Memorandum of Economic and Financial Policies of
the Government of Tanzania for 2000–02

1.  This memorandum reviews progress under the Government's program for 1996-99, which was supported by a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF), and recent economic developments and policies. It also outlines the Govern-ment's medium-term program for 2000-02, to be supported by a new three-year arrangement under the Poverty Reduction and Growth Facility (PRGF), focusing particularly on the annual program for 2000. The program is formulated against the background of the Govern-ment's request for debt relief under the Heavily Indebted Poor Countries (HIPC) Initiative.

2.  The Government's program for the period 1996-99 largely achieved macroeconomic stability and put in place many of the structural reforms needed to promote higher economic growth. Such policies and reforms are essential to reduce poverty, and will continue. There will also be a direct focus on reducing poverty. The Government is preparing a Poverty Reduction Strategy Paper (PRSP), which will focus on specifying poverty reduction objectives and would identify measures to improve the living standards of the poor. Essential to that effort would be the policies and reforms necessary to safeguard macroeconomic stability and promote growth, basic objectives that also form the core of the National Development Vision 2025. In order to assure broad-based support, and building on a process that resulted in adoption, at the end of 1997, of Tanzania's National Poverty Eradication Strategy (NPES), the Government intends to prepare the PRSP in consultation with stakeholders. The PRSP will be developed in conjunction with the Tanzania Assistance Strategy, which is a government initiative that is being developed in collaboration with the donor community and civil society. Some preliminary considerations relating to the PRSP process are set out in a separate memorandum on the poverty reduction framework, which also includes a preliminary matrix of the macroeconomic, structural, and poverty reduction policies to be pursued. These initiatives will go hand in hand with the process already under way to develop a more basic framework for the implementation of the goals of Vision 2025 in a phased manner.

3.  Tanzania's adjustment efforts regained momentum after the election of the present Government at the end of 1995. Under its economic program, macroeconomic stabilization has largely been achieved. Inflation has declined and since the beginning of 1999 has been consistently in the single digits for the first time in 20 years. Gross international reserves have more than doubled to reach the medium-term target of four months of imports of goods and nonfactor services. This progress occurred in the face of adverse weather, which severely affected exports and kept growth below program targets.

4.  The centerpiece of the stabilization effort was control of fiscal expenditures through a cash management system that throughout most of the period of the ESAF arrangement kept expenditures well within the envelope of revenues and external aid, permitting the government to repay substantial amounts of domestic financing. The severe budgetary constraint was initially reflected in sharp cuts in all expenditure categories, but outlays for the priority sectors--social sectors and infrastructure--have increasingly been protected, and a substantial increase has been budgeted for 1999/2000 (July-June). With the strong budgetary performance, rapid growth of credit to the private sector from new banks was possible within the context of a strict monetary policy. On the external side, the exchange rate has been market determined, customs duties have been reduced, and good relations with bilateral donors and multilateral lenders have resulted in substantial increases in program aid. The transformation of the Tanzanian economy away from state control and ownership, which had begun in 1986, has been carried substantially further.

5.  As reviewed in the Government's letter to the Managing Director of the IMF of July 13, 1999, economic developments through the early part of 1999 were broadly in line with program objectives. Since then, inflation has continued to fall, reaching 7.0 percent at the end of 1999. Real growth in the economy is estimated at 4.6 percent in 1999, somewhat higher than in 1998, but still below the medium-term target of at least 6 percent per annum, in part reflecting unfavorable weather. The lagged effect of the adverse weather of 1998 resulted in an increased current account deficit in 1999, but with larger aid disbursements and capital inflows gross international reserves nonetheless increased from 3.1 months of imports of goods and nonfactor services at the end of 1998 to 4.1 months at the end of 1999.

6.  A shortfall in net foreign financing at the end of 1998/99 contributed to the Government's inability to meet its programmed target for net repayment of domestic financing, which was exacerbated by a shortfall in revenues. Excess domestic financing of the budget also reflected problems in the functioning of the cash management system, such as the need to take full account of tax refunds, ministerial retention funds, and the earmarking of road toll revenues for road work. The result was that expenditure restraint did not offset the shortfalls in revenues and aid, and net use of domestic financing was T Sh 29 billion above the amount programmed in the fourth quarter of the fiscal year. The fiscal problems deepened at the outset of 1999/2000, as discussed below.

7.  Monetary policy toward the end of 1998/99 was initially geared to offsetting excess liquidity resulting from the foreign-financed payment of budgetary arrears. Interest rates nonetheless continued to decline. By mid-June 1999, however, the large trade deficit and speculation was resulting in pressure on the Tanzania shilling, which depreciated from T Sh 708 per U.S. dollar at end-May to T Sh 737 at end-June. The exchange rate stabilized around T Sh 800 per U.S. dollar at the end of July, following an increase in interest rates on treasury bills due to the unexpectedly high financing needs of the government; the exchange rate and interest rates changed little in the rest of 1999.

