Dar es Salaam, July 18, 2000

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431
U.S.A.

Dear Mr. Köhler:

1. Tanzania’s ongoing adjustment and poverty reduction program is being supported by the Poverty Reduction and Growth Facility (PRGF) arrangement for 2000–02 that was approved by the Executive Board of the IMF on March 31, 2000. The program for 2000, the first annual program under the PRGF arrangement, was described in the memorandum of economic and financial policies (MEFP) that was attached to my letter to Mr. Fischer of March 9, 2000. It was formulated in conformity with the medium-term policy framework attached to our interim poverty reduction strategy paper (PRSP) of March 14, 2000, which was endorsed by the Boards of the IMF (on March 31, 2000) and the World Bank (on April 4, 2000). This letter discusses progress in implementing the program to date and policy plans for the remainder of 2000, with a particular focus on the budget for 2000/01 (July–June) that was presented to Parliament on June 15, 2000; it also requests completion of the first review of the PRGF arrangement and the disbursement thereunder. The attached Tables 1 and 2 report on developments with regard to quantitative performance criteria and benchmarks through March 2000 and structural performance criteria and benchmarks through July 1, 2000; some modifications and revisions for the period ahead are proposed, and Fund approval of modification of the end-September performance criteria is requested. We expect the next review, which will set out the second annual program under the PRGF arrangement, to be completed by January 31, 2001.

Recent developments

2. Tanzania’s macroeconomic situation has continued to strengthen since the program began. The growth of GDP in 1999 has been revised upward slightly to 4.7 percent, and the recent rains, while spotty in some areas, augur well for achieving the target for 2000 of 5.2 percent. (The rains were particularly spotty in the catchment areas for hydropower reservoirs; to prevent electricity shortages from impeding growth, as they did in 1997, thermal generation began in May.) The 12-month inflation rate has continued its downward course from the 7 percent recorded at the end of 1999, declining to 6 percent in May 2000. The balance of payments has been unexpectedly strong, with little of the usual seasonal demand for sales of foreign exchange by the Bank of Tanzania (BoT). Gross international reserves thus declined only slightly during the first quarter of 2000, even though there were substantial delays in aid disbursements, and the exchange rate remained stable at around T Sh 800 per U. S. dollar. The March performance criterion on the net international reserves of the BoT, as well as those on the BoT’s net domestic assets and the net domestic financing of the government, were met by wide margins.

3. The strengthening of the fiscal position in the first quarter of the year reflected the corrective fiscal measures described in detail in the MEFP. Revenues rebounded, beginning in December, and came close to the program benchmark for the period through March. Severe expenditure restraint was implemented; indeed, through February, continuing problems in implementing the cash management system meant that expenditure ceilings were tighter than necessary. This issue began to be addressed in March, but the cumulative effect through the end of the first quarter was that cash expenditures were kept some T Sh 30 billion below what would have been possible under the program, with adverse consequences for the functioning of the Government, even in the priority sectors, and the incurrence of substantial arrears on tax refunds, interest payments on domestic debt, and payments to suppliers, particularly the utilities.

4. The 12-month growth of money (M2, which excludes foreign currency deposits) declined from 15 percent at end-December 1999 to 12 percent at end-March 2000, slightly above the program target. In the early part of the quarter, the BoT had been concerned about the surge in broad money around the end of 1999; moreover, foreign currency deposits were continuing to grow rapidly, albeit to a substantial extent on account of a few large transactions by foreign investors. The BoT therefore kept a tight rein on its net domestic assets, and interest rates on short-term government debt, which had risen sharply in the second half of 1999 to about 15 percent, declined only gradually. The 12-month growth of credit to the private sector, even after excluding loan write-offs by the National Bank of Commerce (NBC (1997)) in the period leading up to the completion of the sale to Amalgamated Banks of South Africa (ABSA) on March 31, declined to 14 percent, the smallest growth since 1996.

5. Exports in the first quarter of 2000 were almost 50 percent higher than over the same period in 1999, reflecting strong growth in exports of cashew nuts and gold, and the export projection for 2000 has been revised upward by 8 percent. Imports were low, in part because of the fiscal and monetary restraint; they are expected to recover in the rest of the year, in part because of the need to import substantial amounts of fuel for thermal electricity generation.

6. On April 14, 2000, we reached an agreement with the Paris Club on a flow rescheduling on Cologne terms (90 percent net present value reduction), with the coverage of debt rescheduled slightly broader than had been assumed in the program. Moreover, a number of creditors indicated that they would forgive some or all of the remaining debt. With regard to the IDA-financed debt buyback, progress has not been as rapid as we had hoped, as some creditors could not complete the required administrative formalities on time. To increase participation and ensure a satisfactory outcome, we decided, in consultation with the World Bank, to extend the tendering and closing dates for the operation to September and December 2000, respectively.

7. With macroeconomic developments and policies following a somewhat different trajectory than envisaged when the program was developed late in 1999, a number of policy adaptations have recently been implemented, as described below. As for the structural reform agenda, it has moved forward broadly as envisaged when the program was developed late in 1999, but there, too, there has been some evolution in policies and timetables.

