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Tanzania’s economic performance and rising issues on budget 2018/19

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Performance of Tanzania’s economy in the past five years (2012-2016) has remained buoyant with real GDP growing at an annual average rate of 6.7%. This is mainly attributed to improvement in transportation infrastructure, growth in communication, construction and financial services sectors.

In 2016, the Tanzanian economy grew by 7%, marginally missing the set target of 7.2% mainly on account of underperformance in the agriculture sector, which accounts for 28.9% of the GDP.

Spending on public investment remained well below budgeted amounts. On the other hand, the 12-month rolling balance of payments surplus almost doubled in annual terms in March, benefiting from increasing project funds from development partners. In the first three quarters of 2017, the last period for which data is available, the economy expanded almost 7 percent, a solid, albeit slower, pace from the previous year due to weaker domestic demand.

The value of Tanzanian Shilling against the US dollar remained broadly stable throughout 2016/17, consistent with liquidity conditions in the economy and the improvement in the current account balance. Throughout the first half of 2017, headline inflation continued to be in the single digits supported by contractionary fiscal policy and a general slowdown in global commodity prices; specifically stagnant oil prices and a slowed increase in domestic food prices. However, compared to a similar period in 2016, inflation increased marginally.

The 2018/19 budget speech, pointed out that the Tanzania economy continues to flourish as the government focuses on industrialization and infrastructure development. The budget focused on maintaining macroeconomic stability, promoting economic and social development and improving internal revenue collection.

The budget has been prepared in accordance with the Tanzania Development Vision 2025 which is eradicating poverty, transforming Tanzania into an industrial economy and endeavoring to be a middle income country by 2025.

The Finance minister, Philip Mpango, on June 14, 2018 presented the National Budget of Tanzania for the fiscal year 2018/19 to parliament. In his speech, the Minister highlighted the major challenges facing the country including the high level of poverty, narrow tax base, tax evasion, difficulties in collecting tax/ levy from the informal sector, unfriendly environment for tax payment and imposition of numerous taxes and levies, especially for services rendered by regulatory authorities, and underutilization of Electronic Fiscal Devices (EFD).

According to the budget framework, the Government domestic revenue estimated for 2018/19 amounts to TZS20.89 trillion of which TZS18 trillion is from tax revenue, TZS2.16 trillion represents non-tax revenue and TZS735.6  billion will be from the Local Government Authority (LGA).

Macroeconomic Policy Targets

Minister Mpango highlighted the macroeconomic targets for 2018/19 budget are as follows:

  • Attain real GDP growth of 7.2% in 2018 up from the growth of 7.1% in 2017;
  • Continue to contain inflation at single digit;
  • Domestic revenue including Local Government Authority (LGAs) own sources is projected at 15.8% of GDP in 2018/19 up from the likely outturn of 15.3% in 2017/18 and the actual outturn of 15.6% in 2016/17;
  • Tax revenue is estimated at 13.6% of GDP in 2018/19 up from the estimate of 13.0% in 2017/8 and the actual outturn of 13.3% in 2016/17;
  • Total Government expenditures are projected at 24.5% of GDP in 2018/19 from the estimate of 23.0% in 2017/18 and the actual performance of 22.2% in 2016/18;
  • Budget deficit to be 3.2% of GDP in 2018/19 compared to the likely outturn of 2.1% in 2017/18 and the actual deficit of 1.5% in 2016/17.

Priority Areas for 2018/19

In his speech, Minister Mpango stressed that the 2018/19 budget of TZS 32.4 trillion will put more emphasis on implementation of flagship projects, namely:

  • Agriculture: More funds will be allocated in improving irrigation infrastructure, warehouses and markets, strengthening the supply of agricultural inputs and implement, improving extension services, improving researches and dissemination of findings to the people and development of livestock and fisheries sub-sectors.
  • Industries: The Government will direct more efforts in the implementation of a Blueprint for Regulatory Reform to Improve Business Environment for Tanzania in order to attract private sector investments particularly in textiles, leather and meat, fish, edible oil, medicines and medical equipment, food and animal feeds and in the mining sector.
  • Social Services
  • Water: To increase availability and distribution of clean water particularly in villages and sewerage systems, drilling of boreholes in arid and semiarid areas and construction of strategic dams.
  • Education: The Government will continue to finance free basic education, increasing number of experts in rare and specialized skills in areas of minerals, oil and gas, specialist doctors (cardiologists and kidney specialists) as well as the provision of loans to higher education students.
  • Heath: Financial resources will be allocated to increase distribution of medicines, medical equipment and reagents in health centers, dispensaries and referral hospitals.
  • Infrastructure: Construction and rehabilitation of supportive infrastructure especially increasing electricity generation from different sources; to continue with the construction of new central line railway of the standard gauge; construction of roads connecting regions and rural roads; to improve air and marine transport;
  • Other priorities: Ease of land acquisition and ownership; to improve communication services; finance and tourism and to improve defense and security, good governance and justice.

