A. National Accounts²

5. The Tanzania Bureau of Statistics published a revised series for the national accounts 1988–95 in May 1997. It had become necessary to revise the data to reflect the structural changes in the economy since the last major revision in 1976.³ The revision included increased coverage of the formal and informal private sectors based on a number of sector studies, adjustments to the methodology of the 1993 System of National Accounts (SNA), and a rebasing of the constant price series from 1985 to 1992. In addition, the new methodology introduced separate estimates for monetary and nonmonetary GDP.

6. The revisions led to a considerable increase in the level of nominal GDP compared with the previous data (Table 1), namely, an increase in 1988 GDP of 263 percent and in 1992 GDP of 68 percent. The inclusion of the nonmonetary sector added 30 percent to the 1992 level of GDP. Owing to the wider coverage, the share of agriculture in monetary GDP declined sharply, while the shares of trade, public administration, and manufacturing increased. The change in the base year for GDP in constant prices resulted in a decline of the average annual growth rate from 4.3 percent to 2.7 percent for 1988–96. The new methodology also generated a sharp downward revision in the 1992 investment-to-GDP ratio, from 41.9 percent, according to the original estimates, to 27 percent.

Table 1.

Tanzania: Comparison of Old and New GDP Series for 1988 and 1992

Source: Tanzanian authorities.

^1/Interim revision, published in 1996.

Table 1.

Tanzania: Comparison of Old and New GDP Series for 1988 and 1992

	1988			1992
	Pre-1996	1996 1/	1997	Pre-1996	1996 1/	1997
		Rev.			Rev.
		(In millions of Tanzania shillings)
Agriculture	178,760	197,684	292,408	428,441	551,884	339,062
Manufacturing	15,187	23,985	97,730	31,914	82,700	104,589
Mining and quarrying	723	1,673	8,529	11,383	19,181	13,503
Electricity and water	4,628	2,744	15,312	11,033	21,281	19,766
Construction	11,808	14,808	51,728	30,433	47,740	57,293
Trade	41,591	45,591	181,040	98,173	163,100	202,207
Transportation and communications	14,259	18,259	54,935	49,350	64,327	66,191
Public administration and other services	16,952	24,272	99,034	38,392	51,150	117,419
Finance, insurance, and real estate	14,132	14,132	59,908	33,169	45,630	72,209
Imputed bank service charge	-12,888	-12,888	-42,365	-34,264	-39,417	-56,992
GDP (at factor cost)	285,152	330,260	818,259	698,024	1,007,576	935,247
Indirect taxes less subsidies	46,065	46,065	82,225	119,312	99,641	93,958
Monetary GDP at market prices	331,217	376,325	900,484	817,336	1,107,217	1,029,205
Nonmonetary GDP	…	…	300,757	…		340,668
Total GDP	331,217	376,325	1,201,241	817,336	1,107,217	1,369,873
	(In percent of monetary GDP at factor costs, unless otherwise indicated)
Agriculture	62.7	59.9	35.7	61.4	54.8	36.3
Manufacturing	5.3	7.3	11.9	4.6	8.2	11.2
Mining and quarrying	0.3	0.5	1.0	1.6	1.9	1.4
Electricity and water	1.6	0.8	1.9	1.6	2.1	2.1
Construction	4.1	4.5	6.3	4.4	4.7	6.1
Trade	14.6	13.8	22.1	14.1	16.2	21.6
Transportation and communications	5.0	5.5	6.7	7.1	6.4	7.1
Public administration and other services	5.9	7.3	12.1	5.5	5.1	12.6
Finance, insurance, and real estate	5.0	4.3	7.3	4.8	4.5	7.7
Imputed bank service charge	-4.5	-3.9	-5.2	-4.9	-3.9	-6.1
Investment/GDP ratio (in percent)	30.6	28.0	16.1	41.9	33.4	27.0

Source: Tanzanian authorities.

^1/Interim revision, published in 1996.

View Table

Table 1.

Tanzania: Comparison of Old and New GDP Series for 1988 and 1992

	1988			1992
	Pre-1996	1996 1/	1997	Pre-1996	1996 1/	1997
		Rev.			Rev.
		(In millions of Tanzania shillings)
Agriculture	178,760	197,684	292,408	428,441	551,884	339,062
Manufacturing	15,187	23,985	97,730	31,914	82,700	104,589
Mining and quarrying	723	1,673	8,529	11,383	19,181	13,503
Electricity and water	4,628	2,744	15,312	11,033	21,281	19,766
Construction	11,808	14,808	51,728	30,433	47,740	57,293
Trade	41,591	45,591	181,040	98,173	163,100	202,207
Transportation and communications	14,259	18,259	54,935	49,350	64,327	66,191
Public administration and other services	16,952	24,272	99,034	38,392	51,150	117,419
Finance, insurance, and real estate	14,132	14,132	59,908	33,169	45,630	72,209
Imputed bank service charge	-12,888	-12,888	-42,365	-34,264	-39,417	-56,992
GDP (at factor cost)	285,152	330,260	818,259	698,024	1,007,576	935,247
Indirect taxes less subsidies	46,065	46,065	82,225	119,312	99,641	93,958
Monetary GDP at market prices	331,217	376,325	900,484	817,336	1,107,217	1,029,205
Nonmonetary GDP	…	…	300,757	…		340,668
Total GDP	331,217	376,325	1,201,241	817,336	1,107,217	1,369,873
	(In percent of monetary GDP at factor costs, unless otherwise indicated)
Agriculture	62.7	59.9	35.7	61.4	54.8	36.3
Manufacturing	5.3	7.3	11.9	4.6	8.2	11.2
Mining and quarrying	0.3	0.5	1.0	1.6	1.9	1.4
Electricity and water	1.6	0.8	1.9	1.6	2.1	2.1
Construction	4.1	4.5	6.3	4.4	4.7	6.1
Trade	14.6	13.8	22.1	14.1	16.2	21.6
Transportation and communications	5.0	5.5	6.7	7.1	6.4	7.1
Public administration and other services	5.9	7.3	12.1	5.5	5.1	12.6
Finance, insurance, and real estate	5.0	4.3	7.3	4.8	4.5	7.7
Imputed bank service charge	-4.5	-3.9	-5.2	-4.9	-3.9	-6.1
Investment/GDP ratio (in percent)	30.6	28.0	16.1	41.9	33.4	27.0

Source: Tanzanian authorities.

^1/Interim revision, published in 1996.

7. Despite the improvements, serious deficiencies remain in the national accounts statistics. Recent studies indicate continuing large gaps in the trade statistics.⁴ A large part of foreign aid-financed expenditure is not reflected in the budget, and information about such expenditure outside the budget is incomplete. Furthermore, Tanzania lacks a proper import price index. As a result of these weaknesses, there remains a large statistical discrepancy between the production and expenditure accounts. To help to address such deficiencies, the government intends to start preparing GDP data on a semiannual basis, and to transform the Bureau of Statistics into an executive agency in order to improve its efficiency.

B. Recent Developments in GDP

8. Following a disappointing performance in the early 1990s, economic growth rates started to increase in 1995 as the economy stabilized and responded to the strengthened reform effort (Appendix Tables 8 and 9). In 1995 and 1996, real growth accelerated in most sectors; the major exception was public administration, where the downsizing that began in 1993 continued. As a result, the growth rate rose from an average of 1.4 percent a year in 1991–94 to an average of 4.0 percent a year in the next two years, exceeding the population growth rate of 2.8 percent a year. In 1997, the growth rate of nontraditional agriculture declined sharply, owing to drought. However, growth in the trade and manufacturing sectors continued to increase, and overall growth remained at 3.5 percent. The mining, construction, and financial sectors also grew at high rates in 1997, but, because of their relatively low share in overall GDP, their contribution to overall growth remained limited.

C. Investment

18. Capital formation as a share of GDP fell from 26.2 percent in 1990/91 (July–June) to 16.1 percent in 1996/97, owing to declines in both the public and the private sectors (Appendix Tables 10 and 14). This fall reflects a lack of local matching funds for foreignfinanced projects, the privatization of public enterprises, and a decline in investments by the private sector.⁸ Because of the move toward a market economy and the tight budgetary situation in recent years, public consumption declined from about 20 percent of GDP in 1992 to an estimated 9 percent in 1997. The domestic savings ratio increased from −0.2 percent of GDP in 1994/95 to about 7 percent in 1997/98.

D. Inflation

19. As a result of tight monetary and fiscal policies, inflation declined from a 12-month end-of-period rate of 37.0 percent in December 1994 to 16.4 percent in June 1997, and further to 12.0 percent in June 1998 (Appendix Table 17). Initially, in 1995, the inflation rate for food⁹ decreased faster than the rate for nonfood inflation, but the nonfood inflation rate (which averaged 1.6 percent per month in 1996)¹⁰ gradually converged to the lower rate for food (1.1 percent monthly average). However, owing to the droughts in 1996 and 1997, in 1996/97 food prices increased to a monthly average of 1.4 percent, while nonfood prices continued to decline to a monthly average increase of 0.8 percent. During the first eight months of 1998, the average monthly rates for nonfood inflation continued to decline, except for July when, owing to the introduction of value-added taxes (VAT), prices in this category increased by 2.5 percent. As a consequence of weather conditions, the regional inflation pattern was uneven: food was abundant in food production regions where transport had broken down, while, in other locations high distribution costs resulted in shortages.

