International lenders cancel US $3 billion in debt

The IMF and the World Bank have agreed to provide Tanzania with some US $3 billion in debt relief over the next 20 years, the two institutions announced on Wednesday.

Resources made available by debt relief provided under the Heavily Indebted Poor Countries (HIPC) initiative would be allocated to key anti-poverty programmes outlined Tanzania's Poverty Reduction Strategy Paper (PRSP), the Bretton-Woods institutions said in a statement.

"The debt relief will be used to strengthen support for education, health, water, roads and other priority sectors as envisaged under the Poverty Reduction Strategy Paper," the Tanzanian government said in a statement on Monday after the IMF had approved the measure.

The IMF resident representative in Dar es Salaam, Ali Abdi, told IRIN on Thursday 29 November that IMF approval of the relief package was the culmination of a process Tanzania had been going through for the last two years. "This is not a one-time action," he said. "Tanzania has been reforming its economy in line with the poverty reduction strategy paper."

Prior to implementation of the relief package, Tanzania's foreign debt stood at $6.6 billion, according to the country's central bank. The stock of debt was expected to fall to $5.8 billion in 2002, the Economist Intelligence Unit (EIU) reported on Tuesday 27 November.

Tanzania is the fourth country after Uganda, Mozambique and Bolivia to qualify for full debt relief under the enhanced HIPC initiative, launched by the IMF and World Bank in 1996 to reduce unsustainable debt burdens on developing countries.

The initiative was expanded in 1999 by increasing the number of eligible countries, raising the amount of relief each country would receive, and speeding up its delivery, the IMF and the WB said. More than 30 HIPCs are expected to qualify for assistance under the enhanced initiative, most of which are in sub-Saharan Africa.

The HIPC initiative slashes debts of developing countries in the framework of poverty alleviation programmes and economic reforms.

Tanzania has, during the past six years, been implementing a series of macroeconomic reforms. The reforms have severely tightened government expenditure, resulting in a drop in inflation to around 5 percent from more than 30 percent seven years ago.

In their joint statement, the IMF and the World Bank praised Tanzania for the progress it had made in governance, financial management, tax reform, and in its efforts to control corruption. "Tanzania's eligibility for debt relief under the enhanced HIPC initiative underscores recognition by the international community of its continued progress in implementing sound macroeconomic and structural policies," the statement said. The country's PRSP represented "a truly home-grown development strategy", it added.

"The decision crowns commendable collaborative efforts over the past years by the international community, as well as by the government and people of Tanzania, in implementing growth-enhancing and poverty-reducing policies," the government statement said.

Tanzania has established a solid record of economic performance over the past several years, and real economic growth led by agriculture, mining, manufacturing and tourism, was expected to be "robust", rising from an estimated 5 percent in 2001 to 5.4 percent in 2003, according to the EIU. Inflation was predicted to be kept under control at around 5 percent, the EIU added.

Despite economic reforms, Tanzania remains one of the world's poorest countries. It is ranked 140 out of 162 countries on the UN Human Development Index for 2001, below war-torn Sudan (rank: 138), and only just above the strife-riven Democratic Republic of Congo (142).

While economic reforms have led to an increased growth rate, the impact on poverty has been limited. The pattern of growth, regional analysts say, has been biased to sectors of the economy - most notably the tourism and mining sectors - in which the poor generally do not participate.

Tanzanian President Benjamin Mkapa recently called on South African mining companies to invest in Tanzania. "We have made a deliberate and conscious decision to make mining an engine of growth. Tanzania today is where South Africa was at the beginning of the last century - young, unexploited and therefore very inviting and promising," The South African newspaper The Star quoted Mkapa as saying on 16 November.

Abdi told IRIN that Tanzania's agreement with the World Bank and the IMF meant that the government would be expected to spend money made available through debt relief on priority social sectors, including health, education, water and land reform. "The money will not leave Tanzania," he said.

Since large numbers of Tanzania's poor live in rural areas, they do not benefit from expanding economic activity in tourism and mining, analysts say. Indeed, growth driven by these sectors with little benefit for the rural poor is likely to increase wealth inequalities in the country, they argue.

Abdi said additional support to agriculture as outlined in the PRSP would, hopefully, improve the living conditions of rural Tanzanians. "Agriculture is included in the list of priority sectors which Tanzania is committed to support under the PRSP," he said.

In its August 2001 progress report on implementation of the PRSP, however, the Tanzanian government reported that household welfare "may not have changed significantly during the nineties." There had also been "little or no change" in infant and under-five mortality rates, the report said. According to the UN Human Development Report for 2001, enrolment in primary school education in Tanzania fell by approximately 10 percent during the 1990s.

"Overall, therefore, the picture of welfare and poverty in Tanzania in 2001, while still sketchy, is generally one of limited change," the PRSP progress report concluded.

Regional analysts argue that the current growth rate is still much too low to have a big impact on poverty in an economy where the population is growing by around 3 percent each year. Debt relief under the HIPC initiative, however, could make the difference needed to speed up poverty reduction, both through the impact on growth and the freeing of government resources, they say.