THE UNITED REPUBLIC OF

TANZANIA

NATIONAL DEBT STRATEGY

PART I: EXTERNAL DEBT

JUNE 1998

TABLE OF CONTENTS TABLE OF CONTENTS

Glossary of Terms ……………………………………………………………iv

Abbreviations ………………………………………………………….v

Executive Summary ……………………..……………………………………..1

CHAPTER ONE: Introduction…………………………………………….12

CHAPTER TWO: Tanzania Economic Outlook………………....………..15

2.1 Overall Economic situation………………………………15

2.2 Economic Recovery Efforts……………………………...16

2.3 Economic performance…………………………………..19

2.4 Institutional and Management Reforms………………….22

2.5 National debt………………………………………….….24

2.6 Future Prospects and Vision……………………………..26

CHAPTER THREE: Evolution of External Debt…………………………….28

3.1 Historical Perspective……………………………………28

3.2 Structure of External debt………………………….…….28

3.3 Global Debt Reduction Initiatives…………………..…...30

3.4 Strategies for Debt Reduction in Tanzania………………31

3.5 Impact of Debt reduction Initiatives…………………….33

CHAPTER FOUR: Poverty Alleviation and

the Potential Impact of debt Relief ………………....35

4.1 Poverty Situation in Tanzania………………….………...35

4.2 Implication for aid effectiveness……………..…………..37

4.3 The Fiscal Impact of Debt………………… …………….38

CHAPTER FIVE: Institutional and Legal Framework…………….……..41

5.1 The Current Institutional Framework for debt Management………………………………………….…41

5.2 The Current Legal Framework for Debt Management…………………………………………....46

5.3 Role of Civil Societies…………………..……………..48

5.4 Debt Awareness Campaigns……………….…………..50

CHAPTER SIX: Future Debt Strategy and Outlook………………..…..51

6.1 Legal framework and Resource Mobilisation…………...51

6.2 Institutional framework………………………………….55

6.3 Strategy for the various categories of External debt….…56

CHAPTER SEVEN: Summary of main elements of the strategy, Time Frame for Implementation and responsible Institutions…………..………...63

GLOSSARY OF TERMS:

1. Debt Rescheduling - A forum of debt reorganization in which payments of principal and/or interest previously due at a specified time are deferred for repayment on new schedule following negotiations between the creditor and debtor.

2. Paris Club - The Paris Club is an ad-hoc gathering of creditor governments chaired by a high ranking official of the French Treasury which meets for the purpose of rescheduling debts. It is open to all creditor governments that are willing to adhere to its rules and practices and have claims against a debtor country that is seeking debt rescheduling.

3. Special Drawing Rights (SDR) - is a standard unit of account used by the International Monetary Fund (IMF). SDR is not used in commercial transactions but is issued to IMF members from time to time in proportion to their fund quotas.

ABBREVIATIONS

BOP - Balance of Payments

BOT - Bank of Tanzania

CMSA - Capital Market and Securities Authority

CRDB - Co-operative and Rural Development Bank

DCC - Debt Co-ordination Committee

DCP - Debt Conversion Programme

DMC - Debt Management Committee

ESAF - Enhanced Structural Adjustment Facility

GDP - Gross Domestic Product

HIPC - Highly Indebted Poor Countries

IDA - International Development Association

IFEM - Inter-bank Foreign Exchange Market

IMF - International Monetary Fund

LART - Loans and Advances Realisation Trust

MEBO - Management and Employees Buy-Out

NBC - National Bank of Commerce

NESP - National Economic Survival Programme

NGO - Non - Governmental Organisation

OECD - Organization For Economic Co-operation and Development

PC - Paris Club

PMO - Prime Minister’s Office

PSRC - Parastatal Sector Reform Commission

SAP - Structural Adjustment Programme

TRA - Tanzania Revenue Authority

TZS - Tanzania Shillings

TCCIA - Tanzania Chamber of Commerce, Industry and

Agriculture

US$ - United States Dolla

EXECUTIVE SUMMARY

1. TANZANIA ECONOMIC OUTLOOK

(i) Tanzania is a low income country with an estimated per capita income of US$ 200 according to the Revised National Accounts of May 1997. From mid 1960s to mid 1980s the country pursued economic and social policies under the umbrella of the Arusha Declaration which emphasized on socialist principles of economic management. The country made progress in economic and social development, as GDP growth averaged 4.7 percent per annum from 1968 to 1978. However, starting 1979 to early 1980s the average GDP growth rate dropped drastically as the economy was faced with multifaceted economic problems characterized by large fiscal deficits, declining real per capita income and erosion of the tax base.

(ii) From 1986 to date the Government has been implementing continuous economic recovery programmes supported by the World Bank, the International Monetary Fund (IMF), and other bilateral partners in development, the aim being to revive economic growth and improve living standards by strengthening the role of market forces in the economy.

(iii) Implementation of the economic reforms has started to show positive results. In the first half of the 1990s, Tanzania recorded an average GDP growth rate of about 4 percent, largely on account of continuing recovery in agricultural production that started in the mid-1980s as well as production improvements in mining and manufacturing. Favourable achievements have been observed in the external sector, with exports rising from US$ 407.8 million in 1990 to US$ 717.1 million in 1997, representing an annual average growth of 14 percent. The positive performance in overall production and export earnings was mainly on account of improved domestic policy environment, and world market prices of coffee, cotton, sisal, tobacco, cashewnuts and tea.

(iv) Despite achievements recorded so far in the economic front, challenges ahead are considerable, particularly if the gains are to be sustained and translated into overall improvement of living standards of the majority of Tanzanians. It is therefore imperative to continue with the economic reform measures in order to bring about a stable macro-economic environment which is a pre-requisite for growth-oriented development for the country. In the medium - term, the resolution of the debt crisis is a necessary condition to facilitate release of resources for priority expenditures. Resources released from the debt service will have important catalytic effects for socio-economic development and poverty alleviation through enhanced expenditure allocations in priority programmes.

2. EVOLUTION OF EXTERNAL DEBT

(i) Since early 1970’s Tanzania has encountered a series of economic and natural setbacks which led to a build-up of huge fiscal and balance of payments deficits, which in turn necessitated the Government to borrow heavily. As a result, external indebtedness rose from USD 4.9 billion in 1986 to USD 7.9 billion in 1997 while debt arrears increased sharply from USD 0.66 billion to USD 3.1 billion, respectively. By December 1997 bilateral debt accounted for 44.4 percent of the debt stock, while multilateral debt, private and commercial accounted for 48 percent and 8 percent respectively. Despite the ongoing reforms the Government remains the largest borrower accounting for 93 percent of the debt stock.

(ii) Factors which contributed to the acceleration of the debt crisis in Tanzania, are both domestic and external in nature. They included inappropriate socio-economic policies, oil price shocks, droughts, implications of the break-up of the East African Community, unfavourable terms of trade and the influx of refugees.

(iii) Global initiatives to contain debt problems of the Highly Indebted Poor Countries (HIPCs) basically hinge on the Paris Club arrangements and cancellations of official bilateral debts. Within the global initiatives, Tanzania negotiated specific arrangements in the framework of the Economic Recovery Programme which started in 1986. The specific arrangements were as follows:-

(a) Bilateral Debt Relief

From mid - 1970s Tanzania Government requested bilateral creditors to cancel official loans. Up to mid-1997 total debts worth US$ 1,044 million were cancelled.

(b) Paris Club Debt Relief

Tanzania has been to Paris Club five times since 1986 to request for debt relief Debts worth US$ 523.8 million were cancelled and US$ 1,918.7 million were rescheduled by 1997.

Debts worth USD 182.0 million were converted between 1990 -1993 and the proceeds were re-invested in 82 projects. This programme was suspended due to its inflationary impact and in order to pave way for the Debt Buyback scheme which is considered to be non-inflationary.

(d) Debt Buyback Scheme (DBB)

Necessary preparations to execute the scheme have been completed. Its execution is expected to take off in mid - 1998 and debts worth USD 253 million are expected to be extinguished using resources from the IDA Debt Reduction Facility.

(e) Multilateral Debt Fund (MDF)

In April 1998, the Government of the United Republic of Tanzania established a Multilateral Debt Relief Fund (MDRF), so as to bring relief both to the budget and balance of payments. The relief expected in terms of foreign resources would be used to service debts owed to Multilateral Financial Institutions, while the budgetary relief would be used to finance poverty reduction programs in the social sectors. Specifically, the following requests were made to donors:

· To grant support of US$ 125.0 million per annum to cover all multilateral debt service from 1998 until the year 2002;

· To agree in principle to extend their support to the Fund beyond the year 2002, if need arises, given the huge burden of multilateral debt service to the budget and the uncertainty regarding the HIPC Initiative;

· To disburse funds directly into a special account of the Fund in order to avoid delays in the setting-up and utilisation of proceeds from the Fund.

Sufficient safeguards will be put in place to ensure that all the foreign exchange and the counterpart local funds are utilised as intended i.e. for payment of debt to multilateral institutions and for programmed expenditures in the social sector, transport and water supply. If the donors provide the relief requested, about TZS 80 billion, being debt service payment requirements to multilateral institutions, will be freed from the budget for reallocation to the social sector programmes, thereby assisting the Government realise its commitment to reduce poverty. If the Government is not assisted, the debt service burden will continue to crowd-out social sector expenditures and hence undermine the Governments ability to address poverty.

Despite the debt reduction initiatives, Tanzania has not been able to service its debts as scheduled due to poor economic performance. Arrears have increased from USD 0.4 billion in 1980 to US$ 3.4 billion in 1997. Although the combined impact of the repeated rescheduling has reduced the current debt repayment profile by postponing debt servicing to the future, if Tanzania was to pay all the outstanding debt arrears and thereafter remain current, the implied debt service ratio would be 285 percent. The actual debt service ratios of between 30 and 15 percent during 1994 to 1997 though low, are a reflection of partial debt servicing effected to the Paris Club and Multilateral creditors. The actual situation is unsustainable and it is because of this unsustainability that the Government decided to have a National Debt Strategy, to spearhead national debt management and reduction efforts during 1997/98 and beyond.

3. POVERTY ALLEVIATION AND THE POTENTIAL IMPACT OF DEBT RELIEF

Poverty is a very serious problem in Tanzania. Studies have indicated that about 50 percent of the population live below the poverty line and cannot afford even the basic needs. However, it is widely recognized that poverty can be alleviated with the increase in economic growth, redistribution of wealth and increased resource allocation to education, health, water supply and infrastructure development. The severity of debt servicing in Tanzania crowds out allocation of resources to those sectors and it makes efforts for poverty alleviation even more difficult.

4. THE INSTITUTIONAL AND LEGAL FRAMEWORK FOR DEBT MANAGEMENT

(i) The legal framework for raising external resources is enshrined in the Government Loans, Guarantees and Grants Act No. 30 of 1974. The Act empowers the Minister for Finance to raise loans and grants on behalf of the Government. Under the same Act, the Minister for Finance is authorised to delegate to a public officer the authority to execute any agreement or instrument relating to a loan raised on behalf of the Government. However, the Act needs to be reviewed to reflect the current socio-economic and political developments, to meet the requirements for transparency or to involve all stakeholders in decisions in debt issues.