8.  Delays in structural reforms in 1998/99, mainly due to technical factors, have been made up to a significant degree. A reputable international bank took over management of the National Bank of Commerce (NBC) (1997) in August and in December signed an agreement to purchase the bank. The National Microfinance Bank (NMB) was also put under private management in August, and in February 2000 a policy framework for microfinance regulation was submitted for government approval. The World Bank began assisting the Government of Zanzibar in developing options for the restructuring of the People's Bank of Zanzibar (PBZ). The investment memorandum for Tanzania Telecommunications Company Ltd. (TTCL) was further delayed, pending resolution of issues related to cellular telephone licensing, but was eventually issued in November 1999. Bidders will be selected for final negotiations for the Dar es Salaam Water and Sewerage Authority (DAWASA) in March 2000 and for TTCL in June 2000. In September, the Government decided to discontinue subsidies to the Tanzanian-Italian Petroleum Refinery (TIPER) and the decision was implemented on schedule at the end of 1999. Pending the development of a compre-hensive regulatory framework for the petroleum sector, interim regulations were promulgated in December.

9.  Despite the economic progress of the last four years, about 50 percent of Tanzania's population remains below the international poverty line of US$1 per day, and, following the protracted economic decline of the 1970s and the 1980s, and weaknesses in expenditure management in the early 1990s, most social indicators remain below the levels attained two decades ago. The Government's long-term goals regarding poverty reduction, which were established in line with internationally agreed targets for the year 2015, were set out in the NPES. Although the rate of economic growth has increased in recent years, it remains below the level required to attain these goals. The Government's program for 2000-02 aims to address these issues.

10.   The most important condition for sustained poverty reduction remains economic growth, which requires a stable macroeconomic environment. To this end, government policies, which are summarized in the policy matrix, aim at consolidating the gains in stabilization in recent years. The medium-term macroeconomic objectives are to (i) increase annual growth to at least 6 percent by the year 2002; (ii) reduce inflation below 5 percent to rates comparable to those in Tanzania's trading partners; and (iii) maintain international reserves at four months of imports of goods and nonfactor services. Structural reforms will continue with the aim of further improving the environment for private sector-led growth, especially in the agricultural sector. During the next three years, the Government intends to make decisive progress toward completing the privatization process. The first phase of a new long-term Public Service Reform Program has just begun, emphasizing quality in the delivery of government services and transparency and good governance in public affairs, in part through further implementation of the public service pay reform, depending on the availability of fiscal resources and progress in rationalizing government employment. Financial sector reforms, including a cautious gradual liberalization of capital controls, will aim to deepen and widen financial and capital markets and to continue the development of market-oriented techniques for implementing monetary policy. There will be further progress on reducing import tariffs and other impediments to international trade, taking into account developments in regional integration in the context of the Southern Africa Development Community (SADC) and the newly established East African Community (EAC).

11.  The positive effects of these macroeconomic policies and structural reforms on growth and poverty will be reinforced by measures aimed directly at the poor. Detailed objectives and policies for poverty reduction, including monitorable medium-term targets, will be developed in the framework of the PRSP. However, the Government's medium-term expenditure framework (MTEF), developed in the public expenditure review process, has already identified priority sectors--health, education, water, roads, agriculture, lands, and the judiciary--and their resource needs. The government intends to continue increasing budgetary expenditure in these sectors. This effort will be facilitated by debt relief under the HIPC Initiative; it is also critically important that multilateral and bilateral assistance be continued to ensure additionality of these resources.

12.  The macroeconomic targets for 2000 are (i) to increase growth to 5.2 percent; (ii) to reduce the 12-month end-period inflation rate to 5 percent by end-2000; and (iii) to maintain gross official reserves at the equivalent of at least four months of imports of goods and nonfac-tor services. The harmonization of tax incentives for investment (except in mining and infrastructure) will be completed in the 2000/01 budget, as will most of the remaining elements of the ongoing tax reform, and expenditure control will be enhanced by new legislation and the full implementation of the Government's integrated financial management system (IFMS). In the financial sector, regulations governing microfinance banking will be developed and implemented, and the scope for capital account liberalization will be studied. Privatization will be accelerated, and regulatory frameworks for the utilities and large monopolies will be put in place. Specific measures to alleviate poverty will be included in the in-creases in the share of government expenditures going to the priority sectors in the 2000/01 budget.

13.  The far-reaching tax reforms in the 1999/2000 budget, together with those associated with the June 1999 liberalization of petroleum prices, were expected to be revenue neutral. However, the outturn for the first quarter indicated a considerable shortfall. One element was the fact that the import tariff reform, as finally adopted, reduced revenues by substantially more than had been anticipated, as a number of industrial inputs were moved to lower rates than had been intended, including through the partial remission of duties on 25 commodities when imported for use as raw materials or intermediate inputs rather than final consumption. Moreover, revenues from domestic value-added tax (VAT) and, despite somewhat higher rates, excise duties were lower than during the same period last year. To offset the recent sharp increase in international petroleum prices, the former stabilization fund levy was excluded from the new petroleum tax structure, and, despite the measures taken to enforce compliance, tax evasion on petroleum imports remained a serious problem.

