Report No. 48042-TZ United Republic of Tanzania Public Expenditure and Financial Accountability Review 2008 June 2009 Prepared by the Members of Tanzania PER Working Group United Republic of Tanzania, Ministry of Finance and Economic Affairs Development Partners, PER Macro & PFM Group Document of the World Bank Table of Contents A C K N O W L E D G E M E N T S ....................................................................................................................................... i EXECUTIVESUMMARY ...................................................................................................................................... ... 111 PART I:BUDGETANALYSIS ............................................................................................................................. 1 1. INTRODUCTION ............................................................................................................................................ 2 2. MACRO-FISCAL POLICY AND MACRO-ECONOMIC BUDGETFRAMEWORK ....................... 3 MACRO-FISCAL. POLICY: THE IMPACT OF REVENUEAND FINANCING ON THE MACRO CONTEXT ........4 MACRO-FISCAL POLICY: IMPACT OF EXPENDITURESON THE MACRO CONTEXT ................................. 6 THEMACRO ECONOMIC FRAMEWORK OFTHEBUDGET: OVERVIEW .................................................. 9 RECOMMENDATIONS ......................................................................................................................... 12 3. BUDGETALLOCATION ........................................................................................................................... 14 ALLOCATIONBETWEENMKUKUTAAND NON-MKUKUTASECTORS........................................... 14 ALLOCATIONSBETWEENMKUKUTACLUSTERS............................................................................. 15 ALLOCATIONBETWEEN MAIN SECTORS............................................................................................ 16 ALLOCATIONWITHIN SECTORS ......................................................................................................... ALLOCATIONBETWEENCENTRAL AND LOCAL GOVERNMENT.......................................................... 17 21 RECOMMENDATIONS ......................................................................................................................... 22 4. IMPACT/ RESULTS .................................................................................................................................... 23 BUDGET EXECUTIONPERFORMANCE................................................................................................ 23 EFFECTIVENESS PUBLICSERVICE DELIVERY EFFICIENCYINPUBLIC SERVICE DELIVERY...................................................................................... OF ............................................................................... 29 31 PART11: PFMASSESSMENT ........................................................................................................................... 37 INTRODUCTION ......................................................................................................................................... 38 COUNTRY BACKGROUNDINFORMATION ...................................................................................... 40 ECONOMICSITUATION ...................................................................................................................... 40 BUDGETARY OUTCOMES ................................. ....-............................................................................. 41 THELEGAL INSTITUTIONAL FRAMEWORK FORPFM................................................................ AND 42 ASSESSMENT OF THE PFMSYSTEMS. PROCESSES AND INSTITUTIONS ........................... 45 BUDGET CREDIBILITY ........................................................................................................................ 45 COMPREHENSIVENESSAND TRANSPARENCY .................................................................................... 48 PREDICTABILITY AND CONTROL INBUDGET EXECUTION .................................................................. POLICY-BASED BUDGETING .............................................................................................................. 52 ACCOUNTING,RECORDING AND REPORTING...................................................................................... 54 63 EXTERNAL SCRUTINY AND AUDIT ................................................................................................ 66 DONOR PRACTICES............................................................................................................................ 69 PFMREFORMPROCESS .......................................................................................................................... 72 RECENT AND ONGOING REFORMS ...................................................................................................... 72 INSTITUTIONAL FACTORSSUPPORTING REFORM PLANNING AND IMPLEMENTATION ........................ 72 PART 111: PEFARCAPACITY BUILDINGPROGRAM .............................................................................. 74 9. BACKGROUNDAND OBJECTIVES OF THEMISSION ................................................................... 75 10. MAINACCOMPLISHMENTS OF THE MISSION ............................................................................... 77 STRENGTHENING THE MACROECONOMIC MODELMACMOD....................................................... - PREPARINGTHE MACRO FRAMEWORK 2009/10-11/12 FORTHEPLANBUDGET GUIDELINES.........77 79 PREPARINGTHEBUDGET STRENGTHENING THE MTEF............................................................................................................. BACKGROUND MEDIUM AND TERMFRAMEWORK ................................... 80 BUILDINGA PROGRAMMATIC DIMENSIONINTHE SPAND THEMTEF............................................. 81 82 11. ACTION PLAN FORTHE REMAINDEROF THE YEAR (2009) ..................................................... 83 STRENGTHENING MACMOD-TZ AND THE MACRO POLICY FRAMEWORK PAPER2009/10.11/12 ..83 MTEFUPGRADES AND SECTORPROGRAMBUDGETING .................................................................. 84 Listof Annexes ANNEX 1: PERFORMANCEINDICATORSSUMMARYTABLE........................................................ ANNEX 2 :ASSESSMENTOFPEFAR08 CAPACITYBUILDINGWORK .......................................... 85 ANNEX 3:STATISTICALTABLES........................................................................................................ 91 -94 ListofFigures FIGURE1:YEAR-ON-YEAR MONTHLY CPIINFLATION RATE. NEW SERIES ................................................... FIGURE2: CURRENTACCOUNT AND FOREIGNAID 2001-2007 ..................................................................... 3 4 FIGURE3: TOTALAID INFLOWSRELATIVETO DOMESTIC - ........................... FIGURE4..ECONOMICCLASSIFICATIONOF THE 2008/09 BUDGET REVENUES2005/06 2010/11 ............................................................... 5 7 FIGURE 5: CHANGE INBUDGET SHARES BETWEEN2007/08 AND 2008/09 .................................................... FIGURE6: LOCAL FOREIGNFUNDINGININFRASTRUCTUREAND WATER BUDGETS .......................... 8 FIGURE7: SECTOR SHAREFOR SELECTEDMKUKUTASECTOR................................................................ AND 12 FIGURE8:FUNCTIONALCOMPOSITIONOFTHE 2008/09 APPROVEDAGRICULTURESECTORBUDGET........17 18 FIGURE9: COMPOSITIONOFTOTAL EDUCATIONEXPENDITUREBY LEVELS FIGURE 10: GOVERNMENT .............................................. ....18 . FIGURE 11: MAINTENANCE INFRASTRUCTURESPENDINGINSELECTEDSECTORS(INBIL .TSH.).......20 ALLOCATION TO RURAL & URBANWATER SUB-SECTORS(TSH MILLIONS) 19 FIGURE 12: ROAD MAINTENANCENEEDSAND BUDGET(BILL.TSH) .......................................................... AND 21 FIGURE 13: DEVELOPMENT FIGURE 14:NETENROLLMENTRATIOS-PRIMARY, LOWERSECONDARY, 2001-2007, HBS...................... BUDGET EXECUTION- 2006/07 AND 2007/08 ................................................ 23 FIGURE 15: ACCESS SAFEDRINKING WATER SUPPLY PERPERCENTOFPOPULATION........................... 30 TO 31 FIGURE16:UNITCOSTPERKMINROUTINEANDRECURRENTMAINTENANCE ......................................... .32 FIGURE18: HEALTHPERSONNEL EMOLUMENT EXPENDITURE PERCAPITA ACROSSLGAs........................ FIGURE17: EDUCATION PERSONNELEMOLUMENTEXPENDITUREPER CHILD AGED 7-13 ACROSS LGAS 33 33 FIGURE19:LGA RANKEDINTERMS OFPERCAPITAEXPENDITUREBUDGETEDFOR2008/09.................... 34 FIGURE20: DISTRICTRECURRENT BUDGET ANDROAD LENGTH ................................................................ 34 Listof Tables TABLE1:DOMESTICREVENUE:TRENDOVER 2004/05. ................................................................ 2007/08 4 TABLE2: CONTRIBUTIONOFT UDEPARTMENTS ..................................... 5 TABLE3. SELECTEDMDASBUDGETEXECUTIONGAP(INPERCENT) ........................................................... TO OVERALL TAX COLLECTION 8 TABLE4: DECOMPOSITION OF INCREASEINBASICWAGES IN2008/09 ........................................................ 9 TABLE6: MEDIUM-TERMPROJECTIONANALYSIS...................................................................................... TABLE5: FISCALFRAMEWORK,2005/06-2010/11................................................................................... 10 11 TABLE7: MKUKUTA AND NON-MKUKUTAEXPENDITURES (SHARES OFTOTAL) ................................. 14 TABLE8: SELECTEDNON-MKUKUTABUDGETALLOCATIONS(SHARES OFTOTAL) ................................ 15 TABLE10:MKUKUTAALLOCATIONS(INCL.LGA TRANSFERS, EXCL.MDA WAGES) ............................ TABLE9: BUDGET GUIDELINES:CLUSTERALLOCATION........................................................................... 15 TABLE11: MKUKUTAALLOCATIONS(INCL.LGA TRANSFERSAND MDA WAGES)................................ 16 TABLE12: 2008/09HEALTHBUDGETBY LEVEL OF CAREAND TYPE OFEXPENDITURE(SHARE) ................16 TABLE13.OVERALL BUDGETEXECUTIONGAPS......................................................................................... 19 24 TABLE 14.MDAsDEVELOPMENT TABLE15: CENTRALGOVERNMENTOPERATIONS(%OF GDP) ................................................................ BUDGET EXECUTION 2007/08 ........................................................... - 25 TABLE 16: ECONOMICCLASSIFICATIONOFEXPENDITURES OF GDP) .................................................. 41 (% 42 TABLE17:COMPARISONOF ORIGINALLY BUDGETED ACTUALEXPENDITURES AND ................................ 45 TABLE 18: VARIANCE OF EXPENDITURECOMPOSITION ............................................................................ 46 TABLE19:DOMESTICREVENUE PERFORMANCE ........................................................................................ 46 TABLE20: EXPENDITURE ARREARS COMPAREDTO TOTAL EXPENDITURES ............................................... 47 ACKNOWLEDGEMENTS Context Tanzania has carriedout an annual PublicExpenditureReview (PER) process since 1997/98with twin objectives of supporting the budget process and undertaking an external review of fiscal developments. The Tanzania PER Working Group, comprisingrepresentatives from the Government of Tanzania (GOT),the World Bank, UnitedNations (UN)agencies, other bilateraland multilateraldonors, researchand academic institutions,andNGOs, determinedthe agendafor the annual PERprocess, guided and financed the implementationofthe agreedwork program, andreviewedall outputs. In 2004/05 all stakeholders agreed as part of improved harmonization and coordination that assessment of Tanzanian public expenditure issues and financial management (including procurement) issues should be carriedout as part of a broader Public Expenditureand FinancialAccountabilityReview (PEFAR). The PEFAR aims at integrating two diagnostic exercises, PER and Country Financial and Accountability Assessment (CFAA), to facilitate a comprehensive assessment of Public Finance Management (PFM). The overall purpose of the PEFAR is to provide the Government of Tanzania and Development Partners with a comprehensive, integrated and candid assessment of Tanzania's key fiduciary risks as reflected in GOT'Sresource allocation, resource management and control, resource utilization, and accountability processes, and to make recommendations for improving the PFM framework, institutionalperformance, and capacity building. The Macro Subgroup of the PER Working Group is charged with responsibilityfor coordinating and guiding the work of reviewingpublic expenditure and assessing financial accountability under the broader PEFAR. The Annual PEFAMUKUTA (Mkakati wa Kukuza Uchumi na Kupunguza Umaskini Tanzania) Consultative Meeting is an important forum for raising awareness and promoting discussion of povertyreduction,economic growth, public expenditure and financial accountability issues amonggovernment and a wide array of interestedstakeholders in Tanzania. Team composition The report is primarily based on the findings of the PEFAR 2008 team, which comprised members from the World Bank, the International Monetary Fund (IMF), IMF AFRITAC, European Union, Kreditanstalt fuer Wiederaufbau (KfW), Department for International Development (DFID), JICA, CanadianHigh Commission, Embassy of Finland,the Netherlands Embassy, and IrelandEmbassy. The team was also joined by a number of independent consultants (from University of San Francisco, University of Cape-Town and University of Dar es Salaam) and members from Civil Society Organizations (CSOs), includingHakielimuandPolicyForum. The task manager and principalauthor of the report is EmmanuelMungunasi Substantive inputs and background papers were preparedby Paolo Zacchia (rapid budget analysis synoptic note); Florence Charlier, Denis Biseko, Emmanuel Mungunasi, David Robinson, Chelaus Rutachurunva, Florence Kutesa, Vera Mshana, and Gregory Smith (aggregate/macro analysis, wage bill analysis, and budget execution analysis); Shireen Mahdi (budget execution analysis); Gregory Smith, Angela Tormin, Tomi Sarkioja and Goodluck Mosha (local government); Josaphat Kweka, Stevan Lee and Samuel Saigurani (education); Cam Do and GoodluckMosha (health); Caroline van den Berg (water); Asuka Tushoboike, Retsu Hagiwara, and Jonathan Wolsey (road transport); Sergiy Zorya (agriculture); Rene van Nes, Parminder Brarr and FeridounSaraff (public financial management assessment); Charles Ncho, Florence 1 Charlier, Fulbert Tchana Tchana, Leonidas Luteganya and Emmanuel Mungunasi (PEFAR capacity buildingwork programprogressreport) and ClaudioPaul(data). The financialsupport and overall leadership ofthe EuropeanCommissiononthe PFMassessment is highly acknowledged. Also, financial support by the CIDA, the Swiss State Secretariat for Economic Affairs (SECO), and the World Bank on the PEFAR capacity building work program is highly appreciated. The report presents the findings of the budget analysis and execution (core analysis), public financial management assessment as well progress in PEFAR capacity building work program in Tanzania. The initial drafts were shared with government and members of the PER Macro sub-group as well as with a wider audience at the Annual PEFAWKUKUTA Consultative Meeting held in November2008, where they providedusefulcommentsthat are includedinthis report. The task was carried under the general guidance of the Country Director, John McIntire. Technical supervision and quality assurance was provided by Kathie Krumm, Sector Manager, AFTP2 and Mr. Ramadhan Khijjah, Permanent Secretary, Ministry of Finance and Economic Affairs. Allister Moon (AFTP2) served as peer reviewer. Mary-Anne Mwakangale and Mwanaisha Kassanga were responsiblefor the wordprocessingand actual productionofthe report. Finally, the PEFAR 2008 team would like to express its sincere gratitude for the assistance and courtesiesextendedby all partiesthat participatedinthe exercise. Inparticular,the teamwants to mention the names of Mr. Mugisha Kamugisha (Commissioner for Policy Analysis) and Mrs. Monica Mwamunyange (Commissioner for Budget) for the coordination of the whole exercise as the co- chairs of the PER Macro sub-group. 11 EXECUTIVE SUMMARY (FINDINGSAND RECOMMENDATIONS) Macro-fiscal Policy and Macro-economic Budget Framework 1. Rising inflation represents a serious challenge for the government, including fiscal policy. By December 2008, inflation has risen to 13.5 percent, far above the government target of 5 percent since 2004. It is important the government continue its effort to reduce inflation through monetary and fiscal policies, includingreducinginflationary pressures on the budget by controlling wage bill growth in line with medium-termpay policy. 2. The 2008/09 Medium-Term Expenditure Framework (MTEF) projected optimistic targets for domestic revenue and, at a same time, pessimistictargets for foreign aid. Although domestic revenue has been risingover the recent past, the targeted 18.5 percent of Gross Domestic Product (GDP) in revenue effort is high given the fact that revenue has increasedby only 1 percent of GDP annually in the past 5 years. It is important to improve reliability of the macro-framework by sustaining efforts to develop capacity in macro-fiscalpolicy and macro-modeling, which is an important tool for the government to properlyassess expectedlevels of domestic revenue collectionover the medium term. 3. The government has continued to reduce aid dependency, with share of aid in the total budget comingdown to 35 percent in 2008/09. Aid dependency is expected to decline further over the medium term as government increases its domestic revenue effort. However, the projected trend of decline in foreignaid raises some concern, since aid levelhas not declinedover the past 5 years. It is importantthat the government engage Development Partners (DPs) over the medium-termprojected level of financial assistance, with a view to avoidingabrupt reduction. 4. The pattern of aid has remained mixed over the past 4 years, with years of significant over- budgeting and under-budgeting of aid. Failure to properly assess aid flows has hampered budget management and execution.In order to avoidthis problem, it is importantthat the government develop a Priority Expenditure Plan(especiallya priority investmentplan) in line with MKUKUTA objectives, with clear indications of (i)programs that would be protected and financed through domestic borrowing in case of aid shortfalland (ii)a pipelineof highreturnprojectsthat couldabsorb any aid surplus. 5. The government has cautiously continued with its policy of zero net domestic financing. However, the government may consider usingdomestic financing for a limited amount of expenditures smoothing, as long as real domestic interest rates remain low. This will be important in order to protect key programsgiven unexpectedreductions in foreignaid. 6. Development budget share in total budget has increased significantly over the recent past, reaching 35 percent and equivalent to 10 percent of GDP in 2008/09. Local funding component of development budget has also increased, especially in infrastructuresectors. Despite increased share of development budget, the share of the public investment in the budget has remained the same at 24 percent. With the government objective of sustained annual GDP growth of 8-10 percent, increased contribution of public investment in total investment is important. This can be achieved only by improvinggrowthorientationofthe budgetby increasingthe share of public investment. 7. The government has also increased the share of local funding in development budgets of key infrastructuresectors like water, roads, and energy. The increasedlocalfundinghas giventhe government some flexibility to accommodate fluctuations in project funding as well as reducing the possibility of ... 111 donors imposing their budget priorities though earmarked project funding. It is important to reduce this vulnerability by continuing to provide sizeable local fundingto the development budget in key sectors. BudgetAllocation 8. The government has continued to allocate a significant share o f its budgetary resources to implement MKUKUTA. The share of MKUKUTA allocations in the 2007/08 and 2008/09 budgets are 70.6 percent and 70.8 percent, respectively. The slight increase in share o f MKUKUTA in 2008/09 is due to an increase in ministries, departments and agencies (MDAs) wages, since MKUKUTA shares without MDAs decline from 64.5 percent in 2007/08 to 62.0 percent in 2008/09. It is therefore important that the government have a clear commitment to protect MKUKUTA allocations. 9. The applicable definition o f MKUKUTA allocations applies only to other charges and the development budget. The MDA wages and transfers to Local Government Authorities (LGAs).are not allocated according to MKUKUTA.However, MDA wages and transfers to LGAs are important elements for implementingMKUKUTA, especially public service delivery in health and education. It is important that MKUKUTA definitions be redefined to include MDA wages and transfers to LGAs in order to be strategically relevant. 10. The Planning and Budget Guidelinesthat provide strategic direction in preparation of the budget and the MTEF do not seem to show a clear medium-term strategic direction in terms of allocation among three clusters. Allocations have moved more toward 40:40:20 shares despite the government intentions of boosting economic growth. It is important, therefore, that the government express a clear medium-term strategy, which is economic growth, through MKUKUTA cluster allocation and strives to implement it. 11. The Transport Sector Investment Plan has proved a useful anchor for medium-term budgeting in the road sectors by providing a costing o f the sector strategy and some form of prioritization. This experience could be extended to other sectors, such as agriculture. 12. Although the share o f allowances in the overall wage bill has decreased over the past two years, for some sectors, the share has increased. For instance, the education and health ministries have entered the group ofthe top five allowance receivingministries. Most services provided by these sectors are at the LGA level, but most duties facilitating allowances are paid to staff at the central level (ministry). Hence there is a need to control the proliferation o f allowances in the social sector ministries (especially the health and education ministries). 13. Slightly less than 1 percent o f the allocations for social sectors are allocated to infrastructure maintenance. With the current government effort toward construction of social infrastructure, such as classrooms, teacher houses, and health centers, maintenance cost should go up in the future. This implies that the government should also increase the share of maintenance in health and education budgets in order to ensure these infrastructures' good status. 14. The government has continued to make progress toward the 25 percenttarget o f LGA transfers in 2010. However, there has been a stagnation of these transfers at around 20 percent over the past two years. This poses a serious challenge to the government in terms o f achieving its target, which implies further effort would be required inorder to reachthe 25 percent objective of LGA transfers. iv Impact / results 15. The government should continue to improve the results/ outcome orientationof the budget and budget execution. Steps include: 16. Streamline basket funding modalities. Despite basket funds operating under the same financial management system, there are a lot of inconsistencies in frequency of approval and the conditions for approval of disbursement of funds from the holding accounts. While all basket arrangements require effective implementation, monitoring and auditing processes, not all these processes are linked to disbursement. Developing a general standard procedural requirement for a well functioningbasket fund arrangement is a keyto effectiveexecution ofa development budget. 17. Streamline internalMDA procedures: While administrative procedures for triggeringpayment to suppliers are necessary, such measures need to be streamlined. It is understood there are some standard administrative procedures set by the Ministry of Finance and Economic Affairs (MoFEA) for effecting payment to suppliers, but some MDAs have added more procedures, which slows down the payment process and execution of the budget. Ensuringthat MDAs adhere to standard streamlined procedures for effectingpaymentsto suppliers is importantfor effectiveexecutionofthe budget. 18. Improve the cash management system: It is important that spending agencies produce realistic cash flow plans at the beginning of the fiscal year and that MoFEA tracks what happens to these cash flows within the year. This is a key step in order to improvepredictability of funds to spending units and also to improvethe cashmanagementprocess. 19. Improve capacity to implement capital investment projects: It is important to improve the capacity of the key sectors to design and implement quality projects, from feasibility and economic evaluation to procurement and physical implementation as well as monitoring, especially for sectors where developmentprojects have a large componentof capitalspending, as inroads andenergy. 20. Improvequality of expenditure flash reports (including data reliability) given that they are key instrumentsfor trackingon a monthlybasisthe intra-yearbudget execution.This report is preparedby the Accountant General(ACGEN's) office but compiledmanually from reportsgenerated automaticallyfrom the Integrated FinancialManagement System(IFMS).It is recommendedthat this report be automated so that it is generatedfrom IFMSdirectly. 21. Make more regular use of Public Expenditure Tracking Surveys to obtain better information about effective budget execution at the service delivery level. It is suggested that Public Expenditure Tracking System (PETS) be regularly carried out in the education, health, water, and agriculturesectors. The PEFAR2009 work programhas already includedwater and education as sectors where PETSwill be executed. 22. Continue with planto develop significant results indicators for the budget and restructure budget programs to be aligned to such indicators. It is important that MDA and LGA budgets and MTEFs are organized by programmatic approach, with programs drawn from the Strategic Plans (SP) and result indicators linked to programs. This will make it easy to link amount of resources and outcome/results achieved. 23. Make the discussion of results indicatorsa centralelement of the sector budget scrutiny.This is a key step to ensurethat sectors link resourcesto results or outcomes, since sectors will have to justify use V of the previousyear's resources interms of results or outcomes achieved beforemakinga requestfor the followingyear. 24. Introduce key efficiency indicators along with results and quality indicators in budget management. It is important to introduce efficiency indicators in order to ensure that scarce budgetary resourcesare spent where more resultscan be achieved. 25. Inequity among LGAs in terms of resource allocations, especially for education and health, remains wide. Although the government has a formula for allocating recurrent block grants, which are largely for PE, some LGAs receive significantly less or more than their fair share. These inequities in resource allocationhave also translated into significant differences in outcome indicators among LGAs. In order to resolve inequity in public service delivery, like education and health, the government would needto attract andretainstaff in underservedLGAs. Integrated Assessment of PFMPerformance 26. Credibility of the budget: The budget has remained credible over the recent past, with improved revenue mobilization and expenditures contained. Significant improvement in revenue collection is the result of improved economic performance, continued tax policy and administration reforms, and a conservative revenue projectionspolicy. Expenditures have been contained, although at substantiallyless than original estimates, especially in the categories of goods and other services, and domestically- financed development expenditures. The variations between actual expenditures and originally approved budgets, depending on the year, have been greater when looking at the expenditure compositionwithin MDAs. Ina relevant matter, payment arrears that in2005/06 were minimalhave increasedin2006/07 and 2007/08. Althoughthere are reasons for variationsbetweenbudgetsand actual expenditure, it is important that the government stick to its expenditure plans for the budget to remaincredible and achieve intended results. 27. Comprehensiveness and transparency: The budget preparation and documentation process is extensive and is supported by Planning and Budget Guidelines (PBGs) issued by the MoFEA to the MDAs and separately to the LGAs. Transfers to the Autonomous Government Agencies (AGAs) are recorded inthe budgets ofthe MDAs, butthe remainingpart of the AGA budgets is not part ofthe budget documentation, as the AGA budgets are approved by their own authoritiesestablished by individual laws. Some AGAs might pose fiscal risks for future budgets in the form of a need for increased transfers resulting from commitments that are not made known to the MoFEA. Furthermore, it is not known to what extent potential fiscal liabilities created by the Public Enterprises (PES)are taken into account in fiscal planning, as these are not highlightedinthe government budget documentation. 28. Public access to fiscal information,inboththe budget presentation and execution phases, is good. Fiscal information in both budget documentation and execution reports is provided through several means, including the media and some government websites. However, the coverage and details of information is limited in the budget execution phase. For example, the actual composition of the MDA budgets is not published in the course of the year; these details are even excluded from the government final accounts, as the final accounts and government financial statements are very brief summations of government transactions. The lack of an internationally-accepted, functional classificationin the budget, as well as the presentation of recurrent and development expenditures in different formats, reduces the value ofthe budget documentation. 29. The allocation of all types of transfers to LGAs is guided by certain measures, but because the transfers are conditional,sectoralpoliciesare also taken into account. Budgetceilings,alongwith detailed instructionsandtechnical manuals, are issuedto the LGAsthree months beforethe beginningof the fiscal vi year. However, the budget ceilingsare subjectto change as the government budget is finalized.Dueto the conditionalnature ofthe transfers, such changes are unavoidable. 30. Policy-basedbudgeting: Several policy papers and technical documents are preparedto support the budget preparation, including macro-fiscalanalysis papers, the National Strategy for Growth and Reduction of Poverty (NSGRF'), MTEF, and more recently, a document called Strategic Budget Allocation System (SBAS), to help establish MDA budget ceilings. However, there is weak linkage among medium-term sectoral policies and annual budgets. Although the MoFEA is responsible for the preparation of both recurrentand development budgets, these two budgets are technicallynot integrated, and the absence of a functional classificationin the budget does not help improve the policy base of the budget. A clear link between long-term sectoral planning and strategies and the budget formulation process is missing.There is a clear budget calendar, butthe budget is normally submitted to the National Assemblyjust a few days before the beginningofthe fiscal year. 31. Predictability and control in budget execution: Tanzania continues to improve tax policy and administrationas well as procurement. In spite of good tax collectionperformance, as well as increased and timely budget support from development partners, budget execution and implementation of government operations face continuous uncertainty.It is widely believedthat this stems from the monthly cash rationing system that limits timely purchase of goods and services in the MDAs. The weak cash management procedures employed in the process of monthly budget allocations hampers a meaningful budget execution. Some unbudgeted operations may be initiated in the course of the fiscal year in an MDA budget, thereby crowding out other MDAs' spending plans. The bulk of recurrent MDA expenditures are salaries and wages, but payrollcontrols are weak and difficult to manage.Also, internal controlsand internalaudit functions inthe MDAs remainedweak and challenging. 32. Accounting, recording and reporting: Although the IFMS has been very useful, as a central payment and recording system and, by itself cannot improve the back-end accounting processes, and cannot deliver a full accounting reforms. For example, reconciliation of accounting books with their correspondingbank transactions seems to be very weak and faces longdelays. Accordingly,the quality of accounting in the MDAs is questionable, and externalaudit reportscontinue to refer to this problem.The government changed its accounting standards in 2007/08, but its financial statements are yet to includea full set ofasset and liability data. 33. Although MoFEA has initiatedand implemented some expenditure tracking surveys on the final service deliveryunits, its methodologyand reports have not beenmade public. The lack of publicationof in-year budget execution reports by the MDAs, as well as the summary style coverage of the annual financialstatements, remainproblemareas. Fiscalreports are helpfuland are publishedregularly,but they do not refer, by their nature, to any detailed revenue or expenditure data. Both the in-year and year-end reportingneedto be improvedandthe correspondingdataneedto be published. 34. Externalscrutiny and audit: Significantimprovement has beenmade interms submittingexternal audit reports to legislaturein timely manner, within nine months ofthe end of fiscal year. However, there i s little time available for the NationalAssembly to scrutinizethese reports, and even with the little time available, scrutiny is much delayed. A new external audit law, which was passed by the National Assembly and made public in a September 2008 gazette, is expected to bring about some future improvements in the external auditing task. Delays in the reporting of the Public Accounts Committee (PAC) have prevented the follow-up of audit concerns, and the MoFEA does not respond to the PAC findings. The work of the NationalAudit Office (NAO) has significantly improved, but there is need for further improvements, especially value for money auditing. vii Assessmentof the Impact of PFMWeaknesses 35. Tanzania's overall budget performance and fiscal discipline in the context of economic growth and macroeconomic stability remain good. The legal aspects of PFM have also been well addressed in recent years. However, the PFMsystem processesface a number of challenges.Although the weaknesses have already been identified and the DP has been providing technical assistance in a number of areas, further attentionis neededby the authoritiesto overcome the PFMrelated problems in a more systematic manner. 36. There are still some serious challengeswith regardto the PFM.The challenges includesengaging the legislature in the budget process, the low quality of budget classifications, the lack of a realistic resource-supportedMTEF, wider goaldtargetswithout adequate financing scenarios, and the lack of full integration of recurrent and development budgets. There is an urgent need to improve quality of budgetingand bringbackcredibilityto the budget as a firm government financialand operationalplan. 37. Predictabilityand control in the budget execution is still weak. The uncertaintyin availability of funds for the MDAs is an example of the lack of predictability,especially for the development budget. Due to the persistence of modified cash rationing, the MDA request for cash releases cannot always be met, resultingin difficultiesin implementingtheir policiesas planned.Onthe other side, areas of concern include the ineffectiveness of payroll controls and insufficiency of internal controls and audit in non- salary expenditures inthe MDAs. Internal audit is still weak, althoughimprovement efforts are underway. There is little availableinformationon the delivery ofresourcesto service deliveryunits. Prospectsfor ReformPlanningand Implementation 38. Further reforms needto be undertaken in a number of areas, including strengthening the budget preparation process, improvement in budget execution cash management, and accounting and reporting systems. The MoFEA has recognized the weaknesses and redesigned its PFM reform strategy (PFMRP 11), which was approved in July 2008. The new PFM reform strategy demonstrates how the MoFEA intendsto address the observations of key diagnosticreviewsinthe wide-rangingPFMcycle.However, a carefullyphasedimplementationwith intervaloutcomes of the planwill be critical to measurethe impact of reforms in the new round. Phasing the actions and harmonizingthe reforms with the government capacity and commitment to reform will remain key factors in the success of the new PFM reform strategy. Statusof PEFAR CapacityBuildingWork Program 39. The PEFAR capacity building is part of the collaborative effort between the government and development partners to strengthen public financial management in Tanzania. Initiated as one of the major outputs of the PEFAR work program in 2008, it aims to strengthen budget preparationin order to better link resource allocations and MKUKUTA priorities. The major aim is to enhance expenditure efficiency in order to realize growth and social impacts of public expenditure. Three major priority areas for intervention in capacity building were identified as strengthening (i)macroeconomic model (MACMOD) in order to improveits capacity to simulate growth and povertyreductionpolicies as well as to strengthenmacropolicy frameworkfor planningandbudgeting; (ii)the MTEF in order to facilitate and optimize the resource allocation system; and (iii)sector strategic plans (SPs) and sector MTEFs with a programmatic approach in order to enhance the linkage between SPs, MKUKUTA, MTEF and results/outcomes. viii 40. Considerable achievements have been obtained in most of the priority areas of interventionsince the launch.of capacity building activities in September 2008. Among the achievements are (i)a vastly improvedand user-friendlymacro simulationtool (MACOD-TZ); (ii) enhancedhuman capacities (about 25 officials) for macro policy simulation and analysis using MACMOD-TZ; (iii)enhanced macro framework paper for the 2009/10 Budget Guidelines; (iv) first edition of Budget Background and MediumTerm Framework document; and (v) an organized database for annual budget analysis as well as a stronger budget analysis department. Achievements were also realized in other priority areas of intervention, like experimental exercise of upgradingthe MTEF. These include development of a simple Excel-basedMTEFoptimizationmodelandthe revised SBAS Macro, which providesa steppingstone for a full upgradeofthe MTEF. Interms of buildinga programmatic dimensionin the SP and the MTEF, an experimental frameworkdeveloped for the healthsector provedvery successful. However, the framework needs to be revised in order to align it with the new health sector SP (HSSP 111) and revise the sector MTEFaccordingly. 