National Budget Review for Tanzania

Infrastructure and investment in FY2016/17

Leading up to the FY2016/17 national budget speech in June last year, there was a sense among analysts that the Tanzanian Treasury would be presenting an austerity-focused national budget in a bid to restrain the gradual rise in levels of government debt over the past few years. But instead, the Treasury announced a significant public spending increase of 30% year-on-year. The Finance Minister announced that as much as 40% of the FY2016/17 national budget would be allocated to infrastructural development projects.

 

Historically, Tanzania has been reliant on institutional donors (often international) to finance development projects within their country. The current government, under President Magufuli, has taken a different stance, prioritising the need for Tanzania to fund more of its development projects. The new administration seeks to mitigate the country’s reliance on institutional finance by financing the bulk of its infrastructure development projects, primarily through a combination of a higher leveraged budget, increased taxes and employing a more efficient tax collection system.

 

Tanzania’s budget reflects the EAC (East African Community) bloc’s theme for “Industrial Growth for Job Creation”, despite gradually rising government debt levels from 27.4% in 2011 to 40.6% in 2015, according to the CABRI1. Infrastructure development spending has increased appreciably over the past few years in an effort to reduce the cost of doing business in Tanzania and to encourage foreign direct investment. Although infrastructure development represents a critical step in mitigating typical social challenges facing the ordinary Tanzanian, such as unemployment and poverty citizen, it is also vital in terms of creating an environment conducive to inclusive growth. Over the medium to long term, achieving sustainable economic growth and mitigating the growing government debt to GDP ratio will be key elements that will enable Tanzania’s economy to thrive.

 

Following the inauguration of President Magufuli, the national treasury introduced several revenue collection schemes in a bid to improve the efficiency of tax collection by the Tanzania Revenue Authority (TRA). The implementation of the new reforms has yielded a positive impact on monthly revenue collection, improving collection efficiency by as much as 25%, according to the TRA.

 

Despite the remarkable economic growth Tanzania has experienced over the past decade, the country faces several issues central to the majority of emerging economies worldwide. Among these are relatively high levels of inequality and poverty, particularly in areas where the largest proportion of the population live in rural communities. This prompted the Finance Ministry to table a proposal for a reduction in the tax rate for the lowest income bracket from 11% to 9%, a welcome tax relief for the vast majority of Tanzanians.

 

However, a reduction in the tax rate will also reduce overall tax collection in the current financial year and prompt the TRA to find other means of offsetting the shortfall. It is likely we may see progressively higher tax rates imposed on individuals within higher income brackets in the next few years unless revenues raised through other forms of taxation can meet the shortfall from the lowest income bracket.

 

To date, the Tanzanian government has proposed an array of tax changes. The TRA has removed tax exemptions from the following classification of shares: Dar es Salaam Stock Exchange (DSE) shares held by residents of Tanzania and shares held by non-residents with less than 25% controlling interest in private companies. Previously dividends derived from the aforementioned classification of shares were subject to withholding tax at a rate of 5%, which has now been increased to 10%2. To further bolster Tanzania’s state coffers, the Minister of Finance has proposed to grant the Commissioner General of the TRA the powers to determine the imposition of tax on rental income subject to withholding tax based on the minimum market rental value of the property. However, the bill is yet to be assented into law.

 

Further taxes will be levied on the local tourism industry through VAT on services such as tour guiding, game driving, water safaris, animal or bird watching, park fees and ground transport services. According to the IMF, the VAT rate on these services will be increased from 5% to 10%.

 

Sustaining these efforts remains critical for the government to achieve their initial revenue target of 16.3% GDP in 2016/17. Thus far, tax revenue came in lower than was initially anticipated by the TRA. At 13.8% of GDP the FY2016/2017 national budget signals the need for the TRA to continue to find creative, yet sustainable sources of tax revenue, without counteracting taxes raised through personal income tax, which contributes the largest share to the overall tax revenue pool.

 

Total government expenditure is expected to reach 27% in the current financial year3. A significant jump from the previous year’s figure of 23.2%4. This isn’t necessarily an indictment on the TRA tax expenditure patterns, but rather requires objective evaluation: whether the increase in government expenditure as a percentage of GDP can be justified under the present conditions. Do the benefits associated with greater government spending outweigh the implicit debt costs related to greater government expenditure under a national budget surplus regime? This remains to be seen in the medium term.

 

Another significant tax change in FY2016/2017 entailed several amendments to the CET (Common External Tariff) with the EAC (East African Community) which were collectively agreed upon by all relevant partner states. The implication for the EAC is an increase in various duty taxes on several goods. This stance was taken due to the eagerness of member states to strike a deal based on the principle that clarity should be provided on the distinction between finished and semi-finished goods. Employing this approach is favourable for all member states and should eliminate cases in which some goods are imported as finished goods – attracting a higher tariff – but are used as inputs or semi-finished products in the production process.

 

Tanzania has embarked on a Five Year Development Plan FY2016/17-FY2020/21, commonly known as FYDP II, a second 5-year development blueprint which, among other things, seeks to implement lessons learnt from FYDP I. The theme behind FYDP II is Nurturing Industrialization for Economic and Human Development and the plan is centred around three pillars, namely: industrialization, human development, and implementation effectiveness.

 

As far as blueprints go, the FYDP II appears to be a credible financing plan according to the World Bank’s FY2016/17 outlook on Tanzania. The World Bank predicts that should the Tanzanian government adhere to the FYDP II, the country’s fiscal and debt sustainability will be maintained in the short to medium term. In the next few years the private sector also has a crucial role to play, which can be leveraged by the Tanzanian state. Private sector participants will be engaged as sources of financing for the FYDP II through various public private partnerships (PPPs), but also as key drivers of industrialization, by creating jobs opportunities for the locals.

 

As a key driver of GDP and job creation, agriculture remains an important cog in the Tanzanian economy. But the sector has lagged in many respects and there is an inherent need to diversify the sector through industrialisation initiatives such as agro-processing and other downstream activities. Expanding the sector through industrialisation will create more jobs, improve food security and strengthen agricultural exports; thereby positively contributing to Tanzania’s current account balance in the medium to long term. This will not be possible however, without a proper functioning infrastructure network. The Tanzanian government has pledged to make drastic improvements in the basic infrastructure of the country through greater access to water, energy and transport networks to facilitate industrial development.

 

Furthermore, the government has highlighted the following industries to invest in through budgetary allocations and other support measures: textiles, livestock products, agro-processing including rubber products, cashew nuts, tobacco, sugar cane, tea and rice.

 

On balance, the Tanzanian economy has a relatively favourable outlook. The country boasts consistent economic growth that rivals most countries in the world. As one of the fastest growing regions in the world and an established democracy, the country has proven it can encourage foreign direct investment capital flows and will likely continue to do so. The greatest challenge for the country will be improving infrastructure development and investing in key sectors. In addition, as outlined by the Tanzanian Finance Ministry, formalising the informal sector will be pivotal in creating jobs and expanding the tax base in the next few years.


1 Collaborative Africa Budget Reform Imitative
2 Tanzanian Ministry of Finance and Planning
3 World Trade Organisation
4 Collaborative Africa Budget Reform Imitative


 

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