Tanzania - Third Poverty Reduction Support Credit

Document of The World Bank FOROFFICIAL USE ONLY ReportNo. 33166-TZ INTERNATIONALDEVELOPMENTASSOCIATION PROGRAMDOCUMENT FORA PROPOSEDCREDIT INTHE AMOUNT OF SDR 103.8MILLION (US$l50MILLIONEQUIVALENT) TO THE UNITED REPUBLICOF TANZANIA FOR A THIRD POVERTY REDUCTIONSUPPORTCREDIT August 10,2005 PovertyReductionand EconomicManagement2 AfricaRegion This document has a restricteddistribution and may be used by recipients only in the performance o ftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TANZANIA GOVERNMENT - FISCALYEAR July, I -June, 30 CURRENCYEQUIVALENTS (Exchange Rate Effective as of Aug. 2,2005) Currency Unit Tanzania Shilling u s 1-00 TSh. 1132.50 Weights andMeasures Metric System ABBREVIATIONSAND ACRONYMS AIDS Acquired ImmuneDeficiency Syndrome NAO National Audit Office A 0 Accounting Officer NDS National Debt Strategy APL Adaptable Programmatic Loan National EnvironmentalManagement ASDP Agriculture SectorDevelopmentProgram NEMC Council ASDS Agriculture Sector DevelopmentStrategy NEP National EnvironmentalPolicy BEST BusinessEnvironment Strengtheningin NGO NongovernmentalOrganization Tanzania NPV Net Present Value BOT Bank of Tanzania NSC National SteeringCommittee BRU Better RegulationUnit PAF PerformanceAssessment Framework CAG ControllerandAuditor General PCB Preventionof Corruption Bureau CAS CountryAssistance Strategy PER Public ExpenditureReview CEM Country EconomicMemorandum PFMRP Public Financial ManagementReform CFAA CountryFinancial Accountability Program Assessment PHDR Poverty andHuman Development Report CPAR Country ProcurementAssessmentReport PMS Poverty Monitoring System CTB Central Tender Board President's Ofice Public Service DSA Debt SustainabilityAnalysis PO-PSM Management EA EnvironmentalAssessment President's Office-Regional Administration EAC EastAfrican Community PO-RALG and Local Government EIA EnvironmentalImpactAssessment PPA ParticipatoryPovertyAssessment GDP Gross DomesticProduct PRBS Poverty ReductionBudget Support GFS GovernmentFinance Statistics PRGF Poverty Reductionand Growth Facility GGCU Good GovernanceCoordinationUnit PRS Poverty Reduction Strategy GOT Government of Tanzania PRSC Poverty Reduction Support Credit HBS HouseholdBudget Survey PRSP PovertyReduction Strategy Paper HIPC Heavily Indebted Poor Countries PSD Private SectorDevelopment HIV HumanImmunodeficiencyVirus PSIA Poverty and SocialImpactAssessment IDA InternationalDevelopmentAssociation PSRP Public Service Reform Program IFMS IntegratedFinancial Management System RDS Rural DevelopmentStrategy IMF InternationalMonetary Fund SASE SelectiveAccelerated Salary Enhancement IMG IndependentMonitoringGroup SDS Service Deliver Survey LGAs Local GovernmentAuthorities SEA Strategic EnvironmentalAssessment LGRP Local GovernmentReformProgram SECAC SectoralAdjustment Credit M&E Monitoring and Evaluation SME Small and Medium Enterprise MDAs Ministries,Departments, andAgencies TAS TanzaniaAssistance Strategy MDGs Millennium Development Goals TRA TanzaniaRevenueAuthority MKUKUTA National Strategy for Growth and Reduction TWG Technical Working Group of Poverty URT United Republic of Tanzania MoF Ministry of Finance MTEF Medium-Term ExpenditureFramework NACSAP National Anti-Corruptionstrategy and Action Plan Vice President: Gobind Nankani Country Director: Judy 0'Connor Sector Manager: Kathie Krumm Task Team Leader: Robert Johann Utz  FOROFFICIAL USEONLY TANZANU THIRDPOVERTY REDUCTION SUPPORTCREDIT(PRSC-3) TABLE OF CONTENTS CREDIT AND PROGRAM SUMMARY i I INTRODUCTION 1 I1 .. ............................................................................................................................. ...................................................................................................... COUNTRY CONTEXT .................................................................................................................... RECENT ECONOMIC DEVELOPMENTSINTANZANIA..................................................... 2 2 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ....................................... 6 I11 THE GOVERNMENT'S PROGRAM ............................................................................................. 9 IV.. PROGRESSTOWARDS THE MILLENNIUM DEVELOPMENT GOALS (MDGS) ..............6 BANK SUPPORT TO THE GOVERNMENT'S STRATEGY ..................................................... LINKTO CAS............................................................................................................................. 10 10 10 RELATIONSHIP TO OTHERBANK OPERATIONS............................................................... COLLABORATIONWITH THE IMFAND OTHERDONORS............................................... 12 LESSONSLEARNED................................................................................................................. 13 14 V. ANALYTICAL UNDERPINNINGS........................................................................................... THE PROPOSEDTHIRD POVERTYREDUCTIONSUPPORT CREDIT .............................. 15 OPERATION DESCRIPTION.................................................................................................... 15 OVERALL ASSESSMENT OF PROGRESS INIMPLEMENTINGTHE PRSC SUPPORTED ACTIONS .................................................................................................................................... 18 PRIORACTIONS FORPRSC-3................................................................................................. 19 DESIGN OF A NEW PRBS PROGRAMAND TRIGGERS FORPRSC-4............................... 22 23 VI. POLICY AREAS ......................................................................................................................... OPERATIONIMPLEMENTATION .............................................................................................. POVERTY AND SOCIAL IMPACTS........................................................................................ 48 48 FIDUCIARY ASPECTS.............................................................................................................. SUPERVISION............................................................................................................................ 48 50 DISBURSEMENTAND AUDITING ......................................................................................... ENVIRONMENTALASPECTS ................................................................................................. 52 51 53 RISKS AND RISK MITIGATION.............................................................................................. PARTICIPATORY ASPECTS .................................................................................................... 53 TANZANIA MAPIBRD 33494 This document has a restricted distribution and may be usedby recipients only in the performance of their official duties Its contents may not be otherwisedisclosed . without World Bank authorization .  SCHEDULES Schedule 1.Letter o f Development Policy ............................................................................................................ 57 Schedule 2 Operation Policy Matrix 74 Schedule 3 Indicator list o f PRSPRBSPRSC Performance Assessment .. .................................................................................................................... .......................................................... 104 ANNEXES Annex 1 Tanzania at a Glance ........................................................................................................................... 108 Annex 2. Tanzania Social Indicators.................................................................................................................. . 110 Annex 3. Tanzania Key Economic Indicators ..................................................................................................... 111 Annex 4. KeyExposure Indicators ..................................................................................................................... 113 114 Annex 6. Status o f IBRDand IDA Operations Annex 5. Tanzania Balance o f Payment ............................................................................................................. 115 Annex 7. Partnership Framework Memorandum................................................................................................ ................................................................................................... 117 Annex 8. FundRelations Note............................................................................................................................ 129 FIGURES Figure 1. Governance Indicators for Tanzania. 2004. 2002. 2000. 1998 ............................................................... 5 Figure 2. Governance Indicators for Tanzania 5 Figure 3. Projected changes in income poverty and malnutrition ........................................................................... - comparisionwith low income countries. 2004............................ 9 Figure 4. Monitoring Mechanisms Covering Outcomes. Outputs. Processes. and Inputs..................................... 49 Table 1. Key Economic Indicators TABLES ......................................................................................................................... 4 Table 2 M D G baseline, most recent estimate and target . ....................................................................................... 7 Table 3. PRSIPRSC-3 focus areas and priorities .................................................................................................. 17 Table 4 Assessment o fProgress against prior actions for PRSC-3 . ...................................................................... 20 ......................................................................................... 35 Table 6. Integration o f ODA inthe Government budget, 1999/00 -2003/04 Table 5. Budget Management, Key ResultsIndicators ....................................................... 46 BOXES Box 1 Overview o f Structural Reforms inTanzania 3 Box 2. Impact o f abolition o f development levy and reform o f business licensing .............................................. . .............................................................................................. 24 Box 3. Tanzania Crop Boards Reforms PSIA ...................................................................................................... 28 The Credit was prepared by an IDA team consisting o f Robert Utz (Task Team Leader). Allister Moon. Philip Mpango. Emmanuel Mungunasi. Alema Siddiky. Mary-Anne Mwakangale. and Arlette Sourou (AFTP2). Robert Townsend (AFTS2). Dieter Schelling (AFTTR). Denyse Morin. Denis Biseko (AFTPR). Marius Koen (AFTFM). Rogati A. Kayani (AFTPC). Michael Wong. Vedasto Rwechungura (AFTPS). Indumathie Hewawasam and Omar Fye (AFTES). Johannes Hoogeveen (HDNSP). Matthew Glasser (AFTU1). and Manush Hristov (LEGPI). Jeni Klugman (AFTPZ). and Benno Ndulu (DECRS) served as peer reviewers. The IDA team collaboratedclosely with facility. ledby IngeHermanRydland(PRBSChair. NorwegianEmbassy). representativesof 13 other donor agencies who also provide budget support under the common Poverty ReductionBudget Support (PRBS)  CREDITAND PROGRAMSUMMARY TANZANU THIRDPOVERTYREDUCTIONSUPPORTCREDIT - (PRSC-3) Borrower The Republic o f Tanzania ImplementingAgency Ministryo fFinance Amount US$150 million ~ Terms Standard IDA terms: 40-year maturity with a 10-year grace period Tranching 1tranche Description The Third Poverty Reduction Support Credit (PRSC-3) will support the implementation o f Tanzania's National Strategy for Growth and Poverty Reduction (MKUKUTA). The financial support provided through the PRSC-3 will narrow the gap between the cost o f implementing key elements o f the MKUKUTA and resources available from government's own domestic revenue and other donor support. The policy dialogue and performance assessment framework under the PRSC-3 focuses on the following cross-cutting and institutional actions which will facilitate progress towards the PRS objectives: (i)Sustain and accelerate economic growth and broaden its impact: Reducing income poverty is one o f the key focus areas o f the MKUKUTA. Private sector and rural development are the two areas where reforms are expected to have the biggest impact on reducing income poverty in Tanzania. Reforms in the areas o f agricultural and rural development are intended to improve producer incentives and raise agricultural profitability and thus enhance incomes in rural areas, where poverty i s most widespread and most deeply entrenched. Measures include improving export crop quality, reducing marketing cost and the tax burden on farmers and improving access to markets and finance. With respect to private sector development, the focus will be on strengthening o f the business environment, in particular for SMEs, and legal and administrative reforms to enhance the functioning o f land, credit, and labor markets. (ii)Support results orientationof public service delivery: The second area o f impact is through monitoring and leveraging progress in the implementation o f sectoral programs to reduce poverty, covering the priority sectors identified in the first Poverty Reduction Strategy (PRS), i.e., primary education, basic health, water, rural roads, agricultural research and extension, the judiciary, and HIV/AIDS. The PRSC-3 policy dialogue focuses on the establishment o f a robust monitoring and evaluation system that allows an assessment o f the impact and results o f sectoral programs. The information derived from the monitoring and evaluation system will i  then feed into the assessment o f progress towards the MKUKUTA objectives. Finally, the resources provided through the PRSC-3 complement government and other donor resources in financing priority programs for poverty reduction. The well developed participatory Public Expenditure Review and Medium Term Expenditure Framework (PER-MTEF) process provides a mechanism for the monitoring o f the use o f resources. (iii)Enhancepublicsectorperformance: Measures inthisareawillhave a direct impact on poverty reduction as they enhance public sector capacity to implement poverty reduction programs inthe priority sectors and generate additional funds for poverty reduction by reducing leakages in the form o f low allocative or operational efficiency o f public expenditures. Key areas o f reform include strengthening o f financial management through the implementation o f the public financial management reform program, strengthening o f the national audit office, implementation o f pay reform coupled with improved performance management in the public sector, procurement reform, the implementation o f anti-corruption strategies, and enhanced efficiency inthe use o f development assistance. (iv) Strengthen environmental management: Finally, the PRSC-3 also supports government's efforts to enhance the environmental sustainability of Tanzania's development program. The MKUKUTA identifies this as an important element o f efforts to improve the quality o f life and social well- being. Benefits The proposed PRSC-3 will help the United Republic o f Tanzania to implement the MKUKUTA and reach the growth and poverty reduction goals set out in the strategy. The reforms supported by the operation will help to raise growth, make progress towards achieving the Millennium Development Goals and strengthen the institutional infrastructure needed tc improve the public sector's capacity to carry out its role more effectively, as envisioned in the MKUKUTA. Improved delivery o f public services i s essential if the United Republic o f Tanzania i s to reach its goals for poverQ reduction and improve the quality o f life inTanzania. Risks (i) Reforms supported by the credit might encounter resistance from vestec interests. Government has inthe past shown determination to overcome sucf special interests. (ii)Government efforts to build broad consensus foi reforms through consultative processes sometimes tend to slow down the pace o f reforms. However, the benefits o f this approach clearly outweigh tht risk; (iii)As the utilization of PRSC-3 funds is determined by the budge process, there i s a risk that resource allocation and use i s not fully consisten with the MKUKUTA. However, government has adopted an open anc participative budget process including an annual PER process which helps to align and monitor resource allocation and its consistency with the MKUKUTA. (iv) The CFAA and the CPAR identified significant fiduciary risk, but recent assessments such as the joint HIPC Assessment and Action Plan show significant improvements in this area in recent years and put Tanzania among the best performers in Africa. (v) Capacity for program implementation and service delivery at both the central and district level is weak, however, inkey areas programs are in place to strengthen capacity. _____ Operation IDNumber PO87256 .. 11  IDA PROGRAMDOCUMENTFOR A PROPOSED THIRDPOVERTYREDUCTIONSUPPORT CREDIT TO TANZANIA I. INTRODUCTION 1. This program document proposes a third poverty reduction support credit (PRSC-3) for Tanzania inthe amount of US$ 150 million. 2. PRSC-1 laid out a three year policy reform framework which would be supported by a series of three PRSCs. Based on satisfactory implementation of the Poverty Reduction Strategy (PRS) and agreed actions, the first PRSC for Tanzania, in the amount of US$ 132 million (US$ 100 million credit and US$ 32 million grant), was approved by the Bank's Board on May 29, 2003. PRSC-2, in the amount of US$ 150 million (US $ 60 million credit and US$ 90 million grant), was approved by the Board on July 29,2004. 3. The Bank's PRSC support is provided in the context of the multi-donor, Poverty Reduction Budget Support (PRBS) program. This program consists o f a common performance assessment framework (PAF), which defines the areas of budget support dialogue and details the monitorable actions against which participating donors assess progress in program implementation as the basis for their financing decisions, and ajoint review process, which is intendedto reduce transaction cost and to ensure consistency in policy dialogue. A Partnership Framework Memorandum (PFM) outlines the principles behind budget support in Tanzania, the responsibilities of government and development partners, and an annual schedule o f reviews. At present, 14 donors, including the Bank, provide general budget support through the PRBS program. 4. The PRBS program for Tanzania: e I s grounded in Tanzania's first Poverty Reduction Strategy (PRS) and consistent with Tanzania's National Strategy for Growth and Reduction o f Poverty (MKUKUTA), which starting in2005/06 will replace the PRS. e Focuses on cross cutting issues including (a) private sector and rural development, (b) macro- economic stability, (c) poverty monitoring systems, (d) public financial management, (e) public sector management, (f) governance, and (g) environmental management; e Buildson national processesinthe areas covered; e I s results-focused, primarilythrough supporting and drawing on national monitoring systems; e Contributes to donor harmonization through the use of a common Performance Assessment Framework (PAF) andjoint review process, developed and agreed by 14 donors inTanzania; e Provides general budget support in parallel to existing sector development programs for education, health, water, and roads, with a gradual shift away from sectoral and towards general budget support over time; and e I s supported by technical assistance provided through existing project support. 5. As the last operation in the first three year PRSC program, PRSC-3 will continue to support the reforms targeted by the previous two PRSCs. The preparation o f a new multi-year PRBS program is underway and expected to become operational starting with PRSC-4. In order to ensure continuity 1  and predictability of financing in the transition between the current and the new program, triggers for PRSC-4 have been tentatively identified under the current program and will be reviewed once the new program is inplace. 6. The transition to a new PRJ3S program coincides with a number o f other important transitions that are expected to take place in 2005. Firstly, there i s the adoption o f a new PRSP (National Strategy for Growth and Reduction o f Poverty - which to emphasize national ownership is commonly referred to by its Kiswahili acronym as MKUKUTA) which was approved by the Government in February 2005 and the implementation o f which will start with the FY06 budget.' Building on the new MKUKUTA, the Government is leading the development o f a Joint Assistance Strategy (TJAS) which will provide the framework for donor assistance to the MKUKUTA. At the political level, presidential elections are scheduled for October 2005. President Mkapa is currently completing his second term and, consistent with Tanzania's Constitution, will not stand for re-election. 11. COUNTRY CONTEXT RECENT ECONOMIC DEVELOPMENTS INTANZANIA 7. Tanzania has established a solid track record o f macro-economic stability for almost a decade and pursued an ambitious program o f structural reform, which resulted in an acceleration o f economic growth which averaged 5.8 percent duringthe past five years. 8. Tanzania's economic performance remained solid. As stated in the MKUKUTA, Tanzania's economic reform agenda continues to focus on higher growth and poverty reduction. The government remains committed to developing a liberalized private sector-led economy. Real GDP (at factor cost) i s estimated to have grown by 6.7 percent in 2004 while inflation i s estimated to have dropped further to 4.1 percent. The increase in real GDP growth to 6.7 percent in2004 from 5.6 percent in2003 i s due higher growth in agriculture and trade sectors o f 6.0 percent and 8.0 percent respectively in 2004 as compared to 4.0 percent and 6.5 percent in2003. 9. Public expenditure was 22 percent o f GDP in 2003104 and i s estimated to have increased to 25 percent o f GDP in 2004/05. This increase in expenditure was financed through a combination o f increased domestic revenue and higher aid inflows, and higher net domestic financing. Domestic revenue increased from 12.7 percent o f GDP in 2003104 to 13.6 percent in 2004/05. The overall deficit after grants increased to 3.2 percent in 2003104 to 4.8 percent in 2004/05. Most o f the deficit after grants was financed through net concessional borrowing, but net domestic financing increasedto 0.6 percent, while inthe previousyear net domestic financing was negative at 0.4 percent o f GDP. 10. Box 1 provides an overview o f the status o f key structural reforms in Tanzania. The fifth Investors Round Table took place in May 2005, continuing the joint government private sector process o f identifying problems and finding solutions. Formal consultations between the government and the private sector continue to take place within the Tanzania National Business Council framework. 'The ~~ ~ MKUKUTA provides the overall framework for Tanzania's policies for growth andpoverty reduction, with the budget andthe MTEF as the maininstrument for its operationalization andimplementation. The review of the poverty monitoring system andthe preparationof an implementation planare currently underway. A JSAN is scheduled for the secondhalf of2005 to provide an assessment ofthe MKUKUTA and the closely related MTEF, as well as ofthe status ofthe review ofthe poverty monitoring system andthe implementation plan. 2  Box 1. Overview of Structural Reforms in Tanzania I Financial Sector. During the past decade, the fmancial sector has seen significant improvement. From being the sole preserve o f state-owned financial institutions, it has gone through a process o f privatization and been opened up to new entrants. These reforms have already shown some results inthe form ofnarrowed interest spreads and a fairly rapid increase in credit to the private sector. Aside from the unfinished privatization agenda, the main challenges for the sector include mher reduction in interest spreads and enhanced access to credit by the private sector, especially inrural areas. The recent establishment o f a credit rating agency i s a further step inenhancing the efficiency of financial intermediation in Tanzania. Access to credit by SMEs and the rural sector remains limited. Parastatal Sector. Tanzania has been aggressively implementing its privatization agenda. The privatization o f manufacturing and commercial parastatals was virtually complete by 2000 and a solid success. Inthe fmancial sector, the largest commercial bank has been successfully privatized. Privatization o f the National Microfinance Bank is at an advanced stage and the privatization process of the National Insurance Corporation is also progressing. The reform and privatization o f infrastructure utilities proved much more difficult. The President of Tanzania has appointed a Privatization Review Commission to review progress in the privatization o f infrastructure utilities. Trade Policies and Institutions. Reforms o f trade policies have taken mainly place inthe context of regional agreements, including SADC and EAC. Tanzania adopted the Common Extemal Tariff (CET) o f the East African Community (EAC) in January 2005, lowering its average tariff from 13.8 to 12.3 percent, but further raised the dispersion o f protection. The lowering o f the maximum tariff o f the CET from the current 25 percent to 20 percent, as expected to happen in 5 years in accordance with the Customs Union Protocol, should help correct some o f the dispersion o f protection. On the export side, the main issue pertains to export taxes. International experience has shown that export taxes and bans have generally failed to achieve industrial development objectives, led to informal trade, and frequently hurt small-holders who receive lower prices as a result. Factor Markets (Labor and Land). Revisions o f land and labor legislation have been completed, with most of the emphasis on the reform of institutions. The main challenge is now to implementthis new legislation, which inthe caseoflandreforms is expectedto bealengthyandcostlyprocess. Infrastructure (Power Sector and Transport). The establishment o f the executive agency TANROADS with responsibility for the trunk and regional road network has been a major step forward for the transport sector. However, some responsibilities in the roads sector have not yet been clearly defined and this hampers effective road maintenance and development activities. The current formulation of a new Road Act provides an opportunity to clarify these issues and provide the basis for accelerated transport development. Detailed work on the restructuring o f the power sector has been carried out but the implementation o f the restructuring has been delayed, partly as a consequence o f developments inthe international energy market. The financial performance o f TANESCO (Tanzania Electricity Supply Company) has significantly improved under a performance based management contract. Nonetheless, reform o f the policy and institutional framework for the power sector is essential to ensure the effectiveness o f k t u r e investments inthe sector. Public Institutions Interfacing with the Private Sector. From the mid 1990s, the government started reviewing regulations, focusing on removing obstacles and re-organizing the most important tasks o f government, Inpractical terms this means (1) harmonization of local government taxation to remove excessive tax burdenon private enterprise; (2) streamlining o f work permitprocedures; (3) review and amendment o f licensing legislation to reduce the cost o f business establishment and continuation; (4) review and revision o f export-imporl procedures to reduce time costs and corruption-related costs; and (5) design and implementation o f a program foi enhancing access to commercial courts by SMEs. Tanzania has reformed the legal framework for regulatorq institutions which are currently being established. The effectiveness o f these regulatory institutions, especial11 given the current oversight arrangements, needs to be closely monitored. 3  Table 1. Key Economic Indicators Indicator 1995 2000 2001 2002 2003 2004 National accounts,percentgrowth rates Agriculture 5.7 4.1 5.5 5.0 4.0 6.0 Industry -2.0 6.7 6.4 8.5 9.2 9.0 Service 2.9 6.0 5.7 6.4 5.7 6.2 GDP at market price 3.6 5.1 6.2 7.2 7.1 6.3 National accounts(percent of GDP at market price) Gross domesticinvestment 19.8 17.6 17.0 19.1 18.6 18.4 Publicinvestment 3.4 6.0 5.6 7.6 7.4 7.3 Private investment 16.2 11.4 11.2 11.4 11.1 11.0 Gross domestic saving 0.8 10.2 8.8 11.8 9.8 7.9 Annual averagee inflation(percent) 27.4 6.0 5.1 4.6 4.4 4.1 Balance of payments(percent of GDP at market price) Current Acct Balance (excluding grants) -19.9 -9.7 -9.5 -7.5 -11.0 -10.9 CurrentAcct Balance (including grants) -9.9 -5.3 -5.4 -3.1 -4.0 -5.2 External Indicators Debt ServiceExportingo fGoods and Services 21.3 13.2 6.6 6.7 6.7 8.1 (After rescheduling) Reservesinmonthso f imports 1.5 5.2 6.2 6.8 8.1 8.3 GovernmentFinance(percent of GDP at market price) 1994/95 L999/00 2000/01 2001/02 2002/03 2003/04 2004/05 Domestic Revenue 12.5 11.3 12.0 12.1 12.1 12.7 13.6 Public Expenditure 18.3 18.6 17.0 17.6 19.8 22.0 25.0 OverallDeficit (excludinggrants) -5.9 -7.8 -5.3 -5.6 -7.7 -9.3 -11.4 OverallDeficit (including grants) -4.2 -3.3 -1.6 -1.1 -1.5 -3.2 -4.8 Extemalborrowing(net) 0.9 1.6 1.2 1.4 2.0 3.8 4.2 Domestic borrowing(net) 3.3 0.1 0.0 -0.3 -0.4 -0.4 0.6 11, Governance. Tanzania's reform program has continued to aim at improving Tanzania's governance system. The broad range of structural reforms undertaken in the 1990s, including liberalization of the economy and privatization, has significantly reduced the scope of rent seeking opportunities. More recent reforms, supported by the PRSC, aim at improving financial management and accountability, including through the implementation of the public finance management reform program and the procurement reforms. Finally, government also targets corruption directly through theNational Anti-corruption Strategy at the nationaland district level. 12. The governance indicators compiled by Kaufmann et ala2(Figure 1) suggest improvements on most dimensions of governance in Tanzania between 1996 and 2004. Tanzania's performance i s also significantly better than that o f other low income countries (Figure 2) on all dimensions of governance. The most dramatic improvement seems to have occurred with respect to "control of corruption," where Tanzania has moved from being among the poorest performers to being close to the international average. The main area of concern is "regulatory quality" where Tanzania's performance seems to have deteriorated continuously since 1998. Tanzania has put in place a new regulatory framework and is currently making a series o f regulatory agencies operational, with the decline in regulatory quality likely due to several reasons: First, with the liberalization of the D.KaufmannA. Kraay, andM.Mastruzzi(2005). GovemanceMatters IV: Governance Indicatorsfor 1996- 2004. Draft, May 9,2005. 4  economy and the private sector participation in most utilities, including water, telecommunications, and transport, the quality o f regulation has gained in importance and is subject to increased scrutiny by observers and expectations are higher. Second, there have been delays in the implementation of the new regulatory framework, and finally, concerns about the appropriateness of oversight arrangements o f these new regulatory agencies. The governance indicators would suggest that this is a key area for enhanced government attention. A recent World Bank review o f the performance of regulatory agencies as well as financial support is designedto enhance the regulatory environment. Figure 1. Governance Indicators for Tanzania, 2004,2002,2000,1998 TQNZANIQ (2004) Voice and Accountability P o l i t i c a l S t a b i l i t y Governnent Effectiveness Regulatory Quality Rule of Lau Control o f Corruption e 25 58 75 Conparison betueen 2884, 2882, 2808, 1998, 1996 (top-bottom order) Country's Percentile Rank (8-199) Source: D. Kaufmnnr A. KraaY, and H.tlactrurzi 2005: Goutmance Hatters IU: Gouernancr Indicators Cor 1996-2001 < http:/Aud. WPldbank. orglub i/qo uernancc/pubs/go unrtters4. htnl) Figure 2. Governance Indicators for Tanzania comparision with low income countries, 2004 - TANZANIA (2004) Voice and Accountability P o l i t i c a l Stability Gouernnent Effectiveness Regulatory Quality Rule o f Lau Control of Corruption i ~ 25 58 75 i e Source: D. KauCnrnnr R. Kraw, and H. Martrurzi 2005: Govc.mancc Hatters I V :Goucrnance Indicators #or 1991-2004 rhttp:/Aud.l.srldbank.org/ubi/qouLrnan~elpub~/qourmtterr~.ht~l~ 5  MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 13. Economic reforms undertaken duringthe past decade provide a strong basis for continued economic growth and there is a strong commitment by the authorities to sustaining macro- economic stability. Tanzania's MKUKUTA targets growth rates of 6-8 percent and policy based projections undertaken for the forthcoming CEM suggest that such growth rates are ambitious but indeedachievable. These growth rateswould also be consistent with halfingpoverty by 2015. 14. Inaddition to preserving and deepeningreform achievements inthe areas ofprudent fiscal and monetary policy, liberalized markets, an open economy, and a clearer definition of the role of the private and the pubic sector, achieving sustained high growth will also require a scaling up of investment in infrastructure and enhanced access to capital by the private sector. In the medium term, raising the number of Tanzanians with post-primary education, strengthening incentives for innovation and adoption of new technologies, improving the institutions for steering Tanzania's growth agenda, and continued progress in fighting corruption will be essential for sustained high growth. 15. Outlookfor 2005 -2007. Tanzania's economy projectedto grow by6.9-7.5 i s percent over the medium term. In support of this target, investment i s expected to grow by 1.6 percent of GDP in response to ongoing reforms o f the business environment and the financial sector, as well as sustained macroeconomic stability. The agriculture sector is projected to grow by 5.2-6.0 percent over the medium term. The government's strategy to facilitate agricultural growth includes (i)the reform of crop boards; (ii) the reform of local government taxation; and (iii) the improvement in rural infrastructure. Inflation is expected to stay at 4.0 percent over the medium term period. The revenue effort is also expected to increase from 13.6 to 16.2 percent over the mediumterm period due to improved tax administration, expanded tax base, rationalization of tax laws and regulations, and sustained macroeconomic stability. Export earnings are expected to increase from US$ 1.5 billion to US$ 2.2 billion over the medium term due to increased export o f non-traditional commodities and gold. Imports are also expected to increase from US$ 2.6 billion to US$ 3.7 billion over the mediumterm. 