E. Zanzibar

20. Zanzibar, consisting of the islands of Nguja and Pemba, accounts for about 3 percent of the population of the Republic of Tanzania (Appendix Table 38) and 0.3 percent of the surface area. Historically, Zanzibar derived its relatively high income from the export of cloves. However, owing to increased production in its main export markets (especially Indonesia), international prices have sharply declined during the last decades. Agricultural policy now aims at promoting diversification of crops and further private investment in spice farms. Fishery is predominantly artisanal, and deepsea fishing remains at the exploration stage. Production in the three export processing zones (EPZs) remains at very low levels, and no investment in the EPZ on Pemba has yet taken place.

21. An important sector for growth in Zanzibar is tourism. Since 1986, more than 75 percent of all investment on Zanzibar has been made in tourism and tourism-related sectors, and the number of hotel beds has increased from 3,000 in 1986 to 6,000 in 1998. Capacity utilization has also increased, as the number of arrivals picked up from 22,000 in 1986 to 86,495 in 1997 and the average stay increased from four to seven days. Direct and indirect employment in tourism amounts to 10,000, with a high share of imported labor at the management level.

22. Real growth has averaged approximately 4 percent a year during 1990–98, higher than on the mainland (Appendix Table 37), while inflation has declined in line with price developments on the mainland.

A. Background

23. The share of parastatals in the Tanzanian economy increased rapidly after independence in 1961, especially following the adoption of socialist policies, as announced in the Arusha declaration of 1967. In 1961, Tanzania had only 3 government-owned companies; however, that number rose to 43 by 1966 as the government became more active in the electricity, mining, and manufacturing sectors. After 1967, the parastatals rapidly became the dominant economic force in the country, extending from utilities to manufacturing, services, and trading. In the 1970s, the agricultural sector was largely collectivized, and producer prices were set by marketing boards. By 1988, 410 parastatals accounted for 20 percent of GDP and about two-thirds of employment in the formal industrial sector; their activity was largely controlled by sector ministries.

24. By the beginning of the 1980s, the large costs associated with the dominant role of the parastatal sector became apparent. The inefficiencies in this sector, compounded by a deteriorating external environment, contributed to a slowdown in economic growth from an average of 5 percent a year in the 1960s and 1970s to only 1 percent a year during the early 1980s, well below the population growth rate. The average capacity utilization of parastatals was estimated at about 25 percent and net losses at 8 percent of GDP in 1988/89 (July–June). In 1991, only 43 out of 220 surveyed commercial parastatals were capable of generating revenues adequate to fully service their debts. As a result, government subsidies increased from 1 percent of GDP in 1985/86 to 4 percent of GDP in 1992/93, at the same time as the parastatals built up salary arrears and arrears to commercial banks and the treasury.

B. The Parastatal Sector Reform Commission (PSRC)

25. In the context of structural adjustment, a privatization strategy was adopted in the early 1990s. Objectives of privatization policy included the government’s withdrawal from majority ownership of commercial enterprises and the promotion of the private sector by creation of a framework conducive to private investment. Improved access to capital, technology, and external markets, as well as the development of a capital market, were additional objectives. The divestiture of parastatals was expected to reduce budgetary costs, increase efficiency of the productive sector, raise growth rates, and sustain employment. The role of the government was to be reduced and reoriented to the provision of social and economic infrastructure. Privatization policy aimed at creating a broad ownership of shares while retaining significant government minority stakes in large companies. Initially, the government planned to maintain its ownership of the major utility companies, but in 1997 it decided to privatize those enterprises as well.

26. In 1993, the government established the PSRC to coordinate and implement the privatization of parastatals in Tanzania. The PSRC’s wide-ranging tasks comprised all aspects of the privatization, including (1) identification and evaluation of parastatal entities; (2) determination, on a case-by-case basis, of the privatization method; (3) preparation of entities for sale or liquidation; (4) implementation of the sale/liquidation; and (5) provision of policy advice to the government on privatization incentives, safety nets, and compensation packages for employees. The PSRC was established on the basis of the Public Corporations (Amendment) Act 1993 for a period of five years, with a maximum period of extension of one year. It is also guided by the legal framework established by the Capital Markets and Securities Act, and the Banking and Financial Institutions Act. The 1993 Parastatal Privatization and Reform Master Plan formed the basis for two-year rolling action plans.

27. The PSRC has wide-ranging powers to audit and evaluate parastatals, but final decisions about privatization or liquidation are made by the cabinet. Also, the PSRC needs to consult in writing with the Ministry of Finance, the responsible line ministry, and the Attorney General before entering in agreements or transactions relating to the value, sale, or disposal of parastatals. The PSRC is also required to consult and obtain consensus and, in certain cases, clearance for key divestiture stages from other parties, such as the Office of the President, the Treasury Registrar, holding companies, and the Loans and Advances Realization Trust (LART)(see Box 1).

28. A technical committee within the PSRC determines the privatization strategy for each parastatal, depending on past operational and financial performance and the government’s preferred postdivestiture shareholding, as well as on the sector, the relevant technologies, and the need to develop market access. The range of privatization options includes divestiture to company employees or management, the establishment of joint ventures, the selling of assets, sale by auction, or the placement of shares on the stock exchange. In those cases in which the government decides to maintain its ownership, privatization of management, leasing, and performance contracts are additional options.

C. Progress of the Privatization Process

29. The government of Tanzania has made considerable progress with privatization, although it is somewhat behind the original schedule.¹² Almost 60 percent of the about 400¹³ parastatal entities earmarked at the beginning of the privatization process had been divested by mid-1998 (Table 2). While about 50 percent of the entities were divested through share or asset sales, 31 percent were liquidated. In four cases, divestiture involved debt-equity swaps, and one company was denationalized and returned to the previous owner in 1993. A total of 20 companies were placed under LART. In 1998, the government sold 26 percent of the shares of Tanzania Breweries Ltd. through the newly established Dar es Salaam Stock Exchange (see Section IV). Of the privatized companies, 33 percent were in agriculture or agricultural-processing industries, 31 percent were in manufacturing, and 17 percent were in the services sector. Most of the enterprises were small or medium sized, although 20 had more than 500 employees. The majority of the enterprises were sold to local investors.

Table 2.

Tanzania: Parastatal Divestiture by Type of Divestiture, 1992–1997/98

Source: Parastatal Sector Reform Commission.

^1/In 1997/98, the Tanzania Tobacco Board and the Cashew Board of Tanzania were restructured from commercial enterprises to administrative and regulatory entities.

Table 2.

Tanzania: Parastatal Divestiture by Type of Divestiture, 1992–1997/98

	1992	1993	1994	1995/96	1996/97	1997/98	Total
Sale of shares or assets	5	18	11	24	25	38	121
Shares sold on stock exchange	0	0	0	0	0	1	1
Liquidation	0	16	17	9	11	20	73
Closure	4	5	1	3	1	0	14
Lease	2	8	5	7	1	0	23
Performance and management contracts	0	1	2	0	2	0	5
Restructured 1/	0	0	0	0	0	2	2
Total	11	48	36	43	40	61	239
Of which: placed under LART	0	11	9	0	0	0	20

Source: Parastatal Sector Reform Commission.

^1/In 1997/98, the Tanzania Tobacco Board and the Cashew Board of Tanzania were restructured from commercial enterprises to administrative and regulatory entities.

View Table

Table 2.

Tanzania: Parastatal Divestiture by Type of Divestiture, 1992–1997/98

	1992	1993	1994	1995/96	1996/97	1997/98	Total
Sale of shares or assets	5	18	11	24	25	38	121
Shares sold on stock exchange	0	0	0	0	0	1	1
Liquidation	0	16	17	9	11	20	73
Closure	4	5	1	3	1	0	14
Lease	2	8	5	7	1	0	23
Performance and management contracts	0	1	2	0	2	0	5
Restructured 1/	0	0	0	0	0	2	2
Total	11	48	36	43	40	61	239
Of which: placed under LART	0	11	9	0	0	0	20

Source: Parastatal Sector Reform Commission.

^1/In 1997/98, the Tanzania Tobacco Board and the Cashew Board of Tanzania were restructured from commercial enterprises to administrative and regulatory entities.

30. Although data by enterprise are not available, according to the PSRC, the financial performance of enterprises appears to have improved following privatization.¹⁴ Transfers from the budget to parastatals declined from T Sh 20 billion in 1992/93 to T Sh 7 billion in 1997/98. Privatization receipts to the budget (net of privatization costs, including retrenchment costs) amounted to T Sh 17.7 billion (0.5 percent of GDP) in 1995/96, T Sh 12.7 billion (0.3 percent of GDP) in 1996/97, and T Sh 6.5 billion (0.1 percent of GDP) in 1997/98.¹⁵

31. Despite this progress, a number of factors delayed the privatization process, and PSRC has requested that its mandate be extended by another year. These factors include

• delays in decisions on the divestiture strategy, especially before the elections in 1995;

• a less-than-transparent government policy on the Privatization Trust Fund, management and employee buy-out transactions, and the role of holding corporations;

• the lack of a resolution of the debt patterns of highly indebted enterprises;

• controversies over asset valuation and a nontransparent ownership structure;

• unresolved issues with respect to retrenchment and severance packages and subsequent litigation actions by unions, as statutory benefits upon redundancy are not uniform;

• lack of financing for the purchase and modernization of the enterprises following the beginning of reform of the state-owned National Bank of Commerce (NBC) in 1995; and

• in some cases, lack of interest from the private sector, related to poor maintenance of assets, technological obsolescence, the inadequate location of many enterprises, and the substantial investment needs for rehabilitation.