14.  On the expenditure side, in June 1999 a task force including the Bank of Tanzania (BoT) and the Tanzania Revenue Authority (TRA), and chaired by the Ministry of Finance, identified and corrected the technical problems in the cash management system, but also adopted a more judgmental and, in the event, unduly optimistic approach to projecting the availability of budgetary resources. Moreover, such projections did not allow for unbudgeted transactions that were taking place, such as bridging finance of T Sh 10 billion to pay for a shipment of crude oil imported by the Tanzania Petroleum Development Corporation (TPDC) and T Sh 14 billion carried over from the 1998/99 budget. Net foreign financing was broadly in line with projections, but net use of domestic financing amounted to almost T Sh 35 billion, whereas the program had envisaged a small net repayment.

15.  A thorough review of the prospects for 1999/2000 was undertaken beginning in October. The wage bill was expected to surpass the budget's T Sh 278 billion by T Sh 10 billion, even with a freeze on promotions and new recruitment. With the sharp increase in domestic debt and rising interest rates, domestic interest payments were projected to account for a further increase in expenditures of T Sh 20 billion, which could be considerably higher in the absence of corrective action. The revenue shortfall was projected to amount to T Sh 46 billion. All in all, even with full use of the program's contingency margin, and assuming that there would be no further extrabudgetary expenditures, the domestic resource balance for the year as a whole risked being more than T Sh 90 billion worse than budgeted. There appeared to be little scope for additional net foreign financing, as downward revisions in prospective external debt-service requirements (in part reflecting favorable cash-flow implications of recently concluded bilateral rescheduling agreements) were offset by the delay in program aid because of the slow pace of meeting conditionality.

16.  A comprehensive review of additional revenue potential was therefore carried out. As a result of that review, it was decided to eliminate the bona fide gifts exemption from customs duties for religious and charitable organizations, which already benefited from more specific provisions designed to enhance their ability to deliver social services. It was also decided to adjust the petroleum windfall tax to effectively reinstate the amount that would have been collected if the stabilization fund levy had been maintained, and to include future receipts from the energy fund levy in general revenues, as the buildup of the Songo Songo escrow account, to which such resources had previously been directed, had been completed. These measures were expected to yield at least T Sh 13.5 billion in the remainder of the fiscal year. Moreover, TRA was able to identify a range of administrative measures it could take to enhance tax collections, particularly through vigorous identification and collection of tax arrears, but also through steps to enforce future tax collections. Many of these steps focused on the petroleum sector, and included requiring all petroleum product imports to pass through limited entry points and be discharged into bonded warehouses, as well as stricter monitoring of transit trade. Such administrative measures had a potential yield of T Sh 45 billion during the fiscal year, which, if realized, would restore revenues to their programmed level. However, for planning purposes it was considered prudent to take account only of arrears already identified as collectible, as well as early experience under the enhanced effort; by early December it was decided that on this basis administrative measures should not be firmly counted on to exceed T Sh 12.4 billion.

17.  On the expenditure side, it was decided in December that the priority sectors would be spared from cuts; it was hoped that interim HIPC Initiative relief would become available toward the end of the fiscal year to permit that objective to be sustained. Priority develop-ment expenditures, including those required to permit projects that were largely foreign financed to proceed, would also be maintained. A careful review of the rest of the discretion-ary budget by vote and line item suggested that cuts of T Sh 36 billion were feasible. It was recognized that such cuts would necessarily compromise service delivery, but by focusing particularly on items such as travel it was hoped that core requirements could still be met. The ministries affected would be advised that they could not count on receiving the identified amounts during the fiscal year, but that funding under the cash management system (which would be based on more cautious monthly projections of resource availability than had been the case earlier in the year) would to the extent possible try to ensure that the rest of the resources approved in the budget would be provided. The need for cuts would be reviewed monthly, and to the extent that revenue collections exceeded the minimum projection, some of the amounts cut would be restored. Given the drastic cuts that were envisaged, it was considered essential that further extrabudgetary expenditures be avoided.

18.  The overall result of the review of the fiscal situation was that the planned repayment of domestic financing would need to be reduced by T Sh 17 billion from the original 1999/2000 program target of T Sh 25 billion, assuming that interim HIPC Initiative relief of T Sh 10 billion would become available in the last quarter of the fiscal year to support the maintenance of priority expenditures, particularly in the social sectors. To prevent the smaller net repayment of domestic financing from resulting in inflationary pressures or higher interest rates that would crowd out credit to the private sector, it was decided to reduce slightly the planned buildup of international reserves by the end of the fiscal year (June 2000). It was recognized that a slightly tighter fiscal stance than envisaged in the MTEF would need to be adopted in initial planning for the 2000/01 budget; moreover, there would be a need for particular caution in projecting revenues for that budget, as a significant part of the 1999/2000 revenue effort would involve one-off recoveries of tax arrears. Still, it appeared likely that substantial increases in priority expenditures would be possible, particularly if interim HIPC Initiative relief was available.

19.  The recent fiscal problems demonstrate the need for stronger control of expenditure. The prime requirements are an effective legal framework and a reliable expenditure-monitoring system to underpin the political commitment to prudent expenditure management. Major progress is taking place in both respects.

