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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

Shilling Fluctuation, a seasonal phenomenon?  

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The debates about the depreciation of shilling against the US dollar are unprofessional, as the fluctuating dollar exchange rates are global and seasonal.

Contrary to what analysts and a section of the media argue or wish the public to believe, experts in economics and financial matters hint that there are well balanced reasons to that.

Having analyzed such baseless debates, I argue that this situation needs to be explained scientifically and economically rather than being blown up unnecessarily.

It should be noted that not only the Tanzanian shilling has slightly depreciated against the US dollar but also other currencies in the world.

Why? Did they fail to export cashew nut as some would argue here? Why the US dollar outperforms other currencies?

According to the ET Markets (2018), in this year (2019), the US dollar was forecasted to outperform many other currencies because of the interest hike.

The ET Markets report which is also supported by the Bank of Tanzania (BOT), states that last year, the US economy continued to strengthen.

This strength caused the US Federal Reserve to increase interest rate in December 2018. The US Fed increased 25 basis point hikes in December, so interest rate differential widened further to 2.65-2.90 per cent.

Euro and US inflation stabilized nearly 2 per cent, but there was a difference in GDP growth and unemployment rate.

GDP growth is higher in the US and unemployment rate is lower compared with the euro, which naturally makes the dollar stronger against the euro and other currencies in the world, including Tanzania.

Economically and financially, this development has contributed to rise in demand for the US dollar from investment side, consequently causing the US dollar to appreciate against most currencies, including the Tanzanian shilling.

The US Dollar is the benchmark pricing mechanism for most commodities which are global assets.

Base Metals that trade on the LME and precious metals such as gold, silver and energy including oil and natural gas use the dollar to price.

The rising dollar has significant consequences on commodities, as higher dollar tends to weigh on commodity prices.

Production cost of raw material in other countries, including Tanzania rise because of a strong dollar and weighs negative on demand.

In the stock market, a higher US dollar weighs on US multinational companies, as they have to compete globally with strong currency.

According to the latest forecasts from Barclays (2019), the dollar will remain the dominant force in the currency market this year and the pound sterling will succumb to another dose of ‘Brexit uncertainty’ while the euro will reach new lows.

Barclays says in its 2019 outlook that as the Fed drives the dollar to new levels of overvaluation and political factors keep Sterling and the Euro on the proverbial back foot, the Fed will go on raising its interest rate in a sustained manner this year, contrary to what other forecasters have begun to anticipate.

The strength of the US dollar against others as said above, the interest hike by FED has depreciated other currencies in the world, including the Tanzanian shilling.

The Bank of Tanzania (BoT) report indicates that from 22nd February 2018 to 21st February 2019 (one year period), the value of the shilling against the US dollar declined by 3.8 percent.

The BOT reports that the value of the US dollar on Developed Market currencies was also put in pressure in the same period.

The British Pound against the US dollar declined by 6.7 percent, the euro by 8.1 percent, the Australian dollar by 9.6 percent and the Chinese Yuan by 6.4 percent.

Moreover, the emerging markets (EM) have been badly affected by the strength of the US dollar. the Brazilian Real is down 18.4 percent, the Russian Ruble is down 14.75 percent, the Pakistan Rupee is 9.7 percent and the Indian Rupee by 8.9 percent year-to-date (YTD) against the dollar.

The Turkish Lira and Argentinian Peso have been the biggest losers, both down close to 40 percent since the beginning of the year.

Comparative analysis in the African region also provides a gloomy picture. Are measures taken by BOT commendable?

Despite the FED factor, I agree with BoT report (2019) indicating that the current movement in the exchange rate in Tanzania is a seasonal phenomenon related to low foreign exchange earnings from tourism and export crops.

This is true because currency hike may be mitigated by a number of facts. “Customarily, from January to May each year, it is a low tourist season and export crops where the country receives low exchange earnings. This is a common trend that usually normalizes in the second half of the year when earnings from tourism and exports pick-up,” states the report.

I commend BOT, for among other things, implementing monetary policy aimed at maintaining price stability and ensures that inflation remains within the target of single digit intended at stabilizing the value of the shilling.

This can be achieved through maintaining the appropriate level of liquidity in the economy. I understand that BOT is also participating in the interbank foreign exchange market (IFEM), in order to smoothen excessive volatility of the exchange rate.

In doing that, the Bank of Tanzania sold USD 528.6 million in 2018, which is more than double the amount sold in 2017.

In 2019, the Bank of Tanzania continued to sell the foreign exchange in order to reduce its shortage in the economy.

Moreover, the BOT must monitor foreign exchange business in order to ensure that rules and regulations are adhered to, including maintaining foreign currency Net Open Position of commercial banks equivalent to 7.5 percent of core capital.

Factors that could lead the dollar to collapse/depreciate more so to what BoT is mitigating, two conditions must be in place before the dollar could collapse.

First, there must be an underlying weakness. Between 2002 and 2018, the dollar has declined 6 percent according to the U.S. Dollar Index.

This is because the U.S. debt almost more than tripled during that period, from $6 trillion to $22 trillion.

The debt-to-GDP ratio is now more than 100 percent. That increases the chance the United States will let the dollar’s value slide as it would be easier to repay its debt with cheaper money.

Second, there must be a currency alternative for everyone to buy. The dollar’s strength is based on its use as the world’s reserve currency.

The dollar became the reserve currency in 1973 when President Nixon abandoned the gold standard.

As a global currency, the dollar is used for half of all cross-border transactions. That means central banks must hold the dollar in their reserves to pay for these transactions.

As a result, 61 percent of these foreign currency reserves are in dollars. The two situations above make a collapse possible.

But, it won’t occur without a third condition. That’s a huge economic triggering event that destroys confidence in the dollar.

Altogether, foreign countries own more than $6 trillion in U.S. debt. If China, Japan or other major holders started dumping these holdings of Treasury notes on the secondary market, this could cause a panic leading to collapse.

China owns $1 trillion in U.S. Treasury’s. That’s because China pegs the Yuan to the dollar.

This keeps the prices of its exports to the United States relatively cheap. Japan also owns more than $1 trillion in Treasury’s.

It also wants to keep the yen low to stimulate exports to the United States. These facts considered, I reiterate the possibility of a conspiracy theory on the dollar-shilling debate in Tanzania.

The hikes are normal and seasonal, but you still find some people raising unnecessary alarm into markets.

 

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