16. Debt sustainability..' After receiving HIPC debt relief in 2001, Tanzania's NPV of debt- to-export ratio had declinedto about 130. The most recent debt sustainability analysis prepared by Fund and Bank staff shows that this debt indicator has fallen to 118 in 2004 and i s expected to continue this decline, reaching 87 by 2024 However, this favorable development of debt indicators depends critically on sustained economic growth and enhanced export performance. Tanzania's external debt position is thus considered to be sustainable, with moderate risk. 17, In addition, progress in securing debt relief from non-Paris Club creditors is critical to ensure the continued sustainability of Tanzania's debt. Negotiations have been concluded with 5 creditors (Kuwait, India, Bulgaria, China and Slovak and Czech Republics). Negotiations are underway with four creditors (Hungary, Iran, Libya, and UAE) and negotiations are pendingwith seven other non-Paris Club creditors. PROGRESSTOWARDS THE MILLENNIUMDEVELOPMENT GOALS (MDGS) 18. It will be challenging for Tanzania to meet all MDGs, yet there is room for cautious optimism for the achievement o f at least some of them. Preliminary results from the 2004 The formalization and implementation o fthe G-8 Gleneagles debt cancellation will also directly impact Tanzania's debt sustainability. 6  Demographic and Health Survey suggest that considerable progress was made in the reduction o f malnutrition and child mortality. And policy simulations show that the income poverty and hunger MDGs may be attainable if Tanzania is able to continue with its episode o f medium highgrowth and with its improvements inthe social sectors. Table 2. MDGbaseline,most recent estimate and target. Year Most Year of most Baseline recent Target baseline recent Goal 1: eradicate extreme poverty and hunger Reduceextremepoverty by half-national poverty line 38.6% 35.6% 19.3% 1991 2000 -dollaradaypovertyline 61.1% 57.5% 30.6% 1991 2000 Reducehunger by half 29% 22% 14.5% 1991 2004 Goal 2: Achieve universalprimary education Net enrollment inprimary school 51% 91% 100% 1990 2004 Goal 3: Promote gender equality and empower women Equal girls' enrollment inprimary school 1.01 0.99 1 1990 2004 Equal girls' enrollment insecondaryschool 0.70 0.81 1 1990 2000 Goal 4: Reduce child mortality Reducechildmortality ofunder fives by two thirds 141 112 47 1991 2004 Goal 5: Improve maternal health Reducematernalmortalityby three quarters* 529 578 132 1996 2004 Goal 6: Combat HIV/AIDS, malaria and other diseases Halt andreversespreadofAIDS n.a. 7.0% 2003 Halt andreversespread of malaria 21% 36% 1999 2004 Goal 7: Ensure environmental sustainability Halve proportion without improved drinkingwater inurban areas 13% 10% 7% 1991 2000 Halve proportion without improved drinkingwater inruralareas 65% 54% 33% 1991 2000 Halve proportion without sanitation inurbanareas 2% 4% 1Yo 1991 2000 *Halve proportion without sanitation inrural areas 9% 8% 5yo 1991 2000 Maternalmortality is a so called low frequency event. Low frequency events are difficult to measure accuratelyin surveys likethe DHSwhich serve as source for these estimates, as few cases ofmaternal mortality are registered.Consequentlymatemal mortalityrates are associatedwith large confidence intervals and the observedmatemal mortality rates of 529 in 1996 and 578 in2004 are statistically not different. 19. With respect to the eradicationo f extreme poverty and hunger, the latest household survey carried out in 2000/01 shows that, using the national poverty line, income poverty has declined from 38.6 percent in 1991 to 35.6 percent in 2000/01. Ifthe international dollar a day poverty line i s used, income poverty declined from 61.1 percent to 57.5 percent. Halving poverty by 2015 would thus require poverty to decline to 19.3 and 30.6 percent respectively. With the limited progress made during the 1990s (Table 2) this appears unattainable, but the data obscure that the early 1990s were characterized by a recession. The period o f positive growth only materialized from 1995 onward so that by the end o f the 1990s most of the damage from the earlier period was undone, The period o f high growth since 2000/01 i s not captured in the survey data. Yet poverty simulations, presented in Figure 3, suggest that the income poverty MDG i s attainable. Much will depend on rural income growth as most poor are found inrural areas. 20. After a decade o f stagnation in which the fraction o f underweight children remained at 29 percent, it declined to 22 percent between 1999 and 2004, so that Tanzania i s on track with respect to attaining the hunger MDG. Income growth can explain at most a third o f the decline. 7  Malnutrition appears more responsive to changes in non-income factors such as more effective management o f malaria and vitamin A supplementation. Policy simulations (Figure 3) suggest that ifincome growth and especially improvements innutritionrelatedinterventions can be sustained, the hunger MDGmay be attained by 2015. 21. Progress towards attaining the MDG on universal primary education has been impressive. As soon as universal primary education was introduced in 2001, net enrollment ratesjumped and are now close (91 percent) to the target of 100 percent enrollment. 22. Close to complete enrollment also implies gender equality in education. In primary education such inequalities are small (Table 2), but in secondary education gender inequalities persist. These inequalities may be on the way out: in 2004 the girl-boy ratio in Form Iwas 0.98 while it was 0.55 in Form IV. Whether this is the case requires further monitoring. Other non- MDG indicators such as the womedmen prevalence of HIV/AIDS (of 1.22) show that gender inequality persists. 23. Another encouraging fact is the observed reduction in child mortality from 141per 1000 in 1991 to 112 in 2004. This drop occurs after stagnancy in child mortality rates duringthe 1990s (it was 137 in 1996 and 147 in 1999) and appears to be a reflection o f improved malaria management (improved treatment as well as increased use of bed nets) and stronger health systems in general. The MDG target of 47 deaths per 1000 is ambitious however, and it will remain a challenge to meetthis objective. 24. With respect to the reduction of maternal mortality no progress has been made. The data in Table 2 even suggest an increase in maternal mortality rates but the difference is not statistically significant. The lack of progress is reason for concern as the MDG is ambitious (a 75 percent reduction) and maternalmortality rates high (578 per 100,000 births). 25. A recent blood sample survey suggests that the prevalence rate of HIV/AIDS is 7 percent which is less than was expected based on tests performed on blood donors. There is much variation in infection rates by age group, gender and location. Women (7.7 percent) are more affected than men (6.3 percent). Prevalence is 5.2 percent in the 20-24 age cohort but more than double that 10.9 percent on the 30-44 age cohort. Prevalence rates vary from a low of 2.0 percent inManyaraand Kigomato ahigh of 13.5 percent inMbeyaandIringa. 26. Finally some limited progress was made in improving access to drinking water mainly due to increasedaccess to protected wells and springs. Still some 54 percent o f all rural households do not have access to improved drinking water and much needs to be done to attain the MDG objective of 33 percent. As far as sanitation is concerned almost all urban (96 percent) and rural (92 percent) households have access to a toilet. In urban areas, one observes an increase in the fraction of households without a toilet from 2 percent on 1991 to 4 percent in 2000, possibly as a resultfrom rapid urbanization. 8  Figure 3. Projectedchanges in incomepoverty and malnutrition Prevalence of income poverty (%day poverty line) Prevalenceof underweightchildrenunder 5 1 65.0 61.1 55.0 25.0 30'0 29'0 5 45.0 ~x 45.7 h f 35.0 * . 30.6 *. 34.8 25.0 a" 15.0 19.0 c -Medium -Slow growth 5.O .......Fast growth growth -Medium growth -5.0 -0 m m I I - 5.0 0 0 -0 Q 0 - m3 m 0 0 0 0 0 0 -0 W W O 2 ! 9 " N0 N " " 0 - 0 0 0 0 0 0 0 0 N N N N N N Note: Growthscenariosallow for different rural-urbangrowthrates. Inthe slow growthscenario GDP growth is 4.0% per annum (3.8% inrural areas, 4.6% inurban ones). Inthe mediumand fast growth scenarios this is 5.4% and 8.0% respectively with rural growthrates of 5.0% and 6.5% and urban growthrates of7.4% and9.7%. Populationgrowth is assumedto be 2.9% per annum. The incomepovertyprojectionsare determinedby applyingGDP growthrates to unitrecordconsumption information inthe HBS.The nutritionprojectionsare basedon an income-nutritionelasticityof 0.51. The horizontallines inbothgraphs presents the baselinerespectively the MDGobjective. 111. THE GOVERNMENT'S PROGRAM 27. Tanzania's first PRSP was prepared in 2000 and three annual progress reports documented progress in its implementation. A new National Strategy for Growth and Reduction of Poverty (commonly referred to by its Kiswahili acronym, MKUKUTA) for the period 2005/06 - 2009/10 was approved in February 2005. The MKUKUTA provides the overall framework for Tanzania's policies for growth and poverty reduction, with the budget and the MTEF as the main instrument for its operationalization and implementation. The review o f the poverty monitoring system and the preparation of an implementationplanare currently underway. The MKUKUTA maintains the three areas of focus o f the first PRSP, namely: 9 Cluster 1:Growthandreductionofincome poverty; 9 Cluster 2: Improvementofquality oflifeand social wellbeing;and 9 Cluster 3:Governance andAccountability. 28. There is now clearly a stronger emphasis on economic growth with greater attention to stimulating the private sector response, infrastructure, human resource development, and building a competitive economy and an efficient government. The target growth rate i s 6-8 percent per annum for the period 2005-2010. In addition, the strategy adopts an outcome-based approach in contrast to the priority sector spending approach under the first PRSP. The "outcomes-approach" counts on the contribution of all sectors towards growth and poverty reduction and stresses cross sector collaboration and inter-sector linkages and synergies. 29. The adoption of the PRSP approach has changed policy making in Tanzania in significant ways. Firstly, poverty reduction has become the central policy objective in Tanzania. The budget process as well as sectoral initiatives have been re-oriented to ensure their contribution to overall poverty reduction objectives. Secondly, policy making has become more participatory, both 9  through the participatory process for the formulation of the PRSP, but equally important also at the level of sectoral policy formulation. Finally, and possibly among the most important changes that took place since the introduction of PRSl is the greater focus on poverty monitoring, results, and outcomes. A comprehensive Poverty Monitoring System has been put in place and efforts to strengthen statistical capacity andthe link between information generatedby the system and policy making are ongoing. IV. BANKSUPPORT TO THE GOVERNMENT'SSTRATEGY LINKTO CAS 30. The last CAS for Tanzania was approved in 2000 and foresaw the provision of general budget support to assist Tanzania's efforts in combating poverty, spurringrural development, and promoting the protection of the environment as a basis for sustainable development. The 2000 CAS is still relevant and consistent with the objectives of the PRS. Preparation o f a new CAS has been delayed to allow full alignment and consistency with the MKUKUTA; and to allow it to be developed in harmony with other development partners. 31. As the next logical step in the evolution of increased aid effectiveness and client ownership, the Government is now leading the preparation of a Joint Assistance Strategy (TJAS), which is expected to fulfill most of the functions of a traditional CAS. One o f the key themes of the new JAS will be the full alignment of BanWdonor instruments with the principles of local ownership and leadership of development efforts as set out in the MKUKUTA and, more specifically, in the Tanzania Assistance Strategy (TAS). Because government policies and the government budget are the key instruments for implementing the MKUKUTA, the Bank will increasingly provide general budget support, a shift that has already been initiated under the current CAS. The shift to programmatic lending was precipitated by the government's call for a change in donors' lending modalities, and is justified on three grounds: (1) the MKUKUTA has evolved to be the overarching framework for policy dialogue and formulation, both within Tanzania and between government and the donor community, (2) progress on the macroeconomic front has lessened the need for traditional adjustment lending, and (3) progress in planning and budget management provides confidence that public resource allocations and the execution of the budget are consistent with MKUKUTApriorities. The new JAS is expected to define more clearly criteria for the choice of specific aid modalities. COLLABORATIONWITH THE IMFAND OTHER DONORS 32. Tanzania receives development assistance from a large number of bilateral and multilateral donors and NGOs. For the past five years, enhancing the effectiveness and efficiency of foreign aid and the establishment of a conducive relationship between government, domestic stakeholders, and donors has been an important element of Tanzania's development agenda. The Tanzania Assistance Strategy lays out principles governing the government-donor relationship. Key elements for rationalizing donor assistanceinclude the move towards sector development programs (already in place for primary and secondary education, health, and agriculture and under preparation for water and roads) and general budget support. These aid modalities are seen as appropriate mechanisms for increased donor coordination, better integration o f donor assistance into government systems and processes, enhanced ownership, and reduced transaction costs. The local Development Partnership Group is the principal mechanism for ensuringoverall coordination among donors insupport o f government programs. 10  33. With respect to the proposed PRSC-3 operation, the key areas o f coordination are with (a) other donors providing budget support, (b) sector development programs supported by the Bank and other donors, and (c) the IMF. ThePRBS donor group 34. PRSC support i s part o f the Poverty Reduction Budget Support (PRBS) facility, which provides a common framework for general budget support for the implementation o f the PRS. At present, 14 donors4participate inthe PRBS facility. Usingthis facility, donors have agreed to seek improved flexibility, reporting, and predictability o f aid flows through the budget. To ensure impact, the government and donors have agreed on an annually reviewed and updated Performance Assessment Framework (PAF) with a three year horizon for monitoring progress in implementing participating donors, within the framework o f the PAF, the Bank retains flexibility to select - in agreed reforms under the PRBS and as the basis for financing decisions. As i s the case for other consultation with government and other PRBS donors - specific benchmarks and form an independent judgment as to whether significant progress has been made. However, all involved parties encourage minimizing such differences which, if left unchecked, would undermine efficiency objectives and predictability o f resource flows. 35. In 2004, an important innovation to the PRBS facility was the introduction of more formalized structures o f the PRBS group for internal decision making and external representation and dialogue. The PRBS group i s currently chaired by Norway. The responsibility for the representation o f the group in high level dialogue with Government, lies with the "Troika plus", which consists o f the current chair, the past chair, and the incoming chair as well as the World Bank. Responsibility for internal decision making lies with the "Heads o f Cooperation Group", which includes the Heads o f all participating agencies. A "Coordination Group," which consists o f representatives o f the "Troika plus" at the technical level as well as representatives o f key thematic groups on poverty monitoring, public expenditure, and governance, is responsible for leading the technical work o f the PRBS group and for ensuring the linkages to other processes in Tanzania. Finally, the PRBS group i s supported by a permanent PRBS secretariat. TheIMF 36. The current three year PRGF arrangement was approved by the IMF Board in August 2003 and supports measures to (a) enhance revenue mobilization, in order to strengthen domestic savings and reduce aid dependency; (b) improve the economy's supply response by removing impediments to growth, including measures to improve the efficiency o f the financial sector and promote private sector development; and (c) continue trade liberalization in order to enhance efficiency and strengthen the tradables sector. Reflecting Tanzania's improved external position, access under current PRGF arrangement i s only 10 percent o f quota. The authorities have indicated that they would like some form o f Fund involvement with formal Board approval to continue after the current PRGF expires. 37. The reform program supported by the PRSC and the new PRGF arrangement are complementary and mutually reinforcing. The PRSC i s closely coordinated with the PRGF according to the agreed institutional division o f labor, with the IMF taking the lead on macro- economic issues and the Bank taking the lead on structural and social issues. In a number o f areas ~~ Canada, Denmark, Finland, Germany, Ireland, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, the EuropeanUnion, the African Development Bank, and the World Bank. Germany co-financesthe PRSC.  where the mandate of the two institutions overlap, there i s close coordination and collaboration to ensure that consistent advice is provided to the authorities. Maintained macro-economic stability is part of the performance assessment framework and the IMF Article IV consultations and PRGF reviewsare an important input into the assessmentofthe macro-economic situation bythe Bank. Sector Development and ThematicProgram? 38. Another area of close coordination between the PRSC and other donors i s in the area of sector development and thematic programs. Sector development programs which are in place for primary and secondary education, health, and agriculture and under development for roads and water serve as instruments for sector specific policy dialogue and resource transfer. The role of the PRBS vis a vis these sector programs is to (a) ensure alignment of sector development programs with the PRS; (b) monitor outcomes and focus on adequate monitoring and evaluation systems; (c) foster cross-sectoral resource allocation and prioritization through the budget process; (d) strengthen service delivery through public service reform; (e) reduce resource leakagesthrough strengthening financial management and accountability systems, and (f) provide resources for the implementation of sector programs through general budget support. It i s envisaged that resource transfers will increasinglytake place through the PRBS facility, while sectoral policy dialogue will continue to take place inthe context of the sector development programs. 39. In addition to sector development programs, there are also several "thematic" donor supported programs that are closely linkedto the PRBS. These include the Public Sector Reform Program, the Local Government Reform Program, the Legal Sector Reform Program, the Public Finance Management Reform Program, the Public Expenditure Review process, and the tax administration programs, which are supported by various donors through harmonized basket funding arrangements. These thematic programs relate directly to areas of policy dialogue and monitoring under the PAF. Here the role of the PRBS i s primarily that of leveraging reform and monitoring progress, while the thematic programs provide the necessary technical assistance for the implementationof reforms. RELATIONSHIP TO OTHERBANKOPERATIONS 40. Fully developed sector development programs are in place for primary and secondary education and health. Currently, Bank support to the health sector program i s in the form of an Adaptable Programmatic Loan (APL). The proposed strategy is to gradually shift IDA financing for health to the PRSC through the period of the Phase I1APL. Disbursements would decrease over the life of the project (2004-2006) while the PRSC would increase, and MOF allocations for health would be closely monitored to ensure that the total health sector budget does not decrease as a result of the move to the PRSC. 41. Bank support to the Primary Education Sector Development Program was in the form of an education sector adjustment credit which provided sectoral budget support of US$ 50 million per year. After its closure in FY05, financial support to this program will be channeled through the PRSC program. A sector development program for secondary education is supported through a Secondary Education Sector Adjustment Credit (2004-2006), before integrating it into the PRSC program. Sectoralandthematic programs are governmentprogramsthat typically consist of apolicy framework, an expenditure framework, and a process for review anddialogue with donors. Donor support to these programs can be through a wide range of instruments from traditionalproject support to generalbudget support. 12  42. Experience with budget support in Tanzania has also shown that the combination of general budget support with project support that provides technical assistance for the implementation o f institutional reforms is effective. For most areas covered by the PRSC such support is in place, provided by either the Bank or other donors. Bank projects that provide assistance in the implementation of the PRSC supported reform agenda include a tax administration project, a public sector reform project, environment projects, and agriculture sector support. Relevant projects under preparation include a private sector development project and a project to support transparency and accountability inthe public sector. LESSONSLEARNED 43. Prior to the PRSC, Tanzania received traditional Bank adjustment support as well as a Programmatic Structural Adjustment Credit. These adjustment operations provided a rich set of lessonsthat have influencedthe design of the PRSC program. These lessons include: Need for government commitment: Government commitment in both planning and implementation is paramount. Recognizinglimitationsand constraintsfaced by governments:It is important to gauge very carefully any actions that are outside the Government's powers. Similarly, opposition to reforms from civil society, CSOs, NGOs, opposition parties and from other stakeholders could be mitigated by having an effective dialogue with them at the preparation stage. Involving downstream/partner implementing agencies at an early stage: It is important for the MOF to involve the other Ministries, Departments and Agencies (MDAs), during preparation, which will subsequently be involved in the implementation of the program. Experience has shown that ifthese other sectors are not included from the beginning,the implementationcan become very difficult subsequently. Being realistic in program design and implementation: There has often been a tendency to underestimate the Government's capacity constraints and as a result the planned implementation is slower than expected. Effective design of complex actions: Where a complex and multi-step activity is involved, it is crucial to lay out the steps clearly and to pay attention to their sequence and linkages. Buildingcrucial capacity at an early stage: Tanzania faces serious capacity constraints in many areas, which can affect the implementation of reforms. It is thus important, to identify the capacity requirements of specific reform programs early on and ensure that appropriate capacity enhancing measures are taken. Improving predictability of resource flows: A common weakness o f the Bank's adjustment support was that ex-ante conditionality led to low predictability of financial aid flows, which affectedthe implementation of the government budget. The government and the PRBS donor group had commissioned an independent evaluation of general budget support to Tanzania duringthe period 1995-2004 and a draft report was issued in December 2004. The report documents improvements in the effectiveness and efficiency of the policy dialogue and resource transfers to Tanzania which has resulted in an improved financing and institutional framework for public policy and spending. GBS has also enhanced the capacity of government to influence the proximate determinants of poverty reduction. 45. In its recommendations, the independent evaluation strongly supports several initiatives that have been initiated by government. This includes reforming the aid architecture, which is 13  taking place in the context of the Tanzania Assistance Strategy and the Tanzania Joint Assistance Strategy processes; and strengthening the institutional framework for public policy and spending and promoting domestic accountability and open debate, which are among the main objectives of the MKUKUTAand PERprocesses. 46. Specific to the PRBS, the joint evaluation suggests to distinguish more clearly between due process requirements, strategic dialogue and results monitoring. The findings of this evaluation are an important input for the design of the new Tanzania Joint Assistance Strategy as well as for the design of the new PRBS program. ANALYTICAL UNDERPINNINGS 47. PovertyAnalysis: As part of the Tanzanian Poverty Monitoring System(PMS), the local Research and Analysis Working Group (RAWG) carries out a wide range o f analytic work on poverty related issues. This includes joint work by the Government and the Bank on a combined Country Economic Memorandum and Poverty Assessment. Inaddition to analyzing the interaction of economic growth with various dimensions of poverty, a particular focus o f the analytic work is on hunger and nutrition. The Second Poverty and Human Development Report prepared by the RAWG in 2003 provides an overview of the status of poverty inTanzania, as well as more detailed analysis on topics such as vulnerability and social protection, benefit incidence, the relationship between governance and poverty reduction and vulnerability containment, and agriculture. Results of a comprehensive household budget survey carried out in 2001 were published in 2002, and a participatory poverty assessment was completed and a report publishedin2003. 48. Country Economic Work: The last CEM was issued in 2000 and a new CEM is currently under preparation in close collaboration with Government. The issues addressed by the CEM include (a) the prospects for sustaining and improving Tanzania's recent growth performance, (b) reducing income poverty in the rural areas, and (c) linkages between economic growth and various dimensions o f poverty. 49. Related to the focus o f the PRSC on private sector and rural development, the Bank is supporting several pieces o f analytic work that complement the analysis done by government, donors, and research institutes. This includes an investment climate survey carried out by the Regional Program on Enterprise Development, a rural investment climate survey and a supply chain analysis for agricultural products. 50. Poverty and Social Impact Assessments(PSIAs): Specific to the PRSC reform agenda in the area of rural development, the Bank has carried out a PSIA of the reform of crop boards. The objective ofthe work was to examine options for reform o fthe Coffee and Cotton Boards with close attention to the impact o f reform options and stakeholder workshops to discuss the findings of the PSIA and agree on the way forward were held in September/October 2004. Another PSIA on reforms of local government taxation and revenue has been recently completed. The objective of this study was to assess the impact of recent reforms of local government taxation and to assist inthe designof a new revenue systemfor local authorities. One ofthe main findings of this PSIA was that the reform o f local taxation and business licensing has made the tax system more progressive and thus pro-poor. Aside from the PSIA supported by the Bank, Tanzania can draw upon significant work by local research institutes as well as studies carried out in the context of donor supported projects or international research efforts that analyze the social and poverty impact of a large variety of policy and institutional reforms. 14  51. Gender Analysis: In 2004, the Bank carried out a Strategic Country Gender Assessment for Tanzania. It acknowledges that Tanzania has long been at the forefront o f gender analysis and practice, and has often articulated the importance o f gender equality. However, it also points to weaknesses which include (i)the Ministry o f Community Development, Gender and Children (MCDGC) has a broad and unfocussed mandate and gender focused action plans and policies are not prioritized nor implemented effectively; (ii) progress in passing gender-sensitive laws has not been matched by effective implementation; (iii)gender-based violence remains a pervasive problem and relevant laws are not being effectively implemented; and (iv) the gender-responsive budget initiative has stalled. While PRSC-3 does not explicitly address gender issues, many o f the reforms supported do. In particular, this includes the strengthening o f the poverty monitoring system, including efforts to provide enhanced gender disaggregated information, the public sector reform program, which includes a module on addressing gender issues in the public sector, or reforms o f land legislation and support to its implementation, which eliminates discriminatory rules on access to land. Sector development programs for health and primary and secondary education also contain measures to address inequalities and gender specific issues. 52. Fiduciary Work: In the context o f Tanzania's government led, participatory Public ExpenditureReview process, a wide variety o f analytical activities are carried out every year. This includes the Bank-led preparation o f the annual Public Expenditure and Financial Accountability Report (PEFAR), whose findings have been presented during the PER Consultative Meeting in May 2005. The PEFAR combines analytic work that was previously carried out inthe context o f the annual PER external evaluation and the Country Fiduciary Accountability Assessment. A CPAR was completed in 2003. Technical assistance for the implementation o f the recommendations o f the PEFAR and the CPAR is being provided through a Public Finance Management Reform Program, while policy dialogue takes place in the context or the PEFAR and PRBS program. V. THE PROPOSEDTHIRD POVERTYREDUCTIONSUPPORT CREDIT OPERATIONDESCRIPTION 53. The Third Poverty Reduction Support Credit (PRSC-3) will support the implementation o f Tanzania's Poverty Reduction Strategy (PRS). The financial support provided through the PRSC- 3 will narrow the gap between the cost o f implementing key elements o f the PRS and resources available from government's own domestic revenue and other donor support. 54. It had been envisaged that the credit amount o f PRSC-3 would be US$175 million, reflecting an increase of US$25 million compared to PRSC-2. Such an increase would have been inresponse government's request to provide IDA support increasinglythrough the PRSC, based on the implementation o f key reforms in areas supported by the PRSC. Given the delays in agriculture sector reform discussed in paragraph 61 and to maintain consistency between IDA PRSC financing and the pace o f structural reforms, it is proposedto postpone an increase inPRSC financing until PRSC-4, contingent on satisfactory progress in the implementation o f the MKUKUTA. The prior action on crop boardreform has been convertedinto atrigger for PRSC-4. 15  55. PRSC-3 will support and monitor key reforms identified in Tanzania's PRS6. First, it supports measures that are expected to contribute directly to the reduction o f income poverty. This includes reforms in agricultural and rural development which are intended to raise agricultural productivity and thus enhance the incomes o f the population in rural areas, where poverty i s most widespread and most deeply entrenched. It also includes reforms related to private sector development and strengthening o f the business environment, as well as legal and administrative reforms to enhance the functioning o f land, credit, and labor markets. These are intendedto foster economic growth and enhance employment opportunities as access to formal and informal sector employment has been identified as one o f the key areas for sustainable poverty reduction in the PRS. 56. Second, the PRSC-3 monitors and leverages progress in the implementation o f sectoral programs to reduce poverty, covering the priority sectors identified in the PRS, Le., primary education, basic health, water, rural roads, agricultural research and extension, the judiciary, and HIV/AIDS. The PRSC policy dialogue focuses on the establishment o f a robust monitoring and evaluation system that allows an assessment o f the impact and results o f sectoral programs. The information derived from the monitoring and evaluation system will then feed into the assessment of progress towards the PRS objectives. Dialogue on sectoral policy issues will continue to take place in the context o f established sectoral fora. The resources provided through the PRSC-3 will complement government and other donor resources in financing priority programs for poverty reduction. The well developed participatory PER-MTEF process provides a mechanism for monitoring and dialogue with the authorities on the use o f budgetary resources. 57. Third, PRSC-3 includes cross-sectoral actions to strengthen public sector performance and enhance the efficiency and effectiveness o f the use o f resources. These measures will have a direct impact on poverty reduction as they enhance public sector capacity to implement poverty reduction programs in the priority sectors and generate additional funds for poverty reduction by reducing leakages in the form o f low allocative or operational efficiency o f public expenditures. Key areas o f reform include strengthening o f financial management through the implementation o f the public financial management reform program, strengthening o f the national audit office, pay reform coupled with improved performance management inthe public sector, procurement reform, the implementation o f anti-corruption strategies, and enhancing efficiency in the use o f development assistance. 