primary schools increased from 32 percent in 1965 to almost 60 percent by 1975, life expectancy rose by nearly 5 years and access to sate water improved in both rural and urban areas. Significant reductions were registered in net income disparities through the tax structure and a drastic compression in net salary ranges in the public sector. 5. The Economic Crisis. In the second half of the 1970s, the Tanzanian economy entered a period of decline from which it is only now beginning to recover. The downturn in the economy was caused in part by a series of external factors including successive droughts, the rapid increase in oil prices, the collapse of the East Afrran Community and the war with janda. But the crisis also drew attention to some of the underlying weakness in the management of the economy. These included inadequate incentives and resources for the agricultural sector, a poor industrialization strategy, excessive administrative ontrols over economic activity and the continued growth in the size of the public sector without due regard to the limited financial and administratiN e capacity. GDP grew by 5.5 percent per annum between 1973 and 1978 but by only 0.4 percent per annum between '978 and 1982. Inflation accelerated to about 30 percent, the fiscal situation deteriorated sharply after 1979 with deficits averaging about 16 percent of GDP and exports and imports both declined significantly. By 1982, import volumes were 32 percent below the level in 1978 and 24 percent below the level of the early 1970s. 6. Survival Plans and the Structural Adjustment Program. In an effort to address the country's economic problems the Government launched "Economic Survival Plans" in 1980 and 1981 but it was not until 1982 with the introduction of a "Structural Adjustment Program" (SAP) that a more comprehensive approach to resolving them was initiated. This program sought to provide an overall framework of measures designed to restore financial and economic stability, stimulate agricultural production and improve efficiency, while endeavoring to protect the provision oi basic social services and the incomes of the most vulnerable groups ir die society. 7. The measures adopted under the SAP had some positive results, but fell short of the critical mass of policy reform needed to stimulate any major recovery in the Tanzanian economy. The extent of adjustment of the exchange rate, for example, was insufficient to remove the overvaluation, and the increase in agricultural producer prices of 20 percent in nominal terms was less than the prevailing rate of inflation of 30 percent. 8. Real GDP contracted in 1983 and although there was some recovery in 1984 and 1985, GDP growth was still well below population growth. After steady declines in per capita consumption levels in the early 1980s some positive growth was restored in 1984 and 1985. But this was accompanied by a sharp decline in the level of investment. Food crop production, both for subsistence and off-farm consumption, generally kept pace with - 31 - populaion growth due to favorable weather and measures to liberalize domestic grain marketing, but the overall trend for export crops continued to be downward due to inadequate price incentives and inefficiencies in the marketing and transportation systems. 9. The overall decline in agricultural exports, the shortage of foreign exchange for imported inputs, and the growing inefficiency of many industrial enterprises in Tanzania meant that industrial output continued to fall, with average capacity utilization declining to about 25 percent. The condition of the country's transport network also deteriorated, and Tanzania's achievements in the social sector began to be eroded, partly by the growth of the population but also by the inability of the Government to provide adequate resources and management for the operation and maintenance of education, health and other facilities. 10. As a result of efforts to contain expenditures and raise additional revenues the central government's overall deficit relative to GDP started to decline since the early 1980s. But the financial operations of the parastatals showed persistent deficits in spite of price increases and efforts to instill a greater degree of efficiency in their operations. The deficits of the public sector were financed mostly by domestic credit which grew by about 20 percent per annum during 1980-84, and by about 30 percent in both 1985 and 1986. This contributed to a rate of domestic inflation close to 30 percent per annum in recent years. 11. Tanzania's balance of payments also remained under severe strain. The most striking feature was the unrelieved decline in export earnings, which in turn affected import capacity and caused imports to fall to well below even the nominal levels of earlier years. The current account deficit declined from 10 percent of GDP in 1982 to 8 percent in 1984, but rose slightly in 1985 and was estimated at 12 percent for 1986. With suppliers credits and medium and longer term loans both registering a sharp fall in net inflows, the Government was obliged to finance the deficits by an accumulation of external payments arrears. Tanzania's medium and longer term external debt stood at US$3.5 billion in 1986 (it is currently estimated at US$4.5 billion) and the bulk of this debt is owed by the public sector. The Economic Recovery Pro&ra. (ERP) 12. After a comprehensive review of the SAP in the light of the continuing disappointing performance of the economy, the Government decided to continue with the measures initiated under the SAP, and to intensify the overall policy reform. Consequently, in early 1986, in close consultation with the Bank and the IMF, it prepared the ERP intended to remedy the deficiencies of the previous programs. The ERP was a more comprehensive program than any of the adjustment programs that preceded it. The ERP was presented to the donor community at the first Consultative Group (CG) meeting for Tanzania in nine years, in June 1986. The donors including the I?F and the Bank endorsed the ERP and pledged adequate financing for the first year of its implementation. 