African Development Bank

AFRICAN DEVELOPMENT BANK

AFRICAN DEVELOPMENT FUND

UNITED REPUBLIC OF TANZANIA

COUNTRY STRATEGY PAPER 2011-15:

COMBINED MID-TERM REVIEWAND COUNTRY PORTFOLIO PERFORMANCE REVIEW

March 2014

TANZANIA FIELD OFFICE (TZFO)

EAST AFRICA RESSOURCE CENTRE (EARC)

Task team / The report was prepared under the leadership of Gabriel Negatu, Regional Director (EARC), and Tonia Kandiero, Resident Representative (TZFO). The task team comprised:Josef Loening, Principal Country Economist (TZFO), Daniel Lekoetje, Principal Country Program Officer (TZFO), Amu Orison, Chief Country Program Officer (EARC), Prosper Charle, Macroeconomist (TZFO), Patrick Musa, Senior Transport Engineer (TZFO), Stella Mandago, Senior Energy Officer (TZFO), Godfrey Kaijage, Financial Specialist (TZFO), Sabas Marandu, Principal Water and Sanitation Specialist (TZFO), Yussuf Balozi Hija, Procurement Officer (TZFO), Brighton Kishebuka, Procurement Assistant (TZFO), Salum Ramadhani, Senior Agricultural Expert (TZFO), Hamisi Simba, Senior Social Development Specialist (TZFO), Petrine Addae, Economic Consultant (TZFO), Gertrude Mlachila, Private Sector Consultant (OPSM), and Jamilla Bairu, Disbursement Assistant (TZFO).
Peer-reviewers / Alex Mubiru, Lead Strategy Advisor (STRG), Ferdinand Bakoup, Lead Economist (ORWA), Halima Hashi, Principal Country Program Officer (RWFO), Edward Sennoga, Senior Country Economist (RWFO), Andre Almeida Santos, Senior Country Economist (MZFO), Frank Sperling, Chief Climate Change Officer (ONEC), Damoni Kitabire, Lead Economist (ORSA), Eva Ruganzo, Chief Country Program Officer (ETFO), Ando Mensah, Principal Country Program Officer (ORNG) and Lawrence Chi Tawah, Assistant to Vice-President (SAOR).

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MAP OF TANZANIA

CURRENCY EQUIVALENTS

April 2014

UA 1 = US$ 1.5456(United States Dollar)

UA 1 = EUR 1.121 (Euro)

UA 1 = TZS 2531.74 (Tanzania Shilling)

US$ 1 =TZS 1637.9987 (Tanzania Shilling)

GOVERNMENT FISCAL YEAR

July 1st to 30th June

WEIGHTS AND MEASURES

Metric System

1 ton / = / 2204 pounds (lbs)
1 kilogram (kg) / = / 2.204 lbs
1 meter (m) / = / 3.28 feet (ft)
1 millimeter (mm) / = / 0.03937 inch (”)
1 kilometer (km) / = / 0.62 mile
1 hectare (ha) / = / 2.47 acres

ACRONYMS AND ABBREVIATIONS

ADB / African Development Bank
ADF / African Development Fund
ASDP / Agriculture Sector Development Program
ALSF / Africa Legal Support Facility
AWF / African Water Facility
BRN / Big Results Now
CAR / Commitment at Risk
CPIA / Country Performance and Institutional Assessment
COMESA
CPIP / Common Market for Eastern and Southern Africa
Country Portfolio Improvement Plan
CPPR / Country Portfolio Performance Review
CSP / Country Strategy Paper
DASIP / District Agriculture Investment Program
DHS / Demographic Health Survey
DfID / United Kingdom Department for International Development
EDCF / Korea Economic Development Cooperation Fund
EIB / European Investment Bank
EARC / East Africa Resource Center
EITI / Extractive Industries Transparency Initiative
EAC / East African Community
EU / European Union
FDI / Foreign Direct Investment
FYDP / Five Year Development Plan
GBS / General Budget Support
GDP / Gross Domestic Product
HBS / Household Budget Survey
IFAD / International Fund for Agriculture Development
IFC / International Finance Cooperation
IMF / International Monetary Fund
JICA / Japan International Cooperation Agency
kWh / Kilowatt per hour
MCC / Millennium Challenge Cooperation
MDG / Millennium Development Goal
MKUKUTA / Mkakati wa Kukuza Uchumi na Kupunguza Umaskini Tanzania
MKUZA / Mkakati wa Kukuza Uchumi na Kupunguza Umaskini Zanzibar
MW / Megawatt
NBS / National Bureau of Statistics
NSGRP / National Strategy for Growth and Reduction of Poverty
PAPs / Project Affected Persons
PAR / Projects at Risk
PDB / Presidential Delivery Bureau (for BRN)
PEFA / Public Expenditure and Financial Accountability
PSI / Policy Support Instrument
PPPs / Public Private Partnerships
RWSSP / Rural Water Supply and Sanitation Program
SADC / Southern African Development Community
SAGCOT / Southern Agricultural Growth Corridor of Tanzania
SCF / Standby Credit Facility Arrangement
TANESCO / Tanzania Electricity Supply Company
TIC / Tanzania Investment Center
TZFO / Tanzania Field Office
UN / United Nations
UA / Unit of Accounts
US$ / United States Dollar
VAT / Value Added Tax
WSDP / Water Sector Development Program
ZSGRP / Zanzibar Strategy for Growth and Reduction of Poverty

