FISCAL AND MACROECONOMIC IMPLICATIONS OF SCALING UP INVESTMENT IN ACHIEVING TARGETS
By Prof. A.V.Y. Mbelle (Ph.D)
REFLECTIONS FOR MKUKUTA/PER ANNUAL CONSULTATIVE MEETING, MINISTRY OF PLANNING, ECONOMY AND EMPOWERMENT
DAR ES SALAAM, 24-25 MAY 2007
[DRAFT]
TABLE OF CONTENTS
PageCONTENTS
List of Tables
List of Figures
Acronyms
I / INTRODUCTION AND BACKGROUND
II / BRIEF OVERVIEW OF MKUKUTA/MDGs NEEDS ASSESSMENT AND THE COSTING EXERCISE
III / KEY FINDINGS OF NEEDS ASSESSMENT AND COSTING OF MKUKUTA/MDGs
IV / IMPLICATION OF SCALING UP INVESTMENTS FOR ACHIEVING MKUKUTA/MDG TARGETS: FISCAL AND MACROECONOMIC INDICATORS
V / CONCLUDING REMARKS
REFERENCE MATERIALS
List of Tables
Page1.1 / Tanzania: Macroeconomic Indicators and Poverty Situation
1.2 / Mainland Tanzania: Changes in Growth and Poverty: 1991/92-2000/01
3.1 / Key Findings of MKUKUTA/MDGs Costing: Mainland Tanzania
4.1 / Salient Features of 2006/07 Budget Frame (%) (Mainland)
A1 / Mainland Tanzania: Inter- District Inequities: Selected MDGs 2005
List of Figures
Page1.1 / The Vicious Circle of Poverty
A1 / Major Clusters of Poverty Reduction Outcomes: MainlandTanzania
ABBREVIATIONS ANDACRONYMS
AIDS Acquired Immuno-deficiency Syndrome
CSOCivil Society organization
FDIForeign Direct Investment
GDP Gross Domestic Product
GER Gross Enrolment Rate
HIPC Highly Indebted Poor Countries
HIV Human Immuno-deficiency Virus
JASTJoint Assistance Strategy for Tanzania
MDAsMinistries, Departments and Agencies
MDGsMillennium Development Goals
MKUKUTA Mkakati wa Kukuza Uchumi na Kuondoa Umaskini Tanzania (NSGRP)
MKUZAMkakati wa Kukuza Uchumi na Kupunguza Umaskini Zanzibar (ZSGRP)
NGONon Governmental Organization
NPESNational Poverty Reduction Strategy
NSGRP National Strategy for Growth and Reduction of Poverty
PRSPoverty Reduction Strategy
PRSPPoverty Reduction Strategy Paper
RGOZRevolutionary Government of Zanzibar
UNDP United Nations Development Programme
URT United Republic of Tanzania
ZSGRPZanzibar Strategy for Growth and Reduction of Poverty
EXECUTIVE SUMMARY
The development challenge
1. Tanzania has a long and rich history of devising policy frameworks and strategies in order to meet the challenge of poverty.
2. Consultations with the public on the lessons learned during implementation of the strategies, especially PRSP, revealed little progress (if any) in the areas of income poverty, youth, gender, employment, rural electrification, agriculture and water provision. The responses showed disparities across social groups, gender and geographical location.
3. The overall impression was that “growth helped the poor but was much better for the rich”.Much of the growth had not translated into poverty reduction – the growth process was not pro-poor. Relying on growth alone to reduce poverty is neither equitable nor efficient
4. The main development challenge at present is on how to link macroeconomic successes with the real situation at the micro (household) level and get the poorer sections of the society out of the vicious circle of poverty.
Objective of costing
5.The primary purpose of estimating the price tag of MKUKUTA/MDGs was to align the national budget, sectoral plans, local government plans and foreign aid with MKUKUTA. Based on this purpose the costing exercise was undertaken in the context of MKUKUTA implementation framework. The costing was addressed with humility, flexibility and from a point of view of contributing to the learning process. In particular:
To assess needs and cost of implementing MKUKUTA. This exercise is aimed at estimating the amount of financial resources required to implement the strategy for a period of five years (2005-2010).
To identify cross-sector areas, needs and synergies in the implementation of MKUKUTA.
To develop capacity for needs assessment. Institutionalisation of needs assessment in Government Ministries and Departments will require building a capacity in order to implement MKUKUTA effectively and efficiently.
To align and harmonize MKUKUTA, PER/MTEF and JAS/JAST.These key processes require well-balanced sequencing and linkages.