13. Macroeconomic and Sectoral Objectives. The specific objectives of the ERP, covering the period from June 1986 to June 1989, were to: (a) increase the output of food and export crops by providing appropriate price and non-price incentives for production, improving marketing structures, and increasing budgetary and foreign exchange resources available for agriculture; - 32 - (b) direct investment resources towards rehabilitating the physical infrastructure of the country in support of directly productive activities; (c) increase capacity utilization in industry through the allocation of foreign exchange to priority sectors and firms; and (d) pursue prudent fiscal, monetary and trade policies to restore domestic and external equilibrium, to ensure that production incentives were not eroded, and the efficiency of resource allocation was improved. 14. The ERP envisaged that the economy would attain positive growth rates in per capita income, a sustainable external balance of payments position with both higher export and import levels, a lower rate of inflation and restored levels of physical and social infrastructure by the end of a medium-term period of 5-7 years. 15. In order to achieve these objectives, the Government requested assistance from the Bank and the IMF to support the implementation of some major policy and institutional reforms. The key features of the reform program supported by the MRC were: (i) instituting and maintaining an appropriate macroeconomic framework of fiscal and monetary policies; (ii) sustained action on the exchange rate to eliminate the overvaluation of the Tanzania Shilling by the middle of 1988; (iii) price decontrol, improving foreign exchange allocation and reform of the trade regime; (iv) reforming agricultural marketing and producer prices; (v) industrial restructuring; and (vi) improving transport sector efficiency. 16. The IMF supported the ERP with an 18 month Stand-by arrangement focusing on macroeconomic issues, including the exchange rate, budget, revenue policies, monetary and credit policies. B. The Role of the Bank 17. Formulating and implementing the ERP. The Bank played a key role in helping the Government develop the ERP to be supported by the MRC. The ERP stated the general policy objectives. The specific measures for translating the policy objectives into programs of action was the focus of the MRC (paras. 38 and 39). 18. Economic and Sector Work (ESW). All the adjustment measures undertaken by the Government have drawn heavily on the Bank's ESW. Consistent with the Bank's assistance strategy for Tanzania, the agenda for the ESW is geared to facilitate the formulation of policy and institutional reforms which Tanzania needs to carry out and to form a basis for the specific investments. In the specific context of the MRC, the Bank's strategy was to carry out studies that would add to both the Government's the Bank's knowledge of the problems, and over the medium term jointly evolve, under the umbrella of the ERP, specific action programs to address structural issues. In this context, the Bank completed studies on parastatals, public expenditure, foodgrain and agricultural export marketing, education, health, population and transport, all of which have been invaluable for the policy and institutional dialogue between the Bank and the Government, and as a basis for future adjustment pi,,gra"s. In carrying out these studies, the Bank relied extensively on the use of Tanzanian experts (mostly from the - 33 - University of Dar es Salaam) as local consultants. In addition to contributing to domestic capacity building, this has also helped to internalize the reform process. 19. Lending. With the launching of the ERP, the Bank's lending program was reoriented and has been continuously reviewed to provide maximum support to the ERP. The lending program focused on quick-disbursing adjustment lending operations in support of the anticipated policy and institutional reforms which Tanzania needs to make to in order to rehabilitate the economy and return to a path of sustained growth. In addition, it also included high priority specific investments focused on the rehabilitation of key infrastructure and economic services. In this regard, IDA has provided financing for the rehabilitation of the agricultural research, extension and marketing services, education, roads, ports and petroleum distribution infrastructure. 20. Aid coordination. Critical for Tanzania's ERP, has been availability of external financing both in quantum and quality. In addition to IDA financing, the Bank has played a major role in assisting Tanzania to mobilize external financing through cofinancing arrangements, and formal and informal aid coordination efforts. The bank chaired three successful Consultative Group (CG) Meetings for Tanzania since the launching of the ERP. The objectives of these annual CG meetings have been to review progress of and to mobilize donor support for Tanzania's ERP. The Bank has also participated in the Paris Club rescheduling meetings as an observer, reporting on the progress of the Government's adjustment program. The Bank has assisted the Government in organizing effective donor meetings at the sectoral level, including transport, agriculture and energy. 21. Bank assistance was timely and effective. The MRC was approved by the Bank's Board on November 11, 1986, and became effective four days after Board approval. The entire processing was completed in about three months. When additional resources were needed one year later, the Bank quickly provided a Supplemental Credit in January 1988, in order to sustain the progress achieved. C. Accomplishments of the ERP and Justification for Bank Support 22. The MRC was specifically designed as the action program for implementing the ERP. All the focal points of the ERP were elaborated in the MRC as detailed below. External Sector Policies 23. Exchange Rate. A major element missing in earlier adjustment efforts was sustained action on the exchange rate. As a central component of the MRC, the Government committed itself to follow an active exchange rate policy aimed at eliminating the overvaluation of the Tanzania Shilling by mid-1988. The Government executed the policy through a process of regular adjustments since the end of March 1986, with the rate moving from TSh17/US$1 to TSh195/US$1 by the MRC Closing Date of December 31, 1989. This significant progress towards depreciating the Tanzania