41. Although some major achievements have been obtained in capacity building program, priority areas for interventionhave also been identifiedfor 2009. These areas are (i)strengthening of MACMOD- TZ and the MacroPolicyFramework Paper, taking into account the world economic crisis as well as new datddevelopments in Tanzania; (ii)initiating MTEF upgrades (both central and sector) as well as programbudgetingstartingwith the Ministry of Healthand Social Welfare; and (iii)preparingthe second editionofthe Budget Background and MediumTerm Framework for 2009/10-2011/12. ix PART I:BUDGET ANALYSIS 1 1. INTRODUCTION 1.1 This part of the PEFAR presents an overview of the main findings and key messages of the various sector and thematic reports carried out as part of the Budget Analysis of the FY07/08 PER cycle. The analysis for FY07/08 uses both original expenditure estimates approved by the parliament and actual expenditures data, while the analysis for FY08/09 uses the expenditures estimates approved by parliament (original estimates) only. As much as possible, the analysis is cast in a medium-termperspective. 1.2 The key focus of this part is on the alignmentof the budget to the MKUKUTA, the National Growth and Poverty ReductionStrategy of Tanzania. The Rapid Budget Analysis addresses to what extent the nationalbudget is an effective financial instrumentto implementthe policies and achieve the objectives of the MKUKUTA. The analysis of alignment is carried out alongthe three following directions: 1.3 The macro-economic dimension is relevant to the MKUKUTA inasmuch as a positive macroeconomic environment, which is supportive of sustainable growthand low inflation, is by itself an importantingredientin achievingthe MKUKUTA objectives. Inthis respect, the report discusses the impact of the budget on key macroeconomicvariables, such as the inflation rate, the GDP growth rate, and the interest rate. The macro-economic environment in turn is relevant to MKUKUTA because itis a major determinant of the resources envelope available to the budget and influence expenditureallocations. 1.4 The analysis of budget allocation looks at how the budget is distributed among different MKUKUTA sectors and clusters as well as the compositionof the budget in terms of wages, current expenditures, maintenance, and public investment.It discusses whether the sectoral and economic compositionis consistent with the policies and objectives of MKUKUTA and other sector policies. This analysis is carried out with respect to both the execution of the FY07/08 budget and the estimates ofthe FY08/09budget. 1.5 The last stage ofthe analysis addressesthe question of whether the budget achieves its stated impact onthe ground, interms of providingeffectivepublic services to the populationin a way that is both equitable and efficient. This part of the analysis is still sketchy, as the evidence is scarce. It builds on whatever performancereports have been producedby MDAs and on other sources, such as the HouseholdBudget Survey. Itwill be developed further inthe years to come, startingwith the PER FY08/09cycle, which has a strong focus on results inhealth, education andwater. 2 2. MACRO-FISCAL POLICY AND MACRO-ECONOMICBUDGET FRAMEWORK 2.1 This section analyzes two issues: (i)the impact of the budget on the macro-economic situation, which is labeled as the "macro-fiscal policy" issue; and (ii)the constraints imposed by the macro- economic situation on budgetary choices, which i s labeled as "the macro-economic framework" of the budget. 2.2 Within the context of a broadly stable macro-economic framework, emerging vulnerabilities faced by Tanzania involve rising inflation and some pressures on the external balance of payments, making the conduct o f macro-fiscal policy particularly sensitive. 2.3 Inflation has been on a rising trend above the government target of 5 percent since 2004 and significantly accelerated in 2007 and 2008 as internaiional cornmod& inflation added to domestic pressures (Figure 1). Figure 1: Year-on-year monthly CPI inflation rate, new series 9.0% 7.0% 5.0% 3.0% Source: NBS 2.4 The inflation experienced by families, measured in terms o f a basket o f food and non-food basic goods by the household budget survey (HBS), appears to have been also significantly higher than market prices revealed by the Consumer Price Index (CPI). The cumulative consumer inflation measured by the HSB between 2001 and 2007 is around 98 percent (an almost doubling of prices), while the CPI cumulative inflation for the same period measures at 41 percent. 2.5 All together, it is clear that rising inflation represents a serious challenge for the government, including for fiscal policy, as it tries to preserve hard-won macro-stability and protect the purchasing power of the population. 2.6 The Balance of Payments (BOP) of Tanzania is currently strong, with a high level o f foreign reserves, while a more resilient outlook for gold exports compared with other commodities, as well as tumbling oil prices, will be helpful going forward. Over the last five years, however, the composition of the BOPhas become a bit more vulnerable, with the current account deficit exceeding the levels o f foreign 3 aid, making the BOPdependent on private inflows, in particular Foreign Direct Investment (FDI), as shown in Figure 2. The current international economic crisis could have an impact on the level o f FDI inflows, as well as on tourism receipts. Figure 2: Current acccunt and foreign aid 2001-2007 -~ 2B)oom1 200303 -?ao4m5 2006M7 Source: IMF staffreport MACRO-FISCAL POLICY: THEIMPACT OF REVENUEAND FINANCINGON THE MACRO CONTEXT Domestic revenue 2.7 Domestic revenue has witnesseda remarkable sustained upward trend since the early 2000s. This development is particularly important as it provides the foundation to reduce aid dependence and improve domestic accountability. Domestic revenue is also a source of financing that does not have an inflationary impact through monetary aggregates, although potential tax pass-through to the consumers is inflationary. Table 1: Domestic revenue: trend over 2004105-2007108 (in percent of GDP) 2004l05 2005106 2006107 2007108 Budget Actual Budget Actual Budget Actual Budget Actual Total Revenue 11.6 11.8 12.2 12.5 12.7 14.1 15.5 16.2 Tax Revenue 10.7 10.8 11.2 11.5 11.7 13.0 14.2 15.0 ImportDuties 1.1 0.7 0.8 1.1 0.9 1.3 1.4 1.4 VAT 4.4 4.9 4.9 5.0 4.3 4.4 4.7 5.0 Excise Duty 1.7 1.6 1.6 1.5 2.7 2.7 2.9 2.9 Income Tax 2.8 3.1 3.2 3.4 3.4 4.1 3.9 4.6 olw PAYE 1.4 1.6 1.o 1.7 1.7 1.7 2.1 1.9 2.3 olw Corporate 0.8 1.o 1.2 1.1 1.4 1.3 1.7 Other taxes 1.o 0.9 0.9 0.8 1.o 1.1 1.9 1.7 Nontax Revenue 0.9 1.1 1.o 1.1 1.o 1.1 1.3 1.2 Source.` TanzaniaAuthorities( T U ) 2.8 At around 16% of GDP in2007108, and projected at around 18.5% of GDP in 2008109, domestic revenue in Tanzania is still below the average for Sub-Saharan Africa, and not high by international standards (Table 1). This indicates that the level of taxation in Tanzania is not excessive, as far as its macro-aggregate impact is concerned, and that there i s scope for further increase. A 2006 FIAS report assessed the impact of the taxation structure on economic growth as follows: "the income tax code and Value Added Tax (VAT) legislation are broadly appropriate and conducive to growth. Problems remain with implementation, the extent o f exemptions, and local government taxation. The marginal effective tax 4 rate in Tanzania is comparable with those in South Africa, and Zambia... it is excessive only for non- VAT registeredmediumand smallscale enterprises, for which it can be as highas 50.5%."' 2.9 The mainrisk is that the tax base is relativelynarrow.The increasedperformancehas beenreliant on higher contribution by the large taxpayers (Table 2). Expandingthe tax base is important in order to avoid excessive concentration on the narrow base - large tax payers. The government's plans to review tax and non-tax revenue in mining and natural resources are welcome, as they allow the tax base to broaden. Table 2: Contribution of TRA Departments to overall tax collection (in percent share) 2004105 2605106 2006107 2007108 DeDartment Actual Actual Actual Actual Domestic revenue 23.0 18.0 15.0 16.0 Customs andExcise 45.0 44.0 43.O 44.0 Large Taxpayers 32.0 38.0 42.0 40.0 Gross Collection 100.0 100.0 100.0 100.0 Source: TanzaniaAuthorities(TRA) Foreign financing 2.10 In 2007/08, the share of foreign aid in GDP declined for the first time in the last five years. (Figure 3). The Government has projecteda further decline in FY08/09, both as a share of GDP and in absolutevalue. Figure 3: Total aid inflows relative to__ domestic revenue 2005106 2010111 - __________ __-_____. m Domstio Revenue (% GDP) IForllbnAid(% QDP) Source: Budget Frame 12/10/2008, MOEA. 2.11 Foreign aid in FY07/08 was composed of 66 percent in grants and 34 percent in concessional loans. The FY08/09 budget projects an increase in concessional loans to 40 percent; given the nature of concessional lending, this shouldnot significantlyaffect Tanzania's debt sustainabilityprofile. 2.12 The slight reduction in foreign aid potentially helps to control inflation, as foreign currency funding of the budget increasesthe monetary base for an equivalentamount net of the import content of expenditures andneedsto be sterilized. 2.13 The reduction in foreign funding is, however, problematic with respect to the potential vulnerabilities in the balance of payment. These could be exacerbated in case of a potential negative impact ofthe current global economic crisis on flows of foreigndirect investment,as well as lowerexport prices (whichare likelyto be offset by highergold prices and/or lower oil prices). Sector Study of the EffectiveTax Burdenin Tanzania, May 2006, FIAS, the World Bank Group. 5 Domestic borrowing 2.14 Domestic borrowing(excludingCentralBank financing) is a non-inflationaryfinancingsource, as it does not increasethe monetary base andtends to raise interest rates. A drawback of domestic financing compared with foreign financing is its cost. Foreign financing, when it is fully sterilized, has a cost equivalent to the T-bill interest rate on less than the full amount (since part of the expenditure flows back in foreign currency through imports), while the interest cost of domestic financing is borne on the full amount. The cost advantage of (sterilized) foreign financing is lower, the lower the import contents of expenditures and the lower the domestic interest rate. Thanks to vastly improved T-bill auctions and monetary management by the Bank of Tanzania (BOT), over the last year, in parallel to rising inflation, real interest rates on T-bills have become negative. Therefore, use of domestic borrowing to smooth expenditurepattern'inthe current conditionswould be an optionfor the authorities. MACRO-FISCAL IMPACTOFEXPENDITURESONTHE MACROCONTEXT POLICY: 2.15 In a context of rising inflation, a large increase in public expenditure can put additional pressure on aggregate demand, depending also on the funding modality and the composition of expenditures. In such an environment, an expenditure profile tilted toward investment, and less toward current outlays high in domestic content, would be preferable, as it would tend to increase productivity and reduce demand pressure on the non-tradable sector. Higher public investment is also necessary to reach the government's objective of sustained annual GDP growth between 8-10 percent, as few countries have achieved such a feat without an aggregate level of investment reaching over 30 pecent of GDP, which requiresa significantcontributionfrom public investment. 2.16 The approved budget framework for 2008/09 aims at increasing recurrent spending by 1.3 percentage points of GDP, from 17.2 percent to 18.5 percent of GDP, while development expenditure remains stable at 9.8 percent of GDP. Over the medium term (2009/11), as aid flows are projectedto abate, development expenditures are expected to further decrease to reach 7.7 percent of GDP by 2010/11, while recurrent expenditures will stabilize around 17.5 percent of GDP. The trend in projected development expenditure is surprising given the ambition of the Government to sustain the projected higherlevelof growth. 2.17 The current classification of expenditure does not give a fully accurate deconstruction of Government spending. A more accurate classificationshows that 41.8 percent of the development budget i s composedofnon-capitalspending, mostlyon goods and services(accountingfor 22.8 percent, of which the purchase of medical supplies accounts for 9.3 percent). Similarly, 7 percent of the recurrent budget includes expenses linkedto infrastructureor equipment. 2.18 Based on a more rigorous classification, in FY08/09, 75 percent of expenditures are recurrent against 73 percentin FY07/08(Figure4). This relativelylow levelof investment andthe decliningtrends are worryingsignals. 6 Figure 4: Economic classification of the 2008/09 Budget Other Capital, T,,-Smdies, 4.8"/0 Household Furtuture, 1.O%\ Equrpment, 3 7% Wages, 35 9% Current Transfe Goods and Services, 27.8% 2.19 In agriculture, for instance, the share o f capital expenditure is much smaller than that o f development expenditure. It accounts for only 34.8 percent o f total sector budget compared with 46.9 percent o f development expenditure. Fifty seven percent o f the development expenditure is eventually recurrent expenditure, spent on the provision o f goods and services. This indicates that little capital investment i s going into the agriculture sector. Moreover, the actual or spent capital expenditures are likely to be much smaller than approved, partially due to the delays in feasibility studies and project implementation problems, as was the case in 2006/07, which further hampers the infrastructure development for agricultural growth in Tanzania. 2.20 Inhealth, an accurate classification shows that recurrent expenditure accounts for 89.8 percent o f the total health sector budget, o f which wages and salaries account for almost half o f all recurrent spending. Goods and services account for 45.2 percent o f the total health budget, o f which 83.0 percent comprises medical supplies. Therefore, capital expenditure accounts for only 10.2 percent o f the total health sector budget, o f which 8.1 percent i s for investment (see Annex 1). While Government has stated that this year will be focused on addressing the human resources shortage inhealth, there will need to be a substantial increase in the capital expenditure in order to fulfill the other priority that focuses on rehabilitation, upgrading and establishment o f facilities at the primary level. 2.21 The situation is even worse if one looks at actual expenditures. A look at execution rates reveals not only that the development budget shows execution gaps that are much higher than recurrent expenditures, but that some very high execution gaps (very low execution rates) are concentrated in the three key infrastructure ministries (Table 3). This is true even if some o f the execution gaps are due to under-reporting o f donor-funded projects (direct to project funding modality) through the Dummy Exchequer System. 7 Table 3. Selected MDAs budget execution gap' (in percent) I 2006107 2007108 Vote Ministry 1 Recurrent Develop. Total Recurrent Develop. Total 58 Min Energy & Minerals I I 0.2 82.1 64.3 i 6.2 90.8 80.6 49 MinWater & Irrigation 3.9 12.1 11.2 ' 3.5 43.0 39.4 98 MinInfrastructureDev. 1.6 38.3 24.1 5.9 50.3 36.8 ~ I ~ 52 MinHealth& Social We1 3.8 23.3 10.6 10.1 41.9 25.8 46 MinEducation& Voc Tr 2.4 11.5 7.2 7.4 15.9 11.0 43 MinAgriculture & FoodSec 9.9 41.6 23.6 6.4 9.9 8.0 Source: MoFEA, ExpenditureFlashReports 2.22 Inthis context of low capital expenditures, the large increase in the wage bill in the new budget, on the heels of the minimum wage increase, is particularly worrying (Figure 5). While the need to increase the minimum wage was widely recognized, such a big increase raises the risk of putting Tanzania in a vicious circle of increasing wages, rising inflation and lowering economic growth. The overall wage bill, including allowances and "hidden" wage costs, stands at 9.5 percent of GDP in the 2008109, against 9.1 percent in 2007108. Figure 5: Change in budget shares between 2007108 and 2008109 -4.O% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 2.23 The increase in the wage bill appears inconsistent with Medium Term Pay Policy (MTPP). The optimistic scenario of the MTPP projected an increase in the wage bill in the range of 5 percent of GDP by 2007/08. The actual progression to about 7.5 percent of GDP in 2007108 is way out of medium-term pay targets. The picture looks even worse when allowances are added to basic wages, which increasethe wage bill to 9.1 percent of GDP in 2007/08 and 9.5 percent of GDP in 2008109. Basic salaries represent almost 84 percent of the total wage bill in 2008/09, which is 3 percentage points higher than the 2007108 share. This implies slight decrease in allowances and hidden wage assimilated costs. This trend can be explained by the deliberate move to consolidate wage related items into basic wage. However, allowances and hidden wage assimilated costs remain high at 16.4 percent of the total wage bill and equivalent to 5.5 percent of the total government budget, also equivalent to 1.6 percent of GDP. 2.24 The increase in number of civil servant employees (new hires) has little impact on the increase in total basic wages inthe 2008/09 budget. About 70 percent of the increasetotal basic wage is due to salary increases, while less than 10 percent of the increase in the total basic wage bill is due to new hires. Note: Execution gap is sum of release and spending gap, where release gap is the difference between original budget estimates and exchequer release: and spending gap is the difference between exchequer release and expenditure. 8 Table 4: Deconstructionof increasein basic wages in 2008/09 ' I BillionTanzanian 1 Item i Shillings(TSh) %ofTotal 1 ~ % of GDP 2007/08 wage arrears 112.0 11 18.8 0.4 2008/09 wage arrears i! 20.0 i I 3.4 1I 0.1 2008109 new hires 50.0 0.2 2008/09normal salary adjustment 1iii 241.4 11 40.6 IIi 8.4 1i 0.9 Other (incl. Social benefits, Parastatalwages, I ji etc) 171.2 28.8 0.7 Total j Ii j 594.6 i 100.0 1I 2.3 Source: MoFEA, PO-PSM, & Author's Calculation THEMACRO ECONOMICFRAMEWORK OFTHE BUDGET: OVERVIEW 2.25 The following paragraphs review the macro-framework o f the 2008/09 budget from a medium- term perspective, with a focus on two kinds o f issues: the influence o f the macro-economic situation on the level o f the various budget aggregates, and the reliability o f the projection o f the budget aggregates. It i s important to note that the world is in major economic and financial crisis, which may have an impact on the macroeconomic framework for Tanzania. Box 1Economic and Financial Crisis and FiscalStimulus3 The world economy is entering a major downturn, caused by the most dangerous shock in mature financial markets since the 1930s. Developing country growth will fall sharply in 2009 through several channels. Exports will decelerate as a result of falling demand in the advanced economies. A fall in remittances to developing countries has already begun. Primary commodity prices have plunged at the prospect of falling world demand. This reversal, while providing a ray of light for commodity importing nations in the wake of the hugeprice increases ofthe past 1-2 years, also poses the need for adjustment in commodity exporters, which until recently were enjoying boom conditions. Private portfolio and bank lending flows to developing countries have fallen sharply, combined with extraordinary declines in stock prices, significant currency depreciationand sharp increases in external borrowing costs. Trade finance has been disrupted. Over a longer horizon, foreign direct investment may also weaken because of weaker growth prospects. There are also concerns that official aid flows could be affected by tighter budgets in advanced countries andthose political pressures for moreprotectionistscould gather force. I s Tanzania beingaffected by the crisis?Although Tanzania's economy is not fully integrated into the global financial markets, it is likely be affectedby the crisis, like many other developingcountries.Some o f the ways inwhich it will affect Tanzania include: decline in demand and prices of exports (such as cotton, coffee, cloves, horticulture, and tanzanite); decline in FDI; decline in employment in local manufacturing industries; decline in tourism earnings; and decline in remittances. In the long run, there could also be a decline in official aid. Some evidence of the crisis has been reported, including decline in volume and price of tradition exports (tea, tobacco and cloves).The volume of three export crops declined by 7-61 percent and prices declined by 1-36 percent by end December2008. Collectionof import taxes and excise duty were short oftarget by 12-21percent by December 2008. How can Tanzania deal with the crisis?The following fiscal and monetary policy stance can be helpful to the Governmentof Tanzania in dealingwith the crisis: The authorities have indicatedthat their short-term priority is to reduce inflation through a combinationof monetary and, to a lesser extent, fiscal policy. Ifthis proves successful in the next 6 months, the authoritiesmay have to switch quickly to a more expansionary stance in the new FinancialYear (FY). This includes speedingup disbursement of existing commitments, especially in infrastructureinvestments. It would be important to avoid an excessively pro-cyclical fiscal policy, while ensuring sustainable funding for the key development expenditures. Because of the simultaneous Balance o f Payment (BOP)shock, extra foreign financing of the budget may prove important. PREMGuidanceNote on the Financial Crisis, World Bank; Tanzania, Planning and Budget Guidelines 2009/10- 2011/12 9 2.26 The Government's fiscal framework for 2008/09-2010/11 aims at halving the overall budget deficit (before grants) from 11.1 percent in 2007/08 to 5.8 percent in 2010/11. Domestic revenue i s expected to increase by 3.8 percentage points of GDP over the next three years from 15.6 percent to 19.4 percent, while overall expenditures will slightly decrease from 26.7 percent in 2007/08 to 25.2 percent in 2009/10. Table 4 gives a summary of the structure and trend of the main fiscal aggregates over the mediumterm. Table 5: FiscalFramework, 2005/06 -2010/11 2005106 2006107 2007108 2008109 2009110 2010111 Prel Budn. Act. Budg. Act. Budg. Act. Budg. Proj. Proj. Total Domestic Revenue 13.7 12.5 14.5 `14.1 15.6 16.2 18.5 19.0 19.4 Grants 5.2 6.2 8.3 4.9 7.5 7.5 5.6 4.3 4.0 Total Expenditure 26.8 24.4 28.3 23.2 27.0 23.2 28.2 25.4 25.2 Total PrimaryExpenditure 23.3 21.O 26.6 20.7 24.0 22.0 25.3 23.0 23.0 OverallBalance (excl.grants) 13.1 10.7 13.8 10.3 11.1 7.0 9.4 6.4 5.8 OverallBalance (incl.grants) 6.3 4.8 5.3 3.9. 3.6 0.5 3.8 2.1 1.8 Source: MoFEA & Authors Calculations Macro-framework: revenueand financing 2.27 The macro medium-term projection in the 2008/09 MTEF appears optimistic on the revenue side and pessimistic on the foreign aid side. 2.28 The authorities have projected a strong increase in domestic revenue to mitigate long-term vulnerabilities to an anticipated decline in aid over FYs 09/11 period. In 2008/09, domestic revenue is projected to further increase to 18.5 percent of GDP. The authorities anticipate that the expansion of the tax base induced by private sector growth, the implementation of the Tanzania Revenues Authority's ( T U ) five-year corporate business plan and a new strategy to increase revenue collection from natural resources (including the mining sector) would lead to a 2.5 percentage point surge in domestic revenue in 2008/09 and a halfpoint increase over the following 2 years. 2.29 While the growth in the revenue to GDP ratio is commendable, it represents a very challenging target. This 2.5 point annual increase seems highly ambitious against the already sizable one percentage point annual average increase in domestic revenue achieved since 2002/03. The targeted increase in May 2008, under the Policy Support Instrument (PSI) economic program supported by the IMF, was more modest, as the revenue-to-GDP ratio was expected to reach 16.2 percent o f GDP in 2008/09. Inthe March Plan and Budget Guidelines, the authorities had anticipated a 15 percent annual increase in revenue collection, implying that revenue collection would reach 16.7 percent of GDP in 2008/09. This will require careful monitoring and a strategy on how to adjust to eventual shortfalls. 2.30 The government has cautiously revised aid projections over the next 3 years, anticipating aid would be almost halved by 2010111. The pattern of external aid is mixed: over the last 2 years aid was significantly over budgeted; over the 2003/04-2004/05 period aid was under-budgeted. Failure to properly assess aid flows has hampered the budget management as total expenditure was accommodating aid ups and downs. 10 2.31 In2008/09, the GOTanticipates that total foreign aid inflows as a percentage of GDP would decrease by 2 points. This 4.7 percent decline is largely attributed to a decline in grants (-14.8 percent) despite an increase in foreign loans. The structure of aid inflows in terms of aid modalities illustrates a decline in budget and project support (inclusive of MCC and Multilateral Debt Relief Initiative - MDRI) and an increase inbasket support as budgetedin2008/09relative to 2007/08. 2.32 Over 2009/10-2010/11, the GOThas forecasted a further decline in aid flows and plans to scale down expenditures as of 2009/10. Over the medium term, the budget framework indicates that expenditures would be gradually scaled down from 28 percent to 25 percent of GDP as aid decreases from 9.4 percent to 6 percent of GDP between 2008/09 to 2010/11. The projected medium-term level of foreign aid flows seems likely to be higher than projected as new donor projects come on line and more robustdevelopment partner pledges are made. 2.33 An analysis of the medium-term reliability of the MTEF revenue projection (Table 6) bears out the following conclusions: a) Budget support is, on average, the most reliable form of funding for the budget, followed by domestic revenue. b) Both project and basket funding are very difficult to project. c) The first outer year projections in 2006/07 were more reliable than the second outer year. Table 6: Medium-Term Projection Analysis 06/07 MTEF 06/07 MTEF 007/08 MTTEF Year 2 Accuracy Year 3 Accuracy Year 2 Accuracy Domestic Revenue 125 149 120 Aid Inflows o/w GBS 174 139 175 o/w Projects 110 94 80 o/w Baskets 147 247 60 Total Expenditure 125 136 118 o/w Recurrent 110 126 109 o/w Development(local) 188 187 150 Source: Budget Digest 2006/07, BudgetSpeech2007/08, BudgetFrame 12/10/2008, MOEA. Macroeconomic framework: expenditures 2.34 The approved medium-term expenditure framework indicates a 1.2 percentage point of GDP increasein overall expenditurein2008/09 followed by a sharp fall of 3 percentage points in 2009/10. The lower level of expenditure follows the pessimistic assumption on aid trends (discussed above) together with a one percentannualreduction ofthe overall deficit between2009/10 and 2010/11. 2.35 A credible medium-term budget framework would indicate how surplus aid will be saved, or shortfalls made up through domestic borrowing or spending cuts. Hence, it would be important for the GOT to develop a Priority Investment Plan (PIP) in line with MKUKUTA objectives, with clear indication of (i) programsthat would be protectedand financedthrough domestic borrowing in case of aid shortfall and (ii)a pipeline of high return.projectsthat could absorbany aid surplus. 2.36 Table 5 indicates that recurrent expenditure projections are much more accurate than local developmentexpenditure, which may partly being explainedby the fact that it is sometimes tied to donor project inflows via counterpartfunding. 2.37 Figure 6 indicates that, over the last 2 budgets, the GOThas increasedthe share of local funding of the development budget in key sectors, such as roads or water, which gives the Government greater flexibility to accommodatethe fluctuations in project funding. The increasedfunding of the development budget from local resources has also restricted possible donors from imposing their budget priorities through earmarked project funding. Without getting into the merit of the reduction in the water sector budget, the large domestic funding in 07/098 allowedthe Government to reduce the water sector budget in FY08/09, notwithstandinga large increaseindonor fundingfor the sector. Fieure 6: Local and foreign fundine in Infrastructure and Water budgets MolD Budget I UForrx/ BIOOO liJO00 91000 94000 1221WO 11?1621 I196111 E L a c i I 21000 114lWO II13000 11li4000I 360W 1132386 1 3 3 5 1 8 6 RECOMMENDATIONS 2.38 Improve the reliability of the macro-framework by sustaining efforts to develop capacity in macro-fiscalpolicyand macro-modeling.The upgradedMACMOD-TZ should serve as an importanttool for developingthe crediblemacroframeworkas well as budgetframe. 2.39 The share of capital investment in the budget has stagnated at around 25 percent, although the development budget is around 35 percent of the budget. In order to reach the government target of economic growth of 8-10 percent over the medium term, the share of private investment has to be complemented by a significant share of public investment. It is important that the government improve the growthorientationofthe budget by increasingthe share of publicinvestment. 2.40 The government should striveto reducethe inflationaryimpactof the budget by controllingwage growth (includingallowances) in line with medium-termpay policy. Ln the 2008/09 budget, the share of the wage bill (includingallowances) increasedto 9.5 percent of GDP, which is way out of the medium- term pay policytargets. The new medium-term pay policy, which is beingdeveloped, should try to ensure that wage billgrowth is consistent with the macroeconomic framework. 2.41 The government should increase speed and depth of structural reforms on the supply side to increase the economy's capacity to absorb aid. This particularly important for infrastructuresectors like transport, water, and energy. 2.42 The government fiscal framework targets a 2.5 percent o f GDP increase in domestic revenue in 2008/09 compared with 2007/08. However, given the world economic and financial crisis, this target seems ambitious.This suggeststhat there is a needfor improvedforecastingof domestic revenue. 2.43 Given the observed unreliability of aid, it is important that the government develop a Priority ExpenditurePlan in line with MKUKUTA objectives, with clear indicationof (i) programsthat would be protectedand financed through domestic borrowing in case of aid shortfall and (ii)a pipeline of high return projectsthat couldabsorbany aid surplus. 12 2.44 The government needs to engage with Development Partners over medium-termprojectedlevel of financialassistance, with a view towardavoidingabrupt reduction. 2.45 The government could consider using domestic financing for a limited amount of expenditures smoothing, as longas real domestic interest rates remainlow. 2.46 The government is encouraged to continue providing sizeable local funding to the development budget inkey sectorsto reducevulnerability. 13 3. BUDGETALLOCATION ALLOCATION BETWEENMKUKUTAAND NON-MKUKUTA SECTORS 3.1 The share of MKUKUTA spending, net of MDA wages, has decreased since last year. To assess properly the share of MKUKUTA against non-MKUKUTA expenditures, it i s important to consider that the GOThas exclusivelyallocated to MKUKUTA the "other charges" or "development" expenditurecategories, therefore excludingtransfers to localauthoritiesandwages. 0 Basic salaries and pensionpaid, for example, to teachers, medical staff (nurses, doctors) and judges is excluded from MKUKUTA, although they are essential priority expenditures to deliver social services. As more "MKUKUTA infrastructure," such as schools and health centers, is built, the GOTmustrecruit more personnelto ensureadequateservice delivery. 0 Transfers to LGAs, which representabout 20 percent oftotal budget, are not coded according to the MKUKUTA spendingand are therefore considerednon-MKUKUTA spending. 0 Also, a large amount (4.9 percent of total expenditures) is budgeted this year in Treasury - vote 21 (classified as non-MKUKUTA) to pay wage arrears and adjust salary along the revisedpay scale. 3.2 Taking into account these adjustments, two different breakdowns have been calculated; one and arrears included in the Treasury - vote 21); a secondbreakdownincludesLGA expenditures and the includesonly the LGA spendingandexcludesMDA wages (the basicones as well as the wage adjustment whole MDA wage bill (with the arrears and adjustment invote 21 redistributedto their respectiveMDAs (Table 7). In the first case, a reduction in the budget share of MKUKUTA is noticeable. Inthe second case, there is actually an increase in the share of MKUKUTA by half a percentagepoint.As mentioned above, about 70 percent of the increase in total basic wage in FY07/08 is due to salary increases rather thannewhires,sothe increaseis MKUKUTA spendinginthe seconddefinitionreflectsthis fact. Table 7: MKUKUTA and non-MKUKUTA expenditures (shares of total) 2007/08 2008/09 Incl. LGA, excl. MDA wages MKUKUTA 64.5 62.0 Non-MKUKUTA 35.5 38.0 Total 100.0 100.0 Incl. LGA andMDA wages MKUKUTA 70.6 70.8 Non-MKUKUTA 29.4 29.2 Total 100.0 100.0 Source: MoFEA & Author's Calculations 3.3 The diminution in the MKUKUTA share on non-wage expenditures is of concern, particularly given the still modest progress toward poverty reduction, as evidenced by the recent HouseholdBudget Survey, which would advocate for additional effortstowardthe implementationof MKUKUTA. On the other hand, because of the large growth in the overall budget expenditures, the slightly reduced MKUKUTA share translates into a sizeable nominal increase in the MKUKUTA expenditures. 14 3.4 Allocation to key non-MKUKUTA spending agents (votes) has remained stable with the exception of Treasury and Ministryof Finance and Economic Affairs, (Table 8) which have increased substantially, even after the salary adjustments have been nettedout from allocation to the Treasury. Table 8: Selected Non-MKUKUTA budget allocations (shares of total) Vote code Vote name 2007/08 2008/09 Difference 22 Public Debt 10.0 9.4 -0.7 28 Police Force 2.4 2.1 -0.3 29 Prison Service 1.2 1.1 -0.1 30 President's Office 3.1 2.8 -0.4 34 Foreign Affairs 1.o 1.o 0.0 38 Defense 3.3 3.3 0.1 39 National Service 0.8 0.8 0.0 National Assembly 42 Fund 0.7 0.8 0.1 57 Ministry of Defence 1.o 1.2 0.2 21& 50 Treasury & MoFEA4 4.7 7.2 2.5 Sub-total 28.3 29.6 1.3 Total budget 100.0 100.0 0.0 Source: MoFEA & Author's calculation ALLOCATIONSBETWEENMKUKUTACLUSTERS 3.5 The Government has made commendable efforts to use the three clusters of the MKUKUTA as the strategic level of budget allocation. However, in the past three years there has not been a clear direction toward strategic MKUKUTA allocations. The uncertainty seems to be between a 40:40:20 allocation across clusters, and one more skewed toward supporting economic growth resulting in a 50:30:20 distribution (Table 9). For instance, the FY06/07 guidelines projected a 49:30:2 1 allocations for FY07/08, but the FY07/08 budget guidelines went for a 42:41:17 profile. Similarly the FY07/08 guidelines projected a 43:37:20 allocations for FY08/09, but the FY08/09 budget guidelines establish a 48:34: 18 distributions. Table 9: Budget Guidelines: Cluster Allocation iI / BG 06/07-08/09 BG 07/08-09/10 i i BG 08/09-10/11 06/07 07/08 08/09 1 07/08 08/09 09/10 08/09 09/10 10/11 Cluster I i 43 49 48 I 42 43 41 48 50 51 Cluster 11 35 30 31 I 41 37 39 34 33 31 ~ Cluster 111 1I 22 21 21 17 20 20 , 18 17 18 ~ Note: Cluster I: Growthof the economy andreductionin income poverty Cluster 11: Improvementof quality o f life and socialbeing Cluster 111: GovernanceandAccountability Source: MoFEA, PlanandBudgetGuidelines(various) Votes 21 & 50 have been combinedbecause they used to be one vote before 2008/09. Wage adjustments for major sectors in 2008/09 have been taken out of vote 21. 15 3.6 The difficulty in strategically using the MKUKUTA clusters for budgeting is further complicated by the classification of MKUKUTA clusters, which, as mentioned above, does not include basic salaries and transfers to local government. 3.7 Accounting for transfers to LGA but excluding MDA wages provides a different view of MKUKUTA cluster allocation, in particular raisingmarkedly the share of cluster 2, at the expense of cluster 1 and 3, as well as showing a substantial stability of the shares of the various clusters (Table 10). Allocations 2007108 2008/09 YOof Mkukuta I YOof Overall YOof Mkukuta I YOof Overall Cluster I 32.1% I ! 22.7% 32.8% I 23.2% Cluster I1 41.0% I !i I 29.0% I 28.0% Cluster 111 13.0% I 9.2% I 7.9% Cross Cutting 52 % I I I 3.7% 4.2% I 3.o% Total MKUKUTA 91.3% j 64.5% 87.6% I 62.0% Non-MKUKUTA I 35.5% I 38.0% Overall I I I 100.0% I 100.0% 3.8 Similarly, the inclusion of the MDA wage bill rebalances the shares in favor o f Cluster I1and show a substantial stability o f the overall shares (Table 11). Allocations 2007/08 2008109 YOof Mkukuta I YOof Overall YOof Mkukuta YOof Overall Cluster I 33.1% I I 23.4% 34.1% j 24.1% Cluster I1 45.0% 3 1.8% 45.5% 32.2% Cluster 111 16.5% 11.7% 16.0% 11.3% Cross Cutting 5.4% 3.8% 4.4% I 3.1% Total MKUKUTA 100.0% i 70.6% 100.0% I 70.8% Non-MKUKUTA I 29.4% I 29.2% Overall I I I 100.0% I 100.0% ALLOCATIONBETWEENMAINSECTORS 3.9 The only MKUKUTA sector that has seen its share o f total expenditures increase significantly is Transport, which increased by 1.5 percentage points (Figure 7). The Heath sector budget has remained broadly stable, while both Education and Agriculture shares have decreased by around 1 percentage point. The Water sector experienced the most drastic reduction of around 2 percentage points. Altogether these changes imply a decrease of 2.5 percentage points for these MKUKUTApriority sectors, which have beenallocated to other MKUKUTA sectors. 3.10 The increase inthe Transport budget conceals a much sharper increase inthe Road sub-sector budget, which has almost doubled over the last 3 years, moving from 6.5 percent of the total budget in 2006/07 to 8.7 percent in 2007/08 and 11.5 percent in 2008/09. Consequently, the Transport Sector Investment Plan (TSIP) requirements have largely been met, at a level o f 96 percent in 2007/08 and 101 percent in 2008/09. The requirements in TSIP are US$ 646.3 million and US$ 695.88 million in 2007/08 and 2008/09, respectively. Incomparison, the allocated budget for Roads is respectively US$ 16 621 million (719,338.03 million TSh) in 2007108 and US$ 704 Million (716.097 million TSh) in 2008109. 