(ii) The current institutional set-up for Government debt management involves four key central institutions, namely the Ministry of Finance, Planning Commission, the Attorney General’s Chambers and the Bank of Tanzania, Sectoral Ministries and Parastatal Organisations, are also involved in their respective areas. However, there are weaknesses in the current institutional set up which include lack of co-ordination among the key players in Debt Management and deficiency in human/professional capacity.

(iii) Projects which access external loans are identified by implementing agencies, i.e. sectoral Ministries, Parastatal Organisations as well as Regional and District authorities.

Loan Negotiation and Contracting

(iv) The Ministry of Finance submits the project requests to the would be external lender and leads the negotiation process. After all stages of negotiations and where the process is successful, loan agreements are signed by the Minister of Finance or his duly appointed representative on behalf of the Government. After this stage, the projects are taken to Parliament for inclusion in the budget.

(v) Loan disbursements are made in accordance with the action plan of the project subject to meeting all conditionalities for loan effectiveness and related reform targets. In practice, loan disbursements are slowed down due to non-fulfilment of disbursement conditionalities.

(vi) The Government is supposed to undertake project evaluation after project implementation, however, this is not done due to lack of resources. As a result the Government is not made aware of the project effectivenes and the effects of the project externalities and thus can not take corrective measures where necessary.

(vii) In servicing loans for the Government, the Ministry of Finance of the Union Government or in case of on-lent loans, the Ministry of Finance of the Revolutinary Government of Zanzibar and respective Parastatal Organisations are required to budget for all maturities expected in each financial year. They are also required to pay on due date to the Bank of Tanzania the shillings equivalent of the maturing debts for remittance to the creditors. Problems in external loan servicing are related to under-budgeting, non-allocation of requisite cash cover on the part of the Ministry of Finance of Zanzibar, lack of cash cover from Parastatal Organisations and shortage of foreign exchange. The outcome of these problems is the build up of external payment arrears and the transfer of parastatal debt obligations to an already over-strained Government budget.

(viii) The civil society has an important role to play in the overall development of the country in general and in debt reduction efforts in particular. However, their involvement in debt negotiations, campaigns and lobbying has so far been very minimal because either the Government is yet to appreciate their importance or the civil society organisations are in themselves not prepared to take the challenge.

5. FUTURE DEBT STRATEGY AND OUTLOOK

(i) External borrowing shall be used for financing identified priority projects. The Government shall borrow only on highly concessional terms, such as IDA comparable terms with grant element of 78 percent and above. Where the Government is compelled to borrow on commercial terms, such borrowings shall only be for emergency cases.

(ii) Only the Minister for Finance or public officers authorised by the Minister shall contract foreign loans on behalf of the Government.

(iv) The Government Loans, Guarantees and Grants Act of 1974 which stipulates borrowing limits will be reviewed regularly to reflect socio-economic developments prevailing.

(v) There is a need for strengthening capacity to undertake active debt management in relevant Government ministries and institutions. To this end the Government will train and develop professionals in all aspects of debt management.

(vi) There is also a need to establish effective flow of information within departments in the Ministry of Finance involved in loan contracting, disbursements and debt servicing and between key institutions in debt management. In this regard, the Government will establish a Debt Co-ordination Committee (DCC) comprising of the Permanent Secretary of the Ministry of Finance, Permanent Secretary to the Planning Commission, Permanent Secretary of Prime Minister’s Office, Permanent Secretary of Foreign Affairs and International Co-operation, Permanent Secretary of the Ministry of Justice and Constitutional Affairs, Permanent Secretary Ministry of Foreign Affairs, Permanent Secretary Prime Ministers Office and the Governor of the Bank of Tanzania. The Committee will be backed by a technical committee (Debt Management Committee – DMC) composed of members from the same institutions.

(vii) The Government will increasingly involve the civil society organisations such as Non-governmental Organisations (NGO’s), Co-operative Unions, Farmer’s Associations, Workers Unions, Religious Institutions, Private Sector Institutions and the media. Awareness campaigns on the debt problem are a necessary vehicle for creating awareness, interest and literacy on debt issues, as they promote wider participation and accountability.

Future External Debt Strategy

(viii) The share of Multilateral debt in outstanding debt has been increasing and is bound to increase. Currently it accounts for over 45 percent of total debt. The strategy for the multilateral debt category is:

a) To continue to quest donors to provide resources for Multilateral Debt Relief Fund, which has already been established with the aim of servicing multilateral debt and enable the Government to use the saved funds to protect the priority areas such as education, health and water.

b) To continue to convince the World Bank and IMF to ease the fiscal burden indicator in assessing the sustainability of Tanzania’s debt service burden within the HIPC initiative.

(ix) The will Government should implement fully the Paris Club V Agreement so as to enhance its chance for qualifying for HIPC.

(x) Regarding the Non-Paris Club debt the Government:

a) will engage in formal negotiations with all non-Paris Club creditors with a view to obtaining debt reduction of up to 67 percent in net present value terms.

b) will organise a debt buyback scheme to purchase debts at a discount. To this end, the Government will set aside TZS equivalent of USD 60.0 million (about 10 per cent of total exports per annum) from its budget to finance the operation.

c) will strive to retire the remaining debt through debt for equity swaps, debt for nature and debt for aid arrangements.

(xi) With respect to commercial debts, the Government will ensure that the existing verified arrears are cleared through a debt buyback operation using World Bank’s Debt Reduction Facility supplemented by bilateral grants.

CHAPTER ONE

INTRODUCTION

1.1 The Government of the United Republic of Tanzania has been implementing Economic Recovery Programmes supported by the Bretton Woods Institutions, bilateral Governments and other International Financial Institutions since 1986. In implementing the recovery programmes one critical area of attention and which has emerged to be a serious constraining factor to the recovery efforts has been the debt problem both domestic and external. The Government, conscious of this problem and its constraining effects on efforts towards poverty alleviation, requires a Debt Strategy to address the issue.

1.2 Tanzania’s total external debt has been growing consistently from US$ 4,696 million in 1986 to a peak level of US$ 8,017 million in 1995 before dropping slightly to US$ 7.9 billion in 1997. Actual debt service, expressed as a ratio of export of goods and services increased from 6 percent in 1986 to an average of 26 percent during the period 1986 to 1997. It is also estimated that servicing of Government external debt consumes about 30 percent of total domestic revenue. This is inspite of the fact that debt servicing has since 1986 been limited to a few creditors, namely multilateral institutions and Paris Club members.

1.3 Starting mid-eighties, the Government has taken various measures to address the debt problem. These include:-

(i) requesting for cancellation of official bilateral debts;

(ii) requesting for debt rescheduling under Paris Club arrangements;

(iii) conducting Debt Conversion programmes for the un-insured commercial credit;

(iv) limiting borrowing on non-concessional terms; and

(v) arranging for Debt Buyback for the remaining un-insured commercial credit.

1.4 The debt problem has remained an obstacle to overall economic progress despite the various measures already undertaken and thus calls for additional measures and innovative strategies.

CHAPTER TWO

TANZANIA ECONOMIC OUTLOOK

2.1 OVERALL ECONOMIC SITUATION

2.1.1 Tanzania is a low income country with an estimated per capita income of US$ 200 according to the Revised National Accounts of May, 1997. From mid-1960s to mid-1980s the country pursued economic and social policies under the umbrella of the Arusha Declaration which emphasized on socialist principles of economic management. The country made progress in economic and social development, as GDP growth averaged 4.7 percent per annum from 1968 to 1978. Primary school enrolment tripled, access to health services improved, life expectancy improved from 41 years during 1960s to 47 years during 1970s and infant mortality rate declined from 147 during 1960s to 122 (per 1000 births) during late 1970s. However, starting 1979 to early 1980s the average GDP growth rate dropped to less than 1 percent per annum as the economy was faced with multifaceted economic problems characterised by large fiscal deficits, rapid monetary expansion, high rates of inflation, balance of payments deficits, declining real per capita income and erosion of the tax base. The economic policies pursued then were not capable of containing the emerging economic crises.

2.1.2 The Government reacted to the deteriorating socio-economic situation by introducing a series of economic reform measures. In 1981 it adopted the National Economic Survival Programme (NESP) which was followed by the Structural Adjustment Programme (SAP) in 1982/83 to 1984/85 period. These policy programmes, though useful in identifying the nature and gravity of the economic crisis facing the country, could not be effective as intended because they lacked the critical resource injection from the donor community and the private sector. From 1986 to-date (1998) the Government has been implementing continuous economic recovery programmes supported by the World Bank, the International Monetary Fund (IMF), and other multilateral and bilateral partners in development. The economic recovery programmes aim at improving economic growth and living standards through strengthening the role of market forces in the economy, reducing the role of central administrative management of the economy and improving the efficiency of the public sector.

2.2 ECONOMIC RECOVERY EFFORTS

2.2.1 Following a number of reviews and assessments of the state of the economy, the Government established that the causes of the economic problems fall under the following categories:-

(i) External Factors

These were causes for which the country had little or no control. They included the 1978 second round of oil price increases, deteriorating international prices for traditional export crops and high prices for manufactured imports during the late 1970s and early 1980s, poor weather conditions for agricultural activities, the burden from the East African Community break up, the effects of the War with Idi Amin forces, the pressure on domestic resources because of the historical problem of refugees and a general decline in donor financing especially from early 1990s.

(ii) Internal Factors

Key in the internal factors was the policy environment which failed to promote competition and efficiency in resource mobilisation and utilization, in maintaining macro-economic stability and in development of the private sector. Policies of the time focused on public sector intervention, leading to the dominance of parastatal enterprises in production which in the end became inefficient and a burden to the Government budget. Hence, the policy environment failed to achieve the main objectives of economic growth and efficiency.

2.2.2 In implementing the economic recovery programmes, the Government introduced a wide range of policy and institutional reforms to resolve structural problems, which would otherwise continue to hold back the positive effects of the adjustment measures. The main bottlenecks were reflected in macroeconomic instability, underdeveloped economic infrastructure, inefficient parastatal and financial sectors, trade and exchange restrictions, as well as an over-expanded Government. Thus, policy and institutional steps were taken as follows:

(i) Policies implemented to bring about macroeconomic stability include:-

(a) Monetary Policy Measures

The introduction of the Treasury Bills market was intended to provide non-inflationary short-term finance to the Government, thereby stopping Government borrowing from BOT, and to provide a basis for market determined interest rates.

• In May 1996 a special account at BOT was set-up to block the proceeds of the 91-day Treasury bills.

• The discount rate and the statutory minimum reserve requirements were raised, with a view to reduce excess liquidity in the economy, in order to bring about price stability.

(b) Fiscal Policy Measures

• The adoption of the cash budgeting system, which closely matches Government expenditures to revenue collection.

• Stopping subsidies to loss-making Parastatal enterprises.

• Strengthening revenue collection, rationalizing tax structure and expenditure control.

• Improving budgetary management with a view to fully funding priority expenditures.

• Streamlining of Government structure and staff retrenchment.