Recent policy adaptations

8. Following the large overperformance on net domestic financing during the first quarter of 2000, we conducted a comprehensive review of the outlook for the budget for the last months of the fiscal year. Revenue performance in April made it appear likely that the earlier gains, which had relied to some extent on a concerted effort to collect arrears on taxes and other one-off measures, would not be fully sustained, and a shortfall from the program target of some T Sh 9 billion (1 percent) appeared to be in prospect. Nonetheless, there was clearly room to provide more adequate funding to ministries. Operational improvements in the cash management system were implemented so that the monthly calculations of funding ceilings would take account not only of prospective revenues, but also of available financing carried over from the previous month (making sure to keep a cushion to take account of transactions already in process); the new procedures also explicitly took account of the flexibility the program provided in case of shortfalls in net foreign financing. With these improvements, the new interest and tax refund arrears were cleared, priority sectors were provided with the full amounts envisaged in the budget, and the earlier cuts for other sectors were substantially restored. In the case of electricity, T Sh 6.7 billion was cleared through cash payments. The remaining arrears to the Tanzania Electricity Supply Company Ltd. (TANESCO) will be settled before end-2000 by further cash payments or through offsets against payments of TANESCO’s external debt service by the Government. Given the revenue shortfall and the large amount of arrears to be cleared, we decided that the program ceiling on net domestic financing at the end of June should be relaxed by T Sh 8 billion, which would imply no net repayment of domestic financing for 1999/2000. To guard against the recurrence of the overexpenditure problems of early 1999/2000, however, no carryovers of fiscal resources to the new fiscal year were permitted.

9. In view of the positive developments in inflation, the high level of international reserves, and the relatively slow growth in private sector credit, the BoT started to ease monetary policy in March by reducing interventions in the treasury bill auction. As a result, short-term interest rates declined from 14.3 percent in March to 7.3 percent in June.

10. The oil refinery had effectively ceased operations in October 1999 as the state-owned oil corporation, Tanzania Petroleum Development Corporation (TPDC), was unable to finance the last shipment of crude oil, and the earmarking of some petroleum sector taxes to cover the refining losses was halted as of January 1, 2000, marking the completion of the liberalization of the petroleum sector. However, the last shipment of crude, amounting to about 60,000 metric tons, remained stored at the refinery, and in April and May the government transferred T Sh 1 billion to the refinery to cover the start-up costs of processing that final shipment.

11. At the end of June 2000, the TPDC was restructured to enable it to focus on petroleum exploration, and its staffing is being reduced from 105 to around 65. With effect from July 1, this role is being supported through the government budget; to safeguard the corporation’s assets, the TPDC will not engage in any financial transactions unrelated to this role without the express approval of the Ministry of Energy and Minerals. Budgetary support will continue until a decision has been made on whether the TPDC should have a continuing role in gas exploration and production operations in Tanzania, as specified in its establishment order issued under the Public Corporations Act. Whether the TPDC will have any role in the oil and gas sector will be addressed in a study of the sector’s institutional and regulatory requirements, which is scheduled to be undertaken in 2001 under the IDA Songo Songo credit. The government will decide on the TPDC’s future after the study but before commencement of natural gas production, currently scheduled for early 2003.

12. Following a far-reaching reexamination of the modalities of privatization undertaken in consultation with the World Bank, the approach followed by the Parastatal Sector Reform Commission (PSRC) has been substantially revamped. The aim is to have bidders follow a careful prequalification and due diligence process, during which the details of the eventual offer would be developed; thus the bids, once received, would be judged on well-defined criteria, mainly price, obviating the need for extensive negotiations with the winning bidder. Since then, one of the large parastatal monopolies, the container terminal of the Tanzania Harbour Authority, has been removed from government control through a ten-year lease agreement; the agreement was signed in May 2000, and the handover will take place by August. With regard to the Tanzania Telecommunications Corporation Ltd. (TTCL), six entrants completed the due diligence process, out of which three submitted bids in May. The winning bidder, a consortium of Detecom/MSI, was selected in June.

The budget for 2000/01

13. The macroeconomic framework underlying the government’s budget for 2000/01, which was submitted to Parliament on June 15, is in line with the medium-term targets of the program. Fiscal and monetary policies will be formulated consistent with a further decline in inflation to 4½ percent by June 2001, while gross official reserves will be maintained at an average level of at least four months of imports of goods and nonfactor services. To guard against the danger of crowding out the private sector, the government does not intend to make net use of domestic financing over the fiscal year, although there will be a temporary need for financing early in the fiscal year to help meet the costs of the election.

14. The government of Tanzania attaches great importance to increasing the ratio of revenue to GDP, but expects to achieve that objective largely through measures to broaden the tax base and strengthen tax administration, several of which are being implemented this year, as described below. By their nature, it is difficult to estimate the yield of such measures, and the budget submitted to Parliament on June 15 projected the increase in revenues conservatively at 12 percent. The slight increase in terms of GDP comes mainly from the inclusion of all fees, charges, and taxes on petroleum products in revenues for the full fiscal year, a 5 percent increase in excise tax rates, and an increase in the Road Fund tax from T Sh 70 to T Sh 80 per liter (to increase resources for road maintenance and construction).

