A new breed of legal support

Budget 2017/18 should create demand, up investments

2017-06-06 12:45:53

By The Citizen (Tanzania)

The Finance Minister Dr Philip Mpango tables the national Budget for the financial year 2017/18 on Thursday, June 8, 2017 at a time when growth has been on a dispersion mode and there exists weak demand, which is hurting many sectors of the economy. In this Interview corporate lawyer Paul Kibuuka, Managing Partner at Isidora & Company Advocates, explains some of the issues that the Budget should touch on. Excerpts:

Q. What are your expectations from the Budget that will help Tanzania’s economy sail through the global economic slowdown and meet its growth target?

Tanzania is amongst the fastest growing economies in Africa today. Dar es Salaam, the country’s commercial capital, is one of the fastest growing cities on the continent. For a number of years, Tanzania has been showing a high, consistent gross domestic product (GDP) growth of 6-7% and has attracted the attention of foreign investors mainly from South Africa, Kenya, the UK, Canada and China. Amidst a global slowdown, however, the government has identified its key priorities for achieving greater growth. I am confident the performance of our economy would improve even further. Even so, our manufacturing sector is not performing up to its full potential. Growth has been somewhat dispersed. Many economic sectors are feeling the bite of weaker demand and this is placing a burden on their existing capacities. There is an urgent need to spur domestic demand to yield a strong capital expenditure cycle, which is crucial to attain the desired double-digit growth. The forthcoming Budget should focus on stimulating demand, boosting investments and enhancing purchasing power. I would also like the government to outline in the Budget a roadmap for broadening the tax base, whilst reducing the 30% corporate tax burden.

Q. What should the Finance Minister do to boost manufacturing, encourage more investments and increase exports?

The government has two major policy documents, namely the Tanzania Development Vision (TDV) 2025 and the Sustainable Industrial Development Policy for Tanzania (SIDP 2020) to give a thrust to the industrial sector, conceived as the main catalyst to transform the economy, generate sustainable growth and reduce poverty. Several frameworks, including the Tanzania Integrated Industrial Development Strategy 2025, have been crafted to facilitate the implementation of the major industrial policies; however, what matters is resource allocation and timely, consistent and effective policy implementation. The government’s ethics and anti-corruption campaigns have garnered a very positive response. We have also seen high-powered, foreign business delegations from Morocco, India, Turkey, South Africa, China, etc express interest to invest in various sectors of the Tanzanian economy. Further, public sector infrastructure investments need to be accelerated as they have a crowding-in effect on private sector investments, which also need the support of the government. As regards exports, raising duty drawbacks of certain products would give some relief to exporters. We need to stay focused on enhancing the competitiveness of the manufacturing sector as this would help give a push to exports, provided we improve the ease of doing business and reduce the cost of doing business. One way would be to reform the multiple and overlapping requirements imposed by different regulations and agencies on food manufacturers. Moreover, adhering to the rule of law and also maintaining policy stability means that investors, particularly foreign investors, can feel safe to commit for the long-term to manufacturing in Tanzania.

Q. The slow growth of the industrial sector is hurting employment. What can business and government do to enhance employment generation prospects?

Creating jobs for millions of young Tanzanians entering the workforce every year is of paramount importance. President Magufuli made it amply clear in his inaugural address to the National Assembly on November 20, 2015 that job creation would be his government’s top priority. Indeed, the various public projects implemented by the government and also those still on the drawing board are geared towards creating more jobs. The government has taken steps to promote entrepreneurship, but our growth is currently being driven by public investments. We really need a stronger boost to promote an eco-system of entrepreneurs, SMEs and start-ups. And for this, our education system, which considers a student’s ability to memorize, is in need of a review. Even more critical, however, is that our present model of education and career planning is in need of a major paradigm shift in how we train our emerging workforce and the skills they need to possess to be relevant in today’s technologically globalized world. The bottom line is that both business and government must ensure our emerging workforce is primed for success, and it’s in our best interest to do so. Tanzania’s future depends on it. Now, that’s a solid truth.

Q. You have talked about SMEs and startups. How can the government allow more funds for growth and sustainability of start-ups?

The procedures for incorporating startup companies are complicated and laborious and many startup founders find compliance with legal, regulatory and tax requirements difficult. We can borrow lessons from neighbouring Rwanda, where the Rwanda Development Board (RDB) provides a simple, quick and efficient registration of local enterprises and foreign subsidiaries. The government also needs to do more for incubation and mentoring. Key ingredients for success of incubation centres include a strong and continuous institutional support and financial backers to help raise capital and maintain cash flows. The government could introduce a rebated income tax scheme, whereby tax benefits should be linked to direct employment by the start-up businesses. This benefit can be for a specified rebate proportion and for a limited period. The government could also grant tax incentives to angel investors and venture capitalists making investments in small startups. In Singapore, for instance, the government there provides various funding support programs consisting of cash grants, government-backed equity financing, debt financing and tax incentives to assist startups turn their business ideas into operating companies. 