3.1 1 The education sector share has experienced its second decrease in two years, coming down from 20 percent of the total budget in 2006107 to 19.4 percent in 2007/08 and 18.5 percent in 2008109. Figure 7: Sector Share for selected MKUKUTA sector Education Health Water Agriculture Roads FiscalYears Education H e a l t h Water Agriculture Roads (Sector Share of Total Spending) :007/08 19.4% 10.6% 5.4% 5.2% 12.8% ,008/09 18.5% 10.8% 3.3% 4.0% 13.1% (Sector Share of Total Priority Spending) :007/08 36.3% 19.9% 10.1% 9.7% 24.0% ,008/09 37.1% 21.7% 6.7% 8.1% 26.4% (Sector Share of Total Spending excl interest) :007/08 20.4% 11.2% 5.7% 5.4% 13.5% :008/09 19.1% 11.2% 3.4% 4.2% 13.6% qote: Priority spending i s defmed in this table as Road, Water, Agriculture, Education and Health ALLOCATIONWITHIN SECTORS Agriculture 3.12 The specific Government priorities within the agriculture sector in Tanzania (Agricultural Sector Development Strategy) include (i)supportingthe local development process to increase access to services and expand agricultural investments; (ii)increasing agricultural productivity through the adoption of, and investment in more productive technological packages; (iii)increasing the area under irrigation and promoting greater water use efficiency; (iv) improving access to inputs and appropriate technology; and (v) maintaining food security through a national food reserve. Overall, the sector budgets are largely in line with its stated priorities, as indicated in Figure 8, but it is not possible to make a more accurate conclusion, since the cost o f the sector strategy has not been established.. 3.13 There are, however, several emerging trends that require attention. During2006/07-2008109, the budgets for input programs and grain reserves increased, while the expenditure for research and training, policy and planning, and animal disease control decreased. The latter expenditures are growth-enhancing and are for core public goods, without which not only will the performance o f the sector suffer in the long-run but, moreover, the effectiveness o f input use, increasingly promoted by the government, is likely to be constrained. 17 Figure 8: Functional composition of the 2008/09 approved agriculture sector budget Livestock development Animal disease control 2% brigation C o m d t y marketing 2% Fisheries Food securityIGrain ="I 7 reserve 6% I LocalGovernment Researchand Training transfers and support 40% 9% Admnistration, information policy and planning and CO-nlcatlon 3% 3% Education 3.14 The distribution of the education budget shows around 66 percent of the budget going to pre- tertiary education (Figure 9). In the 2008/09 budget, we observe stability of the primary education allocation, a decrease in the secondary education funding, and an increase in tertiary education funding. The decrease in secondary education allocation reflects the fact that most construction work for secondary education infrastructure has been completed, hence there i s less allocation for development budget. Conversely, the increase in the allocations for higher education reflects the extent of construction work in higher education infrastructure (especially University of Dodoma) as well as increased allocations to Higher Education Loans Board for student loans due to expanded admission at higher learning institutions. However, it is not clear how this evolution matches the stated education sector priority to "achieve enhanced enrollment, attendance and completion o f pre- and primary levels." Figure 9: Composition of total education expenditure by Levels I Health 3.15 Inhealth, it is difficult to deconstruct the budget precisely according to the differentlevels of care or according to the key priority programs of the government. It appears that the health budget is 18 more or less evenly distributed between centraVhospita1 care, primary care and medical supplies (Table 12). Depending on the distribution o f medical supplies across levels o f care, the orientation and strategic alignment o f the health budget could look very different. Table 12: 2008/09 health budget by level of care and type of expenditure (share) Ministry (central) 21.l0/0 Administration 4.8% Other priorities 16.3% Hospitals 13.6% Hospitals: national referral /specialist 6.5% Hospitals: regional; 3.1% Hospital: district 4.0% Medical supplies 32.7% Local/regional expenditures(primary healthcare) 32.6% Total 100.0% Water 3.16 The internal consistency o f budget allocations with government policy objectives in the water sector i s improving. The budget reflects changes in the role o f the government, both at the level o f the Ministry o f Water (MOW) and local governments - with more funding allocated to local governments in line with a more decentralized service delivery (Figure 10). In the MOW, the departments focusing on coordination, policy and planning and water resource management have seen their budgets increase sharply. Figure 10: Government allocation to rural & urban water sub-sectors (TSh. millions) 120,000 100,000 80,000 60,000 40,000 20,000 Urban Rural Other 1 Devt. Transfers Devt. Capital Devt. Recurrent Portion Recurrent Costs 1 3.17 The largest part o f the MOWbudget is allocated to the urban water supply and, to a lesser extent, to the water resource management sub-sectors. A positive development is that a larger part of overall government funding is currently allocated to the rural sub-sector, which in view o f the total population living in rural areas and their lower levels o f access, results in a more equitable distribution o f funds. Nevertheless, despite the decline in bias toward rural water supply (and sanitation), the average budget allocation to the sub-sectors is still tilted in favor of the urban sub- sector, which receives 7,767 TShs annually for every urban resident compared with 3,550 TSh per year for rural residents. 19 Social sectors: common issues 3.18 A deterioratingtrend inthe budget composition o f the health and education sectors is the rise of allowances. The Ministry o f Education and Vocational Training and the Ministry o f Health and Social Welfare have entered the group of top five beneficiaries o f allowances in 2008/09 budgets, coming from the sixth and seventh ranking the previous year. Allowances in these two ministries have increased both in share of total allowances and also as a percentage of ministry's personnel emoluments in 2008/09 compared with 2007/08, It i s not very clear whether the activities in the two ministries involve paying a lot of allowances, as is the case for the National Assembly Fund and Ministry of Foreign Affairs. Inthe water sector, only 55 percent of total staff expenditure is made up of wages and salaries (up from 50 percent in 2006/07); almost all o f the remaining staff costs consists of personal allowances. This translates into an overhead cost on basic salaries of 82 percent. This constitutes a decline in the past three years, as in FY2006/07 the overhead costs were higher, at 97 percent, but the current number i s still very high and indicates that the pay reform process still has some way to go inthe sector. 3.19 Inthe water sector, the resourcesfor maintenance represent one third of the total budget and surpass the total resources allocated to the constructionhehabilitation o f infrastructure. By contrast, maintenance spending represents only 1 percent of total spending in the education and health budget. This latter trend is particularly worrisome given the dilapidated state o f much of Tanzania's social infrastructure. As the GOTi s steppingup its efforts to build classrooms and health centers, it will be critically important to also increase the share of budget resources allocated to the maintenance o f these new buildings, not to mentionthe stock of existingfacilities (Figure 11). Figure 11: Maintenance and Infrastructure spending in selectedsectors (in Bil. TSh.) Roads 3.20 The budget allocation in transport is generally in line with sector priorities, with trunk road sub sector as a priority in the transport sector. However, local roads have not been appropriately discussed in the sector strategy and, as a result, are receiving little budget allocation: the budget allocations for trunk and regional roads were, respectively, five and eight times higher in FY07/08 and FY08/09 than the one for local roads, and it is clear that funds for local roads are still very low compared with actual requirements. 3.21 In order to secure enough resources for the maintenance budget, the Fuel Levy, which is the main source of finance for the Road Funds, was increased. This significant increase in the Road Fund has led to a dramatic decrease in the gap between maintenance needs and actual funding in the road sector (Figure 12). 20 Figure 12: Road maintenanceneeds and budget (Bill. TSh) 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 -tNeeds -2-MTCEBUDGET Gap Source: RoadFundReportin the 2"dJoint sector Review, October 2008 ALLOCATIONBETWEENCENTRALAND LOCAL GOVERNMENT 3.22 The Decentralization by Devolution (D by D) process is carried over through five ministries (health, education, water, infrastructure and agriculture) and Prime Minister's Office - Regional Administration and Local Government (PMO RALG). 3.23 The share of resources devoted to LGA expendituresas a proportion of total GOTbudget has slightly decreased. The share of LGA expenditures in the 2008/09 budget (excluding CFS) is 20.8 percent, compared with 21.5 percent in 2007/08. However, adding salary adjustment for agriculture, education, health and water staff in LGA into the total spending, the share of LGAs in the 2008/09 total budget reaches 21.4 percent, which i s still slightly lower than the previous year's figure. This shows that there has not been any movement in transferring more budgetary resources to LGAs inthe 2008/09 budget. Should this trend persist, in the next 2 years Government will not reach its objective o f transferring25 percent of budgetary resources to LGAs. 3.24 Wages represent 61 percent o f the overall LGA budget. Their share slightly increased as compared with 2007/08. However, the composition o f the wage bill has changed, as the share of allowances has increased by 2 percentage points o f the total wage bill at the expense o f the resources allocated for the payment o f basic salaries. The share o f total LGA recurrent spending has seen a 2 percent increase, from 83.2 percent to 85.percent, following a 3 percent rise in the maintenance budget. 3.25 Goods and services represent 17.5 percent of total expenditures, of which 10.3 percent are allocated to the purchase of education and medical supplies. The proportion of the LGA budget allocated for the purchase of goods and services remains stable as compared with 2007/08. 3.26 The share of capital expenditure represents barely 12.7 percent of total LGA budget as the bulk of the constructionhehabilitationwork is carried out at the center level. Infrastructure spending has dropped since last fiscal year from 9.8 to 7.7 percent as the share of studies has surged; in 2008/09, it represents one third of capital expenditure. 21 RECOMMENDATIONS 3.27 The shares of MKUKUTA allocations in the 2007/08 and 2008/09 budgets are 70.6 percent and 70.8 percent, respectively. The slight increase in share o f MKUKUTA in 2008/09 is due to an increase in ministries, departments and agencies (MDA) wages, since MKUKUTA shares without MDAsdecline from 64.5 percent in2007/08 to 62.0 percent in 2008/09. It is therefore important that the government have a clear commitment to protect MKUKUTA allocations. 3.28 The applicable definition o f MKUKUTA allocations applies only to other charges and the development budget. The MDA wages and transfers to LGAs are not allocated according to MKUKUTA.However, MDA wages and transfers to LGAs are important elements for implementing MKUKUTA, especially public service delivery in health and education. It is important that MKUKUTA definitions be redefined to include MDA wages and transfers to LGAs in order to be strategically relevant. 3.29 Although the Planning and BudgetGuidelinesprovide strategic direction in preparation of the budget and the MTEF, they don't seem to show a clear medium-termstrategic direction in terms of allocation among three clusters. Allocations have moved more toward 40:40:20 shares despite government intentions o f boosting economic growth. It is important, therefore, that the government express a clear medium-term strategy, which is economic growth through MKUKUTA cluster allocation, and strive to implementit. 3.30 Allocations to the transport sector, in particular to the trunk road sub sector, have continued to increase in recent years, with substantial funding from local resources. The Transport Sector Investment Plan has proven a useful anchor for medium-term budgeting in the transport sectors by providing a costing o f the sector strategy and some form o f prioritization. This experience could be extended to other sectors, such as agriculture. 3.3 1 Although the share of allowances in the overall wage bill has decreased over the past two years, for some sectors, the share has increased. For instance, the education and health ministrieshave entered the group o f the top five allowance receiving ministries. Most services provided by these sectors are at the LGA level, but most duties facilitating allowances are paid to staff at the central level (ministry). Hence there is a need to control the proliferation of allowances in the social sector ministries(especially the healthand education ministries). 3.32 Slightly less than 1 percent of the allocations for social sectors are allocated to infrastructure maintenance. With the current government effort toward construction of social infrastructure, such as classrooms, teacher houses, and health centers, maintenance cost should go up in the future. This implies that the government should also increase the share of maintenance in health and education budgets in order to ensure these infrastructures' good status. 3-33 Although the government is committed to decentralization by devolution policy, transfers to LGAs have stagnatedat around 20 percent of the budget over the past two years. This poses a serious challenge to the government in terms of achieving its target, which implies further effort would be required in order to reach the 25 percent objective of LGA transfers. 22 4. IMPACTRESULTS BUDGETEXECUTIONPERFORMANCE Timeliness and completeness 4.1 A key factor affecting the performance of public services funded by the budget is the timeliness and completeness in the release offunds to the service delivery units.This section analyzes overallbudget execution interm oftimelinessand completenessof release of funds to spendingunits. More emphasis is also put on development budget execution which has performed poorly over the recentpast. 4.2 Recurrent budget execution continues to perform well in 2007/08, both in timeliness and completeness. This indicates that the basis for delivery of routine services should be good, although two important qualifications apply: (i)some importantrecurrent resources for service delivery, such as drugs, are budgeted under the development budget; (ii)at the LGA level, "execution" actually measures releases of funds from the central government to LGA, and not actual spending. It is therefore important to have more information on actual releases at the service delivery level, for instancethroughthe regular use of such instrument as PublicExpenditureTrackingSurveys'. 4.3 There is a worsening in the overall execution rate and timeliness of the release of development funds, as shown in Figure 13 with the execution rate for the development budget (both regions and MDAs) falling below 50 percent in2007/08 from slightly over 50 percentin 2006/07. Figure 13: DevelopmentBudget Execution- 2006/07 and 2007/08 2006/07 200718 41 42 43 44 41 42 43 44 . I C O n g m a l estimates +Exchequer releases .ICOngmal estimates +Exchequer releases Allocation .IC-Expenditure Allocation -Expenditure Source: MoFEA Expenditureflash reports and author'scalculations 5 PETShavenot beendone over longperiod 23 4.4 An execution index calculated from the IFMIS rather than the flash reports data shows a higher executionrate of 56 percent for the development budget (an execution gap of 44 percent), but also indicates a significantworsening inthe execution rate ofthe development budgetfor 2007/08 for MDAs (Table 13). Table 13: Overall budget execution gaps I I I 2006/07 I 2007/08 Overall execution gap Deviationindex6 Overall executiongap Deviationindex 1 ~ Recurrenttotal .. I i II -0.1% 9.1% ~ MDAS 1.4% 4.5% 1.O% 6.4% ~ Regions I .. I -3 .o% 16.2% Developmenttotal .. I I 44.4% 46.0% MDAs 33.0% 36.2% j 49.6% 49.8% Regions I 16.1% 25.2% ~ Source: MoFEA, IFMSItemizedexpenditureby warrant holder and author's calculation Economic Nature and FundingSource 4.5 The previous analysis reveals that the execution of the development budget stills remains a major challenge. This section attempts to identify the causes ofthe problem.The development budget has two distinct features: (i)it is mostly funded by donors through project and baskets: and (ii) although it contains a good deal of current expenditure, the bulk of the development budget is made of capital expenditure such as infrastructurebuilding and rehabilitation, and equipment acquisition. Executionof capital investment programs requires superior planning and implementationcapacities as compared to current spending programs. This analysis separates the effects of the two features in order to understandmore what is drivingthe low execution ofdevelopment budget. 4.6 To separate planningand implementationcapacities issuesfrom fundingproblems in budget execution, development expenditure is reclassified by true economic nature. Specifically, current spending relatedto development programs (wages, goods and services and maintenance, etc.) were distinguished from actual capital spending (infrastructure construction and rehabilitation, project related studies, equipment acquisition, etc.). Execution rates were then computed and analyzed according to the two dimensions: (i)by economic nature (current vs. capital spending), and (ii)by fundingsources (local vs. foreign) (table 12). 4.7 The analysis reveals three features of development budget. First, there is a sizable amount of current spending in the total development budget, accounting for 47.5 percent of the 2007/08 (Table 14). `The weight of current spending in sectors' development budget differs widely, with health havingthe highest share (83 percent) while roadshavingthe lowest share (9 percent). 4.8 Second, the bulk of current spending in the development budget is financed by foreign resources (41.3 percent foreign vs. 6.2 percent local while in capital spending local funding is dominant. The picturevaries widely across sectors. While in roads and energy sectors local funding of development budget is dominant, agriculture, water, education and health sectors foreign funding i s dominant. The analysis reveals that foreign resources are primarily directed toward agriculture, water andthe socialsectorswhereas localfundingis relativelysignificant inroadsand energy. Deviationindex is the ration of sum ofthe weightedabsolute difference betweenoriginalbudgetestimates and actual expenditureto total original budgetestimates. Inthis table it is calculated separatelyfor recurrent and developmentbudgetsas well as MDAsandregionalvotes. 24 Table 14. MDAs DevelopmentBudget Execution-2007/08 Sectors :Itern Shares of total Execution rates Forelgn Looal Total Forelgn Looal Total Overall :Current 41.3 6.2 47.6:: 47.6 64.6 48.4 :Capltai 24.2 28.3 62.6 23.6 67.8 47.4 !Total 66.6 34.6 100.0 38.6 66.4 46.2 Agriculture :Current 40.2 8.6 46.8 82.1 92.3 87.8 :Capital 29.7 7.1 36.8 83.2 93.5 83.2 :Total 86.2 13.8 100.0!;::: 82.9 92.7 84.1 Educatlon ;Current 56.9 25.9 63.9; 90.0 97.2 90.8 ;Capital 16.1 20.0 36.1 54.9 86.1 72.2 :Total 73.1 26.9 100.0:; 82.3 89.0 84.1 Health :Current 81.8 0.9 82.7: 65.4 83.4 65.6 :Capital 14.6 2.7 17.3 13.3 68.2 21.9 !Total 96.4 3.6 100.0i: 59.4 72.0 59.8 Energy :Current 9.8 7.5 17.3 18.8 12.1 15.9 :Capital 27.1 55.6 82.7 20.7 1.4 7.8 :Total 36.9 63.1 100.0 20.2 2.7 9.2 Roads :Current 4.7 4.7 9.4 6.3 88.0 46.9 :capital 48.1 42.5 90.6 9.7 95.6 50.0 :Total 52.8 47.2 100.0 9.5 92.7 49.6 Water :Current 36.1 1.9 38.0 43.1 95.5 45.8 :Capital 32.8 29.2 62.0 36.0 95.2 42.2 68.9 31.1 100.0::j:j;::: 40.3 95.5 40.3 Source: MoFEA, IFMSdata and author's calculations 4.9 Third, the execution rates among foreign and locally financed current development spending are not significantlydifferent (47.5 percent for foreignvs. 54.5 percent for local). Note howeverthat these rates are still far lower than the execution ratesof the recurrent budget (48.4 percent for current spending in the development budget vs. 98 percent in the recurrent budget). This suggests that the nature of expendituremattersthan fundingsource. This is shown by the overallexecution rate for true capital spending (47.4 percent ) which is not significantly different from that of current spending (48.4 percent) inthe same development budget. The analysisreveals further that, execution rate is far lower for foreign funded capital spending (23.5 percent) compared to the locally funded (67.8 percent) within the development budget. 4.10 While the previous analysis links the problem of low execution to funding modalities, the sector analysis seems to highlight difficulties related to sector capacity to execute large investment projects. For example, although the bulk of the development budget in agriculture, education, and healthsectors is financed by foreignresources, executionrates are relativelyhigh.By contrast, sectors where foreign financing is less dominant but where capital spending accounts for the bulk of expenditure such as energy, roads and water execution rates are significantly lower. These trends underscorethe importanceof the issueof investment planningand implementationcapacity. 4.11 The two sets of conclusions confirm that the problem of the under-execution of the development budget is a compoundedoutcome ofthe two features ofthe budget. First, is the problem of capacity to execute capital investment projects. Second, are the funding patterns and modalities. Weak capacity to execute capital spendingmay be attributedto inadequate capacity in key sectorsto design and implement quality projects, from feasibility and economic evaluation studies to the physicalimplementationand monitoring. These aspects, in turn, reduce the capacity to absorb funds. The problem worsens when releases are untimely and resource levels are unpredictable - a phenomenonnotedoften inthe case of donors funded interventions. Underlying Causes of the SpendingGaps 4.12 Under-reporting of spending for projects: Most of large infrastructureprojects,especially in roads and energy, are funded by donorsthroughdirectto projectfundingmodality(D-Funds). This 25 funding modality allows for the budgets of these projects to be recorded in the IFMS but release and spending data is not integratedin the system. It is estimated about 84 percent of such projectsdon't havetheir release and spendingdata integrated inthe IFMS.This is major problemfor the Ministryof Infrastructure Development (MoID), where, for instance in 2006/07 about US$ 100 million was wrongly-leftunaccountedfor accordingto EMS. 4.13 The problem of under-reporting is partly relatedto disbursement procedure where releases and spending for D-funds are supposed to be recorded in the IFMS through Dummy Exchequer.A recent study7 has concluded that this system is not functioning well and that very little data is captured by dummy exchequer. Although dummy exchequer system is good technically, the main actors (for exampleMODand TANROADS) do notappearto have incentivesto apply it adequately. 4.14 Delays in release development funds: The spending patterns of development budget are heavily linkedto release patternof funds. Fundsthat are released late in the year are likely not to be executed on time. Similarly large budget reallocationsduring the latter part of the financial year are likely to have a similar effect. For instance, whilst LGA budget executionperformancewas generally good in 2006/07, the last quarter of the same year experienced poor performance. The data indicates that substantial amounts of funds disbursed to LGAs in that quarter-particularly for recurrent expenditures-werenot utilized. 4.15 The releases of development funds to spending agencies are on quarterly basis subject to submission of quarterly progressreports. For large contractingsectors certificateof completionofthe project is also a requirement to trigger release of funds from the Treasury. These progress reports serve as tool for assessing the need for the release of funds within a cash management context. However, submission ofthese reports in the first quarter of the financialyear tends to be a significant challenge for the spendingagencies. This is partlybecausethey are still engaged in finalizationof the budgetingprocess in the first quarter. Non release of development funds in the first quarter due to lack of progress report has been a major cause lower execution of development budget in the first quarter of fiscal year. A potential way to overcome this problem is for the MoFEA to waive this requirement in the first quarter; especially to MDAs because they remit unspent funds back to treasury at the end of the financialyear and beginthe first quarter of the next financialyear with clear balances. 4.16 Basket fundingrequirements:Basket funds (loans and grants) accountedfor 18 percentof the total development budget in.2006/07. They are a significant source of development fundingfor some key sectors (health, agriculture, education, water, local government, etc) and most of the core reform programs(PFMW, LocalGovernment ReformProgram- LGW 4.17 LegalSector ReformProgram - LSW, etc). Mostbasket fund mechanisms involvea two step disbursement process. Firstly, funds are deposited by DPs into a holding account once a specific set of requirements have been fulfilled. Secondly, the funds are withdrawn by government in to the exchequer spending account after the fulfillment of another set of requirements. The precise requirements are specificto eachbasket fundingmechanism.Delays inthe flow of funds can occur at either or bothof these stages. 4.18 The sample of three basket funds (health, agriculture and Local Government Capital Development Grant - LGCDG) show inconsistent approach in the frequency of approval for disbursements; and the conditions for approval of disbursements to and from holdingaccounts, even 7 Integrating Aid intoPlanningandBudgetingMechanismof the GovernmentofTanzania,Universityof Dar es Salaam, March2007. 26 though all the funds operate within the same financial management context. It is true that all the basket agreements require effective implementation of monitoring and audit processes. However, some are specifically linked to disbursements while others are not. In the sample of baskets, an approved annual plan, budget and cash flow plans prior to disbursement are requirement. They also requireperiodic monitoringof implementationandperformancebefore disbursing. However, the type and frequency of reporting and audit requirements vary significantly. For instance, reporting requirements vary so that at any quarter in a financial year, a planningofficer in local government councilmay be requiredto prepare performance reports for: Agriculture Sector DevelopmentProgram(ASDP)-the mostrecent quarter (n-1) 0 LGCDG-the quarter beforethe lastcomplete one (n-2) 0 HEALTH-at six monthintervals(n-3) 4.19 Since the most of the performance reports require aggregated data from all of the MDAs, regions and local councils that receive basket funding at short intervals, the quality of these reports will necessarily be affected, diminishing their usefulness as a management tool. Additionally, requiringall of this reportingto take place on a quarterly basis become a big challenge and impairs disbursement of the funds. For instance, in health basket where reporting requirement is based on review of performanceon longer term basis (six month), disbursementsfrom donors were 75 percent in first quarter of 2006107. On the contrary in ASDP and LGCDGbaskets less than 25 percent of the budgetwas releasedinthe same period. 4.20 Demandingadministrativeprocedures: A major obstacle for the timely flow of funds that has been identified by this analysis is the administrative procedures associated with processing payments within spendingagencies (Box 2). Some spending units have developed a large number of administrativesteps requiredto process a regularpayment that can take two weeks to a month if one wouldcount one workingday for each step inthe processdepicted inthe Box 1. The large number of administrative steps for the verification of transactions such as the ones depicted below mark a departure from the standard (more streamlined) procedures set by the MoFEA, and may reflect a weak internal audit function within the vote. In addition to this, there is lack of clarity of the requirementsof various steps as there is no operational or proceduralmanual that guides this process within the spendingagencies. 27 Box 2 Steps involvementin securing payment within the Ministry of Health Subsequentto the procurementprocess, once a contract is inplace,the follow steps needto betaken inorder to secure the Local PurchaseOrder (LPO) andto trigger payment: 1. Followinga request from a line department,PMUpreparesrequestfor LPO 2. Director / Departmentheadsigns off onrequest for LPO 3. Permanent Secretary signs off onrequest for LPO (ifamount exceedsTSh 1million) 4. AccountsDepartmententersthe purchase into the (manual)vote book 5. Request for LPOis sent to the ChiefInternalAuditor (CIA) for `examination' 6. Request is sent to the `machineroom' andentered intothe IFMS 7. The LPOis generated 8. LPO is sent to PMU for signatures 9. LPO is sent to CIA (examination)for signature 10. LPO is sent to ChiefAccountantfor signature 11. PMUdeliversthe LPO to the supplier 12. Upondelivery of goods or services,a delivery noticeandinvoiceare submittedto PMU 13. The invoicewithsupportingdocumentationis passedon to ChiefAccountant 14. The paymentrequest is entered intothe IFMSbythe machine room 15. The check is printed by the Treasury (Accountant General) and provided to the supplies by PMU UnderlyingCausesof the ReleaseGaps 4.2 1 Weak cash flow management system: The cash management system is still nascent and has not been fully implemented. Monthly cash flow projectionsare not beenproduced by all the spending agencies, which makes it impossible to compile the full cash flow picture and to allocate resources accordingly. Even for those spending agencies which have produced cash flow plans they are credible inthe sense that they tend to frontload their resource requirements, makingthem difficult to implement under a cash budgeting framework. Moreover, the draft report on the implementationof the cash management system' indicates that the lack of an established administrative structure and expertise to handlethe roll out o fthe system are the underlyingcauses for the lack of a coherent cash management system. These may largely be teething challenges to this new process. 4.22 Nevertheless, strengthening the cash management unit needs to be to be a priority for the government. This includes spending units producingrealistic cash flow plans at the beginningof the financial year and tracking what happens to them during the year. In addition, the integration of the cash flow forecasts with the relevant module of the EMS should be pursued in order to enhance the coherence of the systems. Currently, the cash management or procurement plans are note captured in the IFMS, where a pro rata allocation (divide by twelve) of the budget acts as the monthly budget plan. Since monthly releases do not tend to follow a cash flow plan, a time consuming resource allocationprocess takes place each month, causing delays in the deployment of resources. 4.23 Unrealistic budgeting: Reliability and relevance of the MTEF projections and budget estimates are important elements in execution of the budget. Since foreign resources finances more than 65 percent of development budget its predictability, both in the budget and MTEF, is key. Projects and basket funds are the most unpredictable resources, leaving budget support as the most predictable resources. The problem of unpredictability results into either over-budgeting or under- 'The Implementationof CashManagementSystem, MinistryofFinance,Tanzania ,May 2008 28 budgeting. For instance, the local government development budget execution performance in 2006107 was affected by over-budgeting for the Primary Education Development Program (PEDP). While the problem of medium-term aid predictability is widely recognized, some options to deal with this problem have been put forward, including the scenario analysis. It i s important that the government develop some scenarios in response to more or less than expected aid. These scenarios should not be limited to priority investment programs but also should include options on how to adjust recurrent expenditures. EFFECTIVENESS OF PUBLIC SERVICE DELIVERY 4.24 Critical to the evaluation of the budget is analysis of its impact on service delivery. Although this kind of effectiveness analysis requires more micro-level analysis, such as quality surveys, expenditure tracking surveys, and other diagnostic tools, it is possible at a more aggregate level to derive usefulconclusions from matching performance indicators with the evolution o f spending. Education 4.25 In the education sector, the Ministry has provided a first-rate performance report for FY2007/08 that is comprehensive, up-to-date, and candid in this identification of issues. Such an excellent report provides a good basis for linkingbudgets and results. 4.26 Inprimary education, the ministry'sdata show that the net enrollment ratio stalled in2007/08 after many year o f increase (Figure 14). More worrisome, the percentage of cohort completing Standard VI1 has dropped to 65 percent in 2007/08 from 72 percent 2006/07 and 77 percent in 2005/06, indicating a trend that is inconsistent with the universal primary education Millennium Development Goals (MDG). There are minor gender differentials. There has also been a consistent worsening of the pupil-teacher ratio in primary, which has now reached 54:1, although the primary qualified teacher-pupil ratio has shown a significant improvement indicating that the proportion of qualified teachers i s increasing. 4.27 At the secondary level, overall enrollment has continued to increase, to around 25 percent for lower secondary and 1.4 percent for upper secondary. There has been a steady increase in completion rates of lower secondary, up to 94 percent; however, the completion rates of upper secondary education collapsed from 93 percent to 73 percent in2007/08. 4.28 The HBS also provides data on primary and lower secondary net enrollment. Those data, at 84 percent and 15 percent, respectively, are lower than the ministry's data, reflecting possibly an inaccurate registration of pupils' age at the schools and some over-reporting of enrollment as well as normal statistical discrepancies among different sources. 4.29 The data indicate that the objectives of universal primary enrollment and universal primary completion are still problematic and that primary education still needs sustained funding if it is to reach these objectives. The data also raise the question o f why, with continuous high levels of funding, some key indicators o f results, such as net enrollment and completion rates, tuned in the wrong direction in 2007/08. Finally, the collapse of the completion rate in upper secondary education, ifconfirmed, mightbe asymptomof low quality andunsustainableexpansion ofsecondaryeducation inrecent years. 29 Figure 14: Net enrollment ratios-primary, lower secondary, 2001-2007, HBS Dar es Salaam Other urban areas Rural areas MainlandTanzania 1 C@3Primary NER ILowersecondaryNER 1 Source:NBS. Health 4.30 The performance report of the health sector provides some indication of the recent evolution o f the health situation in Tanzania, although very few indicators refer to the 2007/08 period. While the top five causes of morbidity remained stable in relative terms from 2000 to 2006, the top five causes of infant mortality have been retreating, in particular malaria and anemia. The only data relative to 2007/08 show a reduction in the immunization coverage below the MKUKUTA target of 85 percent, which had been reached the previous year. 4.3 1 Complementary information on the recent health status of the population also comes from the 2007 HBS. It shows similar proportions reporting illness, and similar patterns by area (rurabother urban>Dar) between 2001 and 2007. It also shows no changes in proportions consulting any provider when sick (69 percent), but an increase in consultation at government facilities (55 percent to 65 percent). It reports a small increase in proportion satisfied with services in government facilities and fewer reporting lack of drugs. 4.32 The snapshot of the effectiveness of the health sector is mixed. With a sustained increase in the health sector budget in the last 3 years, from 10 percent in 2005/06 to 11 percent in 2008/09, the data seem to imply that, although infant mortality is declining, the overall morbidity burden of the population has not improved, casting doubts on the effectiveness o f primary health prevention. The curative care system seems to be performing better, with fewer people report lack o f drugs in government health facilities. Water 4.33 The water sector performance report contains a comprehensive set o f up-to-date indicators to track spending effectiveness. The documents show an increase of around 10 percent inthe number of rural water points built by December 2007, and a larger increase in the number of urban household connections. The rural water supply coverage is estimated at 57 percent in 2007, and the overall coverage of water services in all urban areas including Dar es Salaam stood at 77 percent in June 2008 (Figure 15). The report concluded that the MKUKUTA objective for rural water coverage was off-track, while the urban coverage objective is possibly on-track, though the reduction of the water sector budget this year may make this more problematic. The estimated access to a protected source o f water in 2007 i s 41 percent in rural areas, 83 percent in Dar es Salaam, and 77 percent in other urban areas. The lower estimates for rural areas are likely to be more realistic than M O Wdata that assume a ratio o f 250 people served per water point. 