58. Finally, PRSC-3 also supports government's efforts to enhance environmental sustainability o f Tanzania's development program. The PRS identifies this as an important element o f efforts to improve the quality o f life and social well-being. Table 3 provides an overview o f the focus o f policy dialogue under PRSC-3. Underarevenue sharingagreementbetweenthe UnionGovernmentof Tanzaniaandthe Governmentof Zanzibar, 4.5 percent of donor supportreceived by the UnionGovernment is transferredto the Government of Zanzibar. 16  Table 3. PRSE'RSC-3 focus areas and priorities PRS ObjectiveDmpact PRSCE'RSFocus Area PRSC-3 Priorities Indicator PRS Pillar: ReduceIncomePoverty Breadth -proportion Rural Development e Reformof crop boards below poverty line e Reform ofmicro-fmance legislation and regulations e Monitoringof ASDP implementation e LandandVillage Act implementation e District roads maintenanceand rehabilitation Private Sector Labor market reform Development PSD and SME strategy development Designofnew civil procedurecode Reform ofbusiness licensing and registration e Strengtheningof business environment PRSPillar: Achieve and Sustaina ConduciveDevelopmentEnvironment Macro Stability Debt contracting and Implementation ofNational Debt Strategy management Improved coordination among debt units of MoF, ACCGEN, and BOT National Debt ManagementCommittee Domestic Revenue Reformof tax laws Strengtheningoftax administration Reform of Local Government taxation Reform of taxation of export crops Governance-Improve Budget formulation and Approval and execution of budget effectiveness in the management consistentwith PRS delivery of public Strengtheningof MTEF services and the overall Enhancedintegration o f foreign aid in incentiveenvironment budget Restructuring of development grants to LGSs Enhancedbudgetaryreporting of LGAs Publication of quarterly transfers Governance-Improve Public Service Reform Service delivery surveys the performanceof the Annual plans andperformance budgets public sector Performancemonitoring Pay reform Public ServiceAct Governance- Financial Management PFMRP implementation Minimizeresource Broaden coverage of IFMS leakage and strengthen Enhancedpayrollmanagement accountability IFMS security Audit committees MoF re-organization StrengtheningofNAO Procurement Establishmentof Regulatory 'Procurement 17  PRS Objective/Impact PRSCPRS FocusArea PRSC-3Priorities Indicator Authority Decentralization of procurementauthority to procuring entities Anti-Corruption Strengthenedgovernment-donordialogue on anti-corruption activities Reporting on anti-corruption activities 0 Reform ofAnti-corruption legislation Capacityenhancement 0 Institutional strengtheningto deal with unethical behaviour 0 Anti-corruption action plans for LGAs Aid Management Inclusion of aid inthe budget Monitoring o fTAS implementation PRSPillar: Improve Quality of Life and Social Well -being Environment Environment Framework legislation on environmental management Implementation of institutional framework for environmental management Regulationsand capacity for environmental impact assessments 0 Capacitybuilding Monitoring indicators Poverty Monitoringand Evaluation Poverty Monitoring Poverty Monitoringand Strengtheningof poverty monitoring system and Evaluation Evaluation PRSreporting 0 Indicators for govemance, gender, agriculture, vulnerability, roads, andthe environment Improvements ofroutine data systems OVERALL ASSESSMENT OF PROGRESSINIMPLEMENTING THE PRSC SUPPORTEDACTIONS 59. In the context of the joint PRBS review process, progress in implementing the PRBS program was assessed during the annual PRBS review in November 2004 and during the PRBS mid-year review in April 2005. The PRBS development partners concluded that overall implementation of the poverty reduction strategy and the supporting reform program is satisfactory and serves as a good basisfor continued cooperation. Progress was good inthe area o f maintaining macro-economic stability, improving budget formulation and execution, improving the performance of the public sector, improving external resource management, and enhancing environmental sustainability. The reviews also noted various areas o f concern which need increased attention by government. These include rather slow progress on various reforms related to reducing income poverty, delays in updating the poverty monitoring indicators o f the PRS, and the implementation o f specific anti-corruption measures. 18  PRIOR ACTIONS FORPRSC-3 60. The set o f prior actions for PRSC-3 corresponds to the triggers identified under PRSC-2. The prior actions emphasize the strategic focus of the operation on enhancing pro-poor economic growth and public sector financial management. Seven of the eight prior actions have been completed satisfactorily. 61. The prior action regarding the approval of a strategy for the reform of at least two crop boards has only been partially met. Cabinet approved reforms to the financing of crop boards, but has not yet endorsed specific reforms of the role and function of crop boards, including their regulatory functions, governance structures, and accountability to stakeholders. 62. The agreement on financing reforms is a key step forward in the overall reform of the Boards. It will bring important savings to producers by reducingtheir burden of multipletaxation. Italso subjects the finances of the crop boardsto more rigorous scrutiny, by bringingthem into the fold o f the national budget, and in this way enhances financial accountability. The financing reforms will be implemented during fiscal year 2005/06. An appropriate allocation for the budgetary funding o f crop boards has been made in the budget for 2005/06. Government has indicated that it plans to proceed with the reform of crop boards by developing an Action Plan for the Rationalization of Roles, Functions, Financing and Accountability of Crop Boards by September 2005. New crop board legislation is expected to be submittedto Parliament duringthe secondhalf of 2006. 63. Agricultural growth is central to Tanzania's efforts to reduce poverty. Reform of the crop boards i s considered a critical component of Tanzania's agricultural strategy, reflecting a commitment of government to enhance the competitiveness of the country's main agricultural exports. Progress made on reform of financing of crop boards i s important, and the government has made time-bound commitments toward meetingthe remaining actions for reform of the crop boards. For this reason, the partial completion of this target i s considered consistent with meeting overall objectives of the PRSC. 19  Table 4. Assessment of Progress against prior actions for PRSC-3 ~ Finalised and obtained Governmentapproval of the strategic plan for operationalisationof the Land and Village Land Acts. Completed The draft SPILL was submittedto the Ministry of LandsandHumanSettlements on 31dMarch 2005. The Strategic Plan was discussed during a Stakeholders Meeting on 14' March 2005. Comments from Stakeholderswere incorporated into the draft andthe Strategic Plan submittedto the Ministry where it was presentedto MLHSmanagementon 22"dMarch2005. New business licensing framework under implementationin a phased strategy. ~~~ ~ Completed. The measures conceming the reform of business licencing announcedinthe FY05 budget arc being implemented. These include the abolition of business license fees for small businesses. In addition business licenses have to be issued only at the time of the establishment of the business and no longei annually. The PSIA on the reform of local taxation reports a positive impact of these reforms. In order tc establish a well functioning, transparent, and efficient business registration system, additional actions are needed. A classification system businesses has been formulated. A draft bill on Business Activities Registration is being finalized for submission to Parliament in 2006. Consultants will then design the businessregistration system. Building on the results of the Crop Boards review, Government approval of a strategy to reform two crop boards consistentwith ASDS. Partially completed - converted to trigger for PRSC-4. A draft report on the Crop Board review had been completed in June 2004 and government organized a series of consultations with stakeholders in the coffee and cotton industries in September 2004. In June 2005, Cabinet decided to abolish the Crop Development Funds, and replace the fmancing of crop boards' running costs though crop cesses with fmancing from the central government budget. No decision has beentakenregarding reforms ofthe role and functioning of crop boards, as Cabinet considered available evidence as being inconclusive and requested deeper analysis before a decision on further crop boardreforms is taken. ~~ Approved budget 2004/05 in line with PRS objectives, delineating budget codes for priority sectors and items. Completed. The analysis of the approved budget and PRS funding for 2004/05 was made inthe Ministry of Finance paper: "Budget Review, Recent Developments in Budget Execution and Formulation", which was reviewed by the budget support development partners in the PER Macro Group meeting of October 2004. The general highlight is that PRS finding in 04/05 totals TSh 1,480 billion, 32 percent higher than the actual outtum in 2003104 and 44 percent of the budget including Consolidated Funds Services (CFS). The relative share of PRS funding in the budget has averaged 45 percent since 2002/03. The paper presentedthe PRS funding to the detailed levelof GFS codeditems. The recurrent budget for priority items in2004/05 are 8.8 percenthigher than the outtum in2003/04, while the developmentbudget for priority items is 5.6 percenthigher thanthe budget in2003/04. Budget execution for 2003/04, and 2004/05 (FQ 1 and FQ 2), in line with approved budget and with PRS priorities, consistently reported as per identified expenditure budget codes for priority sectors and items. Zompleted. The reports on the execution of the budget for 2003/04 and for the f r s t two quarters of the inancial year 2004105 have been published on the national website. Detailed information i s provided or `evenuecollection as well as execution of the priority sectors andpriority items. 20  levelopmentactual outtum being low due to the problem of capturingdirect-to-project funds. Budget execution for the first half of 2004105 was in line with the approved budget and PRS priorities (for FQ1 and FQ2, total expenditure including CFS was 78% and 130% of estimates respectively). The over performancein FQ2 is mainly on account of catching up inrecurrent expenditure as well as registeredhigh inflows of project funds. Priority sectors have continued to receive their full quarterly allocations and frontloading o f budget support funds has facilitated adequate allocationsto other MDAs. I Pay enhancement consistent with the approved budget for 2004/05, and the overall thrust of the pay reform strategy. Completed. Pay enhancement implemented inthe 04/05 budget execution. Pay enhanced by between9.09 percent and 15 percent in line with the medium term pay policy and the wage bill ceiling for FY 04/05. Circular effecting enhancementis available. Progressin the implementationof the PFMRP. 2ompleted. During the Annual Review, it had been agreed that progress should be measuredagainst the bllowing three specific actions: (i)MTEF -consistent budget coding system: (achieved) Progress inthis area has been good. The inconsistency in terminologies between the PFMRP interim work plan and the budget, implementation arrangements and way forward, and the MTEF has been corrected. This has resultedinhaving PF objectives that are compatible with the MTEF objectives as well as consistent coding of PFMRP project fbnded, basket funded and Government funded activities within the Government developmentbudget for financial year 2005/2006. (ii)Monitoring indicatorsfor eachcomponentat output level: (achieved). For eachcomponent, core activities andmonitoringindicators havebeenpreparedindraft. The indicators are categorized by type (output/outcome/process) and include target values, baseline values, and collection datedperiods. (iii)JSCmeetingtodiscussprogress,challengesandfutureplansandtoendorseprogrammework plans and budgets (achieved) A JSC meeting took place on April 28, 2005 to approve the strategy, action planand release of funds for financial year 2005/2006. The Governmentestablishesthe Regulatory Authority for procurementand decentralizes procurement to Procurement Authorities. Zompleted The Procurement Bill was approved on November12, 2004 and assented by the President in :ebruary 2005. The new Procurement Regulations were gazetted on April 15' as Public Procurement Goods, Works, Non-Consultant Services and Disposal of Assets by Tender) Regulations, 2005 (GN No. 97) md Public Procurement (Selection and Employment of Consultants) Regulations, (GN No. 98), respectively. 'rovisions ofthe regulations include that effective from May lSt, 2005 a. the Central Tender Board shall cease to exist and in its place there shall be established a Public ProcurementRegulatory Authority; and b. all MDAs shall carry out procurementfunctions within their respective approved budgets. 21  DESIGNOF A NEW PRBSPROGRAMAND TRIGGERS FOR PRSC-4 64. The first PRSC program foresaw a series of three PRSCs (PRSC-1 - PRSC-3) which would support the implementation of Tanzania's first PRSP. The proposed PRSC-3 i s thus the last operation under the existing program and a new one i s under preparation, basedon Tanzania's new PRSP. The formulation of the new PRBS program i s expected to respond to (a) the new PRSP which has a greater outcome orientation than the previous one, (b) the recently completed Joint Evaluation o f General Budget Support to Tanzania, (c) ongoing efforts for greater donor harmonization and efforts to provide greater space for government ownership, and (d) the gradual integration o f sectoral support into the PRBS. It i s expected that the new multi-year PRBS program will be formulated by October 2005, and its implementation start with PRSC-4. In order to ensure continuity and predictability of financing during the transition to the new program, the current PAF has been extended by one year until November 2005/March 2006. The Annual Review identified monitorable actions for FY06 inthe areas covered by the PAF. Fromthis set of actions, the following triggers for PRSC-4 have been identified. Once the new PRBS program i s inplace, the consistency ofthese triggers with the new program will bereviewed. ReductioninIncomePovertythroughPrivateSector andRuralDevelopment i. Progress inthe implementationofthe Action Planfor the Rationalization ofRoles, Functions, Financing and Accountability of Crop Boards, consistent with the Agriculture Sector Development Strategy (ASDS). ii. ProgressintheimplementationofthestrategicplanforoperationalizingtheLandActand Village Land Act. iii. DraftbillonBusinessActivitiesRegistrationsubmittedtoParliament. StrengthenedPublicExpenditureandFinancialManagementto Support Implementationof MKUKUTA iv. Approved budget 2005/06 in line with MKUKUTA implementation, delineating budget codes for budget activities related to MKUKUTA goals and strategies. V. Budget execution for 2004/05, and 2005/06 (FQ 1and FQ 2), inline with approved budget and with MKUKUTA implementation, consistently reported as per identified budget codes for budget activities related to MKUKUTAgoals and strategies. vi. National Audit Office staff has been trained, and procurement and installation of computer equipment at the National Audit Office completed, allowing audit through IFMS infuture periods. vii. President's Office -Public Service Management establishes a Procurement Cadre. v111. ... President's Office - Public Service Management establishes Organization structures and staffing levels o f Procurement Management Units (PMUs). ix. Pay enhancement consistent with the approved budget for FY06, and the overall thrust of the pay reform. X. Process agreed to reform the public sector allowances regime, based on the recommendations of ongoing review. 22  POLICY AREAS 65. The following sections review in detail progress made inthe key policy areas covered by the PRSC-3. Each section discusses the main issues do be addressed, government's reform strategy, progress made under PRSC-3, actions that government plans to carry out under PRSC-4, expected results of the PRSC supported reforms, as well as the indicators which the reforms are expected to influence. Improved investment and business environment 66. Issue. The primary issue for government is to create an environment inwhich households can participate in viable productive activities of their choice by responding to labor or product markets opportunities. Thus as a major priority, government must enhance the operating environment for firms to support its productive sectors to succeed ina globalized economy. 67. Reform Strategy. The PRSC supports government in building a competitive operating environment by working on two major pillars (1) establishing effective services of public institutions interfacing with the private sector and (2) establishing the foundation for efficient factor input markets in starting with land and labor. Pillar 1: the government has started reviewing regulations, focusing on removing obstacles and re-organizing the most important tasks of government. In practical terms this means (a) harmonization of local government taxation to remove excessive tax burden on private enterprise; (b) resolution of outstanding issues emanating from the Land Act; (c) review and amendment o f labor laws constraining business operations; (d) streamlining o f work permit procedures; (e) review and amendment of licensing legislation to reduce the cost of business establishment and continuation; (f) review and revision of export- import procedures to reduce time costs and corruption-related costs; and (g) design and implementation of a program for enhancing access to commercial courts by SMEs. Pillar 2: efficient factor markets are critical for efficient resource allocation and competitiveness of the Tanzanian economy. The government has already embarked on two critical areas (a) the labor laws and (b) the Land and Village Land Act. Complementing these actions supported by the PRSC, the government is also focused on enhancing the efficiency in infrastructure services, ports and harbors and in utilities such as electricity and water. 68, Progress under PRSC-3. (Pillar 1) Following approval of the business environment strengthening (BEST) programme under PRSC-2, its implementation is now underway including work on land and labour reforms, business licenses, regulatory licensing, and the commercial dispute resolution (CDR) system. An M&E framework for BEST is expected to be fully operational by November 2005. 69. Work progressed on replacing the business-licensing regime by a registration system. In particular, measures to rationalize business licensing announced in the budget for FY05 are being implemented (Box 2). This includes the abolition o f business license fees for health facilities operated by religious organizations and small businesses. Inaddition, business licenses have to be issued only at the time of the establishment o f the business and no longer annually. A classification system has been formulated for businesses. A draft bill on Business Activities Registrationhas been submitted to Parliament in July 2005. In addition, work i s ongoing on the harmonisation of sectoral legislation (approximately 26) that affects businesslicensing. 70. Preparation of a private sector strategy has been delayed, as government wanted first to complete the Diagnostic Trade Integration Study (DTIS) which was finalized in June 2005. 23  Implementation of the SME strategy has been slower than expected, due to insufficient budgetary allocations. Government established an SME Credit Guarantee Fund (SCGF) mid 2003 which became operational at the end of 2004. 71. (Pillar 2) Following presidential assent to the new labor legislation on employment relations, collective labor relations, dispute resolution and labor market institutions ( approved during the PRSC-2 period), the following labour institutions are being established: Labour Economic and Social Council (LESCO) and Commission for Mediation and Arbitration (CMA). The first batch of 30 CMA trainees graduated in January 2005 and the second batch of CMA trainees began training mid January 2005. Phase I1labour laws including occupational safety and health, workers compensation act, and employment and skills development i s expected to be submittedto Parliamentin2006. Box 2. Impact of abolition of development levy and reform of business licensing The 2005 Tanzania PSIA on local government tax reformexaminedthe impacts of the 2003 abolition of the flat rate development levy (along with `nuisance taxes'), and the 2004 abolition of business license fees (for enterprises below a certain size, and capping of those fees for larger enterprises). The objectives were to (a) assess the distribution o f the tax burdenacross different social and income groups and smallbusinessesbefore and after the reforms; and (b) to inform other initiatives directed at fiscal policy reform in the context o f Tanzania's decentralization. Regardingbusinesses, fmdings show that the reforms had a progressive impact with an overall reductionof the tax burden of 14 per cent. Within this, medium businessesrecorded 11per cent less tax, small businesses 36 per cent less tax, and micro businesses (under Tsh 54,000 turnover) 11per cent more tax. The increased payment by micro-businesses probably results from their non-payment of previous business license fees, coupledwith the wider use of other taxes (such as billboard fees) by councils after the reform: these were all imposedonmicro businesseswith greater vigor than the dehct license fees. The policy objective of improving the business environment via the 2003 and 2004 tax reforms therefore appears from the study's business surveys to have overall had a modestly beneficial effect, with the middle category of "small businesses" benefiting the most. According to stakeholders, business start-ups have increased, and investment, both in terms of re-investment of savings and business expansion, has occurred since the abolitionof the business license. 72. The Land (Amendments) Act, 2003 has been passed by Parliament and assented by the President in April 2004, to bring about as closer as possible proper balance o f the interests of the mortgagor (borrower) and the mortgagee (lender). Government has put inplace a quick procedure for the acquisition of title deeds and other related documents. Government also revised the land policy and formulated and issue land regulations in line with the amendment to the LandAct. 73. Monitorable Actions under PRSC-4. These include the approval o f a PSD strategy, institutionalization of the M&E systemfor BEST, implementation of SMEpolicy priority projects, gazetting of regulations for the "Company Registration Act," establishment o f CMA labour institution, submission to Parliament o f a draft bill on Business Activities Registration, functioning of the Commercial Dispute Resolution (CDR) management structure, and Government preparation of an issues paper on the reform o f the Civil Procedure Code (CPC). 74. Expected Results of Program The actions implemented under the PRSC program are expectedto leadto four key medium term outcomes, namely: 24  0 Improved efficiency of public institutions interfacing with the private sector, these include the Business Registration, Customs and Tax administration; 0 Improved efficiency o f factor inputmarkets starting with land and labor; 0 Enterprise creation and growth; and 0 Increased value addition of production and competitiveness o f Tanzania based production. 75. Monitoring Indicators. Specific quantitative monitoring indicators under this component o fthe PRSC include': 0 Employment law index* (currently 61 on a scale of 0 to 100 with a higher value meaning more regulation); 0 Cost to register a business (currently 199 percent of per capita income); and 0 Time to enforce a contract (currently 127 days). Agriculture and rural development 76. Issues. The PRS highlights several causes of income poverty, particularly in the agriculture sector, identified by groups consulted during its preparation. The highestpriority items identified were poor technology, non-availability o f farm inputs, poor roads, limited access to markets, and non-availability of credit. In addition, recent research shows that rural poverty is associated with lack of access to land, particularly by womeng. Addressing these constraints I requires reforms of crop boards particularly with respect to input supply, product quality, and competitiveness; micro-finance legislation; the institutional arrangements governing rural roads; local government taxation; property rights; and overall co-ordination of public interventions inthe agriculture sector. 77. Policies governing export crops - crop boards: Crop boards were set up to address concerns of declining quality of exports, uncompetitive private buyer behavior, and a breakdown of input supply systems. They play a significant role in determining the regulatory and institutional environment for crop export and investment growth, and are key determinants in reaching Tanzania's ambitious agricultural growth targets. Performance among boards has varied significantly. There are also concerns about the inadequate accountability o f the boards to traders and farmers whom they are supposed to serve, disruption of marketing and exports, and distortion of inputmarkets. 78. Micro-finance legislation: Access to finance in rural areas ,is low. The 2000/1 H B S shows that only 3.8 percent o f rural households with one or more members have a savings account, 2.8 percent participate in an informal savings group, and 1.3 percent in non-bank formal savings groups. Only 0.4 percent took a bank loan in 1999/2000. In contrast, access to finance was highlighted by about one-third o f the groups involved in the PRS consultation as a key constraint 'These indicators are reported in the Bank's "Doing Business in 2004" publication and will be updated annually. * Composite o f flexibility o f hiring index, conditions of employment index, and flexibility o f fring index. Ellis, F. and Mdoe, N.(2003). Livelihoods and Rural Poverty Reduction in Tanzania. WorldDevelopment, 3 1(8):1367-1384. 25  in agriculture. While some farmers have access to credit through contract farming arrangements (e.g. tobacco), or through various input schemes operated by the boards (e.g. the voucher and passbook programs), more attention is needed on the legal and regulatory framework governing formal savings institutions, particularly micro-finance. It i s also expected that raising the overall profitability o f agriculture will raise the demand for these financial services. 79. Institutional arrangements governing rural roads: Rehabilitation and maintenance of rural roads are key requirements for reducing agricultural marketing transaction costs, with improved market access essential for the transformation from subsistence to commercial agriculture. The district road network continues to be in generally poor condition with ninety percent of district and feeder roads being impassable to vehicles duringthe rainy season. Current institutional arrangements for the maintenance and rehabilitationof district roads remain weak. 80. Local government taxation: Prior to the implementation of PRES supported reforms in this area, rural Tanzanians paid an array of taxes, levies, fees and cesses which inmany cases had a negative impact on producer incentives and incomes. For example, direct taxes on agricultural export crops amounted to about 20 percent, inclusive o f local taxes and levies. While the revenue generated from some of the taxes and levies is rather small, they are perceived to be a significant constraint to economic activity and create opportunities for abuse and corruption. As local governments are increasingly called upon to deliver more services and maintain more infrastructure, it is critical for government to develop a strategy on financing local governments' responsibilities, including the role of own-source revenues and transfers, that i s consistent with a supportive incentive framework for economic activity. 81. Property rights: Lack of access to land is associated with poverty, particularly among women. With the change in land use and increasing population over time, the demand and competition for land for cropping and grazing has increased. Conflicts between different categories of land users, rapid urbanization leading to establishment o f unplanned settlements, increased demand for surveyed land for industrial and commercial investments and poor land administration were key drivers for the development of the National Land Policy and subsequent 1999 Land Act and Village Land Act. The Acts provide the legal framework for strengthening property rights. While there has been some progress in the implementation of the Acts, implementation remains largely uncoordinated, responding to un-prioritized demands. In the meantime, the government has initiated a program on formalization o f assets and businesses (De Soto Initiative), to facilitate the use of land as collateral. 82. ASDP co-ordination: The Agricultural Sector Development Program (ASDP) provides a framework for the implementation of the sector strategy, however, co-ordination o f the three main agriculture ministries(Ministries o f Agriculture and Food Security; Co-operatives and Marketing; and Water and Livestock Development) remains a challenge for implementation. Efficiency of resource use and effectiveness of service delivery remain key concerns. The fixed costs associated with the creation of multiple structures are high, with concerns about the lack of coordination and duplication of activities. 83. Reform Strategy. The government reform strategy which the PRES supports includes: 84. Improving policies governing crop boards: Options for reform o f the coffee, cotton, cashew and tea boards were examined following the review of the existing institutional arrangements for these crops and evaluatingthe effectiveness of the boards' functions inrelationto existing or potential alternative arrangements - particularly in the area o f quality control, input 26  supply, and private sector competition. Government is currently finalizing an Action Plan for the Rationalization of Roles, Functions, Financing and Accountability of Crop Boards which i s expected to be circulated during September 2005. New crop board legislation i s expected to be submittedto Parliament duringthe secondhalfof 2006. 85. Improving micro-finance legislation: In an effort to ensure the emergence of more efficient and sustainable financial intermediaries, a legal and regulatory framework for micro- finance is to be enforced. 86, Strengthen the institutional arrangements governing rural roads: Work is underway to revise the Roads Act which will establish appropriate financial and management arrangements for the road network in Tanzania, including rural roads. As part o f the preparation, options to strengthen the institutional arrangements for district road maintenance and rehabilitation will be developed. Followingthis work, the revisedRoads Act will be submittedto Parliament. 87. Local government taxation: Government is developing an overall strategy on financing local governments' responsibilities, including the role of own-source revenues and transfers. Measures to simplify and rationalize local government taxation will be undertaken and the design of a new intra-governmental transfer system covering both recurrent and development expenditures is at an advanced stage. Given this constraint on agricultural export taxes, a study on taxation of export crops was included as a PAF action under the macroeconomic stability (tax) section to be followed up within the fiscal policy framework. 27  Box 3. Tanzania Crop Boards Reforms PSIA In an effort to increase producer prices and incentives as well as the intemational competitiveness of Tanzania's main export crops, the governmentof Tanzania has embarked on reforms of its Crop Boards. To this end, it intendsto implementmeasuresthat would create amore favorable regulatory environment, a clearer delineation of public and private functions and associated financing, to prevent conflict of interest of the Boards, improved accountability of Boards to stakeholders are. The recent Crop Board reform study recommended changes in the following: (1) the regulatory environment, relating to the scope of activities that private sector agents can engage inand how various activities can be carried out; (2) the scope o f Board activities beyondregulation; (3) financing of Board activities; and (4) governance ofthe Boards and crop development funds. The study suggests that the regulatory environment in the coffee sector should be reformed to allow vertical integration; to permit those with primary processing facilities to buy coffee cherries; to make participation inthe coffee auction voluntary, or at a minimum expand the opportunity for direct exports. In the cotton and cashew sector, reforms should enable producers to make more informed investment decisions by eliminating announcements of indicative prices. Also, transaction costs of producers and traders should be reducedandmarket entry eased for new traders inthe coffee, cashew and cotton sectors through reducing the cost of licenses and the discretionary powers of the Boards to issue and revoke licenses. The Boards' activities are recommendedin areas where there i s a positive public coordination externality for private agents, such as the continuation of seed and input supply through the Cotton Development Fund with private sector management. In the tea sectors with a strong private sector leadership, there is little need for the Tea DevelopmentAgency. The regulatory functions of the Boards should be financed through the budget. This is estimatedto result in savings of about US$3.1 millionto producers. Finally, reforms should provide a greater representation of producers and traders on the Boards and inthe management of crop developmentfknds to improve accountability. The stakeholder and institutional mapping carried out as part of the PSIA work by and large confirmed the positive impact of such reforms on smallholders. To further ascertain a positive social and poverty impact of these reforms, the government has beencompiling additional analysisto inform the preparation of an action plan for the reform of crop boards. Source: Crop Boards andthe Future Prospects ofAgricultural Exports inTanzania. August 2004 88. Improvingproperty rights: A prioritized strategic plan for implementation o f the LandAct and Village Land Act will be developed. This will provide priority focus to areas which are likely to have the highest return while fitting into the overall budget resource envelope. 