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DOCUMENT OF INTERNATIONAL MONETARY FUND AND NOT FOR PUBLIC USE

Ir. Joseph Gold

(1) Room 305 EB/CM/Zanzibar/64/l

1111

March 19, 1964

To: Members of the Committee on Membership - Zanzibar

From: The Secretary

Subject: Zanzibar - Calculation of Quota

Attached for consideration by the Committee is a calculation of quota for the Republic of Zanzibar •

Att: (1)

Other Distribution: Members of the Executive Board Department Heads Division Chiefs

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DOCUMENT OF INTERNATIONAL MONETARY FUND AND NOT FOR PUBUC USE

INTERNATIONAL MONETPl{Y FUND

Calculation of Quota for the Republic of Zanzibar

Prepared by the African Department (In Consultation with the Legal Department and

the Office of the Treasurer)

Approved by J.V. !{ladek

The Government of Zanzibar applied for membership in the Fund in a letter dated December 18, 1963 (EBD/63/l40). Z&~zibar became a British Protectorate in 1890 with the Sultan ruling under the direction of a British Resident. Cn December 10, 1963, Zanzibar became an independent Sultanate. On January 12, 1964, the Sultan was deposed and the country declared a Republic.

1. Background Material on the Economy of Zanzibar

The Republic of Zanzibar consists of two islands off the coast of East Africa: the Island of Zanzibar, 1'lhich is 22.5 ll1iles from the mainland ''lith an area of 640 square miles, and the Island of Pemba, 25 miles to the north of Zanzibar with an area of 380 square miles. The combined popula­tion of the two islands is estimated at 320,000, of which Zanzibar Island accounts for some 180,000.. Africans constitute the largest racial group in the population (170,000); Arabs number some 60,000; the remainder consists mainly of Asians, Ccmorians and a few hundred Europeans. Zanzibar Tov.m, the capital and the only important commercial and shipping cent.er, is by far the largest city. The standard of living is low; per capita gross domestic product is estimated at about £35 ($98.00) in 1961.

Zanzibar's economy is largely dependent on the prcduction of cloves and clove oil. These cClYilllodities account for over 80 per cent of agricul­tural exports and nearly 30 l)er cent of the gross domestic product. The OI1~y other eXpoTt product of some importance is coconut s • The main pro­ducts of the SUbsistence sector are rice, sugar cane, tobacco, cattle, goats, bananas and citrus fruits. Cloves as vlell as coconuts are ,grovm on plantations or in small holdings GVlned either by the government or by indi vi duals.

The manufacturing and construction industries account for only 5-6 per cent of the gross dc:sestic product and consist nainly of the processing of clove-oil and coconut-oil, and the manufacture of soap and coir. The chief handicrafts are basket c_na mat Heaving, 170 odT,..;crk , embroidery, pottery, fishing gear c~nd metal vJorl{. In recent years fishing has beco:rne an increasingly important economic 2ctivity.

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In 1960 Zanzibar had 387 miles of roads, of which 276 miles were asphalt surfaced; comparable figures for Pemba w"ere 227 and 81 miles. Zanzibar Toitffi and Pemba have local airfields. The port of 'Zanzibar handles betvleen 700 and 850 ocean stearners yearly, though its facilities are limited and not as modern as those provided by Mombasa or Dar-es-Salaam on the mainland coast.

Zanzibarts principal exports are cloves and clove-oil, copra, coconuts and coconut oil. Its imports consist mainly of machinery and electrical apparatus, cotton piece goods, motor vehicles, motor fuel, food, beverages and tobacco. Nearly 50 per cent of Zanzibar r s exports go to Indonesia and India. The United Kingdom supplies about 20 per cent of its imports; East Africa (Tanganyika and Kenya) supplies a further 15 per ce"nt. (Import and export figures for recent years are shown in Table 2). •

Zanzibar's economy has been depressed since 1957, but signs of a slight recovery became apparent early in 1963. During this period, the gross domestic product has fluctuated betvleen a high of £12.1 million in 1960 and a lov.T of £10.5 million in 1958. The value of the clove crop fell from £3.9 million in 1957 to £2.5 million in 1961. It dropped further in 1962, but then showed some recovery in the first balf of 1963. Realizing the danger of depending on one crop, the government has recently embarked on the diversification of agriculture by intro­ducing the more prof'i te,ole tropical crops of cocoa and citrus. It bas also made a concerted effort to develop the tourist industry. A Zanzibar Deve"lorment Bank, primarily concerned vlith agricultural finance, is to be set up at an early date.