(ii) Policies implemented to bring about the removal of trade and exchange restrictions include:

(a) The abolition of the import and exchange control system introduced in 1972 and enacting the Foreign Exchange Act in 1992. The Act paved the way for the establishment of Bureax de Change and an interbank foreign exchange market in which free trading of foreign exchange determines the exchange rate.

(b) Overall trade liberalisation, which also includes price deregulation and liberalisation in the marketing of agricultural commodities.

(iii) Policies implemented to bring about structural reforms include:-

(a) Divestiture of parastatal enterprises. The Parastatal Sector Reform Commission (PRSC) was established in 1993 to oversee the privatisation and restructuring of state enterprises, with a view to improve their operational efficiency, to reduce the fiscal and monetary pressures arising from financing their losses, and to promote wider participation in the management and ownership of business activity.

(b) Civil Service Reforms carried-out with the objective of having a leaner and efficient civil service.

• Enactment of the Banking and Financial Institutions Act No.12 of (1991), that provided the legal framework for the changes in the sector. The Act paved the way for licensing of new banks and financial institutions.

• Enactment of the Loans and Advances Realisation Trust (LART) Act No.6 to assume and subsequently realise non-

performing loans of the National Bank of Commerce (NBC) and the Co-operative and Rural Development Bank (CRDB).

• Enactment of the Capital Markets and Securities Act No. 5 of (1994), which led to the establishment of the Capital Markets and Securities Authority (CMSA). The CMSA is responsible for providing an enabling environment for the development of a secondary market for securities, as well as a stock market to serve as a primary source of capital for long-term investment. The law enhances the role of the private sector in production, as well as mobilisation and utilisation of domestic resources.

• Restructuring of state-owned banks, the aim being to bring about greater efficiency in the sector, through right-sizing of their operations, closure of unprofitable branches and increased share capital of the banks.

• Strengthening banking regulations and supervision by putting in place prudential regulations for banks and financial institutions, with a view to promoting the development of a strong and viable financial system in Tanzania.

2.3 ECONOMIC PERFORMANCE

Output

2.3.1 The implementation of the economic reforms has started to show positive results. As seen from Table 2.1, GDP annual growth rate at 1992 constant prices averaged 3.6 percent during 1985 to 1990, followed by a low growth rate of 1.6 percent during 1991 to 1994 and a growth rate of 4.1 percent in 1995, 4.2 percent in 1996 and 3.3 percent in 1997. The performance in output, though still unstable and low, compares favourably with the average of less than 1 percent experienced during the late 1970s and first half of 1980s. Agriculture expanded at

an annual average rate of about 3.4 percent during 1986 to 1996 and 3.8 percent during 1991 to 1997 period. The growth rate is still small in absolute terms and as compared to about 3 percent during the decade prior to the start of reforms in 1986. Production in the manufacturing sector increased by annual average rate of 3.1 percent during 1986 to 1991 period but declined by an average annual rate of 1 percent during 1992 to 1994 period. The manufacturing sector grew by 1.6 percent in 1995, 4.8 percent in 1996 and 5.0 percent in 1997. The response by manufacturing sector reflects the difficulties involved in the restructuring process, the fact that the effect of the measures taken can only be realized in the medium and long term. Mining has tremendous potential as a major source of economic growth, although it still accounts for less than 2 percent of GDP. The sector registered an average annual growth of 11.1 percent during 1990 to 1997 compared to negative performances during 1985 to 1989 period. This is mainly a result of the liberalization of the sector. Performance in other sectors was mixed with construction growing by an annual average of 1.4 percent, transport and communication 1.4 percent, trade, 2.4 percent, and public administration 1.2 percent.

Balance of Payments

2.3.2 Favourable developments have been observed in the external sector. Exports have shown improvements during 1990s, rising from US$ 407.8 million in 1990 to US$ 761.6 million in 1996 but fell to US$ 717.1 million in 1997, representing an average annual increase of 11 percent (see table 2.2). The positive performance in export earnings was mainly on account of improved policy environment, the increasing volume of non-traditional exports and increases in both volume and world market commodity prices of coffee, cotton, sisal, tobacco, cashewnuts and tea. Earnings from non-traditional exports exceeded those from traditional exports for the first time in 1990 and since then their contribution to total exports has ranged between 40-50 percent. Imports increased slightly from US$ 1,227.2 million in 1990 to US$ 1,340.6 million in 1995 before falling to US$ 1,212.6 in 1996 and US$ 1,163.7 million in 1997. Thus, exports accounted for 62 percent of imports in 1996 and 61 percent in 1997 compared to 33 percent 1990. The current account deficit improved from US$ 1,022.0 million in 1993 to US$ 451.0 million in 1996 and US$ 446.6 million in 1997, on account of improved

exports, stable imports and improvements in services and income balances. Capital inflows declined from US$ 327.2 million in 1990 to US$ 191.0 million in 1996, following declining trend in donor financing, increased to US$ 347.0 million in 1997. Foreign direct investment rose sharply with the liberalisation process, increasing from US$ 20 million in 1993 to US$ 157.8 million in 1997. The overall balance of payment deficit improved from US$ 634.4 million in 1990 to US$ 223.9 million in 1996 and US$ 237.7 million in 1997. The foreign reserves position improved from 2.9 weeks of imports in 1993 to 17 weeks of imports in December 1997.

Fiscal Policy and Budgetary Management

2.3.3 Beginning 1986 fiscal policy and budgetary management have aimed at improving the budgetary situation to a position where tax and non-tax sources of revenue could fully finance the Government recurrent budget as well as part of the development budget. The reform process entailed increased efforts on expenditure controls, improved tax administration, including the establishment of the Tanzania Revenue Authority (TRA). Following these measures, budgetary performance improved slightly. Fiscal deficit relative to GDP declined from 10.6 percent during the period between 1981 and 1985 to 1.8 percent during 1996 to 1997, mainly due to a decline in expenditure relative to GDP. Despite significant reduction in expenditure relative to GDP, the fiscal situation remains difficult as revenues are not able to cover all critical budgetary requirements. The situation is compounded by the growing burden of debt servicing which also imposes a heavy burden on the budget.

Monetary Policy and Financial Sector Reforms

2.3.4 The Banking and Financial Institutions Act No 12 of 1991 ushered in a new era in Tanzania by liberalising the banking sector, the objective being to introduce competition and thereby improve the quality of services offered to clients through the participation of private banks and other financial institutions. Between 1991 and 1997 a total of 23 new privately owned banks and financial institutions were licensed and most of them are now operational. Public banks and financial institutions have been undergoing intensive

restructuring. While the former Co-operative and Rural Development Bank (CRDB) was fully restructured and transformed into a private commercial bank, the National Bank of Commerce (NBC) has been split into two banks namely, NBC (1997) Ltd., and the National Microfinance Bank (NMB). Divestiture of the two institutions is still in progress. Financial sector liberalisation has also involved liberalisation of foreign exchange regime and interest rates. The official exchange rate is now determined daily in the Inter-bank Foreign Exchange Market (IFEM) where the Bank of Tanzania, commercial banks, financial institutions and authorised Bureaux de Change freely trade in foreign exchange. Monetary policy essentially focuses on facilitating the domestic mobilization and lending of financial resources as well as keeping inflationary pressure under control. Domestic mobilization of financial resources has increased significantly. Between 1991 and 1997 domestic deposits increased four folds, from TZS 151.5 billion in December 1991 to TZS 667.6 billion in December 1997, with private banks accounting for 58.6 percent of the deposits. Tight monetary and fiscal policies of 1995/96 - 1996/97 reduced growth of broad money supply from 32.1 percent in 1995 to 13.3 percent in 1997, and the inflation rate consequently fell from 29.3 percent in 1995 to 15.4 percent in December 1997.

2.4 INSTITUTIONAL AND MANAGEMENT REFORMS

2.4.1 Civil Service Reform

(i) The Civil Service reform aims at improving efficiency and at reducing the budgetary pressure from the civil service through:-

(a) strengthening personnel control;

(b) reductions in civil service employment to appropriate levels;

(d) efficiency improvement in the civil service operations.

(ii) In order to achieve these objectives, the Government formulated an integrated action plan for Civil Service Reform concerning Personnel Control, Organizational and Efficiency (O&E) reviews, Pay Reform, Retrenchment and Redeployment as well as strengthening of local Government. A total of 61,000 civil servants were retrenched between 1993 and 1996, equivalent to 17 percent of the total number of Government employees in 1993. The first round of O&E review is nearly complete for all ministries. As a major step forward, the Government introduced a pay reform at the beginning of 1996/97 which has gone a long way towards streamlining of the grading structure and consolidating most remuneration packages by including allowances in the basic pay, thus improving control over wage bill expansion.

(iii) In future, the Government is determined to consolidate the above measures through:-

(a) establishing more permanent arrangements for ensuring centralized personnel control;

(b) retrenching poor performers;

(d) developing an integrated remuneration package to replace allowances and in-kind benefits; and

(e) improving remuneration to promote morale in work places.

2.4.2 Parastatal Sector Reform

(i) Parastatal organisations have been characterised by weak management, weak financial performance, shortage of skilled and motivated technical staff as well as excessive employment at all levels. The operations of parastatals have often depended on subsidies such as direct subventions from Treasury, tax exemptions, bad loans from commercial banks and defaults on payments. Following the announcement of the Parastatal Sector Reform Policy in January 1992, the Parastatal Sector Reform Commission (PSRC) was established through the amendment of the Public Corporations Act No.2 in 1992. The objective of the Parastatal Sector Reform Programme is to improve the performance of assets placed under Parastatal Organisations through a programme of divestiture. The programme involves leasing, closures, outright selling of Parastatal

Organisations, liquidating the unviable ones, Management and Employees Buyout (MEBO) and promoting joint ventures with private companies.

(ii) Considerable progress has been made since 1993. Out of about 400 parastatals in existence initially, by end of April 1998, 154 parastatals have been divested by PSRC through sale, lease, liquidation and other forms of divestiture. Those divested by sale of shares to private firms are 79, twenty four have been leased out to the private sector, thirty two liquidated, fourteen closed and five placed under performance and management contracts. In addition, 20 parastatal firms have been placed under LART. The divestiture programme will continue for the remaining public enterprises giving particular importance to the restructuring and privatization of public utilities.

2.5 NATIONAL DEBT

2.5.1 Following the mounting economic problems of the late 1970s and 1980s, Tanzania’s domestic and external debts have been rising steadily, mainly as a reflection of the Government revenues falling far short of its needs. The poor performance of Parastatal Organisations worsened the budgetary situation by their over reliance on Government subsidies; failure to service their debts which were eventually taken over by the Government; and non - remittance of dividends to the Government.

2.5.2 Annual domestic borrowing (including bank and non-bank borrowing) increased from below 5 percent of total domestic revenue during the 1987/88 to 1989/90 period to between 16 percent and 24 percent during the 1991/92 to 1994/95 period (Table 2.3). Total domestic debt in terms of closed stocks, bonds and notes was TZS 641.7 billion by end of December 1997. Interest payment for the total holding of stocks, bonds and notes is estimated to amount to TZS 55,583.7 million in 1997 while principal repayment during the same year is expected to amount to TZS 1,205.5 million. Treasury Bills (face value) stood at TZS 106,124 million by December 1997. Thus, total domestic debt by the end of 1997 amounted to TZS 872.6 billion, of which debt service (interest and principal) amounted to TZS 28,869.2 million.