TABLE OF CONTENTS

EXECUTIVE SUMMARY

1.INTRODUCTION

2.COUNTRY CONTEXT AND DEVELOPMENT PROSPECTS

2.1Political Context

2.2Economic and Sector Context

2.3Social Context and Cross-cutting Issues

2.4Strengths and Opportunities, Weaknesses and Challenges

3.STRATEGIC OPTIONS AT MID-TERM

3.1Country Strategic Framework

3.2Aid Coordination, Harmonization Mechanisms, and Bank Positioning

4.CSP IMPLEMENTATION AND RESULTS

4.1Bank Group Resource Allocation

4.2Mid-term Implementation Status

4.3Achievement of Objectives and Results at Mid-Term

5.COUNTRY PORTFOLIO PERFORMANCE REVIEW

5.1Bank Group Portfolio

5.2Portfolio Monitoring and Evaluation

5.3Implementation Status of the Country Portfolio Improvement Plan (CPIP)

5.4The Bank Group and other Stakeholders Performance

5.5Results from a Survey on Portfolio Quality

5.6Revised Country Portfolio Improvement Plan

6.STRATEGY FOR THE REMAINING PERIOD 2014-15

6.1Experience and Lessons Learned

6.2Rationale and Strategic Selectivity

6.3Bank Indicative Assistance Program

6.4Monitoring and Evaluation

6.5Risks and Mitigation Measures

7.CONCLUSIONS AND RECOMMENDATIONS

Annex 1: Summary of Joint CSP/CPPR Consultations

Annex 2: Selected Economic Indicators

Annex 3: Achievement of Millennium Development Goals

Annex 4: Coordination among Development Partners

Annex 5: Achievement of Country Strategy Mid-term Results

Annex 6: List of Active National and Multinational Lending Projects

Annex 7: Revised Country Portfolio Improvement Plan, 2013

Annex 8: Implementation Progress and Development Outcomes

Tables

Table 1: Strengths and Opportunities, Weaknesses and Challenges

Table 2: Tanzania Portfolio Performance at a Glance, 2009-2013

Table 3: Indicative Lending Program, 2014-15 (in million UA)

Table 4: Proposed Studies (in million UA)

Table 5: Tanzania Comparative Development Indicators

Table 6: Progress at MDGs at a Glance—Mainland Tanzania

Table 7: Progress at MDGs at a Glance—Zanzibar

Table 8: Donor Coordination Matrix for Tanzania

Table 9: Original Results-based Framework, 2011-15

Table 10: Revised Results-based Framework for the Period 2014-15

Table 11: The National and Regional Portfolio for Tanzania – December 2013

Table 12: Revised Action Matrix to Enhance Portfolio Quality - 2013

Table 13: Tanzania Project Ratings in 2013

FIGURES

Figure 1: Political Context

Figure 2: Real GDP Growth (%)

Figure 3: Trends of fiscal balance and oil imports

Figure 4: Trends of current account balance and oil imports

Figure 5: Sectoral composition of active portfolio – December 2013

EXECUTIVE SUMMARY

1. The Country Strategy Paper for the United Republic of Tanzania articulates two main strategic pillars: (1) infrastructure development; and (2) governance.The pillars are aligned with the African Development Bank’sTen-Year Strategyfor 2013-2022and the Government’s development framework, as articulated in the National Vision 2025 and the Zanzibar Vision 2020. Thestrategy aimsto support Tanzania to enhance competitiveness, achieve inclusive growth, and reduce poverty. The Country Strategy PaperMid-Term Review, whichis combined with the annual Country Portfolio Performance Review,comes at an opportune time as the Government is embarking on “Big Results Now!” (BRN) initiative to improve efficiency and accountability in the implementation of its plans. The Bank’s strategic focus is in line with the priorities under Government’s BRN delivery model.