15. Taking account of interim debt relief under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative) from the IMF, the World Bank, and Paris Club creditors, as well as aid from donors (as discussed most recently at the May 2000 Consultative Group meeting), net foreign financing of the budget—excluding project financing—is projected to increase from 0.8 percent of GDP in 1999/2000 to 1.2 percent of GDP in 2000/01. The total resource envelope for recurrent and domestically financed development expenditures in the 2000/01 budget thus amounts to 12.5 percent of GDP, up from 12.0 percent of GDP in 1999/2000.

16. Recurrent expenditures are projected to increase from 12.1 percent of GDP in 1999/2000 to 12.4 percent of GDP in 2000/01. The presidential and parliamentary elections scheduled for October 2000 lay an important claim on the available resources, amounting to 0.4 percent of GDP. Moreover, in light of the HIPC Initiative debt relief, allocations to priority areas have been increased; the increase in nonwage recurrent expenditures is 44 percent. (Although the PRSP is in the final stages of being completed, many of the poverty reduction policies discussed in that paper are already reflected in the budget, which also provides for additional resources to improve the poverty database.) The public service wage reform is an important aspect of the government’s policies to improve the efficiency of the public sector, but, in view of the tight budgetary situation, it has not been possible to provide any real wage increase for 2000/01, apart from a new contribution of 3 percent of the wage bill toward the premium for health insurance.

Tax reform and expenditure management

17. Many of the remaining elements of the ongoing tax reform have been implemented with the 2000/01 budget. The value-added tax (VAT) exemption on petroleum products has been repealed, and the petroleum taxes (including the Energy Fund and other levies, but excluding import duties and the Road Fund tax) have been consolidated into VAT and product-specific excises on a revenue-neutral basis. We will not be providing VAT relief for the government on petroleum products. Moreover, the subsidy to the TPDC through levies on petroleum products has been eliminated, with the levies now included in the new petroleum excise taxes. Low-yielding excise taxes on 46 products have been eliminated, with the rates on three other items—beer, cigarettes, and wine and spirits—increased to compensate for past inflation, as well as the small loss of revenue from eliminating the minor items. The withholding taxes on interest earnings, dividends, and royalties for future recipients of certificates of the Tanzania Investment Centre (TIC) were harmonized with those of other taxpayers, completing the harmonization of tax incentives. Thus, the issuance of TIC certificates no longer confers any tax advantages. The VAT and customs exemptions for nongovernmental organizations (NGOs) and religious and charitable organizations will be strictly limited to projects under specific agreements with the government from January 1, 2001. We will review these remaining exemptions during 2000/01, with a view to providing tax relief to the affected organizations through relevant sector ministries and including such relief as budgetary expenditures from 2001/02.

18. We also continue to make progress in tax administration. In April, the Tanzania Revenue Authority (TRA) implemented a new duty drawback system. In that same month, Parliament approved legislation with regard to taxpayer identification numbers (TINs), and TINs will be issued during 2000/01, paving the way for eliminating the withholding tax on goods and services. The administration of the pay-as-you-earn (PAYE) tax is being computerized, which, in addition to providing more revenue, may allow the elimination of the housing levy in next year’s budget. The TRA will work toward establishing a large-taxpayers’ unit early in 2001. Preparations are on track for the establishment of a unified tax appeals mechanism by August 2000; Parliament is expected to approve a bill in July 2000 providing for the establishment of the unified Revenue Appeals Board and Tribunal and related matters.

19. The application of the VAT to petroleum products is expected to bring additional companies into the tax net, and the fact that the Government will not receive VAT relief should help to promote tax enforcement. The issuance of regulations for the sector in December 1999, which resulted in the withdrawal of the licenses of ten companies, and the requirement, introduced in March, for all imports of petroleum products to be channeled through bonded warehouses have begun to address the problem of large-scale tax evasion in the petroleum sector. The further step of marking petroleum products is expected to substantially resolve the problem. Bids to supply and operate such a system were received in June, and the system is expected to be in place by September.

20. After the introduction of the VAT in Zanzibar in January 1999, virtually all taxes on the islands were harmonized with those on the mainland of Tanzania, with the exception of the levy on imports for preshipment inspection. However, there are complaints that smuggling through the Zanzibar—Dar es Salaam route has continued, not only reducing tax revenues, but also hurting the competitiveness of local producers. The TRA has stepped up controls along the northern borders and the coastline, including increased cooperation with customs authorities in the neighboring countries of Kenya and Uganda, designation of landing sites, specification of vessels allowed to carry certain goods, and strengthening of the customs administration at vulnerable points.