20.  A new accounting circular was issued in July 1999 to effect the requirements of IFMS in cash budget management. Financial regulations are being drafted in order to provide the legal basis for the implementation of the circular (which has been implemented throughout the Government since July 1999), as well as new controls over extrabudgetary transactions. In order to further streamline financial controls, two new bills, the Public Audit Bill and the Public Finance Management Bill, are to be tabled in Parliament during its June 2000 session, and implementing regulations will be issued in August 2000.

21.  Expenditure control is expected to benefit greatly from the full implementation of the IFMS during 1999/2000. In July 1999, the system was extended to most spending units, and all remaining entities, including the President's Office, the Ministry of Defence, the Police, and State House became part of the system from January 2000; the system now includes all budgetary units and accounts, apart from the subtreasuries, five of which will be integrated into the system in the current fiscal year and the remainder in 2000/01. The system will run in parallel with the existing accounting system through the end of 1999/2000. TRA will make provisional arrangements to report revenue collection through the system in a format consistent with the Government Finance Statistics (GFS) classification by April 2000, provided funds are available to meet the need for additional computer and data entry resources. The IFMS will produce monthly commitment-monitoring and expenditure reports, including information on the stock of arrears, beginning July 1, 2000. The government budget for 2000/01 will be prepared on the basis of the GFS classification, as that system will also be used in the IFMS. The latter will be the single government accounting and financial information system (apart from revenue accounts and debt monitoring) starting July 1, 2000, for which the Accountant General will have funding through a separate vote in the budget that will be accorded priority status.

22.  These changes will allow the continuous tracking of government revenues, commitments, and expenditures by detailed budgetary expenditure item, making it possible to verify that expenditures are made within the budget limits and guidelines. The Public Finance Management Bill will provide for a tightening of the regulating and reporting of reallocation of budgetary resources. In the meantime, the approval of any reallocation among votes has been shifted from the Permanent Secretary to the Minister for Finance and, in accordance with existing law, any such reallocation will be promptly reported to Parliament. In no case will the aggregate expenditure ceilings in the budget be exceeded, aside from increases in priority sector expenditures that may become possible as a result of donor assistance. Moreover, the government will avoid financing of expenditures outside the regular budgetary accounts through mechanisms such as direct use of privatization receipts or TRA revenue accounts. To ensure proper recording of commitments, the Ministry of Finance is beginning a publicity campaign in March, informing local suppliers that payments will be made only on the basis of local purchasing orders issued through the IFMS. The ministry intends to recruit in the next fiscal year additional qualified staff for the Policy Analysis Department to strengthen its macro-fiscal analysis capacity; technical and financial support for this is being sought from the IMF and bilateral donors.

23.  The proper recording and monitoring of commitments within the monthly allocations for spending entities will help to avoid arrears. Although the amount of arrears cleared in 1998/99 with European Union (EU) financing was less than originally envisaged, a total of T Sh 39 billion in verified supplier and wage arrears from previous fiscal years was nonetheless cleared. In October 1999, the Government's liabilities to the BoT, including interest arrears, were consolidated into two new long-term loans in a total amount of T Sh 102.7 billion, and the new loans are being serviced on schedule. The Government engaged an external accounting firm in January 2000 to prepare a census of civilian suppliers' arrears that are eligible for clearance with EU support. A schedule for the elimination of any remaining arrears will be prepared by June 2000. From now on, all commitments recorded under the IFMS will be honored according to their contractual terms; moreover, all government debts that are counted in calculating changes in domestic financing will be serviced on schedule.

24.  Fiscal decentralization is an important element of the Government's overall public sector reform policies and aims to enhance transparency and accountability, as well as improve service delivery. Steps are being taken toward effective devolution of authority, responsibilities, and resources to local governments. The Local Government Acts were amended by Parliament in February 1999. Apart from putting in place new central-local government relations, the amendments also provide for decentralized management of staff and finances by local government authorities. The process of rationalizing central and local government taxes has started, with the aim of providing more revenues to local government authorities to match the expenditure responsibilities transferred to them, as well as to harmonize the various taxes levied by central and local governments. The local authorities will on a phased basis assume greater powers to employ and manage their staff, as well as greater autonomy in managing their finances. This includes preparing and approving their own plans and budgets. Under Phase I, conditional block grants for the sectors of health, education, water, roads, and agriculture will be provided to the 35 local authorities starting July 2000.

25.  Training in improved financial management for local authority councilors and staff has begun, in part by zonal reform teams that have already been recruited. Moreover, introduction of the Platinum system (the software package that underlies the IFMS) is under way in some 28 local authorities and is expected to be operational early in 2000, as some local authority staff have already trained in its use; as in the IFMS, the system will facilitate, inter alia, effective expenditure control, maintenance of financial records, and timely preparation of financial reports. Regional secretariats (part of the Ministry of Regional Administration and Local Government) will continue to monitor local authority performance, and secretariat staffs are receiving additional training to help them perform their financial supervision duties.

