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Post-budget analysis of the 2018/19 financial plan

2018-08-17 22:48:25

By Paul Kibuuka

                           This article was first published in The Citizen on June 19, 2018

In accordance with Article 137 of the Constitution of the United Republic of Tanzania 1977, read together with Section 26 of the Budget Act 2015, Finance Minister Dr. Philip Mpango unveiled the Sh32.5 trillion National Budget for fiscal year 2018/19 just five days ago, on 14 June. Once endorsed by Parliament this Budget will set the tempo and direction of the fifth-phase CCM government over the next year and will have medium to long-term consequences for the Tanzanian economy. Thus, it is important to analyse the Budget critically and to share informed perspectives on what it means for Tanzanians and for international investors. It is in the light of this that I have penned this article.

I believe the 2018/19 Budget is growth-oriented with a focus on agricultural production and productivity, industrial manufacturing, social services, infrastructure, consistency of tax laws and supportive tax measures, and actions to improve the ease of doing business. The aim of the Government is to spur domestic investment and attract international investors in order to ensure that the initiative to promote local manufacturing bears significant fruit for the national strategy on industrialization for job creation and growth.

The initiative has notably come with an increase in import tariffs to protect local industries, but the increase should be provisional and within the limits set under the World Trade Organization (WTO) rules lest the high tariffs promote and encourage smuggling, and consequently interfere with revenue targets. A key lesson from global experience in the use of import tariffs to protect local industries is that the moment the tariffs are higher than the premium for smuggling, the tariffs cease to be protective.

 One of the most remarkable aspects of the 2018/19 Budget is its emphasis on public investment-led infrastructure expansion. The Budget allocates a whopping Sh4.2 trillion for transport and communication infrastructure to help lower trade and transaction costs. Of this amount, Sh1.5 trillion has been allocated for constructing roads that will link districts and regions in the country and Sh1.4 trillion for continuing the construction of the standard gauge railway (SGR) line. Additionally, Sh700 billion has been allocated for the massive Stiegler’s Gorge hydroelectric project at Rufiji River, with a generation capacity of 2,100 megawatts. By simple arithmetic, this capacity translates directly to 70 percent of the high demand of 3,000 megawatts that the Finance Minister believes is needed to power the industrial economy.

The deployment of rural electrification, which some research studies have found has a direct impact on agricultural productivity, is another strategy that is meant to create jobs and promote economic growth. However, with the suspension of independent power producers (IPPs), it remains to be seen how the government will address the ‘disconnect’ between the sources of cheap power and the national distribution network. This issue may cast a shadow on the government’s noteworthy gains in expanding electricity access. For now, incentivizing large manufacturers to expand their night shift production, when there is a lot of idle power capacity, could be a solution.

The decision to improve air transport and the turnaround of Air Tanzania will go a long way for the country’s tourism industry. But, in their article “Dare to Fail & Other Lessons Learned the Hard Way” published in Handshake, the International Finance Corporation (IFC)’s quarterly journal, James Morley and Brian Samuel sound a cautionary note: the record of state-owned airlines is “abysmal”. This is not to say that Air Tanzania cannot succeed, far from it! The trials and tribulations of Air Tanzania are the outcome of the objectives and quality of management, not state-ownership. State-owned enterprises can be “efficient and well-run”, according to a 2007 Policy Note produced by the UN Department for Economic and Social Affairs. 

In addition to revamping Air Tanzania, the government should be creating a business-friendly climate for private airlines that fosters healthy competition, which means more flights, reduced prices and more tourists. Creating that climate entails a review of the extant taxes, fees and other charges that have, according to some top industry voices, led to a high operating cost burden for airline operators (Malanga, Alex. “Operators want tax cuts in air transport business.” The Citizen 14 June. 2018: 17. Print.). The reduction in charges would be compensated by the increase in services for passengers and freight. 