21. The new Integrated Financial Management System (IFMS) is now the government’s main accounting system, and it will produce, starting July 2000, monthly commitment monitoring and expenditure reports, as well as reports on arrears. In support of the system, the Ministry of Finance held a publicity campaign in March 2000 to make suppliers aware that payments will be made only on the basis of purchase orders issued through the IFMS; in addition, the office of the Accountant-General was strengthened and received its own vote in the 2000/01 budget. Draft procurement and public finance bills, which are intended to improve the legal framework for the IFMS, were tabled in the June session of parliament. However, in view of the crowded agenda for this last session before the October elections, final passage of the bills is now envisaged for the January–February 2001 session of the next parliament, with issuance of implementing regulations immediate thereafter (a performance criterion). In December 1999, it was decided to include the State House and the Ministry of Defence, which had remained outside the IFMS, within the system. Their actual inclusion was somewhat delayed because of the need to install the necessary computer equipment and train staff in the use of the system.¹ The State House was brought on-line in April, and the Ministry of Defence was included as of July 2000. Because of a lack of financing, the TRA’s revenue accounts have not yet been included in the system, although the TRA provides weekly detailed reports on tax collections for inclusion in the IFMS on an off-line basis. Complete integration will take place within the overall computerization project of the TRA, supported under the Tax Administration Project, during 2000/01.

22. With the IFMS in place, it is now possible to track new arrears, which will be reported on a monthly basis. The avoidance of such arrears will be a benchmark under the program. The domestic arrears census will be completed by end-July 2000; we intend to complete the clearance of the stock of arrears outstanding at the end of 1998/99 in 2000/01, to a large extent with financing from the European Union.

23. We have revised the financial program for the rest of 2000. The ceilings on net domestic assets of the BoT have been revised upward to accommodate a slightly higher demand for money, which now appears to be growing in real terms. Provision has also been made for the government to use domestic financing of up to T Sh 28.3 billion in the first half of the fiscal year to help deal with the cost of elections. The BoT intends to continue to gradually ease monetary policies within the limits of the program, which envisages an increase in credit to the private sector of close to 30 percent. With regard to monetary policy instruments, the BoT continues to rely on the auctioning of 91-day treasury bills, in addition to repurchase operations with the banks. In order to widen its range of instruments, the BoT is seeking Fund technical assistance for promoting an active secondary market for treasury bills.

24. Preparations for the recapitalization and privatization of the National Microfinance Bank (NMB) are progressing. Following the completion of the business plan in June 2000, the NMB will launch a pilot project for microlending in six branches, which will be increased to 15 in 2001. The privatization strategy for the NMB is expected to be finalized by March 2001, and privatization is now targeted to be completed by mid-2002, after which unrestricted lending operations are expected to resume. Microfinance operations will be guided by the microfinance policy approved by the government in May, slightly later than the program benchmark date of April. The legal, regulatory, and supervisory framework for microfinance institutions is under review by a task force, which is expected to release a draft report by November 2000. Studies on two remaining parastatal financial institutions—the Tanzania Postal Bank and the People’s Bank of Zanzibar—will be launched, with World Bank support, in July 2000, in preparation for their restructuring and possible privatization.

25. Seven of the prudential regulations governing commercial banking activity were issued by the end of June, exceeding the program benchmark of five regulations to be issued by that time. Preparations for the establishment of the private sector credit information bureau are being coordinated by the Tanzania Bankers’ Association and are expected to begin shortly. Preparations for establishing a national payments system are progressing; the BoT issued a vision and strategic framework document in January 2000, paper instrument standards were also adopted in January 2000, and three electronic clearinghouses are expected to be operational by the end of the year.

External sector issues

26. The export duty on scrap metal—the last export tax—was eliminated in the 2000/01 budget. With the passing of the 2000/01 Finance Bill, we also plan to unify the rates for a number of the 25 commodities that had been given split rates last year under GN 241. We intend to unify the rates for the remaining items in the 2001/02 budget. In the meantime, no new items will be added to the existing list.

27. Regarding minimum dutiable values (MDVs), since March we have been using international prices provided by a preshipment inspection company as the basis for calculating import duties on the affected commodities. We are building up our capacity for import valuation, and intend to fully implement World Trade Organization (WTO) valuation methodology by January 2001, eliminating any role for MDVs. In parallel, we are also planning to introduce a law on antidumping and countervailing measures that will be WTO consistent, and will request technical assistance in that respect from the WTO.

28. We are planning to withdraw from the Common Market for Eastern and Southern Africa (COMESA) in September 2000 and are concentrating our efforts in regional integration on the East African Community (EAC) and the Southern African Development Community (SADC). Following the signing of the EAC treaty in November 1999, Parliament ratified the treaty in June 2000. The EAC Secretariat has started work on the technical aspects of a regional customs union, and three working groups have been set up to look at various aspects of economic integration.

29. Tanzania is current on its external debt obligations. We have begun bilateral negotiations with Paris Club creditors to implement the recent Paris Club rescheduling agreement of April 2000. In the meantime, we have begun to make the agreed monthly deposits into the special account. We are holding discussions with non-Paris Club creditors to reconcile debts and, once reconciled, to seek concessional rescheduling on terms at least comparable to those agreed with Paris Club creditors. For safety reasons, we have acquired a new radar system to strengthen air traffic control in Tanzania; as the system will also be used for military purposes, we were unable to finance it through bilateral or multilateral aid. We nonetheless were able to obtain bank and supplier financing of US$35 million on concessional terms that comply with the performance criterion on external borrowing.