Shilling in real terms, masks a markedly gradual and at times, very difficult dialogue. The adjustment of exchange rate has been, perhaps, the most difficult of the adjustment measures implemented by the Government. Several times, continuation of the entire ERP was at risk on account of the exchange rate issue. Indeed, Board presentation of the follow-up adjustment operation, the Industrial Rehabilitation and Trade Adjustment Credit (IRTAC), was delayed for six months pending - 34 - Government decision on further adjustment of the exchange rate to a level that could support the operation. The establishment of a responsive exchange rate management regime still remains a major challenge for the Tanzanian authorities. Real Excnange iate and Parallel Premium 1966-1990 2 - , 00 * 300 20 o.s -- ' .too 1966 1970 1975 1960 196 1990 Yeur - Observed RE . Parallel premium alse t Ildes rpmgeall psatoe. ne aeMle: grest ieosee betV po lle and efflatl eao l t. 24. Foreign Exchange Allocation. Pena-ing the establishment of an equilibrium exchange rate, the Government continued to allocate foreign exchange through administrative mechanisms, but introduced some interim measures to improve the efficiency of the administrative allocation process. Under the improved system supply and demand of foreign exchange was estimated on a semiamual as well as on an annual basis. All applications for foreign exchange allocation were ranked according to their order of priority and a screening mechanism based on efficiency of resource use was applied. 25. Trade Regime. The key reform issues were multiplicity of tariff rates, their magnitude, and the discretionary powers this conveyed to some unscrupulous customs officials, and the high rates of effective protection which served to reinforce inefficiency in both state owned enterprises and the private manufacturing sector. The Government carried out a study of the external tariff system and prepared a time phased program of trade reform now being implamented under IRTAC. 26. Q Funded Iprt. As further interim measures for improving foreign exchange allocation, the Government expanded the "own funds" import scheme to cover a wide variety of products. As a result, a large proportion of imports came into the country via the scheme at prices which reflected the parallel market exchange tate. 27. ExIr Retention Scheme. The Government carried out a review of its export retention scbime and modified it by: (i) narrowing the differentials between retention rates; (ii) expanding the list of goods eligible for importation under the scheme; and (iii) enhancing transferability of retention proceeds among exporters. 28. Aid Coordination. A major portion of Tanzania's foreign exchange inflows consist of foreign aid. In the past, use of foreign aid was not effectively coordinated leaving each - 35 - donor agency to focus on its own areas of preference, which did not necessarily coincide with the country's priorities. The Government strengthened its aid coordination mechanism by upgrading the external finance section of the Ministry of Finance into a full Department and appointing an additional Deputy Principal Secretary to head it. Since then, the Department has assumed leadership for aid coordination and the process has been progressively strengthened. 29. The cumulative impact of all these measures was that they resulted in a systematic, transparent and more efficient approach to foreign exchange allocation. Fiscal and Monetary Policies 30. Budg . With regard to the Government's Budget, the Government was successful in controlling expenditure and focusing the public investment program on rehabilitation and completion of the ongoing projects, rather than on new investments. The Government maintained a freeze on new recruitment to public service except for certain specified categories such as teachers and medical personnel. Overall, the numbers on expenditure side were kept stable. On the revenue side, the Government undertook important studies of the custom's tariff and sales tax which formed the basis for the reform measures which were introduced under IRTAC. 31. Credit. Regarding credit and money supply, the annual limits of credit expansion and money supply were exceeded. As a result the Government was not able to reduce inflation, but managed to contain it at 28 percent per annum, despite the massive exchange rate adjustment. The excessive growth in credit was largely the result of the financial difficulties of the marketing Boards, particularly the National Milling Corporation, and to a lesser extent, tobacco and cotton marketing boards. The excessive borrowing by the Marketing Boards, cooperatives and other Government parastatals, crowded out other borrowers. As a result, there was less credit available for other enterprises. 32. Interest rates. The policy objective here was to establish a positive interest rate structure in real terms, as measured against the expected rate of inflation. The Government progressively adjusted the structure and level of interest rates and achieved its objective of establishing an interest rate structure that was generally positive in real terms in mid-1988. 33. Ed=. With regard to prices, the Government reduced the number of categories of goods subject to price control to 10, considered basic necessities, comprising less than 15 percent of the consumer price index basket. As goods were decontrolled, the regulations which confine goods to specific parastatals for their importation and wholesale distribution were also dismantled. For those goods which remained under price control and those set administratively, major adjustments were effected to reflect the impact of the exchange rate depreciation. In general, utility tariffs and other Government regulated prices were brought closer to reflecting the economic cost of goods and services. Parastatals 34. With regard to the parastatal sector, the key policy of objectives were to: (i) down-size the sector which was too big and unwieldly; and (ii) improve the efficiency those parastatals which would remain. The Government introduced a number of efficiency - 36 - enhancement measures for parastatal enterprises. Boards were revamped, enterprises were given more autonomy, and generally were encouraged to operate in a more commercially