D. Social Aspects of Privatization

32. From the start, the government of Tanzania has attached great importance to the social aspects of the privatization process. Since its establishment, the PSRC has submitted wide-ranging recommendations to the government concerning social safety nets,¹⁶ the treatment of displaced employees, and the broadening of share ownership. As far as the latter is concerned, in 1994 the government set up a fund to enable WAZAWA, an organization of the economically disadvantaged, to obtain loans for share purchases. Until recently, however, this fond remained inactive, owing to the absence of a stock exchange. The adoption of the Privatization Trust Fund Act in 1997 has allowed the government to sell part of its remaining shares in parastatals to WAZAWA-targeted institutions, such as unit trusts and cooperatives, and some of these shares may be sold at discounted prices. In order to facilitate wide share ownership, the Capital Markets and Securities Authority was established in 1994, leading to the establishment of the stock exchange in 1998. The PSRC also promotes the repatriation of capital by resident and nonresident Tanzanians while it studies the possibilities of shareownership by employees.

E. Next Steps

33. The next major steps in the privatization process involve the government-owned banks (see Section VI) and the utilities. Considerable progress has now been made with the preparations for the privatization of the utilities and other large parastatal monopolies (Table 3); this progress, however, has been complicated by their size and the need to adopt regulatory frameworks.¹⁷ The process has been supported by international consultants that have advised on best investment strategies on a case-by-case basis. Following the share offering of Tanzania Breweries, six other companies have been earmarked for initial public offerings through the Dar es Salaam Stock Exchange.¹⁸

Table 3.

Tanzania: Status of Preparation for the Privatization of Large, Government-Owned Monopolies

Source: Parastatal Sector Reform Commission.

Table 3.

Tanzania: Status of Preparation for the Privatization of Large, Government-Owned Monopolies

Company	Description	Status
DAWASA	Dar es Salaam Water and Sanitation Authority	Interim operating arrangements (leading to long-term arrangement within five years) expected to be in place by March 1999. Changes in legislation recommended.
NASACO	National Shipping Agencies Corporation	Five companies have been formed from existing departments and will be privatized through sales of shares.
TANESCO	Tanzania Electric Supply Company Limited	TANESCO’s different functions will be privatized separately, starting with distribution and supply. A draft power policy has been prepared.
TCFB	Tanzania Central Freight Bureau	TCFB is expected to become the nucleus of a maritime authority, in charge of regulating the shipping industry.
THA	Tanzania Harbours Authority	The concession arrangements for the container and grain terminals are proceeding. Work on the remaining 12 units will be spread over the next two-three years.
TIPER	Tanzanian-Italian Petroleum Refinery	The government expects to make a decision on the future of TIPER in 1999, based on the recommendations of a 1998 study of options.
TPDC	Tanzania Petroleum Development Corporation	TPDC is expected to be converted into a regulatory agency and/or exploration department of the Ministry of Energy.
TRC	Tanzania Railways Corporation	Approval by the treasury is awaited for the division of assets and liabilities.
TTCL	Tanzania Telecommunications Company Limited	Invitations to bid are expected by January 1999.

Source: Parastatal Sector Reform Commission.

View Table

Table 3.

Tanzania: Status of Preparation for the Privatization of Large, Government-Owned Monopolies

Company	Description	Status
DAWASA	Dar es Salaam Water and Sanitation Authority	Interim operating arrangements (leading to long-term arrangement within five years) expected to be in place by March 1999. Changes in legislation recommended.
NASACO	National Shipping Agencies Corporation	Five companies have been formed from existing departments and will be privatized through sales of shares.
TANESCO	Tanzania Electric Supply Company Limited	TANESCO’s different functions will be privatized separately, starting with distribution and supply. A draft power policy has been prepared.
TCFB	Tanzania Central Freight Bureau	TCFB is expected to become the nucleus of a maritime authority, in charge of regulating the shipping industry.
THA	Tanzania Harbours Authority	The concession arrangements for the container and grain terminals are proceeding. Work on the remaining 12 units will be spread over the next two-three years.
TIPER	Tanzanian-Italian Petroleum Refinery	The government expects to make a decision on the future of TIPER in 1999, based on the recommendations of a 1998 study of options.
TPDC	Tanzania Petroleum Development Corporation	TPDC is expected to be converted into a regulatory agency and/or exploration department of the Ministry of Energy.
TRC	Tanzania Railways Corporation	Approval by the treasury is awaited for the division of assets and liabilities.
TTCL	Tanzania Telecommunications Company Limited	Invitations to bid are expected by January 1999.

Source: Parastatal Sector Reform Commission.

A. Background

34. In the 1970s and 1980s, the capacity and performance of the Tanzanian civil service declined considerably. While total civil service employment almost quadrupled between 1961 and 1993/94, real wages declined sharply, and the pay-scale became severely compressed (Tables 4 and 5). These developments, combined with deteriorating personnel management, led to a decline in staff morale, high rates of absenteeism, the departure of skilled and experienced staff, and, in general, a sharp decline in productivity and efficiency of the civil service.

Table 4.

Tanzania: Civil Service Employment, 1961/62–1997/98 ^1/

(End of period)

Source: Tanzanian authorities.

^1/Fiscal years run from July to June.

^2/September 1996.

^3/December 1996

Table 4.

Tanzania: Civil Service Employment, 1961/62–1997/98 ^1/

(End of period)

	1961/62	1971/72	1981/82	1988/89	1993/94	1994/95	1995/96 2/	1996/97 3/	1997/98
Education	11,145	23,131	93,318	101,042	126,410	…	…	…	…
Health	6,300	12,400	17,036	32,650	37,705	…	…	…	…
Other	72,300	103,072	104,745	165,446	190,497	…	…	…	…
Total	89,745	138,603	215,099	299,138	354,612	315,963	287,038	285,624	270,629
Change	…	…	…	…	…	-38,649	-28,925	-1,414	14,995
Change (cumulative from 1993/94)	…	…	…	…	…	…	-67,574	-68,988	-83,983

Source: Tanzanian authorities.

^1/Fiscal years run from July to June.

^2/September 1996.

^3/December 1996

View Table

Table 4.

Tanzania: Civil Service Employment, 1961/62–1997/98 ^1/

(End of period)

	1961/62	1971/72	1981/82	1988/89	1993/94	1994/95	1995/96 2/	1996/97 3/	1997/98
Education	11,145	23,131	93,318	101,042	126,410	…	…	…	…
Health	6,300	12,400	17,036	32,650	37,705	…	…	…	…
Other	72,300	103,072	104,745	165,446	190,497	…	…	…	…
Total	89,745	138,603	215,099	299,138	354,612	315,963	287,038	285,624	270,629
Change	…	…	…	…	…	-38,649	-28,925	-1,414	14,995
Change (cumulative from 1993/94)	…	…	…	…	…	…	-67,574	-68,988	-83,983

Source: Tanzanian authorities.

^1/Fiscal years run from July to June.

^2/September 1996.

^3/December 1996

Table 5.

Civil Service Real Wages, 1969–84

(In Tanzania shillings)

Source: Tanzanian authorities.

Table 5.

Civil Service Real Wages, 1969–84

(In Tanzania shillings)

	Minimum Salary	Average Salary	Top Salary
1969	100	100	100
1974	135	133	56
1979	58	77	26
1984	40	31	11

Source: Tanzanian authorities.

View Table

Table 5.

Civil Service Real Wages, 1969–84

(In Tanzania shillings)

	Minimum Salary	Average Salary	Top Salary
1969	100	100	100
1974	135	133	56
1979	58	77	26
1984	40	31	11

Source: Tanzanian authorities.

35. In the framework of its overall structural adjustment efforts, the government’s civil service reform was officially launched in July 1991. Initially, the program consisted mainly of a number of studies, undertaken with United Nations Development Program support; implementation started with the adoption of the Parastatal and Public Sector Reform Programme in 1993, supported by the World Bank.

B. The Civil Service Reform Programme (CSRP)²⁰

36. Implemented by the Civil Service Department (CSD) under the Office of the President, the CSRP aimed at creating a “smaller, affordable, well-compensated, efficient, and effective performing civil service.”²¹ The program consisted of six components:

• retrenchment and redeployment;

• pay policy reform;

• personnel control and management;

• organization and efficiency reforms;

• capacity building and training; and

• local government reforms.

The first phase of the program (1993–96) focused on retrenchment, with a view to achieving an optimal size of the civil service. The second phase, beginning in January 1996, also addressed institutional issues, including managerial capacity, the role of the government, and organizational restructuring. The CSRP has been supported by, in addition to the World Bank, a number of multilateral and bilateral donors.²²

C. Conclusion

48. The government has made considerable progress with the civil service reforms, but much remains to be done. While the government payroll has been significantly reduced and control over the wage bill improved, civil service salaries remain far behind those in the private sector. The O&E review has had a mixed impact on the structure of the government and on retrenchment, and local government reform is still in the beginning stages. Also, the reforms have not yet markedly improved the overall performance, including delivery of services of the government.

49. By June 1998, the first phase of the CSRP had been completed. The CSRP Secretariat at the CSD was closed and integrated into the CSD ministry. The public service management and employment policy was adopted by the cabinet in June 1998, and the next phase under the Public Sector Reform Programme 1998–2003 is to focus on capacity building and improvement of the quality of public services. This second phase will emphasize performance improvement; restructuring of ministries and private sector participation; development of executive agencies; promotion of management information systems; development of leadership, management, and governance skills; policy coordination; and monitoring and evaluation procedures.