30 Figure 15: Access to safe drinking water supply per percentof population I Source: NBS. Roads 4.34 The monitoring framework o f the road sub-sector from the joint infrastructure sector review provides a comprehensive and up-to-date set o f output indicators. These show good progress in the share o f roads in good conditions for almost all categories of roads. The document also reports an increase in the length of paved roads by around 500 km in 07/08. These improvements show that the increased allocation to the road sector both for maintenance and construction is being put to good use, although the issue o f cost efficiency, given the recent sharp increase in construction material prices, needs to be reviewed. Agriculture 4.35 The agricultural sector review report provides some physical indicators of the sector, but no output or outcome indicators. The only exceptions are data on crop yields, which are however not up to date for 2007/08 and cover only 3 years, too short to make any inference between agricultural yields and fertilizer use (whichis subsidized by the budget). EFFICIENCY PUBLICSERVICE DELIVERY IN 4.36 Data on efficiency are not commonly produced in many sectors, and more broadly, the budget processinTanzania seems largely unconcernedabout this issue, interms of both budgetary allocation and management.However, given the huge financial needs and the limitedresources, increasingefficiency is an important tool for achieving a betterbudgetpolicy. Roads 4.37 Figure 16 indicates that in the road sector, because of inflation of the price of construction materials, the unit costs of road construction and maintenance have gone up substantially, by almost 40 percent in four years for routine maintenance and rehabilitation, implying that larger budgets do not necessarily translate in potentially greater outputs. 31 Figure 16: Unit Cost per km in Routine and Recurrent Maintenance FY 2003104 FY2004105 FY2005l06 FY2006107 FY2007108 Trunk Road Regional Road Education 4.38 Ineducation, one key indicator of internal efficiency of the system is the repetitionrate, which impacts the cost per student to complete a course of study. The primary repetition rate had been goingdown since 2003 but has increased significantly from 4.4 percent to 4.9 percent between 2006/07 and 2007/08, pointingto a potentially costly decrease in efficiency of the primaryeducation system. Equity inPublicServiceDelivery 4.39 Inequity in budget allocations persists across LGAs, according to 2008/09 budget figures. There is little evidenceof progresstowardaddressingthe inequityin key sectors such as of healthand education. 4.40 The persistent inequity is driven by uneven personnel emoluments budgets stemming from the difficulty of attracting staff to particular LGAs. Government is trying to solve this issue and routinely posts staff to underserved LGAs. However, very few of the staff members recruited actuallytake up their postings, and consequently, the PE budgets continue to reflect staff in posts and not the desiredneeds-basedlevelof staffing. 4.41 LGA educationpersonnelemolumentblock grant budgets for 2008/09 per childaged 7 to 13 are shown below relativeto the budget for 2007/08 andthe formula basedallocation for 2008/09 (Figure 17). The graphshows an increase inthe budgetwith an almost identicalpatternof inequity. Annual personnel emoluments expendituresper 7-13 year old vary from TSh. 33,000 to TSh. 175,000 across LGAs. Ifit were possible to apply the formula, then personnel emoluments expenditure in 2008/09 would have averagedTSh.66,000 acrossLGAs. 32 Figure 17: Educationpersonnelemolumentexpenditure per childaged 7-13 across LGAs 200,000 E 180,000 160,000 " 140,000 PI 120,000 100,000 80,000 60,000 c 40,000 20,000 1 7 13 I 9 25 31 37 43 49 55 81 87 73 79 85 91 97 103 109 115 121 127 4.42 The situation is the same for healthsector personnelemoluments blockgrants budgets, except that there has been only a marginal budget increase between 2007/08 and 2008109 (Figure 18). The healthsector per capita PE budgetvaries from TSh 1,400 to TSh 14,000 across LGAs. It should also be noted that the variation in the health formula line is explained by the fact that the health block grant formula is based on only 70 percent of the LGA population.The remaining30 percent is driven by the number of poor residents (10 percent), district medical vehicle route (10 percent) and under- five mortality(10 percent). Figure18: Health personnelemolumentexpenditure per capita across LGAs - ----- - - . - - _ _ - . 2008109 - Budget 2007108 --bBudget 2008109 1 7 13 19 25 31 37 43 49 55 81 87 73 79 85 91 97 103 109 115 121 127 Highest spend _______ ___-___ Lowest 4.43 Giventhe unevenexpenditures, there are certain LGAsbenefitingand certainLGAssuffering (Figure 19). Some information is providedbelow. It should be noted that a poor rank for education (health) correlates with a poor rank in health (education),which suggests that the problem is with staffing in general and notwith a particularsector. 33 Figure 19: LGA ranked in terms of per capita expenditure budgeted for 2008/09 Top 10 served LGAs Bottom 10 underservedLGAs Per capita aged 7-13 education budget Per capita aged 7-13 educationbudget 2008/09 2008/09 Nkansi (Rukwa) Njombe Urban (Iringa) Bahi (Dodoma) Ileje (Mbeya) Monduli (Dodoma) Kibaha Rural (PwanUCoast) Kondoa (Arusha) SongeaRural (Ruvuma) Bariadi (Shinyanga) Kyela (Mbeya) Kigoma Rural (Kigoma) SongeaUrban (Ruvuma) Ngorongoro (Arusha) Kibaha Urban(PwanVCoast) Tabora Rural (Tabora) Mwanga (Kilimanjaro) Bukombe (Shinyanga) Morogoro Urban(Morogoro) Chato (Kagera) Pangani(Tanga) Top 10 served LGAs Bottom 10 underserved LGAs Per capita health budget 2008/09 Per capita health budget 2008/09 Pangani(Tanga) Bukombe (Shinyanga) Mafia(PwanVCoast) Kasulu (Kigoma) Kisarawe (Pwani/Coast) Rorya (Mara) Mwanga (Kilimanjaro) Mkinga (Tanga) Kibaha Urban (PwaniKoast) Kilindi (Tanga) Ludewa (Iringa) TaboraRural(Tabora) Kibaha Rural (PwaniKoast) Bariadi (Shinyanga) Iringa Urban (Iringa) Kigoma Rural (Kigoma) Ukerewe (Mwanza) Sikonge (Tabora) Bukoba Urban (Kagera) Nanyumbu (Mtwara) 4.44 The distribution o f the recurrent road budget, excluding maintenance, among LGAs is not geographically equal, as it does not correlate with the length of the roads inthe district (Figure 20). ' Figure 20: District recurrent budget and road length 1 25000 1600 1400 200 00 1200 er150.00 1000 -s 800 10000 600 50 00 400 200 0 00 0 Recommendations 4.45 Improve key elements o f the budget execution cycle, which includes streamlining basket funding modalities; streamlining o f internal MDA procedures; improving cash management system; and improving capacity to implement capital investment projects. 34 i. Streamliningofbasketfundingmodalities:Despitebasketfunds operatingunderthe same financial management system, there are a lot of inconsistenciesin frequency of approval and the conditions for approval of disbursement of funds from the holding accounts. While all basket arrangementsrequire effectiveimplementation,monitoringand auditingprocesses, not all these processes are linked to disbursement. Developing a general standard procedural requirement for a well functioningbasket fund arrangement is a key to effectiveexecution of a development budget. ii. Streamliningof internal MDA procedures: While administrativeproceduresfor triggering payment to suppliers are necessary, such measures need to be streamlined. It is understood there are some standard administrative procedures set by MoFEA for effecting payment to suppliers, but some MDAs have added more procedures, which slows down the payment process and execution of the budget. Ensuring MDAs adhere to standard streamlined procedures for effecting payments to suppliers is important for effective execution of the budget. iii.Improvementtothecashmanagementsystem:Itisimportantthatspendingagenciesproduce realistic cash flow plans at the beginning of the fiscal year and that MoFEA completes tracking of what happens to these cash flow within the year. This is a key step in order to improve predictabilityof funds to spending units and also to improvethe cash management process. iv. Improvement in capacity to implement capital investmentprojects:It is importantto improve the capacity ofthe key sectors to design and implement quality projects, from feasibility and economic evaluation to procurement and physical implementation as well as monitoring, especially for sectors where development projects have a large component of capital spending, as in roads and energy. 4.46 Improvequality of expenditure flash reports (includingreliability of the data) giventhat they are key instrument for tracking on a monthly basis the within-year budget execution. This report is prepared by the ACGEN's office but compiled manually from reports generated automatically from the IFMS.Automationofthis reportis recommendedso that is generatedfrom IFMSdirectly. 4.47 Make more regular use of Public ExpenditureTracking Surveys to obtain better information about effective budget execution at the service delivery level. The sector where PETS are suggested to be carried out regularly include education, health, water, and agriculture. The PEFAR 09 work programhas already includedwater and educationas sectorswhere PETSwill be carriedout. 4.48 Continue with planto develop significant resultsindicators for the budget, and restructure budget programs to be aligned to such indicators.It is importantthat MDA and LGA budgets and MTEFs are organized by programmatic approach, with programs drawn from the SP, and that result indicators be linked to programs. This will make it easy to link amount of resources (input) and outcomeh-esults achieved(output). 4.49 Make the discussion of results indicatorsa central element of the sector budget scrutiny.This is a key step to ensure that sectors link resources to results or outcomes, since sectors will have to justify use of the previous year's resource in terms of results or outcomes achieved before making requests for followingyear. 35 4.50 Introduce key efficiency indicators along with results and quality indicators in budget management. It is important to introduce efficiency indicators inorder to ensure that scarce budgetary resources are spent where more results can be achieved. 4.51 To try to solve the inequity issue, further efforts must be made to attract and retain staff in underserved LGAs. Three suggestions have been made by LGA-based government staff during recent field visits: i. The proposed and currently being considered national incentive scheme is fast- tracked and implemented. ii. Anequalizationgrantisallocatedtounder-servedLGAsthatareearmarkedtoefforts focused on the attraction and retentiono f staff. iii. All LGAsreceivetheir PEbudgetbasedonformulddesired postings. Where staff members do not take up their postings, the full funds are still releasedand then can be used as `other charges' to assist in the attraction and retention of staff (for example: equipment for starting a new home, better working conditions, training). 36 PART11: PFMASSESSMENT 37 5. INTRODUCTION OBJECTIVE OF THE PUBLIC FINANCE MANAGEMENT PERFORMANCEREPORT 5.1 The objective ofthis Public Finance Management Performance Report (PFM-PR) is to update previous PEFA indicators and their associated reports to November 2008. Process of preparing the PFM-PR 5.2 In 2004 a PEFA assessment exercise was undertaken by the development partners (DP), using PEFA indicators and scoring methodology before the PEFA Secretariat issued its standard Manual for PEFA-PFM Performance Measurement Framework in June 2005. Later, using the standard PEFA Manual, the PEFA indicators were revisited and scored by different DPs in preparing their individual PFM-related instruments and reports. Also, the DPs have updated PEFA indicators twice, but these updates were limited to the scoring of indicators only, and no comprehensive PFM- PR reports were prepared. In May 2007 the Public Finance Management Working Group (PFMWG) of the DPs, with the assistance of a consultant, conducted a full PEFA exercise. Its report, including a PFM-PR was drafted in July 2008. Comments were received from the Peer Reviewers, the PEFA Secretariat and other stakeholders. 5.3 With the assistance of a short-term consultant recruitedjointly by the World Bank and EC Delegation, and in cooperation with government officials, the 2007 field work data and accordingly its July 2008 PFM-PR was updated in November 2008, and the stakeholders' comments have been addressed. In the absence of a full PFM-PR in the indicator updates prepared in the past, a comparison and explanation of differences between the scores of the PEFA indicators in this report with those recorded in past reports by using summary tables only, may not prove to be firm and/or de~endable.~ The methodology 5.4 In line with the objective of this PFM-PRYthe PFMWG with the assistance of a short-term consultant updated and finalized this report, preparatory work of which had been conducted earlier as mentionedabove. Comments of the institutions on the earlier draft were instrumental in finalizing this report. As in the July 2008 version of the report, the government officials have facilitated the updating and finalization of the report, and whilst not having an input in the scoring o f the indicators, they have been central in supplying the information and updates. In this regard, whenever possible, evidence in the form o f reports was obtained and quantitative data sought. Also the team discussed in detail the qualitative descriptions of events and processeswith the officials. The scope of the assessment 5.5 PEFA exercises in Tanzania were initially planned to be separately conducted for the central government, local governments, and public enterprises. Whereas an exercise was conducted in 2006 for local governments in the context o f a donor fiduciary assessment and a report was prepared, application of the PEFA Manual to the public enterprises was not fully possible. This report covers It should also be noted that comparing the status of PEFA indicators in this report with those of the 2004 PEFA exercise is not helpfil due to different methodology and definitions that were used in 2004 (PEFA pilot period)before the final manual was issuedby the PEFA Secretariat inJune 2005. 38 the central government operations, andthe issues of local governments and public enterprises are only visited in relevant indicators as recommended by the PEFA manual where they have fiscal relations with the central government, and in the context of fiscal risk assessment and transparency and timeliness of fiscal transactions. 39 6. COUNTRY BACKGROUNDINFORMATION ECONOMICSITUATION Country context 6.1 Tanzania is a low income country with a population of 41.5 million people in 2008." The country's economic performance has been stable. Grounded in prudent macroeconomic policies, growth averaged 7 percent during 2001-07, outpacing the average for sub-Saharan Africa. Inflation remained moderate during this period, although recent global fuel and food price increases pushed inflation to 9 percent inthe first quarter of 2008. Government spending has experienced extraordinary growth since 2001, financed by a significant broadening of the revenue base and scaled-up donor assistance. By limiting the government's use of. domestic financing, fiscal policy helped to ease inflationary pressures and provided room for a rapid expansion of credit to the private sector. Extensive debt relief and a major build-up of international reserves have reduced external vulnerabilities.'' Overall government reform program 6.2 Tanzania's National Strategy for Growth and Reduction of Poverty (NSGRP), known as the MKUKUTA (Mkakati wa Kukuza Uchumina Kupunguza Umaskini Tanzania) was designed in June 2005 for implementation over the period 2005-2010. It is the successor to Tanzania's Poverty Reduction Strategy Paper (a first generation Poverty Reduction Strategy Paper (PRSP), formulated in 2000) and builds on Tanzania's Development Vision 2025, especially in its emphasis on growth and long-term strategy for reducing aid dependence. MKUKUTA has an increased focus on equitable growth and governance, and i s an instrument for mobilizing efforts and resources toward targeted poverty reduction outcomes. MKUKUTA includes targets for poverty reduction outcomes that are consistent with, and indeed in many cases go beyond, the MDGs. MKUKUTA identifies three clusters of broad outcomes: (i)growth of the economy and reduction of income poverty; (ii) improvement o f quality o f life and social well being, and (iii)enhanced governance and accountability. Rationale for PFMreforms 6.3 Continuous PFM reforms are recognized as key to achieving the aims of the MKUKUTA. The PFM reforms cover all stages of the system from planning and budgeting to budget implementation, control, auditing, and external oversight. The Government has announced that it seeks to achieve allocative efficiency by (a) ensuring aggregate fiscal discipline and accountability, (b) allocating resources in accordance with government priorities, and (c) promoting efficient service delivery through enhancedpredictability and availability o f medium-termresourcesfor the MDAs. IoBased on the "country data and statistics" information available on the World Bank website for 2006 and calculatingan annualpopulationgrowthrate of2.5 suggestedinthe same source. I'IMFWebsite-Tanzania: Third Review Underthe Policy SupportInstrument-Staff Report, June 2008. 40 BUDGETARYOUTCOMES Fiscal performance 6.4 Between 2005/06 and 2007/08, Tanzania's overall fiscal performance has improved. Domestic revenue grew by 3.4 percentage points to 16.0 percent of GDP. External grants (direct budget support and program support, including basket grants and project grants) grew by 1.6 percentage points, reaching 7.0 percent of GDP. Expenditures remained stable in this period, and fiscal deficit and its financing as a percentage of GDP was reduced from 5.0 percent to 1.6 percent of GDP. Thanks to external concessional loans for financing the deficit, net domestic borrowing in 2007/08 became negative, thereby reducing stock of domestic debt (Table 15). According to the 2008/09 budget speech, a net zero domestic financing policy will continue in 2008/09. On the other hand, the government faces a fiscal risk with about 30 percent of its total revenue coming from external grants. Moreover, given the fact that from a macro-fiscal perspective there is no room for domestic non-inflationary borrowing, almost the entire budget deficit i s financed by concessional external loans. 2005106 2006107 2007108 Actual Actual Actual" Total revenue 18.0 19.4 23.0 - Own revenue 12.6 14.4 16.0 - Grants 5.4 5.0 7.0 Total expenditure 23.0 23.5 23.0 --Interest Non-interest expenditure 21.7 22.4 21.8 expenditure 1.3 1.1 1.2 Primarydeficit -3.7 -3 .O 1.2 Aggregate deficit (incl. grants) -5.0 -4.1 0.0 Adjustment to cash13 -0.5 -0.9 -1.6 Overall deficit -5.5 -5 .O -1.6 Net financing 5.5 5.9 1.6 - external 3.3 3.8 3.2 - domestic 2.2 2.1 -1.6 Allocation of resources 6.5 In the absence of a functional classification of expenditures in Tanzania's budget and accounting systems, it is difficult to provide a clear picture o f the allocation o f government revenue to internationally-recognized government operations (indicator P-5 for details). A data bridging exercise from the existing administrative and economic classifications to a standard functional classification does not seem to be very helpful either, due to several assumptions that may not be stable and reliable over time. Indirectly, however, the economic classification o f expenditures (Table 16) demonstrates a substantial increase in development expenditures, and knowing that these expenditures are mainly allocated to social and economic services, it may be concluded that the composition of expenditures over the last three years has moved these kinds of expenditures from 5.7 percent to 8.0 o f GDP. This l22007/08 data i s preliminaryin accordancewith the data source. l3Unidentifiedfinancing(+)/expenditure (-). Includesexpenditurecarryover from the previous year 41 also may be verifiedby increasedexternal grants and concessional loans, which are typically directed to social and economic services, especially those which are based on programs and projects. However, since recurrent expenditures for operations and maintenance are not classified on a functionalbasis, this alone does not providea full picture. 2005/06 2006/07 2007/08 Actual Actual ActualI4 Totalexpenditure 23.0 23.5 27.0 Recurrentexpenditure 17.3 17.3 15.0 -Interestpayments 1.3 1.1 1.2 I -Goods and services and transfers I 12.1 I 11.1 I 8.8 I Developmentexpenditures 5.7 6.2 8.0 - Domestically-financed 1.8 2.6 4.3 -Foreign-financed 3.9 3.6 3.7 THELEGAL INSTITUTIONALFRAMEWORK PFM AND FOR The legalframework 6.6 The roles and responsibilities, accountability of spending agencies, transparency requirements, and sanctions arrangements are specified to different extents in various pieces of legislation: the Constitution; the Public Finance Act; the Public Procurement Act; the Local GovernmentFinanceAct; the Loans, Grantsand GuaranteesAct, and a new Audit Act. 6.7 Chapter 7 of the Constitution of the United Republic of Tanzania (1977) outlines the legislativefunction and the roles of various bodies involved in the management of public finances, specifically the National Assembly (legislature), the President (executive) and the Controller and Auditor General. 6.8 The Public Finance Act (2001, revised in 2004) and its subsidiary instrument (regulations 2001, revised in 2004) defines in great detail the roles, functions and responsibilitiesin management of government revenue and expenditure (the Minister of Finance, the Paymaster General, the Accountant General, the Accounting Officers and Warrant Holders in ministries, departments and agencies, as well as the ControllerandAuditor General). They also definethe accounting, controland reportingsystems. 6.9 A new Audit Act passed the National Assembly and was made public in a September 2008 gazette. It i s expected to bring about wide-ranging improvements in the external auditing task in the future, including further independence of the NAO, enhanced engagement of the PAC of the National Assembly in the oversight processes, and response of the executive government to the NAO's findings. Presently,the NAO is draftingthe enablingregulationsof the new law. 6.10 The Public Procurement Act (2004) repeals the Public Procurement Act of 2001 with a view to make better provisions for the conduct of public procurementwith the establishment of the public procurement regulatoryauthority, tender boards, principlesand methods of procurement and dispute l42007/08 data is preliminary actual in accordance withthe data source. 42 settlement.The enablingregulationsofthe act were updatedin2005 with a focus on the selection and employment of consultants and outlines of specific guidelines for their selection, recruitment, and payment. 6.11 The Local Government Finance Act of 1982 (as amended in 2000) and the Local Authority Financial Memorandum of 1997 require each council to advertise in the media andor post information on the council notice boards key information, including: receipts of funds from the government, expenditure, statements, budgets and signed audited accounts, and tender advertised. They also requireallowingthe publicto attendthe full councilmeetings. 6.12 The Loans, Grants and GuaranteesAct (1984), amendedin2003, defines roles, functionsand responsibilitiesin public sector contractingof loans, issue of guarantees, and receipt of grants. This covers the entire UnitedRepublicof Tanzania (URT), though some sections are silent on the position inZanzibar. 6.13 Since 2002 a number of taxation acts were updated, including the Income Tax Act; Value Added Tax Act; Tax RevenueAppeals Act; Gaming Act; VocationalEducationaland TrainingAct; Foreign Vehicles Transit Charges Act; Hotels Act; Motor Vehicles (Tax on Registration and Transfer) Act; Stamp Duty Act; Roadand FuelTolls Act; Port Services ChargesAct; Airport Service Charges Act; andTanzaniaRevenueAuthority Act. The institutionalframework 6.14 As noted in the IMF Report on the Observance of Standards and Codes (2002), fiscal management responsibilities are defined on the basis of a clear separation of roles between the executive, legislative and judicial branches. The Constitution assigns the responsibility for fiscal matters to the executive and legislature; and it also provides the legal basis for appropriating and spending public funds. The National Assembly approves the state budget enables laws for the imposition of taxes, and authorizes expenditure out of the Consolidated Fund. The Cabinet of Ministers, on the basis of authority conferred by the President, is responsible for formulating the budget and submitting it to the National Assembly for approval. The judiciary process and procedures, includingthe compositionofthe courts, are definedinthe Constitution. 6.15 The MoFEA oversees budget preparationand execution. Each year in June, it presents to the National Assembly the Budget Speech, which contains the government's fiscal revenue, expenditure, and financing policies and plans.The Ministry monitors fiscal developments during the year and reports to the National Assembly. The Ministry also formulates and manages revenue policies and legislationthat are presented to the legislature.Its responsibilities include preparing the central government budget; developing tax policy and legislation; managing government borrowing on financial markets; determining expenditure allocations to different government institutions;and transferringcentral grants to local governments. The key features of the PFMsystem 6.16 Tanzania hasa few PFMfeatures that needto be mentioned, as they have some impact onthe analysis ofthe indicators. 6.17 First, apart from the central government MDAs as the first levelorganizationalclassification of the government budget (known as vote), there exist some AGAs, which are regarded as central government agencies under some MDAs, and which enjoy more financial freedom after receiving their bulktransfers from their parent MDA. The AGAs might pose some fiscal risksbytheir decisions 43 inthe form of future largertransfers from the government budget. Their spendingis not subject to the same rules and scrutiny that apply to MDAs. For one thing, some AGAs do not use government standard budgetclassifications. 6.18 Second, the LGAs receive about 95 percent of their resources from the central government under different arrangements, almost all of which can be classified as conditional grants. In other words, the central government has delegated several of its functions to the LGAs while policy and financial aspects of these functions remain at the central level. The LGAs, therefore, in the PFM context, should be regarded as the extended arms of the central government's agencies, and are treated as MDAs with regard to their budgeting, payment and accounting systems. Given this and consideringthe fact that LGAs do not have borrowingpower (except by specific law); they do not pose fiscal risksto the central government, as they financially are treated as MDAs. 6.19 Third, the PESgenerally have commercial status in their budgeting and accounting systems, and therefore can pose potential and actual fiscal risks. This may arise from a need for transfer from the central government's budget to them. both on current and capital accounts in the form of subsidy or capital injections. In TanzaniaAGAs and PEScollectively are referredto as "Parastatals," though they are different organizationsby internationalstandards. 6.20 Fourth, the appropriation structure that is approved by the National Assembly is brief and broadly classified(normallyone vote for one ministry). It provideswide authority to the government to change its operations without reference to the legislature. Although some detailed ministerial budgets are preparedand widely disclosed, these can be changedinthe course of budgetexecution by the executive branch, mainlyby the approval by the MoFEA. 44 7. ASSESSMENT OF THE PFMSYSTEMS, PROCESSES AND INSTITUTIONS BUDGETCREDIBILITY Aggregate expenditureoutcomescomparedwith originalapproved budget (PI-1) 7.1 The ratio o f actual to budgeted total expenditures (excluding interest payments and externally-financed development expenditures, both o f which are subject to substantial variations in most countries) in 2005/06 and 2006/07 have been within normal range (Table 17). In 2007/08 this ratio has exceeded 10 percent. The budget execution reports o f the MoFEA reveal that most variations have been from spending on goods and services in the recurrent budget and domestically- financed development expenditures. A draft World Bank policy note identifies the main reasons for budget implementation deviations o f both recurrent and development budget^.'^ Table 17: Comparison of Originally Budgeted and Actual Expenditures in billions of TSh. 1 2005/06 I2006/07 I 2007l08 1. Originally total budgetedexpenditures (excluding interest I 2,845.1 I 3,563.7 I 4,260.2 paymentsand foreign-financed development expenditures). 2. Actual total expenditure(excluding interest payments and 2,739.1 3,425.2 3,700.6 foreign-financed developmentexpenditures). 3. Absolute difference -106.0 -138.5 -559.6 4. Percentage deviation -3.7% -3.9% -13.1% Indicator Score Brief Explanationand cardinal data used PI-1Aggregate expenditureout-turn In last three years, only in2007/08 did the actual total compared to original approved B expendituredeviate from budgetedexpenditureby budget more than 10 percent. Compositionof expenditureoutcomes comparedwith original approved budget (PI-2) 7.2 There are some big differences between original budgets and outcomes in almost all MDAs. This is partly due to the distribution o f contingencies, more specifically to salary increases duringthe year from a provision under the MoFEA vote to the MDAs. Most o f these differences are due to discrepancies on the development expenditures and non-salary expenditures. In general, development expenditures are over-budgeted or, in the case o f those financed from domestic resources, are cut back duringbudget implementation. Cash restrictions force the government to reduce expenditures on goods and services in the course o f the budget year in almost all MDAs. On the basis o f the figures provided by the AGD on the actual expenditures o f the main votes, and comparing them with the original budgets, these variations have been calculated according to the PEFA Manual (Table 18). l5Draft Budget Execution Analysis for 2006/07, Policy Note, World Bank, September 2008. 45 2005106 2006107 2007108 Variance inoverall expenditure(as defined inPI -1 above) 3.7% 3.9% 13.1% Variance in expenditure composition (in percent)16 32.5% 12.9% 20.8% Excess of variance in expenditurecompositionto overallprimary 28.8% 9.0% 7.7% expenditure(percentagepoints) 7.3 Table 19 indicates that in 2005/06, the variance in expenditure composition exceeded the variance in overall expenditure by 28.8 percent, but this has returned to below 10 percent in the last two years. The unusual variation rate in 2005/06 is related to the votes associated with the ministries o f Infrastructure, Health, Education, Water, and Energy and Mining. This deviation is explained in part as the result o f creatindmerging a few MDAs after the elections in the course o f the fiscal year, the accounts o f which are not fully separated or adjusted inthe actual figures for that year. Indicator Scores Brief Explanation and cardinal data used PI-2 Composition of expenditure In2005/06, variance in expenditurecomposition outcome compared with original C exceededoverall deviation inprimary expenditureby approved budget more 10percentagepoints. Aggregate revenueoutcome comparedwith original approvedbudget (PI-3) 7.4 Actual domestic revenue collection compared with its estimates in the originally approved budget has consistently over-performed in the last three years, with surpluses ranging from 3 percent to 13 percent o f the approved budget (Table 19). This performance can be noted in almost all domestic revenue components o f tax and non-tax categories in the budget execution reports o f the MoFEA. Table 19: Domestic Revenue Performance in billions of TSh. 2005106 2006/07 2007108 Original budget (total domestic revenue) 2,066.8 2,461.0 3,502.6 Actual revenue collection 2,124.8 2,739.0 3,634.5 % of actual collectionto original budget 103% 113% 104% 7.5 It appears that traditionally, governments in Tanzania are rather conservative in revenue projections, thereby providing a safeguard to unexpected in-year expenditures, and preventing possible unwanted budget deficits. It should also be notedthat tax policy and administration reform in recent years, along with better economic performance, have helped enhance revenue performance. Figures refer to the sum of absolute deviations for the largest 20 votes as a proportion of total budgeted expenditure, excluding debt service and externally-financed operations. 46 Indicator Scores Brief Explanation and cardinal data used PI-3 Aggregate revenue outcome In the last three years, revenue collection was compared with original approved A consistently above the approved budget. budget Stock and Monitoring of Expenditure Payment Arrears (PI-4) 7.6 Stock of expenditure payment arrears and any recent changes in the stock. Payment arrears in the last two years have increased. It is widely understood that without monthly cash allocations, the Integrated Financial Management System (IFMS) does not allow for expenditure commitment. However, payments still could be delayed for any reason, including those on expenditures without repeatedcontracts, such as utilities or non-completion o f payment documents at the end of accounting period or supplementary legal claims associatedwith previous contracts due to price escalations. In 2005/06, the stock expenditure arrears as a percentage of total expenditures was minimal, but inboth 2006/07 and 2007/08, these have substantially increased. 2005106 2006107 2007108 1.Total expenditure^'^ 2,739.1 3,425.2 3,700.6 2.Stock of arrears at year-end 13.4 131.9 289.4 3.Percentage of 2 to 3 0.5% 3.9% 7.8% 7.7 Availability of data for monitoring the stock of expenditure payment arrears. Data on payment arrears are collected at the year-end, when final accounts and government financial statements are prepared for external auditing. The AGD receives financial reports from the MDAs in which they are required to report any arrears with a footnote explaining the reason for the accumulation. In a related matter, periodic audits for specific MDAs also are undertaken to verify their arrears prior to clearance duringthe year, the action which by itself indicates the accumulation of payment arrears. Indicator Score Brief Explanation and cardinal data used PI-4Stock and Monitoring of (i)Thestockofexpenditurepaymentarrears Expenditure Payment Arrears constitutes 2-10 % of total expenditure, andthere is no c+ evidence that they have beenreducedsignificantly in the last two years (C). (ii)Dataonthestockofarrearsisconsolidated annually, but they do nothave an age profile (B). I I l7 As defined andrecordedintable 3.1 47 COMPREHENSIVENESSAND TRANSPARENCY Classificationof the budget (PI-5) 7.8 Since 2001, the government has introduced a Government Finance Statistics (GFS)-based economic classification to the budgets of all MDAs. This classification is also fully incorporated into the IFMS and the quarterly budget execution reports. However, use o f a standard and internationally- accepted functional classification of expenditures remains absent from the budget documentation and execution reports with respect to both recurrent expenditures and development expenditures. One challenge has been the continued focus on a traditional sector classification in the development expenditures, which does not match with a GFS-based functional classification. This needs to be addressedalong with the introduction of a functional classificationfor recurrent expenditures. 7.9 In the budget preparation guidelines, the MDAs are requested to classify expenditures according to the NSPRG clusters: (i)growth of the economy and reduction of income poverty; (ii) improvement of quality of life and social well being, and (iii)governance and accountability. This , seems to be an innovative but unusual expenditure classificationthat is not directly linkedto standard budget classifications. Some selective program classifications, especially in externally-financed operations, can be found in some MDA development budgets, but none of these classifications is linked to a standard functional classification. Government has announced that it intends to introduce a functional classification inthe 2009/10 budget. Indicator Scores Brief Explanationand cardinal data used PI-5 Classificationof the budget The budget documentationand execution is based on GFS-basedadministrativeand economic C classifications. No GFS-basedfunctional classification is part of the budget documentation and reporting system. Comprehensiveness of Information Includedin BudgetDocumentation(PI-6) 7.10 The annual budget documentation, including the Budget Speech submitted to the National Assembly, includes the following data: 1. Macroeconomic assumptions, including growth rate and inflation, are briefly stated in the budget speech and further supported by a detailed economic review for the previous calendar year. These are submittedseparatelyto the NationalAssembly, but not as part ofthe budget documentation. 2. Debt stock is included inthe economic review volume, mentionedabove. 3. Prior year's budget outcomes in the same format as the budget proposal. 4. Current year's revisedbudget inthe same format as the budgetproposal. 5. Budget proposal data in summary and details in severalvolumes. Missing informationbenchmarks from the budget documentation are: 1. Fiscaldeficit as defined by the GFS or other internationally recognized standards. 2. Deficit financing and its anticipated composition. 3. Financial assets, including data for the current and previous years. 48 4. Budget implications of new budget initiatives for expenditures, though these are mentioned for revenue. Interestingly, immediate item 1 and 2 above are included in the quarterly budget execution reports, butnot inthe budget documentationsubmittedto the NationalAssembly. Indicator Scores Brief Explanation and cardinal data used PI-6 Comprehensivenessof 2008/09 budget documentationfulfils 5-6 out o f 9 information included in budget B benchmarksofthe requiredinformation. documentation Extent of unreported government operations (PI-7) 7.11 The level of extra-budgetary expenditure (other than donor-funded projects) that is unreported. Budgets and accounts of AGAs, with the exception of transfers to them from their parent ministries' budgets, remain outside government budgeting and accounting systems. This is because AGAs are treated as parastatals and are classified alongside PES,even though they are not public corporations and are financed from earmarked revenue and transfers from the government budget. The MoFEA has the authority to collect budget execution reports from AGAs, but this is normally associated with delays and is not published. AGAs range from universities to the Road Agency or National Parks Agency and several non-for-profitorganizations owned and operated by the government. No data is publishedto indicatethe size of unreported expenditures by AGAs that are financed from own sources; but taking into account their size and number, along with available data in the MoFEA, such expenditures are estimated to be between 5-10 percent of total government expenditure. 