2.5.3 Tanzania experienced a rapid growth of its external debt during the 1970s when total outstanding and disbursed debt in nominal dollar terms grew at an annual rate of 24.3 percent. In the 1980s the total debt stock continued to grow but at a lower rate of 9.4 percent. Export earnings from goods and services were increasing at an annual rate of 8 percent during 1970-80 and decreasing at 5.4 percent during 1970-88. During the 1970s the total debt stock grew at a faster rate than the growth of exports. In the 1980s exports recorded a negative growth while the debt stock continued to grow at a high rate. Almost all the debt was contracted by the public sector and guaranteed by Government. The share of the private sector in external debt was highest in 1973 when it accounted for 9.5 percent of the total debt.

2.5.4 Since independence, the Government borrowed externally in order to finance development expenditure. During the 1960s, the Government borrowed primarily from bilateral sources. Most of the funds were used for investment in infrastructure, particularly transport which utilized 52 percent of the borrowed funds. The average terms at which the Government borrowed were very favourable with interest rates averaging around 3 percent throughout the three decades. The parastatal sector borrowed at an average interest rate of 8.3 percent over the years. The private sector terms were more or less similar to those of parastatals. However, the maturity period declined from an average of 18 years in 1966-70 to 6 years in 1986-90, while the grace period also declined from an average of 4 years in 1966-70 to 2 years in 1986-90.

2.5.5 Inspite of the good borrowing terms, Tanzania is now facing a critical debt crisis. The external debt stock has increased from US$ 4.9 billion in 1986 to US$7.9 billion in 1997. About 22 percent of export earnings are used to service external debt even though they service approximately 50 percent of the total debt service obligations. The Government spends about 30 percent of its monthly revenue collection to service external debt. This situation is unsustainable and hence the need to formulate a strategy to address it.

2.6 FUTURE PROSPECTS AND VISION

2.6.1 As a result of economic measures that the Government has been pursuing since 1986, Tanzania’s economic performance has started picking up. Gross Domestic Product (GDP) in real terms regained from an average annual rate of 2 percent in the first half of 1980s to 4 percent in 1995 to 1997. Export earnings increased from US$ 407.8 million in 1990 to US$ 761.6 million in 1996 but dropped slightly to US$ 717.1 million in 1997. Inflation dropped from over 30 percent prior to 1990 to 15.4 percent in December, 1997. Institutional reforms in the financial sector, the parastatal sector and in the civil service are in advanced stages while the private sector is gaining prominence in various sectors of the economy.

2.6.2 Despite these achievements, challenges ahead are considerable, particularly if the gains are to be sustained and translated into overall improvement of living standards of the majority of Tanzanians. It is therefore imperative to implement comprehensively the Economic Recovery Programme, including all related reform measures in order to bring about a stable macro-economic environment which is a pre-requisite for growth oriented development for the country.

2.6.3 Within the framework of the Economic Recovery Programme, resolution of the debt crisis is a necessary factor. Resolution of the crisis is expected to release resources for critical expenditures and create the necessary environment for private sector to thrive. Resources released from debt service will have a crucial catalytic effect to the social-economic development in the country through expenditures on targeted programmes of agricultural extension services, education, health, water supply, energy, transport and grass root services, which have significant contribution to poverty alleviation. The resolution of the debt crisis will also bring about other advantages to the country including improved creditworthiness that will enhance the country’s terms and access to commercial credits and enable resumption of export credit guarantees.

2.6.4 Given the above background and ongoing global developments such as, changes in international trade relations under the World Trade Organisation, Tanzania’s debt strategy will have to be conceived taking into account the country’s Vision 2025 whose elements include:

(i) maintaining macro-economic stability;

(ii) create a market-oriented economy,

(iii) expanding the role of the private sector in the economy;

(iv) promoting the development of the capital market;

(v) securing enhanced access to foreign markets, capital and technology;

(vi) reducing the financial burden of parastatal enterprises on the Government budget;

(vii) encouraging wider participation by the population in the ownership and management of business and;

(viii) preserving the goal of self-reliance for the nation.

CHAPTER THREE

EVOLUTION OF EXTERNAL DEBT

3.1 HISTORICAL PERSPECTIVES

3.1.1 Tanzania has traditionally relied on official bilateral and multilateral donors for financing its development projects and balance of payments requirements. Between 1975 through 1985, a series of economic and natural calamities, both domestic and external, contributed to serious budget and balance of payments deficits, necessitating the country to borrow from external and domestic sources to finance its deficits. Subsequently, between 1986 and 1997, total external debt increased from US $ 4,969.9 million to US $ 7,931.2 million, an increase of 59.6 percent. Actual debt service decreased from US $ 303.0 million in 1986 to US $ 122.0 million in 1990. It increased to US $ 233.0 million in 1992 and dropped again to US $ 173.8 million in 1997. However, because of the country’s economic weakness, debt service was about 50 percent of scheduled debt service in 1986 to 1997 period. Thus between 1986 and 1997, debt arrears increased from US $ 664.0 million to US $ 3,445.0 million.

3.1.2 Factors which have contributed to the build-up of the debt problem are both internal and external in nature as explained in section 2.1.2 above. The combined effect of internal and external factors at a period of sluggish economic performance forced the Government into overdependence on domestic and external borrowings. Since the capacity for debt servicing was seriously constrained, the borrowing process could not be sustained but led to the crisis situation observed today.

3.2 STRUCTURE OF EXTERNAL DEBT

3.2.1 The composition of external debt is a reflection of the historical and ongoing economic policies as well as the debt management strategy pursued recently. The current approach to debt management gives a clear preference to loans on concessional terms which are mostly available from the soft windows of the World Bank and the African Development Bank. Following this policy orientation, bilateral debt which accounted for 61 percent of total disbursed debt between 1986 and 1990 declined in proportion to 44 percent in 1997.

The proportion for disbursed multilateral debt increased gradually from 27 percent in 1986 to 48 percent in 1997. The combined proportion for private and commercial disbursed debts declined from an average of 12 percent during 1986 to 1990 period to 8 percent in 1997. Despite the move to market based economic management, the Government remains to be the largest borrower as it has a large historical debt overhang and it continues to borrow to implement its structural adjustment programme including support to social sectors and major infrastructural projects.

3.2.2 In 1986, the Central Government accounted for 89 percent of the Disbursed Outstanding Debt, Public Corporations accounted for 10 percent and the Private Sector accounted for 1.0 percent only. In 1990, Central Government accounted for 92.6 percent, Public Corporations 6.1 percent and Private Sector 1.3 percent. By 1997, the Central Government still retained its dominance by accounting for 93 percent, Public Corporations declined further to 3 percent and Private Sector share increased to 4 percent. The decline in Public Corporation’s share and the increase for the private sector is attributed to the on-going reforms whereby the public corporations are being privatized and emphasis is being put on private sector promotion.

3.2.3 The analysis by use of funds category shows that over the period of 1986 to 1997, 23 percent of the borrowed funds were directed at Balance of Payments Support while Transport and Telecommunication sector was allocated 21 percent of the disbursed loans Energy and Mining, Industries, and Agriculture each received 12.4 percent, 8.4 percent and 14.2 percent of the total disbursements respectively. The Social Sectors were allocated 4.2 percent, Finance/Insurance 2.8 percent and Tourism 1.4 percent. The share for Balance of Payments remained high throughout the period as a reflection of the ongoing Governments efforts for economic adjustment under the IMF supported programmes. The sectors of Transport and Telecommunications, Energy and Mining accounted for significant proportions because of the priority for improvements in economic infrastructure and mining. The share for productive sectors of Agriculture and Industry is still low as the private sector is yet to pick up.

3.3 GLOBAL DEBT REDUCTION INITIATIVES

3.3.1 After the first oil shock, a number of countries had to borrow to finance deficits provoked by the rising oil prices, to meet rising debt service obligations and to mitigate the pressures of prolonged exchange rate overvaluation. The historical rise in interest rates in the early 1980s and the drop in commodity prices triggered a global crisis by constraining resources for debt servicing more than had been assumed. This was followed by a cut-off of external finance in 1982, calling for major adjustments in fiscal and external trading policies of the debtor countries. In addition, various initiatives were taken at the international level by bilateral and multilateral lenders namely:-

(i) The Baker Plan

The Baker Plan was initiated in 1985, stressing that the debt crisis was a development problem that required more than short term balance of payment adjustments. Under this plan creditors were unwilling to adopt debt write off but were prepared to accept stretching out repayment schedule and easing the terms of debt repayment. The plan also called for major structural reforms in debtor countries in exchange for new financing. However, the plan could not solve the debt crisis, but instead it postponed the debt repayment and the debt crisis to a future date. The Plan fell short of its target since between 1986 and 1988 the net transfer of resources from highly indebted countries to the industrialized countries was more than US$ 100 billion. As the debt crisis worsened, creditors interests including those of the international banking system were threatened and out of these shortcomings the Brady Plan was conceived in 1989.

(ii) The Brady Plan

Under the Brady Plan actual debt reduction was acknowledged as a necessary measure to resolve the debt problem. Apart from that realization, the Brady Plan emphasized the following:-

(a) The extent of debt reduction should be decided on a case by case basis, taking into account the ability of a country to repay its debt.

(b) The beneficiaries of the scheme should be those countries willing to institute economic policy reforms under the supervision of the World Bank and the IMF.

(c) Creditor countries would continue to reschedule their loans through the Paris Club and maintain credit cover for countries with sound reform programmes.

(d) The World Bank and IMF would provide funding for debt service reduction through debt buybacks, exchange of old debt at discount for new bonds, etc.

3.4 STRATEGIES FOR DEBT REDUCTION IN TANZANIA

3.4.1 The Economic Recovery Programmes which Tanzania has been implementing since 1986 had debt reduction components embedded within them, focusing on attaining debt sustainability. However, beside the overall adjustment efforts, in 1993 Tanzania formulated a Debt Management Strategy with the following main objectives:-

(i) To restore orderly relations with all creditors.

(ii) To reduce contractual debt service ratio from 47 percent in 1992 to manageable levels of about 20 percent.

(iii) To prevent the build-up of an unsustainable level of debt and debt service obligations in the future.

3.4.2 In the context of the overall economic reforms and the Debt Management Strategy, specific actions were taken in the form of Bilateral Debt Relief, Paris Club Relief, Debt Conversion Programme and Debt Buyback Scheme.

(i) Bilateral Debt Relief

Tanzania has been requesting for debt relief from her bilateral creditors since the debt crisis started in mid 1970’s. Several creditors acceded to the request and

cancelled or converted their loans into grants. Between 1978 to mid 1997 total debts worth US$ 1044 million were cancelled.