oriented manner. Subsidies to the parastatal sector were eliminated for current operations. The Government and the Bank undertook a joint review of the parastatal sector. The results of that review constitute the basis for the ongoing dialogue on the reform of the parastatal sector, to be implemented in the context of the planned Public Sector Management (PSM) adjustment lending operation. Agriculture 35. In the agricultural sector, the policy objective was to improve the overall package of incentives for agriculture. Critical to this were the issues of appropriate levels of producer prices and the efficiency of agricultural marketing. For the 1986/87 crop season, the Government effected significant increases in the producer prices for Tanzania's principal export crops ranging from 30% for cotton and tobacco to 80% for coffee in nominal terms. From then onward, prices were set at a level equivalent to 60% to 70% of the FOB price. In March 1987, the Government abolished all requirements for permits for internal movement of foodgrains as a major step towards completing the process of liberalizing domestic trade of foodgrains from farm gate to the consumer. This liberalization had a substantial positive impact on foodgrain production. The Government also took steps to improve processing and marketing of export crops by permitting cooperative unions and large producers to participate in export marketing either directly or through their agents, starting with the 1987/88 crop season. The Government also established a task force to review the efficiency of export marketing at all levels. The results of the studies constituted the basis for the ongoing Bank-assisted Tanzania Agricultural Adjustment Program (TANAA). The Government also took a first step to liberalize the importation and distribution of agricultural inputs, by allowing cooperatives and private traders to import and distribute all agricultural inputs except fertilizers and seeds. The response of the agricultural sector accounts for most of the recovery which has occurred in terms of the GDP. Industry 36. In the industrial sector, the Government initiated policies for the rehabilitation and restructuring of the sector. At the macroeconomic level, the progressive adjustment of the exchange rate, by raising the cost of imported inputs to more realistic levels, forced the inefficient firms to either become more efficient or cease production. The process was reinforced by tighter credit policy, price decontrol and a more competitive climate. The new foreign exchange allocation system was also intended to benefit the more efficient firms in the sector. The efficiency of the sector was also improved through more appropriate fiscal and monetary policies, including the elimination of subsidies and budgetary tansfers to parastatals, restriction of credit to some parastatals and the introduction of an interest rate structure that was positive in real terms. For the future, the Government commenced studies as a basis for preparing restructuring plans subsector by subsector, starting with leather, textiles and edible oil. The implementation of these restructuring plans has commenced under the follow up operation, the IRTAC, and is expected to continue in the context of the proposed Ldustrial Restructuring Adjustment lending operation. - 37 - Trasport 37. In the transport sector, the Government formulated a comprehensive national transport policy which, inter alia, permitted intra-regional trucking rates to be determined by market forces. The Government and the Bank undertook a comprehensive transport sector review and conducted a donors' meeting to develop a common approach to addressing the problems of the transport sector. Based on the results of the sector review, the Government prepared the Integrated Roads Rehabi'itation program which is now under implementation with Bank assistance. The Government also increased Tanzania Railway Corporation's (TRC) freight and passenger tariffs by an average of 60% and 100%, respectively, in October 1986, and TRC was given greater discretion to raise tariffs in future, without reference to the Government. In order to improve TRC's performance, the Government successfully implemented an emergency relief program. The program comprised procurement of spare parts and workshop equipment, the rehabilitation of locomotives and wagons, a study of TRC's management, operations and staffing and the preparation of a more comprehensive recovery program. The emergency program was endorsed by the donor community which contributed about US$26 million for its implementation. ImPaof the MRC Table t$ TIMMIA * orY N ZlStAlA - - - - ----~ ~~-------As---*---st- 198S 1961 1986 1980 1980 GDP GrowtA Pate 8.6 4.0 4.6 4.4 4.6 OV/Capite grewh rate 1.0 4.0 1.2 0.7 1.8 ConOmption/capite growth rat 2.1 0.8 0.4 0.6 0.? ebt service (l US so) 8 8 85 I? s0 Debt earvic/ OS 16.0 10.7 17.1 16.4 16.2 Debt service/p 1.4 1.4 1.7 8.1 8.6 Oa"* tavestsmat/oP 16.6 17.6 16.1 19.4 19.8 Doeseti saving/w 1/ 6.5 0.0 -4.6 -0.8 *8.6 National eavIngS/DP 1/ 6.6 0.0 -4.0 -0.6 -4.0 RiO* of pub/p" lavatuent 76.6 44.1 89.7 8.8 ".1 Ov.revenues/4P 16.1 1I. 10.8 18.1 23.1 Gov6.eapenditmes/P 18.0 14.8 S.6 1e1.6 81.8 Defelt(-) or arpIv(*)/P -7.9 48.0 -.7 *9.7 -0.8 aerts grth rate -4.0 16.7 0.1 9.1 10.6 Spert/P 1/ 9.1 18.0 11.6 16.1 8.0 topef grea rate 4.1 0.7 0.9 6.5 1.7 Esot/SP1/ 0.8 88.4 40.0 46.0 66.1 Current asset (In e M .) *ia *741 -744 -068 -76 Curre"t sesa/GP I/ 4.1 -11.6 -8.7 -8.9 -80.1 ism Itees ab"ngate 81.7 64.8 00.8 148.9 106.1 eal lRate ndes 1/ &.08 0.886 0.601 0.460 0.408 Demati UM ltin Rate 38.4 60.0 81.1 17.0 18.6 1etes I/ Rati** are selowletd is surreft term. The large swigs In he rati ** pOleariOI related to the adj-st It Ihe eaeheage VaSe - effeeting the galiflant evervaluatem of the Taenaslen 6h11itag i earlier years. S/ 1Mg0 a 1. Rise In the Iades ladiesatse apore4lA. All grewth rates are epeased tn seastest tee, riose to P Io surreat teN. - 38 - 38. At the time of the appraisal of the MRC, the Bank had a sound overview of the nature and magnitude of the economic problems facing Tanzania, but did not have sufficient detailed knowledge of the individual sectors to be able help to design an action oriented program to address the key sectoral issues. This arose because in the early 1980s, there was a hiatus in Bank/country relations and not much ESW was done. Consequently, the strategy was to initiate the process by supporting the macroeconomic measures coupled with the infusion of the desperately needed foreign exchange, which the Bank believed would result in sufficient recovery of activity in the economy, to generate the support for further reform. At the same time, together with the Government, the Bank would carry out the necessary studies which would constitute bases for developing specific programs. 