1. Tanzania has highly favorable development prospects and the focus of public policy is to make growth more inclusive. The country is peaceful, politically stable, and continues to improve public sector efficiency through gradual reform process.Furthermore, the economycontinues to perform strongly, with average annualgrowthof 7%over the past decade.Future growth prospects arehigh in light of recent natural gas discoveries, commitment to reformsand private sector growth. However, growth is constrained by infrastructure gaps – particularly in transport and energy sectors. Also, poverty has been slow to respond to growth.The areas of focus in supporting inclusive growthare: agriculture productivity, infrastructure (transport and energy), skills gaps, quality of public service delivery, and employment generation – especially in non-farm activities.

1. The performance of the Bank’son-going portfolio is satisfactory, and significant results have been recorded at mid-term. The portfolio has 33 operationswith total commitment of UA 1 billion. The overall portfolio performance is satisfactory with an assessment score of 2.3 in 2013. Important results recorded at mid-term include: upgrading of more than 270km of road to bitumen standard; construction/rehabilitation of 44 market facilities, and training of more than 11,000 Participatory Farmer Groups. Other results are: completion of 300 village water projects – serving about 3.9 million people; provision of micro-credit to 93,364 entrepreneurs, – and, subsequently, an estimated 200,000 new jobs created by small entrepreneurs. Also, 53 Out-Patient Department Units and 9 Obstetric Theaters were constructed.

1. Incorporating lessons learned from this review into ongoing operations and policy dialogue needs to be a joint effort, both by the Bank andGovernment.The Bank should pay more attention to (1) quality at entry and oversightof operations, (2) measurement of results, and(3) knowledge products to inform operations and dialogue. The Government needs to (4) commit to securing counterpart funding, (5) ensure compliance with the Bank’s safeguard policies, and (6) enhance internal operational efficiency, notably on financial management, procurement, and contract management processes.

1. Overall, the strategic direction remains the same, with refinements.Major developments include the leadership role to support reforms in the energy sector andactivities following the discovery of natural gas. The Bank will retain its strategic pillars (1) infrastructure development, focusing on transport and energy, and (2) governance, with focus on the enabling institutional and business environment.Another aspect is the need to generateknowledge in the areas of inclusive and green growth to inform the post-2015 activities. Another area of growing importance is theprovision oflegal advisory functions through the Africa Legal Support Facility (ALSF), especially in the energy and transport sectors.

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1.INTRODUCTION

1. The overall objective of the African Development Bank’s Country Strategy Paper (CSP) is to support Tanzania to enhance competitiveness, achieve inclusive growth, and reduce poverty.The CSP 2011-15 for Tanzania is articulated around two strategic pillars: (1) infrastructure development; and (2) governance with focus on enabling institutional and business environment. The original CSPwas aligned with the Bank’s Medium-Term Strategy, 2008-12, which focused on infrastructure development, governance, the private sector, and higher education.The CSPMid-Term Reviewis combined with the annual Country Portfolio Performance Review (CPPR), and the objective is to assess achievements of the initial objectives and results, assess portfolio performance at mid-term, and update the Bank’s strategy for the remaining period 2014-15. The joint CSP/CPPR Mid-Term Reviewis informed by intensive consultations with the Government, Development Partners, the private sector, and civil society (see Annex 1 for details). The Review ensures strategic alignment with Bank’s Ten-Year Strategy, 2013-22: At the Center of Africa’s Transformation, which highlights the twin objectives of inclusive growth and transition to green growth. It also ensures alignment with the Bank’s new Gender Strategy 2014 – 2018: Investing in Gender Equality for Africa’s Transformation; which focuses on creating opportunities for women, disadvantaged and marginalised people, and communities to participate in, and benefit from development.

2.COUNTRY CONTEXT AND DEVELOPMENT PROSPECTS

2.1Political Context

1. Tanzania is peaceful and politically stable. Regular elections have ensured that the Government upholds the spirit of democratic values (figure 1). After becoming a multiparty democracy in 1992, every five years, Tanzania has successfully held four peaceful multiparty elections.According to World-wide Governance Indicators, in all dimensions of governance, Tanzania rankedbetween the 22 to 47 percentiles among 215 countries surveyed in 2012. The country has the best percentile rank in political stability and absence of terrorism (percentile rank 47).Also, Tanzania ranked 17 out of 52 countries in the Mo Ibrahim Index of African Governance with an overall score of 56.9 (out of 100) in 2012, which is higher than African average of 51.6, and also higher than the regional average for East Africa (47.9). In Mo Ibrahim Index, Tanzania achieved its highest category score in participation and human Rights (61.3), where it also attains its highest rank (12th out of 52).