(ii) Paris Club Debt Relief

The Paris Club Debt relief is linked to both the Baker Plan and Brady Plan by combining debt cancellations and debt rescheduling initiatives. Tanzania has been to the Paris Club five times where debts worth over US $ 924.4 million have been cancelled and US $ 3,136.2 million have been rescheduled. According to Paris Club I Agreement of 1986, debts totalling US $ 1046 million were rescheduled for 5 years with repayment commencing 1st October, 1992 and ending April 1997. In 1988 Paris Club II agreement was signed whereby one third of the eligible debt was cancelled and the balance of two thirds was rescheduled. This resulted in debt cancellation of US $ 22.9 million and debt rescheduling of US $ 372.1 million. In 1990, when the Paris Club III Agreement was concluded, debts worth US$ 18.7 million were cancelled and US$ 199.4 million were rescheduled for 14 years including a grace period of 8 years. The Paris Club IV Agreement of 1992 had a more substantial debt relief element (The Enhanced Toronto Terms) which included a write-off of US $ 182.8 million or 50 percent of debt service due during the consolidation period (1992 January - June 1994) and the balance US $ 518.7 million rescheduled for 23 years including a grace period of 6 years at market interest rates. In 1997, Tanzania was accorded the 67 percent debt reduction under the Paris Club V Naples Terms where debts worth over US $ 1,000 million were cancelled and US $ 700 million in Net Present Value (NPV) terms were rescheduled. The major drawback of debt rescheduling is that it results in postponement of the repayment of the debt and increases the debt burden through capitalization of interest. It nevertheless gives the country time to build capacity for debt servicing.

(iii) Debt Conversion Programme (DCP)

Tanzania opted for a limited Debt Conversion Programme in 1990 as one way of reducing her external indebtedness and at the same time promote export - oriented investments. In total, debts worth US$ 182.0 million were converted between 1990-1993 and the proceeds were reinvested in 82 selected projects. However, the programme was suspended due to its inflationary impact and in

order to pave way for the Debt Buyback scheme, which is by nature non inflationary.

(iv) The Debt Buyback Scheme (DBB)

Upon suspension of the Debt Conversion Programme, preparation for the Debt Buyback Scheme was initiated with the support of the World Bank. Under this programme it is expected that commercial debts worth US$ 253 million will be extinguished at deep discount by use of resources from the IDA Debt Reduction Facility. However, implementation of the programme was delayed due to the suspension of IMF supported Enhanced Structural Adjustment Facility (ESAF) programme in 1994/95 and in 1995/96, which is a pre-requisite to accessing IDA funds. The ESAF programme was eventually approved in November 1996 and it is expected that the Debt Buyback Scheme will be implemented during the second half of 1998.

3.5 IMPACT OF DEBT REDUCTION INITIATIVES

3.5.1 Inspite of the global and national initiatives for debt reduction, Tanzania was not able to service its debts as scheduled due to the poor performance of its economy. Actual debt service has for a long period remained below the scheduled debt payments, resulting into accumulation of arrears which increased from US$ 0.4 billion in 1980 to US$ 3.3 billion in 1997.

3.5.2 The bilateral creditor category accounted for more than 70 percent of all arrears from 1994, followed by commercial and private creditors. The bulk of the bilateral debt arrears emanate from the non-Paris Club creditors as they have not accepted to provide debt relief on Paris Club comparable terms. The multilateral debt, though substantial in magnitude, is normally serviced on due dates as defaulting calls for suspension of future disbursements from multilateral Financial Institutions and boycott from the entire creditor community. The observed multilateral arrears are temporary as they are cleared within 60 days after the due dates.

3.5.3 The commercial and private debt arrears accumulated because of non-availability of foreign exchange which precipitated suspension of external remittance even where local currency had been deposited with the banking system. This phenomenon started in early 1980’s but as from September, 1993 all commercial and private debt maturities are serviced as they fall due. The commercial and private debt arrears emanating from commercial and suppliers credits are expected to be extinguished under the Debt Buyback Scheme.

3.5.4 The combined impact of the repeated reschedulings has reduced the current debt repayment profile by postponing debt servicing to the future. With the expiration of the Paris Club IV agreement in June, 1994 debt servicing obligations increased significantly. However, the current Paris Club V Agreement which provides for debt reduction of up to 67 percent in NPV terms, and a multi-year rescheduling arrangement of the eligible debt covering the entire period of the ESAF programme, gave substantial debt relief which could assist the country out of the economic crisis if the economy responds positively to the other macro-economic and structural measures under implementation.

3.5.5 The actual debt service ratios of between 21 percent and 24 percent during 1994 to 1997 are low as they are a reflection of partial debt servicing in favour of the Paris Club and multilateral creditors. If Tanzania was to pay all the outstanding debt arrears of US$ 3,445.0 million and thereafter remain current, the implied debt service ratio would be 285 percent. Thus the real debt situation is unsustainable. It is because of this unsustainability that the Government decided to have a National Debt Strategy that will spearhead debt management and poverty alleviation efforts in 1997/98 and beyond.

CHAPTER 4

POVERTY ALLEVIATION AND THE POTENTIAL

IMPACT OF DEBT RELIEF

4.1 POVEb RTY SITUATION IN TANZANIA

“The Tanzania society of 2025 must have freed itself from abject poverty and attained a decent quality of life for all its people, with respectable levels of incomes, enhanced ownership of assets, reduced vulnerability, and increased power over their own future”.

President Benjamin Mkapa,

Opening statement at the Consultative Group meeting, 10th December, 1997.

4.1.1 Poverty, which is defined as a state of deprivation and prohibitive of decent human life, has been and still is a very serious problem in Tanzania. Based on studies conducted by Cornell University and Economic Research Bureau of the University of Dar es Salaam in 1991, about 50 percent of all Tanzanians are poor, using a poverty base line income of TZS 46,173 (US$ 227) per annum. Furthermore, about 36 percent of the population is very poor with each individual spending about TZS 31,000 (US$ 152) per annum and cannot afford even the basic needs. According to these studies, about 51 percent of rural Tanzanians live below the poverty line.

4.1.2 Similarly, according to World Bank studies conducted in 1993, the literacy level is estimated to have declined from 85 percent achieved in 1970s and 1980s, to 68 percent during the early 1990s, the hardest hit being the low income families. Primary school gross enrolment rate dropped from 93 percent in 1980 to 72 per cent in 1985 and 63 percent in 1990. The country has ratios of one hospital bed per 1000 people and one doctor per 33,330 people, while about 30 percent of the population live more than 5 km from the nearest health centre. Accessibility to water supply for the majority of Tanzanians is quite difficult. About 32 percent have to walk for up to 15 minutes to get water, while 27 percent of households spend more than 30 minutes to get the same. Life expectancy at birth in Tanzania is 52 years compared to 77 years in the developed world and 62 years in other developing countries. Infant Mortality Rate (IMR) is 84 per 1,000 live births compared to 7 in the developed countries. Maternal mortality rate stands at 200 per 100,000 live births.

4.1.3 It is widely recognized that poverty can be reduced with the increase of economic growth, redistribution of wealth and increased resource allocation to social and economic sectors i.e. in education, health, water supply and infrastructure. The severity of debt servicing in Tanzania crowds out allocation of resources to those sectors, and makes efforts for poverty alleviation even more difficult.

4.1.4 The Tanzanian Government has adopted various measures aimed at poverty alleviation as reflected in many social sector plans supported by the international community. The aim is to simultaneously deepen the economic reform process which started more than a decade ago and to spread more equitably the benefits of growth. The Government has made achievements in sustaining the economic reform process and in maintaining macroeconomic stability, despite extreme problems associated with internal and external factors. However, there is little evidence of the

benefits of growth reaching the poorest communities which continue to suffer from desperate low incomes and deteriorating provision of social services. The combined effects of all those factors mentioned above have intensified poverty levels and have increased vulnerability.

4.1.5 There are serious concerns that Tanzania’s efforts for poverty alleviation and sustained growth are being jeopardised by an unsustainable debt burden. In particular, the heavy fiscal demands associated with debt servicing are increasingly diverting budgetary resources from social sectors. In effect, debt servicing is crowding out the social investments needed to achieve poverty alleviation targets, as the Government spends about one third of its domestic revenue on external debt servicing. Given this situation rapid improvements in the quality of life could be achieved through the transfer of budgetary resources currently allocated to debt servicing.

4.2 Implications for aid effectiveness

4.2.1 Tanzania’s debt problems are undermining the effectiveness of donor aid budgets.

As a result of huge external debt service requirements the Tanzanian Government has been unable to generate the local counterpart funds required to draw on committed aid. Consequently, a large proportion of aid is left unutilised, instead of being converted into programmes and projects which could alleviate poverty. During the first half of 1997, aid disbursements were equivalent to 57 percent of the targets set in the budget, leaving a huge financing gap in the development budgets for social sector programmes.

4.3 The fiscal impact of Debt (Crowding out Social Investment)

4.3.1 As noted above, external debt represents a major drain on public finances in Tanzania. Although since 1996, the Tanzanian Government has adhered to stringent fiscal targets aimed at achieving low inflation, with a fiscal deficit equivalent to less than 4 percent of GDP, debt servicing demands have been increasing. The consequence has been a steady increase in budget allocations absorbed by debt servicing, coupled with a squeeze on other sectors. For instance, external debt service absorbed 45 percent of Government domestic revenue in 1996/1997, while domestic debt service absorbed a further 14 percent. This means that the scope for public investment in social and economic sectors has been severely curtained by debt servicing obligations. High levels of debt repayment to creditors mean more schools without books, chairs, desks, and in many cases without roofs; it means health centres without essential drugs; and ultimately, it means lost opportunities for human development and poverty alleviation.

4.3.2 A fiscal ‘cap’ on the revenue diverted to external debt repayments could act as a powerful catalyst for poverty reduction, releasing resources for investment in social and economic services. On the basis of Tanzania’s extreme needs, a 10 percent ceiling on domestic revenues for debt servicing could be a logical target level, considering the capacity of the economy and the need for good relations with creditors. This would release over US$80 million a year in 1998 and 1999, rising to US$108 million in 2000. See Table below.

Debt Service/revenue projections and savings from a 10 percent budget cap

(Amounts in billion TZS)

	1997	1998	1999	2000
Revenue Projections	563	672	781	890
Debt Service Projections	135	120	132	160
Debt service with 10% budget cap	56	67	78	89
Savings	79	53	54	71
US$ equivalent(USD 1 = TZS 655)	120	82	83	108

4.3.3 If debt servicing was reduced to a proposed limit of 10 percent of government

revenue, approximately TZS 180 billion would be availed over the next three years for primary education, primary health care and other critical poverty related interventions as follows:

(i) Debt service savings for 1997/98 could double primary education and primary health care recurrent budgets for the same year.

(ii) Debt service savings for 1997/98 could expand total education and health budgets by 60 percent.

(iii) Debt service savings for 1998-2000 could ensure that the Basic Education Master Plan is implemented in 3 years instead of 5, and in addition, another 10,000 classrooms could be repaired, and safe water and sanitation could be provided to additional 5,000 schools.

(iv) Debt service savings for 1998-2000 could increase gross enrolment from current levels of 75 percent to almost 90 percent.

