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Tanzania's Budget 2016/17: Magufuli, Mpango Made Hard, But Necessary Choices

2016-11-29 12:52:01

By Paul Kibuuka

The 2016/17 national budget on 8 June was the first for President Dr John Magufuli’s administration and may be the most important austerity budget more than ever before tabled in the National Assembly of Tanzania. 

During the pre-budget consultations, lawmakers, economists, civic groups and other stakeholders, including the Tanzania Private Sector Foundation (TPSF) and the Confederation of Tanzania Industries (CTI), shared great ideas about the 2016/17 budget. The unalloyed truth is that the Dr Magufuli administration just couldn’t adopt all the ideas at once.

That’s exactly why the national budget is the most crucial economic policy instrument for any government to make compromises and reach an accord on spending priorities.

A 2015 debt sustainability analysis report by the IMF said that “Tanzania’s Public and Publicly Guaranteed (PPG) external debt as a share of GDP has steadily increased in recent years”. The report also said that the country’s “primary fiscal deficit has been a major contributor to public debt accumulation”.

In his 2016/17 budget address, Finance Minister Dr Philip Mpango told the National Assembly in Dodoma that the national debt stock stood at US$ 20.94 billion as of March 2016 compared to US$ 19.69 billion as of June 2015, representing an increase of 6.34 per cent.

“Out of this amount, public debt was US$ 17.93 billion and private external debt was US$ 3.01 billion,” he said, adding that “The public debt increased by 6.01 per cent compared to US$ 16.92 billion in June 2015.”

You read that right, an increase of 6.34 per cent in the national debt stock and 6.01 per cent in the stock of public debt.

The increase in debt stock, Dr Mpango explained, is chiefly attributed to new borrowings to finance various, big-ticket development projects; for instance, the Bus Rapid Transit (BRT) System, the expansion of the Julius Nyerere International Airport and of the Ruvu Water Treatment Plant, the Strategic Cities Project, as well as, the construction of the 240-MW Kinyerezi II Gas-Fired Power Plant, the Mtwara–Dar es Salaam Natural Gas Pipeline, the Arusha – Holili/Taveta – Voi Road and the Nyerere Bridge, among others.  

The Dr Magufuli administration needs to achieve a balanced budget, of course, within its mandate, in order to start paying down this debt. A key question is, in this year's budget, how many steps closer is the government towards the achievement? Dr Mpango has requested Parliament to approve Tshs 8 trillion (approximately US$ 3.6 billion) to service public debt for the 2016/17 financial year. 

The budget process started some time ago when the Dr Magufuli administration scanned the functions of each ministry, department and agency. This exercise, also known as Public Expenditure Review (PER), aimed to search for efficiencies and to discover programs that could be reformed or discontinued.

In a Tshs 29.5-trillion budget, there are many programs. In a bid to cut costs and restrict wastage of public funds, President Dr. Magufuli challenged each ministry, department and agency to examine their activities and to find more appropriate ways to deliver “best value for money” (BVM).

But, why would the Dr Magufuli administration put a lot of efforts into evaluating the efficacy of Government programs? The reason is not far to seek: it is the unequaled way of finding improvements in public sector performance on a tight budget.

During the pre-budget consultations and in surveys carried out by some media houses at the street level, people from all walks of life expressed their aspirations, hopes and dreams for Tanzania. The dominant message that came through is that change is necessary and the Dr Magufuli administration needs to get its finances in good shape.

What did this really mean? It meant President Dr Magufuli and his cabinet of ministers needed to reconsider what Government does, and how it does it. This perspective encompasses all facets of Government administration, including but not limited to rebates, concessions, tax incentives and exemptions, as well as fees and levies.

Indeed, it will be remembered that, as soon as he took office, the President directed that all tax exemptions provided by the Government be examined. Consequently, in the 2016/17 budget unveiled this month, we have seen the bold proposals to remove tax exemptions.

These exemptions cost East African countries about US$ 2.8 billion annually, with Tanzania hitherto unswervingly granting the most in the region, says a 2012 report by Tax Justice Network-Africa and ActionAid.