30. A large part of program grants have been provided through the Multilateral Debt Fund (MDF) in recent years. These grants have helped the government to free up resources in the budget and have largely succeeded in ensuring full funding of priority sector budgets. However, in light of the prospective lower debt-service payments to multilateral institutions as a result of interim assistance under the enhanced HIPC Initiative, the amount of multilateral debt service remaining would no longer be sufficient to absorb the amounts provided under the MDF. Accordingly, the government and donors have replaced the MDF with a Poverty Reduction Budget Support (PRBS) Facility, although because of existing commitments the MDF may remain in place for some time to come. The main aim of the PRBS is to provide more flexible and better coordinated budget support for poverty reduction strategies of the government and help to ensure that adequate resources flow into the priority sectors. As under the MDF, donors will continue to monitor the agreed priority allocations in quarterly review meetings with the government; however, the release of funds will not be linked to debt service, but to actual requirements of the budget in the priority areas.

31. The initial phase of establishing a comprehensive framework for monitoring capital flows began in May 2000 with a joint private and public sector workshop, which emphasized the need for the two sectors to exchange information on a regular basis on investor sentiment and the need for an institutional framework to collect and analyze the different types of capital inflows. In early June 2000, the BoT, the TIC, and the National Bureau of Statistics (NBS) launched a census on private investments with a foreign component, and the census report is expected to be completed by December 2000. Also, with Fund technical assistance, we expect to carry out an assessment of the capacity of the financial system to handle capital flows following the further liberalization of the capital account.

Structural reforms

32. The first phase of implementation of local government reform started in January 2000. A manual to guide the restructuring of individual local government authorities has been developed and is being used by the zonal reform teams in facilitating restructuring work. Following the amendments that were made to the Local Government Acts in February 1999, preparations for provision of conditional block grants have been completed, and block grants for health, education, roads, water, and agriculture have been allocated in the budget for local governments for 2000/01. In-house training in financial management is being provided to staff of local government authorities to enable them, among other things, to properly manage and control the use of block grants and sector-specific common basket funds. Furthermore, the IFMS software is now also being used in 28 local government authorities. Plans are under way to put in place a more sustainable support mechanism using a core team to be established by the Ministry of Regional Administration and Local Government. This team will provide support services to the councils, which are implementing the IFMS. Resources permitting, the system will be extended to the remaining councils in phases.

33. Concerning privatization, the PSRC has, in consultation with the World Bank, adopted a work plan aiming to substantially complete the divestiture of the 212 remaining entities by the end of 2003. The number of entities divested so far in 2000 (13 through the end of June) has fallen short of the program benchmark of 20, but overall activity has been intensive, and we still hope to reach the targeted 40 by the end of the year. The present benchmark does not take any account of the economic significance of the entities divested, and the PSRC, in consultation with the World Bank, is developing data on turnover and employment of the companies being privatized. With the completion of the full database of remaining divestitures in September 2000, it will be possible to develop more meaningful measures of progress. The database will also provide a basis for studying the impact of privatization. To standardize the approach to parastatal staff retrenchment, in May 2000 the Government decided to pay retrenched employees only their statutory benefits. With respect to parastatal debt, it was decided to maintain the existing case-by-case approach. Draft legislation for establishing regulatory agencies for the utility and transport sectors will be prepared by September 2000, and the agencies will be operationalized by September 2001. In light of the nonconforming initial bids for the Dar es Salaam Water and Sewerage Authority (DAWASA), the Government, in consultation with the World Bank, has decided to restart the bidding process. External consultants will be engaged by January 2001 to guide the restructuring of the electricity sector, including a detailed plan for the unbundling of TANESCO. We have completed a financial audit for TANESCO and are planning to strengthen its management at an early date to reduce costs, preparing the way for a rationalizing of electricity tariffs and, if necessary, bearing the costs that may arise when the power tariff dispute with Independent Power Tanzania Limited (IPTL) is eventually resolved. If such costs prove to be substantial, the program will have to be reviewed to see what additional measures would be needed to ensure fiscal viability.

34. The effectiveness of the NBS continues to be limited by the lack of adequate funding as well as transitional problems in adapting to its new status as an executive agency. Government funding for the NBS will be protected to enable it to execute its services delivery contracts. The quality of NBS data will be improved by strengthening links with the Statistics Department of the Ministry of Agriculture for agricultural output data. Following the completion of the first phase of the preparation for Tanzania’s participation in the General Data Dissemination System (GDDS), an interministerial committee has been appointed, with the NBS acting as coordinator. To commence the second phase, the preparation of the metadata by this committee will be completed by July 2000. Data collection for the Household Budget Survey (HBS) began in May 2000. Preliminary results from the HBS will be used to revise the weights used in the consumer price index (CPI) calculations from October 2000, and to revise the calculation of the nonmonetary component of GDP starting in January 2001. The BoT has made progress with the reporting of interest rates of commercial banks, as the simple average rates presented in earlier monthly surveys have now been replaced by the weighted-average rates reported by most banks, which better reflect actual developments in interest rates. The new reporting system is expected to be developed further and will provide the BoT with adequate information about market developments.