89. ASDP co-ordination: Co-ordination arrangements for the implementation o f the ASDP will be strengthened, including a National Steering Committee (NSC). The NSC will oversee implementation, comprising the permanent secretaries o f key ministries involved in implementation, and will endeavor to ensure co-ordination and resolve impasses and disputes across the agriculture sector ministries. In addition, the overall budget allocations to the agricultural sector line ministries will be monitored to ensure that an increasing share is going to ASDP priority areas. 90. Progress under PRSC-3. Progress is being made on all elements ofthe program. Work on micro-finance regulations, local government taxation (Box 2), and lands have advanced with slower progress on crop board reform and rural roads. 91. The review o f the coffee, cotton, cashew and tea boards was undertaken with subsequent stakeholder workshops on coffee and cotton held in September 2004. In June 2005, Cabinet 28  decided to abolish the Crop Development Funds, and replace the financing of crop boards' running costs through crop cesses with financing from the central government budget. N o decision has been taken regarding reforms of the role and functioning of crop boards, as Cabinet considered available evidence as being inconclusive and requested deeper analysis before a decision on further crop boardreforms is taken. 92. The micro-finance regulations have been approved by Government and are currently being gazetted. There is ongoing work on the development of an overall strategy on financing local governments' responsibilities, including the role of own-source revenues and transfers. The work includes both an assessment of the links of local taxes and the provision of local services, and on the fiscal transfers. 93. After a slow start, work on the preparation of a prioritized implementation plan of the Land Act and Village Land Act has progressed. Stakeholder field consultations and validation started in September 2004. The plan for implementation of the land laws was approved by Government inApril 2005. 94. More time than initially anticipated is neededto finalize the Road Act. This will likely be submitted for the first Parliamentary reading in January 2006 for likely approval by April 2006. A detailed classification inventory of both trunk and regional roads and district feeder and urban roads is needed prior to finalization of the Act to assist inthe clearer delineation of responsibilities between central and local governments. The inventory was completed in September2004. 95. Monitorable actions under PRSC-4. There are several monitorable actions under PRSC- 4: progress inthe implementation of an Action Plan for the reform o f crop Boards, consistent with the Agriculture Sector Development Strategy; (ii)enforcement of new regulations for the micro- finance legislation with licensing of qualifying financial NGOs and financial co-operatives; (iii) development of an overall strategy on financing local governments' responsibilities, including the role of own-source revenues and transfers; (iv) implementation o f the land sector strategic plan on the Land Act and Village Land Act; and (v) the changing share of the agriculture sector line ministriesbudgets goingto ASDP priorities. 96. Expected results of program. The actions implemented under the PRBS program are expected to lead to: 0 Improved institutional arrangements governing key export crops; 0 Facilitative legal and regulatory framework for micro-finance; 0 Strengthenedinstitutional arrangements for ruralroadmaintenance and rehabilitation; 0 Streamlined local government taxes and levies; 0 Improved framework for implementation o f the Land Act and Village LandAct; and 0 Increased focus of relevant Ministries on ASDP priorities. 97. Monitoring Indicators. Specific monitoring indicators under this component of the PRES include: Number of registered and operatingmicro-finance institutions (MFIs); Number ofMFIs' clients; Percentage increase involume of agricultural exports; Relative increase inpremium prices of agricultural exports; Number of people usingland as collateral for accessing credit; 29  0 Numberofwomen taking loans andusing landas collateral. Improvedpoverty monitoring and evaluation 98. Background. Results orientation and a focus on pro-poor outcomes are key characteristics of the poverty reduction strategy. To these ends, a poverty monitoring system (PMS) has been set up in Tanzania in 2001 to support the PRSP. The data and analytics generated are critical to assessing: overall progress in the implementation of government's poverty reduction agenda; the effectiveness o f macroeconomic policies and sectoral and cross-cutting structural and institutional reforms; and related cost efficiency and resource allocation questions. This composite set of results i s necessary for informing the policy and financing decisions o f the authorities. The PMS i s made even more critical with the introduction of greater results orientation in the MKUKUTA for 2005-2010, which is organized around key outcomes in three clusters. There i s a need to review the PMS to take into account the specificities o f the MKUKUTA, especially the greater attention to growth and the increased focus on results monitoring. This review of the PMS is currently ongoing. 99. Improving the quality of data is key to results management. To this end, the preparation of a Statistical Master Plan will become an important building block o f the poverty monitoring system. It will identify how data quality in the National Statistical System (routine data, social statistics, economic statistics) can be enhanced, by prioritizing amongst different data collection activities and formulating an implementationplan for improvement of data collection methods. 100. Progress under PRSGR Government has led a widely consultative process, at national, regional and local level in the design phase of the MKUKUTA. The MKUKUTA contains a set of indicators and targets at the outcome, output, process, and input level. Reporting on progress against indicators is mainly limited to those indicators which are subject to routine data collection, given no major survey other than the HIV/AIDS survey was produced over the last year. The MKUKUTA already provides better coverage of indicators that previously received insufficient attention such as on governance, gender, agriculture, vulnerability, roads and the environment. Still, a key challenge is to further define and sharpenthe outcomes and related indicators included inthe MKUKUTAmatrix. This task will be taken forward duringthe PMS review. This process will also inform other challenges in the MKUKUTA and help clarify the link between outcome indicators and sector strategies (by defining outcomes, outputs and inputs and the related indicators), and between outcome indicators and budget allocations. 101. The RDS TWG has prepared a strategy paper for rationalization of the routine data collection system. This was seen as a major step towards the modernization of the routine data collection system. The document presents an overarching framework that goes beyond the PMS. It aims to rationalize routine data collection and to coordinate between sectors and improve capacity at the community, ward and village level to process and analyze this information. In response to challenges in the routine data systems, as well as demands new demand originating from the monitoring of the MKUKUTA NBS has applied to the TFSCB for funds to design a national statistical strategy. This strategy would cover data production by NBS as well as routine data collection. Through a process o f broad consultations that are closely related to the PMS review, the statistical strategy will for the MKUKUTA period identify national data needs, prioritize and cost these and provide an implementation plan on how to further improve data quality provided by surveys and censuses, national accounts and routine data systems. 30  102. The Research and Analysis TWG is preparing a new research strategy that takes into account the focus on results and the inclusion of growth in the MKUKUTA. This strategy not only pays attention to poverty, but also to growth and impact evaluation. The PHDR currently under preparation reflects this shift in researchpriorities and will provide in depth analysis of the business climate (growth), service delivery (quality of life) and local ownership (governance). 103. Monitorable actions under PRSC-4. These include (i)clearer definition ofMKUKUTA a outcomes and indicators resulting in the adoption of (part of) the MKUKUTA indicators in the PAF matrix; (ii)continued reporting on progress and review of performance against the updated set of indicators and targets in the MKUKUTA; and (iii)development, adoption and implementationof a strategy to improve data collection inthe National Statistical System. Macro-economicstability 104. Issue. Tanzania has successfully implementeda program o f macro-economic stabilization, resulting in sustained growth, low rates of inflation, and the build up o f international reserves. Tanzania has also refined its monetary and fiscal instruments and institutions to provide a solid basis for sustained macro-economic stability. The 4threview under the current PRGF arrangement was approved by the IMF's Board on July 29, 2005. Weaknesses remain in the areas of'debt management and tax policy and administration. The PRSC supports efforts to eliminate residual weaknesses inthese areas. 105. Tanzania's public and publicly guaranteed external debt i s assessed as being currently sustainable after obtaining irrevocable debt relief under the enhanced HIPC Initiative (amounting to US$2.026 billion inNPV terms). However, continued sustainability o f Tanzania's external debt i s contingent on the sustained implementation of macroeconomic and structural reform policies, as well as prudent management o f external debt. 106. Tanzania's revenue performance has increased in recent years from 11.3 percent of GDP in 1998/99 to an estimated 13.6 percent in 2004/05 but is still low compared to other countries in the region. Improving Tanzania's comparatively low revenue effort i s a key element of government's strategy to ensure sustainable financing for the implementation of the PRS. 107. Reform strategy. Tanzania's reform strategy for debt management is spelled out in the national debt strategy, the implementation of which is monitored under the PRSC program. Key elements of this strategy are actions to (a) ensure fiscal sustainability and an optimal debt structure, (b) deal with domestic contingent liabilities, (c) develop financial markets, (d) strengthen the institutional arrangement for public debt management, and (e) strengthen the legal framework for borrowing and debt management. 108. Tanzania's strategy to enhance government revenue focuses on broadening the tax base and improving tax administration. Technical support for improving tax administration is provided bythe Bank and other donors. 109. Progress under PRSC-3. Government continued prudent debt contracting and management and close monitoring o f the debt situation. Progress has also been made in strengthening the institutional framework for debt management. The National Debt Management Committee and the Technical Debt Management Committee have been meeting regularly to advise the Minister of Finance on all proposals for new credit and to monitor the implementation of the National Debt Management Strategy. There has also been improvement inthe coordination among 31  the various agencies involved in debt management, including the preparation of an inter-agency work plan for the implementation of the National Debt Strategy, and disseminationof information on the National Debt Strategy to ministries, departments, and agencies (MDAs) though various channels. 110. Concerning government revenue and taxation issues, the Tanzania Revenue Authority ( T U ) has made progress in implementing an ambitious programme of reform, including advancing the establishment of a Taxpayer Intelligence Unit, roll-out o f the new Central Motor Vehicle Registration System, strengthening of the Large Tax Payers Department, establishment of 66 one-stop tax payer centers, and modernization o f the computer system for customs administration. TRA has carried out a review of tax laws to ensure consistency of measures undertaken to remove tax exemptions. However, the update of the tax laws has been delayed by the need to include all historical legal amendments, which were not included inthe first draft. In addition, revised regulations for customs under the Export Processing Zones (EPZ) Act have been prepared. These will be incorporated into the Special Economic Zones Act, which is planned to supersede and incorporate the EPZ Act. Followingthe rationalization o f local taxes and levies to a closed list in 2003, government i s now undertaking a comprehensive review of taxes and levies that can be charged by local authorities. Government continues its efforts to enforce the upper limit for cess on agricultural products to five percent of the farmgate price, although monitoring and enforcement inall 115 district councils remain difficult. 111. Monitorable actions under PRSC-4. Inthe area of debt management, the primary focus will be on continued prudent debt contracting and management and close monitoring of the debt situation. Regarding strengthening debt administration, the focus will be primarily on the continuation o f actions pursued under PRSC-3, Le., approval o f the work plan for implementation of the NDS and integration into the PFMRP, the distribution of circulars to all MDAs describing in clear language the changes in debt contracting and management enacted inthe Loans, Guarantees and Grants (Amended) Act, including correct debt contracting procedures, criteria for new loans and punitive actions for flouters of the legislation, and the preparation o f an updated Debt Sustainability Analysis. Continued progress on the implementation o f TRA's corporate plan, the reform of local government taxation, as well as the completion o f consultations on the updated tax laws are actions to strengthen tax administration. 112. Expected results of theprogram. The key results of the macroeconomic reforms pursued under PRSC-3 are (a) prudential debt contracting and management consistent with the annual repayment and borrowing plan presentedto Parliament together with the annual budget and with maintaining macro-economic stability and (b) an equitable and efficient tax system that supports an increase inthe revenue to GDP ratio without impinging on economic growth. 113. Monitoring indicators. The following indicators will be used to assess the effectiveness of reforms inthis area: 0 Net present value o f public external debt to exports (as an indicator of sustainability; information source: Debt SustainabilityAnalysis) 0 Ratio between actual and budgeted: a. Debt service (domestic and foreign) b. Gross borrowing (domestic and foreign) 0 The eight key performance indicators usedby the Tax Administration Project. 32  Public ExpenditureManagement 114. Issues. The budget is a key instrument for the implementation of the MKUKUTA. An effective budget process, which can translate MKUKUTA priorities into budgetary allocations and execute these, i s critical to ensure that both domestic resources and program aid are used effectively. At the central government level, Tanzania has established fairly robust systems for budget allocation and execution as documented inthe annual PER external evaluation reports, IMF monitoring, and the HIPC expenditure tracking exercise. While initial reform efforts have rightly and successfully focused on strengthening budget management at the central level, budget management at the local government level has received less attention and still displays considerable weaknesses. The ongoing decentralization process which gradually gives greater responsibility for the management of fiscal resources to local government makes reforms of the intra-governmental transfer system and of budget management at the local level an important focus of current reform efforts. Progress has also been made in integrating donor resources into Government's budget management systems. However, an estimated 20 to 30 percent of donor support is still provided to government outside the budgetary system. 115. Reform strategy. The PER process is a key forum for discussing expenditure policy issues and guidingthe reform strategy. Until2004105, the focus was on ensuring a non-declining trend in allocations to the seven PRS priority sectors (education, health, water, roads, agriculture, judiciary and HIVIAIDS) and commitment to financing the implementation of the PRS I.From 1998/99 to 2004105, the PRS sectors have seen rising allocations and the share of expenditure compared to the total budget has also been monitored. Since the PER External Evaluation o f May 2004, Government has used the recommendations to further improve budget formulation and execution, particularly those related to improving linkages between policy and financing. The development of the MKUKUTA has involved the identification of a comprehensive and wide range of cross- sectoral poverty reduction goals and strategies. The complex nature of the MKUKUTA has been key to changing the approach for resource allocation. The need for a more comprehensive, analytical tool for preparing the budget has arisen and has been developed to improve the MTEF process. In addition to improving the use o f the MTEF requests from MDAs, the Government is also aiming to improve the link between such requests, the BudgetGuidelinesresource allocations and the preparation of annual budget estimates. This reform strategy i s being pursued in order to promote a tight budget preparation process throughout the cycle. Given the aims to decentralize the management of resources to local levels, the challenge over the mediumterm will be not only to integrate the central but also the local government budget formulation process with the MKUKUTA to ensure a Government-wide approach to tackling poverty reduction through the budget. The efforts to continue with transparent information on budget execution continue to be made in order to ensure all parts of the budget cycle are in line with policy. 116. Progress under PRSC-3. The approved budget for 2003104 was amended by a Supplementary budget in February 2004. However, PRS sector budget estimates were not cut as originally proposed in the reallocation warrants, in order to ensure implementation o f the PRS was not hampered. Including reallocation warrants and items such as replenishment of the Strategic Grain Reserve (agriculture sector) and wage adjustments, the total upward adjustment compared to the original budget amounted to TSh 92.75 billion, with total PRS spending estimates at 45 percent of the total budget including CFS and the actual outturn at 44 percent of the total budget. PRS expenditure at itemlevel was also reportedto be consistent with budget estimates, but with foreign financed development expenditure outturn being low due to the problem of capturing direct-to- project funds, While capturing o f direct-to-project funds remains difficult, MDA reporting in 2003104 was significantly higher than reporting in2002103, 33  117. PRS funding in04/05 totals TSh 1,480 billion, 32 percent higher than the actual outturn in 2003/04 and 44 percent of the budget including Consolidated Funds Services (CFS). The recurrent budget for priority items in 2004/05 are 8.8 percent higher than the outturn in 2003/04, while the development budget for priority items is 5.6 percent higher than the budget in2003/04. A detailed analysis of public expenditure outturns during 2003/04 and the first half of 2004/05 i s provided in the PEFARreport, which was presentedat the PER consultative meetinginMay 2005. 118. The Budget Guidelines for 2005/06 - 2007/08 link the MKUKUTA closely with the budget. In particular, MKUKUTA cluster strategies are being adopted by the relevant spending votes as MTEF targets. The Government has developed a software - the Strategic Budget Allocation System (SBAS) - to incorporate all MDA requests for the cross-sectoral MKUKUTA strategies and other MTEF targets. The SBAS will also aggregate requests, facilitate macro-level analysis and assist in strategically allocating resources down to vote and target level. Given the changes in the budget and MTEF planningprocess in light of the MKUKUTA and development of the SBAS, the Ministry o f Finance had to revise the initial plans for preparing an MTEF manual for the seven PRS priority sectors. 119. Government has already started implementation of, resource allocation through the formula-based recurrent grant system for local government authorities (LGAs). In 2004/05, the formula was used for personnel emoluments (PE) and other charges (OC) for the health and education sectors and also for local development funds. Government has reviewed the problems faced inapplying the formula in 2004/05 in order to ensure smoother application in 2005/06. The Budget Guidelines 2005106 - 2007/08 incorporate a broad Government policy proposal for both recurrent (the remaining sectors - agriculture, water and roads) and development grants. Application of the formulae will follow in 2005/06. Central government transfers to local authorities continue to be published quarterly in newspapers and on the national website and receipt of transfers on notice boards (by districts and sent to wards and villages by councillors). 120. Monitorable Actions under PRSC-4. The budget for 2005/06 and the budget guidelines for the period 2006/07 - 2008/9 are expected to reflect MKUKUTA priorities and support its implementation. Furthermore, budget execution for 2004/05 and the first six month of 2005/06 should be consistent with the approved budget. 121. Government i s also committed to the preparation o f an MTEF manual for planning departments in line ministries based on an evaluation of the Budget Guidelines preparation experience in 2004/05, the implementation o f the formula-based recurrent grant system for all sectors and new development grant system, and the continued quarterly display of central government transfers in newspapers and national website and receipt of transfers on notice boards (by districts and sent to wards and villages by councillors). 122. Expected Results of the Program. The key result of these actions is to ensure that budgetary allocations and spending are consistent with the objectives and strategies set out inthe MKUKUTA. Furthermore, the actions are also intendedto yield greater transparency in budget formulation and execution both at the central and local government level. 123. Monitoring Indicators. There are three broad indicators that are usedto monitor progress inthis area. The first is spending on the PRSP priority sectors, which tries to capture the extent to which outcomes of the budget process are consistent with the PRS. Recent discussions in Tanzania have put in question the usefulness and possible moral hazard problems in monitoring budgetary inputs to priority sectors instead of focusing primarily on outputs o f government 34  activities and the integrityo f the budget process. Inaddition, since the definition o f priority sectors inthe PRS focuses primarily on social sectors and excludes important spending categories related to economic growth such as infrastructure expansion, operation, and maintenance, the usefulness o f focusing on expenditure shares o f the priority sectors has also been questioned. The second indicator thus focuses on the integrity o f the budget process by monitoring to which extent budgets are executed as approved. The share o f budgetary votes for which the deviation between budgeted and actual expenditures i s more than five percent captures this aspect o f public expenditure management. The last indicator i s the number o f benchmarks met inthe HIPC expenditure tracking assessment, as a composite indicator covering many aspects o f budget formulation, execution, and reporting. Table 5. Budget Management, Key ResultsIndicators ', I I 2001102 2002103 1 2003104 1 ~ ~ I Share of priority sector spending intotal 46% I1 46% I spending I I I greater than 5 percent I L I P C expendituretracking benchmarks ~ 8 ~ 9 I met (out of 15) I 124. The external evaluation under the annual PER process, which also includes an update o f the H P C expenditure tracking exercise, serves as the main monitoring tool inthis area. As part o f the PRBS annual and mid year review, a detailed budget review i s also carried out and it i s intended to mainstream PRBS monitoring requirements, both with respect to substance and timing, with the PER external evaluationfunction. Public Service Reform 125. Issues. Despite good achievements in structural reforms in the mid-nineties, much remained to be done to translate these results into improved service delivery to the people o f Tanzania. Although substantial progress had been made in reducing the size o f the public service and implementing other cost containment measures, GOT felt that it needed to focus on the transformation o f the public service into an institution that will play a pivotal role in economic growth and reducing poverty. It believed that, under severe budgetary constraints, it was important to put in place a work force that would become more accountable for its performance. It is against that background that GOTlaunched a more comprehensive public service reform program in 2000. Since then the GOThas also moved to a programmatic approach to harmonize its policy dialogue with development partners. The PRSC supports this comprehensive program. 126. Reform Strategy. More specifically, the PRSC supports government's effort to improve the performance o f the public service by: (i)institutionalizing a strategic process to sustain the structural and institutional reforms; and (ii)strengthening the capacity for improved delivery of public services. The PRSC supports the government's long-term process o f sustainable capacity building and transformation o f the public service to more result-orientation, Under this process, the public service i s expected to improve its performance to strategically utilize the limited public resources available towards service improvements. Within this framework, key capacity 35  requirements are identified as are appropriate institutional incentives for performance. Key components o f the program include the acceleration o f pay reform, the installation o f performance management in the MDAs, the monitoring o f performance and decentralization o f human resources management closer to the people. A key constraint to public service performance i s low public sector wages. This has led to difficulties in attracting, motivating and retaining qualified staff. However, government recognizes that pay alone will not improve performance o f the public service and that there i s a need for wage increases to be linked to improved performance. Thus government i s institutionalizing in MDAs the implementation o f a range o f performance-focused instruments including annual plans, performance budgets, service delivery surveys, and open performance appraisal as part o f performance monitoring. Performance improvement i s at the core o f GOT'Spublic sector reforms and its plan to build sustainable capacity in the public service. In order to ensure that the program i s truly contributing to delivery o f better services, GOTis putting inplace a comprehensive monitoring and evaluation (M&E) system. 127. Progress under PRSC-3. GOThas completed service delivery surveys (SDSs) for all MDAs. Since it was the first time that Government carried out SDSs, the information generated was o f uneven quality, and the results were in some cases not directly captured in the strategic planning process. The information from SDSs has been summarized and incorporated into a report on the State o f the Public Sector which was released to the public in June, 2005. This report will present the overall progess in implementing the reform program including results o f the SDSs in assessing the performance o f the public service in delivering services. The GOTi s re-assessing the feedback mechanism it should be using to measure improvement in performance towards delivering better services. Government has approved strategic plans and action plans and budgets that are linked to the medium term expenditure framework for all MDAs. In addition the Monitoring & Evaluation system developed to monitor performance in implementing the strategic plans has been rolled out in all MDAs. However, as Government strives to link its planning and budgeting system closely to achieving outcomes o f the Mkukuta, there seems to be a need to rationalize the planning, budgeting and monitoring systems that are used within GOT,which could mean fine-tuning the M&E system put in place to monitor the PSRP. Salary increases between 9.09 and 15 percent were in line with the pay reform targets and the approved budget for FY05. The selective accelerated salary enhancements (SASE) continued to be granted in four pilot MDAs, but government is exploring alternatives to the SASE scheme that are currently not beneficiaries. A study i s underway to assess the scheme and to propose alternatives. In addition to focusing on pay reform, GOThas also started paying some attention to the issue o f allowances. A recent study showed that their number i s increasing and that more use o f allowances i s being made rather than rationalizing remuneration. The approval o f the Amendment o f Public Service Act No. 8 o f 2002 by Parliament on November 10, 2004 reaffirmed that the authority for appointment, confirmation, promotion and discipline o f public servants in the Local Government Service, other than those for whom the appointing authority i s the President, shall be the Local Government Authority (LGA) concerned. 128. Monitorable actions under PRSC-4. It is expected that government will continue to use updated strategic plans, performance budgets and the performance monitoring system for all MDAs.Inaddition, Government will review the findings ofthe SDSs and start the implementation o f the emerging recommendations. A popular version o f SDSs will be disseminated in 2005 and broader mechanism agreed to disseminate to the public feedback on the performance o f the public service. Government remains committed to implementing pay enhancements consistent with the approved budget for FY06, and the overall thrust o f the pay reform strategy; and to adopt an alternative incentive mechanism to SASE for all MDAs. An important element o f the pay reform strategy is to avoid the re-emergence o f allowances that distort the pay structure and incentive 36  systems. At present the gains made in reducingthe number o f allowances at the beginning o f the program seem to be eroding. Based on the findings o f an ongoing review, government needs to approve a process to reform and rationalize the public sector allowances regime. Finally, government will adopt regulations based on the amended Public Service Act to ensure effective human resource autonomy for Local Government Authorities. 129. Expectedresults of theprogram. The PRSC actions are expected to lead to the following outcomes: e Improved public service capacity and performance to support the delivery o f services; e Improved clients' awareness o f what they can expect from the public service and increased satisfaction; and e Enhanced professionalization o f the public service through improved motivation and retention o f staff. 130. Monitoring indicators. e M&E performance monitoring system functioning in all MDAs indicating increased outputs from the public service; e PSRP M&E system harmonizedwith government's overall planning and budgeting-system; e Pay enhancement in line with pay reform strategy targets; e Specific recommendations on the rationalization and reform o f allowances available; e Gradual but increased decentralization o f human resources management to local governments. Public Financia1Management 131. Background. The 2005 Public Expenditure and Financial Accountability Review (PEFAR) concludes that, generally Tanzania now has a sound system o f formal rules for financial management and extensive training has taken place on the application o f the financial rules and regulations. Most o f the recommendations contained inthe 2001 Country Financial Accountability Assessment (CFAA) report have been implemented or are included in the Public Financial Management Reform Programme (PFMRP). The government has made progress in certain areas o f accounting and auditing. In terms o f appropriate legislation and regulatory frameworks, significant progress has been made to reduce the risk associated with the lack o f clear rules and regulations. Also more useful information i s provided in the annual accounts. As a result the general level o f fiduciary risk has declined. 132. However these efforts now need to be translated into improved accountability and it i s recognised that the process o f implementation o f new rules and ways o f working does take time and does require changes in attitude, continued capacity building and widespread demand for greater accountability. Risks remain in terms o f (i)controls, compliance and sanctioning, including enforcement o f procurement and payroll rules and procedures; (ii) timeliness o f audited financial information and effectiveness o f public reporting o f corruption; (iii)predictability o f internal and external resources; (iv) low technical capacity; (v) effective independent oversight; and (vi) timeliness and effectiveness o f legislative and public scrutiny. Tanzania does not have the kindof legal framework that would facilitate and help to make public reporting o f corruption more effective, i.e. there is no freedom o f information, whistleblower or QuiTam legislation. 