A. Background

50. After falling to less than 10 percent in 1992/93, over the last five fiscal years, the ratio of Tanzania’s tax revenues in relation to GDP has remained at about 11–12 percent. Tight control of expenditure since 1996 has meant that this relatively low ratio has not impeded the effort to control inflation, but the government has not had the fiscal resources to meet its budgeted expenditures. Moreover, Tanzania relies heavily on foreign financial assistance (net of external debt service). Such assistance amounted to an average of 2.5 percent of GDP in 1996/97 and 1997/98, and over the medium term Tanzania wishes to reduce its aid dependency. The ongoing tax reform effort thus has as one of its key objectives the generation of higher revenues; the fact that Tanzania has not yet achieved that objective reflects both the long gestation period of the effectiveness of new tax systems and certain ongoing weaknesses in the tax system which have yet to be addressed. This section reviews developments in tax reform and tax structure since a comprehensive 1996 review by IMF staff.²⁹

B. Tax Reform, 1996/97–1998/99

51. The 1996/97 budget included a number of tax reform measures. The sales tax was extended to eight additional services, the Income Tax Act was amended to increase the minimum taxable threshold and adjust the income brackets, and a number of “nuisance” taxes were abolished.³⁰ In addition, a number of excise taxes were raised (in the case of specific taxes to adjust for inflation), and, as a revenue measure, the stamp duty was raised by 20 percent. However, the budget also included a number of measures that were not in line with the thrust of tax reforms, including reinstatement of a 2 percent tax on traditional exports,³¹ and a series of new exemptions.³²

52. An important tax administration measure was the establishment of the TRA in July 1996. The TRA was set up as an executive agency; its objectives were to establish “a sustained revenue base to enable Tanzania to finance its recurrent and development expenditure needs without being excessively dependent on external aid” and to develop “a tax regime which is transparent, effective, and conducive to uncumbered growth of private investment and international trade.”³³ The executive agency status allows the TRA to pay considerably higher wages, thus enabling it to hire and retain high quality staff. The TRA was entrusted with the task of collecting, on behalf of the government, all major taxes, including import duties, export taxes, sales, excise and income taxes, as well as the VAT (as of July 1998). It collects all taxes on mainland Tanzania, and the income tax and all taxes on imports on Zanzibar; all domestic taxes on Zanzibar (except the income tax) are collected by the Zanzibar Revenue Board, established on October 1, 1997.

53. The 1997/98 budget included a more extensive set of measures than the 1996/97 budget. At least sixteen explicit tax measures were introduced, including: (1) a reduction in the custom duty structure from seven to four bands and in the maximum duty rates from 40 percent to 30 percent; (2) as a transitional step toward introduction of the VAT, a narrowing of the dispersion of the sales tax rates from 0–30 percent to 5–25 percent, and imposing a 10 percent sales tax on most goods previously not in the tax net; (3) elimination of a further number of nuisance taxes;³⁴ and (4) measures to collect tax arrears on fraudulent Investment Promotion Center exemptions. In addition, the government increased petroleum taxes and the road toll (from 60 shillings to 70 shillings per liter gasoline or diesel). Improvements in tax administration occurred in four areas. First, the collection of the windfall tax on petroleum was shifted from the Tanzania Petroleum Development Corporation (TPDC) to the TRA. Second, a new preshipment inspection contract was to require the sealing of containers, thereby allowing the rationalization of customs procedures, including the establishment of a green channel for sealed containers. Third, the National Tax Appeals Board was to be activated, along with the establishment of commercial courts.³⁵ Fourth, an action plan was drawn up for each of the three major departments of the TRA (customs and excise, sales tax, and income tax).

54. The 1998/99 budget included the single most far-reaching measure in Tanzania’s tax reform program: the introduction of the VAT on mainland Tanzania as of July 1, 1998 replaced a cumbersome and inefficient set of sales taxes.³⁶ In view of the uncertainties associated with the introduction of this new tax, the authorities decided to wait with further major tax reforms until the next budget, although a number of smaller tax changes were implemented, especially in customs duties and withholding taxes.³⁷

C. Tax Structure, 1996/97–1997/98

55. In its first year of operation, the TRA succeeded in increasing revenues by 34 percent, raising the tax revenue-to-GDP ratio from 11.3 percent to 12.1 percent.³⁸ The increase was most pronounced in import taxes, but also occurred in sales taxes and excises and in “other taxes.” The increase in revenue partly reflected the collection of tax arrears, and the increase in “other taxes” is explained by the change in stamp duty rates. In 1997/98, however, the tax revenue-to-GDP ratio fell back to the 1995/96 level, owing to declines in all tax categories except “other taxes.” Specific factors that contributed to this decline include: (1) transportation problems following the floods in early 1998, which caused delays in tax collections; (2) preparations for the introduction of the VAT in July 1998, leading to reduced efforts in collecting sales tax; (3) increases in the scope of exemptions from import duty during 1997/98 (see Section VII); and (4) the decrease in the maximum import duty rate in the 1997/98 budget. The increase in the revenue-to-GDP ratio of “other taxes” was mainly due to the increase in the road toll in the 1997/98 budget.

56. As a result, Tanzania’s tax-to-GDP ratio remains one of the lowest in the region (Table 6). Tax revenues in Kenya are about 25 percent of GDP. Only Uganda has (slightly) lower rates than Tanzania.

Table 6.

Tax Revenue-to-GDP Ratio

Sources: Tanzanian, Kenyan, and Ugandan authorities; IMF Working Paper 97/107 (1997).

^1/Fiscal years run from July through June.

^2/Calendar years covering the period ending at the middle of the fiscal year.

Table 6.

Tax Revenue-to-GDP Ratio

	1991/92	1992/93	1993/94	1994/95	1995/96	1996/97	1997/98
Tanzania 1/	12.5	9.5	11.0	11.3	11.3	12.1	11.2
Uganda 1/	6.7	7.1	8.3	9.9	10.4	10.9	10.7
Kenya 1/	19.5	19.3	24.9	25.3	25.3	24.5	27.2
Sub-Saharan Africa 2/	15.9	15.7	16.0	15.6	15.7	…	…

Sources: Tanzanian, Kenyan, and Ugandan authorities; IMF Working Paper 97/107 (1997).

^1/Fiscal years run from July through June.

^2/Calendar years covering the period ending at the middle of the fiscal year.

View Table

Table 6.

Tax Revenue-to-GDP Ratio

	1991/92	1992/93	1993/94	1994/95	1995/96	1996/97	1997/98
Tanzania 1/	12.5	9.5	11.0	11.3	11.3	12.1	11.2
Uganda 1/	6.7	7.1	8.3	9.9	10.4	10.9	10.7
Kenya 1/	19.5	19.3	24.9	25.3	25.3	24.5	27.2
Sub-Saharan Africa 2/	15.9	15.7	16.0	15.6	15.7	…	…

Sources: Tanzanian, Kenyan, and Ugandan authorities; IMF Working Paper 97/107 (1997).

^1/Fiscal years run from July through June.

^2/Calendar years covering the period ending at the middle of the fiscal year.

57. Buoyancy ratios bring out the trends in the ratio of tax revenue to GDP over the last four years, although there are substantial fluctuations in the ratios (Table 7).³⁹ For 1997/98, the ratio for income tax on individuals and on companies in 1997/98 is about 1, but the ratio for overall income taxes is only 0.65 because of a stagnation in withholding taxes and a sharp decline in other income taxes. On taxes on imports, the elasticity of sales and excise taxes to GDP was almost 0.9 in 1997/98, but the overall buoyancy ratio for import taxes was only 0.22, reflecting the lower customs duty rates and tax losses from exemptions.

Table 7.

Tanzania: Buoyancy Ratios of Central Government Tax Revenues ^1/

Source: Tanzanian authorities

^1/The buoyancy ratio for any type of tax for a given time period is the percentage, change in tax revenue divided by the percentage change in GDP for the same time period.

^2/Sum of income tax on individuals and PAYE tax.

^3/Mainly withholding taxes.

Table 7.

Tanzania: Buoyancy Ratios of Central Government Tax Revenues ^1/

			1992/93–1993/94	1993/94–1994/95	1994/95–1995/96	1995/96–1996/97	1996/97–1997/98
Tax revenue			1.59	1.14	1.28	1.11	0.43
	Income tax		0.96	1.50	0.72	1.14	0.65
		Personal tax 2/	0.77	3.26	0.71	1.88	1.11
		Company tax	5.60	0.38	0.69	0.27	0.99
		Other 3/	-2.21	4.36	0.80	2.16	-0.65
	Payroll and manpower tax		0.57	2.90	1.50	1.20	0.97
	Property tax		2.68	0.41	-0.53	-1.45	0.05
	Sales and excise taxes on local goods		1.69	0.10	1.16	1.42	0.21
	Import taxes		1.96	2.54	1.19	1.39	0.56
		Custom duties	2.48	…	…	1.13	0.22
		Sales and excise taxes	1.41	…	…	1.66	0.88
	Other taxes		3.18	0.51	0.94	1.68	0.88

Source: Tanzanian authorities

^1/The buoyancy ratio for any type of tax for a given time period is the percentage, change in tax revenue divided by the percentage change in GDP for the same time period.

^2/Sum of income tax on individuals and PAYE tax.

^3/Mainly withholding taxes.

View Table

Table 7.