35. There has been considerable progress on governance issues. For example, the newly established commercial court is resolving disputes expeditiously and helping to restore respect for the judiciary. As part of the Government’s campaign against corruption, an anticorruption sensitization scheme has been launched. Most ministries have completed drafts of their sectoral action plans, and a medium-term budget for sector-specific measures is under preparation. In view of the potentially high costs of an unfavorable ruling from the arbitration tribunal examining the issue of the large capacity payments demanded by the IPTL, the government intends to reinforce the investigation into the circumstances surrounding the awarding of the contract between TANESCO and the IPTL.

Poverty reduction and the PRSP

36. Early steps in our poverty alleviation efforts mainly focussed on providing additional fiscal resources to the priority sectors and strengthening our statistical base for monitoring progress. Meanwhile, we have continued to develop the PRSP in conjunction with the Tanzania Assistance Strategy, which will describe our overall poverty reduction effort and plans. The Government conducted zonal PRSP workshops with representatives of civil society, including villagers, local councilors, NGOs, and district administrators covering the entire mainland Tanzania, as well as a workshop for members of parliament. Results of these workshops will be reflected in the draft PRSP, which will be discussed at a national technical workshop in July, and subsequently at a policy level workshop for Members of Parliament, government representatives, and regional commissioners, as well as representatives of large NGOs, the business community, and other members of civil society. Results of the technical and policy workshops will be used to improve the draft PRSP, which will be presented to the Government in early August 2000, after which the document is expected to be submitted to the IMF and the World Bank, also in August 2000. Later in the year, the government aims to arrange workshops to discuss preliminary results of the Household Budget Survey and the Labour Force Survey, as well as progress with developing poverty-monitoring indicators.

Concluding remarks

37. The government of Tanzania will continue to provide the Fund with such information as the Fund requires to assess Tanzania’s progress in implementing the policies described in this letter, and in the memorandum of economic and financial policies and the policy matrix indicated in paragraph 1. Moreover, Tanzania will continue to consult with the Fund on Tanzania’s economic and financial policies in accordance with the Fund’s policies on such consultations.

38. We request the Fund to approve the changes to the quantitative and structural performance criteria as set out in Tables 1 and 2, and to complete the review of the PRGF arrangement. The government of Tanzania remains fully committed to the implementation of the economic and financial program supported by the PRGF arrangement, and we trust that we can count on the continued support of the Fund.

Sincerely yours,

Attachments:

Table 1.Tanzania: Financial Benchmarks and Performance Criteria Under the First Annual Program Under the PRGF, January–December, 2000

Table 2. Tanzania: Structural Benchmarks and Performance Criteria Under the First Annual Program Under the PRGF, January–December 2000

Technical Memorandum of Understanding
between the Government of Tanzania and the International Monetary Fund

July 28, 2000

1. This memorandum contains the definitions of the quantitative benchmarks and performance criteria of Tanzania’s program supported under the Poverty Reduction and Growth Facility (PRGF) for 2000 as amended at the first review of the arrangement, and reporting requirements. It is an integral part of the documents and terms and conditions that govern the IMF’s support for Tanzania’s economic and poverty reduction program supported by the PRGF for the period 2000-2002.

I. Net International Reserves (NIR) and Net Domestic Assets (NDA) of the Bank of Tanzania (BoT).

2. For the purpose of the program, the BoT’s NIR is defined as its usable foreign assets minus its foreign liabilities excluding medium-and long-term foreign liabilities, converted in U.S. dollars at the end-period exchange rates.² The NIR is defined consistent with the definition of the Special Data Dissemination Standard template as external assets readily available to, or controlled by, the BoT. It includes the reserve position with the Fund net of outstanding use of Fund credit, but excludes any pledged or otherwise encumbered reserve assets, including, but not limited to, reserve assets used as collateral or guarantee for third party external liabilities.

3. For the calculation of the NIR, the balances in the account of the Multilateral Debt Fund (MDF) will be deducted from foreign liabilities (and added to government deposits).³ Similarly, the balance in the account of the European Union (EU) for the clearance of domestic arrears will be added to foreign liabilities (and subtracted from other domestic liabilities). At end-March 2000, the BoT’s NIR under the program definition amounted to US$401.5 million. Net foreign assets of the BoT (NFA) consists of its foreign assets minus its foreign liabilities, corrected for the balances in the MDF and the EU arrears account as mentioned above, excluding medium-and long-term foreign liabilities, converted into Tanzania shillings (T Sh) at the end-period exchange rate. At end-March 2000, the BoT’s net foreign assets amounted to T Sh 321.5 billion.

4. Net domestic assets (NDA) of the BoT are calculated as the BoT’s reserve money plus medium- and long-term liabilities minus its NFA, in billions of T Sh. At end-March 2000, the BoT’s net domestic assets amounted to T Sh 194.3 billion.

5. Reserve money is defined as the sum of currency issued by the BoT, consisting of currency in hands of the public and cash in vault held by the commercial banks, and the deposits of the commercial banks with the BoT. At end-March 2000, reserve money was T Sh 472.1 billion.