1. There are noticeableimprovements in governance, combined with a strong commitment to reform.The country is in the processof preparing a new Constitution, expected to be finalized before the general elections in 2015. The draft New Constitution is currently being reviewed by the Constituent Assembly, and the dominant issues include: structure of the Union between Tanzania Mainland and Zanzibar; political reforms, powers of the President, and natural resources.Overall, Tanzania continues to demonstrate high-level international commitment to improved openness, transparency, and access to information. Most notably, the Tanzania Extractive Industry Transparency Initiative (EITI) will further deepen the country’s compliance with international transparency standards. In order to assure that commitments are rigorously implemented, Tanzania launched in 2013 the ‘Big Results Now!’ (BRN) initiative, which offers an additional opportunity for deepening government accountability.

2.2Economic and Sector Context

1. Tanzania’s economy has continued to perform strongly, growing at 7% in 2013.[1]The average Gross Domestic Product (GDP) growth from 2004 to 2013 stood at6.9%, maintaining stability and resilience to exogenous shocks (figure 2). The economy is expected to grow at about 7% annuallyuntil 2015. For the past 3 years, almost 60% of growth has been driven by trade, manufacturing, transport, telecommunications, and agriculture.In 2012, the contribution of agriculture to GDPwas27%, industry 25%, and services 48%. Average annual agricultural growth has been relatively small at only 4% over the past decade. While the structure of the economy has undergone some changes over the years, the low performance of agriculture suggest that Tanzania is in the process of structural transformation.Tanzania, overall, has earned a record for sound macroeconomic management. Currently the International Monetary Fund (IMF) has a Standby Credit Facility arrangement (SCF) with Tanzania until April 2014. In addition to periodic article IV consultations, the Government is in the process of renewing the Policy Support Instrument (PSI) arrangement with the IMF.

1. Over the next decade, natural gas discoveries are expected to boost Tanzania’s economic growth. This might happen gradually, as significant commercial exploitation is projected to start in 2020,through investment flows, increased government revenue, power generation, and various spin-off effects. The Government is already putting measures in place to prepare for the gas economy.Discoveries are currently projected at 46.5 trillion cubic feet.According to estimates at least US$ 15 billion in Foreign Direct Investments (FDIs)could flow to Tanzania over the next decade.[2]The country has a ‘latecomer’ advantage, which opens an opportunity to learn from other countries and is compliant with the Extractive Industries Transparency Initiative (EITI) as of December 2012. Tanzania also needs trained and qualified manpower in the oil and gas industry and beyond, such as in physical sciences, construction, and engineering. There is need to further enhance governance and institutional reforms to lay the ground for inclusive growth, and implementthe Natural Gas Policywhich was approved by the cabinet in October 2013to guide the activities in the new gas industry.

1. Tanzania continues to maintain a tight monetary policy stance. Monetary policy aims to support economic growth and maintain price stability. Bank of Tanzania hasmaintaineda policy rate at 12%.In line with a tight monetary policy stance, private sector credit grew by 18.2% in 2012/13, slightly lower than the 20% target, and significantly lower than 27.2% growth recorded in 2011/12. Private sector credit was channeled to manufacturing, building and construction, trade and personal activities.Improved food supply and a generally favorable external environment helped to ease inflationary pressures. Annual headline inflation has declined consistently from a decade high of 19.8% recorded in December 2011 to 5.6% in December 2013, an impressive rebound.

1. The Government has shown commitment to strengthen its fiscal position.The overall fiscal deficit in 2012/13 was5.8% of GDP (figure 3), against the planned 5.5% of GDP, as a result of lower than expected non-tax revenues, reducedValue Added Tax (VAT) collection relative to the Government’s ambitious target, and expenditures for emergence power financing. Thisissimilar to a deficit of 5.8% of GDP recorded in the previous fiscal year, though it is still lower than the deficit of 6.4% of GDP in 2009/10.In 2012/13, Public spending was up by 0.7% of GDP compared to 2011/12, with an increase inshare of recurrent spending, from 64% to 68% of total expendituredue to increased spending on wages and salaries notably in the social sectors, budget transfers to the energy sector, and increased domestic debt services. Through improved revenue performance and expenditure management, the Government expects to reduce the fiscal deficit to 5% of GDP in 2013/14.

1. Progress onstrengthening economic and financial governanceremains positive.Tanzania’s scores in the Bank’s Country Performance and Institutional Assessment (CPIA) have remained stable during the past 3 years, with a good overall score in economic management and quality of public administration.[3]The country is implementing a comprehensive Public Financial Management Reform Program (PFMRP), and by 2013, an integrated financial management system had been rolled out in all local government authorities. Tanzania has overtime shown strong leadership in addressing weaknesses highlighted in Public Expenditure and Financial Accountability (PEFA) assessments.However, challenges still exist, and areas of improvement include the effectiveness of internal audits, effectiveness of payroll control, the annual budget process, and procurement and external audits.Other areas that that need improvement include alignment of expenditure plans with available resources, including revenue forecasts and collection, reduction of arrears, and management of budget re-allocations.

1. Tanzania’s publicdebtremains sustainable.