Policy and Strategies to Increase Revenue

In order to increase and strengthen domestic resources mobilization, revenue policies for the year 2018/19 will focus on widening tax base; strengthen management of existing sources especially by intensifying the use of electronic collection systems and other administrative measures. In widening the tax base, there are two main measures that the Government will undertake, namely formalization of the informal sector and improve investment environment in order to foster new sources of revenue from such investments.

For this, Minister Mpango reminded that the Government prepared a Blueprint for Regulatory Reform to Improve Business Environment for Tanzania. The recommendations of the Blueprint which strongly proposed to be implemented in the financial year 2018/19 include simplification of payment of taxes, levies and different fees, and to shorten the time and bureaucratic procedures in the registration of businesses and companies.

In addition, the Government seeks to improve collaboration with Development Partners as grants and concessional loans have been declining from an average of 26.3% of the actual budget in 2010/11 to 10.4% in 2016/17. The 2018/19 Budget is in line with Tanzania’s 2017/18 Budget that revolved around the theme “Industrialization for Job Creation and Shared Prosperity”, which in turn represented a continuation of the 2016/17 theme “‘Industrial Growth for Job Creation.”

In relation to VAT, the Minister has proposed to amend VAT Act as follows:

  • To grant powers to the Minister for Finance to provide a VAT exemption on government projects funded by non-concessional loans or exemption where there is an agreement signed between the Government and a financial institution or bank that is representing another government and has been given powers of attorney by the said government to execute the agreement. The Act currently does not permit the Minister to grant an exemption to government projects funded by non-concessional loans or the financial institutions/banks. The amendment will enable smooth operation of the projects.
  • To provide a VAT exemption on packaging materials produced specifically for use by the local manufacturers of pharmaceutical products. The amendment aims to reduce production costs and to protect local pharmaceutical industries in Tanzania.
  • To provide a VAT exemption on imported animal and poultry feeds additives. The amendment is intended to reduce the costs incurred by livestock keepers.
  • To provide an exemption of VAT on sanitary pads (intended to make the product available and affordable to women and girls, particularly school girls and those in the village).

Tax Amnesty

The Minister has proposed to amend the Act by giving 100% amnesty on interest and penalties for six months starting from 1 July 2018 through 31 December 2018. The amnesty is expected to improve tax compliance.

The worries of the budget for other players include:

  • Gaming firms whose tax is supposed to increase from the current 6% of gross gaming revenue to 10%. Tax on slot machines will increase from Sh32, 000 to Sh100, 00 per machine per month.
  • Casinos for whom the income tax rate is proposed to increase from the current 15% to 18%
  • Oil importers as government proposes a customs duty rate of 25% on palm oil and an increase in customs duty on semi-refined edible oil from 25% to 35%
  • Mineral water importers in which the government proposed to increase customs duty from 25% to 60% to protect local industries.
  • Meat importers as the government proposed to increase customs duty on meat and edible meat offal from 25% to 35%. The measure aimed at encouraging local meat production and processing.

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Tanzania

Tanzania Economy to decline to 6.6% in 2019

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Tanzania’s economy remains buoyant, thanks to the stability of major macroeconomic indicators, according to a Bank of Tanzania report. Inflation remained in single digits, while money supply in the economy rose during the year ending May 2019, the BoT says in its Monthly Economic Review (MER) for June 2019. Another notable development during the period was the rise in the importation of capital goods for ongoing mega infrastructure projects.

This is in line with President John Magufuli’s endeavor to build world-class infrastructure, which is expected to greatly reduce the cost of doing business in the country. The projects include the 2,100-megawatt Stiegler’s Gorge hydroelectricity station and standard gauge railway. With the government embarking on various measures to improve liquidity in the economy, the cost of borrowing also went down, BoT figures show, while food prices were generally stable.

These positives outweighed the impact of a fall in exports of goods and services, as well as shrinking foreign exchanging reserves and increased national debt, among others. The review shows that the annual inflation rate remained at 3.5 per cent, which was below the targeted five per cent, and this helped to maintain the stability of prices of goods and services.