39. This strategy has been successful and the results fully justify Bank support. The stabilization measures were successfully implemented and have resulted in a significant reduction of ecanomic distortions. A number of important studies carried out have formed the basis of subsequent sectoral programs for addressing key sectoral issues. The Tanzanian economy has responded favorably to the combination of policy and institutional reforms implemented under the MRC, coupled with increased external assistance. The rate of growth of real GDP exceeded the population growth rate in 1986 for the first time since 1980, and is estimated to have grown at 4% p.a. in 1987 and 1988, and at slightly above 4% for 1989 c'early indicating that the economic decline had been arrested, and that recovery had begun. Moreover, much of the obvious growth in economic activity which took place throughout the country, was outside of the formal sector and not fully captured in the GDP statistics. But as envisioned at appraisal, these are only initial steps which need to and are being followed by further policy and institutional changes for the nascent recovery to be strengthened and sustained. In the monetary area, for example, Government failed to limit overall credit growth, with the result the ERP targets of reduced inflation will take longer to achieve. Moreover, because of inappropriate credit allocation, some dynamic segments of the economy were relatively starved of credit. 40. The measures introduced under the MRC and the expanded availability of resources were beneficial in social terms. Noteworthy, was the increased availability of food and imported consumer items, resulting from the supply response in the agricultural sector and higher aid flows, respectively. The devaluation of the Shilling had an impact on the price level. But for most of the imported iiems, the parallel rather the official exchange rate prevailed in the market place long before the implementation of the MRC. In addition, the Government is only now under ESAP, beginning to take the more difficult policy and institutional measures which may affect some fenerable groups. In mitigation, the Government is also implementing a Priority Social Action Program (PSAP), which is fully integrated in the ESAP. Sustainabilit 41. The measures introduced under the MRC and the Standby, have since been broadened and deepened with further IDA and IMF assistance through two sectoral adjustment credits (IRTAC and TANAA) and three IMF structural adjustment facilities. The progress made under the MRC has clearly demonstrated the potential. The economic decline has been reversed and recovery is underway. Moreover, consensus for reform is strengthening. At this stage, all indications are that Tanzania is capable of continuing with the adjustment process and achieving its primary objectives of recovery and sustained economic growth. The - 39 - key requirements for this are that: (i) the policy and institutional reforms must continue; and (iii) that Tanzania should continue to obtain the quantum and quality of external assistance it desperately needs. The Government has decided to continue with the policy and institutional changes under the second phase of the ERP, the Economic and Social Action Program (ESAP). To the extent that it continues to implement ESAP as designed, it should be to continue to attract adequate donor support to sustain the adjustment process. Assessment of Risks 42. At the time of the appraisal the assessment was that there was one main risk to the successful implementation of the Credit and the ERP: "that the proposed policy changes in such areas as liberalization of trade and marketing structures, parastatal management, and public investment program could be delayed or even abandoned because of opposition either from within the party or from specific interest groups." To a much less extent than anticipated, this risk materialized in the form of the gradualist and incremental style of implementation of the ERP. For example, it took eight months (February to October 1988) for the Government to reach agreement internally on the need for further exchange rate adjustment. But, this decision-making process which emphasizes consensus and which donors find cumbersome and at times frustrating, had important positive elements, it helped to: (a) deepen the understanding of the problems and possible solutions; and (b) internalize the reform program, albeit modestly. 43. A more pervasive risk which was not appreciated at appraisal, was that of the limited domestic capacity to develop and implement measures for delivering such an extensive and complex program. This more than any other constraint, continues to dictate the pace of adjustment in Tanzania and most of the adjusting African countries. Hence, the issue of capacity building is a top priority in our assistance strategy for Tanzania. Lessons Learned for Subsequent Adjustment Programs 44. An important factor for a successful implementation and a prerequisite for sustainability of an adjustment program is Government's capacity and willingness to "internalize" the policy reform. This requires, intaralia, comprehensive understanding of the program on the part of the implementing Government. The MRC was prepared and processed in a record time with limited up-to-date economic and sector analyses, a relatively brief dialogue between the Bank and the Government and with no assessment of the domestic capacity to implement the program. These serious shortcomings resulted in a difficult dialogue dominated by over-reliance on negotiations, and at times resulted in mild "adjustment fatigue" on part of Government officials and Bank staff. 