26.  On the revenue side, the Government intends to complete the tax reforms initiated under the ESAF arrangement. Following the introduction of the VAT in 1998/99, the comprehensive reform of the customs duty and income tax systems, and the start of the harmonization of investment incentives with the budget for 1999/2000, a number of issues remain outstanding, several of which will be addressed in the 2000/01 budget. The VAT exemption on petroleum products will be repealed, and all taxes (apart from the Road Fund and the Energy Fund) on petroleum products will be consolidated, on a revenue-neutral basis, in the VAT and product-specific excise taxes. The process of removing differential treatment of investments will be completed in the 2000/01 budget by harmonizing withholding tax rates on interest earnings, dividends, and royalties for holders of certificates of the Tanzania Investment Centre with those for other taxpayers. Low-yielding excise taxes will be eliminated, reducing the number of excise taxes from 52 to 6. In line with the need to preserve the integrity of VAT, the Government does not envisage allowing any new exemptions, zero-rating, or special relief. The issue of exemption of government from VAT and customs duties will be studied over the coming year with a view to removing the exemptions in the 2001/02 budget.

27.  Supported by the World Bank and bilateral donors, the TRA is continuing its medium-term program of strengthening tax administration, in addition to the large number of specific steps being taken to address the current revenue shortfall. The TRA has already established a new unit for the centralization of the control of exemptions. Following IMF technical assistance, a new duty drawback system will be in place by March 2000. Preparations are under way to establish a unified tax appeals mechanism by August 2000.

28.  The budget for 2000/01 will be formulated within the framework of the medium-term macroeconomic and structural objectives, and will be aimed at achieving a sustainable balance over the medium term, taking into account the impact of HIPC Initiative debt relief and prospects for program aid and revenues. In recent years, the budget has repaid sizable amounts of net domestic financing, allowing attainment of the macroeconomic targets and creating room for a rebound in credit to the nongovernment sector, but after the current fiscal year, with its consolidation of the stabilization effort, further significant repayment of domestic financing is not likely to be needed.

29.  In developing its expenditure policies for the 2000/01 budget, the Government intends to further increase outlays in real terms for the priority sectors, in line with the medium-term targets and taking into account HIPC Initiative debt relief and program aid. The main thrust of expenditures in the health sector is to improve primary health care by focusing on equity, with emphasis on capacity building; district level support; improvement of service delivery; and provision of drugs, medical supplies, and other logistics. Quarterly, annual, and triennial performance and impact indicators will be used to measure levels of implementation. More generally, the targets for strengthening health services in 35 districts in the year 2000 are institutionalizing operational health plans; strengthening primary health care services; rolling back malaria and HIV/AIDS; and providing drugs and medical supplies. With regard to education, the government hired 3,153 additional teachers in 1998/99. In 1999/2000, the government intends to recruit a further 2,500 teachers, and 3,500 are expected to be hired in 2000/01. With the gross enrollment rate rising from 77 percent to 83 percent by 2002/03 and a move toward achieving a pupil-teacher ratio of 39:1 in the year 2005 (down from the present 45:1), there will be a further need for additional teachers; there will also be better deployment of teachers, especially in the underserved areas. In the water sector, the main thrust is to rehabilitate existing water and sanitation facilities and install efficient management, with the eventual aim of transferring ownership of the facilities to local authorities, user groups, and private companies. Rehabilitation schemes currently under way aim to bring service levels from 46 percent to 50 percent of the rural population and from 68 percent to 70 percent of the urban sector by 2001/02.

30.  Long-term targets for poverty reduction were articulated in the NPES adopted by the Government in November 1997. Medium-term poverty reduction targets covering the period 2000-02 will be set out in the PRSP currently under preparation. For the year 2000, efforts toward poverty reduction will focus on (i) preparing the PRSP; (ii) assembling baseline data on poverty by reviewing and reconciling the existing data sets and undertaking a household budget survey; (iii) conducting a pilot labor force survey; (iv) developing a national poverty line; (v) mainstreaming the poverty-and welfare-monitoring system into the budgetary process and development programs; (vi) establishing a poverty data bank; (vii) beginning preparation of district action plans for poverty eradication; and (viii) preparing a directory of sources of support for the poor. Poverty reduction targets will also be set for each sector.

31.  The poor in Tanzania are concentrated in smallholder and subsistence agriculture in rural areas, and the Government's policies to reduce poverty will increasingly focus on rural development. Agriculture employs more than 80 percent of the population and accounts for almost 50 percent of GDP. Most of the sector was liberalized during the 1990s, but growth rates have remained low. In addition to adverse weather conditions in recent years, growth has been hampered by delays in developing adequate private sector marketing, input distribution, and rural credit institutions, at a time when the Government was reducing its role and budgetary allocations declined. The Government has designated agriculture as one of its priority sectors, and budgetary allocations will be increased. In addition to the economic reforms currently being implemented, the Government has now given legal backing to reforms that will enhance security of tenure and access to land by the majority--with particular attention paid to disadvantaged groups. The goal of the new land laws is to promote the aspirations and principles of the National Land Policy (1995).