To produce a snap shot of a long-term strategy 2005-2015 building on MKUKUTA (outlining the key policies, institutions, and investments needed to achieve MDG targets by 2015).
Methodology
6. Costing a goal/ target involved estimating and ascertaining the financial implications of actions and interventions required to reach the identified goal/ target. Several issues needed to be resolved. They included credibility/accuracy of macroeconomic assumptions, projection of resource envelope, setting scenarios, assessing the absorptive capacity, data availability and quality, existence of inequities, problem of population projections and assumptions about unit cost.
7. The pilot phase of the needs identification and costing involved five sectors, namely, Agriculture, Education, Health, Roads and Water and Sanitation. Later, Lands and Human settlement and Energy were added.
8. In order to maintain objectivity and achieve realistic/scientific costing the following principles were adopted:MKUKUTA context, participatory process, distinction between costing and financing aspects, transparency, Millennium project methodology only to provide guidance, dis-aggregation of results and sequencing of scale-up interventions.
9. In costing beyond 2010, the main emphasis was to accelerate progress towards meeting MDG targets.
Key findings
10. The main findings are: the resource requirements for meeting MKUKUTA/MDG targets are high compared to current mobilization efforts; the financing gap is large and differs from one sector to the other: lowest in education sector and highest in sub roads sector; there have been several earlier attempts at costing sectoral interventions. These consistently showed lower values compared to MKUKUTA/MDG costing; quick wins (for faster reduction of poverty) exist in all sectors, the highest being in roads sub-sector; consultations have been important in identifying, as far exhaustible as possible, the interventions required and opened dialogue for future collaboration among sectors, and, finally, in all sectors need was demonstrated for scaling up investments in order to achieve MKUKUTA and MDG targets.
Implications
11. The government was seen to be the main vehicle of mobilizing resources for implementing MKUKUTA.However, as the costing exercise took on board both recurrent and development components (in fact these are complementary) both will have to increase.The policy choice will have to be on determining the appropriate mix.
12. The main policy implication is on fiscal choices that have to be made on sources of revenue and structure of spending.
13. Increased spending raises key fiscal ratios such as with respect to deficits. The policy choice is to watch against adverse outcomes on macroeconomic indicators such as a rise in inflation.
14. As a way forward, refining the dialogue and zeroing on the “quick wins” have the potential of leading to faster achievements of MKUKUTA/MDG targets.
I: INTRODUCTION AND BACKGROUND
1.1 Background
Tanzania exhibits typical characteristics of a developing country with low per capita income, wide spread poverty and needing greater attention to meet the Millennium Development Goals (MDGs) (Table 1.1).
Table 1.1: Mainland Tanzania: Selected IndicatorsMacroeconomic indicators
Population in millions (2005) / 36.2
Real GDP growth rate (%) / 5.7 (2006)
Agricultural GDP (2005) (%) / 45.6
Per capita income (US$ nominal, 2005) / 370
Inflation rate (2005) (%) / 4.3
Unemployment rate (2005) (%) / 13
Poverty indicators
Basic needs poverty (%) / 36 (2000/01)
Food poverty (%) / 19.9 (2000/01)
Gini coefficient / 0.35 (2000/01)
Selected MDG Indicators and Prospects
1. Extreme poverty / Off track
2.Universal Primary Education NER (2006) / 94.8 on track
3. Gender Parity Primary (2005)- target 2005 / 0.98 on track
4. U-5 mortality rate (per 1,000 live births)2004 / 112 off track
5. Maternal mortality (per 100,000 live births)2004 / 578 off track
6. HIV/AIDS Prevalence (2004) / 7.0 on track
Sources: URT (various)
The main development challenge that Tanzania has faced is how to eradicate poverty and over the last decade or so, mainly on how to link macroeconomic successes with the real situation at the micro (household) level. In a nutshell, how to get the poor out of the vicious circle of poverty (Figure 1.1)
One of the strategies towards meeting the challenge of poverty has been to devise policy frameworks, the overall vision having been provided by long term Vision2025.
The first comprehensive PRS, the National Poverty Eradication Strategy, NPES, 2010 (1998) provided a framework to guide poverty eradication initiatives in order to reduce absolute poverty by 50 per cent by the year 2010 and eradicate it by year 2025. The strategy targeted improved economic growth and people’s incomes as a basis for poverty eradication. A growth rate of 8-10 per cent for the economy was targeted. NPES was the first attempt to translate Vision 2025 to medium term targets.
