Statement by Joaquim R. Carvalho at the Board meeting of June 19, 1997

International Bank for Reconstruction and Development International Development Association 86601 International Finance Corportation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS97-233 June 18, 1997 Board Meeting of June 19,1997 Statement by Joaquim R. Carvalho Tanzania Country Assistance Strategy and Structural Adjustment Credit Project 1. We thank Management and staff for this well-prepared and succinct Country Assistance Strategy for Tanzania. Tanzania's relationship with the Bank Group is long-standing and extensive and we are particularly pleased to see in this CAS that the linkage with the previous CAS and with the CAS progress report of May 1996 has been well preserved. The sense of continuity in Bank Group operations in the country comes through clearly in the document. 2. Tanzania has embarked upon a number of reforms in the last five years. Reforms have been cumulative and based on a medium- and long-term vision of the country's growth and development strategy. GDP growth reached 5% in 1995, revenue as a share ofGDP rose from 14.5% to 15%; government expenditure is projected to decline from 21.4% ofGDP in 1995 to 18.1% in FY97, while the deficit before grants is projected to reduce to 2.3% of GOP in FY97. Inflation has declined from 28% in FY95 to 14% in the first quarter of 1997. My Tanzanian authorities are determined to maintain the momentum of macroeconomic reforms to ensure sustained economic growth. 3. Implementation ofthe 1996 ESAF agreement with the IMF has been satisfactory according to the ESAF mid-term review in March/April 1997, particularly with respect to controlling recurrent expenditures and parastatal reforms. The Tanzania Revenue Authority (TRA), which has been established with support from the IDF has been instmmental in enhancing public finance management. Having noted this, we would like to make a few additional remarks on the content of the CAS itself. 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.  2 4. A clear message emerging from the CAS is the imperative to build administrative capacity. During the previous CAS the Bank has extended support for capacity building in the Tanzania Revenue Authority (TRA) and in strengthening banking supervision in the Bank of Tanzania, for which we are thankful. EDI has also played an important role in this respect. Yet there are many other additional and pressing areas of need for capacity building and we would like to see in this CAS a more far-reaching programme of capacity building. While we are pleased to note that three of the ten projects in the lending programme for FY98-00 focus on capacity building, we would have liked to see the capacity building aspect incorporated more substantially in other projects. 5. Table 3 underscores the centrality of agriculture in the country's future growth strategy. As Tanzania's GDP growth rate begins to increase, it will become increasingly important to diversify the country's sources of economic growth and to expand the share of manufacturing (currently only 7.6%) in total GDP 6. With regard to Tanzania's external indebtedness, the data presented in paragraphs 24-28 clearly reveal that Tanzania is a prime candidate for debt relief in terms of the HIPC debt initiative. The country has a present value of external debt equivalent to 636% of exports and a debt service ratio of 32%. These are very substantial payment obligations and are clearly inhibiting prospects for Tanzania achieving future higher levels of economic growth. As the CAS document clearly reflects, the donor community, NGO's, Members ofParlian1ent, the Central Bank and a wide spectrum ofline Ministries in Tanzania are all of the opinion that the country's debt service obligations are a serious constraint on future growth and development prospects. As Tanzania is continuing on the path it has set itself and has pursued for the last five years and as these reforms are widening and deepening, it is my authorities strong belief that Tanzania qualifies for an early debt relief under the HIPC initiative. 7. We welcome the proposed East African Regional Study mentioned on page 18. We urge staffto pursue initiatives of this nature, which can highlight the significant and growing opportunities for multi-country and regional trade and investment. Tanzania also chairs the SADC portfolio on Trade and we would have liked to have seen some detailed comments on how progress with the proposed SADC Free Trade protocol will impact Tanzania's macroeconomic profile during the forthcoming CAS period. The Government believes that movement towards a free-trade approach within SADC will have enormous long-run benefits for all member countries, including Tanzania. It also realises that there will be short-term adjustment costs, to the macroeconomic, fiscal and industrial structures. Consideration by the Bank of the extent and likelihood of these short-term adjustment costs, particularly in view of the fact that these costs will influence the low-, base- and high-case scenarios, will be useful in helping Tanzania deal with these costs.  3 8. We appreciate IFC's role in Tanzania, depicted in Annex 2.1. There are a wide spectrum of projects for IFC's involvement. While we commend IFC for the initiatives to date, we encourage the Corporation to further deepen the initiatives. IFC's participation could be very substantially improved, particularly as the investment multipliers from the Songo Songo project come on stream. In this regard, we consider the US$40 million in new IFC projects proposed for FY98-00 to be lower than the level we would have expected. 9. Similarly, we urge MIGA to speed up the encouraging pipeline of I 4 guarantee projects noted in paragraph 54 and to bring these to an early and successful conclusion, while building a healthy pipeline of future guarantee initiatives. In addition, in view of the trenchant implications for the macroeconomy of the Songo Songo gas initiative, it would have been particularly useful if more detail could have been provided on progress with this project in the CAS document. 10. The CAS matrices in Annex 1.1 present a detailed outline of CAS benchmarks for the forthcoming period to FYOO. The spread of activity is encouraging and sets out a full and growing programme of engagement with the country. We need to achieve a balance, which on the one hand provides a far-reaching set of policy challenges to the Tanzanian authorities, while retaining the incentive for the Tanzanian authorities to persist in the reform efforts which have gathered steam in the last five years; and on the other hand ensuring that we do not set objectives which could be so insurmountable that they drain this enthusiasm at the outset. On balance, the CAS framework achieves this balance. However, we wonder whether the benchmark for achieving profitability ofNBC in the proposed Structural Adjustment Credit Project is feasible and would be interested in hearing staffs' comments. 11. In conclusion, we thank staff for a detailed and well prepared document. Tanzania is beginning to see the first fruits of a long period of economic, institutional, fiscal and financial reform. We trust that management and staff will pursue the challenging CAS agenda with vigour, particularly the capacity building elements of the CAS.