32.  Rural development and integration in the national economy have also been greatly hampered by the low quality of the road network in Tanzania. Therefore, an important component of the Government's policy is to provide better access to markets and services in rural areas by improving maintenance of the road network. To this end, the Government established a Road Fund, which became operational in July 1999; it comprises four public sector representatives, including the Ministry of Works, and four representatives of the private sector. Its work will be complemented by the establishment of an executive agency to implement the road policy--TANROADS--which should become operational by July 2000. The Road Fund obtains its revenue from the dedicated road toll on petroleum products and the budget's general resources.

33.  Monetary policy will remain geared toward further reducing inflation. With the decline in inflation in recent years, the expected expansion of banking activities in the rural sector following the resumption of normal banking activities by the NBC (1997) and the NMB, and the adoption of microfinance banking regulations, the trend of declining demand for money relative to GDP in recent years is expected to be gradually reversed over the medium term, facilitating the achievement of macroeconomic objectives.

34.  The financial sector reforms and the recent rapid growth in the share of foreign currency deposits in the money supply have made it difficult to project the relationship between broad money growth and the targets for inflation, growth, and international reserves. In light of recent developments, the BoT intends to shift its focus from a monetary aggregate that includes foreign currency deposits to one that excludes such deposits. The monetary program for 2000 is thus built around a prudent target for growth in broad money (excluding foreign currency deposits) of 9.8 percent. The BoT will adjust its targets if developments in other indicators, such as sharp declines in real interest rates, point to a shift in the underlying demand for money from the projected levels. Supported by continued fiscal restraint and facilitated by a continued high level of foreign program assistance, the target for net domestic assets of the BoT in 2000 has been programmed to be consistent with maintaining official international reserves at four months of imports.

35.  For the time being, intervention through the treasury bill auctions will remain the BoT's main monetary policy instrument, supplemented by repurchase operations with the banks. Open market operations will play a growing role, however, as the secondary market in treasury bills becomes more active; the operation of the primary dealer system, introduced in December 1998, will be reviewed from this perspective. The BoT aims to avoid, within the overall monetary objectives, large short-term fluctuations in treasury bill interest rates, thus making treasury bills more attractive for investors. After a number of changes in the statutory reserve requirement in 1997-1998, no changes were made in 1999, apart from excluding clearing account balances from the calculation of reserves. The general intention of the BoT is to maintain the statutory reserve requirement at the present level of 10 percent. However, if longer-term trends indicate a decline in bank liquidity, the ratio of required reserves to deposits could be further decreased, which would also help in lowering the spread between banks' lending and deposit rates. The BoT has also begun to monitor the effective interest rate structure of banks by collecting data on weighted average actual, rather than posted rates.

36.  The privatization of the two offshoots of the former NBC, the main element of finan-cial sector reform in recent years, is nearing completion. The NBC (1997) Act was repealed in October 1999, satisfying a condition precedent to finalization of the sales agree-ment for the NBC (1997), which was signed on December 20. Following a settling-in period for the private sector managers of the NMB, by June 2000 the Government intends to develop a strategy for recapitalizing the bank and transforming it into a microfinance institu-tion. With support from the World Bank, studies for the restructuring or privatization of the remaining state-owned financial institution--the Tanzania Investment Bank, the Tanzania Postal Bank, and the People's Bank of Zanzibar--are expected to be completed by June 2000.

37.  The BoT continues its work on improving regulation and supervision. A legal framework for microfinance institutions will be provided within the next 18 months, likely through an updating of the Banking and Financial Institutions Act. In light of the expansion of the banking sector--there are now 19 commercial banks and 12 nonbank financial institutions, some of which are expected to become licensed commercial banks over the medium term--capacity building in the BoT's Banking Supervision Department continues to be a high priority. Prudential regulations generally meet the Basel standards and are being updated to take account of the recent evolution of the Tanzanian banking system, with a view to issuing five of the projected ten regulations by June 2000 and the remainder by the end of the year. The BoT plans to review minimum capital requirements for banks to ensure that they are sufficient to provide a sound basis for beginning banking activity. The commercial court is now in operation, and the banks, with assistance from the BoT, aim to establish a credit information bureau in 2000/01. Work on the establishment of an electronic payments system for Tanzania is proceeding well; the system is expected to be established in 2000/01, with the potential of being extended to other countries in the region over the medium term. The Government is also examining options for facilitating the use of land as collateral for credit transactions, with a view to taking any necessary actions by July 2001.

38.  During the last two years, the deficit on the current account of the balance of payments increased, as the volume of exports declined by about 25 percent while imports, fueled by the recovery of foreign project assistance and large investments in the mining sector, increased. The decline in exports is mainly attributed to falling world prices, the adverse weather conditions in recent years--including its effects on road and transportation--and the structural problems in the agricultural sector. New export sectors are developing, including gold mining and horticulture, and exports are expected to rebound in the near future. The Integrated Framework for Trade Development, supported by multilateral and bilateral donors, aims to facilitate the development of export trade through mechanisms such as export financing, guarantee schemes, business support development funds, measures to enhance competitiveness in the industrial sector, and institutional capacity building. Tanzania's exchange rate will continue to be market determined, with intervention by the BoT limited to short-term and seasonal smoothing. In order to limit Tanzania's vulnerability to external shocks, the BoT intends to maintain gross official reserves at the equivalent of four months of imports of goods and nonfactor services (taking account of seasonal factors).