7.12 Income/expenditure information on donor-funded projects that is included in fiscal reports. While income/expenditures of loan-financedoperations are included in the fiscal reports using data available in the debt management unit of the MoFEA and the MDA final accounts, there are still some unreported expenditures usingexternalgrant funds. The AGD has recentlyincreasedits attempts in this regard throughadvisingMDAs and providingthem with specific forms for reporting such transactions on a monthlybasis. The AGD then enters this information into the IFMS centrally. However, there are some unreported income/expenditure data from grants where donors directly are spendingand/or providinggoods and servicesto the MDAs or LGAs.The levelofthe latter is far less than 50 percentof all donor grants, even ifNGO spending, which is not classifiedas official aid flow, is taken into account. Indicator Scores Brief Explanation and cardinal data used PI-7 Extent of unreported (i)Extrabudgetaryspendingisestimatedtobebetween government operations 5- 10 percentof totalgovernmentexpenditure(C). C+ (ii)Complete income/expenditureinformationis included inthe fiscal reports for all loan-financedoperationsandat least 50 percentof grant-financedoperations(B). Transparency of Inter-governmental Fiscal Relations (PI-8) 7.13 In Tanzania, about 95 percent of LGA (presently 133 urban municipal and rural district councils) operations are financed by different types of transfers from the central government. This demonstratesthe low revenue baseofthe local governments that in fact is limitedto small amounts of municipal taxes and service charges. The transfers from the central government to the LGAs are 49 mostly sector-based; therefore, they can be classified as conditional grants. In other words, the LGAs must observe sectoral ceilings and limitations but may implement with reasonable flexibility while following the central government's guidelines. In 2007/08 these transfers consisted of: Recurrent block transfers (60 percent), sector basket funds and ministerial subventions (10 percent), and development grants and funds (30 percent). Though under different names, almost all of these transfers are sector-based and fully conditional, with the exception of only 8 percent o f recurrent block grants associated with a general purpose grant allocated for the improvement of local government capacity. 7.14 Transparent and rule-based systems in the horizontal allocation of unconditionaland conditionalgrants from centralgovernment (both budget and actual allocations). In each of the above types of transfers and in each sector covered by them, several quantitative measures, such as population and its composition, number of villages, number o f rural population, and some sector- specific measures initiated by sectoral ministries, are taken into account and budgetary amounts are calculated in great detail. However, these do not constitute a firm formula, and because of the conditional nature o f the transfers, sectoral policies need to be taken into account as well. The LGAs do not have a say in these measures, but they are announced in the local government's budget preparation guidelinesand are published inthe website of the Prime Minister's Office. As for actual allocations, the LGAs are treated like central government MDAs, meaning that in the course of the year their allocations are subject to the government's cash position. 7.15 Timeliness of reliableinformationto LGAs on their allocationfrom centralgovernment for the coming year. Information on the ceilings of LGAs budgets is known normally three months before the beginning of the fiscal year, and in this regard they are treated as MDAs. However, the LGAs are required to receive their Councils' approval before sending their budgets to MoFEA, and then a round of discussions begins between MoFEA and the LGAs. In the event that some other outcome (either ceiling or budget composition) emerges as a result of these negotiations, then the concerned LGAs are required to receive Council approval again. In other words, initially timely data is available to the LGAs on their ceilings, but these are not firm and may change during their budget discussions with the MoFEA. All this is due to the conditional nature of the transfers and the engagement of sectoral policies mandated by MDAs. A balance always needs to be made between central policy-making and decentralized execution, and within changing financial means. 7.16 Extent to which consolidated fiscal data (at least on revenue and expenditure) is collected and reported for general government according to sectoral strategies. Reporting on the local governments' operations is o f two types. First, when the central government makes monthly transfers to the LGAs, it reports the transfers as its outlays, which can be considered satisfactory in the context of in-year fiscal reporting for general government. Second, for their minimal local funds, as well as for their sectoral distribution of their operations financed from transfers, the LGAs report to the Local Government Working Group, a body comprising representatives of the Prime Minster Office, MoFEA, and relevant sectoral ministries.This data is available in less than three months after each quarter on the Prime Minister's Office website. The main users of these reports are the Prime Minister's Office itself and the relevant sectoral MDAs. 50 Indicator Scores Brief Explanationand cardinaldata used PI-8 Transparency of inter- (i)Thehorizontalallocationofalmostalltransfersisguidedby governmentalfiscal relations certain measures, but becausethey are conditional transfers, sectoralpolicies also needto be taken into account (B). B (ii)ReliableinformationisissuedtoLGAsthreemonthsbefore the start ofthe fiscal year, which is ashort period for significant budget changes to be made (C). (iii)Fiscalinformationthatisconsistentwiththecentral government fiscal reporting is collected on quarterly basis (B). Oversight of aggregate fiscal risk from other public sector entities (PI-9) 7.17 Extent of central government monitoring of AGAs and PES.AGAs and PES(collectively called parastatals) are required to submit quarterly financial statements and audited year-end statements to MoFEA. These reports, however, are not yet standardized and are frequently received with delays. The 2006/07 NAO's report mentions that there was a large increase in guarantees provided to parastatals, which results in risk o f increased expenditures should the parastatals not be able to repay the loans, thus pointing to a weakness in financial control and risk assessment. 7.18 Extent of central government monitoring of sub-national governments' fiscal position. LGAs usually are not allowed to generate fiscal liabilities for the central government through borrowing, unless with special authorization from MoFEA, which is normally not granted. Moreover, their budget execution reports are prepared and published regularly by the Office of the Prime Minister, as mentioned above. Indicator Scores Brief Explanationand cardinaldata used PI- 9 Oversight of (i)MostAGAsPEssubmitfiscalreportstothecentralgovernment, aggregatefiscal risk from but these are normally delayed and their consolidated overview is other public sector entities B incomplete (C). (ii) LGAsdonothaveborrowingpower,unlessapprovedby The MoFEA, which is not used, andtheir budgetexecutionreportsare available on quarterly basis (A). Public Access to FiscalInformation (PI-10) 7.19 The government has improved the public access to fiscal information through the dissemination o f its reports on the national websites and in government gazettes and local newspapers. These include: 1. Annual budget documentation, as prescribed in PI-6 and as submitted to the National Assembly. 2. In-year budget execution reports (quarterly one page fiscal table with narratives), but not budgets o f MDAs either in total or in detail. 3. Year-end financial statements, as they are completed. 4. External audit reports, as they are completed. 51 5. Contract awards, published bi-weekly, as reported to PPRA, which may or may not be complete. 7.20. Missing from the list is: Resources available to primary service providers, such as schools and healthcenters. Indicator Scores BriefExplanationand cardinaldata used PI-10. Public access to key fiscal The governmentmakes availableto the public five of six information. I B l types of information, buttwo ofthemare not complete. POLICY-BASEDBUDGETING Orderlinessand participationin the annual budget formulation process(PI-11) 7.21 Existenceof and adherence to a fixed budgetcalendar. There is a clear budgetpreparation calendar encompassing macro-fiscal studies, MTEF planning exercises, annual budget policy analysis, budget preparation circular issuance, and budget discussions between MDAs and MoFEA. However, the calendar is always implementedin a manner so that the government budget is presented to the National Assembly in mid-June, just 10-15 days before the start of the fiscal year. This late budget submission has become an oldtradition. 7.22 Claritykomprehensiveness of and political involvement in the guidance on the preparation of budget submissions (budget circular or equivalent). A very detailed and comprehensive budget preparation circular called the budget preparationguidelines is issued to the MDAs and separatelyto the LGAs,which apart from the budget preparationforms include:economic policy directions, major pointsof the NSGPR, three-year budget preparation forms, and so forth. The political involvement is secured, normallybefore communicatingbudget ceilingsto the MDAs, in an attempt to makethe budget submissionsas affordableandas realistic as possible. 7.23 Timely budget approval by the legislature or similarly mandated body (within the last three years). Following the Budget Speech by the Minister of MoFEA around mid-June, the National Assembly has a roll call vote to approve the budget aggregates, called Finance Bill for revenue and Appropriation Bill for the expenditure of each MDA, which authorize government to implement the budget. Any combinationwithin the total ceiling of an MDA's budget remains at the discretion of the executive branch, which is determined between the MoFEA and the MDA in the course of the budget execution. The late submission of the budget to legislature does not provide sufficient time to the NationalAssembly to meaningfullydebate the government budget.The MDAs, as they discuss with MoFEA and finalize their budget within the ceilingsduringMay, also attendthe National Assembly's Sectoral Committees and explain their budgets to them before the budget is formally presentedby the government in mid-June. 52 Indicator Scores Brief Explanation and cardinal data used PI-11Orderliness and (i) A comprehensivebudgetcalendar exists, but always ends participation in the annual budget upwith late submissionofthe budgetjust beforethe endof formulation process fiscal year, though MDAs needmore time to submittheir budgets (C). B (ii)Acomprehensive budgetcircular andbudgetpreparation guidelines are issued, andthe center ofgovernmenthastime to makenecessary adjustments(B). (iii)TheLegislativenormallyapprovesthebudgetbeforethe start of the fiscal year, but all authority for changes withinthe approvedtotal level ofa MDA'sbudgetremainwithinthe power ofthe executivebranch(B). Multi-year perspectivein fiscal planning,expenditurepolicy and budgeting(PI-12) 7.24 Preparation of multi-year fiscal forecasts and functional allocations. The government budget system includes a three year rolling MTEF, but this has key limitations on the outer years' expenditureprojections. The budget preparationguidelines,the principal decisionmakingprocess for the framework, is insufficiently strategic. The budget ceilings in the budget guidelines have little to do with the previous year's MTEF. The formal part of the MTEF continues vigorously, but because of short-term emerging needs, the rolling plans need to be adjusted widely to the annual budget realities. Moreover, in the absence of a functional classification of expenditures, the MTEF normally follows an administrativeclassification, which is less relevantto an MTEF. 7.25 Scope and frequency of debt sustainabilityanalysis. A debt sustainabilityanalysis (DSA) was carried out inApril 2004, includingbothdomestic andexternaldebt. A new DSA was carriedout in2006 but has notyet beenmadepublic, althoughit is availableto developmentpartners involvedin its preparation. It has been decided to conduct a full DSA only every two years as debt has been brought under control and generally does not change much from year to year. Additionally, the IMF, in collaborationwith the World Bank, has carried out two DSAs in 2005 and 2007. The 2007 DSA covers domestic and external debt. 7.26 Existence of sector strategies with multi-year costing of recurrent and investment expenditures. Fully costed sector (or sub-sector) strategies cover most sectors but tend to be inconsistent with aggregate fiscal forecasts. The sectoral strategic plans are not being followed, sometimes to the extent that the implemented budget may not be totally relevant to the sectoral policies, and they may not represent the real priorities of the government. Part of the reason behind this is lack of a realistic connection between the sector strategies and domestic resources, coupled with the reliance on donor funds, which by themselves are not clearly known for longer periods, especially on programand project funds. On the other hand, the resultant drastic reductionsto reach affordable budget ceilings together with the late involvementof senior policy-makers in the process make it difficult for stakeholdersto see any transparentapplicationof clear sector priorities. 7.27 Linkages between investment budgets and forward expenditure estimates. Separate recurrent and development budgets are prepared under MoFEA's coordination, but there is limited integrationof recurrent anddevelopment expenditure proposals inthe planningprocess.There are even two different budget classifications and volumes for recurrent and development budgets.Moreover, the 53 separation of these two budgets is based on their financing source rather than the nature of their operations. For example, considerable amounts of recurrent expenditure are classifiedas development expenditures simply becausethey are financed from external sources. Linkages between investments in different sectors are not being analyzed. There is no overall public investment programming process, but instead, political priorities (not always as reflectedin sectoral expenditure programs) andor donor preferences are the main drivers behind the more sizeableinvestment projects. The links between investmentsandthe recurrentcost implicationsofthese investments are weak. Scores PI-12 rnulti-year (i)Forecastsoffiscalaggregates,onthebasisofmaincategories perspective in fiscal of administrative andeconomic classification for recurrent planning, expenditure expendituresandprojector sector-basedfor development policy and budgeting expenditures, are preparedfor two years in addition to budgetyear 0. C (ii) forexternalanddomesticdebthasbeenundertakeninat DSA least two out ofthe lastthree years (B). (iii)Sector strategies exist, but they are inconsistent with aggregate fiscal forecast (C). (iv) Linkages among investment budgets and sector strategies and recurrentbudgetsare weak (D). PREDICTABILITY AND CONTROL INBUDGET EXECUTION Transparencyof taxpayer obligationsand liabilities(PI-13) 7.28 Clarity and comprehensiveness of tax liabilities. Tanzania has relatively new and up-to- date income tax (2004) and VAT (1997, and as amended in 2006) laws. A number of high profile dispute resolution cases in recent years indicate that this legislation is being enforced. The East African Customs Management Act (2005) is relatively comprehensive. Revenue administration procedures are clearly documented and uniformly implemented. Overall, discretionary powers have been reduced and the clarity of taxation liability has improved. Still outstanding is legislation regarding the development of the taxation procedures court. This involves harmonizing various taxation law regulations and, in doingso, reassigningthe power from the other Acts. Standardization focuses on dates for the submission of tax returns, penalties for non-submission, and objections and appeals procedures.Common administrativeprocedures are, in some cases, applieddifferentlyacross the incometax andVAT laws. 7.29 Taxpayer access to information on tax liabilities and administrative procedures. TRA has developed some comprehensive taxpayer education material, in both Englishand Kiswahili, and has an active taxpayer education program across the country involving communications in newspapers, the radio, and billboard advertising.TRA, however, does not yet have full-fledgedtax information centers, phone-in call centers, and an advance rulings regime. Due to lack of a comprehensiveand integrated tax administrationsystem, the taxpayers may not know preciselywhat their liabilities are, especially since the self-assessment system is only beginning to operate. The positive side is that some information is available on the TRA website, includingthe taxation laws andthe latest associatedcommunications. 54 7.30 Existence and functioning of a tax appeals mechanisms. Tanzania has an independent disputes resolutionsystem funded separately by government. The Tax Revenue Board and Tribunal has beenestablished, although this is not used in all cases. There are still residualcases with the court system since the establishment of the appeals Board and Tribunal under the Tax Revenue Appeals Act of 2000. However, it is estimatedthat the number of such cases is small and reflectsthe nature of the work rather than a systemic and serious backlog. Indicator BriefExplanationand cardinaldata used PI-13 Transparency of (i) There are relativelynew andcomprehensiveincometax and TaxpayerObligations and VAT laws (B). Liabilities (ii)Taxpayeraccess to informationontax liabilities and B administrativeprocedures.There is goodtaxpayer education systems but nocall center or centralinformationsystem (B). (iii) There is an independentdisputesresolutionsystem funded separatelyby government,though it needsfurther capacity enhancement(B). Effectiveness of measuresfor taxpayer registration and tax assessment (PI-14) 7.3 1 Controls in the taxpayer registration system. Taxpayers have a single identification number. A block management system is in place, and currently, a large scale review of business is being implemented in a number of blocks in Dar es Salaam. Inconsistency still exists, as linkages within TRA are weak due to limitedconnectivitybetweenthe integratedtax administrationsystemfor VAT and income tax) and customs.Linkageswith external systems such as the Tanzanian Bureau of Standards and the Ports Authority are nonexistent. There have not been any surveys of potentialtax payers. 7.32 Effectiveness of penalties for non-compliance with registration and declaration obligations. Clear penalties are provided for under the income tax and VAT laws; penalties are too low, and negotiatingan increase is a lengthyand challengingprocess. Penalties under the incometax and VAT laws not harmonized; therefore, different penalties for similar offenses, such as non submission of returns, may apply. There are no guidelines for penalties, which can lead to inconsistencies. For example, there is no guidance for the applicationof different penalties to first time or repeatoffenders and for differenttypes of offenses. 7.33 Planning and monitoring of tax audit and fraud investigation programs .A comprehensive and documented audit plan has been developed and implemented in the Large Taxpayers Department (LTD), which accounts for 70 percent of revenue but less than 5 percent of taxpayers. The audit planis beingoperated effectively, with goodrisk profiling and quality assurance. The Domestic RevenueDepartment(DRD),which accounts for morethan 90 percent of the taxpayer population, has an audit plan and manual, but implementationhas not been possible due to capacity limitations. 55 Indicator Scores Brief Explanation and cardinaldata used PI-14 Effectivenessof (i)Taxpayersareregisteredinadatabasewithanidentification measures for taxpayer system, but there are no links to other systems (C). registration and tax assessment (ii)Penaltiesexist, but they are insufficiently specific and in C+ some cases too low to havean impact on compliance (C). (iii)ThereisagoodtaxauditoperationintheLTD(themain tax collectiondepartment), but a mixedperformanceinDRD (B). Effectiveness in collection of tax payments (PI-15) 7.34 Gross tax arrears collection ratio: the percentage of tax arrears at the beginning of a fiscal year collected during that fiscal year, expressed as an average of the last two fiscal years. The debt collection ratio in 2004/05 and 2005/06 was 33 percent according to LTD data and 71 percent according to LTD and DRD data. This indicates an improvement, but tax arrears remain significant. The improvement of the debt collection ratio in those two years suggests that some debts have been written off, and it is important to note the process used to select which debts are determined to be uncollectible, but unfortunately, it is not possible to get data to verify this. The process for writing off debt requires a Board resolution, which necessitates the submission of a list stating whether the taxpayer can't be traced or has gone out of business. 7.35 Effectiveness of transfer of tax collections to the Treasury by the revenue administration. The individual accounts for taxpayers are posted, and transfers are made to the Treasury main account, called the Paymaster General's account, twice a week. The LTD taxpayers pay directly into the treasury main account. 7.36 Frequency of complete accounts reconciliation between tax assessments, collections, arrears records and receipts by the Treasury. The authority to undertake assessments, collections, arrears and transfers is delegated from MoFEA to TRA, as a department of MoFEA. T u ' s functions are to assess, collect and account for tax revenue. Assessments are raised and logged in the ledger account, as are collections when they are made. Arrears are the difference between the assessment and the collections. Therefore there are regular and routine reconciliations. Indicator Brief Explanation and cardinaldata used PI-15Effectivenessin (i)Collectionratioforgrosstaxarrearsin2004/05and2005/06 collectionof tax payments was 33% (LTD data) and 71% (LTD and DRDdata) (C). (ii)Revenuecollectedistransferredtothegovernmentmain account inthe BOTwithin aweek (B). (iii)Reconciliationbetweentaxassessments,collections,arrears records and receipts by the Treasury takes place as a matter of routine(A). 56 Predictability in the Availability of Fundsfor Commitment of Expenditures(PI-16) 7.37 Extent to which cash flows are forecast and monitored. After approval of the budget, cash flow projections and plans are prepared by the MDAs on a monthly basis and submitted to the MoFEA Budget Department. MDA cash outflow requirements are thereafter forwarded to the MoFEA Cash Management Committee, chaired by the Permanent Secretary, which determines the corresponding monthly ceilings for each MDA as well as transfers to the LGAs. These ceilings are mainly determined basedon overall government's cash availability for the month, with a view to the MDAs' previousmonthlyimplementationreports,their work plans and procurementplans. 7.38 The cash management system is still nascent and has not been fully implemented. The main challenge is that monthlyprojectionsare notyet produced by all the spending agencies.This makes it impossibleto compile the full cash flow picture and allocate resources accordingly. In addition, the cash flow projectionsreceivedby MoFEAtendto be frontloaded, makingthem difficult to implement under a cash budgeting framework. A draft report on the implementationof the cash management system indicates that the lack of an established administrative structure and expertise to handle the system rollout are the underlyingcauses for the lack of a coherent cash management system. These may largely be regarded as growing pains of this new process.Nevertheless, strengtheningthe cash management unit needs to be 'a priority for FY 08/09. In addition, the integration of the cash flow forecasts with the relevant module of the EMS should be pursued in order to enhance the systems' coherence. Currently, the cashmanagementfor procurementplans is not captured in the IFMS,which uses a pro rata allocation (divide by twelve) of the budget provisions as the monthly budget plan. These factors affectthe resource allocationprocess within spendingagencies. Since monthlyreleases tend not to follow a cash flow plan, a time consuming resource allocation process takes place each monthwithin the spendingunits, causingdelays inthe deployment of resources.'8 7.39 Reliability and horizon of periodic in-year information to MDAs on ceilings for expenditure commitment. The existing cash management system, though very useful for maintainingoverall macro-fiscalbalance and controllingtotal government expenditures, by its nature creates uncertainty for the MDAs. MoFEA is aware that the monthly cash release system has undesirable consequences in terms of predictabilityof funding for the MDAs and thus affects their effectiveness, including service delivery. Without these monthly ceilings and their associated fund releases, commitment of funds i s not possible, and processingbulk purchases for MDAs is difficult, though according to MoFEA staff, the CMC takes into account the urgent needsfor bulk purchasesin each month. A strong and predictablequarterlyfund allocationfor commitments, includingmonthly limitations for actual payments, may make the cash flow projections a more helpful tool for both maintainingmacro-fiscalbalance and securingpredictabilityfor commitment of funds by the MDAs. 7.40 Frequency and transparency of adjustments to budget allocations, which are decided above the levelof managementof MDAs. Budget adjustmentstake placethroughout the year, based on MDA requestsand MoFEA approval and/or due to lack of sufficient cash, which forces the MDAs to reallocate funds within their approved budgets.The adjustments are consolidated and submittedto the National Assembly at any intervalfor its information.Becausethe adjustments are within a given MDA budget, they do not require approval by the National Assembly. In the event that an MDA budget is increased, a supplementary budget submission to legislature is required.A contingency is also made for payrolladjustments and annual pay increases as well as for other needsthat may arise in the course of the budgetyear. MDA budget reallocationsare made routinely, as the monthlycash allocationsnecessitate such changes, and this mainly remains at the discretion of the MDAs. By its ''MOFEA,TheImplementation ofthe CashManagementSystem, May 2008 57 nature this is not fully transparent because the MDAs re-allocatetheir appropriationwithin the cash availableto them monthby month. Indicator Brief Explanationand cardinaldata used PI-16 Predictabilityin the (i) An annualcashflow forecast for government budgetand Availability of Fundsfor eachMDA is prepared,but substantially revised on a monthly Commitment of Expenditures basis (B). C+ (ii) areprovidedwithreliableinformationfortheir MDAs commitments,but only for eachmonthandwithrelatively short notice (C). (iii) Significantin-yearbudgetadjustmentsare frequent,but undertakenwith some transparency(C). Recording and management of each cash balances, debt and debt guarantees(PI-17) 7.41 Quality of debt data recording and reporting. Debt is recorded and managed by the AGD usingthe CS-DRMS (a debt management system developedby the Commonwealth Secretariat), which provides information on servicing and repayment of the principal for foreign debt and a portion of domestic debt, the informationof the latter beingcomplementedby the BOT, as it manages government treasury bills. The debt database is updated on a monthly basis, includingdata receivedfrom the BOT. While some discrepancies exist, they are not large and are mainlydue to the differenttimingof updating of the information.Reconciliation of the debt database is done on a monthly basis, using the system's reportsandthe creditors' records.Monthlydebtprofiles(external anddomestic), aquarterly newsletter, an annual debt report, andannualstatementsofpublicdebt are preparedbytheAGD. 7.42 Consolidation of the Government's cash balances. Apart from the main Government bank account heldat the BOT,a number of government bank accounts are held inthe commercial banksunder differentarrangements.This reducesthe government's liquiditypositionwhile cashavailable ina number of bank accounts is not accessibleto the MoFEA for its monthlyMDA and LGA cashallocations inthe budget execution. Due to different legal and/or managerial arrangements, until recently no attempt has beenmadeto consolidatethe balancesofthese accounts inthe BOT,therebyallowingaccumulationof idle cash in different government bank accounts. Some of these accounts hold donor funds. The MoFEA Minister announced in his 2008/09 budget speech that in order to improve MoFEA's cash position, the Government intends to transfer balances of these bank accounts from the commercial banks to the Government mainaccountat the MOT,andthat the government hasbegundiscussionswith donors. Apart from changing the rules governing government's own bank accounts in the commercial banks, such action, would also.require agreement of individual donors that are holding mostly project-relatedbank accountsinthe commercialbanks. 7.43 Contracting loans and issuing guarantees. The National Debt Management Strategy adopted in 2002, as well the Loans, Grants and Guarantees Act of 2003, outline comprehensive proceduresfor contractingand guaranteeingloans. Since 2004/05, the government has a policyof not providing guarantees for any external borrowing, but rather of considering selective guarantees for domestic borrowing,mostlyby public enterprises. 7.44 An implementationplan for public debt management has been developed in line with the Strategy and the Act mentioned above. The National Debt Management Committee advises the MoFEA Minister on the contracting of debt based on an evaluation against set criteria, including 58 viability and suitability. Only the Minister has the authority to contract new debt. At the same time, the 2006/07 NAO report recommended that debt management be improved to ensure accurate information at all times and that communication be improved between all those involved. It is not clear whether issuingof guarantees are made within limits for total debt and total guarantees. Indicator Scores Brief Explanation and cardinal data used PI-17 Recording and (i)Debtdataisofarelativelyhighqualitybutminorreconciliation management of each problems occur, andtimely statisticalreports are produced(B). cash balances, debt and debt guarantees C (ii)Thebalancesofseveralgovernmentbankaccountsin commercial banksare not consolidated, though there is a planto do so inthe future (D). (iii)Contractingofloansandissuingguaranteesisapprovedby the MinisterofMoFEA inline with rules, but it is not clear if ceilings apply (C). Effectiveness of payroll controls ("1-18) 7.45 Integration and reconciliation between personnel records and payroll data. Personnel records kept at the President's Office-Public Service Management (PO-PSM) and payroll data kept at MoFEA are totally integrated and use the same software: a Lawson human resources software package called Human Capital Management Information System (HCMIS). The system is operated by the MoFEA Computer Center, which is connected to the PO-PSM. MDAs undertake monthly reconciliation between payroll and personnel records and send them to the MoFEA and PO-PSM, where relevant personnel records and payroll data are entered into the system prior to payment of salaries. 7.46 Timeliness of changes to personnel records and the payroll. Every month, MoFEA and PO-PMS receive approximately 10,000 MDA and LGA requests to change the payroll and personnel records. There i s limited capacity to verify these requests in the two weeks currently allocated for monthly payroll data entry. Approval of these requests is generally fast, based on trust that the officers in the MDAs have checked and verified the requests before making their submissions. Although HCMIS is designed to assist the officers in authenticating most requests, each request cannot be checked through the system. Because salary payments are time-sensitive, the data processing both in the MDAs and the two central agencies is quite timely, but its accuracy is not assured, due, in part, to low quality o f work in the MDAs and shortage o f time for all parties involved. As mentioned below, there are reasonsto be concerned about this process. 7.47 Internal controls of changes to personnel records and the payroll. The payroll system data is currently accessible to several users (operators and systems analysts), which poses challenges in protecting the payroll information from being lost, read, changed (either maliciously or accidentally), or modified by those not authorized to do it. Some internal controls are incorporated into the system, but these are not sufficient to prevent entries by unauthorized operators. The main risk area, however, originates inthe MDAs, where operators are close to beneficiaries and thus more easily inclined to manipulate data than operators based in the central agencies. Auditing reports have frequently mentioned deficiencies in the MDAs and LGAs, indicating that central internal controls are not sufficient or even fully practical. 7.48 Existence of payroll audits to identify control weaknesses and/or ghost workers. Payroll audits are conducted for a sample of MDAs and LGAs on a quarterly basis. Usually, officers from 59 PO-PSM constitute teams that visit selected MDAs and LGAs. A key audit challenge is that the payroll data in the current payroll system are not accurate and the human resources information is incomplete. Therefore, the selection of the MDAs to be audited may be triggered by various events, including unusual payroll changes requests from a MDA, a static payroll that never changes over the year (ghost workers), or even someone receiving both pension and salary for some time. In such cases, the audits are not sufficiently funded to cover an entire MDA, such as the Ministry of Health or Ministry of Education, but rather focus on specific problem institution, such as a school or health facility. 7.49 As a result of these audits, it was recently observed that records are not beingkept up to date by the MDAs, and MoFEA issued a circular to the MDAs to do so. In 2000, the government computerized the payroll by collecting data from employees. Since then, payroll data has been changed through payroll amendment requests submitted by MDAs to MoFEA and PO-PSM. Since 1994, no survey has been conducted for government employees, now totaling about 350,000 (including about 200,000 teachers). A complete employee census is planned for 2009 in order to overhaul the payroWpersonne1database. Brief Explanationand cardinaldata used PI-18 Effectivenessof (i)Personnelrecordsandpayrolldataarestoredinthesamedatabase and are filly integratedandreconciled(A). (ii)Changesto personnelrecords and payroll data take place on a monthly basis, but its quality is not assured (C). C+ (iii)Someinternalcontrolsexisttodataentryforchangesonpersonnel records and payroll data, but are not adequate to ensure the integrityof data, which originate inthe MDAs (C). (iv) Quarterly payroll audits with limited coverage havebeen undertakenduringthe last three years, but no survey has been conductedsince 1994 (C). Competition, value for money and controls in procurement (PI-19) 7.50 A new Public Procurement Act (PPA) was enacted in 2004 and, together with its associated regulations, became operational on May 1, 2005. The Public Procurement Regulatory Authority (PPRA) was established and is now fully staffed. The PPRA is responsible for the oversight of public procurement and overall capacity building in the procuring agencies. The Authority has developed a system for checking and monitoring procurement activities in the MDAs, LGAs, AGAs, and PES. Recent work o f the PPRA has included the training of approximately 1200 staff for procuring agencies. Some government agencies have not yet established their Procurement Boards or Procurement Management Units. 7.5 1 During2007/08 the PPRA carried out procurement audits in 70 procuringagencies.However, 30 further audits for the financial year 2007/08 have yet to be completed. The audits' objective was to determine whether the procedures, processes and documentations for procurement, contracting and disposal of public assets by tender were in accordance with the provisions of the PPA regulations. Further, they were to establish whether the standard documents prepared by PPRA and those procurements carried out achieved the expected economy and efficiency, and whether the implementation of contracts conform to the terms therein. The audits indicated an average level of 60 compliance of 43 percent computed from the 13 established compliance indicators.The average level of compliance was 45 percent for MDAs and 41 percent for LGAs. The Tanzania Ports Authority attained a maximumaverage compliance of 73 percentwhile the Tanzania Library Services attaineda minimumaveragecompliance of 7 per~ent.'~ 7.52 Use of open competition. According to the NAO's 2006/07 report, 66 percent of tenders under the open tendering process in that year were advertised. However, the report pointed to a weakness inthe publicationof contracts awarded, as a majority of them had not been communicated properly to the public. The PPRA's own periodic audit reports, which are also published, show similar results. Presently, the PPRA's bi-weekly publication and website contain a wealth of informationon the procurement plans and bids by government agencies, as well as contract awards, thoughthe full coverage ofthe latter hasto beverifiedby further procurement audits. 7.53 Competitive procurement. The procurement act allows the use of less competitive procurement methods with justification. Although PPRA's professionalviews may be sought, the procuring agency is responsible for interpretingthe law and choosing such methods, the quality of which may differ from one agency to another. 7.54 Existence and operation of a procurement complaints mechanism. The legislative frameworkhas a very comprehensivecomplaints mechanism.A three levelcomplaintmechanism has been established consistingof the procuringagency, the PPRA, and the Public Procurement Appeals Authority (PPAA). The model for complaints handlingis in linewith internationalpracticesand gives aggrieved bidders adequate means to protect their interests. It has, however, been observed that although the PPRA is timely in processing these complaints, the number of complaints is declining. While this may be interpreted as a good development, it is also argued that some local contractors avoidfiling complaintcases, fearingthe risk ofbeingexcludedfrom futurebids. iIndicator Brief Explanation and cardinal data used PI-19 Competition, value for (i) 66 percentoftendersunderopentenderingprocesswere money and controls in advertisedinfiscal year 2006/2007 (B). procurement B (ii)Usingless competitiveprocurementis allowed with justification. Although PPM's view may be sought,observing the procurementact remainswithinthe power ofprocuring agencies (B). (iii)Acomprehensivecomplaintsmechanismoperates,butfor unknownreasonsthe numberofcomplaintshasdeclined(B). Effectiveness of internal controls for non-salary expenditure (PI-20) 7.55 Effectiveness of expenditure commitment controls. As part of the functionality of the IFMS, a commitment control system was introduced in 2001 under which a Local Purchase Order (LPO) is requiredfor the purchaseof goods and services. The system is relativelyeffective, restricts the production of an LPO to financial codes with adequate funds, and is issued only when the resources are releasedto the MDAs. On the other hand, the system has providedMoFEA with a re- budgeting power during the year, creating uncertainty among the MDAs and LGAs. In fact, the accumulation of payment arrears in recent years, as noted in IP-4 above, indicates that some unpaid Furtherinformation, includingindicatorsusedfor auditcomplianceis availableonthe PPR4 website. 