37  133. A Country Procurement Assessment Report (CPAR) carried out in 2003 undertook a diagnostic review of all areas of public procurement systems inTanzania, including: the legislative framework; the performance of regulatory functions; the enforcement regime; the capacity of public sector institutions to conduct procurement; and the effects of corruption on procurement. CPAR recommendations include: (a) separating the operational and regulatory functions of the Central Tender Board and transforming the Central Tender Board into a regulatory authority responsible for procurement policy and monitoring of public procurement; (b) fully decentralizing procurement operations to MDAs; (c) establishing a new cadre of procurement specialists and a system of certification for the same; (d) restructuring the composition of the District Tender Boards to exclude councilors; (e) abolishing the Government Stores and introducing framework contracts for common items that will be managed by a slim government agency; (f) abolishing the Materials Management Board and establishing a new Procurement Professionals Body; (8) publishinga weekly Procurement Journal where all procurement opportunities will be advertised; (h) establishing a whistle-blowing mechanism to curb corruption inprocurement; and (i) replacing the systemofpre-shipmentinspection by destination inspection. 134. Reform strategy. The CFAA, PEFARand the CPAR have identifiedkey actions that need to be taken forward over the short and medium term. The government is taking measures to address some of these gaps and weaknesses. Government has developed and will update the Public Financial Management Reform Program (PFMRP)", which serves as a coordinating framework for financial management reforms and associated technical assistance. It sets out a methodology to mitigate fiduciary risk and strengthen the country's financial accountability framework. The main output targets of the revised PFMRP have been sequenced to reflect the logical progression from macroeconomic forecasting through revenue mobilization and resource allocation to expenditure management and oversight. It recognizes the need to address constraints to improve PFM across government and will take forward existing public financial management reform initiatives and address outstanding weaknesses. The PFMRP provides an analytical underpinning for design o f the financial management component of the PRBS and in particular to establish appropriate targets and output indicators/measures. 135. The government's vision of the future for Local Government Authorities (LGAs) is well articulated in the reform agenda, which is being implemented through Local Government Reform Programme (LGRP). The LGRP includes activities on financial management reforms. The functions, funding, reporting requirements, and other mandates of LGAs are clearly stated in the various laws and regulations. Inevitably the process of change i s slow as the concept of local participation is still in its formative stages in Tanzania. As of January 2004, 28 LGAs are fully using the IFMS. The LGRP i s in the process of identifying an additional 28 LGAs to start implementingthe IFMS. 136. Progress under PRSC-3. Coordination of reforms through PFMRP. The PFMRP basket funding arrangement i s currently in its first year of implementation. The coordination framework has been established, but several obstacles remained. It has been agreed to measure "progress in the implementation of the PFMRP" (a prior action) against the 3 following key measurableundertakings: loThe original PFMRPhadbeendeveloped in2000 as a conceptby SIDA but it was not yet completelydevelopedand only partially fundedby SIDA.However,MoF was keento use the existingframeworkto avoid duplication with ongoing efforts. The CFAA actionplan was thereforeusedas abasisto revise and improvethe PFMRP rather thandevelop a completely new program. 38  0 The PFMRP Joint Steering Committee meeting to be held in early 2005 - to discuss challenges and future plans, and to endorse programme work plans and budgets. 0 Notification by the Government to develop partners that a relevant, MTEF-consistent budget coding system has been designed that is able to distinguishroutine activities from reform activities, such that fundingfor PFMRP-related activities i s able to be tracked. 0 Monitoring indicatorsto be developed for each component, at output level. 137. While the target date for achievement o f these key undertakings was set for 31 March, these key undertakings were achieved by 30 April 2005, 138. Financial accounting and reporting. The MoF and Civil Service Department are currently preparing improvements to the payroll system whereby ministries will be required to enter payroll changes themselves. While the foreign and local debt had been consolidated and also the debt data is regularly reconciled with that o f the BOT(who runs a parallel system), the foreign and local debt systems have not yet been integrated with the IFMS. Institutional responsibilities between the various departments engaged in debt management had been agreed and an action plan was prepared. It identifies the intermediate actions that need to occur, and timeframe for public debt to be centralised within the Accountant General's Department. The entire database is anticipated to be transferred from BOTto the Accountant General's Department by endJune 2007. Tax and non- tax revenues are now captured in the IFMS. The implementation o f the IFMS disaster recovery pladsite was delayed because o f the need to re-tender owing to there being an insufficient number o f eligible tenders in the first instance. However, the procurement i s now underway and implementation i s expected from next fiscal year. The government planned to have at least 30 percent o f all financial management positions filled with qualified staff -only around 15 percent of positions have been filled. Delays have been experienced in the approval o f the recruitment o f new graduates by PO-PSM. 139. Internal audit. Relevant training materials have been developed (based on the new Manual) and the required internal audit training had been provided by local training institutions. In addition, the new proposed internal audit structures have been agreed with CSD. Audit Committees have been established in 55 out o f 68 MDAs and most are meeting regularly. Also, the Accountant General has trained almost all o f these committees' members. The minutes o f the audit committees are received and monitored by the Accountant General's Department, with 95% o f MDAs committees meeting quarterly. With respect to substantive follow-up o f internal and external audit findings, quality varies -some deal with substance, other with terms o f reference. 140. External audit. Sixteen o f the positions in the NAO that should be filled by suitably qualified CPAs are so filled, setting the NAO well on the way to meeting a target o f 15% by November 2005. The Controller and Auditor General (CAG) was unable to proceed with the electronic audit o f accounts via access to IFMS because o f the late arrival o f necessary technical assistance. The CAG was to submit the audit report for fiscal year ending 30 June 2003 to Parliament during the June/July 2004 budget session, but was 5 months late because o f capacity and administrative problems. 141. Local Government Authorities. The Local Authority Financial Memorandum should be amended in order to ensure consistency o f legal requirements at the central and local levels - consistency between the Public Finance Act, Public Procurement Act, their related regulations on the one hand, and the Local Government Finance Act and the Memorandum on the other. While a 39  draft Memorandum has been developed, it has not yet been endorsed by the stakeholders or approved by the Minister for Local Government. With regard to preparationfor the eventual roll- out o f the IFMS to additional LGAs, the Accountant General's Department has begun training fresh graduates on the IFMS, and sponsored training in various institutions in and outside the country in the areas o f information technology, accounting and materials management for several staff members who will be posted in LGAs. Increased effort has also been put on strengthening support systems for the implementation o f the IFMS. A Systems Development Unit for LGAs housed in the Accountant General's Department i s now in place -25 specialists were trained in the EPICOR software and had been deployed to the zones starting July 01, 2004. Other support includes defining a chart o f accounts for LGAs, and supervision o f 5 LGAs support zones. Also, the extension o f IFMS to an additional 18 local authorities was not achieved because o f delays in the procurement process. All the councils are now submittingtheir audit reports to the National Audit Office. The statutory requirement for submission (3 months after fiscal year-end), is also largely observed -only some 10 councils failed to comply. 142. Procurement. A new Public Procurement Act (2004) was passed by Parliament on November 12, 2004 and assented by the President in February 2005. The Government gazetted the new Public Procurement Regulations (Goods, Works, non-consultant Services, and Disposal o f Public Procurement; and Selection and Employment o f Consultants) on April 15, 2005. Following effectiveness and operationalization o f the new Public Procurement Act, effective from May 1, 2005: 0 The Central Tender Board (CTB) ceased to exist and in its place the Government established a Public Procurement RegulatoryAuthority; and 0 All MDAsbegunto carry out procurement functions within their respective approved budgets. 143. By May 15, 2005, all Accounting Officers and Chief Executive Officers o f the Parastatal Organizations were asked to constitute their Tender Boards in accordance with the requirements o f the new Act. 144. These reforms are consistent with the recommendations o f the CPAR and expected to lead to enhanced accountability and efficiency inthe government procurement process. 145, Monitorable Actions under PRSC-4. Effective implementation of the PFMRP. While significant strides have been made, there remain various bottlenecks to effective implementation. Most o f these had been discussed with GOTduring a Joint Steering Committee meeting held in April 2005. It is important that these are addressed over the next year to ensure that the PFMRP offers a credible basis for driving forward coordinated and sequenced P F M reform and is effectively integrated into GOT'Sroutine planning processes and operational work. Key undertakings include: (1) the work plan and budget, and reports on the status o f progress against them, will be distributed to development partners for discussion in JSC meetings; and (2) M o F and NAO will incorporate PFMRP activities into their strategic plans. 146. Financial accounting and reporting. The MoF and Civil Service Department will pilot improvements to the payroll system whereby at least five ministries will be required to enter payroll changes themselves. A wireless radio link between the Tanzania Revenue Authority (TRA) and the Accountant General's Office, allowing the automatic capturing o f revenue information in IFMS, is in place but has yet to be activated because TRA has not completed certain connectivity matters. It i s expected that all will be in place by November 2005. Other non-tax revenue such as 40  fees and penalties etc. collected by MDAs are captured. Installation of the disaster recovery system by Softech Consultants was completed and preparations for trials are underway. The revision of the MOF organisational structure (reflecting legislative and technologicalhystems changes in accordance with the Public Finance Act) will not be achieved and will be moved to 2006. There seems to be resistance to make these changes in the MOF. Also it appears to be a lengthy process that causes delays. Inaddition, the government plans to have around 30 percent of all financial management positions filled with qualified staff. Progress inthis area i s inextricably linked to the pace of pay reforms ingovernment. 147. Internal audit. It was originally envisagedthat Audit Committees would provide evidence of substantive follow-up of internal and external audit findings, showing that civil servants are sanctioned for financial mismanagement. However, this action depends on the GOThaving regulations for sanctioning in place. Preparation of penalties and surcharge regulations is at an advanced stage and it is expected that they will be finalized byNovember 2005. 148. External audit. Based on its developed computerisation strategy, the NAO will procure and install computer equipment and train its staff to allow piloting of audits through IFMS-this is a proposed prior action for PRSC4. Also, the NAO plans to adopt modem audit techniques which go hand inhand with the computerisation strategy (moving from the transaction audit approach to a more risk-based and systems approach). The CAG plans to submit to parliament the audit report for fiscal year ending 30 June 2004 duringthe June-August 2005 budgetary session of Parliament. This would reduce the time lag by 8 months and allow the Office to move towards compliance with the statutory requirement of nine months. Finally, of the approximately 450 staff on the establishment of the NAO, it is expected that about 15% of these positions (originally set at 20%) will be filled with suitably qualified staff byNovember 2005. 149. Local Government Authorities. Work on harmonising the legal inconsistencies between Financial Regulations (for central government) and Financial Memorandum (for local government) has begun but will be concluded in future periods. The extension of IFMS to more Local Authorities had been delayed; the procurement is in progress whereby the tendering and bid evaluation has been concluded. Meanwhile the plan for the roll-out of IFMShas been reviewed. It is expected that the EPICOR-based IFMS will be piloted in another 28 councils sometime in 2006. Training of the relevant staff will begin in2005 after installation of the equipment, followed by the support from the 23 zonal support groups which are beingtrained simultaneously. In addition, 18 Local Authorities, which were part of the initial roll-out plan, require to be subjected to rectifications and in some cases redoing so that they can perform better. 150. Procurement. After decentralizing procurement and establishing the PPRA, the PPRA will continue with the implementation of the other CPAR recommendations within the PFMRP framework. In the context o f this, the Government has undertaken to complete the following actions by March 2006: (a) ensuring that the PPRA is fully staffed; (b) completing preparationof a capacity development strategy; (c) establishing organization structures and staffing levels of Procurement Management Units (PMus); and (d) establishing a procurement cadre in the public service. 151. No action has yet been initiated in the areas of staffing the PPRA, establishment of procurement cadre, and establishment of organization structures and staffing levels of procurement managementunits by Public Service Management (PSM) because defunct CTB was fully engaged with preparation for operationalization of the new Act. Consideringthat the defunct CTB was also carrying out its operation mandate o f approving contracts, its capacity was severely strained. Now 41  that the Act is operational, the PPRA will have adequate capacity to expedite implementation of procurement reforms, which are being implemented in the framework of the PFMRP. There is progress regarding development of strategy for procurement capacity. Selection o f the consultant to undertake this assignment i s at advancedstage. 152. Expected results of theprogram. Linkage betweenthe PRBS and PFMRP is achieved by ensuring that the following proposed PRBS outputs and outcomes are consistent with the main objectives of the PFMRP. Over the course of the PRBS program, Tanzania expects to, inter alia, achieve the following: 0 Improve completeness and quality of financial information, accounting records and reporting; 0 Effective cash planning & managementmechanism; 0 Accountability o f AOs and Audit Committees improved; 0 Role, responsibilities of MOF and accounting function in line ministries professionalized; 0 Timely submission of government annual accounts to parliament. 0 Increase number o f clean audit reports; 0 External audit capacity developed to enhance quality and timeliness o f reporting; 0 Enhance the independence of the NAO; 0 Financial management capacity at Local Government. level enhanced to sufficiently carry out responsibilities; 0 More efficient and transparent procurement of goods, works, and services; 0 Better value for money; and 0 Harmonized procurement procedures throughout the government. 153. Monitoring indicators. Specific quantitative monitoring indicators under this component include: NAO issues its report on central government for the fiscal year ended 30 June 2004 intime for the Financial Budgetary Session of Parliament which will be in June 2005 thru to August 2005. Audit reports for local government authorities are submitted in a timely manner (within the statutory requirements). Audit reports for central government MDAs shows an improvement in Public Accounts Committee recommendations being followed up - fewer cases o f audit queries carried forward from year to year. Pilot changes to the payroll system (whereby ministries will enter payroll changes in at least 5 ministries). Professionally qualified staff has filled 15% of revisedaudit positions inNAO. 30 percent o f all financial management positions in MDAs should be filled with qualified staff. For N A O the target is proposed at 20 percent (up from the present level of about 5 percent). EPICOR-based IFMS i s introduced and operational in another 28 councils (including redoinghectification o f 18 not achieved inprevious year). Time for processing international and national competitive tenders reducedby 2 weeks. 42  Compliance (as determined by procurement audits) with Procurement Regulations of contracts reviewed, improved by 10%. Anti-Corruption Activities 154. Issues. The 2002 Report on the State of Corruption in Tanzania, commissioned by the Prevention of Corruption Bureau (PCB) and carried out by ESRFRACEIT, indicates that the level of corruption has declined somewhat between 1996 and 2002 with some variations among sectors. Since 1996, considerable groundwork has been done on the institutional framework (the National Anti-Corruption Strategy and Action Plan--NACSAP, Public Finance Act o f 2001 and Public Procurement Act o f 2001) and in raising the awareness of the public on the need to fight corruption. However, the perception of the public is that the decline in the level of corruption has at best been modest. The report cited the incidence o f experiences with corruption as highest within health services followed by police, business licensing, the judiciary, tax authorities, education and public utilities. Therefore muchremains to be done to actually curb corruption. Paper - Vision 2025 states that, inter alia: "Tanzania cherishes good governance and the rule of 155. Reform strategy. Tanzania's vision, contained in the Government's Development Policy law ... and seeks to ensure that its people are empowered with the capacity to make leaders and public servants accountable." Inorder to realize this vision the Government launched the National Framework on Good Governance (1999) that elaborates the priority areas for reforms, which now include the Public Service Reform Programme (PSRP), the Public Financial Management Reform Programme (PFMRP), the Legal Sector Reform Programme (LSRP) and the Local Government Reform Programme (LGRP). In addition to these reforms that seek to plug the loopholes for corrupt activities, NACSAP provides a cross cutting anti-corruption strategy that permeates all the key reforms. The LSRP medium-term strategy was launched on March 22, 2005 with high level commitment to implement fully the vision "timelyjustice for all". 156. Specifically NACSAP calls for coordinated steps to achieve the following: 0 Comprehensive anti-corruption legislation. 0 Identification o f areas of government activities most prone to corruption and redress them. 0 Identification of legal and administrative corruption remedies that provide adequate deterrence. 0 Provision of a creative partnership between government and the civil society including the private sector, professionaland religious organizations infighting corruption. 157. Progress under PRSC-3. Limited progress has been made on the implementation of the seven PAF actions on resource leakage and improving accountability for the period under review. Progress has been made in reviving dialogue between the Government and development partners. A High Level Government Governance Team composed of Permanent Secretaries of the Central Government Ministries has been established to meet regularly with development partners and government efforts to combat corruption will be a standing agenda item. However, as of now, there has been limited interaction. The latest report on anti-corruption has been published, reflecting actions by MDAs to sanction officers for corrupt activities. A report on the review of Anti-Corruption legislation has been discussed by stakeholders. However, so far progress is limited in accelerating the revision of the legislation and in getting it approved. Government has opted not to do a highprofile launch of the State of Corruption report, although it has been broadly disseminated. The Good Governance Coordination Unit (GGCU) has been strengthened by 43  recruiting a Planning Officer and an Accountant. So far the GGCU has lacked the clout and visibility to play a significant coordination role. A mechanism for complaints and grievances has not yet been fully established. However, a decision has been made to pilot the instrument in a number of Ministries, Departments and Agencies (MDAs).Draft guidelines for Local Government Authorities (LGA) Anti-Corruption Action Plans have been published and LGAs have used them to prepare plans for 2005/06. 158. Monitorable actions under PRSC-4, Government will seek to have more frequent regular dialogue on its anti-corruption efforts with development partners through the High Level Governance Team. Based on the quarterly reports, GGCU will monitor progress on actions taken vis-a-vis corruption in MDAs and LGAs. In addition, GGCU will bring to the attention of responsible authorities key issues requiring their attention. For now, the reports are not being used to improve decision-making in the areas related to the anti-corruption effort. GOTwill present to DPs a detailed and concrete description of the steps that need to be taken for the repeal and re- enactment of Anti-Corruption legislation to be passed by Parliament by April 2006. In addition, Government will take action on the recommendations identified in the evaluation report - Strengthening of Capacities to Combat Corruption in Tanzania and agreed during a consultative meeting with the development partners. PO-PSM will establish Ministerial Ethics Committees to deal with corruption, complaints and grievances and pilot the mechanism to deal with complaints and grievances in 6 MDAs. Finally, funding for the LGA Action Plans will be included in the 2005/06 budget to enable their implementation. 159. Expected results of theprogram. The programis expected to yield the following results: 0 MDAswill show improvementintheir fight against corruption; 0 Civil society, media and private sector actively engaged inthe fight against corruption; 0 Joint efforts from the various parts of the public service will show positive results; 0 There will be an increased number of complaints adequately addressed; 0 LGAswill improvetheir performance inthe fight against corruption at local level. 160. Monitoring indicators. Quarterly Monitoring Reports on NACSAP implementation contain quantitative and qualitative data, particularly in the areas of monitoring and controlling public procurement, public finance and legal and judicial processing, that will help assess progress. GGCUwill provide information on managerial action taken by MDAs as a result of their monitoring. It is also expected that LGAs will have in place action plans and will prepare quarterly reports. Management of DevelopmentAid Resources 161, Issues. Official development assistance finances more than 40 percent o f government expenditures in Tanzania and the efficient management of aid resources thus plays an important role in the implementation o f the PRS. The management of aid provided by a large number of donors, each with it own procedures and monitoring and reporting requirements, i s a formidable task for government, given its very limited and already overstretched capacities. Improved aid management and reduced transactions costs in the utilization and delivery of foreign aid are spelledout inthe PRS as key elements o f creatingan enablingenvironment for its implementation. 162. Reform Strategy. Tanzania has put inplace two complementary processesto enhance the management of aid resources. The first i s the TAS process, which serves as the platform for dialogue between government and donors on enhancing aid effectiveness. The TAS lays out 44  principles for the effective provision and use o f foreign aid, including a move towards sector wide approaches and general budget support. Under PRSC-1, government finalized a TAS action plan which sets out concrete steps for improving aid management. The second element o f Tanzania's aid reform strategy has the PER process at its core. Its objective i s to foster more comprehensive integration o f donor support into government processes and in particular into the budget. The PRSC program supports this strategy and monitors progress in the development and implementation o f the TAS as well as progress in integrating official development assistance inthe budget. 163. Progress under PRSC-3. There has been further improvement in the forecasting and integration o f external finances into the national budget. This again resulted in an improved level o f coverage o f development partner funded projects and programmes and external finance reflected in the development budget has increased from TShs 302,272 million in FY 2001/02 to TShs 667,349 million in FY 2003104 and TShs 857,885 million in FY 2004/05. The second TAS Annual Implementation Report has been published covering the second year in the roll out o f the TAS from July 2003 untilJune 2004. 164. Monitorable actions under PRSC-4. Government attaches high priority to implementing the TAS and integrating donor assistance into the budget. Actions to be implemented under PRSC-4 include continued efforts to integrate projections o f external resource flows into the budget, to fully operationalize the system for both MDAs and LGAs to report on levels o f direct external assistance budgeted and disbursed, to integrate data on levels o f direct foreign assistance from MDA quarterly reports to the budget department into the External Finance database, and to issue a 3"d annual TAS implementation report. 165. Expected results. The key result inthis area is the better integration o f donor assistance in the budget, which in turn would facilitate the coherence between government and donor financed expenditures and thus enhance the effectiveness and efficiency in the use o f domestic and foreign funds. 166. Monitoring indicators. Two indicators will be usedto assess progress inthis area, namely the share of official development assistance in the form o f project and basket donor support captured in the budget estimates and the ratio between donor assistance shown in the budget estimates and the amount o f donor assistance captured in the appropriation accounts. The TAS implementation report and the PER external evaluation monitor these indicators. In recent years, these indicators have shown steady improvement with the first indicator increasing from 68 percent in FYOO to 107 percent in FY04 and the second indicator displaying an increase from 31 percent inFYOOto 72 percent inFY04. 45  Table 6. Integration of ODA in the Government budget, 1999/00-2003/04 ............................................................... Environmental Sustainability 167. Issues. The primary issues relate to Tanzania's high resource dependence, the close linkages between poverty and environment, and government's ability to address these within a modern institutional framework that concurrently promotes environmental protection and improved livelihoods, especially among the most vulnerable populations. The poor in Tanzania are heavily dependent on the environment both for income generation and consumption. There is, however, insufficient understanding of how the positive aspects of poverty/environment and growth linkages can be pragmatically applied to: (a) support sustainable livelihoods; and (b) ensure that benefits of high growth sectors reach the poor. 168. A weak institutional framework for coordination and limited governmental capacity for monitoring, compliance and enforcement pose serious challenges to broad based growth. The absence of appropriate governance regimes, for example in fisheries and forestry, leads to significant loss o f revenues in resource rents. Overexploitation due to weak monitoring and enforcement leads to unsustainable harvesting and open access situations. Lack of information and data of markets, and environmental externalities lead to mispricing and revenues that fall short of their potential. 169. Reform strategy. The PRSC supports government's efforts to address these issues through a three-pronged strategy involving (a) mainstreaming of environmental concerns into the PRS, the budget process, and sectoral policies; (b) improved understanding o f poverty-environment linkages, and options for reducing vulnerability of the poor; and (c) strengthened institutional capacity to integrate environmental assessment (EA) procedures into sectoral strategies and policies and specific activities at the district and local level. Many o f these efforts were spurred by the National Environmental Action Plan (1994) and the National Environmental Policy (NEP) adopted in 1997. The goals o f the NEP are to ensure sustainability, security and equitable use of resources. In December 2002, the Cabinet approved an Institutional and Legal Framework for Environmental Management Program (ILFEMP), which provides the basis for Environmental Impact Assessment (EM), cross-sectoral coordination, and integration of environment management into local government planning processes. A number of key sector policies and strategies: forestry, agriculture, fisheries and mining reflect an increasing focus on internalizing environmental sustainability objectives and empowering the poor for improved resource management. 170. Progress under PRSC-3. The Environmental Management Act (EMA) has been approved by Parliament. The passage o f the law was carried out with an intensiveconsultation process, thus 46  ensuring the ownership o f the law by a range o f stakeholders. An initial needs assessment for implementation the EMA was conducted as part o f the first PER on environment, and plans are underway to conduct a detailed assessment under the second PER. A draft Environmental Impact Assessment (EIA) training manual has been prepared, and draft EL4 guidelines are in place. Plans are underway for transforming the guidelines into regulations. Government also prepared guidelines on mainstreaming environment for the PRS Review, and guidelines for the implementation o f MKUKUTA are under preparation. In addition, a report on economic instruments has been prepared and a report on poverty-environmentindicators has been submitted as an input to the Poverty Monitoring System (PMS) review. A draft Strategic Environmental Assessment (SEA) o f PRSC has also been prepared. 171. Monitorable actions under PRSC-4. Government i s committed to commence the implementation o f EMA to achieve the MKUKUTAtargets with a focus on following actions: 0 Preparation and implementation o f a capacity building programme to strengthen institutions for environmental management, and compliance with EMA commitments; 0 Integration o f environmental planning into local and sector plans to achieve MKUKUTA targets and EMA commitments; 0 Implementation o f environmental economic and fiscal instruments; 0 Waste management and pollution control strategies and measures inplace; 0 Environment assessment (EM and SEA) regulations finalised and operational; and 0 Setting up o f poverty and environment monitoring system, preparation o f state o f environment report, and environmental awareness and information programme. 172. Expected results of theprogram. The actions implemented under the PRSC program are expected to lead to five key medium term outcomes, namely: 0 Improved institutional capacity for environmental assessments (including environmental impact assessments and strategic environmental assessments) and their integration into sector and district plans; 0 Harmonized environmental management and increased compliance with environmental impact assessments; 0 Increased environmental information will contribute to the effectiveness o f the poverty monitoring system and strengthen the feedback required for the PRS; 0 Enhanced knowledge and awareness about environment and poverty linkages to ensure the sustainability o f poverty reduction and environmental management efforts, and reduce the vulnerability o f the poor to environmentalrisk; and 0 Improved understanding o f the role and use o f economic instruments in environmental management. 