CHAPTER FIVE

THE INSTITUTIONAL AND LEGAL FRAMEWORK FOR DEBT MANAGEMENT

5.1 THE CURRENT INSTITUTIONAL FRAMEWORK FOR DEBT

MANAGEMENT

Institutional Setup

5.1.1 The current institutional setup for Government debt management involves four key central institutions, namely the Ministry of Finance, Planning Commission, the Attorney General’s Chambers and Bank of Tanzania. Other institutions such as sector Ministries, Parastatals Organisations and the Private Firms are involved at appropriate stages in the loan cycle. The loan cycle covers activities for project identification, project appraisal and approval, loan negotiations and contracting, loan disbursement, implementation and monitoring, project evaluation as well as Loan repayment. Evidently, to perform these functions efficiently the Government requires a well functioning institutional arrangement equipped with high quality professional capacity.

Project Identification, Appraisal and Approval

5.1.2 Identification of projects is supposed to be done by implementing agencies/beneficiaries that is:

(i) Parastatal organisations for projects falling under the parastatal sub sector.

(ii) Regional and District authorities for Local and Regional programmes.

(iii) Sectoral Ministries for projects belonging to those ministries.

5.1.3 After projects are identified the actual appraisal for purposes of establishing the feasibility of the project requires professional reviews and assessments. This work is normally done by consultants and in few cases by public officials. In most cases where external funding is expected, project appraisal is normally done by consultants. After project appraisal is done and where the implementing agency is convinced that the project is feasible, the relevant sectoral Ministry or Regional Authority is required to submit it to the Planning Commission for review at the national level. The aim of this review is to see to it that the project is of priority in nature and is in accordance with the national policies for economic development. However, because of weaknesses in the institutional framework, in many cases project proposals are taken straight to the Ministry of Finance for submission to external funding institutions. In cases where they are taken to the Planning Commission, this is done when many commitments are already in place making it difficult to undertake meaningful project appraisals. Within the Planning Commission and the Ministry of Finance the procedures for processing projects will need to be streamlined. This is important in order to eliminate delays, approvals by inappropriate officials and the use of short cuts when submitting projects.

Loan Negotiations and Contracting

5.1.4 After a project has been appraised and approved it is submitted by the Ministry of Finance to the would be external lending agency. Following that submission, the Ministry of Finance leads the negotiation process, working closely with the Attorney General’s Chambers, Planning Commission, the relevant sectoral Ministry and implementing Parastatal Organisation or Regional authority. Within the Ministry of Finance, negotiations are coordinated by the External Finance Division. After all stages of negotiations and where the process is successful, loan agreements are signed by the Minister for Finance or his duly appointed representative on behalf of the Government of United Republic of Tanzania. After this stage, the project is taken to Parliament for approval and inclusion in the budget.

5.1.5 The current arrangement has several weaknesses

(i) Loan agreements are signed before assurance that local budgetary requirements will be in place.

(ii) Project proposals are taken to Parliament after loan agreements have been signed. This limits considerably the authority of the Parliament in respect of external loan contracting.

(iii) The Minister of Finance is not obliged to take into account the advice of the Minister responsible for Economic Affairs before signing such agreements and therefore possibilities for decisions not observing the national economic policies can not be ruled out.

(iv) Lack of coordination and interlinkages between sectoral Ministries and institutions responsible for debt management.

Loan Disbursement

5.1.6 After loan agreements have been signed, loan disbursement is done in accordance with the action plan of the project and the speed of project implementation. Loan disbursements are also subject to meeting all conditionalities for loan effectiveness and related reforms targets. In actual practice, loan disbursements are slowed down by the following factors:-

(i) Lack or delayed availability of local counterpart funds.

(ii) Delays in fulfilling conditionalities which are linked to project implementation.

(iii) Poor progress in implementation of projects or in awarding of tenders.

(iv) Slow preparations and submissions of implementation reports.

(v) Processing delays by external lending institutions.

(vi) Method of disbursement.

5.1.7 Within the Ministry of Finance disbursement transactions are co-ordinated by the Accountant General. Disbursements are effected in three methods, namely Cash, Direct to project (in form of equipment and personnel) and by Reimbursable System whereby the borrowing agency incurs costs and thereafter submits claims on costs incurred. Where Cash method is used, disbursements are made to the Government Account in the Bank of Tanzania then released to the relevant Accounting Ministry or Region. Where a Parastatal Organisation is the ultimate beneficiary agency, the relevant sectoral Ministry would transfer the disbursed funds to the respective parastatal organisation. Regarding Reimbursement procedure, the implementing agency submits its claims through the Ministry of Finance and lenders disburse the claimed funds following the Cash method. For Direct to project arrangement, disbursements are made directly to the implementing Ministry, Region or Parastatal Organisation. The lending agency is then required to report to the Ministry of Finance on the type and value of all Direct to project disbursements and the implementing agencies are required to provide the Ministry of Finance information on type and value of disbursements received.

Project Implementation and Monitoring

5.1.8 Supervision of project implementation is the immediate responsibility of the implementing Ministry, Region or Parastatal Organisation. At the National Level the monitoring of project implementation is co-ordinated by the Planning Commission. Implementing agencies are required to submit quarterly implementation reports as a basis for plan implementation and monitoring. However, recently monitoring of projects have been highly constrained by the acute shortage of development funds and the squeeze in allocations for other charges in the Recurrent Budget.

Project Impact Evaluation

5.1.9 Project evaluation is supposed to be undertaken after project completion and after an appropriate period of implementation. The objective is to evaluate the impact of the project as against immediate objectives and targets as well as against long-term factors like contributions to employment, literacy and environmental protection. This exercise is normally not done by the Government because of lack of resources. If resources were available, the most effective approach would be to commission specialised consultants as independent evaluators. The negative effect of not carrying impact evaluations are that the Government is not made aware of the effects of project externalities and thus not able to effect corrective measures where necessary. Most negative effects of projects are related to environmental destruction, dislocation of societies, use of inappropriate technologies and distraction of cultural and ethical values.

Loan Servicing

5.1.10 In servicing loans for the Government, the Ministry of Finance is required to budget for all maturities expected in each financial year. Once the budget has been approved by Parliament, the Ministry is required to pay on due date to the Bank of Tanzania the shillings equivalent of the maturing debts for onward remittance to the creditors. Where the Government loan is on-lent to Zanzibar or to a Parastatal Organisation, the Ministry of Finance for Zanzibar and the respective Parastatal Organisation are required to pay the equivalent local cash cover to the Bank of Tanzania for onward remittance to the creditor.

5.1.11 External loan servicing is associated with the following problems:-

(i) Under-budgeting on the part of the Government because of weak revenue base.

(ii) Non-allocation of requisite cash cover on the part of Ministry of Finance; Zanzibar.

(iii) Lack of cash cover from the Parastatal Organisations because of their poor financial positions.

(iv) Shortage of foreign exchange, especially during the period prior to economic liberalisation programmes.

The outcome of these problems is the build up of external payment arrears and the transfer of parastatal debt obligations to an already over-strained Government budget.

5.2 THE CURRENT LEGAL FRAMEWORK FOR DEBT MANAGEMENT

5.2.1 The legal framework for raising local and external loans and grants is enshrined in the Government Loans, Guarantees and Grants Act No. 30 of 1974. The Act empowers the Minister for Finance to raise loans and grants on behalf of the Government. The Act also stipulates the limits within which the Government can borrow.

The limits are:-

(i) The total debt service cost of the four succeeding years including the recurrent year should not exceed 15 percent of the average annual foreign exchange earnings of the preceding three years.

(ii) The total debt service cost of all foreign and local loans due in the recurrent year and the next four years should be less then 30 percent of the annual recurrent revenue of the past 3 years.

5.2.2 Other key aspects of the Act include:-

(i) Where an asset is acquired under an agreement which provides for repayment to be made outside Tanganyika, the sum of money payable shall be deemed to be a loan raised outside Tanganyika.

(ii) All moneys raised by foreign loans shall be paid into the consolidated Fund.

(iii) Where the Government raises a loan for the use of a Parastatal Organization, the Act stipulates that the Minister for Finance may direct that the amount be paid into a special fund established to give effect to the loan agreement under which it was raised.

(iv) The Minister for Finance may also issue guarantees on a loan raised externally by a Parastatal Organization or other corporate body if it is in the public interest to do so. The Parastatal or other corporate body benefiting from a Government guarantee must reimburse all moneys which the Government has paid to fulfil the guarantee and all expenses incurred by the Government, as directed by the Minister.

(v) Under the same Act the Minister of Finance is authorizerd to delegate to a public officer the authority to execute any agreement or instrument relating to a loan or guarantee raised on behalf of the Government.

Weaknesses in Implementation of the Legal Framework

5.2.3 The main weaknesses of the current legal framework are:

(i) Although the legal framework has been in force since 1974, it has been poorly administered and it is not properly observed as there cases where unauthorized persons have contracted loans without the consent of the Minister for Finance. This partly explains why foreign loans continued to be contracted without respect of the legal limits.

(ii) Although the Act has been contravened by exceeding the stipulated borrowing limits and by unauthorized persons contracting loans without the concert by the Minister of Finance, no sunction has been applied to the relevant public officers.

5.3 ROLE OF CIVIL SOCIETIES

5.3.1 The civil society has an important role to play in the overall development of the country in general and in debt reduction efforts in particular. This can be attained by involving the civil society organisations such as Non-governmental Organisations (NGO’s), Co-operative Unions, Farmer’s Associations, Worker’s Unions, Religious Institutions, Private Sector Institutions, and the media . The involvement of the civil society in decision making and in the negotiation process of debt will facilitate achievement of the following:-

(i) Ensuring more transparency and therefore more accountability on the part of the Government and Bank of Tanzania in dealing with creditors.

(ii) Providing support and advice to the Government during the negotiating processes.

(iii) Initiating the necessary development alternatives to counter the negative impact of debt at the grassroots level.

(iv) Forming a common front in dealing with debt issues nationally and internationally in a bid to influence the necessary policy changes.

(v) Improving the process of assessing whether the debt relief proceeds achieve the intended benefits. This can be done by establishing joint programmes for monitoring the human and social impact arising from the relief.

5.3.2 The involvement of the local civil society organisations in debt negotiations, campaigns and lobbying has so far been very minimal because either the Government is yet to appreciate their importance or the civil society organisations are in themselves not prepared to take the challenge. To this end therefore, the following will be done:-

(i) Encourage the civil societies to get involved in debt negotiations, campaigns and lobbying, by providing them with the necessary information on debt issues such as external loan contracting and debt servicing.

(ii) Inviting civil societies to workshops, conferences, and other forums focusing on debt, so as to expose them to the main issues discussed.

(iii) Encourage the formation of a network of civil societies, which will be bringing together different non-governmental organisations interested in debt issues to form a common front in the lobbying and advocacy campaigns.

5.4 DEBT AWARENESS CAMPAIGNS

5.4.1 Deliberate campaigns on the debt problem are necessary vehicles for creating awareness, interest and literacy on debt issues, mainly its causes, its effects, negotiation processes and outcome thereof. This will promote wider participation

in all issues such as loan contracting, disbursements debt servicing, debt refinancing, terms of the loans and project formulation. The target in awareness campaign should be the general public, the media, the civil societies, business community, government officials and members of the parliament. For purposes of effectiveness, awareness campaigns will seek to:

(i) Inform the public on major development trends on the debt issues and on how the Government is responding.