45. The lessons of this experience are, firstly, a sound ESW is a critical underpinning for the Bank's policy dialogue. It is imperative for the Bank to carry out comprehensive analyses, identify policy options and clearly demonstrate the expected benefits and costs of our recommended agenda of policy and institutional reforms. Secondly, we needed to analyze and understand more fully the reasons for the Government's hesitance to undertake certain measures, instead of attributing hesitance to lack of political will or ideological bias. Clearly, the Bank did not fully realize that there was no shared understanding on some key elements of - 40 - the MRC program. Finally, the scope of adjustment programs and the pace of its implementation must take into account domestic capacity for implementation. Technical assistance can play a useful role in designing and even in implementing adjustment programs, but it cannot be a perfect substitute for domestic capacity. 46. After the first year of the implementation of the MRC, .evere bottlenecks arose. The economy was not able to capitalize on the strong supply response in agriculture (cotton production doubled between 1986 and 1987, largely due to improved incentives under the MRC), because of crop processing and transport bottlenecks which impeded the transformation of these significant production gains into higher export earnings. An important lesson which follows from this experience is that in designing future adjustment programs, the Bank must pay attention to sequencing of reforms and actions, taking into account the critical interlinkages among the major components of the program. Again, with the benefit of hindsight, with our and other donors assistance, some of the bottlenecks like lack of adequate storage and processing facilities could have been eased or even avoided. D. Implementation and Monitoring Compliance with Covenants 47. Annex 1 details the conditionalities for the release of the second and third tranches of the Credit. The conditionalities constituted the important covenants in the Development Credit Agreement. The Government met all the second and third tranche release conditions fully and in a timely fashion, justifying the tranche release as originally scheduled. However, the Government had difficulties in complying with the Accounting and Auditing covenant on schedule (but it complied belatedly). Procurement 48. Procurement was limited to goods (except luxury items, explosives and armaments) from Bank member countries, Switzerland and Taiwan. Both private and public sector imports were eligible for financing. The Credit Agreement provided for procurement through normal commercial channels for private sector imports and Tanzania Government practices for Government imports, except in cases of contracts costing over US$2 million. All purchases under contracts amounting to more than US$2 million were to be procured through international competitive bidding. Certain commonly traded commodities were to be purchased at prices quoted in organized international markets. Altogether up to US$25 million was available for the purchase of petroleum. In general, no particular problems were experienced with procurement. isbursmn 49. MRC. The total of US$130 million of the original MRC, from IDA, African Facility and Special Joint Financing was disbursed in three tranches. The first tranche amounted to US$50 equivalent, of which US$20 million was available for retroactive financing. The second tranche was available for disbursement as originally planned, in April 1987, after it was agreed that the tranche release conditions had been fulfilled, following a review of performance in March 1987. The third tranche was also available for disbursement -41- in October 1987, after it was agreed that the spe 4fic tranche release conditions had been fulfilled. Disbursements of the original MRC were completed in August 1988, just two months beyond the appraisal estimate. The slight slippage in completing disbursements was due to administrative holdups, but not due to delays in fulfilling the tranche release conditions. 50. MRC Supplemental. The Supplemental Credit was declared effective in February 1988. Procurement and disbursement procedures were the same as those under the MRC Agreements with one exception: US$30 million of the proceeds of the Supplemental Credit was earmarked to support the open general licensing (OGL) window. The Supplemental Credit was disbursed in two tranches. The first tranche of US$30 million was made available immediately upon effectiveness. The balance of US$30 million was made available when the OGL system was established. In order to allow full disbursement of the proceeds of the Supplemental Credit, the MRC Closing Date of December 1988, was extended to December 1989. The final withdrawal authorization was dated January 25, 1991, and the proceeds of the Supplemental Credit were fully disbursed. 51. The Ministry of Finance bore the primary responsibility administering the Credit. The Bank of Tanzania was responsible for the necessary documentation, the preparation and submission of withdrawal applications and the maintenance of the Special Accounts (Revolving Funds); one for the IDA Credit and the other for the African Facility. 52. Notwithstanding the reasonable pace of disbursement for the proceeds of the MRC and MRC Supplemental, disbursement performance was not satisfactory. Given the long Tanzania/Bank association, we expected a better grasp of the Bank's procurement and disbursement policies and procedures. The operation of the special accounts, particularly during the first two years of the implementation, which were introduced for the benefit of the borrowers, proved to be extremely difficult in spite of several Bank missions visiting Tanzania specifically to explain the procedures regarding use of the accounts and statements of expenditures (SOEs). Audit reports of the Credit accounts were not provided as required. Of a total of three status reports required by the Bank, only one was submitted on scheduled. The lack of compliance with accounting and audit covenants is prevalent in respect of other lending operations as well. The Bank is planning to assist in the strengthening of the domestic capacity for accounting and audit, through a component of the proposed Financial Sector Restructuring lending operation. 