173. Monitoring indicators. Specific quantitative targets to be reached by 2005 under this component o f the PRSC (which are commitments under the EMA) include: 0 40 percent o f sectors with environmental units; 47  0 40 percent o f the districts have officers with environmental functions; 0 30 percent o f the designated environmental officers at the district levels trained; 0 Committees o f environment established in 30 percent o f the districts inthe country; and 0 Activities underway to implement 50 percent o f obligations under international environmental conventions and agreements. VI. OPERATION IMPLEMENTATION POVERTY AND SOCIAL IMPACTS 174. The assessment o f the poverty and social impact o f the measures proposed by the MKUKUTA and supported by the PRSC is carried out in the context o f Tanzania's poverty monitoring system. In addition, the Bank supports the preparation o f PSIAs to inform the design o f specific reform efforts, such as the reform o f crop boards or o f the local tax system. SUPERVISION 175. Monitoring arrangements. Tanzania has established a comprehensive monitoring system, which covers outcome, output, process, and input indicators. This system comprises three interrelated tiers. The poverty monitoring system focuses on the measurement o f impact, outcomes, and proxy indicators. Sector programs, such as those for education and health, focus on the tracking o f output indicators with adequate monitoring mechanisms in place. The PER-MTEF processes focus on inputs, with an emphasis on budget allocation and budget execution. Inorder to strengthen domestic accountability, the PRSC supports regular reporting to the public in all areas covered by the PRSC. 48  Figure4. MonitoringMechanismsCoveringOutcomes, Outputs, Processes, and Inputs I Overall IPRS progress report I reduction (all 1 IPHDR Economic .Macrofiscal Investment performance developments assessment I PRGF review Public sector Client survey performance reports Anticorruption PER (covering public expenditure performance and management at the central and local level) Administrative monitoring systems for other sectors and local authorities I SDP reviews for education, health, agriculture, and roads I 1 IMG-TAS donor implementation report 176. In the context o f the PRSC and the PRS, outcome, output, and input indicators provide direct information on the status o f poverty in all its dimensions. Monitoring o f these indicators i s based on a broad range o f surveys and administrative data systems identified in the poverty monitoring master plan. The Poverty and Human Development Report (PHDR), which i s published bi-annually, consolidates poverty measures from various sources, and provide analysis o f poverty trends and underlying factors. Sector development reviews are a key monitoring mechanisms for outputs at the sectoral level, and the PRGF reviews and the quarterly macro- financial developments report will be the key sources for the assessment o f the macroeconomic situation. Progress inpublic expenditure management covering both improvements in systems and enhanced allocative and operational efficiency in the use o f inputs will be tracked by the annual PERs. 177. An additional dimension o f the monitoring framework covers the government-donor relationship in monitoring progress on PRSC objectives, such as enhanced local ownership o f the development process, participation by all stakeholders, and efficiency o f aid delivery mechanisms. 49  This dimension is reviewed via an annual report of the findings o f the independent monitoring group" for the implementationof the TAS. 178. Supervision and subsequent PRSCs. Supervision and preparation of the subsequent credits and grants will take place in close collaboration with other donors and be consistent with the PRS review mechanism. For most of the program areas, supervision and dialogue will be carried out on a continuous process in the context of sectoral or thematic programs. This includes the PER process, the PFMRP, the PSRP, the ASDP, the BEST program and sectoral programs. A joint PRBS-PRSC review will be conducted annually for an overall assessment of progress made in each of the program areas. In addition, the achievement of PRSC targets will be assessed annually in the context of the PRS review that will document the progress made in the PRS implementation and analyze the outcomes of reforms. The reform program sets out clear quantitative and qualitative benchmarks for three years. The PRSC targets are fully consistent with the PRS. Given satisfactory progress, Tanzania's reform program will be supported through subsequent PRSCs under the programmatic lending framework, subject to the approval of the Board of ExecutiveDirectors. FIDUCIARY ASPECTS 179. Foreign exchange. The safeguards assessment of the Bank of Tanzania (BOT),which was completed by the IMF on December 5, 2003, found that, while the bank had a relatively strong internalcontrol environment,some vulnerabilities existed, notably in the externalaudit and financial reporting areas. In order to mitigate these vulnerabilities, staff recommended that the BOTshould: (i) contract annual external audits that are conducted in accordance with International Standards on Auditing (ISA); (ii)adopt International Accounting Standards (IAS) as the financial reporting framework; (iii) establish a formal process of reconciling accounting data to the program data reported to the Fund; (iv) publish the full audited financial statements on a timely basis, within five months of the financial year's end; and (v) adopt an audit charter for the internal audit function to strengthen audit methodologies and procedures. The 2003/04 financial statements were audited by a local auditor, TAC, using ISA standards, though TAC is not itself fully ISA compliant and the statements were publishedwith a brief delay. To ensure full ISA and I A S compliance inthe audit of the 2004/05 financial statements, the authorities have selected Deloitte and Touche, Johannesburg to conduct a joint audit with the TAC. The BOTwill hold a new three year external ISA/IAS compliant audit tender by early September covering the 2005/06 and 2007/08 financial years. The BOTboard has adopted I A S as its financial reporting framework, and a reconciliationprocess was recently adopted. 180. Budget resources. In depth assessment of Tanzania's public financial management and procurement systems have been carried out through a CFAA in 2001 and a CPAR in 2003 as well as in the context of the annual Public Expenditure and Financial Accountability reports (PEFAR). The "Public Expenditure Management Country Assessment and Action Plan (AAP) - Tanzania" prepared in2004 concludedthat over the last three years Tanzania has made significant progress in the PEM reform process and that Tanzania meets 11 of the 16 benchmarks, which places Tanzania's PEMamongthe best performingin Sub-SaharanAfrica. 181. The assessment also identifiedareas where progress is yet to be made. The coverage of fiscal reports continues to be limited to the central government. Fiscal reporting needs to cover The independentmonitoring group was establishedinthe mid-1990sto monitorthe relationshipbetweengovernment and donors building on the findings of the Helleinerreport. 50  the GFS definition o f the general government sector, Le., including both central, and local governments, as well as all government operations whether or not they are funded through the budget. External audit has not been sufficiently strengthened and delays in the submission o f external audit reports still persist. The ongoing work on internal audit needs to be continued to make it effective. The procurement system does not meet the benchmark due to weak enforcement and limited accountability in the current system. Also, a Fiduciary Risk Assessment Report issued by the Departmentfor InternationalDevelopment(U.K.)inMay 2004 concludedthat: "The overall problems however remain those o f a weak fiduciary contract between citizens and the state, inadequate domestic revenue collection, limited delivery o f public goods, inadequate monitoring, inefficient capacity, non-compliance, lack o f enforcement, and inadequate oversight". The PRSC contains a strong focus on government's efforts to address residualweaknesses in the areas of internal and external audit as well as procurement. A Public Finance Management Reform Program i s in place to ensure sustained improvements in Tanzania's public expenditure management system. DISBURSEMENTAND AUDITING 182. Borrower and credit amount. The borrower is the UnitedRepublic o f Tanzania. A single- tranche credit o f SDR 103.8 million (US$l50 million equivalent) would be made available upon credit effectiveness, anticipated for September 2005. The closing date o f the operation would be June 30, 2006. It is envisaged that there will be a further single-tranche, annual PRSC to support the implementation o f the PRS in FY07. 183. Disbursement, reporting, and auditing arrangements. The proposed credit will follow the Bank's disbursement procedures for development policy credits. Credit proceeds will be disbursed against satisfactory implementation o f the development policy program and not tied to any specific purchases or be subject to procurement requirements. Once the credit i s approved by the Board and becomes effective, the proceeds o f the credit will be deposited at the request o f the Borrower by IDA in an account designated by the Borrower and acceptable to the Bank at the Bank o f Tanzania. The Borrower shall ensure that upon the deposit o f the Credit into said account, an equivalent amount i s credited in the Borrower's budget management system, in a manner acceptable to the Bank. The Borrower will report to the Bank on the amounts deposited in the foreign currency account and credited in local currency to the budget management system. If the proceeds o f the credit are used for ineligible purposes as defined in the Development Credit Agreement, IDA will require the Borrower to promptly upon notice from IDA, refund an amount equal to the amount o f said payment to IDA. Amounts refunded to the Bank upon such request shall be cancelled. The administration o f this credit will be the responsibility o f the Ministry o f Finance. 184. The following arrangements support the requirements related to fiduciary assurance: 0 Foreign reserve account. The GOTwill acknowledge receipt to IDA o f the money into the foreign reserve account and the crediting o f this amount in local currency to the Tanzania Government Consolidated Fund Account. While no external audit will be required, it i s expected that the confirmation o f receipt will be countersigned by the Accountant General and the Controller and Auditor General. 0 Public (government) accounts. The Controller and Auditor General is required by law to produce hidher annual report to Parliament on the public accounts within nine months o f the financial year-end. IDA will have access to those accounts. 51  e Bank ofTanzania. The annual entity financial statements of the Bank of Tanzania, audited in accordance with international auditing standards as promulgated by the International Federation of Accountants, are publicly available. ENVIRONMENTAL ASPECTS 185. PRSC-3 falls under OP 8.60 and is no longer subject to environmental safeguards. As the PRSC focuses primarily on institutional reforms, there are no direct significant effects on Tanzania's environment, forests, and other natural resources. In addition, the PRSC supports reforms of Tanzania's legal and institutional framework for environmental management, environmental impact assessments, and strategic environmental assessments (SEAS).An SEA has been prepared. Reviews of the environmental impact of PRSC-1 and PRSC-2 included (i) a review of supported sectors within the SECAC, (ii) consideration of potential policy reforms under the SECAC; and (iii) assessment o f the ability of the government to address any impacts within an these sectors using existing mechanisms, or using mechanisms developed internally within this particular SECAC. The assessments concluded that: (i) policy reforms supported under the the PRSC-1 and 2 would have no deleterious environmental impact, or their impacts could be addressedwithin the existing SEA processesthat have been developed under PRSC-1 and PRSC-2 and will continue to be developed under PRSC-3; (ii) sectoral activities to be supported generally under the roads and agriculture initiatives may involve some Category "B" activities, but guidelines developed under PRSC-1 and 2 for addressing these are being adequately implemented by Government, and will continue to be monitored and developed to improve their effectiveness in PRSC-3, Some elaboration on these points is provided below. 186. In an effort to mainstream the environmental sustainability dimension into the PRSC process, the Bank has undertaken various analyses with the objective to identify linkages between key macro and structural reforms policies and the environment. This analysis, undertaken under PRSC-1 and 2, identifies measures at both national and local government levels to reduce poverty and enhance environmental sustainability of policy reforms. The analysis concluded that environment and poverty are linked in three major ways: (a) poverty reduction programs should not damage the resource base and the environment of which poor depend for their livelihoods (b) improving environmental conditions can help to reduce poverty and promote sustainable pro-poor growth; and (c) mitigating measures may be necessary as part of policy dialogue. 187. Working with the government and other development partners, the analysis identified a number strategic entry points for mainstreaming key issues of the poverty-environment nexus in Tanzania into PRSC process and ongoing policy reforms in general. This included inter alia. further support for EA activities, a comprehensive environmental review of all taxes and levies associated with the agricultural sector, and increased attention to removing land tenure uncertainties. Specifically, the Vice President's Office and the National Environmental Management Council (NEMC) have been supporting the development and implementation of various sector-specific guidelines for EA (initially in roads and agriculture), and have more recently pursued procedures for strategic and sectoral environmental assessment to permit mitigation of any adverse environmental impacts while taking advantage of potential synergies between poverty reduction and environmental protection efforts. In this regard the PRSC-2 and PRSC-3 reform agenda has specific actions to be implementedby the Government of Tanzania as part of the environmental component. 52  PARTICIPATORY ASPECTS 188. The PRSC is grounded invarious participatoryprocesseswhich are critical indefining the reform agenda and monitoring its implementation. The reform agenda supported by the PRSC derives from Tanzania's PRSP, which has been developed through a consultative process inwhich Government sought inputs and feedback from a wide array o f stakeholders representing all levels of society and all regions of Tanzania. Similarly, Tanzania's Poverty Monitoring System also is open to inputs from insideand outside government. 189. Aside from the MKUKUTA, the Government of Tanzania carries out wide ranging consultations on most policy reforms and many of the policy areas covered by the PRSC are underpinned by sectoral or thematic processes that are open to stakeholders from civil society, NGOs, academic and research institutes, the private sector, and the donor community. This includes the PER process as a regular forum for dialogue on public expenditure, financial, and macro-economic management, the Investor Round Table and the Tanzania National Business Council for government -private sector dialogue, and the environment working group. Inaddition, Tanzania has also put in place a process for an independent monitoring of the government - donor relationship, which also covers the PRSC. RISKS AND RISK MITIGATION 190. Because the proposed PRSC-3 supports the implementation of Tanzania's PRS, there are two closely interrelated and overlapping sets of risks. The first set covers all risks that may interfere with the achievement of the objectives of the PRS. The second i s narrower and concerns risks to the successful implementation of actions covered in the PRSC policy matrix. The following risks can be identified at this stage: 0 Election cycle. As the next round of elections approaches in 2005, concerns about the durability of commitment to reforms will mount. To mitigate this risk, government has implemented legal and institutional changes to underpin its reforms. This will reduce the risk of policy reversals and root these reforms more deeply in both attitude and practice. Inspiringinvestors' belief that the changes made are durable is a major challenge in scaling up investor response. An important means to sustain reform and limit the possibility of policy reversals is the ongoing transition from a conditionality-based approach to reforms, to the building of domestic constituencies for reform-which provides a more durable and secure basis for ensuring the sustainability o f reform efforts. 0 Reliance on domestic budget process. The utilization of PRSC resources is determinedby the domestic budget process with the possibility that resource allocation is influenced by other factors than pursuit of the PRS objectives, including the above mentioned elections cycle. The principal mitigating measure derives from strengthening the role of domestic stakeholders in budget formulation and budget review. Government's continued commitment to an open and participatory PER and budget process is an important and well established tool to support and monitor consistency o f budget formulation and execution with the PRS. It is worth noting that due to fungibility o f resources, the allocative risk also exists for other aid modalities and the PRSC i s explicitly designed to address this risk. 0 External Shocks. Areas of vulnerability to external shocks include tourism, which has been become a leading source of foreign exchange and which could be affected by developments in the international security situation, agriculture which remains the main source of income and employment for Tanzania and exposed to climatic shocks, and terms of trade, especially with regard to the prices o f the leading export commodities including 53  gold, coffee, tea, and fish, and import commodities, especially oil. Tanzania's economy is reasonably diversified and has in the past shown remarkable resilience to individual shocks such as the drought in 2003/04 or the increase in oil prices. However, simultaneous or prolonged negative shocks could undermine macro-economic and fiscal stability. Tanzania's dependence on external aid, which i s about 12 percent o f GDP and finances almost half o f her budget, makes the country extremely vulnerable to changes in donor sentiment. The Tanzania Assistance Strategy clearly recognizes the need to design aid modalities with a view towards minimizing the scope for abrupt changes. However, there i s also a clear recognition that the authorities need to maintain an appropriate environment for sustaining relatively high levels o f aid. e Fiduciary risks. Both the CFAA and the CPAR identify significant fiduciary risks. In recent years, government has implemented measures to eliminate fiduciary risks, including the approval and application o f new public finance and procurement acts, the full operationalization o f the Integrated Financial Management System, and strengthening o f the National Audit Office. The PFMRP and actions monitored by the PRSC are designed to address weaknesses ingovernment's financial management and procurement systems. e Slow decision processes. As policymaking has become more inclusive-with a greater role for stakeholders beyond the executive and, in particular, for parliament-decision making processes have tended to become more drawn out. This poses a risk primarily with respect to the speed o f implementation o f agreed actions, while the risk for significant policy reversals is considered to be reduced. The key mitigating measures contain two elements. The first i s dissemination and knowledge sharing with a wide range o f domestic constituencies on the rationale and benefits o f reforms. The second relates to using the process leading to the definition o f the PRSC policy matrix (PAF) to gauge the extent to which there i s consensus on reforms among key constituencies and then sequence reforms accordingly. e Decentralization. Another risk for the achievement o f PRS objectives arises from the ongoing decentralization process, which shifts responsibility for key poverty reducing programs in education, health, the water sector, and agriculture to the districts. Preliminary assessments indicate great variations in the quality and capacity o f financial management and reporting systems across districts, in addition to often limited capacities to manage and implement poverty reducing programs. The local government reform program focuses on strengthening the capacity o f local authorities. The PRSC also supports actions to strengthen the watchdog role o f beneficiaries at the community level through disclosure o f the flow of resources to various activities at the grassroots level and expenditure tracking o f financial flows from the central government through the annual PERs. Capacity constraints. Although systems and capacities at the central level are generally stronger than at the local level, limited human resources capacity to implement and manage the PRSC reform agenda at the center represents another risk in the Tanzanian context, especially in the areas o f public expenditure management, procurement, and financial management. To mitigate these risks, the proposed PRSC focuses appropriately on the strengthening o f oversight arrangements. A large number o f capacity-building efforts are in place. Most reform programs have capacity-building components embedded, including the PFMRP, the local government reform program, and the public sector reform programs. Similarly, sector programs and projects typically also contain capacity building components. The challenge for Tanzania is to enhance the effectiveness o f capacity-building efforts by shifting from supply-driven to demand-driven efforts and address capacity building in a holistic way, in which the incentive structure, education system, and specific capacity- building efforts are organized in a mutually reinforcing manner. Analytic work to address 54  these issues is planned. In the medium term, it i s expected that the shift from project to budget support by the Bank and other donors will release staff who are currently tied up in project management to play a greater role in overall public sector management. 191. To ensure that such risks do not derail the implementation o f the PRS and PRSC, appropriate monitoring instruments have been put in place. The government's annual PRS progress report, which builds on the recently developed, comprehensive poverty monitoring system, and a well-established annual PER mechanism, provide open and transparent arrangements for monitoring outcomes on fiduciary risks. Moreover, the annual nature o f the PRSC provides a framework for appraising risks identified in the CFAA and CPAR and agreeing on necessary corrective actions. 55   Tanzania Third Poverty ReductionSupport Credit Schedules Schedule 1: Letter o f Development Policy Schedule 2: The Performance Assessment Framework for PRBSPRSC Schedule 3: Indicator list o f PRSRRBSPRSC Performance Assessment 56   Schedule 1. Letter of Development Policy THE UNITEDREPUBLIC OF TANZANIA MINISTRY OF FINANCE P. 0. Box 9111, Telegram "Treasury ,Dar Es Salaam Telephone 2111174-6, Fax 211 0326, Dar Es Salaam Telex 41329 (All Oflcial cornmumcattons should be addressedto the PermanentSecretary to the TreasuryandNOT to indwrduals) 25thJuly, 2005 Inreply please quote Ref: TYC/ 1/ 210/2/01 Ms. Judy O'Connor Country Director, World Bank 1818H Street, NW WASHINGTON D.C Dear Ms. O'Connor, RE: LETTER OF DEVELOPMENT POLICY 1. On behalf of the Government of the United Republic of Tanzania, I hereby write to request for approval of the third Poverty Reduction Support Credit (PRSC 3) of US$ 150 million (SDR equivalent). This credit will assist in the implementation of the newly adopted National Strategy for Growth and Reduction of Poverty (NSGRP or MKUKUTA in Kiswahili), by augmenting the Government's resources directed to MKUKUTA targets. The credit will also support implementation of complementary structural reforms relating to private sector and rural development; macroeconomic management, public financial management, public service reform, governance and environmental sustainability. 1. BACKGROUNDAND RECENT DEVELOPMENTS A. MACROECONOMICPERFORMANCE 2. Tanzania's overall macroeconomic performance has recovered following a severe drought in most parts of the country during 2003. Real GDP grew by 6.7 percent in 2004, against a projection of 6.3 percent and the 5.7 percent recorded in 2003. This was contributed mainly by the recovery in agricultural production on account of improved 57  weather conditions, and a noticeable improvement in mining, construction, transportation, communications, manufacturing, trade and tourism activities. Manufacturing for exports, including Export Processing Zones and SMEs, continue to pick up. The overall annual inflation which had risen to 6.5 percent by end June 2004 owing to effect of draught, declined to 4.2 percent by end June 2005 despite higher fuel prices. The Government has introduced a new Series of Consumer Price Index (CPI) whose basket is based on the 2000/01 household budget survey. The change to a new index is on account of commodity market prices movements over time and changes in the composition of the basket of goods and services consumed by a typical household. 3. Gross official reserves of the Bank of Tanzania at end March 2005 reached US$ 2,125.51 million from about US$ 1,878 million at end-June 2004. This level is equivalent to about 7.5 months of imports of goods and non-factor services, and is attributable to a steady inflow of foreign assistance during July-December 2004, coupled with modest increase in exports and foreign investments. Tanzania successfully concluded its Third Review under the IMF's Low Access Poverty Reduction and Growth Facility in February 2005, and the Fourth Review is due for completion in July 2005. The Government remains committed to pursuing sound macroeconomic management policies, and ensuring a sustainable growth and reduction of poverty. B. REVIEW OF TANZANIA'S POVERTY REDUCTIONSTRATEGY AND ADOPTION OF THE NATIONALSTRATEGY FOR GROWTH AND REDUCTIONOF POVERTY (MKUKUTA) 4. Following the successful completion of the implementation period of the first Poverty Reduction Strategy (PRS I) and publication of the final PRS Monitoring Report in 2004, a new National Strategy for Growth and Reduction of Poverty was adopted in February 2005. The adoption of MKUKUTA was preceded by a national consensus building process that included discussion at the regional level before presentation to a National Conference during the National Poverty Policy Week in November 2004. In this respect, all civil government agencies, society representatives, non-governmental organisations, development partners private sector players, contributed their views during the drafting process. 58  MKUKUTA focuses on three core areas as instrumental to poverty reduction in the period 2005-10. These are (i) Growth of the Economy and Reduction of Income Poverty; (ii) Improvement of Quality of Life and Social Wellbeing; and (iii) Governance and Accountability. Key to higher growth and reduced poverty will be water. Governance and accountability will be addressed through more equitable allocation of resources, the protection of the rights of the poor and of vulnerable groups and the improvement of personal and material security. C. BUDGET SUPPORT AND ASSISTANCE FOR THE GOVERNMENT'S OWNREFORM PROCESSES 5. The.Government reaffirms that general budget support is the preferred mode of development assistance delivery since it enhances national planning and Implementation systems, local ownership, transparency as well as shifting Government accountability from external to the domestic constituency. Currently, the facility is supported by 14 development partners, 12 of which contribute grant aid to the programme, the World Bank provides a combination of an IDA credit and a grant under the Poverty Reduction Support Credit (PRSC), and the African Development Bank provides credit in the form of a Poverty Reduction Support Loan (PRSL). The 12 development partners are the EU, the UK, the Netherlands, Germany (KNV), Norway, Sweden, Finland, Denmark, Ireland, Switzerland, Japan and Canada. National planning would benefit from better information sharing on the basis of determining the credit and grant portions of IDA support under this instrument. The Policy Assessment Framework (PAF) matrix had been commonly used to assess Government's progress in various areas of the reform agenda under the PRS I cycle. With the adoption of MKUKUTA, the Government has initiated consultations with development partners to align the budget support review within the existing forums/processes so as to minimize transaction costs and facilitate the strengthening of these forums/processes. These processes include the PRGF, MKUKUTA reviews, the PER/PEFAR Review process, Sector Reviews, and Annual Poverty Monitoring System. II. REFORM PROGRAMME UNDER THE PAF 2004/05 -2005/06 II A. IMPROVED INVESTMENTAND BUSINESS ENVIRONMENT 6. Substantial progress has been observed in the areas related to private sector development. All reform programmes in this area are on track. A major study on a new 59  PSD strategy is under way and the Strategy is scheduled to be completed by November, 2005 and approved by the Government by April 2006. This work will benefit through inputs from a Diagnostic Trade Integration Study COnS) currently underway by the World Bank. The reform work in this area will increase the longterm growth potential of the economy and support poverty reduction through increased incomes. A coherent M&E system for BEST, SME Policy, and PSD strategy is being developed and is expected to be institutionalised by November 2005. The Government has continued to mobilise resources and it is envisaged that the implementation of SME Policy priority projects will start by November 2005. 7. With regard to the SMEs' access to finance, the SME Credit Guarantee Scheme (SME -CGS) was launched in May 2005 with an initial funding of TShs 2 billion from government budget. In addition, TShs. 1.5 billion has been set aside for the scheme in the 2005106 and TShs 1.5 billion for the National Entrepreneurs Development Fund (NEDF) both from government budget. These resources for SME development will be augmented by the USD 1 million earmarked for the SME Competitiveness Fund (SCF) under the Business Service Programme Support I1(BSPS 11). 8. The Better Regulation Unit (BRU) is currently finalising the implementation of first year priority work plans, and has reviewed various draft bills including the draft Business Activities Registration Bill; draft Land (Mortgage) Regulations; Occupational Health and Safety Bill; and Workmen's Compensation Bill, all of which have been forwarded for final drafting. Other regulatory instruments under review include the Regulatory Licensing System; and the draft Regulations for Real Estate Agents for facilitation of the operation of the Land Market. 9. Management structures for BEST were established in January, 2005 and the BEST Steering Committee and the Tripartite Review Committee held meetings in February 2005 to approve the work plans, activities and budget for the first year. Work plans for the Commercial Dispute Resolution component of the BEST programme have also been prepared and are among the activities that were approved by the Review Committee. Recruitment of international lead advisors to support the implementation of CDR reforms is on going. Implementation of priority activities including reform of Civil Procedure Code was expected to commence in June 2005. BRU's work plan for financial year 2005/06 were also approved by the Tripartite Review Committee in June 2005. 60  Regulations for the Companies Act, 2002 have been prepared, and are to be gazetted soon. 10. Under Phase II of the labour law reforms, the Government is reviewing the policy and legislations on occupational safety and health, Workmen's Compensation, Social Security, Employment Services, Skills Development, Labour Market Information and Employment Promotion. Reports on Social Security, Employment Services, Skills Development, Labour Market and Information and Employment Promotion were presented to the Labour Law Reform Task Force in April 2005 and early May 2005. Sixty trainees from the Commission for Mediation and Arbitration (CMA) have already graduated, with the last batch scheduled to graduate in July, 2005 thereby paving the way for the Labour Institutions to commence full operations. 11. Reforms in the business licensing system have continued consistent with the Government's commitment under the following PRSC 3 prior action: New business licensing framework under implementation in a phased strategy. In this regard, the business licensing reforms introduced with the 2004 budget were implemented at the central and local government levels. A Draft Business Activities. Registration Bill has also been prepared and is expected to be submitted to Parliament in July, 2005. The draft Bill proposes the repeal of the Business Licensing Act of 1972. Further, other forms of regulatory licensing are being targeted for reform and proposals have been invited from stakeholders. The Prior Action in this area has therefore been met. B. AGRICULTURALAND RURAL DEVELOPMENT 12. Agriculture continues to be a key sector of the economy due to its strong contribution to growth and poverty reduction. In addition to improving rural infrastructure, elimination of nuisance taxes targeting crop production, and strengthening the provision of extension services, crop marketing is a key element of the sector's development strategy. The reform of crop boards to reduce their burden on producers has been being implemented in phases. 61  The review process of the roles and funding arrangements of Crop Boards completed, and the following were decided by the Government in June 2005. (0 To abolish the Crop Development Funds, and ensure people/farmers are not charged for these funds. (ii) That the Government shall finance Crop Boards' running costs. (iii) Given the strategic importance of crop development for growth and poverty alleviation, the Government will improve provision and availability of extension services to all farmers and that respective Crop Boards and the Government will continue playing a key role in this endeavour. (iv) That in view of the inconclusive outcome of the study on Crop boards' Reform, there is a need to carry out a deeper analysis and determine who is doing what among the institutions and agents dealing with agriculture in the country in order to form a firm basis for further Government action in this area. The Government decision has anchored the Crop Board reforms on the sources of financing and in view of this, the Government is preparing an "Action Plan for the Rationalization of Roles, Functions, Financing and Accountability of Crop Boards'' detailing reform interventions including the amendment of relevant legislation as well as activities to effect the interventions and expected outputs. The Action plan will be completed and circulated by the first week of September, 2005. The following outputs are therefore expected as a result of the Crop Boards reform: Crop Boards legislation will be revised with a view of abolishing as appropriate non regulatory functions, collection of crops cess, issuing indicative prices; The legislation will be reviewed to reduce the number and frequency of issuance of licences, consistent with the Finance Act No. 15 of 2004; Increased producer margins as a result of the abolishment of levies charged on crops to finance Crop Boards operations; Creation of favourable regulatory environment. Following the completion of the Agricultural Sector Development Programme (ASDP) framework in December 2002, monitoring benchmarks for assessing the effectiveness of coordination mechanisms for ASDP implementation have been prepared 62  to focus on, among others, timely reporting and monitoring of the sector in accordance with the ASDP monitoring and evaluation framework, and the share of Agricultural Sector Lead Ministries' (ASLMs) budgets and actual expenditures going to ASDP priorities. In the fiscal year 2004/05, 88% of the total budget of ASLMs was aligned to ASDP priorities. In Fiscal year 2005/06, the ASDP priority proportion has been increased to 90%. Moreover, we intended to have a detailed PER study carried out to clarify the definition of ASDP priority and non-priority areas. 