Tanzania: Buoyancy Ratios of Central Government Tax Revenues ^1/

			1992/93–1993/94	1993/94–1994/95	1994/95–1995/96	1995/96–1996/97	1996/97–1997/98
Tax revenue			1.59	1.14	1.28	1.11	0.43
	Income tax		0.96	1.50	0.72	1.14	0.65
		Personal tax 2/	0.77	3.26	0.71	1.88	1.11
		Company tax	5.60	0.38	0.69	0.27	0.99
		Other 3/	-2.21	4.36	0.80	2.16	-0.65
	Payroll and manpower tax		0.57	2.90	1.50	1.20	0.97
	Property tax		2.68	0.41	-0.53	-1.45	0.05
	Sales and excise taxes on local goods		1.69	0.10	1.16	1.42	0.21
	Import taxes		1.96	2.54	1.19	1.39	0.56
		Custom duties	2.48	…	…	1.13	0.22
		Sales and excise taxes	1.41	…	…	1.66	0.88
	Other taxes		3.18	0.51	0.94	1.68	0.88

Source: Tanzanian authorities

^1/The buoyancy ratio for any type of tax for a given time period is the percentage, change in tax revenue divided by the percentage change in GDP for the same time period.

^2/Sum of income tax on individuals and PAYE tax.

^3/Mainly withholding taxes.

58. The shares of the different tax categories in total tax revenue changed only slightly during the last three years. The share of taxes on international trade increased from 27 percent in 1995/96 to more than 29 percent in 1997/98, owing to increases in the share of sales and excise taxes. However, the share of customs duties declined from 13.7 percent of tax revenues in 1995/96 to 13.2 percent in 1997/98. The shares of domestic sales and excise taxes, income taxes, and other taxes (mainly stamp duty and the road toll) remained at about 23–24 percent of total tax revenue.

D. Conclusion

59. Tanzania has made substantial progress in reforming its tax structure during the 1990s. Many smaller taxes have been eliminated and progress has been made in reducing and rationalizing customs duty rates. In July 1998, the VAT replaced the much more cumbersome sales tax. The establishment of the TRA in 1996 was an important step on the road to improve tax administration.

60. Despite the progress, much remains to be done. Firstly, the measures taken have not yet been able to overcome the effects of the reductions in tax rates in 1992/93 and 1995/96; the tax revenue-to-GDP ratio remains low. A major cause appears to be increasing prevalence of exemptions, especially in customs duties. Without measures, the immediate outlook is not positive as new exemptions are emerging in the VAT and in income tax as a result of exemptions provided to holders of certificates issued by the Tanzania Investment Center. Secondly, it will take time for the TRA to build-up a highly qualified staff; the TRA is addressing these issues with assistance from multilateral (World Bank) and bilateral donors. Thirdly, the reform of the tax system has not yet been completed. A number of major reforms are being prepared with the objective of further reducing the number of taxes and their complexity, and reducing statutory exemptions to a minimum. In customs duty reform, the major objectives are to simplify and rationalize the tariff system, improve its revenue productivity, and align it to the requirements of regional economic integration agreements.

A. Background

61. Following the Arusha Declaration of 1967, all private commercial banks operating in mainland Tanzania were nationalized and replaced by a new state-owned bank, the National Bank of Commerce (NBC).⁴¹ Between 1967 and 1972, four more state-owned financial institutions were established following the enactment of institution-specific acts that provided for their operation and regulation. There was no legal framework for harmonizing the activities of all financial institutions and no supervisory body for enforcing adherence to prudential standards. The government maintained interest rate controls and used state-owned banks as means of directing credit to parastatals and cooperatives. The financial institutions’ disregard for asset quality, combined with an unfavorable economic environment, led to a large accumulation of nonperforming loans.

62. The deterioration of banking conditions in the 1980s prompted the establishment of a Presidential Banking Commission (Nyirabu Commission) in 1988, aimed at developing recommendations for rehabilitating the financial sector. In 1991, following the commission’s report, the government of Tanzania initiated a financial sector reform program. Its goal was to promote the efficient mobilization and allocation of savings through a competitive and market-based financial system. To this end, in 1991, interest rates were liberalized and the Banking and Financial Institutions Act (BFIA) was enacted. The BFIA legalized the establishment of private financial institutions and gave the Bank of Tanzania (BoT) the responsibility for licensing, regulating, and supervising banks and nonbank financial institutions. That same year, the Loans and Advances Realization Trust (LART) was created to facilitate the recovery of overdue debts transferred from state-owned financial institutions. In 1992, the Banking Supervision Department was elevated to the status of a directorate, and its staffing levels were increased. The Bank of Tanzania Act, 1995, and a series of banking laws and prudential regulations, further consolidated the BoT’s supervisory authority.

63. At the commencement of financial sector reform in 1991, the country’s banking sector comprised six deposit-taking financial institutions. The banks were the NBC, which enjoyed a virtual monopoly in the mainland and extended credit to parastatals and the government; the Cooperative and Rural Development Bank (CRDB), the government’s main rural banking vehicle; and the People’s Bank of Zanzibar (PBZ), a quasi-central bank to the government of Zanzibar. The nonbank financial institutions⁴² were the Tanzania Investment Bank (TIB), which provided development finance to the industrial sector; the Tanzania Housing Bank (THB), which specialized in rural and urban housing finance; and the Tanzania Postal Bank (TPB), which mobilized deposits for investing in government securities. The entry of private banks was permitted in 1992, but the first ones—Standard Chartered and Meridien-BIAO—did not begin operations until 1994.⁴³

64. Since 1996, the financial sector has expanded dramatically. In June 1998, it comprised 19 licensed commercial banks (17 operating), 9 nonbank financial institutions, 105 foreign exchange bureaus, and a number of informal intermediaries.⁴⁴ Despite the large number of nonbank financial institutions and foreign exchange bureaus, the financial system is still dominated by commercial banks. Of the 17 operating commercial banks, only three—the NBC (1997), the National Microfinance Bank (NMB) (the two banks created after the split of the NBC in 1997), and the PBZ—remain under government control. Combined, however, they control 40 percent of domestic credit and 55 percent of deposits (Figure 1).⁴⁵ The six largest banks—the NBC (1997), the CRDB (1996) (created upon the divestiture of the CRDB in 1996), Citibank, the NMB, Standard Chartered, and Stanbic—hold 90 percent of all assets. The market share of the remaining 11 banks, which include foreign African, as well as indigenous Tanzanian banks, is only 10 percent. Private banks operate almost exclusively in Dar es Salaam, maintain high minimum deposit balances, and lend primarily for short-term trade finance (Appendix Table 25), thus limiting their customer base to a handful of low-risk, high-value customers. Small and medium-sized urban enterprises, as well as the rural population, continue to have limited access to banking services.

View Full Size

Tanzania: Market Share of Private Banks, June 1994–June 1998 ^1/

Citation: IMF Staff Country Reports 1999, 024; 10.5089/9781451838282.002.A001

Source: Tanzanian authorities.^1/ The Cooperative and Rural Development Bank is included in the private sector beginning in December 1996.2/ Loans to treasury are excluded from total lending.3/ Government deposits are excluded from total deposits.

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B. Prudential Regulations and Supervision

65. In order to support the liberalization of the financial sector and ensure its safety and soundness, the regulatory and supervisory environment has been modernized in line with the Basle Committee’s Core Principles for effective banking supervision. Before granting a license to an institution wishing to provide banking services, the Banking Supervision Directorate analyzes the soundness of its business strategy and financial position, its capital adequacy, the integrity and experience of the management, and its likely contribution to the financial development of Tanzania. Minimum core capital requirements for commencing operations (which are to be maintained at all times) are T Sh 1,000,000 for commercial banks and T Sh 500,000 for nonbank financial institutions. In order to encourage the development of the financial sector outside Dar es Salaam, the statutory minimum core capital requirement is lower for regional financial institutions.⁴⁶ Currently, the Kilimanjaro Cooperative Bank is the only regional financial institution in operation, but licenses to two more such institutions have been granted. Given the liberal entry of financial institutions in the market in the last three years, the high degree of concentration in Dar es Salaam, and the pressures on the supervisory capacity of the Banking Supervision Directorate, the BoT intends to proceed with caution in granting licenses to new financial institutions in the coming years.

66. In addition to the minimum statutory core capital requirement, the BoT requires financial institutions to maintain minimum capital adequacy ratios at all times. The capital adequacy ratios, however, differ for banks and nonbank financial institutions. Banks must hold minimum core and total capital equivalent to 6 percent and 8 percent, respectively, of their risk-weighted assets and off-balance sheet activities.⁴⁷ Nonbank financial institutions do not face a total capital requirement but must maintain minimum core capital equivalent to 8 percent of their risk-weighted assets and off-balance sheet activities, 2 percent more than banks.

67. Capital-deficient financial institutions are allowed up to three months to increase their capital and/or reduce their assets and off-balance sheet exposure. Penalties for institutions that remain capital deficient for more than 14 consecutive days include the suspension of new lending (unless they obtain prior approval from the BoT), capital expenditures, and branch expansion. Raising capital, however, is difficult, given the underdevelopment of Tanzania’s capital markets.

68. In order to effectively assess the financial condition and profitability of financial institutions, the BoT requires them to submit annual, quarterly, and monthly balance sheet and income-expense statements. Only the annual financial statements, however, are required to be prepared by external auditors approved by the BoT.⁴⁸ Financial institutions are also required to publish their quarterly unaudited and annual audited financial statements in newspapers of general circulation. However, they are not required to publicly disclose their share of nonperforming assets or capital adequacy ratios.

69. The Banking Supervision Directorate performs annual (or more frequent, if needed) on-site inspections of financial institutions to assess their financial condition and performance, as well as their compliance with regulations and reliability of reporting.⁴⁹ On-site supervisors focus on assessing institutions’ capital adequacy, asset quality, management effectiveness, earnings, and liquidity (the CAMEL indicators). In addition to the on-site inspections, the Banking Supervision Directorate performs off-site monitoring based on the prudential ratios provided by financial institutions. These ratios act as indicators of the institutions’ financial condition and are incorporated in an early warning monitoring system, which was recently computerized.