61 commitments at the end of fiscal year may be related to commitments, such as utilities or price escalations embodied in some contractsthat cannot be preventedby the IFMS. 7.56 Comprehensiveness, relevance and understanding of other internal control rules/procedures.There is a comprehensive set of controls, although in some instances concern is expressedthat they can excessive. These includepayment for casual labor, minor goods, and services as well as collection and handling of minor non-tax service charges and administrative fees, safekeeping, store management, and similar items coveringa long list that is generally understoodby MDA staff. 7.57 Compliancewith rules for processing and recording transactions. Levels of compliance vary. According to the NAO's 2006/07 report, of the 70 MDAs audited, eight had outstanding bank reconciliation items such that the discrepancy between receipts and bank statements pointed to the potentialfor revenue misappropriation,or there was vouched expenditure where a payment voucher existed but was not supported by other documentation, such as LPO, invoice, delivery note, or expenditure statement. The report further noted that a large improvement in reducingthe amount of improperlyvouched expenditures hadtaken place, decreasing such cases significantlyfrom previous years. Indicator Scores BriefExplanationand cardinaldata used PI-20 Effectiveness of (i) The useofIFMSwitha commitmentcontrol feature is internalcontrolsfor non- relatively effective, but cannot provide a full guarantee at all salary expenditure C+ times (B). (ii) Other internalrules andprocedurescover major sets of controls that are generallyunderstood,but in some areas these are excessive and compliance rate varies (C). (iii) Rulesare observedina majority oftransactions, butthere is some evidence of misconduct(C). Effectiveness of internal audit (PI-21) 7.58 Coverage and quality of the internal audit function. According to the NAO's 2006/07 report, most MDAs have established Internal Audit Units. Most are understaffed and ineffective. Consequently, they are able to undertake only audits of narrow scope with minimal follow-up on findings.A roughestimate is that 4 percent ofMDAs do not have an internalaudit committee. Where they are established, they lack charters or do not meet quarterly as they are expected to do. The NAO's report emphasizes the need to increase capacity (qualified staff and regular training) and to establish audit committees properly. Establishing a central internal audit unit at the AGD in September 2006 was a step toward enhancing the effectiveness of the internal audit function. This unit is now operativeandhas undertaken some audits and identifiedactivitiesto be undertaken. 7.59 Frequencyand distributionof reports. Internalaudit reports are issuedfor most MDAs, but these are not routinely reliedupon, in part due to the weak capacity in most MDAs, as highlightedin the NAO's report. Reports have been standardized with some improvement in quality. The NAO, however, still reports that a considerable number of cases of previous years' audit issues remain unresolved. 62 7.60 Extent of management response to internal audit findings. Internal audit findings follow- up is limited, although Audit Committees inthe MDAs are tasked to do so. The central internal audit unit is workingto changethe style of auditing, which includes agreeing on a timetable with the client for the follow-up of queries or recommendations, with the objective o f improving the quality and timing of follow-up. Due to the large numbers of MDAs, it has not been possible to monitor the follow-up o f all audit queries. Indicator BriefExplanation and cardinal data used PI-21 Effectivenessof (i)InternalauditfhctionexistsinmostMDAs,anditis internal audit estimatedthat 20 percent ofthe stafftime is allocatedto system- basedreviewsand high risk areas (C). D+ (ii)ReportsareissuedformostMDAsbutthesearenot submittedeither to the AGD or the NAO (C). (iii)Tosomedegreeactionsaretakenbymanagementonmajor issues but often with delay (D). ACCOUNTING, RECORDINGAND REPORTING Timeliness and Regularity of Accounts Reconciliation (3'1-22) 7.6 1 Regularity of reconciliation of bank accounts. Transactions of the central government's bank accounts (main treasury account held at the BOTand other accounts with smaller amounts held in commercial banks) are reconciled with the government accounting records at the end of each month, but with substantial delays, and its quality is questionable. Although with some delay, the AGD produces lists o f unreconciled items and submits them to the MDAs to identify matching pairs and enter them into an adjustment model for reconciliation, the process is unreliable and at times incomplete. The bank reconciliations are reviewed by the AGD and subsequently made available to a resident NAO staff member in MoFEA. Delays in the monthly reconciliation and the size of the unreconciled transactions make this process less effective, but these issues are taken more seriously for the year-end final accounts as required by law. However, less effective reconciliation between government accounts and their corresponding bank transactions lead to lack of proper bank reconciliation in the annual accounts as well. The 2006/07 NAO report disclosed such unreconciled items, noting that payments were recorded in bank statements but not recorded in cash books (government accountingrecords). 7.62 Regularity of reconciliation and clearance of suspense accounts and advances. Reconciliation o f suspense accounts and clearance of advances is also a long process, and again it appears that the year-end reconciliation and clearance i s taken more seriously than the monthly process. Suspense accounts are normally reconciled within two months of the end of the period, which in principle is monthly because of the bank accounts reconciliation cycle of government transactions. But the size o f unreconciled items is not known, nor does the reconciliation exercise happen in a comprehensive and timely manner. Advances, such as travel advance and imprests, are small in size, but their clearing time varies. In fact, these factors may be contributing to the size of unreconciled bank account and accounting reconciliation mentioned above. 63 Indicator Scores Brief Explanation and cardinal data used * PI-22 Timeliness and Regularity of (i) Bankreconciliationsfor Treasury-managedaccountsare Accounts Reconciliation undertakenmonthlywithin4 weeks, butthe size of unreconcileditemsseemsto belarge(C). C (ii)Suspenseaccountsare reconciledandadvances are ' clearedinmonthlyperiods,butthe size ofunreconciled uncleareditemsis notknown.A significantnumberof accountshaveunclearedbalancesbroughtforward.(C). ~ Availability of Information on Resources Received by Service Delivery Units (PI-23) 7.63 Collection and processing of information to demonstrate the resources that were actually received (in cash and kind) by the most common front-line service delivery units (focus on primary schools and primary health clinics) in relation to the overall resources made available to the sector@), irrespective of which level of government is responsible for the operation and funding of those units. In last three years, MoFEA has carried out a number of expendituretrackingsurveys on LGAs andtheir Direct Service DeliveryUnits, most recentlyin 2008. MoFEA has not finalized any of the reports and cleared them for publication. As a result the coverage, methodology and presentation of the findings of these reports are unknown. In 2004 a donor-supported PETS was undertaken in the education sector, but its findings and results were not publishedbecause of disagreement betweenthe government and the donors who helped carry out the exercise. Presently, a PETS is being undertaken for the water sector with the help from the World Bank, and a new PETS for the educationsector is under discussionfor 2009, also with the support of the World Bank. Indicator Scores Brief Explanation and cardinal data used PI-23 Availability of Information Informationonresourcesreceivedby front lineservice on ResourcesReceived by Service deliveryunitsis mostlylacking.Specialsurveys were Delivery Units undertakenwithinthe last three years,buttheir resultsand methodologiesusedhavenot beenpublished. Quality and timeliness of in-year budget reports (PI-24) 7.64 Monthly in-year budget execution reports, called "flash reports," are produced by the AGD, mainly for internal use. The Policy Analysis Department also publishes reports on the MoFEA website on a quarterlybasis for revenue, expenditures, deficit and financing (a fiscal table). 7.65 Scope of reports in terms of coverage and compatibility with budget estimates. The IFMS has the capacity to produce timely centralgovernment expenditure reports (includingtransfers to the LGAs) with any coverage that may be needed. However, the actual coverage is limited to the vote level (total expenditures of a MDA) with no information on its sub votes, economic classification, or operations. These flash reports are itemized by original and revised budgets, funds made available by MoFEA to each MDA, and commitments and payments. The flash reports have limited circulation, and their usage, though very helpful, is mainly for total cash management purposes, as there is no further detailed informationwithin an MDA. This mainly stems from the appropriationstructure of Tanzania (total budget of each MDA), by which the executive branch has 64 the full authority to introduce changes and reallocations within any MDA's total budget. Flash reports do not cover the revenue side o f the budget. The quarterly reports, on the other hand, include all fiscal data as mentioned above. 7.66 Timeliness of the issue of reports. Since the State House and the Ministry of Defence are usingthe IFMS on a stand-alone basis outside the network, they provide data to the AGD on backup tapes that are restored in the AGD's main server. As a result, the consolidated expenditure flash reports are not produced until around two weeks after the end of the month. Quarterly budget execution reports are published on MoFEA's website, usually within three months after the end of each quarter. 7.67 Quality of information. Because flash reports are prepared before reconciliation of government accounts with corresponding bank transactions, by their nature they cannot provide a full picture, but mostly serve as a timely indication of commitments and payments and the status of the budget execution in its total magnitudes. The weakness o f the quarterly reports, on the other hand, is that the data is classified in very broad categories. That is mainly because MoFEA needs to collect data from different sources on grants, revenue, domestic and external financing, fiscaVmonetary data gaps, and other items. Indicator Scores Brief Explanation and cardinal data used PI-24 Quality and timeliness of in- (i)Scopeofflashreportsiscompatiblewiththebudget year budget reports. estimates for bothcommitments and payments, but in very broadcategories.Revenueis also classifiedvery broadly (B). B (ii)Dataareprovidedmonthlyonflashreportingfor expenditures and quarterlyfor all fiscal components, includingrevenue, expenditure deficit, and financing(A). (iii)Informationisaccurateinflashreports,butunknownin overallquarterly fiscal reportingdue to multiple sources of data (C). Quality and Timeliness of AnnualFinancialStatements(PI- 25) 7.68 Completeness of the financial statements. The financial statements for the central government transactions (including its transfers to the LGA) include revenue, expenditures, and bank balances, but not complete assets and liabilities. The 2007/08 financial statements include a sort of financial liabilities, thanks to changing the accounting standards (see below), butthe assets side is still not reported. 7.69 Timeliness of submission of the financial statements. All MDAs are required to submit their final accounts to MoFEA and NAO within 3 months after the end of the fiscal year. The consolidated government financial statements are then prepared by the AGD and submitted to the NAO within an additional month. For the last three fiscal years, these were produced and submitted to the NAO within the statutory four month period, with only two weeks' delay for the accounts of the 2007/08 due to changing the accounting standards. 7.70 Accounting standards used. Until the end of fiscal year 2006/07, accounts were prepared using local cash accounting standards. Beginning 2007/08 the government has adopted the 65 internationally recognized IPSAS cash accounting standards, but a full reporting of assets and liabilitiesrequiredunder such standards is yet to be established. Indicator BriefExplanationand cardinal data used PI-25 Quality and Timeliness of (i)Centralgovernmentfinalaccountsincluderevenue, Annual Financial Statements expenditure and bank balances,and since 2007108, some data on liabilitiesbut not on assets (C). B (ii) Financialstatements are submittedfor externalaudit within 6 monthsofthe end ofthe fiscal year (A). (iii)IPSAScashaccountingstandardsareused,butstill assets and liabilitiesare not filly reported(C). EXTERNAL SCRUTINYAND AUDIT Scope, nature and follow-up of external audit (PI-26) 7.71 Scope and nature of audit. The last three years' NAO annual reports cover all central government MDAs and LGAs.By law, all AGAs and PESare supposedto submit their final accounts and financialstatementsto the NAO, but some fail to do so in a timely manner. As a result, the NAO audits whatever reports are receivedfrom the AGAs and PESwithin 3 to 4 monthsoftheir accounting period, issues its report in a reasonable time span, and mentions the same limitation in the audit report.The MDA and LGA audits comprise primarilytransaction leveltesting, andthe audit report is primarily of a financial nature (whether accounts have been properly kept, rules and procedures followed, resources expended for the purposes appropriated, and records maintained) with very little attentionto performanceaudit.The audit is carriedout on a test basis, therefore the audit findings are confinedto the extent that records, documents and informationrequested for the purpose of audit are were made available to the NAO. 7.72 However, the audit report mentions various aspects of the PFM processes, such as compliance with the Public Procurement Act, internal controls, internal audit functions and audit committees. Further, the audit report analyzes major findings of the accounts under auditing, mainly inthe form of organizationalcross-cuttingissues, but at the same time explains certainexamples from the MDAs to substantiate its findings. 7.73 The audits broadly adhere to appropriate auditingstandards (INTOSAI) and the international standards on auditing issuedby the InternationalFederationof Accountants. However, there are still some deficiencies in terms of meeting international standards; full compliance is expected to be achieved after 2010. The passage of the new act is considered an important factor in improving further independenceof the NAO as it addresses staffing issues, budget allocationsand the coverage ofthe external audit task. At present, however, comparing auditreports inthe last threeyears interms of style, natureand quality ofthe fiduciary work does not indicatea distinct changeto be pointedout, and all recommendedor initiatedchangesare expectedto bear fruit inthe future. 7.74 Timeliness of submission of audit reports to legislature. Audit reports of the last three years, including government financial statements, have been submittedto the legislaturewithin 8-9 months of the end o f the period covered. The audit reports are made available to the public through NAO's website. 66 7.75 Evidence of follow-up on audit recommendations.Follow-up on addressing the external audit recommendations by the executive branchhas been generallyweak. Following donors' request, some responses were prepared by the MDAs and LGAs on the 2005106 NAO report and were submitted to NAO, the results of which should be observed in the future audit reports by indicating that how the audit findings were addressed or cleared. The NAO indicates that these responses first are expected to be discussed with the PAC in January 2009, when the 2005106 audit report i s scheduled for discussions (see further on this long time lag in indicator 28 below). Until now, very limited evidence has beenobserved in addressing or clearingexternalaudit recommendations. A new external audit law passedthe NationalAssembly and was made public in a September 2008 gazette, which is expected to bring about some wide-ranging improvements in the external auditing task, including further independenceof the NAO, and response of the executivegovernment to the NAO's findings. The NAO is drafting the enabling regulations of the new law, so it will take some time to assess the impact of the new law. Scores PI-26 Scope, nature and follow-up (i)TheauditreportcoversallMDAsandLGAs,butpartof of external audit the AGAs and PES. The nature of the audit remains centered on transaction level testing, but reports identify some significant issues (C). (ii)In the last three years, the audit report, including C+ consolidated financial statements of government, was presentedto the legislature within 8-9 months after end of periodcovered(B). (iii) MDAs and MFOEA submittedformal responsesto the NAO on only the audit report of the 2005/06. These are due to be discussed by the PAC in 2009 after a long time gap. No evidence can be demonstratedfor a systematic follow up on audit findings bythe MDAs (C). Legislativescrutiny of the annual budget law @I-27) 7.76 Scope of the legislature'sscrutiny. The NationalAssembly is providedwith informationin regard to macro fiscal policy mostly in the form of previous calendar years' economic performance (though not as budget documentation series) and detailedrevenue and expenditure data. This provides a reasonably good opportunity for the legislature's scrutiny of the budget. But as explainedbelow, the time for suchanalysis and scrutiny is very short, and in practiceit becomesa formal actionrather than one of substance. In an attempt to overcome this, the Sectoral Committees of the NationalAssembly andthe MDAs officials meet before the budget presentation andthe MDAs explaintheir draft budgets to the committee members beforethe government budget is formally presented.There is no approval or disapproval process at this stage; it is a sort of briefing on the MDAs' draft budget, with no information on fiscal policies and aggregates of the budget's resource envelope. When the government budget is formally tabled, normally two weeks before the start of the budget year, approval is given to the appropriationbill, which is a very brief document containingthe total budget of eachMDA, within the short time availableto the NationalAssembly. 7.77 Extent to which the legislature's procedures are well-established and respected. In addition to the PAC, the Local Authority Accounts Committee, and the Parastatal Committee, there are 11 sectoral committees associated with the review of the budget prior to its submission to the 67 National Assembly. There are some established internal procedures for committee meetings, but since the nature of debate is mostly inthe form o fbriefings only, their effectiveness is limited. 7.78 Adequacy of time for the legislature to respond to budget proposals with both the detailedestimatesand, where applicable, for proposalson macro-fiscal aggregatesearlier in the budget preparation cycle (time allowed in practice for all stages combined). In practice the legislature has only two weeks or less to approve the government's proposed budget. The ability of the National Assembly to question or influence inter-sectoral allocations and to ensure that they follow sectoral policies is therefore very limited. The technical capacity of the sectoral committees is also limited. 7.79 Rules for in-year amendmentsto the budgetwithout ex-ante approvalby the legislature. Rules exist for in-year amendments within the appropriation structure and total budget of a MDA. The MDA must submit a request to the MoFEA by completing a standard form. Such requests are discouraged withinthe first halfo f the fiscal year, as it i s recognized as poor planning, though they do still arise. The requests are submitted and approved as and when needed. These virements are consolidated into a Reallocation Warrants, which are submitted to the National Assembly for its ex- post information, normally duringthe second half o f the fiscal year. No specific limits are set on the extent of the virements. However, ifthe total appropriationo f a MDA needs to be increased, approval by the National Assembly is requiredinthe form of a supplementary budget. Indicator BriefExplanationand cardinal data used PI-27 Legislative scrutiny of the (i)Legislativescrutinyoftheannualbudget(detailsof annual budget law expenditure and revenue) takes place within a short period o f time, but MDAs M i e f the National Assembly's Sectoral Committees on their estimated expenditures inadvance and before the budget is submitted (C). (ii)Thelegislativecommitteeshaveestablishedrulesfor C debatingthe government budget. (B) (iii) Legislature'stime for ameaningfuldebate of official government budget is very limited @). (iv) Clear rules exist for in-yearamendments, but they allow unlimited and extensive re-allocationwithin an MDA budget (C). LegislativeScrutiny of externalaudit reports(PI-28) 7.80 Timeliness of examination of audit reports by the legislature (for reports received within the last three years). The scrutiny of audit reports takes a very long time in the PAC, simply because they begin the exercise 11 months after they receive the NAO report. Innone o f the last three years has the PAC issued its reports within 12 months of the NAO's reports submission date. 7.81 Hearings on key findings undertaken by the legislature. For the preparation of the PAC report, in depth hearings take place with a selection of responsible officers from the audited entities, usually at a pace of one or two entities per day. The hearings commence with entities in receipt of audit queries or qualified reports. However, those with clean reports are also selected at random and 68 asked what improvements they want to undertake in their MDA, which often reveals some weaknesses despite a clean audit report. 7.82 Issuance of recommended actions by the legislature and implementation by the executive. A substantial weakness within the accountability process is the lack o f response from the MoFEA to the recommendations o f the PAC. Until now, there is no evidence to show that recommendations are acted upon by the executive branch. Indicator BriefExplanationand cardinaldata used PI-28 Legislative scrutiny of (i)Examinationofauditreportsbegins11monthaftertheir externalaudit reports receipt andtakes another 4 monthsto complete (D). C (ii)Indepthhearingstakeplacewithresponsibleofficers from the audited entities (B). (iii)ActionsarerecommendedbythePAC,buttheyarenot actedupon by the executive (C). DONOR PRACTICES Predictability of Direct Budget Support 0-1) 7.83 Annual deviation of actual budget support from the forecast provided by the donor agencies at least six weeks prior to the government submitting its budget proposals to the legislature. Provision o f information on direct budget support by donors is quite timely, and in the last three years all donor agencies engaged in direct budget support have provided information several months before the submission o f the government budget to legislature. There has been no deviation between announced amounts and paid amounts. 7.84 In-year timeliness of donor disbursement of direct budget support. All donors have agreed to provide their annual direct budget support in the first quarter o f the fiscal year and in one installment to provide a further cash facility to the government early in the fiscal year; they have done so inthe last three years.20 D-1Predictabilityof DirectBudget (i)Innoneofthelastthreeyearshasdirectbudgetsupport Support. A outcome fallen short of forecast (A). (ii) directbudgetsupportispaidinthefirstquarterin All one installment to help boost (enhance) the government cashposition inthe beginning ofthe fiscal year (A). 2oThe direct budget support for fiscal year 2008/09,exceptionally, has been released inthe second fiscal quarter due to the external audit issues inthe BOT. 69 FinancialInformation Providedby Donors for Budgetingand Reportingon Projectand ProgramAid @-2) 7.85 Completeness and timeliness of budget estimates by donors for project support. Most donors provide estimates of their support for programs and projects, and baskets in a timely manner and in line with the government budget cycle to help budgetingand secure government counterpart funds, where applicable. This process is specifically linked to the MTEF exercise, but the estimates need annual adjustment, as the MTEF itself is regarded as a rolling plan. It is also possible that a new project, which was not known to the parties at the time of the budget preparation, may be initiated in the course of the fiscal year; similarly, a grant may be agreed, or the negotiations of a loan may be concluded, duringthe fiscal year. 7.86 Frequency and coverage of reporting by donors on actual donor flows for project support. MoFEA has noted a number of difficulties related to the financial information on projects and basket support funds. Moreover, it is difficult for MOEFA to compile and aggregate data from different projects from MDAs and LGAs.According to MoFEA officials, some donors do not provide quarterly reports within two months of the end of the quarter in which the disbursements were made, which is the main concern o f this indicator. On the other hand, since most donor project and basket funds use national budget execution procedures, MDAs and LGAs are required to provide timely information on using these funds, which also faces some problems. Unlike direct budget support, project and basket funds lack a serious data reporting gap. A low budget implementationrate in donor project and basket funds activities in part indicates the lack of proper reporting. A draft World Bank policy note of September 2008 concludes that in 2006/07 (Footnote 7), the implementation rate for project and basket supported activities were as low as 62 and 51.6 percent respectively, which i s accordingto the study largely associatedwith under-reporting.2' *'According to this policy note, in some instances, poor budget execution performance is largely a problemof under-reporting rather than an issue o f non-expenditure. For instance, while donor-funded infrastructure projectsare reportedinthe budget books release, allocation and spending data are not integratedin IFMS for 84 percent of the projects. This results automaticallyin a very low level of recorded spending for the development budget of Ministry for Infrastructure Development. This is naturally considered a major problem by both MOFEA and Ministry for Infrastructure Development, as more than TSh. 100 billion is wrongly left unaccountedfor according to IFMS. This problemofreportingis directly linkedto the disbursementprocedures used for donor projects: the dummy exchequer system. A recent study has concluded that this system is not functioning well and that very little data is captured through the dummy exchequer. Discussions with the Ministry for Infrastructure Development suggest that this is partly correct. The dummy exchequer system appears to be a sound system from a technical perspective, but the main actors in charge of its implementation, inparticular Tanzania Roads Authority and the Ministry for InfrastructureDevelopment, don't appear to have the incentives to apply it adequately. This specific issue will be the subject of a separate report financed by Japan InternationalCooperation Agency on the exchequer system inthe road sector. Notwithstandingthe poor implementation of the dummy exchequer system, it does report on a quarterly basis on the physical and financial execution performance of these projects. However, financial execution information is limited to approximately 25% ofthe projects.Therefore, it is difficult to reconcilethe list of projects completedwith those plannedfor inthe budget. 70 Indicator Scores BriefExplanationand cardinaldata used Donor 2. Financialinformation (i)At least half of donors provide complete budget providedby donors for budgeting estimates for disbursement of project and program aid in and reportingon project and line with government budget calendar, with a breakdown program aid. that could be transformed to the government budget C+ classification, which is very broad for accommodating classificationof any project or program (B). (ii)Most donors provide quarterly disbursement reports within two months of end of quarter for at least 50 percent of externally-financedprojectestimates inthe budget (C). Proportion of aid that is managed by use of national procedures 0-3) 7.87 The use of national procedures means that the banking, authorization, procurement, accounting, audit, disbursement and reporting arrangements for donor funds are the same as those used for government funds. All direct budget support and some sector support will by definition use national procedures in all respects. Other types of donor funding (such as project and basket funds and other specific funds) use some or no elements o fthe national procedures. 7.88 In response to the government's strong request to channel support through the national systems, some donors have converted significant shares o f their annual aid to budget support or basket funding for sector-specific activities. In 2006/07, such support accounted for 68 percent of the total assistance (56 percent budget support and 11 percent basket funding), compared with just 31 percent in 2001/02. Consequently, reporting on donor-funded activities using national systems and procedures has significantly improved duringthe past few years, although there are still considerable amounts o f funds that bypass government systems. 7.89 In 2006, a survey monitoring the implementation of the agreements made under the Paris Declaration on using government systems was undertaken. This found that aid usingthe country PFM systems was on average 66 percent. However, given the increased share of the direct budget support in recent years, it is estimated that at present between 75 and 90 percent of external aid funds are using national procedures, though at times with some minimal additional steps required by certain donors based on their own requirements. Table 3.5: Aid flows usingnationalsystems: 2005/06 (YO) National process Percentage of total aid Aid usingbudget systems 76% Aid usingfinancial reporting systems 61% Aid usingaudit systems 61% Aid usingprocurement systems 61% managedusingnationalprocedures 71 8. PFMREFORMPROCESS RECENT AND ONGOING REFORMS 8.1 Tanzania has, over the last several years, initiated several reform measures in a number of PFM components, some o f which are continuing. These mainly include: macro-fiscal analysis, central payment and recording system, forward looking expenditure forecasting, tax policy and administration, external auditing, procurement, and, to a certain degree, internaI auditing and internal controls. In February 2008, the government adopted a new PFM reform plan called Public Financial Management Reform Programme (PFMRPIII), which calls for further reforms in the areas of policy analysis and development, external resources management, budget management, treasury management and accounting, procurement, information technology services, investment management, administrative support services, external audit services, and program leadership coordination, monitoring and evaluation. 8.2 An evaluation of the degree of success of the PFMRP I1was conducted in 2006, and some modalities o f the reform process were changed. The PFMRP I11 has now broadened its scope to include the BOT,the National Assembly, MDAs and LGAs. The new reform plan needs to be implemented by first addressing the basics and then ensuring that they are firmly in place before expanding the reforms. For example, accurate, transparent and improved cash forecasting, enhanced control over all public investments, improved credibility of MTEF, a reformed budget calendar and comprehensive budget classifications should be addressed as soon as possible. Moreover, in the plan there is little narrative to understand why certain outputs and activities have been included, and there i s little sense of prioritization among outputs. The calendar to achieve these outputs (3 years) may also appear ambitious. 8.3 Additionally, and perhaps as significantly, the reform plan addresses what appears to have been an important obstacle to reform implementation over the last years: poor capacity within MoFEA and the PFMRP Secretariat to coordinate or steer the reform process. The new plan envisages a much stronger coordination structure than in the past. But coordination, leadership and overall program management may nonetheless remain a challenge for many reasons that cannot be detailed inthis report. INSTITUTIONAL FACTORSSUPPORTINGREFORM PLANNINGAND IMPLEMENTATION 8.4 While there has been ownership of some specific reforms and piecemeal actions have been proceeding, government leadership in the coordination of PFM reforms, in particular of the PFMRPs as the coordinating vehicle for reforms, has been problematic in the past. It is believed that some basic reforms in accounting and reporting have been lagging compared with reforms in, say, macro- fiscal analysis or tax reforms. The budget preparation process clearly needs to address the issues of budget classifications, timely preparation and submission o f the budget, and related concerns. The dissemination of the government vision in reform strategy documents has been an area of strength, with the production of an annual progress report on PFM reforms, although there is scope for improving the analysis, and the absence of a forward looking action plan is a matter of concern. While the allocation o f funds to PFM reforms is substantial, the procurement of resources by government for this purpose is rather weak, as government has been unable to spend the allocated funds. It is assumedthat some o fthese problems relateto the ownership ofthe reforms. 72 8.5 The reform design process is generally led by the President's Office and the MoFEA. The involvement o f line ministries is limitedunless the reforms concern the particular sector in which case they take the lead role. The P F M W series represents an example of a coordination structure that supports a set of reforms and serves as a focal point within government for coordination of donor support for PFM reforms. The successful establishment of the coordination structure has been problematic and prolonged, and a number of challenges remain, though the institutional framework has been put in place through the establishment of a coordination unit, a steering committee and a management committee. It was particularly challenging to clarify the roles and responsibilities for implementing the reforms, though the formalization o f the institutional structures can be viewed as a success. The main challenge remains the buy-inof the most relevant and directly responsible unitsfor the proposed reforms. 8.6 In many areas, the reform process has been driven by technical assistance and pressurefrom development partners. This represents the development of partnerships whereby the donors and government have identified key areas for reform and donors have agreed to provide supporting assistance. However, it also means that there is a heavy reliance on technical assistanceto undertake the reforms, and an ongoing challenge has been to build domestic capacity through recruiting and retainingofthe personnel involved. 73 PART 111: PEFAR CAPACITY BUILDINGPROGRAM 74 9. BACKGROUNDAND OBJECTIVESOF THE MISSION 9.1 Fornearlya year, a PEFARCapacity Buildingteam ledby the WorldBank hasbeenassisting the Government of Tanzania (GOT)in strengthening its performance-based planningand budgeting, budget-MKUKUTA link, Strategic Plans (SP) and the Medium Term Expenditure Framework (MTEF). This initiative is part of the ongoingcollaborative efforts of the GOTand the Development Partners (DP) to strengthen public financial management (PFM) in Tanzania. The broad capacity buildingprogram's objectiveis to strengthenthe budgetpreparation processto more effectively align resource allocationto the prioritiesof MKUKUTA, thereby enhancing expenditure efficiency as well as growthand socialimpacts of the budgetarypolicies. 9.2 With support from the World Bank and CIDA, the core PEFARCapacityBuildingteam, with its GOTcounterpart, carried out a preparatory missionbetween February 22 and March 20, 2008 (cf. Attachment 6: CB Mission1 Report). The mission identified the following priority areas for interventionduringthe first phaseofthe capacity buildingprogram: 0 To strengthen the macroeconomic model (MACMOD)to enhance its capacity to simulate growth and poverty reduction policies and to strengthen the "Macro Policy Framework for the Planningand Budgeting."This is key for a reliablebudget frame that constitutes a critical inputfor preparation ofthe BudgetGuidelines; 0 To strengthen the MTEF in order to facilitate and optimize the budgetary resource allocationsystem, while taking into account strategic priority choices as well as basic sector needs; 0 To strengtheningsector Strategic Plans (SP) and sector MTEF with a programmatic approachto enhance the "readability" and strategic focus of the MTEF as well as ensuring consistency between SP/MKUKUTA/MTEF and results/outcome. This is also important in order to facilitate dialogue between the MoFEA and the sector ministries in the interactive inter-sectoralresource allocationprocess. 9.3 This secondmissiontook place in Tanzania from September 4 to December 17,2008 to kick- start the capacity building work program. The mission was supported by the Swiss Development Cooperation(SDC) andthe World Bank.The specificobjectives were to assist the GOTteam in: 0 Upgrading the macro model (MACMOD) with the construction of an endogenous growth simulationmodule; and preparinginputs to the Macro frameworkfor the 2009/10-11/12 Plan andBudget Guidelines(PBG); 0 Preparing a budget background paper that explains the macro framework and the strategic and sector-specific challenges that determine the medium-termbudget resource allocations (MTEF 2009/10-11/12) andthe 2009 annual budget; 0 Proposing upgrades to the MTEF that could improve the inter-sectoral resource allocation processwith the StrategicBudgetAllocation System(SBAS). 