1. What is Development Policy Financing?
World Bank assistance can be provided through development policy financing (DPF), which provides non-earmarked funds for development policy operations (DPO). DPOs can be extended as loans, credits, or grants. They provide rapidly disbursing financing to help a borrower address actual or anticipated development financing needs.
DPOs are complemented by a strong mix of analytical and technical assistance to underpin reforms, create a signaling effect to markets by endorsing a medium-term macro-framework for the country, and establish a framework for policy dialogue.
The World Bank offers DPOs to help governments achieve sustainable poverty reduction through a program of policy and institutional actions; for example, strengthening public financial management, improving the investment climate, addressing bottlenecks to improve service delivery, and diversifying the economy.
2. Why does Tanzania need this support?
Tanzania graduated to a Lower Middle-Income Country status in July 2020 following a long stretch of high growth and macroeconomic stability. In the last two decades, GDP growth averaged 6.5 percent annually and was accompanied by strong macroeconomic fundamentals. Despite this impressive record of economic performance, however, Tanzania faces new challenges that can threaten the country’s development momentum going forward.
First, the declining share of private investments observed over the last several years needs to be reversed. Boosting private investments and private economic activity is a prerequisite for Tanzania’s future growth and development. Second, despite rapid growth, poverty rates have been stagnant in Tanzania. International experience shows that, while an initially rapid economic growth can lift economies up from low-income status, pushing the development agenda further requires shared prosperity. Therefore, a more inclusive growth agenda is needed in Tanzania. Third, unlike in the previous decades, Tanzania faces increasing climate change driven challenges going forward. Tanzania’s traditional sectors, agriculture, and tourism, which employ a large share of the country’s labor force, are highly sensitive to temperature and precipitation volatility.
In light of these considerations, this DPO (the first in a programmatic series of two operations) aims to support Tanzania’s policy and institutional reforms that are critical for strengthening the role of the private sector in economic recovery, increasing the transparency and risk management capacity of the Tanzanian public sector, and building economic resilience against future shocks driven by climate change and other external factors.
3. What are the objectives of the First Inclusive and Resilient Growth Development Policy Financing?
This operation covers three pillars (a.k.a. ‘objectives’) which are aligned with the focus areas and objectives of the World Bank Group Country Partnership Framework for FY18-22:
- The first pillar (“Improving the environment for private sector-driven recovery and growth”) supports critical business climate measures to boost private-sector-driven growth by addressing longstanding constraints on private investment, including excessive bureaucracy, predatory taxation, and limited access to finance.
- The second pillar (“Strengthening the management of SOEs and fiscal risks and improving fiscal transparency”) covers fiscal reforms to strengthen the risk monitoring of state-owned enterprises (SOEs) and to enhance the efficiency and transparency of fiscal operations by improving the management of arrears.
- The third pillar (“Boosting economic resilience”) includes measures aimed at boosting the resilience of the Tanzanian economy including the expansion of health insurance coverage, the introduction of climate change risk detection in financial and public investment sectors, and the creation of a comprehensive farmer registry to facilitate better targeted interventions against adverse weather and market shocks.
4. What are the results expected from this DPO and how will they be monitored?
The economic and social impact of the policy reforms supported by this DPO will be monitored through 11 results indicators mapped onto 9 Prior Actions. These indicators monitor FDI inflows, Capital Adequacy Ratios in the Banking system, the magnitude of outstanding VAT refunds and public expenditure arrears, the speed of VAT refund processing, the share of population (male and female) with health insurance, and the number of farmers registered by authorities, among others. The actual levels of these results indicators (in the fiscal year 2025), will be compared with the targeted levels by an Implementation Completion Report (ICR) to assess the success of the reforms supported by the DPO.
5. How sustainable is Tanzania’s debt?
Both public and external debt distress ratings are “moderate” for Tanzania. The most recent Debt Sustainability Analysis (July 2022) conducted by the World Bank and the IMF preserved Tanzania’s “Moderate Risk” rating and, in October 2022, Moody's changed Tanzania’s outlook from stable to positive. Tanzania is appropriately balancing between proactive counter-cyclical monetary/fiscal policies and structural reforms, while emphasizing private sector-driven recovery, improving public sector efficiency and accountability and domestic revenue mobilization, as well as maintaining prudence in concessional and non-concessional composition of loans. To enhance transparency and management of public debt and ensure fiscal sustainability, Tanzania is implementing Policy and Performance Actions under IDA’s Sustainable Development Financing Policy with World Bank support. Reform measures introduced in this DPF will also help mitigate headwinds.