53. Supervision of the MRC was shared between the country operations division and the Bank's resident mission in Dar es Salaam. The Resident Economist took an active role in maintaining a policy and implementational dialogue with the Government. He followed up on outstanding areas of performance seeking ways of expediting the implementation His reporting served as the basis for the MRC supervision missions from headquarters, particularly the tranche release missions of which he was a full member. Overall, supervision was comprehensive and adequate. - 42 - PART I - PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE Financial Assistance 54. The World Bank supported Tanzania's ERP with a Multi-sector '"thabilitation Credit. Initially the Bank approved the equivalent of US$ 96.2 million. This was followed by a supplemental Credit to the tune of US$ 56.8 million. The Credit financed all items essential for the ERP. US $30.0 million of the Credit, financed items imported under the non administrative open general licensing (OGL) basis. 55. In addition to the World Bank loan a number of bilateral donors, notably, the Federal Republic of Germany, the Netherlands, Switzerland, the United Kingdom, Norway, Sweden, Italy and Saudi Aiabia supported the program through Special Joint Financing. The contributions from FRG was tied to the transport sector and was administered by the National Transport Corporation (NTC). Sweden's contribution financed the expansion program of Dar es Salaam Harbours. Italy's contribution was tied to financing commodities originating from Italy only. The United Kingdom's contribution financed general essential items, except, Pound Sterling 4.0 millicn which specifcally financed imports under the OGL. Disbursements and Implementation Experienced 56. The MRC w&s disbursed in three tranches. Special accounts were established by the Bank of Tanzania with Lloyds Bank, London, and Morgan Guarantee Trust Company of New York, to facilitate the disbursement of the funds from the World Bank. To make it possible for the project to take off quickly an initial disbursement of US $20.0 m (IDA - $10.0 m and SFA - $10.0 m) was disbursed upfront and deposited in the Bank of Tanzania account at Federal Reserve Bank of New York. The Government wishes to register its appreciation of the flexibility shown by the World Bank, which enabled the project to take off smoothly. The supplemental Credit, except the OGL portion, was disbursed through the BOT's special accounts with Morgan Guarantee Trust Co. and Lloyds - London. The OGL portion was disbursed through two special accounts operated by National Bank of Commerce at Lloyds Bank in London and Berliner Handisund Frankfurter (BHF). 57. The disbursement procedures required statements of expenditures as evidence of utilization of the funds. In order to facilitate quick utilization of the funds, the World Bank disbursed funds upfront without the documents. However, the initial disbursement had to be accounted for by making recovery from the submitted statements of expenditures. 58. Replenishment of the special accounts required the submission of a ithdrawal application to be accompanied by a full set of shipping documents which incl-- ad copies of letters of credit, invoices, bills of lading, clean reports of findings issued by S.O.S., bank statements and the reconciliation of the special accounts.j/ Ordinarily, banks do not provide such services, which imposed additional work. At the beginning there was confusion regarding the execution of 1/ Only when Statements of Expenditure (SOE) were not used, documentation had to be sent with the request for replenishment of Special Accounts. Most disbursements are made under SOE's and only the bank statement reconciliations of the Special Account are required. - 43 - the work. This was attributed to lack of understanding of the nature of the assignment on the part of administrators of special accounts. The staff who were involved in the preparation of the statements of expenditures did not participate in the negotiations of the Credit and therefore did not know the details of the Credit Agreements. The knowledge gap could have been filled if the World Bank's Disbursement Unit had organized a one or two days seminar for the implementors of the program immediately after the effectiveness date of the Credit. In order for the borrower to have benefitted effectively from such a seminar, the institutions which were involved in the administration of Credit. especially the Ministry of Finance/Bank of Tanzania. should have identified the key people to participate in the seminar well in advance of Credit effectiveness.2/ 59. Under the existing import procedures, the import documents are mailed directly by the suppliers bank to the importers bank. These in turn are surrendered to the importer after payment of the balance of the cash cover. Retrieval of the documents for the purpose of preparing withdrawal applications proved difficult. To track down these documents, NBC headquarters had to request the Banks holding special accounts to arrange with suppliers' banks to mail the documents directly to them. T'e banks holding the special account would then make photocopies of the documents and mail them to NBC while the original documents would be mailed to importers bank. 60. Once the statements of expenditure were prepared, they had to be submitted to the Ministry of Finance for signature before the later submitted them to the World Bank Resident Mission for onward transmission to Washington through the pouch. The statements of expenditure had to be accompanied by the bank statements. Under those arrangements, the banks holding the special accounts had to ensure both the statements of expenditure and importation documents were delivered to NBC. There were instances where importation documents were submitted without the accompanying bank statements, which entailed delays. Banks holding special accounts should have been requested by NBC in advance, to organize themselves to cope with the increased work pressure and additional costs. 