39.  The reduction in the top rate of import duties on July 1, 1999 was an important step toward increasing the efficiency of the domestic economy and providing Tanzanians with the benefits of international integration. Given the current revenue difficulties, we do not envisage being able to make further reductions in the top rate in the 2000/01 budget, but, in keeping with the Government's intention of reducing reliance on international trade taxes, it is planned, subject to the performance of domestic revenue sources and progress of negotia-tions within the frameworks of agreements with regional trading partners (particularly in SADC and EAC), to carry out further reductions in the top rate over the three-year program period. In the 2000/01 budget, the tariff structure will be reviewed, and anomalies in the classification of goods in the intermediate bands will be corrected. In line with our policy of eliminating tax exemptions and remissions, we also intend by the 2001/02 budget to elimin-ate the remissions recently provided on 25 commodities when used as intermediate goods rather than for final consumption by assigning the goods to single rates. Minimum dutiable values will be reviewed in order to ensure that by July 2000 they are based on international prices, except in the case of sugar. We will not impose minimum dutiable values on any other commodities, and in line with Tanzania's undertakings under the World Trade Organization, minimum dutiable values will have a temporary character; to this end, the Government will review the existing list on a quarterly basis, with the aim of phasing them out in line with the strengthening of the customs administration. Consideration will also be given to establishing an antidumping law. The sole remaining export duty, on scrap metal, will be eliminated by July 1, 2000. The suspended duty on sugar will be eliminated by July 1, 2002.

40.  The Government continues to support regional economic integration. Following its notice to the Common Market for Eastern and Southern Africa (COMESA) of its intention to withdraw from that organization in September 2000, the Government intends to pursue regional economic integration through EAC, SADC, and the Cross-Border Initiative (CBI), but continues to observe all obligations under COMESA until the effective date of the withdrawal. The treaty for establishment of the new East African Community was signed on November 30, 1999, and it is expected that a separate protocol on internal tariffs, as well as a common external tariff, will be negotiated and agreed within four years. In the meantime, member states are working on a harmonized EAC customs nomenclature.

41.  The Government's policies regarding capital account liberalization remain focused on attracting foreign direct investment. In the absence of foreign participation, the low level of domestic savings limits the development of the Dar es Salaam Stock Exchange. In view of the high-expected benefits, and the low risk for the economy, as a first step the Government will study relaxing the restriction on foreign portfolio investment participation through the stock exchange. In order to enable local participation in privatization, some shares in the newly privatized companies will continue to be reserved for Tanzanians. Following recent IMF technical assistance, the BoT will develop a medium-term policy on capital account liberalization by June 2001, including measures to improve transparency in the regulations and monitoring of capital flows.

42.  In 1998/99, assistance through the Multilateral Debt Fund (MDF) amounted to US$88 million, covering over 80 percent of multilateral debt service and freeing budgetary resources for spending on the priority sectors. Possible interim HIPC Initiative debt relief will cover about half the multilateral debt-service obligations falling due, and donors are counted on to at least maintain the current levels of the MDF and other program aid. The Government will also be seeking a comprehensive Paris Club rescheduling agreement under Cologne terms, with comparable treatment of debt owed to non-Paris Club bilateral and commercial creditors. The IDA approved the financing for the buyback of commercial debt (amounting to about 5 percent of Tanzania's total public external debt) in June 1999, and the operation, which was launched on October 25, is expected to close by end-March 2000.

43.  Tanzania will remain current on its external payments obligations. The authorities indicated that the bilateral Paris Club agreements with Italy and Russia were signed in November 1999, and virtually all details of the agreement with Japan have been settled and it is now ready for signature, completing the process of implementing the 1997 Paris Club rescheduling. Tanzania will work with Paris Club creditors to complete expeditiously the bilateral agreement under the new rescheduling and will urge its other bilateral parties to negotiate comparable agreements as soon as possible.

44.  Tanzania will not impose or intensify restrictions on payments and transfers for cur-rent international transactions, introduce or modify multiple currency practices, conclude any bilateral payments agreements that are inconsistent with Article VIII of the Fund's Articles of Agreement, or impose or intensify import restrictions for balance of payments reasons.

45.  The Government intends to make major further progress in privatization over the next three years. The privatization of the smaller parastatal entities will be accelerated with the aim of completing it by the end of 2003, and it is planned to complete the process for at least 40 entities in 2000. The restructuring of the utilities and remaining large monopolies will be completed and regulatory frameworks put in place, and decisive progress will be made with their privatization. The Government intends to adopt policies in the area of parastatal staff retrenchment and parastatal debt by May 2000. Privatization will be supported by institutional reforms in other areas affecting the environment for private sector growth, as described in the interim PRSP. The mandate of the Parastatal Sector Reform Commission (PSRC), the main executive body for privatization, has been extended to 2003, and it will continue to benefit from World Bank support.