In year 2000 the Government crafted the Poverty Reduction Strategy Paper (PRSP) in the context of the Highly Indebted Poor Countries (HIPC) initiative.Thisfirst generation poverty reduction strategyfocused on the priority areas of basic education, primary health, water, rural roads, agricultural research and extension, Judiciary and HIV/AIDS.
Consultations with the public on the lessons learned during implementation of PRSP revealed little progress (if any) in the areas of income poverty, youth, gender, employment, rural electrification, agriculture and water provision. The responses showed disparities across social groups, gender and geographical location.
The overall impression was that “growth helped the poor but was much better for the rich”. Relying on growth alone to reduce poverty is neither equitable nor efficient
Table 1.2: Mainland Tanzania: Changes in Growth and Poverty: 1991/92-2000/01Change in growth between Household Budget Surveys / +206
Change in head count ratio: basic needs / -7.5
Change in head count ratio: food poverty / -13.6
Source: Computed from URT (2002)
The conclusion that emerges from Table 1.2is that much of the growth had not translated into poverty reduction – the growth process was not pro-poor.
The successor strategy, second generation National Strategy for Growth and Reduction of Poverty (NSGRP or MKUKUTA the Swahili acronym (2005-2010), is MDG-based and adopted an outcome-based approach with the twin goals of achieving and sustaining high economic growth and substantial poverty reduction.
This is a five year strategy addressing poverty in a comprehensive outcome-based approach. The strategy is presented in three broad clusters: Growth and Reduction of Income Poverty, Quality of Life and Social Wellbeing and Governance and Accountability. See Annex Figure 1. In terms of economic growth the target is a growth rate of 6-8 per cent per annum from a base of 6.7 per cent in 2004. The poverty reduction targets by 2010 (basic needs poverty) are from 25.8 per cent (2000/01) to 12.9 per cent in urban areas and 38.6 per cent (2000/01) to 24 per cent in rural areas.
II: BRIEF OVERVIEW OF MKUKUTA/MDG NEEDS ASSESSMENT AND COSTING
2.1 Overview
MKUKUTA needs assessment and costing is a joint endeavour of the Government of Tanzania and the United Nations Country Team, supported by the Millennium Project, to identify policy priorities in MKUKUTA, sequencing and linking them to sector strategies and generate approximate estimates of resources needed to meet the targets, to develop a snap shot of a long-term strategy for achieving MDGs (2015), and to coordinate international and local advocacy for increasing international financial assistance for MKUKUTA/MDG-related investments.
2.2 Purpose and objectives:
The primary purpose of estimating the price tag of MKUKUTA is to align the national budget, sectoral plans, local government plans and foreign aid with MKUKUTA targets. Based on this purpose the costing exercise was undertaken in the context of MKUKUTA implementation framework. The costing was addressed with humility, flexibility and from a point of view of contributing to the learning process. In particular:
To assess needs and cost of implementing MKUKUTA. This exercise is aimed at estimating the amount of financial resources required to implement the strategy for a period of five years (2005-2010).
To identify cross-sector areas, needs and synergies in the implementation of MKUKUTA.
To develop capacity for needs assessment. Institutionalisation of needs assessment in Government Ministries and Departments will require building a capacity in order to implement MKUKUTA effectively and efficiently.
To align and harmonize MKUKUTA, PER/MTEF and JAS/JAST.These key processes require well-balanced sequencing and linkages.
To produce a snap shot of a long-term strategy 2005-2015 building on MKUKUTA (outlining the key policies, institutions, and investments needed to achieve MDG targets by 2015).
2.3 Guiding principles
In order to maintain objectivity and achieve realistic/scientific costing the following principles were adopted:
MKUKUTA context
Participatory process
Distinction between costing and financing aspects
Transparency
Millennium project methodology only to provide guidance
Dis-aggregation of results
Sequencing of scale-up interventions
2.4 Early attempts at costing
There have been various attempts to estimate the cost of financing sector in the country. The main ones included:
Universally recommended per capita expenditure
This refers to expenditure “that fixes it all”. In education UNESCO recommends a per capita expenditure of USD 12.
Poverty Reduction Strategy Paper (PRSP)
The main weakness of this approach was the narrow focus on “priority sectors” in general.
Millennium Development Goals (MDGs) Approach
The second generation MDG Country Report for Tanzania (see UNDP 2002) estimated resource requirements for meeting MDG targets. The strength of this attempt was in pioneering the costing of a poverty reduction strategy. The main weakness of the methodology was the narrow
The Millennium Project
The Millennium project was piloted on five countries, namely, Bangladesh, Cambodia, Ghana, Tanzania and Uganda. The project sought to provide synergies where rational choices could lead to resource savings. A list of interventions for achieving the identified targets was suggested on which costing was done.