(ii) Generate views and comments from people and institutions which otherwise are not easily obtained under normal or official procedures.

(iii) Generate efforts to assist Tanzania secure better negotiating terms.

CHAPTER SIX

FUTURE DEBT STRATEGY AND OUTLOOK

6.1 LEGAL FRAMEWORK AND RESOURCE MOBILIZATION

6.1.1 Acquisition of loans and grants

According to the existing Government Loans, Guarantees and Grants Act No. 30 of 1974, only the Minister for Finance is authorized to borrow or solicit grants on behalf of the Government. The Government has therefore decided to effectively adhere to the Act.

6.1.2 Borrowing Powers

The Debt Coordination Committee (DCC) has been established. (See 6.2.1)

6.1.3 Borrowing Limits

In line with the Government Loans, Guarantees and Grants Act No. 30 of 1974, the Minister for Finance has been granted powers to raise external loans and grants for

purposes of financing deficits in the Government budget. In order to observe the limits.

(i) The Government will endeavour to bring back the currently exceeded borrowing limit to manageable levels within five years beginning 1999/2000.

(ii) The Paymaster General shall ensure that the ceilings are strictly observed before any loan is raised.

(iii) Where the Government is compelled to borrow on commercial terms this will be limited to emergency cases only.

6.1.4 Loan Guarantees

For purposes of checking mismanagement of guarantees issued by the Government, the Debt Coordination Committee (DCC) shall advise the Minister for Finance on granting of Government guarantees to the parastatal and private sectors. The issuing of guarantees would be guided by the following:-

(i) The loans being acquired should go to areas considered to be of priority and strategic importance in the economy.

(ii) The borrowers should be required to pledge assets to the Government, which may be taken over in the event of default.

6.1.5 Priority Areas

(i) External loans will be targeted to priority areas namely, agriculture extension, health, education, water supply and sanitation, energy and transport. In any case such loans shall only be contracted after every effort to raise grants has failed.

(ii) The Government will continue to pursue cautious policies in contracting new external loans so as to bring the debt situation to manageable and sustainable levels. This implies that the Government will have to refrain from large scale borrowings and borrowing for productive and commercial activities, but it will need to concentrate on loans for a few priority and strategic areas of investment. However, in order to provide for likely gaps in future investment demands, the Government will have to continue with efforts for developing the private sector by encouraging investments (local and external) in all sectors.

6.1.6 Concessionality

When Tanzania started implementing Structural Adjustment Programmes in 1986, the debt problem was one of the areas, which received serious attention. In particular, the Government reached an understanding with the IMF that it could borrow up to a maximum of US$ 50.0 million per annum on non-concessional terms and the rest on concessional terms. In the context of the Enhanced Structural Adjustment Facility, which was approved in November 1996, Tanzania was allowed to borrow at a concessional level of 35 percent and above. However, it is the Government intention to borrow only on highly concessional terms, such as, IDA terms with grant element of 78 percent and above. Where the Government is compelled to borrow on commercial terms this will be limited to emergency cases only.

6.1.7 Appraisal Criteria

The screening of new loans will target at establishing the following:-

(i) The loan amount to be contracted reflects the realistic costs of the targeted project(s).

(ii) Longer repayment period which should allow the Government sufficient time to raise funds for repayment of the loan taking into account other commitments.

6.1.8 Monitoring and Evaluation

There is inadequate capacity within the Government for monitoring and evaluating external loans although in some cases evaluations are carried out by external financiers. The strategy for overcoming this problem will be to:

(i) Strengthen the Government implementation capacity and streamline monitoring and evaluation procedures through:

(a) Introduction of guidelines for project managers. These will include the following:

• All implementing agencies (or project managers) have to ensure that all disbursements received in the form of cash, direct to project funds or machinery and equipment are reported to the Ministry of Finance, Planning Commission and Sectoral Ministries.

• Project Managers have to prepare overall Financial Expenditure statements and submit them to the Ministry of Finance, Planning Commission and to the respective Sectoral Ministries on a quarterly basis.

• The Ministry of Finance, Planning Commission and Sectoral Ministries in collaboration with the Project Managers have also to make physical inspections and evaluations and prepare progress reports on a quarterly basis and upon completion of implementation. Reports will be used to assess the utilization of loans.

(b) Introduction of standard reporting format for compulsory reporting by the project managers.

(ii) Build capacity for monitoring and evaluation of projects through:-

(a) Training of officials in the Planning Commission, Ministry of Finance, Sectoral Ministries and local Governments.

(b) Requirement for the production of completion and evaluation reports in the implementation agreements.

6.2 INSTITUTIONAL FRAMEWORK

6.2.1 The functions of debt management will be given sufficient attention, especially in the Ministry of Finance. Therefore a strong capacity in the Ministry of Finance will therefore be built to undertake active debt management. In addition, a Debt Co-ordination Committee (DCC) has already been established which shall comprise of the Permanent Secretaries in the Ministry of Finance, the Planning Commission, Ministry of Justice and Constitutional Affairs, Ministry of Foreign Affairs, Prime Minister’s Office and the Governor of the Bank of Tanzania. The DCC shall advise the Minister for Finance on loans to be contracted and their utilization. The DCC will be assisted by a technical Debt Management Committee (DMC) which has also been established drawing members from the same institutions.

6.2.2 The Government will take further steps:

(i) To put up an effective linkage among the departments involved in loan contracting, disbursements and debt service within the Ministry of Finance.

(ii) To strengthen the flow of information from the Ministry of Finance to the Bank of Tanzania and vice-versa. This information shall also be provided to the Planning Commission for policy analysis.

(iii) To establish linkage between debt servicing forecasts at the Ministry of Finance and foreign exchange budgeting at the Bank of Tanzania.

(iv) External Funds shall be deposited in the Consolidated Fund with the Bank of Tanzania and thereafter transferred to the accounts of the implementing agencies. This action would improve the accounting of Government receipts.

(v) To continue to build and strengthen the skills of staff in the Ministry of Finance in various aspects of aid and debt management through training and provision of computers to facilitate use of management software. The training should focus on skills for loan negotiations, approval procedures, monitoring, documentation and data management.

(vi) The Ministry of Finance has targeted to have a working debt data system by July 1999.

6.3 STRATEGY FOR THE VARIOUS CATEGORIES OF EXTERNAL DEBT

6.3.1 Strategies for the various types of debts are as outlined hereunder:-

(i) Multilateral Debts

Multilateral debts have become prominent in the Tanzanian debt portfolio. Whereas in 1986 the share of multilateral debt in the disbursed and outstanding debt was 27.0 percent, in 1997 multilateral debt accounted for 47.1 percent of the disbursed and outstanding debt. The proportion of multilateral debt to the total debt is bound to increase over the years because of the financing requirements of the Structural Adjustment Programme, through which the Government borrows to revamp the social sector, infrastructure and balance of payments support. Likewise, the debt service to the multilateral creditors is on the increase and will continue to be so in the medium term. While it has been possible for Tanzania and other heavily indebted countries to obtain debt relief from the bilateral creditors, it has not

been the case with multilateral creditors. Given the severity of the debt burden to the poorest countries, the Bretton Woods Institutions approved a programme in 1996 through which the Heavily Indebted Poor Countries will be assisted in repayment of their multilateral debt.

The strategy for this category of debts will be to:-

(a) To convince the World Bank and IMF to ease the fiscal burden indicator in assessing the sustainability of Tanzania’s debt service burden. By easing this indicator, it will be possible for Tanzania to qualify for the HIPC facility because it utilizes a large portion of her domestic revenue to service external debt.

(b) To request donors to continue contributing resources to the Multilateral Debt Relief Fund which will be used to service the debt and reduce the burden on the Government revenue. It is estimated that about US $ 125.0 million will be required annually into the Fund. The relief resulting from the Multilateral Debt Relief Fund will release Government funds to go to priority areas related to poverty alleviation such as health, education, water supply and infrastructure.

(ii) Paris Club Debt

(a) Tanzania has had five rounds of Paris Club debt relief arrangements. Despite the relief given under the Paris Club arrangements, Tanzania’s external debt remains severe and structural in nature. During the fifth meeting, the Paris Club creditor countries agreed to provide, through rescheduling or refinancing, debt relief for Tanzania

on the Naples Terms, which provide for debt reduction of up to 67 percent in net present value terms. The main conditions for the Paris Club V Agreement are:-

• To pay approximately US $ 17.0 million of all debt service due and not paid as at 21st January, 1997 and not covered by the Agreed Minute of January 21,1997. These payments were made before June 30, 1997.

• To fully implement a three year ESAF Programme supported by the IMF i.e. December, 1996 to November, 1999.

• To initiate dialogue with Non-Paris Club Creditors with a view to obtaining debt reorganization arrangement.

• To inform in writing the Chairman of the Paris Club by June 30, 1997 the status and contents of its bilateral negotiations and inform in writing regularly the status of negotiations with other creditors as well as of the payments made to them.

• To deposit Special Drawing Rights (SDR) 4.75 million monthly into the Paris Club Account. The amounts are to be utilized to service Paris Club obligations as and when they fall due. The Paris Club creditors agreed in principle to hold a meeting to consider the matter of the United Republic of Tanzania’s stock of debt after November 30, 1999 during which Tanzania will receive a 67 percent “stock” cancellation.

(b) The Government strategy for this category of debt is to implement Paris Club V Agreed Minutes so as to obtain 67 percent stock of debt cancellation during Paris Club VI negotiations in 1999. This will also be the basis for accessing the HIPC debt relief.

(ii) Non - Paris Club Debt

Up to December, 1997 the arrears to this category of creditors were to the tune of US$ 1,179.1 million (principal arrears US $ 795.8 million and interest arrears US$ 383.3 million). Several attempts have been made to reach agreements with these creditors, but the negotiations have not been successful. Tanzania is required to negotiate with all Non-Paris Club creditors on terms similar to those it has obtained from the Paris Club creditors. This Paris Club condition has actually been the stumbling block in the negotiations with non Paris Club creditor countries who maintain that they are not part of the “developed world” and, are themselves facing serious debt difficulties. Despite of these problems, the Government will:-

(a) Continue formal negotiations and conclude agreements with the Non-Paris Club creditors to obtain debt reduction of up to 67 percent in net present value terms.

(b) Request for discounted payments in the framework of debt buyback and set aside the equivalent of US $ 60.0 million (which is about 10 percent of total exports per annum) from its budget to finance the operation. Assuming that creditors would agree to forfeit the payment of interest arrears of US $ 383.3 million and if Tanzania manages to negotiate for a discount of up to 85 percent on the principal arrears of US$ 795.8 million it will require about US$ 120 million to do away with the Non-Paris Club arrears, with a budgetary allocation of around US$ 60 million.

(c) Retire some of the debt via debt for equity swaps, debt for nature, debt for aid or other local currency swaps, in a manner that will benefit the economy and reduce the country’s debt.