6. Medium- and long-term foreign liabilities of the BoT consist of the sum of blocked foreign liability accounts, counterpart funds for foreign currency liabilities, and the Export Promotion Agency/National Bank of Commerce (NBC) deposits. At end-March 1999, medium and long-term liabilities amounted to T Sh 43.6 billion.

7. The program includes end-of quarter quantitative benchmarks/performance criteria on the minimum level of NIR, and on the maximum level of NDA.

II. Net domestic financing of the government of Tanzania (NDF)

8. NDF includes financing by the banking system (BoT and commercial banks) and the nonbank public of the budget of the central (Union) government of Tanzania. NDF consists of treasury bills (excluding liquidity paper issued by the BoT for monetary policy purposes and included as such in the BoT’s balance sheet), government stocks and bonds, promissory notes and other domestic debt instruments issued by the government and loans and advances net of government deposits with the BoT and the banks.⁴ For the purposes of the program, NDF excludes privatization proceeds and government debt issued for the recapitalization of the NBC (1997), the NMB, and the restructuring of the debt owed to the BoT.

9. NDF is calculated as the cumulative change since June 30, 1999 in the sum of (i) loans and advances to the government by the BoT minus all government deposits with the BoT (including the MDF deposit), from the balance sheet of the BoT; (ii) loans and advances to the government by the commercial banks minus all government deposits held with the banks, from the balance sheet of the commercial banks; and (iii) the outstanding stock of domestic debt as identified in the Monthly Domestic Debt Report issued by the Ministry of Finance, excluding principal and interest arrears, minus (iv) government debt instruments issued for the recapitalization of the NBC (1997) and the NMB, and minus (v) government debt issued for the restructuring of government obligations to the BoT. The balances and items constituting NDF as of June 30, 1999 and through end-March 2000 are provided in table 1a.

III. Adjuster to the performance criteria and benchmarks for NIR and NDA of the BoT and NDF of the Budget for a Shortfall/Excess in Net Foreign Financing

10. For the purposes of the program, the benchmarks and performance criteria for NIR and NDA of the BoT and NDF of the budget will be adjusted for a shortfall or excess in net foreign financing of the budget compared with the projected level. In the case of an excess (shortfall) the benchmarks and performance criteria for NIR will be adjusted upwards (downwards) and the benchmarks and performance criteria for NDA and NDF will be adjusted downward (upward) for the full amount of the excess (shortfall). However, with the objective of safeguarding a minimum level of NIR, in the case of a shortfall, the adjustment of the benchmarks and performance criteria will be limited to a maximum amount of US$60 million (in the case of NIR) or the equivalent amount in T Sh at the end-period exchange rate (in the case of NDA and NDF).

11. Under the program, for the adjustment to NIR, net foreign financing of the budget is calculated as the cumulative sum since June 30, 1999 of the receipts from (i) program loans (financing for the budget provided by multilateral institutions); (ii) program grants (financing for the budget provided by bilateral donors); and (iii) grants provided for debt relief by the IMF and the World Bank; minus (iv) interest on external debt paid from the budget; and (v) amortization of external debt paid from the budget. For NDA and NDF, the amounts of (i)-(v) above are converted into T Sh at the average quarterly exchange rate. The calculation of the adjustor for the shortfall/excess in net foreign financing is provided in table 1b.

IV. Other adjusters

12. For the purposes of the program, NDA will be adjusted for changes in the reserve requirement in an amount equal to the change in percentage points in the reserve requirement times the amount of deposits held by the public with the commercial banks.

13. For the purposes of the program, NDA will be adjusted for the difference between the actual and the programmed exchange rate. NDA will be adjusted by the difference between (i) the sum of the actual net foreign assets and the net Fund accounts in US dollar terms times the actual exchange rate of the T Sh against the U.S. dollar; and (ii) the sum of the actual net foreign assets and the net Fund accounts in US dollar terms times the programmed exchange rate of the T Sh against the U.S. dollar.

V. External payments arrears

14. External payments arrears consist of the total amount of external debt service obligations (interest and principal) of the government and the BoT, that have not been paid at the time they are due, excluding arrears on external debt service obligations pending the conclusion of debt rescheduling arrangements. Under the program, the avoidance of external payments arrears is a continuous performance criterion.

VI. Nonconcessional external debt

15. Under the program, the avoidance of nonconcessional external debt contracted or guaranteed by the government or the BoT is a continuous performance criterion. Nonconcessional external debt is all debt with a concessionality level of less than 35 percent. For loans with a maturity of at least 15 years, the 10-year average “Commercial Interest Rate Reference Rate” (CIRR), published by the OECD, should be used to calculate the level of concessionality. For loans with shorter maturities, the 6-month average CIRR should be used. For the purposes of the program through December 31, 2000, the 6-month and 10-year CIRRs published by the OECD in April 2000 will be used. To both the 10-year and 6-month averages, the following margins for differing repayment periods should be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15-19 years; 1.15 percent for 20-29 years; and 1.25 percent for 30 years or more.