14. The law for establishing legal, regulatory and supervisory framework for micro- finance institutions was approved by Parliament in February 2003 in order to improve access to essential agricultural and rural financial services. The Microfinance Regulations, completed in March 2005, provide the legal framework for Micro Finance Companies and Financial Cooperative Societies to operate and contribute to the implementation of the Microfinance Policy and facilitate rural financing. 15. The Government is committed to further improving the security of tenure in order to promote rural development. The Government has therefore approved the Strategic Plan for the Implementation of the Land Laws that will operationalise the Land and Village Land Acts. In this regard, the following Prior Action is on track. Finalised and obtained Government approval of the strategic planfor operationalisation of the LandAct andVillage LandAct. 16. Development of rural roads also continues to be part of the Government's reform programme benefiting rural areas. Efforts are underway to strengthen the capacity at district level to manage road rehabilitation and maintenance carried out by contractors. The compilation of Road Inventory is expected to be completed by September 20051 and provide inputs to the delineation of responsibilities between central government institutions and LGAs, following the road classifications. The draft Road Act is expected to be submitted for Parliamentary approval in February 2006. 63  C. POVERTY MONITORINGAND EVALUATION 17. Government has made progress in improving the routine data collection system with sector Ministries and operational guidelines are expected to be formulated and adopted after the review of technical issues and field trips. Consultationswith some core sector Ministries (namely the Ministry of Education and Culture, Ministry of Works, Ministry of Agriculture and Food Security, Ministry of Water and Livestock Development) on the Routine Data Collection (ROC) strategy have been conducted, issues for the technical review prepared, and fact finding field trips conducted. This will form the basis for an ROC strategy. 18. Given that the MKUKUTA was adopted only recently and its implementationstarts with the 2005/06 budget while the PMS review is on-going, it is too early to provide indication on the process of reviewing the performance of the updated set of indicators and targets in the MKUKUTA. However the Government remains committed to reporting on poverty trends and indicators this year, and expects to use the Poverty and Human Development Report 2005 as a basis for such reporting. 19. Substantial progress has been made in translating the MKUKUTA framework into policy actions. The new budget process provides budget incentives for MDAs to adjust their strategies to the clusters, goals and targets of MKUKUTA. Furthermore, draft MKUKUTA implementationguidelines providing broad guidance to MDAs on how to adapt their plans and strategies to MKUKUTA are being finalised. This should facilitate linkage of resource utilisationto poverty outcomes in the future. D. MACROECONOMIC STABILITY 20. The Government continues to implement policies which aim at securing and sustaining the macroeconomic gains achieved so far by clearly emphasizing on fiscal and debt sustainability as key areas of macro economic reforms. Strong growth is expected to continue across all sectors of the economy leading to overall economic growth targeted at 6.9 percent in real terms in 2005 and, supported by the continued structural reforms and infrastructure investment, accelerating further to 7.5 percent over the medium term. Inflation, on the other hand, is expected to be contained at around 4 percent in the medium term. While the trade balance is projected to remain consistently negative in the 64  medium term, overall foreign reserves are expected to remain favourable on account of aid and investment flows. Debt management 21. Public debt continued to be managed favourably as planned, with debt relief beyond HlPC having been obtained from all but one Paris Club creditors. Moreover, the UK has offered additional relief this year of 10 percent of debt service obligations to IDA and ADB. Efforts are under way to have the remaining bilateral agreements signed with Brazil and the outstanding Japanese agencies namely EID/MITI and the Japanese Food Agency. Also, Tanzania has concluded debt relief negotiations with several non-Paris Club creditors. Once approved by the relevant institutions, the proposal by the G8 countries for additional debt relief would provide savings that would reduce the financing gaps in health and education, and substantially pop up poverty reduction efforts. The Government continues to be guided by the National Debt Strategy in its debt management activities, and borrows only from concessional sources. In line with the strategy, a circular was issued to all MDAs in May 2005 describing in clear language, the changes in the debt contracting and management framework enacted through the Loans, Guarantees and Grants (Amended) Act of 1974 including correct debt contracting procedures, criteria for new loans and punitive actions for flouters of the legislation. Tax managementand policy 22. Good progress has also been made in the area of taxation, in both the policy and administration areas. The review of tax laws was completed, and changes introduced after consultations with stakeholders. Implementation of the TRA Second Corporate Plan is also progressing well, with revenue collection increasing at 19 percent per annum over the last three years, and much improved services for taxpayers. Other achievements realised over the past year include: (i) Consolidation of the recently installed flow meters to ensure greater accuracy when measuring petroleum imports through the introduction of air eliminators; thereby improving tax assessment of petroleum imports; (ii) Rollout of the new Central Motor Vehicle Registration System to two new stations, namely Tanga and Dodoma; 65  (iii) Adoption of a function-based organisation structure at the Large Taxpayers Department and the merger of the Income Tax and VAT Departments into a single Domestic Revenue Department, in pursuit of integration of TRA operations; (iv) Expansion of the coverage of the Large Taxpayers' Department, from 100 to 208 taxpayers over the last 12 months, with plans to increase this to 350 by June 2006; Introduction of One-Stop-Centres at all District TRA Offices. Review of the EAC Customs Management Bill, and commencement of implementation of the EAC Customs Management Law. Adoption of the HIV / AIDS policy for the Authority. 23. Simplification and rationalisation of Local Government taxation continued, with more nuisance levies and fees abolished in the 2005/06 budget. To provide a framework for sustainable financing of LGAs, the Government commissioned a study on the matter. The study has been completed, and the Government is reviewing its recommendations with a view to developing a strategy' for local Government financing that ensures prudent taxation without advers,ely affecting the fiscal viability of LGAs or the benefits of fiscal decentralisation and the overall national objectives including investment climate. E. IMPROVEMENTIN THE EFFECTIVENESSOF ClELlVERY OF PUBLIC SERVICES 24. The focus in this area has continued to be on the need for transparency in all stages of the budget formulation and budget execution, both at the Central and Local Government levels. With the introduction of the outcome -focused MKUKUTA, new challenges in resource allocation have come on board. Unlike the situation under PRSl whereby resource allocation focused on seven traditional priority sectors (namely education, health, water, roads, agriculture, governance and HIV / AIDS), the MKUKUTA is cross cutting, involving all MDAs. The newly developed Strategic Budget Allocation System (SBAS) has ensured this strategic linkage, with MKUKUTA related funding accounting for 54 percent of Central Government budget allocations. Over time, as MKUKUTA gets fully costed and interventions prioritised and sequenced, the Government's Medium-Term Expenditure Framework will translate comprehensively the 66  policy objectives into programmes, targets and activities. Nevertheless, public expenditure is already driven by policy priorities and disciplined by budget realities, such as institutional capacity and resource constraints. In order to mitigate these constraints, the Government will press ahead with its ongoing programmes of strengthening public expenditure management systems and domestic resource mobilization. 25. With regard to the budget formulation, the following Prior Actions 2005/06 have been achieved: Approved budget 2004105 in line with PRS objectives, delineating budget codes for prioritysectors and items. Analysis of approved budget and PRS funding for fiscal year 2004/05 presented to stakeholders at PER consultative meetings shows that overall priority sector funding increased compared to 2003/04. As noted in the PRBS Annual Review Report of November 2004 and the PER Report for 2004/05, budget execution for 2003104 and 2004/05 was in line with the approved budget and PRS priorities, as priority sector expenditures continued to be protected. Moreover, the Budget Guidelines for 2005/06 - 2007/08 include a significant effort to link the MKUKUTA and sector strategies more explicitly with budget allocations. To do this the SBAS indicates the poverty cluster interventions (targets) and the respective action (sectors) that will be required to collaborate during the implementation of their activities. In this regard, we consider the following action to have been completed. Budget Guidelines for 2005106 - 2007108 consistent with PRS priorities, and explicitly taking into account recommendations of PRS review process, sector reviews, PER sector reports and the PER external evaluation 2003104. 27. Allocation of resources to LGAs for recurrent and development expenditures in 2005106 was based on the formula adopted in 2004. This allocation system has covered all sectors, namely, Education, Health, Water, Roads, Agriculture and Administration. 67  However, after orientation of LGAs staff of MKUKUTA, it is envisaged that future resource allocations to LGAs will be linked to MKUKUTA cluster strategies. 28. Budget execution for 2003/04 and 2004/05 was in line with budget estimates. Therefore, the following PRSC 3 Prior Action in this area has remained on track: Executed the FY 2004 budget and first semester of the FY 2005 budget in line with its approved budget and PRS priorities, and reported such budget execution as per identified expenditure budget codes for priority sectors and items. The Government remained committed to ensuring transparency in its budgetary operations. To this end, the reports on the execution of the first two quarters of the financial year 2004/05 have been made public, and subsequent reports will be published as well. In the reports, detailed information is provided on revenue collection as well as expenditure execution in the priority sectors and priority items. It is noteworthy that there has been an overall increase in expenditure execution relative to estimates, which indicates that procurement planning and implementation are improving. 29. It is still difficult to timely assess budget execution at the Local Government level, since no related consolidated expenditure data is available as there are only 32 Councils currently using IFMS. We are implementing a plan to add another 32 Councils during 2005/06, before rolling out to all Councils in future and therefore establish the basis for consolidating the general Government budget (Central and Local Governments) and hence its execution. In view of the fact that many Councils are not yet linked to IFMS, manual reports serve the purpose in the short term as we move to full integrated system in the medium term. 30. The Government continues to publish the transfers to LGAs in newspapers, and on the Government website. LGAs are equally being encouraged to continue displaying receipt of grants on their District Notice Boards, with evidence of the practice having been confirmed by the Ministry of Finance's Technical Audit Unit (TAU) as part of its audit activities. 68  F. IMPROVED PERFORMANCEOF THE PUBLIC SECTOR AND THE OVERALL INCENTIVEENVIRONMENT 31. Substantial progress has been made in the implementation of the Public Service Reform Programme (PSRP), aiming at improving public service delivery so as to contribute to economic growth and poverty reduction. The reform strategy has continued to be in attracting and retaining better qualified staff and strengthening human resource capacity in order to sustain the overall Government reform programmes. This will be achieved through the Government's long-term plan of capacity building as well as performance orientated pay reform. An M&E system has been installed in 34 MDAs and five staffs from each MDA have been trained in the use of the system. Plans are underway to commission a consultant to prepare popular version of Service Delivery Surveys in English and Kiswahili in order to operationalise the system. Based on financial feasibility, the Government has continued implementation of the Medium Term Pay Reform. A study is underway to establish a detailed analysis of the nature of and trends in employment allowances, and employment growth in order to make specific recommendations that would be consistent with improved rationality and an accelerated pace of salary enhancement within an affordable wage bill. With these developments, we consider the following PRSC3 prior action to have been met. W05, and the overallthrust of the pay refarm strategy. 1 1 32. As part of the public service reform, we plan to establish Ministerial Ethics Committees to handle complaints and grievances internally and from the public. Initially, the system will be field tested in 6 MDAs by November, 2005 before being rolled out to 10 other MDAs by November 2006. The code of conduct for public servants has also been revised and published, in consultation with stakeholders. 69  G. MINIMISATION OF RESOURCE LEAKAGESAND THE STRENGTHENING OF ACCOUNTABILITY i) Public Financial Management 33. The Government continued in its effort to secure sustainable and effective financial management arrangements that support an equitable delivery of public services, and to minimise resource leakages as well as strengthen accountability over use of public funds. The Financial Management Reform Programme (PFMRP) is the main vehicle for building the requisite capacity in public institutions for this purpose. Progress made in the implementation of the PFMRP includes the identification of core activities for each component as well as the processes, outcome and output indicators, and a structure for monitoring, reporting and controlling performance. The PFMRP has been mainstreamed into the budget to ensure consistency between strategic plans and budgets, and the programme activities have been accommodated in current Government accounting codes. The following prior action is therefore considered to be met: I Progress in the implementation of the PFMRP. 34. With respect to procurement, substantial progress has been made, meeting the prior action for establishing a Regulatory Authority, by enacting a new law, (The Public Procurement Act 2004), which has decentralised all tendering functions and established a Public Procurement Regulatory Authority (PPRA). The PPRA's regulatory function is expected to be substantially strengthened as operational functions have been decentralised. The following PRSC 3 prior action is completed. ii) Reduction of corruption 35. Government continues to pursue good governance as part of the strategy to reduce resource leakages. In the fight against corruption, the focus is on implementing 70  the National Anti-Corruption Strategy and Action Plan (NACSAP), and the Anti - Corruption Plans of individual MDAs. Published quarterly reports on the implementation of the MDAs' anti-corruption plans depict substantial progress. Anticorruption strategies and action plans for all Local Government Authorities were prepared and submitted to the Good Governance Coordination Unit (GGCU) during 2004/05, with implementation slated to start in 2005/06. The Government is also taking broad measures to strengthen the GGCU through, among others, increasing the number of staff and enhancing training. Tanzania's commitment to improve good governance, and the results thereof, has been recognised by local and international stakeholders including a finding from a recent survey that the country's governance profile made the most improvement in all three governance areas (Voice and Accountability, Government Effectiveness, and Control of Corruption) over the last ten years among African countries South of the Sahara'. Improvements in Aid management 36. Consistent with the undertakings under the Tanzania Assistance Strategy (TAS), the second TAS Annual Implementation Report (FY 2003/04) has been prepared and shared with members of the Joint TAS secretariat. The report provides progress made to date by the Government, Development Partners (DPs) and other stakeholders in implementing the TAS priorities according to TAS Action Plan in the second year. It also highlights the remaining challenges related to achieving the principles and objectives of best practices in aid coordination as set out in the TAS document. The report will be officially released and widely distributed as soon as approved. 37. The Government continued to liaise with Development Partners in compiling the external resources commitments and projections for the FYs 2005106 -2007108 MTEF period as part of the routine activities of the annual PER process. The data were consolidated and circulated to sector Ministries (projects and basket funds) for review. Discussions of these data with sector Ministries were made during November December - 2004 and then compiled and submitted to the Budget Guidelines Committee for the preparations of the FY 2005106 -2007108 Budget Guidelines. These data were also shared with the PER macro group in February 2005, during their discussion on the FY 200906 -2007/08 Budget Guidelines. Further, budget support and basket funds data to 'Kauhann, Kraay and mastruzzi (2005) -http://www.worldbank.org/wbi/govemmane/govdata 71  circulated to Development Partners during February 2005 for re-confirmation and firming up and the ensuing data were used for the preparation of annual budget for FY 2005106. Project funds were reconfirmed with sector Ministries and regions during the national budget finalization process. H. ENVIRONMENTALSUSTAINABILITY 38. Following its passage by Parliament in 2004, implementation of the Environmental Management Act (EMA) has commenced, with a focus on (i) capacity building programmes to strengthen institutions on environmental management, and compliance with EMA commitments; promulgation of guidelines on mainstreaming environment in the policy processes; and development of poverty-environment indicators to be fed into the Poverty Monitoring System (PMS) Review. Environment experts are now represented in the PER sector Working Groups, in order to mainstream environmental issues into Government processes. 39. In the coming year, the Government targets the finalisation of the regulations and guidelines on environmental assessments, to include: (a) integrating environmental assessments into sectoral and district planning processes, (b) economic instruments, and (c) environmental standards for monitoring and compliance. Implementation of priority activities in the new institutional framework began in fiscal year 2004/05. Government will arrange for training on environmental assessment within sectors and districts and carry out pilot strategic environmental assessments in priority areas. Implementation of the action plan for building capacity within the VPO for poverty-environment monitoring will be initiated and the mainstreaming of the poverty-environment indicators within the PMS will be completed. 1. CONCLUSION 40. The Government remains committed to pursuing efficient and effective implementation of articulated strategies for maintaining sustainable growth and reducing poverty and through the MKUKUTA framework. The favourable overall macroeconomic developments in Tanzania and continued efforts in improving domestic revenue mobilisation, augmented by favourable external support, are supportive of growth and poverty reduction. The remarkable achievements in reaching the PRSC 3 prior actions 72  and pursuit of the agreed policy actions laid out in the new PRBS/PRSC Performance Assessment Framework for the coming year will continue to guide the Government in policy reforms. In addition, consistent implementation of the Government's reform agenda in private sector and agricultural development will enhance a sustained positive growth. Good performance in domestic revenue collections and well planned expenditure programme will facilitate the realization of the MKUKUTA targets. Yours sincereIy, PleniejM. Lyllho - . _ PERMANENT SECRETARY 73  4E &e E c, 4 iE m 4 m H Q) 4 m Q) 0E sg"kk x .3 E" c) L a" 2 H .-e 0 Y 0" E4  Notes: For the first annual cycle, all actions in the context of the Performance Assessment Framework (PAF) for PRBS/PRSC 1, includingthe Prior Actions (in bold) for PRSC 1 were to be completed no later than March 2003. The Prior Actions for PRSC 2 (in bold) and the indicative Prior Actions (Triggers) identified For PRSC 3, will have to be fully accomplished/completed by March 2004 and March 2005, respectively, in order for successful negotiations and subsequentpresentation o f the relevant PRSC operation to the World Bank's Board of Directors. All other Actions, would have had to be completed by no later than 14 March 2005 (PRBS/PRSC 2) and November, 2005 (PRBSFRSC 3). Substantive progress on the full set of actions is recognized as vital for continuation of the overall program of support to Tanzania. A broad-based review of the PAF Actions will be conducted in November of eachyear. The review of the PAF, originally designedfor a three-yearprogramme, concludes in 2004/05. During the November 2004 PRBS Annual Review/ PRSC 3 pre-appraisal, joint agreement has been made to achieve indicative PAF actions to be completed by November 2005March 2006. This interim arrangementfor a continuedPAF isfor oneyear (2005/06). If stakeholdersagree to a revision of the assessmentframework before then, then the revisedframework will take precedencefor monitoring in the budget support arrangement. 75   4E 2 3 L o - a - B K+ B 2: M a  m 2 "Icd  49E Ql y1 4 3 V I M d .e cO oM  0 00  I- 3 4E B E 0 z , 2: m a - d d a C  d  .-00 -e I 8 m 00  ap a - m 2 a 3 %1  B x .E B 0  m 3 am  3 4E 3 4 8 q z n a i 4A B  'E8 w  *I U 21 $ -e  4 W 8Ed s* 4 E n   c U X 4 eL E E 2 i Y x CA E  n 3 3 2n 2m  Ecl  M c 2 M i  u X pr; 1  - L Q (I) E  -86 8  VI  3P 0 E Ez a::   u X 4E2: v1 4 -  m 0 b     Tanzania Third PovertyReductionSupport Credit Annexes Annex 1: Tanzania at a glance Annex 2: Tanzania Social Indicators Annex 3: Tanzania KeyEconomic Indicators Annex 4: Tanzania KeyExposure Indicators Annex 5: Tanzania Balance of Payment Annex 6: Status ofIBRDand IDA Operations Annex 7: Partnership Framework Memorandum Annex 8: International Monetary FundRelationsNotes 107  Annex 1. Tanzaniaat a Glance , Tanzania at a glance 7/28/05 Sub- POVERTYand SOCIAL Saharan Low- Tanzanla Africa Income Developmentdiamond` 2004 Population,mid-year (millions! 35.1 703 2,310 Life expectancy GNI per capita (Atlas method, US$) 320 490 450 GNI (Atlas method, US$ billions) 11.3 347 1,038 Average annual Qrowth,1998-04 Population(%) 2.6 2.3 1.9 Labor force (%j -0.8 2.4 2.3 GNI Gross per primary Most recent ertlmate (latest year available, 1998-04) capita nroilment Poverty(% ofpopulation belownationalDove* line 35 Urban population(% of total population) 36 36 30 Life expectancy at birth (years) 47 46 58 1 Infant mortality(per 1,000live births) 85 103 82 Child malnutrition(% ofchildren under5) 44 44 Access to imDrovedwater source Access to an improvedwater source (% ofpopulatic 56 58 75 Illiteracy(% ofpopulationage 15+) 21 35 39 - Gross primaryenrollment (% ofschool-age populat 106 87 92 Tanzania Male 109 94 99 -Low-incomegroup Female 103 80 85 KEY ECONOMIC RATIOS and LONG-TERMTRENDS 1984 1994 2003 2004 Economic ratios. GDP (US$ biiiionsl 6.3 4.5 10.3 11.3 Gross domestic investmenffGDP .. 24.6 18.6 18.4 Exports of goods and serviceslGDP 8.3 20.6 17.6 19.1 Trade Gross domesticsavingsiGDP 7.8 -0.3 9.8 7.9 Gross nationalsavingsiGDP 9.9 6.6 9.3 7.4 T Current account balancelGDP -5.0 -23.8 -8.7 -12.1 Interestpayments/GDP 0.5 1.4 0.3 0.8 Domestic Investment Total debffGDP 114.7 160.4 73.1 66.4 savings Total debt service/exports 26.6 21.5 5.1 13.5 Presentvalue of debffGDP 18.6 18.1 Present value of debffexports 106.4 102.1 Indebtedness 1994-04 2003 2004 2004-08 (average annualgrowth) GDP 5.0 7.1 6.7 7.3 -Tanzania GDP per capita 2.1 5.0 4.2 4.7 Low-income group Exports of goods and services 5.7 8.8 9.0 0.8 1984 Ig94 2003 2004 Growth of investment and GDP (Oh) (% of GDP) Agriculture 52.6 45.0 45.0 46.2 2o Industry 10.9 15.1 16.6 16.7 ': " Manufacturing 7.7 7.4 7.2 7.0 Services 36.5 39.9 38.4 37.1 Privateconsumption 77.6 81.2 75.4 75.9 -5 General government consumption 14.6 17.1 14.8 16.2 Imports of goods and services 15.1 43.6 26.5 29.6 -GDI +GDP 1984-94 1994-04 2003 2004 (average annualgrowth) Growth of exports and Imports(%) Agriculture 3.5 3.9 4.0 6.0 100 Industry 1.o 7.4 10.4 10.1 80 Manufacturing 39.9 5.8 8.6 8.6 60 Services 4.1 4.9 5.6 6.0 40 20 Privateconsumption 3.1 4.3 3.7 1.3 0 Generalgovernment consumption 0.7 7.6 29.6 20.9 -20 Gross domesticinvestment 3.8 5.0 5.6 9.2 Imports of goods and services 2.9 4.7 6.9 3.2 Note:2004 data are preliminaryestimates. Group data are for 2003. *The diamonds showfour key indicators in the country (in bold) comparedwith its income-groupaverage. If data are missing, the diamond will be incomplete. 108  Tanzania PRICES and GOVERNMENTFINANCE 1994 2003 2004 Domesticprices (% change) Consumer prices 33.1 4.4 4.1 Implicit GDP deflator 31.1 5.6 8.1 Government flnance (% of GDP, includes current grants) Current revenue 10.5 11.4 11.8 Current budget balance -1.8 -2.5 -3.5 Overall surplus/deficit -5.1 -7.2 -8.5 TRADE 1 1994 2003 2004 (US$ millions) Export and import levels (US$ mill.) Total exports (fob) 486 1,010 1,175 2.500 Commodity 1 115 49 41 1 Commodity 2 105 42 38 12.000 Manufactures 77 76 95 1,500 Total imports (cifl 1,344 1,821 2,366 1,000 Food 97 146 257 Fuel and energy 124 261 461 500 1 Capital goods 597 751 877 0 90 99 00 01 02 03 04 Export price index (1995=100) 84 95 103 Import price index (1995=100) 103 79 94 0Exports 0Imports Terms of trade (1995=100) 82 119 110 BALANCE of PAYMENTS 1994 2003 2004 I Current (US$ millions) account balance to GDP (X) Exports of goods and sewices 855 1,716 1,911 0 Importsof goods and services 2,242 2,580 3,231 2 Resource balance -1,387 -864 -1,320 4 6 Net income -154 -33 -68 8 Net current transfers 465 I 15 -10 Current account balance -1,076 -896 -1,373 -12 -14 Financing items (net) 1,183 1,327 1,604 .16 Changes in net resewes -107 -431 -231 Memo: Reserves including gold (US$ millions) 306 2,040 2,238 Conversion rate (DEC, localNS$j 509.6 1,039.1 1,089.7 EXTERNAL DEBT and RESOURCE FLOWS 1994 2003 2004 (US$ millions) :omposition of 2004 debt (US$ mill.) Total debt outstanding and disbursed 7,235 7,517 7,509 IBRD 114 3 0 IDA 1,998 3,474 3,608 G: 831 Total debt sewice 183 92 271 IBRD 42 3 3 IDA 70 29 85 Composition of net resource flows Official grants 564 788 829 Official creditors 156 459 171 Private creditors 2 16 13 Foreign direct investment 63 232 232 Portfolio equity 0 0 0 C:396 World Bank program Commitments 195 251 451 \. IBRD E Bilateral Disbursements 217 397 193 3- D Other multilateral -- ~ F Private Principal repayments 77 12 62 ;-IDA IMF G -Short-term Netflows 139 385 131 Interest payments 35 20 28 Nettransfers 104 365 105 Development Economics 7/28/05 109  Annex 2. Tanzania Social Indicators Tanzania Social Indicators Latest single year Same region/income group Sub- Saharan LOW- 1975-80 ISSS-SO 1897-2005 Afrlca Income POPULATION Total population, mid-year (millions) 18.6 25.5 35.9 704.5 2.311.9 Growth rate (% annual averagefor period 3.1 3.1 2.3 2.3 1.9 Urban population (% of population) 14.8 21.7 35.4 36.5 30.4 Total fertility rate (births per woman) 6.8 6,3 5.0 5.2 3 7 POVERTY (% ofpopulation) National headcount index 35.7 Urban headcount index 29.5 Rural headcount index 36.7 INCOME GNI per capita (US$) 190 300 500 440 Consumer price index (1995=100) 2 30 199 Food price index(1995=100) 2 29 217 lNCOMElCONSUMPTlONDISTRIBUTION Share of income or consumption Gini index Lowest quintiie ( O hof income or consumptioi Highest quintile (% of income or consumpti0 SOCIAL INDICATORS Publio expenditure Health (% of GDP) 2.7 2.6 1.5 Education (YOof GDP) 2.2 3.3 3.2 Social security and welfare (% of GDP) Net primary school enrollment rate (% of age group) Total 50 69 77 Male 49 69 82 Female 50 68 72 Access to an improved water source (% of population) Total 38 73 58 75 Urban 79 92 82 89 Rural 27 62 48 70 Immunization rate (% of children ages 12-23months) Measles 46 80 97 61 65 DPT 59 78 95 59 67 Child malnutrition (% under 5 years) 29 44 Life expeotancyat birth (yea@ Total 49 50 43 46 58 Male 47 49 42 45 57 Female 51 52 43 46 59 Mortality Infant (per 1,000live births) 106 102 104 101 80 Under5 (per 1,000 live births) 175 163 165 171 123 Adult (15-59) Male (per 1,000 population) 451 444 569 519 319 Female (per 1,000population) 370 373 520 461 268 Matemal (modeled, per 100,000live birth: 1,500 916 669 Births attended by skilled health staff (%) 36 39 38 Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age. 2005 World Development IndicatorsCD-ROM, World Bank 110  Annex 3. Tanzania Key EconomicIndicators Tanzania Key EconomicIndicators - Actual Estimate Projected Indicator 2001 2002 2003 2004 2005 2006 2007 2008 National accounts (as YOof GDP) Gross domestic producta 100 100 100 100 100 100 100 100 Agriculture 45 45 45 46 45 44 44 44 Industry 16 16 17 17 18 18 19 19 Services 39 39 38 37 38 37 37 37 Total Consumption 91 88 90 92 93 92 91 87 Gross domestic fixed investment 17 19 18 18 19 19 20 21 Govemment investment 6 8 7 7 8 8 8 8 Private investment 11 11 11 11 11 12 12 14 E X ~ O (GNFS)~ ~ ~ S 16 17 18 19 21 21 21 15 Imports(GNFS) 24 24 27 30 32 32 32 23 Gross domestic savings 9 12 10 8 7 8 9 13 Gross national savings' 8 11 9 7 I I 8 12 Memorandum items Gross domestic product 9442 9806 10284 11307 12217 14114 15641 17246 (US$millionat current prices) GNI per capita (US$,Atlas method) 290 300 310 340 340 370 400 Real annual growthrates (Yo,calculatedfrom 1992prices) Gross domestic product at marketprices 6.2 7.2 7.1 6.7 7.0 7.2 7.3 7.5 Gross Domestic Income -1.4 11.7 5.7 4.6 6.7 8.4 8.0 11.5 Real annual per capita growthrates (%, calculatedffom 1992 prices) Gross domesticproduct at market prices 3.1 5.0 5.0 4.2 4.5 4.8 4.8 Total consumption -5.7 7.5 4.9 1.9 3.6 6.3 4.2 Private consumption -7.7 6.8 1.7 -1.1 1.8 6.3 4.1 Balanceof Payments(US$ ) E X P O ~ ~ S (GNFS)~ 1431 1495 1716 1911 2443 2776 3103 3470 MerchandiseFOB 776 840 1010 1175 1456 1709 1922 2160 Imports(GNFS)~ 2384 2363 2580 3231 3986 4684 5096 5552 Merchandise FOB 1715 1685 1821 2366 2826 3456 3759 4048 Resourcebalance -954 -869 -864 -1320 -1543 -1908 -1993 -2082 Net current transfers -19 -19 1 15 -24 10 -65 -85 Current accountbalance -1058 -951 -896 -1373 -1607 -1960 -2 152 -2281 Net private foreigndirect investment 327 374 448 478 495 510 582 645 Long-termloans (net) Official 93 148 459 171 92 46 -5 -51 Private Other capital (net, incl errors & ommissions) Change in reservesd -171 -347 -43 1 -23 1 -89 -176 -470 -264 Memorandum items Resourcebalance(% of GDP) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Real annual growthrates( YR92 prices) Merchandiseexports(FOB) 17.1 8.1 20.3 16.3 24.0 17.3 12.5 12.4 Primary Manufactures 29.2 8.5 24.3 24.7 26.5 26.9 28.3 31.1 Merchandiseimports(CIF) 11.7 -1.7 8.1 29.9 19.5 22.3 6.1 7.1 111  Tanzania Key Economic Indicators - (Continued) Actual Estimate Projected Indicator 2001 2002 2003 2004 2005 2006 2007 2008 Public finance (as Yo of GDP at market prices)e Current revenues 12.0 12.1 12.1 12.7 13.5 13.6 13.9 14.0 Current expenditures 12.8 13.6 14.8 16.4 18.1 17.8 17.8 17.7 Current account surplus (+) or deficit (-) -0.8 -1.5 -2.7 -3.7 -4.6 -4.2 -3.9 -3.7 Capital expenditure 3.7 3.4 5.0 5.6 6.8 6.8 8.0 7.6 Foreign financing 4.6 5.3 7.7 9.2 10.3 10.8 11.4 11.0 Monetary indicators M2lGDP 19.4 21.5 22.7 23.4 28.7 27.6 23.1 22.8 Growth o fM2 (%) 19.8 26.9 19.4 18.6 36.0 7.3 -6.4 10.2 Private sector credit growth I -83.9 292.1 -61.6 101.9 63.5 41.9 85.9 -123.8 total credit growth (Yo) Price indices( YR92 -100) Merchandise export price index 114.7 120.2 122.4 133.4 148.2 157.3 164.0 167.7 Merchandise import price index 104.5 91.6 98.9 117.5 131.8 133.8 135.6 135.8 Merchandise terms o ftrade index 109.8 131.2 123.8 113.5 112.4 117.6 120.9 123.5 Real exchange rate (US$/LCU)' 145.8 132.8 111.8 121.8 121.8 121.8 121.8 121.8 Real interest rates Consumer price index (% change) 5.2 4.6 4.5 4.3 4.0 4.0 4.0 4.0 GDP deflator (% change) 7.2 6.4 5.6 8.1 3.7 4.0 4.0 4.0 a. GDP at factor cost b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use o f IMF resources. e. Consolidated central government, f, "LCU" denotes "local currencyunits." An increaseinUS$/LCU denotes appreciation 112  Annex 4. Key Exposure Indicators Tanzania Key Exposure Indicators - Actual Estimate Projected Indicator 2001 2002 2003 2004 2005 2006 2007 2008 Total debt outstanding and 6768 7339 7517 7509 7547 7515 7429 7304 disbursed (TDO) (US$m)a Net disbursements(US$m)a 121 173 493 143 38 -32 -83 -126 Total debt service (TDS) 152 111 92 271 294 311 314 314 (US$m)" Debt and debt service indicators (%) (Assumingfull delivery o fHIPC) NPV o fDebtExports o f Goods and Services 100.9 101.6 104.8 105.2 105.3 103.7 Debt/GDP 14.8 15.4 17.1 17.7 17.5 17.1 Debt ServiceExports o f Goods and Services 6.1 5.3 6.0 6.5 6.0 5.5 IBRDexposure indicators (%) IBRDDS/publicDS 2.8 3.0 3.6 1.1 0.0 0.0 0.0 0.0 Preferredcreditor DSipublic 51.2 51.9 67.6 62.5 63.6 64.5 65.4 66.1 DS (Yo)/b IBRDDSKGS 0.3 0.2 0.2 0.1 0.0 0.0 0.0 0.0 IBRDTDO (US$m) ic 8 6 3 0 0 0 0 0 IDA TDO (US$m)/c 2588 2869 3474 3608 3642 3661 3658 3636 IFC (US$m) Loans Equityand quasi-equity /b MIGA a. Includespublic and publicly guaranteeddebt, private nonguaranteed, use o f IMF credits andnet short- term capital. b. Preferredcreditors are defined as IBRD, IDA, the regionalmultilateral developmentbanks, the IMF,andthe Bank for International Settlements. c. Includespresentvalue of guarantees. 