70. If the BoT determines that a bank or nonbank financial institution operates in an imprudent manner or is in violation of the BFIA or other prudential guidelines, it is authorized to take punitive and supervisory actions. Such actions may include the removal of management, injection of new capital, or the establishment of directives, such as “cease and desist” orders, requiring the bank to improve operations.

71. The rapid expansion of the financial sector in the last three years has put a strain on the supervisory capacity of the Banking Supervision Directorate. In response, the directorate continues to recruit and train supervisory staff and enhance its information technology. It is also standardizing the guidelines for on-site inspections, reviewing prudential regulations to improve adherence to the Basle Committee’s Core Principles, and encouraging financial institutions to establish internal audits. The BoT is also closely cooperating with the central banks of Kenya and Uganda, the other members of the Monetary Affairs Committee of the East African Commission, in harmonizing banking supervision practices across the region.

C. Restructuring of State-Owned Financial Institutions

72. By the late 1980s, the state-owned financial institutions’ poor asset quality, small capital base, and high operational costs had resulted in a large accumulation of losses.⁵⁰ As part of the financial sector reform, these institutions, and especially the NBC, were to be restructured. In its 1990 report, the Presidential Banking Commission proposed that the NBC be split into smaller institutions to facilitate its restructuring and promote competition.⁵¹ At the time, the government chose not to split the NBC but instead to try to rehabilitate it as a single entity. From 1991 to 1994, the government’s strategies were directed to achieving this aim. In 1992, it transferred some of the NBC’s nonperforming loans to LART and replaced them with treasury bonds, and in a two-part transaction in 1992 and 1993 it issued bonds for the NBC’s recapitalization. To reduce operating costs, 2,800 staff were retrenched in 1993 and 1994 (from over 9,000 in 1991), and 23 unprofitable branches (out of 205) were closed.

73. These measures, however, proved insufficient to improve the NBC’s performance, and its financial position continued to deteriorate. In 1995, a more radical plan was adopted for the NBC’s restructuring. A new board of directors was appointed, and the BoT required it to develop a plan of action for improving the bank’s profitability. That business plan was the basis for a memorandum of understanding, a “cease and desist” order, between the NBC’s board of directors and the Ministry of Finance, to be monitored by the BoT through the Banking Supervision Directorate. The memorandum of understanding, which was put in place in October 1995, required the NBC to break even between January and June 1996 and to improve its credit performance. In order to reach the profitability target, the NBC was to reduce operating expenses by 40 percent, increase fees and commissions by 50 percent, and attain a 2 percent net interest margin (after provisioning for loan losses). If the management failed to meet those targets, it was to suspend all lending operations, and the BoT would intervene on behalf of the shareholders. The June 1996 compliance review, which was completed in December 1996, concluded that, even though the NBC had made substantial progress in increasing its earnings, it had not broken even and its credit quality had not significantly improved.⁵² Despite the government’s efforts since 1990 to rehabilitate the NBC, it remained insolvent and undercapitalized, threatening the safety of the banking system.

74. In 1997, the government decided to split the NBC, an option it had rejected in 1990, and to subsequently privatize its successor entities. After considering various options, the government chose in July 1997 to split the NBC into two banks, the NBC (1997) and the NMB, and to create a holding company to manage the residual assets and liabilities of the former NBC. A condition for granting the two banks a banking license was that they agree on new memorandums of understanding with the Ministry of Finance, to be monitored by the BoT. The memorandums required that reporting be intensified and performance benchmarks on profitability and credit quality achieved until the two banks were in compliance with the capital adequacy requirements mandated by the BFIA. The board of directors of the two banks agreed to their respective memorandums in October 1997.

75. The NBC’s accounts and branch network were divided between the NBC (1997) and the NMB. The NBC (1997) was to focus on corporate and large business customers, and the NMB to be transformed into a microfinance bank serving rural and urban small businesses. Both banks retained branches in the major urban centers, but most rural branches were assigned to the NMB. Within urban areas, the NBC’s loans and current accounts were transferred to the NBC (1997), while the NMB maintained the savings and smaller time deposits. In rural areas, the NBC’s current accounts were converted into NMB savings accounts. The NMB also retained government accounts to facilitate government payments throughout the country. Two thousand (approximately half) of the NBC’s remaining employees were retrenched, and the two banks began operations on October 1, 1997 under new management teams.

76. Currently, the NBC (1997), with 35 branches at the major regional centers, offers a full range of wholesale, retail, and international banking services. It provides working capital to manufacturers, and it finances export-import activity and the marketing of cash crops. The NMB, pending its transformation into a microfinance institution, operates as a savings bank. Through its 95 branches, it provides savings and payments services to an extensive customer base. It mobilizes savings and time deposits and invests them in government securities. The NMB does not offer current accounts and has suspended all lending. In August 1998, the government issued long-term recapitalization bonds in the amount of T Sh 69.76 billion to eliminate the financing gap in the NMB’s opening (September 1997) accounts and subsequent operating losses.⁵³

77. Accounting problems resulting from the split of the NBC have delayed the privatization of the NBC (1997) and the NMB, but it is proceeding according to a revised timetable. Invitations to bid for the NBC (1997) were issued in July 1998. Individual bids are to be evaluated beginning in February 1999, with negotiations to begin soon thereafter. In the case of the NMB, a private management team is to be appointed to ensure that the bank is profitable and properly managed prior its privatization and transformation into a microfinance institution. Invitations to bid for the management contract were issued in May 1998 and a manager was selected in November 1998. The activities of the NMB will remain constrained until it is recapitalized through private investors, and builds capacity according to international best practices in microlending.

78. The privatization of the NBC (1997) and the NMB is expected to enhance competition within the banking sector and reduce market fragmentation. Currently, the NBC (1997) maintains relatively high lending and low deposit rates to enhance its profitability, as mandated by its memorandum of understanding. Given its dominant position in the banking sector, its rates influence those offered by other commercial banks. As a result, the industry-wide spread between lending and deposit rates is high and deposit rates are negative in real terms, which deters financial intermediation (Appendix Table 26).⁵⁴ It is expected that, following the NBC (1997)’s privatization, interest rate spreads will decline, thus improving the mobilization of savings and the allocation of credit to the private sector.⁵⁵ The government expects that the NMB’s transformation into a microfinance bank and the commencement of lending to small urban and rural enterprises will further stimulate the expansion of private sector credit (see Box 2).

79. Of the remaining state-owned financial institutions, the THB was closed in mid-1995 and the CRDB divested in 1996.⁵⁶ The delays associated with the privatization of the NBC (1997) and the NMB have postponed the restructuring of the remaining financial institutions. TIB is to be transformed into a merchant bank and has ceased all new lending pending its privatization. The PBZ remains undercapitalized and burdened by nonperforming assets; the government of Zanzibar intends to restructure and privatize it in 1999 with the assistance of the World Bank.

D. Developments in the Financial Markets

80. At the commencement of financial sector reform in 1991, there were no capital or money markets, and foreign exchange controls limited current and capital account transactions. Government bonds and treasury bills were the only securities issued that were held by the state-owned insurance company, the National Insurance Corporation (NIC), the two stateowned pension funds—the National Provident Fund (NPF) and the Parastatal Pension Fund (PPF)—and the state-owned financial institutions. Since the early 1990s, however, substantial progress has been made in developing the money, capital, and foreign exchange markets.⁵⁷

81. The BoT introduced treasury bill auctions in August 1993. Currently, the BoT sells treasury bills of 91-, 182-, and 364-day maturities in the primary market through weekly auctions. Since May 1996, the BoT has issued 91-day treasury bills as its own paper, which it uses for open market operations, and the government uses the 182- and 364-day treasury bills to finance its deficit. The secondary market for government bills is still at an early stage of development. The introduction of an automated book-entry system and a primary dealership arrangement for government securities in December 1998 should facilitate its development.

82. In July 1997, the BoT introduced a repurchase agreement facility, through which it sells long-term government notes to commercial banks for repurchase at 7- and 14-day maturities. Transactions in repurchase agreements provide the BoT with an additional instrument to conduct open market operations.⁵⁸ In November 1998, the BoT established a financing facility to assist commercial banks in meeting seasonal demand for agricultural credit. The duration of the facility is up to three months, with government securities serving as collateral.⁵⁹

83. The interbank market in domestic currency was established in July 1997 and has become increasingly active. The volume of transactions in April 1998 was T Sh 9.6 billion, but by July 1998 it had increased to more than T Sh 18 billion.⁶⁰ A change in the minimum reserve requirement, announced in May 1998, was in part responsible for the fast growth in the volume of interbank transactions. Beginning in June 1998, banks had to maintain their statutory reserves for both domestic and foreign deposits in Tanzania shillings, while previously they could hold them in either currency. Many banks, especially foreign ones, had to borrow in the interbank market to meet their statutory reserve requirement. In November 1998, the volume of interbank transactions had grown to T Sh 71.2 billion (14 percent of banks’ domestic currency deposits). The maturities are primarily overnight or up to three days, but longer maturities are also available. The introduction of a book-entry system in December 1998 should further stimulate the development of the interbank market.