(iv) Commercial Debt

Beginning late 1970s when Tanzania started experiencing foreign exchange shortages, commercial borrowers had to apply for foreign exchange through the National Bank of Commerce to service their external debts. Accordingly, on due dates, the equivalent amount in Tanzanian shillings were deposited with the National Bank of Commerce in non-interest bearing accounts until such time that foreign exchange was available for externalization. The funds were deposited in what was referred to as External Payment Arrears Account and by 1993 the arrears had grown to over US $ 500 million. With effect from September ,1993 there has been no further build up in external payment arrears because commercial banks are required to externalize promptly all debt service due, sourcing foreign exchange from the Inter-bank Foreign Exchange Market (IFEM).

The Government Strategy for this category of debt is:-

(a) To ensure that the existing arrears, of which about US $ 253 million has been verified, will be cleared through a debt buyback operation that will use the World Bank’s Debt Reduction Facility supplemented with bilateral grants. This will be implemented before the end of 1999, subject to release of funds by the World Bank.

(b) All other arrears in this category which are not eligible for clearance through the buyback arrangement will be dealt with using own resources. The strategy aims at clearing the debts within two years from January, 2000.

CHAPTER SEVEN

SUMMARY OF ELEMENTS OF THE STRATEGY, TIMEFRAME FOR IMPLEMENTATION AND INSTITUTIONAL

RESPONSIBILITIES

7. The National Debt Strategy is geared towards eliminating the debt burden and slowing the build up of Tanzania’s debt and alleviating poverty. Key elements of the Strategy are:-

7.1 Economic Management

(i) Resolving the debt burden requires an environment which is conducive for high rates of economic growth. This implies implementing economic policies capable of ensuring macro-economic stability, promoting good business relations with trading partners, promoting exports and attracting local and foreign private investments.

(ii) In future the Government will be cautious when contracting new external loans so as to bring the debt situation to manageable and sustainable levels. This implies that the Government will have to limit its borrowings for productive and commercial activities and concentrate on loans for priority and strategic areas of investment to support poverty alleviation and growth especially in agriculture extension, health, education, water and sanitation, transport and energy sectors. However, in order to provide for likely gaps in future investment demands, the Government will continue with efforts of promoting the private sector by encouraging investments (local and foreign) in all sectors.

(iii) Responsible Institutions:-

(a) Planning Commission (Leader).

(b) Ministry of Finance

(iv) Time Frame:-

Continuous.

7.2 Institutional Framework

In order to improve the institutional framework so as to meet the requirements of an efficient debt management system, the following will be implemented:-

(i) The Government strengthen its project implementing capacity and introduce standard reporting formats for project managers.

(ii) The Government will implement a program aimed at building a strong and comprehensive database for debt management in the Ministry of Finance.

(iii) The Debt Co-ordination Committee already established will be responsible for advising the Minister for Finance on all debt matters, including supervising the implementation of the Strategy.

(iv) In order to ensure that all requests for external loans are scrutinized adequately and at appropriate levels, public officers in the Ministry of Finance, Planning Commission, Sectoral Ministries and Bank of Tanzania, who are responsible for approving and submitting such requests on behalf of their respective Chief Executives, will be designated explicitly.

(v) The Government will train and develop its professionals in all aspects of debt management, namely:

(a) Computer use.

(b) Project appraisal, monitoring and evaluation.

(d) Accounting and auditing.

(vi) Responsible Institutions

(a) Ministry of Finance (Leader)

(b) Bank of Tanzania

(d) Attorney General’s Chambers

(e) Sectoral Ministries.

(vii) Time frame:-

Immediate.

7.3 Project Appraisal and Approval

In order to ensure maximum economic impact from loan proceeds, new borrowings should be for priority projects aimed at speeding up socio-economic development. In this regard, no new loans shall be negotiated by the Government unless the targeted project or programme has been evaluated properly by the relevant sector Ministries and the Planning Commission to ensure attainment of national objectives. In the relevant Ministries and Institutions, clear arrangements will be stipulated to eliminate delays in project evaluation and approvals. Approvals shall be made in standardized formats and by specified officers.

(i) Responsible Institutions: -

(a) Ministry of Finance (leader)

(b) Planning Commission

(d) Sectoral Ministries/Parastatal Organisations.

(ii) Time Frame:-

Beginning 1998/99.

7.4 Loan Disbursements

Once a loan agreement has been signed, all parties to the contract shall fully honour their contractual obligations to avoid delays, penalties and hence, negating the benefits of the intended programmes. The Government will provide adequate matching funds in its budget, and lenders are expected to disburse funds as per terms and conditions of the loan agreement. In addition information on project implementation progress and expenditures will be availed to the relevant institutions in time.

(i) Responsible Institutions:-

(a) Ministry of Finance (Leader)

(b) Creditors

(ii) Time Frame:-

Immediate and continuous.

7.5 Project Monitoring and Evaluation

(i) It is important that all borrowed funds are used efficiently to ensure maximum benefits and to build capacity for loan servicing.

(ii) Sectoral Ministries shall undertake physical evaluations, prepare reports on a quaterly basis and submit status report of projects and programmes to the Ministry of Finance and Planning Commission. They will also submit completion reports of projects.

(iii) Standardized formats for compulsory reporting by project managers will be reintroduced. The reports shall be submitted on quarterly basis to the Ministry of Finance, Planning Commission and relevant sectoral Ministries.

(iv) The Planning Commission after receiving completion reports from sectoral ministries will submit a consolidated report to the Cabinet.

(v) Adequate capacity will be developed in preparing and analysing reports.

(vi) Responsible Institutions: -

(a) Planning Commission (Leader)

(b) Ministry of Finance

(d) Controller and Auditor General

(vii) Time Frame:-

Beginning 1998/99.

7.6 Debt Co-ordination Committee

The Government has established the Debt Co-ordination Committee to advise the Minister for Finance on all debt matters. DCC shall comprise of:-

(i) Permanent Secretary, Ministry of Finance (Chairman).

(ii) Permanent Secretary and Secretary of the Planning Commission (Vice Chairman)

(iii) Permanent secretary, Prime Minister’s Office

(iv) Permanent Secretary, Ministry of Foreign Affairs and International Co-operation

(v) Permanent Secretary, Ministry of Justice and Constitutional Affairs.

(vi) Governor, Bank of Tanzania.

(vii) Responsible Institutions:-

(a) Ministry of Finance (Leader)

(b) Planning Commission

(d) Bank of Tanzania.

(viii) Time Frame:-

Beginning 1998/99.

7.7 Loan Servicing

Following conclusive negotiations with creditors, the Government shall provide budgetary resources for servicing all debts as they fall due.

(i) Responsible Institutions:-

(a) Ministry of Finance (Leader)

(b) Ministry of Finance - Zanzibar

(d) Sectoral Ministries/Parastatal.

(ii) Time Frame: -

Continuous.

7.8 Legal Framework

The Government Loans, Grants and Guarantees Act No. 30 of 1974 and as may be amended will be strictly adhered to. Only the Minister for Finance or public officers authorized by the Minister shall contract foreign loans on behalf of the Government. Those contravening the Act should be sunctioned.

(i) The Act will be amended to reflect current socio-economic developmemnts in the following areas:-

(a) The Act should state specifically that the Paymaster General will issue clearance or non-clearance certificate for each new loan in respect of the limits set in the Act.

(b) All moneys raised under the Act be paid to the Consolidated Fund including cases where funds would finally be paid to special accounts.

(ii) Responsible Institutions:-

(a) Ministry of Finance (Leader)

(b) Attorney General’s Chambers.

(iii) Time Frame:-

Beginning 1998/99.

7.9 Borrowing

The Government of United Republic of Tanzania shall not undertake any non- concessional borrowing except for emergency requirements .The acquisition of new loans by the Government shall be allowed only after every effort to secure grants for a particular project has failed.

(i) Responsible Institution:-

Ministry of Finance.

(ii) Time Frame:-

Immediate and Continuous.

7.10 Guarantees

The Government shall only guarantee institutions upon being satisfied that the projects for which the loan is being secured falls within the priority areas. The borrower will pledge assets to the Government to be taken over in the event of default.

(i) Responsible Institution:-

Ministry of Finance.

(ii) Time Frame:-

Immediate.

7.11 Role of Civil Societies and Awareness Campaign

The general public has an important role to play in debt management. The Government will take deliberate actions to involve the civil societies (including the NGOs, the private sector and the media). Deliberate campaigns should be carried out to promote awareness, interest and literacy on debt issues. This will have the advantage of ensuring transparency, enforcing accountability and utilizing the knowledge, experience and resources from the civil societies.

(i) Responsible Institutions:-

(a) Ministry of Finance (Leader).

(b) Planning Commission.

(d) NGOs.

(e) Private Sector Institutions.

(f) Media.

(ii) Time Frame:-

Immediate.

7.12 The Strategy For Multilateral Debt

The Government strategy for this category of debt shall be to:-

(i) Negotiate with the World Bank and IMF to ease the fiscal burden indicator in assessing the sustainability of Tanzania’s debt service burden under the HIPC arrangements, since the Government utilizes a large proportion of its domestic revenue to service external debt. The objective is to make Tanzania qualify for HIPC facility before November, 1999.

(ii) Request creditors to deposit about US$ 125 million annually into the established Multilateral Debt Relief Fund and Government source the balance from its revenue. The Government will identify within its budget frame projects and programmes to benefit from the budgetary savings accruing from the Fund during the five years.

(iii) Responsible Institutions:-

(a) Ministry of Finance (Leader).

(b) Planning Commission.

(iv) Time Frame:-

Immediate and continuous.

7.13 Paris Club

The Government strategy for this is to implement Paris Club V agreement

Responsible Institutions:-

(a) Ministry of Finance (Leader)

(b) Bank of Tanzania.

Time Frame:-

Continuous.

7.14 Non - Paris Club Debt

For this Non - Paris Club Debt the Government will:-

(i) Continue formal negotiations and conclude agreements with respective creditors to obtain debt reduction of up to 67 percent in NPV terms.

(ii) Request for discounted payments in the framework of a debt buyback and set aside its budget to finance the operation.

(iii) Some of the debt be retired for equity swaps, debt for nature, debt for aid or other local currency swaps. Cash swaps should not exceed US$ 30 million per annum. Debt swaps be conducted in a manner that would stimulate economic activities and reduce the country’s debt.

(iv) Responsible Institution:-

(a) Ministry of Finance (Leader)

(b) Bank of Tanzania.

(v) Time Frame:-

Immediate.

7.15 Commercial Debt:

(i) For commercial debts the Government will extinguish arrears of US$ 316 million through debt buyback operation using the World Bank’s Debt Reduction Facility by end 1999.

(ii) Responsible Institutions:-

(a) Ministry of Finance (Leader).

(b) Bank of Tanzania.

BENARD MBWILINGE

Wednesday, January 11, 2012

THE UNITED REPUBLIC OF TANZANIA, NATIONAL DEBT STRATEGY

NATIONAL DEBT STRATEGY

PART I: EXTERNAL DEBT

TABLE OF CONTENTS TABLE OF CONTENTS

EXECUTIVE SUMMARY

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