46.  A principal focus of the Government's reform policies in the petroleum sector is to eliminate the large cost to the economy of TIPER. Expansion of the Kurasini oil jetty has been completed, and Tanzania now has fully adequate capacity for importing petroleum products. All subsidies to TIPER have stopped, and oil-marketing companies no longer need to purchase any product from the refinery. Pending the rationalization of petroleum taxes scheduled for implementation with the 2000/01 budget, the TIPER processing fee and the portion of the windfall levy that was disbursed as a subsidy through TPDC have been accruing to the budget since the beginning of 2000. With the buildup of the Songo-Songo escrow account completed, from November the Energy Fund has accrued as general government revenue. The Government is considering a proposal that, as of July 1, 2000, TPDC activities will be limited to petroleum exploration and petroleum sector development. In any case, the remaining petroleum product levies that are earmarked for the TPDC will be incorporated into the general petroleum tax structure at the end of June 2000, and any continued government support for TPDC will be provided transparently through the budgetary process. Comprehensive regulations are expected to be in place by July 2001; a set of interim regulations went into effect in December 1999.

47.  The investment memorandum for TTCL was issued in November 1999; potential bidders have asked for more time to prepare their bids, and negotiations with the winning bidder are now expected to start by June 2000. Financial bids for DAWASA were opened on January 31, 2000, and, facilitated by the intensive preparation process, the memorandum of understanding will be signed with the winning bidder by end-March 2000. As detailed in the PRSP matrix, progress is also being made with the restructuring and privatization of the other large monopolies.

48.  In October 1999, the Government approved the restructuring of the electricity industry. In order to improve the efficiency of the sector and reduce the high costs of energy in Tanzania, the activities of the Tanzania Electricity Supply Company (TANESCO) will be separated into generating, transmission, and distribution segments. Consultants' reports with recommendations on the optimal number of entities, as well as competition, trading, and regulatory mechanisms in each segment, will be completed by the end of 2000. Following the preparation of TANESCO for the restructuring and the establishment of a new legal framework for the sector by December 2001, the separate segments will be privatized, starting with distribution. A study on the establishment of a regulatory framework for all utility sectors has been completed, and a proposal was submitted to the Government in January 2000.

49.  A stable macroeconomic environment and structural reforms are necessary conditions for increasing investment and growth, but they will not succeed in attracting large amounts of domestic or foreign investment if investors are faced with the inefficiencies and uncertainties imposed by corruption. The Government attaches great importance to fighting corruption, and has developed the National Anti-Corruption Strategy and Action Plan for Tanzania, which was adopted in November 1999. Immediate measures--to be implemented in the framework of the new Public Service Reform Program, which includes sectoral anticor-rup-tion plans at the level of ministries--aim at (i) improving the competence and attitude of the public service by increasing remuneration under the public service pay reform and improving supervision and performance management; (ii) establishing transparent systems and proce-dures, especially for procurement; and (iii) strengthening the legislative framework. In order to avoid excessive payments for the oil-fired thermal power plant owned by Independent Power Tanzania Ltd. (IPTL)--whose electricity-generating capacity is not expected to be needed for several years to come--the Government has requested arbitration on its high costs. In November 1999, the arbitration tribunal rejected IPTL's request for interim capacity payments pending the final decision in May 2000 on the amount to be paid. The Government recognizes that capacity payments even at the lower end of the range being discussed would imply a need for budgetary resources, in which case the program would need to be reviewed to see what additional measures would be needed to ensure fiscal viability.

50.  Public service reform is an important cornerstone of the Government's overall structural reform policies. The first phase of the reform, which began in 1993, has been completed. The Government approved a new Public Service Reform Program in November 1999, the first phase of which, covering the period through 2004, begins in early 2000. The main objective of this new long-term program is to improve the delivery of public services and, combined with the strengthening of performance evaluation, to bring public service pay to levels competitive with those in the private sector over a five-year period, depending on available resources.

51.  The Government continues to strengthen the statistical database. The National Bureau of Statistics (NBS) was converted into an executive agency in March 1999. About half the resources for the NBS in the 1999/2000 financial year have been earmarked for critical activities related to the production of monthly consumer price index (CPI) and trade statistics, follow-up of the business register, and development of semiannual GDP estimates. The Government will ensure the NBS has adequate funds to prepare the core set of macroeconomic statistics by according funding on a priority basis. A new household budget survey, to be carried out in the 12 months beginning January 2000, will permit the NBS to revise the basket for the consumer price index and improve the statistical database on poverty. In order to improve national accounts statistics, the GDP for agriculture will be reviewed with technical assistance from the World Bank in the first half of 2000. The NBS will also push for the development of timely indicators on the real economy and the improvement of agricultural sector statistics. The NBS has been appointed national coordinator for the General Data Dissemination System (GDDS). The review of Tanzania's statistical system in preparation for participation in the GDDS is scheduled to be completed by March 2000. As noted above, the BoT has introduced a new reporting format to better reflect current interest rate developments in the banking sector.