2. The Monetary and fiscal system

Zanzibar belongs to the East African Currency Board's monetary area 1"hich was described in detail in EB/CM/Kenya/63/1. The Board estimates that its currency circulating in the t'\Vo islands amounts to only 3 1/2 per cent of its tote.l circulation in East Africa. On June 30, 1963 circulation in Zanzibar v.las estimated at a little over £2 million; this compared \vith nearly £19 million in each of the three main­land territories of Kenya, Uganda and Tanganyika.

COIlli'·nercial banks operating in the Republic are branches of foreign banks responsible to regional offices in Nairobi, Kenya. Betvleen 1957 and 1961 demand deposits rose by 70 per cent from less than £2.5 million to over £4 million; in 1962, hc-vlever, they fell by nearly 32 per cent to £2.8 million. In the same period, loa.ns and advances (mostly to agri culture) rose b~r ever 15 per cent to a high level of over £.4.5 million in 1961, but then fell sh8.rply to only £2.5 million in 1962. These sharp drops in deposits and loans and advances in 1962 1,rere due to the political uncertainty in East Africa viThich gave rise to a general out-flovl of capital in the entire area. Post Office savings deposits have been declining ste8_dily since 1957.

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Government budget has increased frem £2,382,400 in 1958 to £3,247,000 in 1963. (Goverr~ent revenue and expenditure are shown in Table 3). The deficit increased from £148,000 in 1958 to over £1.4 million in 1959; in 1963 it was reduced to the still sUbstantial figure of £450,000. No information is available on the manner in which these deficits 'were financed. The major source of goverr~ent revenue is customs, which, on the average, accounts for over 66 per cent of total revenues. Public works, education and health are the major categories of government expenditures, with expenditures on education rising at a faster rate than the other tvlO.

3. Range of Suggested Quota

A computation of Zanzibar t s quota according to the Bretton Hoods formula has not been attempted since no foreign trade data for the period 1934-38 and no national i~cme data for 1940 are available •

The most recent available data on foreign trade, national income and population of Zanzibar and a number of small member countries are shown in Table 1. A comparison of these data suggests that the small quota policy ,'lOuld apply to Zanzibar and a quota in the range of $7.5 million to $11.25 million ,\vQuld, therefore, be appropriate.

4. Gola Subscription

Like the mainlanct territories of Tanganyika, Kenya and Uganda, Zanzibar has no independent currency of its 0''111; the reserves that support its currency in circul2.tion are held by the East African Currency Board, the corr~on currency issuing authority for the four countries in addition to the Protectorate of .Aden. The Currency Board has earmarked a small part of these assets for its constituent territories to be used by them to'\-"ards the payment of their subscriptions to inter­national institutions such as the International Monetary Fund, viThen they join these institutions; the Board has already ma,de gold subscrip­tion payments on behalf of Tanganyika, Uganda and Kenya.

If the assets of the E8st African Currency Beard vIere distributed among its constituent members, it is assumed that this i;Tonld be based on the proportion of its currency circulating in each constituent member territory. The Board's estimate of currency in circulation in Zanzibar has been fixed at approximately 3.5 per cent of the total circulation. Assurning proportionate distribution of the various assets of the Board, it might be expected that Zanzibar t s share vJould include 3.5 per cent of the Board t s tote.l cash and short-term convertible currency holdings.

Based on the principles set forth in Article III, Section 3(b) of the Articles of Agreement, Zanzibar might be expected to }:lEy in gold the lesser of (c,) 25 per cent of its qu.ota, Ol~ (b) 10 per cent of its net official holdings of gold and convertible currencies. Since Zanzibar's share of the gold &nd convertible currency holdings of the

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East African Currency Board (excluding those earmarked for constituent territories) has been estimated at 3.5 per cent, 10 per cent of this amount 1'Jould equal .35 per cent.

It is therefore recorr~ended that in respect of the gold sub­scription Zanzibar be required to pay the lesser of (1) 25 per cent of its quota or (2) the sum of (a) 10 per cent of the net official holdings of gold 8.nd convertible currency of Zanzibar as at the date that Zanzibar makes the representation to the Fund that it has taken all action necessary to adhere to the Articles of Agreement; (b) 10 per cent of the gold and convertible currency holdings of the East African Currency Boe.rd earmarl\:ed for Zanzibar as at that date; and (c) .35 per cent of the gold and convertible currency holdings of the East African Currency Board (excluding those earmarked for constituent territories) as of that date.