61. Utilization of the credit was sometimes delayed by lack of cash cover on the part of importers. The continued exchange rate adjustment coupled with stringent conditionalities in approving bank overdrafts, contributed to this delay. On the other hand, suppliers were not in hurry to honor their obligations due to the flexibility in the extension of letters of credit. In order to force suppliefs to honor their delivery periods. extension of validity of LCs should not have been granted. For this to be enforced. the Bank of Tanania accordingly should not have extended the validity of the import license. Timely delivery of the items especially at this time of reviving the economy cannot be over emphasized. The country lost money on account of delays and the process of economic recovery was slowed down. 62. Measures have since been taken to overcome the problems experienced under MCR, including the transfer of special accounts from NBC to BOT. This decision has meant that the upfront payment of equivalent shilling to treasury is now assumed by BOT. This implies that NBC would not have to borrow funds from BOT to pay for cash cover, a burden which also made it difficult for the commercial bank to provide importers with the necessary financing arrangement. Furthermore by transferring the funds BOT has made it possible for other a/ The lesson of experience to be learned here, is the need to ensure adequate preparation by project implementing agencies, prior to credit effectiveness. -44 - commercial banks, particularly CRDB and PBZ to participate in tt.e establishmeti of letters of credit under the OGL. 63. It took approximately three weeks to process a normal withdrawal application, while a minimum of four weeks was required to process an application under the special commitment. For the borrower to have benefitted more from the credits. and to speed up the importation process. the World Bank should have expedited the handling of the withdrawal applications.3/ The Disbursement Division should have striven to reduce the time lag and instituted a mechanism to notify the borrower by telex whenever the application was approved/relected.4/ Such advice would have assisted the borrower to follow up the deposit of the funds with the Banks or alternatively, accelerate the necessary amendments to the rejected applications, in order to minimize delays which temporarily deprived the borrower of the funds urgently needed for implementing the project. 64. The services discussed above which the banks holding special accounts had to provide to the borrower, were not easily forthcoming. The World Bank should have helped in ssurizing fhe banks to e W that the bankh provided those, services eff iv ./ When such services and other necessary conditions are not fully met by the Banks, borrowers should be given special consideration when they request extension of the credit Closing Dates.6/ 65. The floor ceiling on the OGL which was initially US$1000 and then to $5000, had a number of drawbacks. On the one hand the establishment of small letters of credit cost the country in terms of bank charges. While on the other, it left out the majority of the people who could not afford to raise the cash cover or borrow at high interest rates. Even for big importers in the industrial sector, the requirement forced the importer either to foreg,) the facility, or ended up carrying large stocks of spare parts. Furthermore, the stipulation that all payments should be I/ The pouch of the Resident Mission was used, becaused it was the best and safest way. BOT, if they wished, could have used DHL. 4/ Telex payment advices were sent for over $1.0 M payment. There is no mechanism in the Bank for Smaller payments. BOT/NBC could and should have requested that the commercial - banks inform ftcm by telex of any payments made by the World Bank. I/ Records clearly, show that on an average, it takes less than 13 days to process applications for Tanzania. The World Bank did pressurize the commercial bank, and even strongly recommended that Special Accounts that did not work well be closed. A disbursement mission proposed to stop over in London to visit one of those banks, but BOT did not take up the proposal. fi Substaintial flexiity was allowed under the MRC-Supplemental Credit (closing dates were informally extended for several months, in order to allow full disbursement). - .45 - by way of letters of credit,2/ needed to be reviewed especially for small value orders, in order to avoid payments of unnecessary charges. There was need for flexibility in this area.1/ 66. In administering the OGL, it was realized that use of the BTN classification was too broad for meaningful determination of the eligibility of the items. We expect to solve this problem with the switch to SITC classification which is more precise. Conclusio 67. The World Bank's support to ERP through MRC and its assistance in arranging cofinancing for tho program, were timely and effective. The ERP, unlike the SAP which was severely underfunded, benefitted immensely from the substantial amount resources provided by the World Bank. The availability of funds focussed on the three key sectors, helped to arrest the economic decline. After several years of poor economic performances, the country began to record a satisfactory economic growth rate of 4 percent per annum since 1988. The Agricultural sector accounted for most of the growth with output of both major cash and foodcrops increasing. Industrial production improved sligitly with a few industries increasing their capacity utilization to an average of 40 percent. Although some progress was made towards the rehabilitation of the dilapidated infrastructure, the poor transport and inadequate agricultural processing facilities, inhabited full realization of the benefits of the supply response. 2/ This was M required by the World Bank, but probably by NBC. I! The floor/ceiling was very often n respected by BOT/NBC. Nevertheless, in order to accommodate the Government, the World Bank did not reject the transactions. - 46 - PROJECT COMPLETION REPORT TANZANIA MULTISECTOR rEHABILITATION CREDIT (Credits 1741-TA and A-24-TA) PART III. STATISTICAL DATA SUMMARY ~~t~Igi bil~ IIt o-ti i is i If3 I !it~ 'lall !&11- 貧計訂寫合騷呂可面『竺蠻籐奮邊言奮才面牙讓婦登會徒旦〞‘ ‘對！}’誹’對蠟矓’犖’讖．-&& 鄴！！瀏驪群 ！譏：！難，無 :，鋤―蠍ha糾鑣繡 亂．，紜小！ 粽璽領雜廈豐領三萬召 ．粽戲辭三g纏權屆蠶名 ，莖l糁I乏I馴居喜名。跑XS登 了粽劉〔殲1鶸 藝劇”遝膩B。仕‘忽•B. &―一’-!！〕！!-}!-,l!｝〕！〕―-―〕―!}!---；。．-！〕！!!！〕，--!--！〕―}! 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