75 9.4 The missionwas led by Charles N'cho-Oguie(lead consultant), and includedFulbertTchana (consultant), Leonidas Luteganya (consultant), Paolo Zacchia, Florence Charlier, Emmanuel Mungunasi(all from the World Bank), and RoseAiko (SDC). This report provides a summary of the mainaccomplishmentsofthe missionand outlinesaroadmap for the capacity buildingwork program for the remainder of 2009. 76 10. MAINACCOMPLISHMENTS OF THE MISSION STRENGTHENING THE MACROECONOMIC MODEL -MACMOD How this work was conducted 10.1 Roughly two-thirds of the missionwas devoted to modelingwork to revise and upgrade the MACMOD as well as to prepare the macro framework paper for the 2009/10 Plan and Budget Guidelines.Througha series of technicalmeetings, workshops, and on-sitetraining, we upgradedthe modeland strengthenedbothhumanresources and capacities. These tasks were undertakenby a core macro group organized and led by the Policy Analysis Department (PAD) of the MoFEA with some facilitation from the DP PEFAR Capacity Building team. The core macro modeling group included key resource persons from the President's Office - Planning Commission, the Bank of Tanzania (BOT), the National Bureau of Statistics (NBS), the Tanzania Revenue Authority (TRA), and the regularstaffinthe PADofthe MoFEA. 10.2 The capacity buildingwork was organized inthree stages (Attachment 1): First, a series of regular technical meetings and on-site training sessions were held on a daily basis in the Conference Room of the PAD (September 15-27) (cf. Work Plan, Annex 1). This series of technicalmeetings and training were restrictedto the core macro modeling group, which is composedof 10 members.The group reviewedMACMOD and discussedand implementedthe first set ofupgrades, notablythe Endogenousgrowthmodule. Second, a two-week workshop was held at the POTREA COURTYARD Hotel (October 6- 16) for the larger Macro Modeling Group (-25 members). The workshop was used to appropriate, review the data, and organize the policy simulations work for the input to the macro framework paper. The workshop was extended to the entire Macro Group, including moreparticipantsfrom the CentralBank andthe Universityof Dar es Salaam. PAD in the MoFEA to prepare simulations for the macro framework while continuing to Third, regular meetings/training sessions were organized in the Conference room of the strengthenthe modeland enhance its appropriation. Accomplishment 10.3 As a result of the series of technicalworkshops described above, the team accomplishedthe following tasks: A complete review of the original version of MACMOD. This was the first step in the capacity strengtheningprocess and was meant to fully explainthe original MACMOD to the core group so as to enhance its appropriation and also to initiate future upgrades. These sessions involved: (i)revisiting the theoretical underpinnings of the MACMOD (the IS- LM-BOP/AD-AS framework) and briefly retracing the history of the development of MACMOD; (ii)reviewingthe main equations and closure of the IS-LM-BOP model; (iii) analyzing the specifications, econometric estimates, and key parameters of the model; (iv) reviewingthe databaseand the computer implementationof the model on Excel(the INPUT, 77 CORE MODEL and Output files). This review provided the core group with a sufficient understandingof MACMOD andhowto performsimulationexercises with the model. Discussion of model upgrades. The objectives were to revisit the theoretical underpinnings and the model specification in the context,ofcurrent needs of the GOTin terms of macro policy analysis and MKUKUTAMTEF-based planning. A further goal was to provide rationale for proposed model upgrades. These series of technical meetings were used to: (i) assess the key limitationsof MACMOD and to argue for a disaggregatedsupply approach in order to enhance growth and poverty policy simulation capabilities of the model; (ii) specify the key equations of the aggregate supply block (an endogenous growth module); (iii) reconcile the supply-driven growth module with the rest of the IS-LM-BOP/AD-AS framework, includingrequiredchanges in model closures. Econometric analysisand estimation of modelparameters. This sessionfocusedon how key modelparametersare estimated, including:(i)preliminaryeconometric analysis of key model equations by Econometric-Viewsusing both panel data and Tanzanian economic series; (ii) estimationof other key model parameters by calibrationmethods; (iii)preliminary draft of a note on the econometric analysisofthe model. Programming MACMOD-TZ on Excel. This included reorganizing and programmingthe key components of the model, namely the Input module (MACMOD-TZ-IN), the new core module (MACMODTZ-MODEL), and the output module (MACMOD-TZ-OUT); (ii) programminga navigationtool (the SART module) to facilitate data input as well as policy simulations andresults analysis.The Macro includes an overallcontrolmodule (START)that allows users to navigate from one module to another, as well as navigationtools within each module. Policy simulation and analysis. This set of activitieswas designed to facilitate appropriation and the exploitation of the model by the core group. The group was trained to: (i)design alternative"scenarios" (consistent $et of exogenous as well as policy variables); (ii) perform simulations with the modeland analyze the results, which subsequently constitutedinputs to the macropolicy frameworkpaper. Achievements 10.4 As a result of these activities, the core macro modeling group was strengthened in two complementary ways: A vastly improved and user-friendly macro simulation tool (see Attachment 2). The team is now equipped with a model that has enhanced capacity to simulate growth policies, includingbudgetary policies, sector strategies, investment, as well as exogenous shocks.The modelis also organizedto facilitate scenario analysisandrisk assessment. Enhanced human capacities for macro policy simulation and analysis. The series of workshops and the sustained involvement of the core group have contributed to strengthening capacity and bringing the macro group together for substantive technical work leadingto the preparation of the macro policy frameworkpaper. As a reflectionof this, the core group has been able to organize and simulate alternative scenarios for the macro framework 2009/10-11/12, and is now in the process of revising the baseline scenario to take into account new informationabout the world economic outlook as well as new data from the economic survey (see. Section 2.2). 78 PREPARINGTHE MACRO FRAMEWORK 2009/10-11/12 FORTHEPLANBUDGETGUIDELINES How this work was conducted 10.5 At the request of the Commissioner for Policy Analysis, the work program was slightly modifiedto cater to immediate needsrelatedto the preparationofthe Macro Policy FrameworkPaper (MPFP) for the 2009/10 Plan Budget Guidelines (PBG). The modeling work was reorganized in order to provide inputs to the PBG mid-way through the mission (first input by the end of October 2008). To this end, the workshops' sessions on econometric analysis were shortened to acceleratethe programmingofthe modeland its exploitationfor policy simulations. 0 The two-week workshop with the larger Macro Group provided a venue for organizingand intensifyingthe policy simulationwork for the MPFPandthe PBG.Duringthe workshop, the team was divided into specialized groups (Production; Government, External Sector, and Money). The sub-groups took charge of their respective sub-modules (GDP, Gov-Fin, Trade/BOP, and Money). They prepared the database for each sub-module, updating estimates for 2008; and they prepared input to the model, including specifying the main exogenousand policy assumptions for 2010-11 intheir respectiveareas. Then, a coregroup was designated toprepare draft zero of theMPFP, includingan analysis of the most recent developments and medium-termoutlook and targets, as well as simulated macroand budgetframes (GDP growthand publicrevenueand expenditureprofile). Thereafter, "in-house" technical meetings were held to revise and upgrade the draft, includingperformingscenarioanalyzes. Accomplishment 10.6 The following tasks were executed by the Group in order to prepare the first draft of the MPFP for the 2009/10 PBG: Review of recent economic developments: This included: (i)a survey of real sector development for 2007 and 2008 and the analysis of recent (2008) macroeconomic developments (Chapter 1 of the draft PFP); (ii)assessment of the world economic outlook andthe implicationsfor Tanzania. 0 Design and simulation of a "baseline scenario": This includes: (ii)Specifying key macroeconomic and fiscal policy targets (growth, inflation, exchange rates, revenue and primary deficit targets), and making well-informed conjecture on exogenous world developments (world markets trends for Tanzania's export, FDI and ODA); (ii)simulating a "baseline scenario" using MACMOD-TZ; (iii)performing risk analysis to develop alternative growth scenarios based upon the likely magnitude and impact of the world economic recession,persistent energy problems, and government fiscal strategies. Draft theMPFP: The team preparedthe first draftofthe MPFP, includingchapters on recent economic developments (Chapter l), outlook for 2009-11 (Chapter 2), and analysis of the "baseline scenario" and possible alternative scenarios, as the world recession was proving more severe than originallyanticipated (Chapter 3). Achievement 10.7 The above activities, combinedwith the modelingexercise, yieldedthe followingoutputs: A preliminary draft of the MPFPfor input to the 2009/10 PBG (see Attachment 3). The draft is still beingstrengthened as new informationregardingthe extent andnoticeable impact 79 of the crisis becomes available, and also on the latest estimates of actual macroeconomic performancein2008 (GDP growth and fiscal performance). Strengthened human capacities. The macro team has grown considerably in its capacity to generate a consistent set of macro framework tables (Real Sector, Gov, Trade and BOP, Money) andto simulate policies andundertake scenario analysis in a timely fashion. PREPARING THE BUDGET BACKGROUND MEDIUM AND TERMFRAMEWORK 10.8 More than one third of the missionwas devoted to assisting the MoFEA Budget Department in preparing the first edition of a "Budget Background and Medium Term Framework Paper" (BBMTF). The paper provides a coherent review of the macroeconomic backgroundas well as the strategic focus of the budget; it also analyzes key trends in budget executions and explains how the medium-termexpenditure allocationsare alignedto the strategic priorities of MKUKUTA and related sector needs. This document is at the cornerstone of the GOT'Seffort to make the budget more "readable" andtransparentto stakeholders, as well as align the MTEF andthe budget on the priorities of MKUKUTA and sector Strategic Plans. The GOTintends to produce the BBMTF every year to accompany and explainthe traditionalbudget books. How thiswork was conducted 10.9 The preparatory work for the BBMTF was led by the Commissioner for the Budget. A task team was designated, which mainly consists of technical staff from the Budget Analysis Department andwas supported by the DP PEFARcapacity buildingteam. Regular "in-house" technical meetings. As in the macro modeling exercise, most of the preparatory work that led to the first and full draft of the document was undertaken in the form of regular technical meetings within MoFEA's facilities. These meetings were organized to discuss the framework and content of the document, provide practical training on how to extract budget data, and prepare key tables for analyzing budget execution and allocationstrends usingpivot tables in Microsoft Excel. Technical workshops. Several technical workshops were organized outside the MOFEA in order to draft the document or to reviewhpgradethe existingdraft in an iterativefashionuntil a complete and satisfactorydraft was obtained. Several ofthese meetingswere chairedby the Commissioner for the Budget. Internal review within the GOT.The full draft ofthe BBMTFwas circulatedto the rest of the senior staff and management of the MOFEA as well as other central government institutions for an internal review process organized by the Commissioner for the Budget. Cross-support and full collaboration with the DP's Rapid Budget Analysis Group. The preparation of the BBMTF has benefited considerably from a close collaboration with the PEFAR Rapid Budget Analysis work that was carried out by the World Bank-led DP task team. The collaborative work includes exchange of data, discussion of methodology, and exploitation ofthe results of the PEFAR analyticalwork on budget allocationandexecution. Accomplishment 10.10 The Task team undertook the following activities in order to prepare the full draft of the BBMTF: 80 Training for budget data manipulation and budget trends analysis. This task involved strengthening team member's capacities to (i)manipulate budget data (extraction, pivoting and tabulation techniques), (ii)prepare key tables and analyze budget execution and budget allocations by clusters, sectors and economic classification, as well as allocation and execution within each sector. Drafting the report. This task included (i)preparing the outline of the document, (ii) organizing the team'by sub-groups to take charge of drafting the various chapters and sections. Reviewing, discussing, and strengthening the draft. This was done in an interactive and iterativefashion via the series of meetingsandtechnicalworkshops mentionedabove. Validatingthe draft. At the conclusionof the work, the draft document was submittedto the Commissioner for Budget for validation. The task team received many comments from the internalreviewprocess andrevisedthe final documentaccordingly. Achievements 10.11 The coordinated activitiesabove yielded importanttangibleresults, including: A strong analytical budgetpolicy framework document (see Attachment 4). The BBMTF ties together the macroeconomic framework and the challenges in the execution of the budget, especially development budget, to realize MKUKUTA objectives and MDG goals as well as the medium-termexpenditure trends. The GOTis determined to institutionalize the document andto prepare it as a cover documentto the traditionalbudget books. An organized database for annual budget trends analysis, including key tables of expenditure trends by clusters, by sectors,, economic classification, as well as budget allocationsand expenditures tables within each sector. A stronger budget analysis department. Inthe process of accomplishingthe above tasks, the budget team considerably enhanced its capacity to carry-out "in-house" analytical work, includingan expenditurereview andMTEF allocationanalysis. STRENGTHENING THE MTEF How this work was conducted 10.12 While the previous components of the work program were undertaken primarily by the respective task teams organized by the GOT,the exploratory work to upgrade the MTEF and SBAS was conducted mainly by the core PEFAR capacity building team. This is partly because the GOT task teams were already stretched thin and consumed by other ongoing assignments, namely the macro modeling exercise, the preparation of the MPFP for the PBG, and the production of the BBMTF. But it is also by design, that, given the complexity of the MTEF system, the mission has decided to adopt a more cautious approach for strengthening it. The strategy is to first develop key upgradeson an experimental basis, to test their pertinenceand usefulness and also assess the scope of the programming work neededto upgrade the SBAS, both Macro and Micro versions. It is expected that with provenresults from the experimental exercise, the capacity buildingwork will be enticedto embark on a full-scalerevisionofthe current MTEF and itscomputer system, the SBAS. Accomplishment 0 First, a simple Excel-based MTEF optimization model was designed by the team (Attachment 4). This simple spreadsheetmodel serves as a transparent tool for implementing 81 the 3-step strategic allocation process, distinguishing a "baseline budget" covering basic necessities, a "pipeline budget" covering ongoing investment programs, and a marginal budget allocatedto new projects on the basis of performance, MKUKUTA priorities and the available "budget space." A new SBAS Macro module is developed. This work included: (i)discussion of the 3-steps allocation approach and identification, by government functions/sector/votes, of "baseline expenditure," "pipeline spending," and new allocations, based on priorities, merits, and the available "budget space;" (ii)programmingofthe 3-step approachinSBAS Macro; (iii) allocationsanalysis with the enhancedMTEF model. Achievements 10.13 The experimental exercise proved largely successful and provides a stepping stone for a full scale upgrade of the MTEF: e The three-step approach was testedon the 2008 and 2009 budgets andprovidesan effective and more transparent means of streamlining the resource allocation process in SBAS-Macro. It also providesan effectivetool for projectingthe MTEF over the outer years (n+l, n+2). This is because the baseline budget can be projected with simple and explicit assumptions on the progression of the wage bill and the cost of basic expenditure on goods and services. Likewise, the "pipeline budget" provides an effective mechanism for keeping track of multi-year investment programs and consistently supportingthem over the planning period. e The Revised SBAS-Macro is operational (Attachment 5). It provides a more effective tool for optimizing resource allocations on the basis of "budget space" remaining once basic necessities and pipelineprogram costs have beencovered. BUILDINGA PROGRAMMATICDIMENSIONINTHE SPAND THE MTEF 10.14 An experimentalframework was developedfor the healthsector duringthe precedingmission (Attachment 6). The remainingtasks were (i)to revise the suggested program-basedframework and reconcile it with the new priority action plan developed by the sector as part of the revised sector strategy, and (ii)to revisethe sector MTEF accordingly. 10.15 However, the Commissioner for Budget requested that this component of mission activities be moved to the next phase of capacity building work program. This is partly because the budget team was already consumed with other tasks, and also because of considerable delay in the implementation of the functional budget classification system, which the GOT regards as a prerequisiteto the program-budgetingsystem. Therefore, and at the request of the PAD, the time and resources freed from the health sector program-budgeting work were reallocated to intensify the modelingwork and prepare rapid inputsto the MPFPandthe 2009/10 PBG. 82 11. ACTION PLANFORTHE REMAINDEROFTHE YEAR (2009) 11.1 A tentativeactionplanwas discussed with the PADwith regardto the macro modelingwork and the Budget Department for the BBMTF and the MTEF work. The following were identifiedand agreed as key areas of immediateattentionfor the remainder of2009. STRENGTHENING MACMOD-TZ AND THE MACRO POLICY FRAMEWORK PAPER2009/10-11/12 Revising the baseline macroeconomic framework for the PBG 11.2 The world economic outlook has continued to worsen since the first draft of the macro framework was prepared last fall. There are signs that the world financial crisis and the ensuing recession may have impacted Tanzania's economy much more deeply than anticipated in terms of FDI and ODA flows as well as tourism and exports. The sensitivity analysis performed last fall indicatedthat under such a scenario, GDP growth may be reduced from 7 percent to 6.5 percent or even lower in 2009. There are also indications that the fiscal revenue performance may be weaker than planned, partlythe reflectionof a slow-downin economic activities. 11.3 In light of these developments, the core macro modelinggroup has resumedwork to revise the exogenous assumptions, redo the simulations and revise the baseline scenario for the budget frame. This work is being supported by the PEFAR capacity buildingteam. The revised framework was prepared in April 2009, based on the new data on productionsectors that was released by the NationalBureauof Statistics in early April. Revising the econometric analysis of MACMOD-TZ 11.4 As of now, the main equations and model parameters have been estimated using a panel approach with data for SSA countries, and on the basis of Tanzania's old economic series. During the next mission, a workshop will be organized with the core macro team to redo the econometric analysis onthe basis of the new SNA-93 economic series. Developing a simple poverty and social development indicators projection module 11.5 A simple poverty module will be developed to enable the model to project key poverty and social indicators, including the income poverty incidence as well as education and health sector MDGs.Econometric techniques will be usedto predict such indicatorson the basis of growth pattern (per capita growth rate and distribution of growth), public spending in education, health, and infrastructure.This technique is similar to the approach used in the MAMS model (Marquette for MDGs Simulation). This task could possibly be accomplished during the next capacity building mission. Developing a labor market and full poverty and MDG modules 11.6 Duringthe second half of the year (July-December), the modelingwork will concentrate on strengthening the capacities of MACMOD-TZ to perform Poverty and Social Impacts Analysis (PSIA). To this end, a labor market module will be developed that will allow the model to project 83 trends in employment and wages consistent with sector growth. A framework has already been developedby the core macroteam, which will providea startingpointfor the labormarketmodule. 11.7 Also, expanding from the previous work, a full Poverty/MDG module will be developed to project poverty incidence and all key MDGs. This will ensure that the model is well equipped to assist inpoverty simulationsfor ongoingwork for preparingthe new editionof MKUKUTA. Intensifying the training componentof the capacity buildingwork program 11.8 During this first phase, priority has been given to achieving models, documents, and other specificoutputs. As a consequence,the training componenthas not receivedadequateattention.Inall subsequent missions, emphasis will be placed on trainingthe larger macro team in order to facilitate appropriation and exploitation of the model. All aspects will be covered, especially the econometric analysis as well as the modelingof growthandpovertyreductionpolicies. MTEFUPGRADES SECTOR PROGRAMBUDGETING AND At the centrallevel(SBAS-Macro) 11.9 The first step is to discuss the proposedupgrades of the MTEF allocation system as well as the revised SBAS project with the Commissioner for Budget. The second is to agree on a list of baseline expenditure items as well as the nature of the typical "pipeline" programs. The Priority Investment Program (PIP), which is being developed by the GOT,will form the major input to this exercise. Then, a full-scale revision of SBAS, both macro and micro, could be implemented as a meansfor a consistent 3-year MTEFallocationssystem. Sector Strategic Plan and Program Budget 11.10 Duringthe second half of the year (July-December), the capacity buildingteam can resume work to build a program dimension in sector strategic plan and MTEF, which would also help sectors' MDAsto performscenario analysisbasedon projected budgetceilings. 11.11 SBAS-Micro will be revised accordingly, allowing for program codes as well as codes for identifyingexpenditure by degree of contingency (basic necessity, pipeline, and new programs).The new approachwill befully implementedfor designatedpriority sectors. BudgetBackgroundand Medium Term Framework 11.12 The Commissioner for Budget is planning to resume work on preparing the BBMTF-2009/10-11/12 in the second half of the year (July-September). In order to assist the capacity buildingwork, the PEFAR team will prepare an Excel program for extractingbudget data and preparingkey tables for rapidexpenditureanalysisfor the BBMTF. 11.13 The capacity building work will put emphasis on the training component in order to strengthen capacity for analysis of budget execution and strategic budget alignment. This will help the task team as it preparesthe 2009/10-11/12 editionof the BBMTF. 84 ANNEX 1: PERFORMANCE INDICATORS SUMMARY TABLE hdicator Score Brief Explanation and cardinal data used ?I-1Aggregate expenditure outcome Inlast three years, only in2007/08 didthe actualtotal expenditure :ompared with original approved budget B deviate from budgetedexpenditureby more than 10percent. PI-2 Composition of expenditure outcome In2005/06, variance inexpenditurecomposition exceededoverall :ompared with original approved budget C deviation inprimary expenditureby more 10 percentagepoints. PI-3 Aggregate revenue outcome Inthe last three years, revenuecollection was consistentlyabove :ompared with original approved budget A the approvedbudget. PI-4 Stock and Monitoring of Expenditure (i)Thestockofexpenditurepaymentarrearsconstitutes2-10%of Payment Arrears total expenditure, andthere is no evidence that they have been reducedsignificantly inthe last two years (C). C+ (ii)Dataonthestockofarrearsisconsolidatedannually,butthey do not have an age profile (B). PI-5 Classification of the budget The budget documentationand execution is basedon GFS-based C administrative and economic classifications. No GFS-based hnctionalclassification i s part ofthe budget documentationand reporting system. PI-6 Comprehensiveness of information included in budget documentation B the required information. PI-7 Extent of unreported government (i)Extrabudgetaryspendingisestimatedtobebetween5-10 operations percent oftotal government expenditure (C). c+ (ii)Complete income/expenditure information is included inthe fiscal reports for all loan-financed operations and at least 50 percent of grant-financedoperations (B). PI-8 Transparency of inter-governmental (i)Thehorizontalallocationofalmostalltransfersisguidedby fiscal relations certain measures, but becausethey are conditional transfers, sectoralpolicies also needto be taken into account (B). (ii)Reliable information to LGAs is issuedthree monthsbefore the start of the fiscal year, which is a short period for significant budget changesto be made (C). (iii)Fiscalinformationthatisconsistentwiththecentral governmentfiscal reporting is collected on quarterly basis (B). PI- 9 Oversight of aggregate fiscal risk (i)MostAGAsPEssubmitsfiscalreportstothecentral from other public sector entities government, but these are normally delayedand their consolidated overview i s incomplete (C). B (ii)TheLGAsdonothaveborrowingpower,unlessapprovedby the MoFEA, which is not used, andtheir budgetexecutionreports are available on quarterly basis (A). PI-10. Public access to key fiscal The government makes available to the public 5 out of from 6 types information B of information, but two ofthem are not complete. )__1 ndicator Brief Explanation and cardinal data used '1-11 Orderliness and participation in the (i) comprehensivebudgetcalendarexists,butalwaysendsup A innual budget formulation process with late submission ofthe budgetjust before the end of fiscal year, though MDAs needmore time to submit their budgets (C). (ii) comprehensive budgetcircular andbudgetpreparation A guidelinesare issued, andthe center of government has time to make necessaryadjustments(B). B (iii)TheLegislaturenormallyapprovesthebudgetbeforethestart ofthe fiscal year, but all authority for changes within the approved total level of an MDA's budget remainwithin the power ofthe executive branch (B). PI-12 Multi-year perspective in fiscal (i)Forecastoffiscalaggregates,onthebasisofmaincategoriesof Ilanning, expenditure policy and administrativeand economic classificationfor recurrent Iudgeting expenditures and project or sector-basedfor development expenditures, are preparedfor two years inadditionto budget year (C). (ii)DSAforexternalanddomesticdebthasbeenundertakeninat leasttwo out ofthe last three years (B). (iii)Sectorstrategiesexist,buttheyareinconsistentwithaggregate fiscal forecast (C). (iv) Linkagesbetween investmentbudgetsand sector strategiesand recurrent budgetsare weak (D). PI-13Transparency of Taxpayer (i)Therearerelativelynewandcomprehensiveincometaxand 3bligations and Liabilities VAT laws (B). (ii)Taxpayeraccesstoinformationontaxliabilitiesand administrativeprocedures. There are good taxpayer education systems but no call center or central informationsystem(B). (iii)Thereisanindependentdisputesresolutionsystemfunded separatelyby government, though it needs further capacity enhancement(B). PI-14 Effectivenessof measures for (i)Taxpayersareregisteredinadatabasewithanidentification taxpayer registration and tax assessment systembut there are no links to other systems (C). (ii)Penaltiesexist,buttheyareinsufficientlyspecificandinsome C+ cases too low to have an impacton compliance (C). (iii)ThereisagoodtaxauditoperationintheLTD(themaintax collectiondepartment), but a mixedperformancein DRD(B). PI-15 Effectivenessin collectionof tax (i)Collectionratioforgrosstaxarrearsin2004/05and2005/06was payments 33 percent accordingto LTD data and 71 percent according to LTD and DRDdata (C). B (ii)Revenuecollectedis transferred to the mainaccount inthe Bank o f Tanzania within a week (B). 86 [ndicator BriefExplanationand cardinal data used (iii)Reconciliationbetweentaxassessments,collections,arrears records andreceiptsby the Treasury takes place as a matter of routine(A). PI-16 Predictability in the Availability of (i)Anannualcashflowforecastforgovernmentbudgetandeach Fundsfor Commitment of Expenditures MDA is prepared, but substantially revised on a monthly basis (B). (ii)MDAsareprovidedwithreliableinformationfortheir C+ commitments but only for each monthandwith relativelyshort notice(C). (iii)Significantin-yearbudgetadjustmentsarefrequent,but undertaken with some transparency(C). PI-17 Recording and managementof each (i)Debtdataisofarelativelyhighquality,butminorreconciliation cash balance, debt, and debt guarantees problemsoccur, and timely statisticalreports are produced(B). (ii)Thebalancesofseveralgovernmentbankaccountsin C commercialbanks are notconsolidated, though there is aplanto do so inthe future (D). (iii)Contractingofloansandissuingguaranteesisapprovedbythe Minister of MoFEA in line with rules, but it is not clear ifceilings apply (C). P1-18 Effectivenessof payroll controls (i)Personnelrecordsandpayrolldataarestoredinthesame database andare fully integratedand reconciled(A). (ii)Changestopersonnelrecordsandpayrolldatatakeplaceona monthly basis, but quality is not assured(C). (iii)Someinternalcontrolsexistfordataentryforchangeson C+ personnelrecords and payroll data, but are not adequateto ensure the integrity of data, which originates inthe MDAs (C). (iv) Quarterlypayroll audits with limited coverage have been undertaken duringthe last three years, but no survey has been conducted since 1994 (C). PI-19 Competition, value for money and (i)66percentoftendersunderopentenderingprocesswere controls in procurement advertisedinfiscal year 2006/2007 (B). (ii) lesscompetitiveprocurementisallowedwith Using B justification. AlthoughPPRA's view may be sought, observingthe procurementact remainswithin the power of procuringagencies (B). (iii)Acomprehensivecomplaintsmechanismoperates,butfor unknownreasonsthe number of complaints has declined (B). PI-20 Effectivenessof internal controls for (i)TheuseofIFMSwithacommitmentcontrolfeatureisrelatively non-salary expenditure effective,but cannot provide a full guaranteeat all times (B). 87 [ndicator BriefExplanation and cardinal data used (ii) Other internalrules andprocedurescover major setsof controls that are generally understood,but insome areas, these are excessive C+ andcomplianceratevary (C). (iii) Rulesare observedinmajorityoftransactions,butthere is some evidence of misconduct(C). PI-21 Effectivenessof internal audit (i) Internalaudit function exists inmost MDAs, and it is estimated that 20 percentofthe stafftime is allocatedto system-based reviews andhighrisk areas (C). D+ (ii) Reports are issued for most MDAs,but these are not submitted either to the AGD or the NAO (C). (iii)Tosomedegree,actionsaretakenbymanagementonmajor issues, but oftenwith delay (D). PI-22 Timeliness and Regularity of Accounts Reconciliation (i)BankreconciliationsforTreasury-managedaccountsare undertakenmonthly within 4 weeks, butthe size of unreconciled itemsseems to be large(C). (ii)Suspenseaccountsarereconciledandadvancesareclearedin monthlyperiods,butthe size ofunreconcileduncleareditems is not known.A significant number of accounts have unclearedbalances broughtforward. (C). PI-23 Availability of Information on Informationonresources receivedby front lineservicedelivery ResourcesReceived by Service Delivery units is mostly lacking. Specialsurveyswere undertakenwithin the Units lastthreeyears, buttheir results andmethodologiesusedhave not beenpublished. PI-24 Quality and timeliness of in-year (i)Scopeofflashreportsiscompatiblewiththebudgetestimates budget reports. for bothcommitmentsandpayments,but invery broadcategories. Revenueis also classifiedvery broadly (B). (ii) areprovidedmonthlyonflashreportingforexpenditures Data and quarterly for all fiscal components,includingrevenue, expendituredeficit, and financing (A). (iii)Informationisaccurateinflashreports,butunknowninoverall quarterly fiscal reportingdue to multiplesources ofdata (C). PI-25 Quality and Timeliness of Annual (i)Centralgovernmentfinalaccountsincluderevenue,expenditure Financial Statements andbankbalances, and since 2007/08 some data on liabilitiesbut not on assets (C). (ii)Financialstatementsaresubmittedforexternalauditwithin6 monthsofthe endofthe fiscal year (A). (iii)IPSAScashaccountingstandardsareused,butstillassetsand liabilitiesare not fully reported(C). 88 [ndicator Brief Explanation and cardinal data used PI-26 Scope, nature and follow-up of (i) auditreportcoversallMDAsandLGAs,butpartofthe The :xternal audit AGAs and PES.The nature of the audit remains centeredon transaction leveltesting, but reports identify some significant issues (ii)Inthelastthreeyears,theauditreport,includingconsolidated financialstatementsof government, was presentedto the legislature C+ within 8-9 months after end of periodcovered(B). (iii)MDAsandMFOEAsubmittedformalresponsestotheNAO on only the audit reportof the 2005/06. These are due to be discussedby the PAC in2009 after a longtime gap. No evidence can be demonstratedfor a systematic follow up on audit findings by the MDAs (C). PI-27 Legislative scrutiny of the annual (i)Legislativescrutinyofthe annual budget (details of expenditure wdget law and revenue) takes place within a short period oftime, but MDAs briefthe NationalAssembly's Sectoral Committees ontheir estimatedexpenditures inadvance and beforethe budget is submitted (C). C (ii) legislativecommitteeshaveestablishedrulesfordebating The the government budget (B). (iii)Legislature'stimeforameaningfuldebateofofficial government budget is very limited (D). (iv) Clear rules exist for in-year amendments, butthey allow unlimitedand extensive re-allocationwithin the budget of an MDA 0. PI-28 Legislative scrutiny of external audit (i)Examinationofauditreportsbeginsafter 11monthoftheir reports receipt, and takes another 4 monthsto complete (D). (ii)Indepthhearingstakeplacewithresponsibleofficersfromthe C audited entities (B). (iii)ActionsarerecommendedbythePAC,buttheyarenotacted uponby the executive (C). Donor 1. Predictability of Direct Budget (i)Innone ofthe last three years has direct budget support outcome support fallen short of forecast (A). A (ii) directbudgetsupportispaidinthefirstquarterinone All installment to helpboost (enhance) the government cash positionin the beginningofthe fiscal year (A). lonor 2. Financial information provided (i)Atleasthalfofdonorsprovidecompletebudgetestimatesfor iy donors for budgeting and reporting on disbursement of project andprogramaid inline with government iroject and program aid C+ budgetcalendar, with a breakdownthat couldbe transformedto the governmentbudget classification,which is very broadfor accommodatingclassificationof any project or program(B). 89 Indicator ScoreBriefExplanation and cardinal data used (ii) donorsprovidequarterlydisbursementreportswithintwo Most months of end of quarter for at least 50 percentof extemally- financed project estimates inthe budget (C). Donor 3. Proportion of aid that is managed using national procedures B 90 ANNEX 2 :ASSESSMENT OF PEFAR 08 CAPACITY BUILDING WORK (Views from the Macro ModelingGroup and BudgetBriefTeam) Macro FrameworkPaper 1. The Macroeconomic framework paper is prepared every year as one of the necessary background papers for the Plan and Budget Guidelines (PBG). The Macro framework paper for 2009/10-2011/12 is one ofthe productsofthe PEFAR 0 8 capacity building,which also contributed to and informed the Budget Guidelines Committee (BGC) on the available resources both from domestic and foreignsources. Basedonthe projectedGDP level, the resourceenvelope is determined using macro modeling. During the preparation of the 2009/10 PBGs, the upgraded MACMOD-TZ was used in projectingthe resource envelope basedon the projectedlevels of real GDP growth.Using the MACMO-TZ,the governmentwas able to projectrobust levelsof real GDP growth, which in turn was used to project more reliable levels of domestic revenue, aid and expenditure. In the 2009/10 PBG, projectedreal GDP for 2009/10 is 7.0 percent and the revenue to GDP ratio is 16.8 percent, which is more reliablethan the 17.7 percent projectedin the previous year. The increasedreliability of these key macroeconomic variables signifies the improvement achieved with the upgrade of the MACMOD-TZ and subsequent training of a dedicated team coordinated by the Ministry of Finance and Economic Affairs (MoFEA). Budget BriefPaper 2. Despite the government efforts to improve the budget preparation process, some challenges have also emerged, including the increased need and demand for more communication with stakeholders on the background of the budget. The stakeholders have continued to demand more information on the guiding principles, macroeconomic underpinning, strategic objectives, and medium-termtargets of the budget in a simple, integrated, and compellingmanner. The government has risento this challenge in a number of ways. First, the Budget Guidelineshave been streamlined and enhanced to more clearly reflect strategic objectives and choices, and the implications for key sectors in terms of medium-term resource allocation. Second, a summary budget framework document is published(Budget Digest) and submitted to the parliament accompanying other budget documents on budget speech day. This note explains in a clear and concise fashion the main macroeconomic assumptions and fiscal underpinnings of the annual budget and the medium-term expenditureframework. 