16. Nonconcessional external debt under the program excludes debt contracted in the context of rescheduling agreements and includes financial leases and other instruments giving rise to external liabilities, contingent or otherwise, on nonconcessional terms.

VII. Central government recurrent revenue

17. Under the program, central government revenue consists of tax revenue and nontax revenue, cumulative since the start of the fiscal year, excluding privatization proceeds and the excess of dividends received from the BoT over the programmed amount. For 2000/01, the programmed amount of dividend receipts from the BoT is T Sh 4.5 billion. Tax revenue consists of all revenue collected by the Tanzania Revenue Authority (TRA) minus nontax revenue collected by the TRA, as per the monthly TRA revenue report. Nontax revenue consists of nontax revenue collected by the TRA, dividends, revenue collections by the Treasury and the Ministries and Regions, and appropriations in aid.

VIII. Extrabudgetary expenditure

18. The avoidance of extrabudgetary expenditure is a benchmark under the program. For the purposes of the program, extrabudgetary expenditure is defined as expenditure financed outside the regular budgetary (paymaster-general) accounts, including from the accounts of non-budgetary government entities such as the Public Sector Reform Commission or the TRA.

IX. Accumulation of budgetary arrears

19. The avoidance of new budgetary arrears constitutes a benchmark under the program, starting July 1, 2000. New budgetary arrears are defined as arrears accumulated during the fiscal year on wages, domestic interest, goods and services, and tax refunds. Payments on salaries, wages and pensions are deemed in arrears when they remain unpaid more than 30 days beyond the due payment date. Interest payments are in arrears when the payment is not made on the due date. Payments to suppliers are deemed to be in arrears if they have not been made within the normal grace period of 30 days or such other period as has been contractually agreed after the verified delivery of the concerned goods or services, unless the amount or the timing of the payment is subject to good faith negotiations between the government and the creditor. In the case of tax refunds, a refund is in arrears if the refund has not been made within 30 days after receipt of the claim, unless the claimant has been notified in writing of the nonacceptance of the claim by the TRA.

X. Data Reporting Requirements

20. For purposes of monitoring the program, the government of Tanzania will provide the data listed below. This memorandum distinguishes two different reporting requirements, (i) for the purpose of monitoring performance in relation to the program’s benchmarks and performance criteria; and (ii) for the monitoring of general macroeconomic and financial developments. The data will be collected by the BoT and transmitted through the office of the Resident Representative, no later than one month after the date to which the data refer. The required information concerns:

A. Reporting of developments in relation to the program’s benchmarks and performance criteria (to be provided monthly).

1. Table of Financial Performance Criteria and Benchmarks Under the First Annual Program Under the Poverty Reduction and Growth Facility, January-December 2000 (Table 1attached). Although this table only identifies quarterly ceilings or floors for NDA of the BoT, NDF of the government and NIR of the BoT, for the purpose of program monitoring the relevant actual data will be provided on a monthly basis for all benchmarks and performance criteria. In case the government incurred external payments arrears, contracted or guaranteed external debt on nonconcessional terms, made extrabudgetary expenditures or accumulated budgetary arrears, details of the arrears or transaction(s), including amounts and reasons for the noncompliance with the performance criterion/benchmark will be provided in an annex to this table.

2. Table with the calculation of net domestic financing of the budget (Table 1a attached).

3. Table with the calculation of the program adjuster for the shortfall (excess) of net foreign financing of the budget (Table 1b attached).

4. Table with the Structural Benchmarks and Performance Criteria for the First Annual Program Under the PRGF Arrangement (Table 2 attached). The fourth column of this table, labeled “Status,” will be updated on a monthly basis with a view to monitor progress with the structural benchmarks and performance criteria.

5. Table on priority sector expenditure targets and performance. (Format table under preparation in cooperation with the authorities).

B. Reporting of developments in relation to the monitoring of general macroeconomic and financial developments.

To be provided monthly (data for the latest month):

The balance sheet of the BoT.
The consolidated balance sheet of the commercial banks.
The monetary survey.
Commercial banks--domestic lending by borrowing sectors.
Commercial banks--interest rate structure.

The flash report on revenues and expenditures.
The Monthly Domestic Debt Report.
The TRA revenue report.
The external cash flow statement, including details on payments of interest and principal on government external debt.
Exports and Imports.

The published consumer price index report of the National Bureau of Statistics (NBS).

To be provided quarterly:

Balance of payments.

To be provided when available:

The half-yearly and yearly national accounts statistics in constant and current prices as prepared by the NBS.

Attachments:

Table 1. Financial Performance Criteria and Benchmarks Under the First Annual Program Under the Poverty Reduction and Growth Facility, January-December 2000

Table 1a. Calculation of Net Domestic Financing of the Budget, June 1999-December 2000.

Table 1b. Calculation of the Program Adjuster for the Shortfall (Excess) of Net Foreign Financing of the Budget.

Table 2. Structural Benchmarks and Performance Criteria for the First Annual Program Under the PRGF Arrangement.

Table 3. Priority Sector Expenditure Targets and Performance. (Format table under preparation in cooperation with the authorities)