Q. Every budget is important for the social sector. What specific areas can be focused on in the forthcoming Budget for inclusive growth?

Incomes and livelihoods and human development are tied intrinsically to the agenda of inclusive growth. The forthcoming Budget will generally reflect the economic policy of the Tanzanian government, and central to the policy will be the goal of job creation. As I alluded to earlier, we need to nurture our large and growing youth workforce through better education and skills training. Along with healthcare, education and skills training will lead to innovation, investment and economic diversification and also enhance labour productivity. To further accelerate GDP growth to double-digits, the government expenditure on education needs to rise to around 25.1% before factoring in the national debt service, which would cause the spending power of the education budget to decline to 20%, the minimum set by the Global Partnership for Education. In the current fiscal year 2016/17 the government planned to spend 22.1% devoid of the national debt service.

Q. At what percentage should the fiscal deficit target be pegged in Budget 2017/18? And how realistic is that percentage?

For the current fiscal year 2016/17, the fiscal deficit target has been put at 4.5% of GDP. While meeting this target could be challenging; on the brighter side, there has been robustness in tax collections since December 2015 as well as the phasing out of some tax exemptions. Achieving the 4.5 percent fiscal deficit target as envisaged in the 2017/18 Budget Guidelines could be extremely challenging for the government on account of public investment push, which means bigger outlays on capital expenditure. In light of this, a re-assessment of the fiscal deficit target is necessary. Given the need to impart momentum to Tanzania’s industrialization drive, the government has urged for higher public investments, particularly in infrastructure. According to the Budget Guidelines, development expenditure is anticipated to take up 13.6trn/- or 40% of the total new budget of 32.9trn/-. If this requires adjusting the fiscal deficit target again, then the Finance Minister will do as necessary.

Q. What can the Finance Minister do to revive the real estate and stock markets that have seen a dramatic slowdown?    

I believe real estate and stock markets react to a diverse range of factors, including political events such as the formation of a new government. Although these markets sometimes reflect a broad sentiment of an economy’s performance, they don’t usually indicate mid- to long-term fundamentals of an economy. The government is focused on addressing more fundamental issues in the economy, which should enable every market to improve its health. Having said that, when the real estate and stock markets will come out of a slowdown is usually a subject of much interest and debate. The Finance Minister needs to address two things, namely the liquidity issue and confidence on the sectors among various stakeholders. He could also allow 100 percent foreign direct investment (FDI) in real estate projects within the special economic zones (SEZ). This would not only help ease the slowdown in Tanzania’s real estate sector, but also have a ripple impact on the entire economy. An improved real estate sector would lift the construction industry, which has been facing pressure due to the downtrend in the real estate sector. Also, the reduction or removal of Value Added Tax (VAT) on construction materials and finished houses would ensure affordable housing and low mortgage rates. This would augur well for the Tanzanian real estate sector.  

Q. How serious is the problem of non-performing loans (NPLs) in the banking sector? What bold steps can the Finance Minister take to address the problem?

The banking sector is vital to the Tanzanian economy, but is facing risk stemming from declining asset quality. According to recent statistics from the Bank of Tanzania, as at March 2016, NPLs constituted over 8 percent of banks’ total loans, compared with 6.8 percent in September 2015 if my memory serves me right. In order to address the NPLs problem, the Finance Minister could consider the creation of a National Asset Management Company which would take NPLs off the banks’ balance sheet and also focus on rehabilitation, recapitalization and refinancing of banks. This would release capital, provide banks with lendable resources and restore their health.

Q. Is the speed of legal, economic reforms undertaken by President Magufuli’s government adequate? What do you expect from the Budget on the horizon in accelerating the reform agenda?

The government is keen to carry forward legal and economic reforms. I can see a commitment to bring in changes in some of the most sensitive areas such as labour, land, mining, telecoms, and so on. Infrastructure has been a priority for the government and this is good for Tanzania and its eight neighbours. The onus of initiating changes in the electricity sector is with the government. I look forward to a roadmap for restructuring power utility firm TANESCO into three separate legal entities, namely generation, transmission and distribution. This would facilitate focus and attraction of investments across the entities, thereby improving the electricity infrastructure for powering the industries we want to build. I also look forward to the Finance Minister announcing a significant step-up in land reforms with respect to digitization of land records.

This Q&A Interview was first published by The Citizen, a daily English newspaper in Tanzania on Tuesday, June 6, 2017

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