84. In order to promote the development of capital markets and encourage greater private sector participation, the Capital Markets and Securities Act was enacted in 1994. It provided for the establishment of the Capital Markets and Securities Authority (CMSA), which began operations in 1995, to develop the institutional and regulatory framework for capital market institutions and the stock exchange. In April 1998, the Dar es Salaam Stock Exchange commenced operations with the trading of shares of the Tanzania Oxygen Co. Ltd.⁶¹ In May 1998, the government offered for sale 26 percent of its shares in Tanzania Breweries Ltd. (TBL) through an initial public offering in the stock exchange. By early 1999, the government intends to sell to the public half of its shares in AGIP (Tanzania) Ltd., making it the third company to be listed on the stock exchange. More public companies are to be privatized through initial public offerings in 1999 once they meet the listing requirements. In order to broaden the market, the government has announced that two-year treasury bonds will be listed on the stock exchange by early 1999.⁶²

85. Pension and insurance funds provide the only major collective investment schemes. The deregulation of the insurance industry commenced with the enactment of the Insurance Act in October 1996, which called for the establishment of a supervisory board responsible for the industry’s regulation. The National Insurance Board was instituted in May 1998. In July 1998, three private insurance funds began operations, and by October 1998 there were nine registered insurance funds: eight private ones and the state-owned NIC.

86. Tanzania’s pension funds remain under government control. Four pension funds are currently operating: the National Social Security Fund (NSSF), for private sector employees;⁶³ the PPF, for parastatal employees; the Government Employees’ Provident Fund (GEPF), for central government employees; and the Local Authority Pension Fund (LAPF), for local government employees. The pension system is mandatory; both employees and employers contribute a fraction of the salary.⁶⁴

87. Following the enactment of the Foreign Exchange Act in 1992, which provided for the establishment of foreign exchange bureaus and allowed residents to hold foreign currency deposits with domestic banks, controls on foreign exchange transactions have gradually been eased.⁶⁵ Since 1993, when foreign exchange auctions were introduced, exchange rates have floated independently. The BoT, however, periodically intervenes to smooth fluctuations and to increase official international reserves. In June 1994, the Interbank Foreign Exchange Market (IFEM) was established. Transactions in the IFEM determine the official exchange rate. Since 1996, foreign exchange bureaus have been prohibited from participating in the IFEM and are limited to over-the-counter transactions at freely negotiated rates. The differential between the official and the bureaus’ exchange rate, however, continues to decline.⁶⁶

A. Background

88. In the late 1960s, Tanzania embarked on an import-substituting development strategy based on the concept of “socialism with self-reliance” articulated in the 1967 Arusha Declaration. This strategy had, among its key economic objectives, the promotion of heavy industry and the achievement of self-sufficiency in food production. Two main instruments were employed in the implementation of that strategy: (1) a series of ambitious investment programs, embodied in five-year plans, targeted mainly at the expansion of the capital-intensive industrial sector and infrastructural projects; and (2) a set of large public enterprises that dominated most industries, had legal monopolies in the pricing, marketing, and processing of agricultural crops, and, that by the mid-1970s, had become the major importers and exporters in the country.

89. Throughout the 1970s, the government used trade restrictions as key tools to support their development priorities. Producers of export cash crops (mainly coffee, cashew nuts, sisal, tea, and tobacco), traditionally the main source of export earnings, had to sell their products to marketing parastatals, which offered prices well below world prices. Exporters of other, “nontraditional” exports had to surrender most of their foreign exchange earnings, and were subjected to a cumbersome and nontransparent system of export permits, which required them to obtain a license for each consignment and effectively gave individual ministries the right to regulate a wide range of exports on an ad hoc basis. Similarly, on the import side, all imports were regulated through administrative allocations of foreign exchange and an import licensing system, both of which became increasingly restrictive toward the end of the 1970s as foreign exchange earnings declined.

90. Producers of export cash crops were faced with procurement prices that declined steadily both in relation to the consumer price index and to world prices, reflecting the appreciating real exchange rate, the increasing operating inefficiency of the marketing boards, and the government’s policy of inducing a shift in the pattern of agricultural production in favor of food crops. Tanzania also experienced exogenous problems such as drought and declining terms of trade. The overall result was that the output of export crops fell by about 50 percent in per capita terms in the 1970–82 period, and the share of food production in agricultural output increased. Other (nontraditional) exports also experienced a sharp contraction during this period, owing to the pervasive administrative restrictions imposed on most exports. The falling export earnings were soon reflected in foreign exchange shortages, and the consequent curtailment in imports of intermediate goods and raw materials led to sharp cutbacks in production, especially in the highly import-dependent industrial sector, and to a deterioration in the country’s infrastructure.

91. The exposure of the tradable sector to a distorted incentive structure and its consequent contraction led to a deterioration in the fiscal position. The contraction of the international trade base led to an erosion in revenue and a major change in its structure, with the share of import duties in total budgetary revenue falling from 22 percent in 1969/70 (July–June) to 11 percent in 1979/80. Revenues were becoming increasingly dependent on transfers from public enterprises, whose profitability was being undermined by import shortages and rising operating costs. On the expenditure side, subsidies and transfers to public enterprises accelerated sharply, and essential expenditure on operations and maintenance had to be restrained, leading to a degradation of the country’s capital stock and infrastructure. The rising fiscal imbalances were a major source of inflationary pressures and gave rise to an accumulation of external payments arrears and increased reliance on external borrowing.

B. Trade Liberalization

92. Tanzania continued to suffer from significant financial imbalances throughout the early 1980s, and the external situation continued to be precarious, with recurrent foreign exchange shortages and a heavy reliance on balance of payments support, In the 1980–85 period, the real effective exchange rate increased by a yearly average of about 16 percent and real exports declined by a yearly average of about 10 percent (Figure 2). Large imbalances in the country’s fiscal and external accounts emerged, reflected in a fall in gross official reserves to the equivalent of less than one week of imports by end-1985. There was a general recognition by mid-1980s that important factors underlying the unsatisfactory economic performance were the overly restrictive external trade policies and the consequent adverse effects on the export performance. To address these issues, the Economic Recovery Program included as an important component the reinvigoration of the export sector through the elimination of cost-price distortions and important import liberalization measures.

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Tanzania: Trade Indicators, 1980–97

Citation: IMF Staff Country Reports 1999, 024; 10.5089/9781451838282.002.A001

Source: Tanzanian authorities.

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93. One important objective of the reform program was to reverse the contraction in exports that had been witnessed since the mid-1970s. A key to reaching this objective lay in raising the profitability of cash crops by introducing multiple channels for marketing crops, as greater profits would allow farmers to receive a higher share of proceeds from export sales. Although the government attempted various plans to restructure the marketing boards and improve their efficiency, including through the replacement of parastatals by “cooperatives” that had some flexibility in setting producer prices, a complete dismantling of their monopsonistic power did not occur until 1994, when regulations were issued allowing private sector competition in the marketing and processing of cash crops.

94. Restrictions on the export of nontraditional crops were also slowly relaxed, as a scheme allowing exporters to retain an increasing share of their export proceeds to finance their import requirements was introduced in 1985/86. By 1993/94, the system of export licensing, including for traditional crops, was abolished, the requirement of registration of exporting companies eliminated, and surrender requirements were no longer imposed. By 1996, the only remaining export restrictions consisted of a 2 percent tax on traditional exports (including minerals) and a ban on the export of scrap metal, both of which were fully abolished in 1997–98.⁶⁸

95. The gradual recovery in exports led to a steady relaxation in the foreign exchange constraint and facilitated the liberalization of imports. An important step in this regard was the marked reduction in the tariff burden in 1988 through a rationalization of import tariff rates, reflected in a reduction in the trade-weighted average tariff rate to 23 percent from 35 percent in 1986. The reduction in the tariff burden was complemented by two key liberalization measures in 1988–90: (1) the introduction of an open general license (OGL) system, under which import licenses were provided automatically for eligible imports; and (2) the creation of the Own Funds Facility (OFF), under which import licenses were provided freely to importers using their own foreign exchange resources for specified imports. The scope of these facilities remained limited, however, until a major intensification of liberalization efforts in 1991–93 eliminated all administrative allocations of foreign exchange and abolished the system of import licensing.⁶⁹

96. The steady relaxation of trade restrictions was supported by strong macroeconomic stabilization measures, which induced a substantial fall in inflation, as well as by steps to correct the misalignment in the exchange rate, which led to an average annual depreciation of the real effective exchange rate of about 10 percent in 1986–97.⁷⁰ Reflecting the increasingly favorable incentives to exporters, the average annual rate of growth of commodity exports increased steadily in real terms from negative levels in 1980–85 to 4 percent in 1986–91, and to 14 percent in 1992–97. This rise, in turn, contributed to the steady relaxation of the foreign exchange constraint, as evidenced by the increase in gross official reserves from an average of two weeks of imports in 1980–85 to seven in 1986–91, and to nine in 1992–97. This buildup allowed a rebound in commodity imports, which, after the sharp contraction in 1980–85 rose by a yearly average of about 4 percent in real terms in 1986–97. The rapid expansion in trade and the associated economic recovery took place despite a continued deterioration in the terms of trade, which declined at an average yearly rate of 6 percent during 1986–91, about the same rate as during the previous five-year period (Figure 2).

97. The liberalization of imports slowed markedly in 1993/94 as emerging fiscal imbalances led the authorities to resort to increases in customs duty rates (in both fiscal years 1993/94 and 1994/95) to compensate for shortfalls in domestic tax revenues. This slowdown reflected to an important extent the steady erosion of the tax-to-GDP ratio, as well as the increased dependence of tax revenue on trade taxes.

98. The sweeping exchange and trade liberalization measures had a pronounced effect on the level and composition of budgetary revenues through the following key channels: (1) the removal of agricultural price controls and the liberalization in marketing arrangements significantly shifted agricultural income from marketing boards to small farmers; (2) the liberalization measures led to a rapid growth of the informal sector; and (3) the economic weight of public enterprises, which were previously subject to frequent and discretionary increases in taxation, was reduced substantially. The shift in income from the public sphere to farmers, small enterprises, and the informal sector, which, owing to weaknesses in tax administration and a narrow tax base, was in large part outside the tax base, was responsible for a fall in tax revenue as a share of GDP from about 22 percent in 1980–85 to about 14 percent in 1986–91 (Figure 3).