Tanzania is also currently food sufficient, although increased demand for maize in neighboring countries is putting pressure on prices of the commodity in the domestic market. According to the review, the extended broad money supply growth jumped to 5.8 per cent in May this year from 4.8 per cent recorded during the year ended in May 2018.

The improvement of broad money supply was a result of the growth of domestic credit to both the government and private sector. The recovery of the domestic credit market indicates increased lending to the private sector. The BoT review shows that credit to the private sector grew by nine per cent from 2.9 per cent, indicating borrowers’ increased confidence in the banking industry.

This was experienced as individual banks were lowering their interest rates as part of implementing an accommodative monetary policy by the BoT. The review shows that the average interest rate dropped to 17.17 per cent from 17.53 per cent, thus stimulating borrowers’ appetite. A decreased was also recorded in gross official reserves, which amounted to $4.3billion, covering about 4.2 months of projected imports of goods and services.

However, this was above the country’s benchmark of not less than 4.0 months, but below the East African Community’s 4.5 months. Another indicator which fell slightly during the period under review was exports of goods and services, which dropped to $8, 514.4 million from $8, 578.7 million.

Exports of traditional crops declined to $533.9 million from $1,140.3 million, manifested in all traditional crops, except coffee and cotton. However, non-traditional goods exports, which account for 78.9 per cent of goods exports, increased to $3, 499.2 million from $3, 142.7 million, largely driven by gold exports.

The value of gold– which accounted for 38.6 per cent and 48.9 per cent of total goods and non-traditional exports, respectively – grew by 15.4 per cent to $1, 716.7 million on account of increased volume. Domestic revenue realized by the government in May 2019 amounted to Sh1.28 trillion from Sh1.30 trillion. Out of the collections, Sh1.2 trillion was collected by the central government and Sh50.4 billion was local government authorities’ collections from own sources. Tax collections amounted to Sh1.1 trillion, accounting for 87.4 per cent of domestic revenue.

In May 2019, expenditure amounted to Sh1.8 trillion, of which recurrent expenditure was Sh1.06 trillion and development expenditure was Sh741.7 billion. The level of external debt stock, comprising public and private sector debt, amounted to $21.6 billion, having increased by $1.07 billion from May 2018. The increase was mainly on account of new disbursement, with recent sustainability reports indicating that Tanzania’s debt is still stable.

Tanzania’s economic growth slowed to 6.6% year on year in the first quarter of 2019 from 7.5% in the same period a year earlier, official data shows, weighed down by softer construction, agriculture and manufacturing activity.

A leaked report from the IMF said earlier in 2019 that Tanzania’s economy has not been expanding as fast as official figures suggest. It said lower growth was partly due to President John Magufuli’s “unpredictable and interventionist” policies.

In the first quarter, construction, the biggest driver of GDP, grew 13.2%, compared with 15.6% a year ago, the state-run national bureau of statistics said.

However, growth in the mining sector, which has been the target of repeated government interventions, rebounded to 10.0% from a 5.7% decline during the same period in 2018. Tanzania is Africa’s fourth-largest gold producer.

“The growth of the mining sector was mainly due to an increase in production of gold, coal and diamonds,” said the bureau.

Magufuli embarked on an ambitious programme of industrialisation after coming to power in late 2015, investing billions of dollars in infrastructure, including a new rail line and a major hydropower plant and reviving the national airline.

But critics say government intervention in mining and agriculture have discouraged investment. Foreign direct investment has slumped and private sector lending growth dropped below 4% in 2018, from an average of 20% from 2013-2016.

Agriculture, which accounts for about a third of economic activity, also slowed in the first quarter of 2019, with crop production growing 6.0% compared to 8.9% in the same period in 2018, the statistics bureau said.

In 2018 the government sent the military to seize the cashew harvest, the main export crop, after complaints by farmers that prices offered by brokers were too low. Manufacturing, another key GDP contributor, grew 4.8% in the first quarter compared with 5.3% a year earlier.

Tanzania’s economy grew 7% in 2018, according to the government, which has forecast 7.1% growth in 2019. Earlier in July, however, the World Bank released its own estimates that said Tanzania’s economy grew 5.2% in 2018.

Following the World Bank report, Tanzania said it might revise its 2018 GDP growth rate after meetings in August. In April, a leaked report from the IMF predicted lower growth of about 4%-5% in the “medium term”. The IMF report said there were serious weaknesses in Tanzania’s official data.

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