The strength of this approach lies in its ability to incorporate interventions from other sectors/actors that have a direct relevance to the achievement of the targets of a particular sector. Others include recognition of the importance of governance, absorptive capacity, as well as the balance between pubic and private investments. Synergies and cost savings across interventions, as well as distinction between the rural and urban sections of the population.
The main weakness includes narrow focus (as compared to MKUKUTA targets).
Sectoral PERs and MTEFs
These were mainly influenced by the government’s “fiscal space”.
Methodology for costing
Costing a goal/ target involves estimating and ascertaining the financial implications of actions and interventions required to reach the identified goal/ target. Several issues need to be resolved first. These include:
Credibility/accuracy of macroeconomic assumptions
Projection of resource envelope
Setting scenarios
Assessing the absorptive capacity
Data availability and quality
Existence of inequities
Problem of population projections
Assumptions about unit cost
In costing beyond 2010, the main emphasis was to accelerate progress towards meeting MDG targets.
The government was seen to be the main vehicle of mobilizing resources for implementing MKUKUTA.
Coverage
The pilot phase of the needs identification and costing involved five sectors, namely, Agriculture, Education, Health, Roads and Water and Sanitation. Later, Lands and Human settlement and Energy were added.
Summary of lessons from earlier attempts
There are two main lessons to be learned from these earlier attempts: the lack of comprehensive costing of interventions and the need to take into consideration synergies and inter-linkages.
III: KEY FINDINGS OF MKUKUTA/MDG COSTING EXERCISE
3.1 Overview
An important aspect of the costing exercise has been the use of common methodology. This has enabled comparison of results where information was complete.
3.2 Key findings
- The resource requirements for meeting MKUKUTA/MDG targets are high compared to current mobilization efforts.
- The financing gap is large and differs from one sector to the other: lowest in education sector and highest in roads sector
- There have been several earlier attempts at costing sectoral interventions. These consistently show lower values compared to MKUKUTA/MDG costing
- Quick wins (for faster reduction of poverty) exist in all sectors, the highest being in roads sub-sector.
- Consultations have been important in identifying, as far exhaustible as possible, the interventions required and opened dialogue for future collaboration among sectors.
- In all sectors need was demonstrated for scaling up investments in order to achieve MKUKUTA and MDG targets.
Table 3.1: Key Findings of MKUKUTA/MDG Costing: Mainland Tanzania
Agriculture / Education / Energy / Health / Lands
& H.S. / Roads / Water& Sanitation
Price tag
USD mill. / 372,611 / 19,550 / 7,792.8 / 5,179 / 302 / 9,082 / 1,684
Financing gap Scenario II (relaxed) / 111,083 / 92,056 / 3,530.4 / 8,801,105 / 487,997
% of availability / 29.8 / 18.8 / 55.0 / 100 / 43
Earlier costing attempts / 4 / 5 / 3 / 3 / 3 / 5
Areas of intervention / 7 / 5 / 10 / 6 / 6 / 5 / 10
Intervention packages / 55 / 64 / 23 / 22 / 114 / 9 / 52
Quick wins / 3 / 3 / 3 / 17 / 25 / 5
Source: URT 2006a
IV: IMPLICATION OF SCALING UP INVESTMENTS FOR ACHIEVING MKUKUTA/MDG TARGETS: FISCAL AND MACROECONOMIC INDICATORS
4.1 Overall impact on Budget Frame
The immediate implication of scaling up investment will be felt in the Budget Frame since the component of Expenditure will need adjustment. The main adjustment will be on the structure of spending between recurrent and development, in favour of the latter. However, as the costing exercise took on board both recurrent and development components (in fact these are complementary) both will have to increase. The policy choice will have to be on determining the appropriate mix.
Table 4.1: Salient Features of 2006/07 Budget Frame (%) (Mainland)REVENUE
[T.Shs tr. 4.9] / Domestic / 50.7
External / 45.9
Drawdown / 3.4
EXPENDITURE
[T.Shs tr. 4.9] / Recurrent / 64.2 / Public debt 9.2
Development / 35.8 / External resources 63.0
The resource requirements are large, the challenge is whether they are “manageable”.
Given the rich experience with external financing and the need to enhance country ownership of MKUKUTA implementation, the structure of revenue will have need major policy decision in terms of increasing the domestic revenue component (increased mobilization)