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Tanzania: Tax Shares, 1980–97

Citation: IMF Staff Country Reports 1999, 024; 10.5089/9781451838282.002.A001

Source: Tanzanian authorities.

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99. One particular cause of the erosion of the tax-to-GDP ratio was that decreases in tax rates, including tariff rates, were not accompanied by adequate improvements in tax and customs administration or by a reduction in the scope of exemptions. While the tax ratio was gradually being eroded, the composition of tax revenue also became increasingly dependent on trade taxes. The liberalization of the trade and exchange system induced a rapid growth in imports and thus in customs duties, while revenue from domestic taxes, in particular from sales and income taxes, was falling. As a result, the share of import taxes in total tax revenue reversed its earlier decline, from an average of about 14 percent in 1980–85 to 23 percent in 1986–91, and 27 percent in 1992–97 (Figure 3).

100. Thus both the erosion of the total tax ratio and the increased weight of trade taxes in total revenue led the authorities to delay further reductions in tariff rates until measures were put in place that improved tax and customs administration, reduced the scope of exemptions, and broadened the domestic tax base. The implementation of the latter measures has in recent years continued to represent a key challenge in the trade reform area.

C. Recent Measures and Remaining Challenges in Trade Reform

101. Tanzania’s trade reform program has in recent years been largely molded by its efforts to fulfill the ambitious trade liberalization objectives set out in the context of the Cross-Border Initiative (CBI).⁷¹ The CBI has involved common targets and timetables for its members, notably with regard to (1) reducing import tariff rates and the number of tariff bands; (2) improving the transparency of the import tax system, notably by minimizing the scope of exemptions and incorporating all duties and charges on imports into the tariff schedule; (3) rationalizing the import tax burden by applying duty rates that increase with the degree of processing of the imported goods; (4) eliminating nontariff barriers; (5) removing export restrictions; and (6) granting intraregional tariff preferences. This section examines Tanzania’s recent trade reform efforts and discusses the steps that are still needed to eliminate trade-related distortions, employing as a useful benchmark the goal of satisfying the CBI objectives.

102. An important objective of Tanzania’s trade reform efforts is the reduction of the overall import tax burden, with a view to minimizing allocation inefficiencies and improving export incentives. The only remaining nontariff barriers are restrictions on petroleum product imports, reflecting physical constraints in port facilities; these are expected to be resolved by end-1999.⁷² Progress in reducing tariff rates has been steady in recent years: the weighted-average tariff rate was gradually lowered from 25 percent in 1993/94 to 20 percent in 1997/98, while the maximum rate was reduced from 40 percent to 30 percent.⁷³ The authorities are considering the possibility of a further reduction in tariff rates, including the lowering of the maximum rate to 25 percent and the adoption of three nonzero bands, with the tariffs distributed so as to yield a trade-weighted average import tariff of no more than 15 percent, in line with the CBI targets. The extent of progress achieved since 1986 in relaxing trade restrictions can be assessed by employing the IMF’s trade restrictiveness index, which is estimated to have fallen from 10 prior to 1986 to 8 in 1993/94, and to 7 in 1997/98; a further decline to 3 is projected if the trade measures specified in the 1998/99 budget are implemented (see Box 3).

103. The reduction in the overall import tax burden, as described above, will have positive effects on resource allocation in the economy overall, notably by reducing the discriminatory effects of the cost-price incentive structure vis-à-vis the export sector. However, one important issue that also needs to be addressed relates to the uneven level of effective protection implied by the tariff structure, which induces allocation inefficiencies within the import-substituting sector. The current tariff structure imposes relatively high rates on raw materials and intermediate inputs, and low rates on finished goods, which implies an unduly heavy implicit tax burden on producers of finished goods (notably, consumer goods). In addition to its adverse effects on allocation efficiency within the industrial sector, the distorted tariff structure contributes to the pervasive use of exemptions on imported inputs to partially compensate for the heavy import tax burden on these goods—a practice that has negative implications for the transparency of the tariff structure and for budgetary revenue.

104. The scope of exemptions or partial remission of import duties has been increasing in recent years, with the ratio of exemptions to total import taxes assessed (including exemptions) rising from 24 percent in 1993 (calendar year) to 30 percent in 1996/97, and to 48 percent in 1997/98. Exemptions and remissions are in line with the provisions of the investment code, granted to holders of certificates issued by the Tanzania Investment Centre (TIC); they are also granted on public sector imports, and imports used in foreign-financed projects and by nonprofit organizations. Reflecting the uneven tariff burden discussed above, the bulk of the exemptions has been focused on industrial inputs, with a relatively small share on processed consumer goods. For example, in 1997/98 the ratio of revenue forgone through exemptions to import taxes assessed was 13 percent for processed food, compared with a ratio of 55 percent for exemptions on imports of capital goods and raw materials.⁷⁴

105. A key factor inhibiting the reduction in tariff levels toward the CBI targets has been concern about a consequent loss in budgetary revenues. The adverse impact on revenue can, however, be offset if the reduction in rates is accompanied by a marked reduction in the scope of the exemptions described above, through the following measures: (1) correcting the uneven import tax burden among goods by applying rates that increase according to the degree of processing;⁷⁵ (2) eliminating exemptions on public sector imports, which is likely to yield savings as a result of the reduced diversion of imported goods to nonpublic purposes; and (3) eliminating exemptions and introducing an exemption control system whereby the import taxes are paid for by tax credit checks issued by the treasury.⁷⁶

106. The transparency of the tariff system has improved through the incorporation of all duties and charges into the tariff schedule, as envisaged under the CBI agreement. However, imports of alcoholic beverages and tobacco are still subject to higher excise tax rates than those domestically produced. While the authorities view this discriminatory treatment as necessary in view of budgetary pressures, the measure grants a high degree of protection to the alcohol and tobacco sectors and raises the effective rate of import taxation, further adversely affecting allocation efficiency.⁷⁷

107. In line with the CBI framework, the Common Market for Eastern and Southern Africa (COMESA) treaty, and the East African Cooperation Agreement (EACA), Tanzania has adopted a strategy of promoting intraregional integration that is consistent with multilateral liberalization. One of the key targets set out in these agreements is the implementation of a schedule of preferential tariffs on intraregional trade.⁷⁸ Although Tanzania adopted a preferential tariff schedule granting COMESA members a preferential tariff margin of 20 percent in 1996/97, this measure was reversed in the context of the 1997/98 budget, and again readopted with the 1998/99 budget.⁷⁹

108. The competitiveness of export manufactures has been adversely affected by delays in refunding exporters for taxes on imported inputs used in export production. Such delays have had an especially harmful effect on the profitability of exporters in view of the distorted tariff structure, which imposes relatively high rates on raw materials and intermediate inputs. The current shortcomings in the duty drawback system are currently being addressed through: (1) the establishment of a special budget to ensure that payments of duty drawbacks are made in full and with minimal lag time; and (2) development of an effective drawback control system in the Customs Department with simplified and transparent procedures, which ensures that drawback rates are periodically updated to reflect changes in prices, duties, and taxes affecting exporters.

109. With most direct cost-price distortions affecting the export sector now largely eliminated, the authorities have been focusing on the reduction of high transportation costs to exporters arising from a weak physical infrastructure, including the dilapidated state of transport routes that link farmers to outlets to external markets. The authorities’ strategy also aims to promote the growth of the export sector through the following steps: (1) strengthening the legal and regulatory framework affecting investors in the export sector; (2) developing effective mechanisms to control smuggling and corruption; (3) developing a strategy to exploit the commercial potential of international agreements; (4) improving the quality of information on international market conditions available to Tanzanian exporters; and (5) ensuring that export development is consistent with sound environmental policy.

110. Substantial progress has been achieved in the harmonization of trade policies between Zanzibar and the mainland of Tanzania, notably the elimination of discrepancies between the two tariff schedules in 1998. Moreover, the following steps are currently being undertaken in Zanzibar: (1) the implementation of the VAT; (2) improving the coordination between the ministries of finance of Tanzania and Zanzibar in setting the criteria and eligibility for granting exemptions; and (3) the harmonization of fees for the preshipment inspection services between Zanzibar and the mainland of Tanzania.

D. Conclusion

111. Several important lessons can be drawn from Tanzania’s experience in trade liberalization. First, the prevalence of a restrictive trade regime, and the associated cost-price distortions, represented an important factor underlying the economic deterioration in the 1970s and early 1980s. The gradual phasing out of trade restrictions since the mid-1980s played a key role in the revival of the export sector, the recovery and rationalization of imports, and the relaxation of the foreign exchange constraint. Second, the liberalization process, in the absence of adequate improvements in tax administration and a broadening of the tax base, was associated with an erosion in tax revenue and an increased reliance of that revenue on trade taxes. These developments in turn, slowed the pace of import liberalization and tariff rationalization. Today, an important objective of Tanzania’s trade reform efforts is the fulfillment of the ambitious goals set under regional arrangements, notably the CBI. One central goal is the reduction in the import tax burden, with a view to further improving export incentives and raising allocation efficiency. It is important, however, to avoid the recurrence of past episodes of reversals in trade reform owing to fiscal constraints. The recent implementation of the VAT, by broadening the tax base and improving the efficiency of the tax system, represents an important step toward the prevention of such reversals. Efforts should now focus on improving tax and customs administration and on minimizing the scope of tariff exemptions.