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Table 1. Foreign Trade, National Income and Population of Zanzibar and of Selected Member Countries

National Population Fund Quotas Average 1960-62 Income or (latest

Pre-1959 Present Exports Imports Total relatedl

! available t,:' figure) concep ..

(In millions of US dollars) (In millions)

Zanzibar 13 15 28 31 (GDP 1961) 0.3

Panama 0·5 0·5 37 149 186 318 (NI 1958) 1.1

Laos 7·5 1 18 19?J 171 (GDP 1956) 1·9 Gabon 7.5 44 31 75 65 (NI 1956) 0.4

Cyprus 11.25y 54 117 171 174 (NI 1959) 0.6 El Salvador 7·5 11.25 127 118 245 490 (GDP 1959) 2.5 Haiti 7.5 11.25 36 41 77 327 (GDP 1955) 3.5 Honduras 7.5 11.25 72 75 147 308 (NI 1958) 1·9 Iceland 1.0 11.254/ 68 84 152 188 (GNP 1960) 0.2 Jordan 3.0 11.25- 11+ 122 136 140 (l'IDP 1954) 1.8 Nicaragua 7.5 11.25 66 81 147 188 (NI 1957) 1.5 Paraguay 7.5 11.25 30 L~O 70?} 181 (NI 1960) 1.8 Liberia 11.25 69 50 119 112 (NI 1957) 1.3 Sierra Leone 11.25 74 83 15~ l;~(~I 1957) 2.4 Somalia 11.25 20 29 4 2/ / (NI,.1958) 2.0 Togo 11.25 15 19 34y 140 (GDP 1956) 1.4 Burundi 11.25 1 L, 17 132 (GDP 1961) 2.3 - ... 31y Rvlanda 11.25 14 17 31 108 (GDP 1961) 2.7

Sources: Il\:fF, Interpational Financial Stati stics ; United Nations, Yearbook of National Accounts Statistics, 1960 and Monthly Bulletin of Statistics.

1/ Latest official estimates as reported by the United Nations or other official estim&tes converted into US dollars at official exchange rates prevailing in the year to vlhich the figures refer.

2/ Average 1958-60. 3/ Has requested quota increase to $20 million. Tjj Maximum to i1hich quota is to be increased in installments. 5/ St&ff estim&te. ~ 1961 estimate.

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Table 2. Imports, Exports and Balance of Trade, 1958-62

(In thousands of pounds sterling)

L"'11ports

1958

5,208

5,064

Visible Balance - 11+4 of Trade

1959

4,635

- 734

1960

5,238 5,491

5,614 i~ ,400

+ 376 -1,091

5,318

4,519

- 799

Source: East African Conw.on Services Organization, Economic and Statistical Revie1'T, No.7, June 1963.

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Table 3. Govermnent Revenue and Expenditure

(In thousands of pounds sterling)

1958 1959 1960 1961/ 62 1962/6311 1963/64!i

Revenue

Expenditures

Surplus or Deficit

2,382 2,255

2,531 3,674

- 149 - 1, l~19

2,573

2,525

+ 48

2,618 2,509 2,787

3,142 2,992 3,247

- 524 - 483 - 460

Sources: Estimates of Revenue and E~8)endi ture of the Zanzibar Protec­torate for the year 1963/6i~; UN Report of the Secretary-General, African and Adjacent Territories: A/5078/Add 2, March 21, 1962.

11 Estimates .

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Mr. Horne. Hareh 13, 1964

Prank A. Southard, 31'.

Zanzibar: Committee Chairmanship

tbe Managing Director and I have seen your memoraa4_ of lfaro 12 and we botD feel that Mr. Heamann has a real problem an4t'llat "* .ught 'to Delphia solve it. Wouldn't it be fairly easy, since be i.e 1 ....... and. t.here would be a new German Di.rect.or, for him to tellve"'"t. Ita would like to avoid leaving a committee chairmanship for Mr .... 11,-. since. be would be unfamiliar withprecedures in the Fund on -tbeH -.. 'Dr..-, and that he would therefore appreciate it if another ch .. irmart •• 141Je name.d Defore he leaves. You eould tbenfind an.therch .. lr .......... t1,., the Board that Mr. Ranemann had asked to be reI laved of the <elull .... 1\l' in view of his ~ine.nt departure.

It would be useful to find 8. chairman fairly remotefr.m Z..-i'Dar problems who then might be willing to help U8 work out the aatter'mantic_d in my previous memorandum •

cc: .,/Mr. Gold Mr. Mladek

FASouthard:brs

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