3. The Budget Brief Paper (titled "Budget Background and Medium Term Framework," BBMTF) constitutes a milestone in the government's sustained effort to address stakeholders' demandfor enhanced.communicationandtransparency ofthe budgeting process.The document is the first editionof an annual reporton the budget and the MTEF, designedto serve as a "narrative cover" for the traditional budget books. The BBMTF is an integrated document that knits together the reviews of the macroeconomic framework, the achievements and strategic challenges in the implementation of MKUKUTA, and the analysis of budget execution, expenditure trends, and medium-termfocus with the strategic priorities of MKUKUTA as a backdrop. The BBMTF was prepared by the Budget Department of the MoFEA. This work has received technical support from the DevelopmentPartners inthe framework of Capacity Building. 4. The BBMTF highlights critical issues in the budget preparation and implementationlexecution, including allowances, better balance between MKUKUTA clusters, low maintenance budget in social sectors, slow pace in D by D policy, under-execution of the 91 development budget, need for prioritized medium-term public investment planning, and many other issues. Many of the issues identified in the BBMTF have received recognitionof the BGC and have also been included in the PBGs in order to be addressedin the 2009/10 budget. In addition, BBMTF presents analysis of the medium-termexpenditure by strategic objectives, by MKUKUTA clusters, major sectors, economic nature, and key sectors. The paper also providesan analysis of expenditure by current and capital components.This informationhas significantlyenhancedthe requiredlevels of clarity and transparency in the budget and gives an indication of budget consistency with policy objectives. 5. Inthe future, the BBMTF could serve as a unique and comprehensive background document for different review processes such as PEFAR, budget review, and sector reviews. This will help streamline the large number of sometimes repetitivebackgroundpapers used for these processes. In this regard, the government intendsto usethe BBMTF to better informand considerably facilitate the dialogue with domestic stakeholders as well as its DevelopmentPartners, thus reducingthe burden of related preparatory work on government staffs. The government intends to publish the BBMTF for wider circulation to stakeholders, includingCSOs, academia and general public. And a streamlined calendar for its disseminationwill beestablishedfor future publications. MACMOD-TZ 6. It should be noted that in 2007, the National Bureau of Statistics revised the National Accounts of Tanzania Mainland with the goal of enhancing the quality of National Accounts (NA) estimates to better portray the economic activities in the country and ensure international comparabilityin accordancewith the UnitedNations System ofNationalAccounts 1993 (SNA 1993). The revision is based on the 2001 results of the Household Budget Survey, and thus the benchmark for the newhevised GDP series is at constant 2001 prices as opposed to the former outdated 1992 prices. 7. Giventhe revisionof the NA data, it was imperativeto update the MACMOD with the new data series, which starts in 1998. The task was undertaken by a core macro group (CMG) organized and led by the Policy Analysis Department (PAD), Ministry of Finance and Economic Affairs and includedkey resource persons from President's Office, PlanningCommission, the Bank of Tanzania (BOT),the NationalBureauof Statistics (NBS), andthe TanzaniaRevenueAuthority (TRA). 8. The maintasks undertakenby the Teamunderthe guidanceofProfessorNchowere to review the existingversion of the MACMOD and update the database with the new national income series and any other new data available. The upgraded model was used to assist in the preparation of the first draft of the macro policy framework for the planand budget for the period2009/10-11/12.Other tasks undertaken so far include developing a navigation tool to make the new framework user- friendly and facilitatingthe utilizationofthe modelfor policyanalysis andplanning. 9. Apart from producingthe Macro framework paper, the upgraded MACMOD-TZ has been a useful tool for simulating different scenarios of the impact of the current economic crisis. This is necessary input into the dialogue and discussions on the crisis. The Commission, which was formed by the President (and chaired by the Governor of the Bank of Tanzania) to oversee/evaluate the impact of the crisis, will benefit from the inputs produced by the MACMOD-TZ team. The MACMOD team comprised about ten energetic staff from different relevant institutions(as indicated above), is working hardto simulate different scenarioswith regardto the crisis as well as updatingthe Macro framework paper and the budget framework as new information comes on board. The modeling process is always a "work in progress," and therefore there is some work still pending, including further update of the model in the work of Global Financial Crisis; revising the model 92 description manual and user's guide to reflect the new upgrades; incorporating labor market, production function, and poverty analysis into the model; and data harmonization and linkages, among others. Budget Analysis Training 10. As part of budget brief document preparation, about ten staff of the Budget department in the MoFEA benefited from the training offered by the DP PEFAR CB support team. The training involved analyzing the budget and expenditure data and preparation of summary tables using pivot tables. The staff members from the Budget department have confirmed that this training is very useful, as it has helpedthem to identify inefficient allocations and expenditures in differentMDAs on per diems and travel allowances, government vehicles and transport, seminars and workshops, and furniture.All these have also been included in the new PBGs as the areas where accountingofficers are supposedto scale down in order to realize some cost saving. They have also confirmedthat they will use the skills acquired during the budget scrutinization process, a stage where the MoFEA and MDAs meet to assess budget requests and allocations.This has also started to yield positiveresults at the MDAs' planning level, especially the compliance of MTEF submissions with priority criteria outlined in the PBG, with backstoppingprovided by the budget officers at the MoFEA. Additional capacity building initiative would result in long-termsustainabilityinthis area. 93 ANNEX 3: STATISTICAL TABLES Appendix 1:TanzaniaKeyMacroeconomic Indicators............................................................................. Appendix 2: Balance of Payments(in millionsofU S dollars)................................................................... 95 Appendix 3: BudgetFrame-Analytical (in BillionTsh.) ......................................................................... 96 Appendix 4: BudgetFrame-Analytical (in% of GDP)............................................................................ 97 Appendix 5: BudgetFrame-Accounting(in BillionTsh.)....................................................................... 98 99 Appendix 6: BudgetFrame-Accounting(in % ofGDP) ........................................................................ 100 Appendix 7: GovernmentExpenditureby Strategic Allocation (inBillion Tsh.) .................................................................................................................................................................. 101 Appendix 8: GovernmentExpenditureby Strategic Allocation(inpercentageshares) .................................................................................................................................................................. 102 Appendix 9: Government Expenditureby EconomicAllocation............................................................. Appendix 10: GovernmentExpenditure-AgricultureSector ................................................................. 103 Appendix 11: GovernmentExpenditure-RoadSector ........................................................................... 104 Appendix 12: GovernmentExpenditure-Energy Sector........................................................................ 105 Appendix 13: GovernmentExpenditure-EducationSector.................................................................... 106 Appendix 14: GovernmentExpenditure-HealthSector ......................................................................... 107 108 109 Appendix 16: MDAs Budget Estimatesand Expenditure(InBillionTanzania Shilling)........................ Appendix 15: GovernmentExpenditure-Water Sector.......................................................................... Appendix 17: RegionalBudgetEstimates and Expenditure..................................................................... 110 111 94 Appendix 1:Tanzania Key Macroeconomic Indicators Indicator Unit 2000 2001 2002 2003 2004 2005 2006 2007 2008 Population(Mainland)i2 Millions 31.9 32.9 33.6 34.2 35.3 36.2 37.5 38.3 39.4 Per capitaIncomei2 US$ 270.0 270.0 280.0 300.0 320.0 330.0 380.0 450.0 470.0 GDP Growhi2 % 4.9 6.0 7.2 6.9 7.8 7.4 6.7 7.1 7.0 GrossDomesticSavingsi2 (as a% of GDP) 9.2 8.8 12.9 12.2 13.6 11.7 10.2 10.2 10.2 GrossInvestmentsi2 (as a% of GDP) 17.6 18.6 20.5 22.7 22.5 23.8 25.0 26.0 27.0 Inflatiod2(period average) % 6.0 5.2 4.3 5.4 4.7 5.0 7.2 7.0 10.3 ExchangeRateil (periodaverage) TZSIL)S$ 800.4 876.3 963.2 1039.1 1090.6 1127.1 1250.1 1255.1 1198.2 ExternalSector Exports Mil.US$ 1361.0 1766.7 1899.7 2168.6 2615.3 2948.3 3445.7 3940.6 4504.5 Imports Goods & Servicesil -- Goods& Servicesil Mil.US$ 2050.0 2209.7 2143.9 2659.2 3457.6 4204.9 5 1 13.5 6276.0 7330.9 CurrentAccount Balance/l Mil.US$ -665.2 -395.2 78.6 -118.1 -365.6 -862.2 -1142.6 -1776.7 -2429.5 Balanceof Payments(Overallbalance)/l Mil.US$ -36.9 -167.5 317.9 389.1 234.1 -222.4 460.7 412.7 -245.0 ForeignReservesil Mil.US$ 974.4 1156.6 1528.4 2037.8 2296.1 2048.4 2128.3 2755.2 2510.2 ExternalDebV2 Bil. US$/I 6.9 6.2 6.8 7.0 7.8 7.8 4.2 5.0 5.5 ForeignDirectInvestmenu1 Mil.US$ 282.0 388.8 387.6 308.2 330.6 494.1 597.0 647.0 776.4 TourismEamingsi2 Mil.US$ 739.1 725.0 730.0 731.0 746.0 823.6 862.0 1037.0 Monetary Sector Average DepositRateil % 7.1 4.2 3.5 2.5 2.4 2.6 2.5 2.6 2.8 Average LendingRateil % 19.1 20.9 14.8 16.4 15.7 16.1 15.8 14.0 14.7 Growthin Money Supply (M2)/1 % 15.1 14.9 21.3 16.9 19.1 27.5 24.5 20.7 Government Finance Total DomesticRevenueil (as a% of GDP) 10.5 10.8 10.8 11.1 11.6 11.8 12.5 14.1 16.0 Tax Revenueil (as a% of GDP) 9.3 9.5 9.6 10.0 10.6 10.7 11.4 13.0 14.8 Non-TaxRevenueil (as a% of GDP) 1.2 1.3 1.2 1.1 1.0 1.1 1.1 1.1 1.2 Total Expenditureil (as a% of GDP) 15.2 15.2 16.5 18.6 20.7 21.7 22.8 23.0 23.0 RecurrentExpenditureil (as a% of GDP) 9.9 11.5 13.1 13.6 15.1 14.6 17.2 16.9 15.0 DevelopmentExpenditureil (as a% of GDP) 5.3 3.7 3.4 5.0 5.6 7.1 5.6 6.1 8.0 Grantsil (asa% of GDP) 4.5 3.7 4.5 6.2 6.1 7.7 5.4 4.9 7.0 FiscalBalanceil (asa%ofGDP) -7.3 -5.0 -5.6 -7.7 -9.3 -9.9 -10.3 -8.9 -7.0 Note /1 Fiscalyear is used, and it ends June 30th of the mentionedyear 12 Calendar year is used, and it ends in mentionedyear December 31th. Source: TanzaniaAuthorities(MoF, BOT,NBS, and MPEE). 95 Appendix 2: Balance of Payments (in millionsof US dollar) Item 2000/01r 2001/02r 2002/03r 2003/04r 2004/05r 2005/06p 2006/07p 2007/08p A. Current Account -480.9 -324.4 -23.9 -295.9 -518.0 -1064.7 -1532.4 -2066.9 Goods Exports (f.0.b.) 789.2 888.6 1085.9 1303.9 1607.4 1795.9 2036.6 2391.6 Imports(f.0.b.) -1438.9 -1554.0 -1627.6 -2183.4 -2731.6 -3436.4 -4335.6 -5636.7 Service Receipts 735.9 911.3 948.2 1006.3 1236.1 1396.7 1656.2 1883.0 Payments -674.9 -631.1 -651.8 -808.3 -1121.0 -1243.2 -1348.9 -1486.6 Income Receipts 46.3 66.1 73.7 88.9 82.9 74.6 89.0 128.4 Payments -208.6 -174.5 -196.7 -204.5 -203.3 -145.3 -148.0 -156.8 Transfer Inflows 306.9 256.8 407.4 563.7 678.1 560.2 590.5 888.1 Government 253.8 200.9 343.8 484.2 596.2 464.5 496.9 790.6 Other sectors 53.2 55.9 63.6 79.4 81.9 95.7 93.6 97.5 outflows -36.6 -87.6 -63.1 -62.5 -66.5 -67.1 -72.1 -77.9 B. Capital Account 341.8 376.6 356.2 269.1 301.4 763.7 5386.5 758.7 Inflows 341.8 376.6 356.2 269.1 301.4 763.7 5386.5 758.7 General Government 324.1 348.5 322.5 230.5 259.9 718.1 5337.6 701.2 Other sectors 17.8 28.2 33.7 38.6 41.5 45.6 48.9 57.5 Outflows 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 C. FinancialAccount -40.5 -72.5 180.5 236.6 474.5 689.3 -3211.2 1246.5 Direct investmentin Tanzania 335.4 388.2 347.9 319.4 389,l 540.5 653.4 711.7 Portfolio investment 4.1 5.2 2.5 2.6 2.5 2.6 2.7 2.8 Other investment -380.0 -465.9 -169.9 -85.4 82.9 146.3 -3867.3 532.0 D. Net Errorsand Omissions -224.0 -478.1 -535.8 -344.3 -172.1 -43.6 -410.3 555.6 Overall balance -403.5 -498.5 -23.1 -134.6 85.7 344.8 232.6 493.9 Financing 403.5 498.5 23.1 134.6 -85.7 -344.8 -232.6 -493.9 E. Reserves and RelatedItems 403.5 498.5 23.1 134.6 -85.7 -344.8 -232.6 -493.9 Reserveassets -231.2 -229.7 -457.7 -207.6 -90.6 22.0 -236.8 -495.1 Use ofFundcredit and loans 32.5 20.8 4.6 -3.1 -38.3 -366.7 4.2 1.3 Exceptionalfinancing 602.3 707.4 476.2 345.3 43.2 0.0 0.0 0.0 Rescheduleddebt 70.7 70.6 48.3 43.5 0.0 0.0 0.0 0.0 Debt forgiveness 345.8 536.2 382.4 250.4 0.0 0.0 0.0 0.0 Interest arrears 70.6 33.8 32.8 16.2 43.2 0.0 0.0 0.0 Principalarrears 115.1 66.8 12.7 35.3 0.0 0.0 0.0 ' 0.0 Memorandum items GDP(mp) Bill.TZS 8,627 9,772 11,276 13,039 14,968 16,953 19,445 23,118 GDP(mp) Mill.USD 10,421 10,495 11,266 12,099 13,723 14,336 15,169 19,494 CAB/GDP -4.6 -3.1 -0.2 -2.4 -3.8 -7.4 -10.1 -10.6 CAB/GDP (excl. off. Cur. transfers) -6.7 -4.2 -2.7 -5.9 -7.6 -10.2 -12.9 -14.3 Gross OfficialReserves 982.9 1,212.7 1,670.4 1,878.0 1,968.6 1,863.2 2,153.4 2,648.5 Monthsof Imports 5.6 6.7 8.8 7.5 6.1 3.9 4.5 4.5 Notes: r=Revised p = Provisional Source:Bank of Tanzania 96 Appendix 3: Budget Frame -Analytical (in Billion Tsh.) 2008109 2008/09 2009/10 2010111 Ceiling Budget Projections Projections Domestic revenue 4,028.0 4,728.6 5,532.5 6,473.0 OIW Fuel Levy and transit fees 230.0 247.1 261.2 276.1 Total Expenditure 6,079.2 7,139.1 7,401.4 8,413.3 Recurrent expenditure 4,229.0 4,647.6 5,060.7 5,832.6 Interest on external debt 34.6 34.6 38.1 41.9 Interest on domestic debt 247.8 247.8 272.5 299.8 Wageslsalaries 1,458.3 1,458.3 1,746.5 1,999.6 Goodslservicesltransfers 2,488.3 2,906.9 3,003.6 3,49 1.4 olw FuelLevy and Transit Fee 230.0 247.1 261.2 276.1 Special Expenditure 381.1 150.0 384.7 372.7 CFS (Others) 277.3 320.5 305.0 335.6 Parastatal PE 286.0 286.0 300.3 315.3 Retention Scheme 85.2 85.2 89.4 93.9 Other Charges 1,228.8 1,818.1 1,662.9 2,097.9 Development expenditure 1,850.2 2,491.5 2,340.7 2,580.6 Local 604.2 940.4 1,28 1.4 1,482.2 Foreign 1,246.0 1,551-1 1,059.3 1,098.4 Overall Deficit before grants - -2,051.2 -2,410.5 -1,869.0 -1,940.3 Grants 1,285.4 1,441.2 1,243.3 1,332.0 Budget Support 512.0 543.9 614.0 620.6 olw GBS 512.0 521.5 614.0 620.6 Project grants 700.8 831.O 629.3 711.4 o/w Development Projects 509.4 556.4 356.0 320.4 O/W MCC (MCA-T) 99.9 68.5 191.3 317.2 olw Basket Support 91.5 206.1 82.0 73.8 MDRI(IMF) 72.6 66.3 0.0 0.0 Overall deficit after grants - -765.9 -969.3 -625.6 -608.3 Financing 765.9 969.3 625.6 608.3 Foreign (net) 759;3 946.2 662.8 648.3 Budget support loans 256.1 268.2 277.0 307.8 Project support loans 545.2 720.1 430.0 387.0 olw Project Loans 461.1 507.4 352.0 316.8 olw Basket Support Loans 84.1 212.7 78.0 70.2 Amortization -42.1 -42.1 -44.2 -46.4 Domestic (net) 6.6 23.1 -37.2 -40.1 Amortization o f Contingent Debt -20.0 -20.0 -21.o -23.1 Amortization -Domestic -15.4 -16.9 -16.2 -17.0 memo: CDPmp 24,149.1 25,548.8 29,109.0 33,326.5 OC for distribution 2,211.0 2,586.4 2,698.5 3,155.8 Primaiy DeJicit(checks issued) -1,768.9 -2,128.1 -1,558.4 -1,598.6 Government Saving(checks issued) -201.0 81.0 471.7 640.3 % of GDP Saving -0.8% 0.3% 1.6% 1.9% Source: Ministryo f Finance and Economic Affairs. 97 Appendix 4: Budget Frame -Analytical (in YOof GDP) 2008/09 2008/09 2009/10 2010/11 Ceiling Budget Projections Projections Domestic revenue 16.7 18.5 19.0 19.4 O/W Fuel Levy and transit fees 1.o 1.o 0.9 0.8 Total Expenditure 25.2 27.9 25.4 25.2 Recurrent expenditure 17.5 18.2 17.4 17.5 Interest on external debt 0.1 0.1 0.1 0.1 Interest on domestic debt 1.o 1.o 0.9 0.9 Wagedsalaries 6.0 5.7 6.0 6.0 Goods/services/transfers 10.3 11.4 10.3 10.5 o/w Fuel Levy and Transit Fees 1.o 1.o 0.9 0.8 Special exp. 1.6 0.6 1.3 1.1 CFS (Others) 1.1 1.3 1.o 1.o Parastatal PE 1.2 1.1 1.o 0.9 Retention Scheme 0.4 0.3 0.3 0.3 Other Charges 5.1 7.1 5.7 6.3 Development expenditure 7.7 9.8 8.0 7.7 Local 2.5 3.7 4.4 4.4 Foreign 5.2 6.1 3.6 3.3 Overall Deficit before grants - -8.5 -9.4 -6.4 -5.8 Grants 5.3 5.6 4.3 4.0 Budget Support 2.1 2.1 2.1 1.9 o/w PRBS 2.1 2.0 2.1 1.9 Project grants 2.9 3.3 2.2 2.1 o/w development projects 2.1 2.2 1.2 1.o O/W M C C (MCA-T) 0.4 0.3 0.7 1.o o/w Basket Support 0.4 0.8 0.3 0.2 MDRI(IMF) 0.3 0.3 0.0 0.0 Overall deficit after grants - -3.2 -3.8 -2.1 -1.8 Overall deficit financed -3.2 -3.8 -2.1 -1.8 Financing 3.2 3.8 2.1 1.8 Foreign 3.1 3.7 2.3 1.9 Budget Support loans 1.1 1.o 1.o 0.9 Project support 2.3 2.8 1.5 1.2 o/w Project Loans 1.9 2.0 1.2 1.o o/w Basket Support Loans 0.3 0.8 0.3 0.2 Amortization -0.2 -0.2 -0.2 -0.1 Local (net) 0.0 0.1 -0.1 -0.1 Amortization o f Contingent Debt -0.1 -0.1 -0.1 -0.1 Privatisation Funds 0.2 0.2 0.0 0.0 memo: OCfor distribution 9.2 10.7 9.3 10.8 Primary Dejicit(checks issued) -7.3 -8.8 -5.4 -5.5 Government Saving(checks issued) -0.8 0.3 1.6 2.2 Source: Appendix 3, 98 Appendix 5: Budget Frame-Accounting (in BillionTsh.) 2008109 2008109 2009110 2010111 Ceiling Budget Projections Projections I.TOTALRESOURCES 6,156.7 7,218.1 7,482.8 8,499.7 Domestic revenue 4,028.0 4,728.6 5,532.5 6,473.0 Programme loan and grants 768.1 812.1 891.0 928.3 Project loans and grants 970.5 1,063.8 708.0 637.2 Basket Support Loans 84.1 212.7 78.0 70.2 Basket Support Grants 91.5 206.1 82.0 73.8 MDRI(IMF) 72.6 66.3 0.0 0.0 MCC (MCA-T) 99.9 68.5 191.3 317.2 Privatisation Funds 42.0 60.0 0.0 0.0 11. TOTAL EXPENDITURE 6,156.7 7,218.1 7,482.8 8,499.7" RECURRENT EXPENDITURE 4,306.5 4,726.7 5,142.1 5,919.1 CFS 637.2 681.9 697.0 763.7 Debt service 359.8 361.4 392.0 428.1 Interest 282.4 282.4 310.6 341.7 Amortization 77.5 79.0 81.4 86.5 Others 277.3 320.5 305.0 335.6 Recurrent Exp.(excl. CFS) 3,669.3 4,044.7 4,445.1 5,155.4 olw Salaries & wages 1,458.3 1,458.3 1,746.5 1,999.6 Other Charges 1,829.9 2,436.4 2,313.8 2,783.2 DesignatedItems 381.1 150.0 384.7 372.7 DEVELOPMENT EXPENDITUP 1,850.2 2,491.5 2,340.7 2,580.6 Local 604.2 940.4 1,281.4 1,482.2 Foreign 1,246.0 1,551.1 1,059.3 1,098.4 Source: Ministry o f Finance and Economic Affairs. 99 Appendix 6: Budget Frame-Accounting (in YOof GDP) 2008109 2008109 2009110 2010111 Ceiling Budget Projections Projections I.TOTALRESOURCES 25.5 28.3 25.7 25.5 Domestic revenue 16.7 18.5 19.0 19.4 Programme loanand grants 3.2 3.2 3.1 2.8 Project loans andgrants 4.0 4.2 2.4 1.9 Basket Support Loans 0.3 0.8 0.3 0.2 Basket Support Grants 0.4 0.8 0.3 0.2 MDRI(IMF) 0.3 0.3 0.0 0.0 MCC (MCA-T) 0.4 0.3 0.7 1.o PrivatisationFunds 0.2 0.2 0.0 0.0 11. TOTAL EXPENDITURE 25.5 . 28.3 25.7 25.5 RECURRENT EXPENDITURE 17.8 18.5 17.7 17.8 CFS 2.6 2.7 2.4 2.3 Debt service 1.5 1.4 1.3 1.3 Interest 1.2 1.1 1.1 1.o Amortization 0.3 0.3 0.3 0.3 Others 1.1 1.3 1.o 1.o RecurrentExp.(excl. CFS) 15.2 15.8 15.3 15.5 olw Salaries & wages 6.0 5.7 6.0 6.0 Other Charges 7.6 9.5 7.9 8.4 DesignatedItems 1.6 0.6 1.3 1.1 DEVELOPMENT EXPENDITU 7.7 9.8 8.0 7.7 Local 2.5 3.7 4.4 4.4 Source: Appendix 5 100 Appendix 7: Government Expenditure by Strategic Allocation (inBillionTsh.) ~~ ~~~~ ~ All Sectors 2007/08 2008/09 Recurrent Development Total Recurrent Development Total Dev Local Dev Foreign Total dev Dev Local Dev Foreign Total dev A. By StrategicClassification: MKUKUTA (transfer to LGA not included) MKUKUTA 1,1967 6291 1,3935 2,0226 3,2192 1,4157 7607 1,5182 2,2789 3,6946 ClusterI 292 0 4593 591 3 1,0506 1,342 6 421 7 5287 6897 1,2184 1,6400 Clusterll 469 1 1373 4893 6266 1,095 7 581 1 1735 5184 691 9 1,273 1 ClusterIll 435 6 26 7 949 1216 5572 4129 51 8 1023 1541 5670 Cross Cuttmg 5 7 218 0 223 7 223 7 6 8 2077 2145 2145 Non-MKUKUTA 1,9746 1154 63 5 1789 2,1535 2,4179 1798 323 212 1 2,6300 Total 3,171 3 7444 1,457 0 2,201 4 5,372 7 3,833 6 9405 1,550 5 2,491 0 6,3245 B. By StrategicClassification: MKUKUTA (Including transfer to LGAs) MKUKUTA 2,259.9 629.6 1,397.1 2,026.7 4,286.7 2,813.3 767.3 1,524.2 2,291.5 5,106.6 ClusterI 366.8 459.9 591.9 1,051.8 1,418.6 520.1 529.3 690.3 1,219.6 1,739.9 clusterII 1,300.4 137.3 490.I 627.4 1,927.8 1,623.7 179.3 519.1 698.5 2,323.0 ClusterII1 586.5 26.7 96.I 122.9 709.3 662.7 51.8 104.9 156.7 819.0 CrossCutting 6.2 5.7 219.0 224.7 230.9 6.7 6.8 209.9 216.7 224.7 Non-MKUKUTA 1,606.6 114.8 59.9 174.7 1,781.3 1,913.3 173.3 26.2 199.5 2,111.0 Total 3,866.6 744.4 1,457.0 2,201.4 6,068.0 4,726.7 940.5 1,550.5 2,491.0 7,217.6 C. By Major Sectors Education 910.0 190.0 1,100.0 1,216.4 196.6 1,413.0 Health 387.3 211.3 598.6 457.0 286.6 743.6 Water 29.1 281.1 310.2 33.8 199.5 233.3 Agriculture 111.9 165.0 276.9 158.9 137.8 296.7 Roads 283.8 498.7 782.5 301.4 668.9 970.3 Judiciary 52.3 17.6 69.9 52.6 30.6 83.2 HIV-AIDS 3.6 104.1 107.7 19.1 87.9 107.0 Energy 41.5 312.4 353.9 43.7 335.2 378.8 Others 2,047.1 421.2 2,468.3 2,443.8 548.0 2,991.7 GrandTotal 3,866.6 2,201.4 6,068.0 4,726.7 2,491.0 7,217.6 D. By Broad Functions Administration 892.6 1 1 8.0 223.1 341.1 1,233.7 1,450.3 215.9 245.5 461.4 1,911.7 CFS 615.0 615.0 681.9 681.9 DefenseandSecurity 455.1 8.I 2.5 10.6 465.7 503.6 22.9 4.9 27.8 531.4 EconomicServices 262.8 429.8 363.4 793.2 1,056.0 269.5 455.1 467.5 922.6 1,192.2 ProductionServices 132.5 10.8 91.1 101.9 234.4 170.2 30.8 74.7 105.5 275.7 SocialServices 1,508.5 177.8 776.9 954.7 2,463.1 1,651.1 215.8 757.9 973.7 2,624.7 Grand Total 3,866.0 744.4 1,457.0 2,201.4 6,068.0 4,726.7 940.5 1,550.5 2,491.0 7,217.6 Source: Ministryof FinanceandEconomic Affairs. 101 Appendix 8: Government Expenditure by Strategic Allocation (Inpercentage shares) All Sectors 2007108 2008109 Recurrent Development Total Recurrent Development Total Dev Local Dev Foreign Total dev Dev Local Dev Foreign Total dev A. By Strategic Classification: MKUKUTA (transfer to LGA not included) MKUKUTA 37.7 84.5 95.6 91.9 59.9 36.9 80.9 97.9 91.5 58.4 Cluster I 9.2 61.7 40.6 47.7 25.0 11.0 56.2 44.5 48.9 25.9 Cluster I1 14.8 18.4 33.6 28.5 20.4 15.2 18.4 33.4 27.8 20. I `Cluster III 13.7 3.6 6.5 5.5 10.4 10.8 5.5 6.6 6.2 9.0 Cross Cutting 0.0 0.8 15.0 10.2 4.2 0.0 0.7 13.4 8.6 3.4 Non-MKUKUTA 62.3 15.5 4.4 8.I 40. I 63.1 19.1 2.I 8.5 41.6 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 B. By Strategic Classification: MKUKUTA (Including transfer to LGAs) MKUKUTA 58.4 84.6 95.9 92.1 70.6 59.5 81.6 98.3 92.0 70.8 Cluster I 9.5 61.8 40.6 47.8 23.4 11.0 56.3 44.5 49.0 24. I cluster I1 33.6 18.4 33.6 28.5 31.8 34.4 19.1 33.5 28.0 32.2 Cluster Ill 15.2 3.6 6.6 5.6 11.7 14.0 5.5 6.8 6.3 11.3 Cross Cutting 0.2 0.8 15.0 10.2 3.8 0.1 0.7 13.5 8.7 3.1 Non-MKUKUTA 41.6 15.4 4.1 7.9 29.4 40.5 18.4 1.7 8.0 29.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 C. By Major Sectors Education 23.5 8.6 18.1 25.7 7.9 19.6 Health 10.0 9.6 9.9 9.7 11.5 10.3 Water 0.8 12.8 5.1 0.7 8.0 3.2 Agriculture 2.9 7.5 4.6 3.4 5.5 4. I Roads 7.3 22.7 12.9 6.4 26.9 13.4 Judicialy 1.4 0.8 I.2 1.1 I.2 1.2 HIV-AIDS 0. I 4.7 1.8 0.4 3.5 1.5 Energy 1.1 14.2 5.8 0.9 13.5 5.2 Other sectors 52.9 19.1 40.7 51.7 22.0 41.5 Grand Total 100.0 100.0 100.0 100.0 100.0 100.0 D. By Broad Functions Administration 23.1 15.9 15.3 15.5 20.3 30.7 23.0 15.8 18.5 26.5 CFS 15.9 0.0 0.0 0.0 10.1 14.4 0.0 0.0 0.0 9.4 Defenseand Security 11.8 1.1 0.2 0.5 7.7 10.7 2.4 0.3 1.1 7.4 Economic Services 6.8 57.7 24.9 36.0 17.4 5.7 48.4 30.2 37.0 16.5 Production Services 3.4 1.4 6.3 4.6 3.9 3.6 3.3 4.8 4.2 3.8 Social Services 39.0 23.9 53.3 43.4 40.6 34.9 22.9 48.9 39.1 36.4 GrandTotal 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Ministry of Finance and Economic Affairs. 102 Appendix 9: GovernmentExpenditure by Economic Allocation All sectors 2007108 2008109 Recurrent Development Total Recurrent Development Total In billion Tsh. Current 3,722.3 814.3 4,536.6 4,385.0 1,042.0 5,427.0 Wages 1,745.9 88.4 1,834.3 2,33 8.4 113.1 2,45 1.5 Basic Salaries(incl PE) 1,327.5 6.7 1,334.3 1,829.5 23.7 1,853.2 Pension 143.7 1.o 144.7 185.8 1.3 187.0 Allowances 274.7 80.7 355.4 323.1 88.2 411.3 Good and Services (incl. PE) 1,244.2 593.3 1,837.5 1,439.2 567.9 2,007.1 Education 71.9 64.2 136.1 93.4 12.0 105.4 Medical 86.8 196.2 283.0 72.0 232.1 304.0 Fuel and Oil 44.0 5.9 50.0 59.3 13.2 72.6 Others (incl PE) 1,041.5 327.0 1,368.5 1,2 14.5 310.6 1,525.0 Maintenance 269.5 65.1 334.7 265.9 111.7 377.7 Current Transfer (excl PE) 158.0 67.5 225.5 72.8 249.3 322.1 Interest 304.6 304.6 268.7 268.7 Capital 144.3 1,387.1 1,531.4 341.6 1,447.4 1,789.0 Infrastructure 86.2 778.0 864.2 176.6 905.0 1,081.6 Construction 81.2 288.8 369.9 146.9 497.4 642.6 Rehabilitation 5.1 489.2 494.3 29.7 409.3 439.1 Equipment 44.9 333.8 378.7 87.1 179.1 266.2 Household Furniture 9.6 3.7 13.2 68.0 7.4 75.3 Other Capital 1.7 1.4 3.1 4.0 12.2 16.2 Studies 2.0 270.2 272.2 5.9 343.7 349.6 Total 3,866.6 2,201.4 6,068.0 4,726.7 2,491.0 7,217.7 As percentage of column total Current 96.3 37.0 74.8 92.8 41.9 75.2 Wages 45.2 4.0 30.2 49.5 4.5 34.0 Basic Salaries(incl PE) 34.3 0.3 22.0 38.7 1.o 25.7 Pension 3.7 0.0 2.4 3.9 0.1 2.6 Allowances 7.1 3.7 5.9 6.8 3.5 5.7 Good and Services(incl. PE) 32.2 27.0 30.3 30.4 22.8 27.8 Education 1.9 2.9 2.2 2.0 0.5 1.5 Medical 2.2 8.9 4.7 1.5 9.3 4.2 Fuel and Oil 1.1 0.3 0.8 1.3 0.5 1.o Others (incl PE) 26.9 14.9 22.6 25.7 12.5 21.1 Maintenance 7.0 3.0 5.5 5.6 4.5 5.2 Current Transfer (excl PE) 4.1 3.1 3.7 1.5 10.0 4.5 Interest 7.9 5.0 5.7 3.7 Capital 3.7 63.0 25.2 7.2 58.1 24.8 Infrastructure 2.2 35.3 14.2 3.7 36.4 15.0 Construction 2.1 13.1 6.1 3.1 19.9 8.9 Rehabilitation 0.1 22.2 8.1 0.6 16.4 6.1 Equipment 1.2 15.2 6.2 1.8 7.2 3.7 Household Furniture 0.2 0.2 0.2 1.4 0.3 1.o Other Capital 0.0 0.1 0.1 0.1 0.5 0.2 Studies 0.1 12.3 4.5 0.1 13.8 4.8 Total 100.0 100.0 100.0 100.0 100.0 100.0 PErefers to Public Enterprises. Source: Ministryo f Finance and Economic Affairs. 103 Appendix 10: Government Expenditure-Agriculture Sector Agriculture Sector = MDAs + LGAs 2007108 2008109 Recurrent Development Total Recurrent Development Total Share o f total expenditure Current 92.8 51.9 68.2 80.3 48.0 65.2 Wages 47.2 8.0 23.6 47.7 13.9 31.8 Basic Salaries (incl PE) 39.9 0.3 16.1 41.8 1.o 22.7 Pension 0.0 0.0 0.0 0.0 0.2 0.1 Allowances 7.3 7.7 7.5 5.8 12.6 9.0 Good and Services (incl. PE) 39.9 22.7 29.5 29.2 18.3 24.1 o/w Apr inout susidies & SGR 36.4 20.8 27.0 26.3 12.9 20.0 Maintenance 1.7 8.1 5.6 1.2 12.0 6.3 Current Transfer (excl PE) 4.0 13.1 9.5 2.3 3.8 3.O 0.0 0.0 0.0 Capital 7.2 48.1 31.8 19.7 52.0 34.8 Infrastructure 5.3 16.2 11.9 15.7 21.9 18.6 Construction 5.2 2.3 3.4 0.0 15.7 7.4 Rehabilitation 0.1 14.0 8.4 15.7 6.2 11.3 Equipment 1.4 23.2 14.5 1.o 9.8 5.1 Other Capital 0.6 8.7 5.4 3.O 20.3 11.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 MDAs only 2007108 2008109 Recurrent Development Total Recurrent Development Total Share of total expenditure Current 91.1 43.8 63.8 75.4 60.6 70.7 Wages 28.3 11.2 18.4 28.2 19.1 25.3 Basic Salaries (incl PE) 21.1 0.4 9.1 22.5 2.0 16.0 Pension 0.0 0.0 0.0 0.0 0.6 0.2 Allowances 7.2 10.8 9.3 5.8 16.5 9.2 Goodand Services (incl. PE) 39.5 11.4 23.3 16.1 25.8 19.2 o/w Agr input susidies & SGR 36.1 8.8 20.4 13.2 19.1 15.1 Maintenance 1.7 2.7 2.3 1.2 7.5 3.2 Current Transfer (excl PE) 21.6 18.5 19.8 29.9 8.2 23.0 Capital 8.9 56.2 36.2 24.6 39.4 29.3 Infrastructure 6.6 11.3 9.3 19.8 8.7 16.3 Construction 6.6 3.2 4.6 0.0 0.0 0.0 Rehabilitation 0.1 8.1 4.7 19.8 8.7 16.3 Equipment 1.6 32.7 19.5 1.1 6.3 2.7 Other Capital 0.6 12.2 7.3 3.7 24.4 10.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 LGAs only 2007108 2008109 Recurrent Development Total Recurrent Development Total Share of total expenditure Current 98.8 71.7 80.6 99.3 38.9 56.3 Wages 89.2 0.0 29.2 91.8 10.1 33.5 Basic Salaries (incl PE) 81.5 0.0 26.7 85.6 0.4 24.8 Pension 0.0 0.0 0.0 0.0 0.0 0.0 Allowances 7.7 0.0 2.5 6.1 9.7 8.7 Goodand Services 8.0 50.2 36.4 6.1 12.9 11.0 o/w Agr input susidies & SGR 4.3 50.2 35.2 3.4 8.4 7.0 Maintenance 1.6 21.5 15.0 1.4 15.3 11.3 Capital 1.2 28.3 19.4 0.7 61.1 43.7 Infrastructure 0.2 28.3 19.1 0.1 31.4 22.4 Construction 0.1 0.0 0.0 0.0 27.0 19.3 Rehabilitation 0.1 28.3 19.0 0.1 4.4 3.2 Equipment 0.7 0.0 0.2 0.5 12.3 8.9 Other Capital 0.3 0.0 0.1 0.1 17.4 12.5 Total 100.0 100.0 100.0 100.0 100.0 100.0 2007108 2008109 Recurrent Development Total Recurrent Development Total M D A s 71.O 78.6 74.1 79.3 41.8 61.8 L G A s 29.0 21.4 25.9 20.7 58.2 38.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Ministry o f Finance and Economic Affairs. 104 Appendix 11: Government Expenditure-Road Sector Roads Sector = MDAs + 2007f08 2008f09 LGAs Recurrent Development Total Recurrent Development Total Share of total expenditure Current 99.6 9.8 42.7 99.7 14.4 40.9 Wages 10.9 1.5 4.9 11.8 0.7 4.2 Basic Salaries (incl PE) 9.6 0.0 3.5 10.6 0.0 3.3 Pension 0.0 0.0 0.0 0.0 0.0 0.0 Allowances 1.3 1.5 1.4 1.3 0.7 0.9 Good and Services (incl. PE) 11.5 7.8 9.2 12.0 11.1 11.4 Maintenance 77.3 0.3 28.4 75.8 2.4 25.2 Current Transfer (excl PE) 0.0 0.3 0.2 0.0 0.2 0.2 Capital 0.4 90.2 57.3 0.3 85.6 59.1 Infrastructure 0.2 82.3 52.2 0.1 79.3 54.7 Construction 0.0 6.4 4.0 0.0 32.1 22.1 Rehabilitation 0.1 76.0 48.2 0.1 47.2 32.6 Equipment 0.2 5.6 3.6 0.2 0.5 0.4 Other Capital 0.0 2.3 1.5 0.1 5.7 4.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 MDAs only 2007f08 2008/09 Recurrent Development Total Recurrent Development Total Share of total expenditure Current 99.7 8.0 35.7 99.7 14.6 36.2 Wages 3.3 1.5 2.1 5.3 0.7 1.9 Basic Salaries (incl PE) 1.9 0.0 0.6 4.0 0.0 1.o Pension 0.0 0.0 0.0 0.0 0.0 0.0 Allowances 1.3 1.5 1.5 1.3 0.7 0.9 Good and Services (incl. PE) 1.4 6.2 4.7 1.2 11.5 8.9 Maintenance 73.5' 0.0 22.2 71.3 2.1 19.7 Current Transfer (excl PE) 21.5 0.3 6.7 21.9 0.2 5.7 Capital ' 0.3 92.0 64.3 0.3 85.4 63.8 Infrastructure 0.1 84.0 58.7 0.1 79.2 59.0 Construction 0.0 6.5 4.5 0.0 33.0 24.6 Rehabilitation 0.1 77.6 54.1 0.1 46.2 34.5 Equipment 0.1 5.7 4.0 0.1 0.5 0.4 Other Capital 0.1 2.3 1.6 0.0 5.8 4.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 LGAs only 2007f08 2008/09 Recurrent Development Total Recurrent Development Total Share o f total expenditure Current 99.5 98.1 99.3 99.4 11.1 80.1 Wages 10.3 0.0 9.1 9.9 0.5 7.9 Basic Salaries (incl PE) 9.1 0.0 8.0 8.8 0.1 6.9 Pension 0.0 0.0 0.0 0.0 0.0 0.0 Allowances 1.2 0.0 1.1 1.2 0.4 1.o Good and Services 1.5 86.0 11.5 1.5 0.7 1.3 Maintenance 87.6 12.1 78.7 88.0 9.8 71.0 Capital 0.5 1.9 0.7 0.6 88.9 19.9 Infrastructure 0.2 1.9 0.4 0.1 83.2 18.2 Construction 0.0 1.9 0.2 0.0 6.7 1.5 Rehabilitation 0.2 0.0 0.2 0.1 76.5 16.8 Equipment 0.3 0.0 0.2 0.3 0.8 0.4 Other Capital 0.0 0.0 0.0 0.2 5.0 1.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 2007f08 2008f09 Recurrent Development Total Recurrent Development Total M D A s 73.5 97.9 89.0 73.O 96.6 89.3 L G A s 26.5 2.1 11.0 27.0 3.4 10.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Ministry of Finance and Economic Affairs. 105 Appendix 12: GovernmentExpenditure Energy Sector - Energy Sector = MDA 2007108 2008109 Recurrent Development Total Recurrent Development Total Share oftotal expenditure Current 97.2 15.2 24.8 97.1 27.0 35.3 Wages 15.1 0.7 2.4 16.6 0.7 2.6 Basic Salaries(incl PE) 9.4 0.2 1.3 10.6 0.2 1.4 Pension 0.0 0.0 0.0 0.0 0.0 0.0 Allowances 5.6 0.5 1.1 5.9 0.5 1.2 Good and Services (incl. PE) 7.5 11.4 10.9 6.7 15.4 14.3 Maintenance 1.o 2.9 2.7 0.9 7.8 7.0 Current Transfer (excl PE) 73.7 0.2 8.8 72.9 3.1 11.4 Capital 2.8 84.8 75.2 2.9 73.0 64.7 Infrastructure 0.8 2.9 2.6 1.1 7.0 6.3 Construction 0.3 2.8 2.5 0.0 7.0 6.2 Rehabilitation 0.5 0.0 0.1 1.1 0.0 0.1 Equipment 1.8 47.3 42.0 1.6 12.9 11.6 HouseholdFurniture 0.2 0.0 0.0 0.1 0.0 0.0 Other Capital 0.0 0.0 0.0 0.0 0.1 0.1 Studies 0.0 34.6 30.5 0.0 52.9 46.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Ministry o f Finance and Economic Affairs. 106 Appendix 13: Government Expenditure- EducationSector Education Sector = MDAs + 2007/08 2008/09 LGAs Recurrent Development Total Recurrent Development Total Share of total expenditure Current 99.2 31.7 84.5 99.5 40.3 92.3 Wages 70.8 3.6 56.2 76.3 6.9 67.8 Basic Salaries (incl PE) 67.0 0.0 52.4 64.6 6.3 57.5 Pension 0.0 0.0 0.0 9.5 0.0 8.4 Allowances 3.8 3.6 3.7 2.1 0.5 1.9 Good and Services (incl. PE) 28.0 24.4 27.2 23.1 13.6 21.9 o/w Education 7.4 10.6 8.1 7.4 4.7 7.1 Maintenance 0.3 3.8 1.o 0.2 6.5 0.9 Current Transfer (excl PE) 0.2 0.0 0.1 0.0 13.4 1.6 Capital 0.8 68.3 15.5 0.5 59.7 7.7 Infrastructure 0.0 16.9 3.7 0.0 34.3 4.2 Construction 0.0 12.0 2.6 0.0 28.8 3.5 Rehabilitation 0.0 4.8 1.1 0.0 5.5 0.7 Equipment 0.6 31.1 7.3 0.4 3.7 0.8 Other capital 0.1 20.3 4.5 0.0 21.7 2.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 MDAs only 2007f08 2008/09 Recurrent Development Total Recurrent Development Total Share of total expenditure Current 99.5 32.3 73.8 99.6 39.0 86.0 Wages 31.1 3.7 20.6 39.6 7.4 32.4 Basic Salaries (incl PE) 26.6 0.0 16.4 16.0 7.4 14.0 Pension 0.0 0.0 0.0 23.1 0.0 17.9 Allowances 4.5 3.7 4.2 0.6 0.1 0.4 Good and Services (incl. PE) 8.4 24.8 14.6 6.4 10.6 7.4 o/w Education 1.5 10.6 5.0 2.1 0.9 1.8 Maintenance 0.2 3.8 1.6 0.2 5.4 1.3 Current Transfer (excl PE) 59.7 0.0 36.9 53.4 15.6 44.9 Capital 0.5 67.7 26.2 0.4 61.0 14.0 Infrastructure 0.0 15.4 5.9 0.0 33.0 7.4 Construction 0.0 10.5 4.0 0.0 26.9 6.0 Rehabilitation 0.0 4.9 1.9 0.0 6.1 1.4 Equipment 0.4 31.9 12.4 0.4 4.3 1.2 Other Capital 0.1 20.4 7.9 0.1 23.7 5.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 LGAs only 2007/08 2008/09 Recurrent Development Total Recurrent Development Total Share o f total expenditure Current 99.1 9.8 98.0 99.5 48.2 97.8 Wages 85.1 0.0 84.0 87.0 3.4 84.3 Basic Salaries (incl PE) 81.8 0.0 80.8 83.8 0.0 81.0 Pension 0.0 0.0 0.0 0.0 0.0 0.0 Allowances 3.2 0.0 3.2 3.2 3.4 3.2 Good and Services 13.7 8.5 13.6 12.3 31.8 12.9 o/w Education 12.0 8.5 12.0 11.2 27.3 11.7 Maintenance 0.3 1.3 0.3 0.2 12.9 0.6 Capital 0.9 90.2 2.0 0.5 51.8 2.2 Infrastructure 0.0 72.9 0.9 0.0 42.4 1.4 Construction 0.0 71.0 0.9 0.0 40.5 1.3 Rehabilitation 0.0 1.9 0.0 0.0 1.9 0.1 Equipment 0.8 0.0 0.8 0.5 0.0 0.5 Other Capital 0.1 17.4 0.3 0.0 9.3 0.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 2007/08 2008/09 Recurrent DevelopmentTotal Recurrent DevelopmeniTotal MDAs 43.8 97.5 55.5 41.2 85.8 46.6 LGAs 56.2 2.5 44.5 58.8 14.2 53.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Ministry o f Financeand EconomicAffairs. 107 Appendix 14: GovernmentExpenditure-Health Sector Health Sector = MDAs + 2007/08 2008/09 LGAs Recurrent Development Total Recurrent Development Total Share of total expenditure Current 97.7 84.1 92.0 98.6 79.0 89.8 Wages 64.7 1.3 38.0 71.7 2.1 40.3 Basic Salaries (incl PE) 57.8 0.0 33.5 58.0 0.1 31.9 Pension 0.0 0.1 0.0 7.0 0.1 3.9 Allowances 6.9 1.3 4.5 6.7 1.8 4.5 Good and Services (incl. PE) 3 1.2 78.6 51.1 25.4 69.3 45.2 o/w Medical 21.0 75.7 44.0 14.3 65.8 37.5 Maintenance 1.8 3.2 2.4 1.5 0.7 1.1 Current Transfer (excl PE) 0.0 0.9 0.4 0.1 6.9 3.2 Capital 2.3 15.9 8.0 1.4 21.0 10.2 Infrastructure 0.2 13.8 5.9 0.1 17.8 8.1 Construction 0.0 5.O 2.1 0.0 11.7 5.3 Rehabilitation 0.2 8.8 3.8 0.0 6.2 2.8 Equipment 1.8 1.4 1.7 1.1 2.6 1.8 Other Capital 0.3 0.7 0.4 0.2 0.6 0.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 MDAs only 2007/08 2008/09 Recurrent Development Total Recurrent Development Total Share of total expenditure Current 97.9 78.5 89.0 99.0 75.8 87.0 Wages 24.8 1.9 14.2 36.4 1.3 18.2 Basic Salaries (incl PE) 17.6 0.0 9.5 17.1 0.1 8.3 Pension 0.0 0.1 0.0 11.5 0.2 5.7 Allowances 7.2 1.8 4.7 7.7 1.1 4.3 Good and Services (incl. PE) 38.6 75.3 55.5 27.8 65.6 47.4 o/w Medical 32.0 71.3 50.1 21.0 62.0 42.2 Maintenance 2.0 0.1 1.1 1.6 0.2 0.9 Current Transfer (excl PE) 32.5 1.2 18.1 33.2 8.7 20.5 Capital 2.1 21.5 11.0 1.0 24.2 13.0 Infrastructure 0.2 18.6 8.7 0.0 20.8 10.8 Construction 0.0 6.7 3.1 0.o 13.5 7.0 Rehabilitation 0.2 11.9 5.6 0.0 7.3 3.8 Equipment 1.6 2.0 1.8 0.8 2.9 1.9 Other Capital 0.3 0.9 0.6 0.2 0.5 0.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 LGAs only 2007/08 2008/09 Recurrent Development Total Recurrent Development Total Share of total expenditure Current 97.4 98.4 97.8 98.1 91.0 96.0 Wages 85.5 0.0 56.0 87.1 4.9 62.3 Basic Salaries (incl PE) 79.2 0.0 51.9 81.8 0.2 57.2 Pension 0.0 0.0 0.0 0.0 0.0 0.0 Allowances 6.3 0.0 4.1 5.3 4.7 5.1 Good and Services 10.3 87.2 36.9 9.8 83.3 32.0 o/w Medical 3.6 87.2 32.4 4.1 80.5 27.1 Maintenance ~ 1.5 11.2 4.9 1.2 2.7 1.7 Capital 2.6 1.6 2.2 1.9 9.0 4.0 Infrastructure 0.1 1.6 0.6 0.1 6.6 2.1 Construction 0.0 0.7 0.3 0.0 4.7 1.4 Rehabilitation 0.1 0.8 0.4 0.1 1.8 0.6 Equipment 2.1 0.0 1.4 1.6 1.5 1.6 Other Capital 0.3 0.0 0.2 0.2 0.9 0.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 2007/08 2008/09 Recurrent Development Total Recurrent Development Total M D A s 61.2 71.9 65.7 60.4 79.1 68.8 L G A s 38.8 28.1 34.3 39.6 20.9 31.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Ministry of Finance and Economic Affairs. 108 Appendix 15: Government Expenditure-Water Sector Water Sector = MDAs + 2007/08 2008/09 LGAs Recurrent Development Total Recurrent Development Total Share of total expenditure Current 93.5 34.3 40.0 94.3 52.2 58.5 Wages 50.5 1.4 6.1 59.4 3.7 12.0 Basic Salaries (incl PE) 36.3 0.2 3.7 43.9 1.1 7.5 Pension 0.0 0.0 0.0 0.0 0.0 0.0 Allowances 14.1 1.2 2.5 15.5 2.5 4.5 Good and Services (incl. PE) 29.8 4.0 6.5 24.8 10.7 12.8 Maintenance 12.5 25.5 24.2 8.7 33.9 30.1 Current Transfer (excl PE) 0.7 3.4 3.1 1.4 4.0 3.6 Capital 6.5 65.7 60.0 5.7 47.8 41.5 Infrastructure 1.3 49.7 45.0 1.7 31.7 27.2 Construction 0.7 46.1 41.7 0.8 28.1 24.1 Rehabilitation 0.6 3.6 3.3 0.9 3.5 3.1 Equipment 3.6 10.7 10.0 2.5 6.5 5.9 Other Capital 1.7 5.3 5.0 1.5 9.6 8.4 Total 100.0 100.0 100.0 100.0 100.0 100.0 MDAs only 2007/08 2008/09 Recurrent Development Total Recurrent Development Total Share of total expenditure Current 93.7 14.3 21.1 96.4 34.6 45.9 Wages 51.6 2.5 6.8 64.0 6.1 16.7 Basic Salaries (incl PE) 34.8 0.4 3.3 45.3 2.5 10.4 Pension 0.0 0.0 0.0 0.0 0.0 0.0 Allowances 16.8 2.2 3.4 18.7 3.6 6.4 Good and Services (incl. PE) 33.2 4.9 7.4 26.4 16.4 18.2 Maintenance 3.6 0.8 1.o 3.4 2.4 2.6 Current Transfer (excl PE) 5.3 6.1 6.0 2.6 9.7 8.4 Capital 6.3 85.7 78.9 3.6 65.4 54.1 Infrastructure 0.0 57.1 52.2 0.1 40.1 32.7 Construction 0.0 50.8 46.4 0.0 35.3 28.8 Rehabilitation 0.0 6.4 5.8 0.1 4.8 4.0 Equipment 3.6 19.0 17.7 1.7 14.7 12.4 Other Capital 2.7 9.5 9.0 1.8 10.6 9.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 LGAs only 2007/08 2008/09 Recurrent Development Total Recurrent Development Total Share of total expenditure Current 93.2 59.7 63.4 91.9 64.4 67.8 Wages 49.4 0.0 5.4 54.3 2.0 8.5 Basic Salaries (incl PE) 37.9 0.0 4.1 42.4 0.2 5.4 Pension 0.0 0.0 0.0 0.0 0.0 0.0 Allowances 11.5 0.0 1.2 11.9 1.8 3.0 Goodand Services 22.6 2.9 5.0 23.1 6.8 8.8 Maintenance 21.2 56.9 53.0 14.5 55.6 50.5 Capital 6.8 40.3 36.6 a.1 35.6 32.2 Infrastructure 2.5 40.3 36.1 3.5 25.8 23.1 Construction 1.3 40.3 36.0 1.7 23.3 20.6 Rehabilitation 1.2 0.0 0.1 1.8 2.6 2.5 Equipment 3.5 0.0 0.4 3.4 0.8 1.1 Other Capital 0.7 0.0 0.1 1.2 9.0 8.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 2007/08 2008/09 Recurrent Development Total Recurrent Development Total M D A s 91.2 10.5 55.3 52.2 40.8 42.5 L G A s 8.8 89.5 44.7 47.8 59.2 57.5 Total 100.0 100.0 100.0 100.0 100.0 100.0 Source: Ministry o f Finance and Economic Affairs. 109 t m 0 t I , Y X MAP SECTION