Doing business in Tanzania is not easy, as reflected by Tanzania’s rank of 113 out of 137 countries in the World Economic Forum’s 2017 Global Competitiveness Index. The 2018/19 Budget proposals to improve this situation are welcome, in particular executing the Blueprint for Regulatory Reform to Improve the Business Environment for Tanzania strategy in order to simplify laws and regulations and streamline and expedite license and permit clearances. As I wrote in the article (Kibuuka, Paul. “Expectations from Tanzania’s Budget 2018/19.” The Citizen 12 June. 2018: 8. Print.), redressing regulatory overlap due to the multiplicity of regulations was on food manufacturers’ wish list of expectations from the new Budget. Meeting this expectation for manufacturers and the business/investor community in general is in the right direction.

The commitment to ease the process of acquiring and owning land, as well as improving good governance and justice are a big positive, although in terms of details the 2018/19 Budget statement fell short of expectations. Since international investors attach a lot of importance to fair and efficient access to a country’s courts, I would have expected the Finance Minister to give a more tangible statement that the government will appoint more judges to the bench, giving special attention to judicial diversity; especially the selection of more female judges, while taking into account the existing administrative and financial constraints. Nevertheless, the absence of such a statement in the Minister’s Budget Speech is counterbalanced by Tanzania’s Chief Justice Prof. Ibrahim Juma’s recent call for more diversity in the judicial system (Okoro, Sandie and Juma, Ibrahim. “Gender and justice: a foundation for economic development.” The Citizen 11 June. 2018: Web. 17 June. 2018).

Reducing corporate income tax rate from 30 percent to 25 percent for new investors in Tanzania’s pharmaceutical and leather industries over the next five years, starting this year, is intended to spur investment in those industries. Nevertheless, given the substantial outlays of capital required in setting up a manufacturing plant and the market entry and related challenges of establishing business operations in a new market, there is a strong likelihood that new investors would not generate taxable profits within the first 5-year lifespan of the corporate income tax relief. It seems the relief would be more beneficial if it would start running from the first year of generating taxable profits.

The Magufuli government has also proposed to exempt withholding tax on interest payments on government loans obtained from banks and financial institutions for financing government projects. This measure is expected to not only encourage banks and financial institutions to lend to government projects, but also cut the administrative burden on the government to collect the tax on its own projects. Exempting motor vehicles for transporting tourists from import duty; granting remission of duty on selected raw materials and industrial inputs for the manufacture of textiles and footwear; exempting imported animal and poultry feeds additives from VAT; and zero-rating materials used in paint manufacturing are all measures directed toward improving the business environment. Further, abolishing various fees, levies and fines charged by the Occupational Safety and Health Authority (OSHA) in respect of workplaces is meant to reduce multiplicity of nuisance charges on business entities and bring greater transparency to the Tanzanian business environment.

What appears to be surprising about the fifth-phase CCM government’s 2018/19 Budget is that the consumption of fuel remains high, yet the Finance Minister did not announce an increase in the excise duty rate on fuel. This decision is a departure from the budgets presented for fiscal years 2013/14, 2015/16 and 2017/18, all of which increased the rate on petroleum products and shifted the tax burden to end-consumers. However, on a closer scrutiny the decision not to raise excise duty on fuel isn’t particularly surprising—any increase in the duty would eclipse the tax reliefs in the new Budget intended to enhance agricultural production and productivity and local manufacturing.

There is a bit of disappointment for the venture capital (VC) and private equity (PE) industry as the Finance Minister did not make a Budget announcement regarding the government’s support for the industry. Start-ups and small businesses require funding to grow and reach their full potential. Yet, raising capital nowadays has become very challenging due to the tight liquidity environment. And although this situation presents opportunities for especially VC funds in Tanzania, the current capital gains tax rate of 30 percent on the disposal of investment assets (e.g. unlisted shares, securities) is relatively high, compared to the rates charged by some of Tanzania’s peers in the EAC and SADC regional economic blocs. This puts a dent in Tanzanian competitiveness for attracting VC/PE funds. When funding to start-ups and small businesses declines, this should be a major concern, because lack of support for growing companies can prevent them from scaling up—ultimately impacting the Tanzanian economy.

We should definitely encourage initiatives aimed at fostering an industrial based economy. The 2018/19 Budget is bold but its success will depend on the effective implementation of the announced policies over the coming year.

Paul Kibuuka is the managing partner of Isidora & Company Advocates, a corporate, commercial and financial law firm. Email: paul.kibuuka@isidoralaw.co.tz

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