113  Annex 5. Tanzania Balanceof Payment Tanzania Balanceof Payments - (US$millionsat current prices) Total exports of GNFS a 13069 1367 I 1191 5 17160 19107 22595 2695 8 27353 32273 Merchandise(fob) 663.1 714.5 839.6 1010.1 1174.5 1456.4 I708 9 1921.8 2160 Nonfactor services 643.8 652.6 654.9 705.90 736.2 803.10 986.9 813.5 1067.3 Total Imports of GNFS 2063.9 2133.6 2213.9 2418.5 3020.0 3734.0 4375.4 4760.5 5190.1 Merchandise(fob) 1367.9 1438,9 1536.0 1659 6 2155 0 2573 8 3147.5 3422.7 3685.9 Nonfactor services 696.0 694.7 677.9 758 9 865.0 1160.2 1227.9 1337 8 I504 2 Resourcebalance . -757 -767 -719 -703 -1109 -1475 -1680 -2025 -1963 Net factor income -105.1 -100.3 -63.9 -32.5 -68.1 -41.0 -62.0 -94.3 -114.5 Factorreceipts 50.4 46.3 66.0 74 89 87 84 90 90 Factorpayments 155.5 146.6 129.9 106.0 I57 4 128.0 145.9 184.3 204 5 Interest (scheduled) 120.8 118.9 106.8 73 5 124.5 81.9 102 9 134 1 149 3 Other factor payments 34.7 21.1 21.6 18 21 33 29 30 35 Net private current transfers -38.0 -23.6 -18.9 1.o 10.8 -23.5 10.3 -65.0 -85.0 Currentreceipts, of which 34.9 43.5 48.2 60 69 39 73 45 45 Workers' remittances 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Currentpayments 72.9 67.1 67.1 58.80 56.40 62.40 63.00 110.0 130.0 -900.1 Currentaccount balance(before grants) -900.1 -890.4 -802.2 -734.0 -1166.6 -1539.0 -1731.3 -2184.5 -2162.3 Official capitalgrants 533.8 445.1 426.3 488 3 550 9 733.8 713.0 869.4 902.3 Currentaccount balance(after grants) -366.3 -445.3 -375.9 -245.7 -615.7 -805.2 -1018.3 -1315.1 -1260.0 Private investment (net) 463.4 395.3 374.0 448.0 478.0 495.0 510.0 582.0 645.0 Direct foreign investment 463.4 395.3 374.0 448.0 478.0 495 0 510.0 582 0 645 0 Net LTc borrowing -34.3 -66.3 -51.4 78.7 179.3 126.9 185.3 210.4 229.5 Disbursements/b 227.0 317.7 306.6 268.4 487.3 640.4 669.5 770.0 900.5 Repayments (scheduled) 261.3 384.0 358.0 189 7 308.0 513 5 484.2 559 6 671.0 Total principal repaid/b 261.3 384.0 358.0 189.7 308.0 513.5 484.2 559.6 671.0 Net adjustmentsto scheduledre 10.0 0.0 0.0 0 0 0 0 0.0 0 0 0.0 Adjustments to scheduleddebt service 91.1 212.7 251.1 13.2 48.3 0.0 0.0 0.0 0.0 Debt servicenot paid 10.0 70.7 98.2 0 0 0 0 0 0 Reductionin amearsiprepayments(-) 81.1 142.0 152.9 13 2 48.3 0 0 0.0 0 0 0.0 Other capitalflows -198,3 -239.2 -206.6 -155.9 -187.9 14.0 13.8 8.3 3.2 Net short-termcapital 12.8 12.8 13.1 13.3 13.3 I 4 0 13.8 8.3 3 2 Net capital flows n.e.i.d 0.0 0.0 0.0 0 0 0 0 0 0 Errors and omissions -211.1 -252.0 -219.7 0 0 0 0 0 0 Changeinnet internationalreserves -197.4 -233.2 -279.5 -458.0 -207.6 -243.7 -1 10.2 -254.9 -268.4 (-indicates increase in assets) Memorandumitems Total gross reserves, of which 974.4 983.0 1183.8 1670.4 1878.0 2121.8 223 1.9 2486 8 2755 2 Total gross reserves (inmonths' impoi 5.3 5.3 5.9 6 6 6 0 5 8 5 6 5 7 6 6 The data is in FY from 2000/01 a. Goods andnonfactorservices. b. 'Data-Wtorical data from Debt Reporting System (DRS); other dataprojectedby country operations division staff. c. "LT" denotes "long-term." d. "n.e.i."denotes "not elsewhereincluded." e. "G & S" denotes "goods and services." f. "LCU" denotes "local currencyunits." g. The index of the real exchange ratereflects US%ILCU,so an increaseis an appreciationat the real exchangerate. 114  s N r! r m (D r 4 : ' ( 1 x ln 4a v, 3 3 L 0 w  0 0 0 0 0 m'? 00 0 o CY m 3 2 0 x 0 0 z z  Annex 7. PartnershipFrameworkMemorandum TANZANIA PartnershipFrameworkMemorandum TABLE OF CONTENTS MainPrinciples Justification The PerformanceAssessmentFramework ReviewProcess Responsibilitiesof the Government of Tanzania Responsibilitiesofthe Donors Appendix Dates for reviewmeetingsand detailson the reviewprocess 117  1. Main principles The Government andthe donors considerthe PartnershipFramework" (PF) for budget su~port'~ as the common instrument of support to the Poverty Reduction Strategy (PRS) through the Government's budget. The PF is an integral part of the Government of Tanzania's public sector budgetingand priority setting process and the PRS. The budgetwill be usedas a tool to reach the PRS objectives, and priority sectors as defined in the PRS will be protectedin the budget. The agreed priority allocations as well as indicators of achievements will continue to be monitored through joint processes including the Public Expenditure Review (PER) and PRS process and reviews as detailed in this PF. These joint processes will involve the Government and the PF donors. This PF Memorandum describes the common framework for the development grant and loan agreements to fund poverty-orientedprogramme budget support to Tanzania. Together with the attached Technical Annexes, it replaces the Memorandum of Understanding for the Poverty Reduction Budget Support (PRJ3S) signed on 27* November 2001 and the Technical Note of October 2001. This Performance Framework Memorandum has beenreviewedand agreedby the Government and the PF donors during the joint Annual Review/pre-appraisalof general budget support carriedout inNovember2002. The PF Memorandum will be supplemented by bilateral agreements between each individual donor and the Government of Tanzania, and by a PRSC programme document and related legal documents of the World Bank. The bilateralagreementswill have the choiceto focus on all or a subset of the actions and targets in the list of policy actions and targets jointly agreed on in the PAF. It is understood by the parties that the contents in the individual funding agreements take legal precedence over this Partnership Framework Memorandum. However, it is the intention of the parties to establish funding agreements that are compatible with the provisions of this PartnershipFrameworkMemorandum. The intention is to manage existing and future budgetary support from donors and financing institutionsthroughthe PF facility. The objectives are to minimizetransactioncosts, to harmonize performancebenchmarks and dialoguebetweenthe parties andto link fundingcommitmentsby the donors to achievement of targets set. The Partnership Framework and the funding Facility is therefore open for contributionfrom and participationby all donors and financial institutionsthat are providingor consideringprovidingsuchbudgetarysupport. The PF aims at increasingthe predictability of donor flows. This will benefit overall economic developments and the implementationand efficiency of programmes in priority sectors. The PF facility will provide general budget support co-ordinated among the participating donors and operated according to established government procedures and reportingrequirements agreedwith the partners. l5The PartnershipFrameworkis the namegivento the harmonizedPRBS andPRSCbudgetsupport framework. '`Theterm "Budget Support" as usedto denotebothbudgetandother similar support inthe context ofthe PF Memorandum.  2. Justification Tanzania has implemented an economic reform programme that has shown a number o f positive results. Significant progress has been made in macroeconomic stabilisation and structural reform of the economy. Inflation has stabilised below 5 percent and signs are that many o f the elements required for a private sector led growth are inplace. In the first years o f the reform programme, growth rates in the economy were slow to pick up, however, and this led to lack o f progress in poverty reduction and slow development o f the economic base needed to support the public sector. Growth rates inthe economy have improved in recent years, but poverty i s still prevalent. It has been estimated that about one third o f the population cannot afford basic needs for livelihood. As many as 18 percent are living in abject poverty, that is, in a situation where the income is insufficient to buy food to cover minimum nutritional needs. Tanzania needs several years o f high per capita growth rates to reduce poverty levels significantly. Surveys of poverty and living conditions in Tanzania show that there are important challenges in the priority sectors that are detailed in the PRS. These priority sectors (and priority items) may be subject to change during the ongoing process o f reviewing and updating the PRS, but they currently include: health (primary); education (basic); water; roads (rural); agriculture (extension services); justice and HIVI AIDS. There is furthermore a serious concern about the possibility o f large segments o f the population being left out o f the economic growth and income generation process. In recognition o f the enormous challenge in combating poverty the Government o f the United Republic o f Tanzania has refocused priorities towards social sectors and primary services within them. Long-term targets for poverty reduction were articulated in the Vision 2025 and elaborated further in National Poverty Eradication Strategy adopted by the Government in November 1997. The Tanzania Assistance Strategy (TAS), which expresses the modalities and coordination requirements for donor support and the PRS focus on how to combat poverty in an effective manner, both in terms of more effective use of public resources and in improving the possibilities for economic growth, employment creation and income generation. Domestic revenue to the public sector inTanzania was 12,2 percent o f GDP inthe 2001/02 budget year. The fiscal deficit before grants was 6,6 percent. In addition to the reforms carried out in tax policy and administration, the Government recognizes that more measures are needed to enhance domestic resource mobilization. However, a realistic assessment i s that the tax base, which is the monetized, non-governmental part o f the economy, needs to grow faster than overall GDP for a number of years to yield a significantly higher tax/GDP ratio. While efforts to increase revenue mobilisation are being implemented, the poverty reduction programme i s in need o f external grants or other concessional financing. Direct budget support provides a sustainable route to manage the transition from aid dependency. It strengthens national ownership o f the development process as well as Government institutions, and it facilitates the implementation o f democratically selected sector strategies for growth and poverty reduction. 3. The Performance Assessment Framework The PF is linked to a common set o f policy and poverty reduction goals. These goals are agreed between the Government o f Tanzania and the participating donors and shall be based on the goals of the PRS. The goals, including the policies to reach them and the indicators to monitor them, are 119  described in a Performance Assessment Framework (PAF)17. It is the intention of the parties to harmonizethe PRS actionplanandthe PAF completely within threeyears. The PAF is a results-orientedmatrix of agreed actions and indicators including timeframe for reachingtargets. The PAF sets out agreed key short and mediumterm actions to reduce poverty such as macroeconomic stability andperformance improvements inthe public sector together with specific annual measures to be taken by the Government to achieve the PRS targets. The indicators for the macroeconomic targets of the PAF will be those elaborated in the IMF programme framework discussions. Dialogueon these issues with a wider groups of stakeholders will be handled in the appropriate common forum e.g. the PER macroeconomic group. The PF partieswill avoid introducingnew targets, indicatorsor measuresthat are outside the PAF andthe IMFprogrammemacroeconomicframework. The parties will use the PAF and PRS Review process as a tool for dialogue on PRS implementation and progress on PRS implementationand PAF actions will help to determine appropriate levelsof future fundingfor the GeneralBudget. Througha continuous process, it will allow the Government and the Donors to assess progress towards agreed mediumterm objectives and the implementationstatus of specific measures. The PAF will be updated annually as part of the AnnualReviewprocess. 4. Review Process The review process for PF will be common for all participatingdonors and based on the review process for the PRS. The Government of Tanzania and the donors participatingwill maintaina close dialogue regarding the PF. The parties shall meet on an agreed schedule to review implementation and the attainment of objectives (see Appendix). The PAF matrix and PRS Progress Report will form the basis for discussions on progress between PF donors and the Government. The timing of review meetings through the year will be decided in such a way that the budget process is facilitatedand that the PRSC requirements and the bilateraldonors' need for inputsto their decision-makingprocesses are accommodated. The table in the Appendix lists the meetings and actions needed. Assessment of performance will be based on progress towards targets and measures identified throughthe PRS and expressed in the PAF matrix. Joint reviewsof the PF Facility will be carried out by Government and all participatingcontributors. These reviewswill use informationgathered throughongoing processesto ensure that they do not set up a parallelreview process. The review processes should endeavour to minimize additional technical work. However, should the quality of regular informationprove not to be satisfactory, the PF donors and the Governmentwill agree on a timeframe and on the possible support donors could offer to build the capacity needed to providethis information. The reviewprocesseswill draw together summaryreports reviewingprogress against relevantPAF and PRS targets. Progress against the list of indicatorsof socialwell-being, derivedfrom the PRS and attached to the PAF matrix, should be covered in the context of the PRS and discussed as part of the Annual Review. The aim will be to fully harmonise the Annual Review Report with the l7The PAFwill form a partofthe loanagreementsunderthe PRSCprogrammewiththe World Bankandlist the actions andprior actions underthat programme. 120  PRS progress report over time. This will ultimatelydependon progress with harmonisationof the PAF andPRSAction Plan. At least two weeks prior to the reviews, the Government of Tanzania shall providethe following informationto the donors: For each of the reviewmeetings, statements showingthe budget and the budget execution figures includingtax revenues and presentationof priority expenditures as defined in the PRS progress reports; For the Annual Review, PRS progress report and a progress report on implementationof PAF actions; For the Mid-term and Annual Review, a statement of inflows and outflows from the PF accounts includinga statement of internalaudit; and As soonas available, the AnnualAudit Reportpreparedbythe NationalAudit Office. 5. Responsibilitiesof the Government of Tanzania The donor support towards the PF is based upon the understanding that the Government of Tanzaniawill: 0 Implement the key actions identified within the PAF and through the on-going PRS process; 0 Implementthe overall economic programmeaimedat stabilisationand increasedeconomic growth as has been described in the context of the IMF programme macroeconomic framework. 0 Ensure that total expenditures and sector allocations effectively reflect the poverty reductioncommitment and that extra budgetary expenditure is brought into the budget so that budgetcomprehensiveness is ensured; and 0 Monitor and report on the effective implementation of the budget and on progress in achieving PRSandPAFtargets. 6. Responsibilitiesof the donors The development partners are committed to working in Partnership with the Government of Tanzania and facilitating implementationof the PRS boththrough financing governed by this PF and complementary support provided through development partners' wider development cooperation programmes. To the best extent possible within existing administrativeand statutory provisions including individual bilateral funding agreements with Tanzania, which ultimately governdecisionson disbursements andcommitments,the donors committhemselvesto: 0 provide informationon future disbursements in advance of the budget year in a common financialframeworkfor PF; 121  0 disburse all of the commitments made within the Tanzanian budget year and attempt, where possible, to front loadtheir disbursementswithin the first quarter; 0 as a general rule, change funding only for the next budget year by reference to the implementationof measures inthe PAF, the PRS and IMF assessmentsof macroeconomic performance; and 0 endeavour to co-ordinate their disbursements in line with the Government's budgetary requirementsas presentedby the Government. The donors will endeavour to follow the principlesenshrined in the PF and assess performance on the basis of the PAF and PRS progress report. Reference to these key processes should be includedin individualbilateralfundingagreementsto the maximumextent. These agreementswill mainly provide further details on the obligationsof bothparties and the procedures for disbursing funds together with any standard conditionsfor developmentcooperationthat the individualdonor mayhave.The parties agreeto keep such general conditionsto a minimum. 7. Appendix Dates for review meetings will be determined by taking into account the preparation of the Tanzanianbudget and by the presentationof the annualPRSreport.The budgetyear is from 1stof July to 30thof June. The Annual Review process of updatingthe PAF targets will involve focused technical working groups for each area of the PAF. Eachof these groupswill comprise Governmentrepresentatives, PRBS donor representatives and World Bank representatives. They will jointly review progress and priorities for the future. A finaljoint meeting involvingall working groups will then be held to agree on key findings of the reviews and the way forward. The Mid-year Review will involve similar processes, but will be a light reviewof progress to date. The Ministry of Finance, inclose coordinationwith the Vice President's Office will maintainoversight of the Review process and coordinate inputs where necessary from other Government departments. Within the Ministry of Finance, the Technical Committee will act as the main point of contact; they will co-ordinate preparation of the necessary Government assessments of progress and provide the informationas outlined in Paragraph 17; and they will also lead the process of updating the Performance Assessment Framework. 122  Meetingheview SOTCycle PRBS activity ?RSCactivity linked dates PRS Progress Mainprogrammereview based on PRSC pre-appraisal Report PRSreport; nission. Settingof Assess progress on implementation of xior actions for the PAF actionsfor previousyear and iext PRSC (to be fmalise PAF actions for coming year :ompleted by March) (November to November); and October/ Review progress on macroeconomic indicativehentative November developmentsdrawing on information prior actions for future from IMF programmereviews. PRSC's. Review 1st quarterbudget implementation; Indicative contributions from participating donors for fiscal year startingnext July. Budget Mid-year programmereview; PRSC negotiations ~ xeparation Assessment of implementation ofprior andfinalisation of actions for PRSC, andprogresson agreement remaining annualactions assessed and March updatedaccordingly; Review of 1st and 2nd quarter budget implementation; Communication of firm fmancing commitments from donors. 4nnual Budget Review implementation of approved md Accounts for budget andbudget execution for September xevious fiscal previous fiscal year and assess vear approvedbudget for current fiscal year. 123   THE UNITED REPUBLICOF TANZANIA TECHNICAL NOTE ON POVERTY REDUCTION BUDGETSUPPORT FORBILATERAL DONORSAND THE EUROPEANCOMMISSION NOVEMBER2002 124  TechnicalArrangements The technical arrangements for the bilateral donors and the European Commission are described below: All donor contributions to the PRBS foreign exchange account and interest accrued, shall be used to provide budget support to the Government of Tanzania; The facility shall be managedbythe Ministryof Finance; The interest-bearing PRBS forex account shall be monitored by the Bank of Tanzania on the authority ofthe MinistryofFinance, Accountant General's Department; The donors shall provide updates at the mid-termand annual review meetings regarding disbursements for the PRBS facility (amounts and timing); The Permanent Secretary, Ministryof Finance shall issue payment instructions to the BOT authorising the transfer from the PRBS account to the consolidated account; The Ministry of Finance, Policy Analysis Department will co-ordinate the operations, advising donors when the balance inthe PRBS account i s less than anticipated; Deposits in the PRBS forex account, and transfers to the consolidated fund, will be subject to an annual external audit financed by Government of Tanzania. (See Audit section below for further details); The Ministryo f Finance and Bank of Tanzania shall keep detailed records inrespect ofthe PRBS foreign exchange account as follows: 9 Disbursementsmadebydonors; 9 Balances inthe account atthe endofevery quarter; 9 Withdrawal ofthe PRBSaccount for payment intothe ConsolidatedAccount. Audit Arrangements The following audit arrangements shall be established: The National Audit Office (NAO) carries out an independent annual external audit of the Government Accounts. The annual audit report by the N A O shall be presented to PRBS donors as soon as it becomes available; Given the current considerable time lag between the end of the fiscal year and the availability o f the annual N A O audit report for that fiscal year, a more timely audit of selectedflows inthe Government Accounts would be undertaken annually. This audit will be carried out by the NAO, which may contract assistance from an internationally recognised audit company. This audit would be financed by the PRBS donors. The terms of reference for this selected external audit and a short list of audit companies would be jointly prepared and agreed by the Government, the National Audit Office and the PRBS donors. The selection o f auditors and approval o f the audit contract would be endorsed by the Government andthe PRBS donors; Internal audits o f the PRBS account will be undertaken. Contributing donors may undertake an independent external audit of the PRBS account at any time at their own cost; The internal and external audit reports will be discussed as part of the reviews (ref.: Appendix o f the Partnership Framework Memorandum- schedule of reviews). 125  THE UNITED REPUBLICOF TANZANIA TECHNICAL NOTE ON POVERTY REDUCTIONSUPPORT CREDIT FOR THE WORLD BANK DRAFT UPDATE MARCH2005 126  PRSC-3 Credit Administration 1. The technical arrangements and the steps to follow inrespect to the IDA Credit administration are described below: 2. Borrower and credit amount. The borrower is the United Republic o f Tanzania. A single- tranche credit o f SDR 103.8 million (US$l50 million equivalent) would be made available upon credit effectiveness, anticipated for September 2005. The closing date o f the operation would be June 30, 2006. It is envisaged that there will be a further single-tranche, annual PRSC to support the implementationo f the PRS in FY07. 3, Disbursement, reporting,and auditing arrangements. The proposed credit will follow the Bank's disbursement procedures for development policy credits. Credit proceeds will be disbursed against satisfactory implementation o f the development policy program and not tied to any specific purchases or be subject to procurement requirements. Once the credit i s approved by the Board and becomes effective, the proceeds o f the credit will be deposited at the request o f the Borrower by IDA in an account designated by the Borrower and acceptable to the Bank at the Bank o f Tanzania. The Borrower shall ensure that upon the deposit o f the Credit into said account, an equivalent amount i s credited in the Borrower's budget management system, in a manner acceptable to the Bank. The Borrower will report to the Bank on the amounts deposited in the foreign currency account and credited in local currency to the budget management system. If the proceeds o f the credit are used for ineligible purposes as defined in the Development Credit Agreement, IDA will require the Borrower to promptly upon notice from IDA, refund an amount equal to the amount o f said payment to IDA. Amounts refunded to the Bank upon such request shall be cancelled. The administration o f this credit will be the responsibility o f the Ministry o f Finance. 4. The following arrangements support the requirements related to fiduciary assurance: Foreign reserve account. The GOTwill acknowledge receipt to IDA o f the money into the foreign reserve account and the crediting o f this amount in local currency to the Tanzania Government Consolidated Fund Account. While no external audit will be required, it is expected that the confirmation o f receipt will be countersigned by the Accountant General and the Controller and Auditor General. Public (government) accounts. The Controller and Auditor General is required by law to produce hidher annual report to Parliament on the public accounts within nine months o f the financial year-end. IDA will have access to those accounts. Bank ofTanzania. The annual entity financial statements o f the Bank o f Tanzania, audited in accordance with international auditing standards as promulgated by the International Federation o f Accountants, are publicly available. 5. Governance aspects. Aside from the measures supported by the PRSC that aim at the strengthening o f governance, various processes are in place that aim at improved accountability and transparency for the use o f public resources. The Prevention o f Corruption Bureau and the National Audit Office have been significantly strengthened during recent years, and the Bank is preparing a project that would support further strengthening o f accountability mechanisms. The participatory PER-MTEF process provides for an open review o f budgetary performance. The CFAA on Tanzania concluded that the central and local government financial management systems represent high fiduciary risk. The major recommendations contained in that report have been reflected in the reform program supported by the PRSC. To ensure effective implementation 127  o f the reform, the government has developed the PFMRP, the implementation o f which will be monitored under the PER process. 6. Environmentalissues. PRSC-3 falls under OP 8.60 and i s no longer subject to environmental safeguards. As the PRSC focuses primarily on institutional reforms, there are no direct significant effects on Tanzania's environment, forests, and other natural resources. In addition, the PRSC supports reforms o f Tanzania's legal and institutional framework for environmental management, environmental impact assessments, and strategic environmental assessments (SEAS). An SEA has been prepared. Reviews o f the environmental impact o fPRSC-1 and PRSC-2 included (i) a review o f supported sectors within the SECAC, (ii) consideration o f potential policy reforms under the SECAC; and (iii) assessment o f the ability o f the government to address any impacts within an these sectors using existing mechanisms, or using mechanisms developed internally within this particular SECAC. The assessments concluded that: (i) policy reforms supported under the the PRSC-1 and 2 would have no deleterious environmental impact, or their impacts could be addressed within the existing SEA processes that have been developed under PRSC-1 and PRSC-2 and will continue to be developed under PRSC3; (ii) sectoral activities to be supported generally under the roads and agriculture initiatives may involve some Category "B" activities, but guidelines developed under PRSC-1 and 2 for addressing these are being adequately implemented by Government, and will continue to be monitored and developed to improve their effectiveness in PRSC-3. Some elaborationon these points i s provided below. 7. In an effort to mainstream the environmental sustainability dimension into the PRSC process the Bank has undertaken various analyses with the objective to identify linkages between key macro and structural reforms policies and the environment. This analysis, undertaken under PRSC- 1 and 2, identifies measures at both national and local government levels to reduce poverty and enhance environmental sustainability o f policy reforms. The analysis concluded that environment and poverty are linked inthree major ways: (a) poverty reduction programs should not damage the resource base and the environment o f which poor depend for their livelihoods (b) improving environmental conditions can help to reduce poverty and promote sustainable pro-poor growth; and (c) mitigating measures may be necessary as part o f policy dialogue. 8. Working with the government and other development partners, the analysis identified a number strategic entry points for mainstreaming key issues o f the poverty-environment nexus in Tanzania into PRSC process and ongoing policy reforms in general. This included inter alia. further support for EA activities, a comprehensive environmental review o f all taxes and levies associated with the agricultural sector, and increased attention to removing land tenure uncertainties. Specifically, the Vice President's Office and the National Environmental Management Council (NEMC) have been supporting the development and implementation o f various sector-specific guidelines for EA (initially in roads and agriculture), and have more recently pursued procedures for strategic and sectoral environmental assessment to permit mitigation o f any adverse environmental impacts while taking advantage o f potential synergies between poverty reduction and environmental protection efforts. In this regard the PRSC2 and PRSC3 reform agenda has specific actions to be implemented by the Government o f Tanzania as part o f the environmental component. 128   Annex 8. Fund Relations Note Press Release No. OS1177 IiitematioiialMoiietary Fluid FORIMMEDIATERELEASE Washington, D.C. 20431 USA July 29, 2005 ISIF Executive Board CompletesFourthReview Under Tanzania's PRGFArrangement and Approves US$4.1 MillionDisbursement The Executive Boardof the Intemational Monetary Fund(IhE)today completed tlie fourth review o f Tanzania's econonic perforrnanceunder a three-year Poverty Reduction and Growth Facility (PRGF) mangeiiient (see Press Release No. OY127.) The completion of the review enables a further release of an amoiint equivalent to SDR 2.8 million (about USs4.1 million) under tlie aimigeiiieiit, andwill bringthe total disbursements under the programto the equivalent o f SDR 14.0 million(about US$20.2million.) Followhg tlie Executive Board's discussion on Tanzania's economic p e r f o r m " , Mr.Agustin Carstens. Deputy Managing Director andActing Chair., stated: "The Tmaiiaii authorities are to be coinmended for sustaining strong ecoiiomk performance through market-oriented policies withinan appropriate macroeconomic framework. The authorities will need to buildon tlie recent success by inairitaining souiid policies and steadily pmsuingkey structural reforms and capacity buildingto remove key impediments to growthand make meaningful progress on poverty reduction. Sustainedreformefforts to stimiilate private- sector led growth will be needed, particularly insuch areas as infrastnicture, access to the financial sector, improving the business enviroruiient, trade facilitation, and governance. <`Theauthorities' decision to scale back tlie planned rapidexpansion of govenuiient speuding under the 2005106 budget is commendable inview of the need to limit net domestic budget firianciiig and reduce the risk of crowding out prodwtive private sector activity. Itwill be iniportcutto protect priority arid poverty-related spending while avoiding divergences between the proprunandbudget expenditure levels, as they undeimine the budset process and transparency. The autlioiities are committed to strengtheningpublic expenditure umiageuient aidaddressing weaknesses intlie budget prepmation and executionprocess. "Mobilizing domestic resources andraising tlie reveiiue-to-GDP ratio throtighbetter tax administration will provide resources for key expenditures for development andpoverty alleviation, andreduce the dependence on fore@ aid. Inthis regard, it will be essential to fiu-ther eidiaiice the operation of the VAT and income tax depai-tnietits, fiwther strengthen tlie Large Taxpayers Department, arid continue efforts to streamline customs aduinistration. 129  "The Bark o f Tanzania's iiioiietaiyprograni is consistent withthe growth md iiiflation objectives. The authoiities deseive credit for their management o f liquiditypressures that arise from highaid inflows and continue to present challenges to monetary policy. The Bank of Tanzania should continue to exercise vigilance andto iise a full range o f tools available for liquidity managementand sterilizationoperations. "The authorities' efforts to develop the financial sector willbenefit from the new financial sector reformplan. It is important that the goveinnient maintain its cautious andpiiident approach to several new initiatives to facilitate mediimi-teim lending md investment in the context of improving the availability of medium-temicredit to key sectors o fthe economy. Specifically, inaintaiiiing strong goveniance and strict limits on govemient exposure iuiderthe Developnient Finance Guarantee Facility and the plaunedDevelopment Finance Institutionwill be critical. "Efforts should continue to reach debt reliefagreenients withnon-Paris Club creditors urider the EnhaiicedHeavily IndebtedPoor Countries (HIPC) Initiative," Mr.Carstais said. The PRGF i s the IMF's coacessional facility for lowincome countries. PRGF-supported programs are based on cowhy-owned poveity reduction strategies adopted ina pai-ticipatoiy process iiivolving civil society ariddevelopment partnersandarticulated ina Poveity Reduction Strategy Paper (PRSP). This is intendedto ensure tliat PRGF-supportedprogranis are consistent with a coniprehensive framework for niacroecotiotnic, stiiictwal and social policies to foster groivth andreduce poverty. PRGF loruis cariy ai aiuiual interest rate o f 0.5 percent and are repayable over 10years with a 5 %-year grace period011priiicipal payments. 130  MAP SECTION