Although some tax incentives and exemptions help minimize poverty and have been fruitfully implemented in the developing world e.g. Mauritius and Malaysia, latest studies on the Africa continent show that the costs of these incentives and exemptions far outweigh the benefits.

The Dr Magufuli administration, thus, needed to consider whether they have been effective in attracting foreign direct investments (FDIs) amidst a rising demand for Tanzania’s natural resources and growing concerns around the 'resource curse' that is widely acknowledged to bedevil most resource-rich African countries.

Let's face it, hard choices cannot be suspended ad infinitum.

After careful thought and consideration, the Dr Magufuli administration has proposed the removal of tax exemption on disposal of Dar es Salaam Stock Exchange (DSE)-listed shares, all fee-based financial services (except interest paid on loans), and tourism services. The Tanzania Investment Act, 1997 will also be reviewed with an eye to scrapping VAT exemptions on big investors. This is intended to widen the tax base and increase Government revenue.

Dr Magufuli's administration has also proposed to amend current tax legislation to require religious institutions, and such other like institutions to pay taxes and apply for refunds which would be reimbursed upon verification.  Here, it needs to be underscored that much as the administration seeks to safeguard religious-liberty rights, it is also concerned that religious institutions operate within their chosen sphere and not participate in prohibited activities.

Other hard choices include extending the application of 10 per cent excise duty on mobile money charges, and imposing withholding tax on investment income i.e. dividends, interest and rent of approved retirement funds.

Also, rates of fees and levies charged by ministries, regions and independent departments will be reviewed “in order to rationalize them with the current economic development”. This is intended to help cover the cost of providing services.

Without this, Dr Magufuli's administration would need to cut some billions of shillings from essential public services in our schools, universities, hospitals and other public amenities.

All public spending, along with tax incentives and exemptions, has to be scrutinized if Tanzania is to move forward. The strong call to action in the 2016/17 budget by Dr Mpango, has been heard; and, for the country’s poor, the status quo is not working for them. Also, as indicated above, concern is rife that Tanzania is heading towards a debt trap.

This must be avoided. 

The Dr Magufuli administration must make tough choices to balance its budget. Obviously, the US$ 20.94 billion debt did not accumulate overnight. It’s been years of increasing public spending. The country’s deficit and stock of debt grew from several decisions taken by past Governments.

Calls have been made for the administration to focus more, in this day and age, on its core functions. It simply can’t afford to be all things to all people.

Interestingly, President Dr Magufuli, while speaking with members of the Tanzania National Business Council (TNBC) in December 2015, promised to work closely with the private sector, saying his administration strongly believes in private sector partnerships as being critical to unlocking the economy, creating additional jobs and helping lessen the debt burden.

Against this backdrop – and reflecting the East African Community (EAC) bloc’s theme of “Industrial Growth for Job Creation” – the 2016/17 budget has increased its development spending by 40 per cent, mainly on industrial and infrastructure projects.

This represents a critical step on the road to solving the challenges facing the people of Tanzania so as to bring new hope for a better life and to transforming the economy into real middle income status.

To achieve these goals, Dr Magufuli's administration intends to develop industries that will foster job creation; enhance agricultural productivity in order to increase incomes; carry out reforms aimed at restoring discipline and accountability and doing away with the “business-as-usual” mentality; and strengthen the integrity and management of public expenditure and national resources.

In the long run the administration will be able to minimize taxes and create winning conditions for the country. That seems to be the plan.

This year’s budget has also embodied the electoral promises of President Dr Magufuli. These promises have committed his administration to a conservative fiscal approach and, as stated earlier, restricting wastage of public funds.   

These are hard, but necessary choices that have had to be made for the long-term benefit of all Tanzanians; although, of course, this will depend on availability of funds to implement the budget.

If charted well, the approach could see a drop in the national debt; the money that would be spent on debt servicing would be spent on reducing taxes, spurring economic development, and providing needed public goods and services.

In putting forward the 2016/17 budget, the Dr Magufuli administration has set aggressive timeliness for its implementation. The budget is being put to test as Parliament debates the proposals made. It is important for the administration to trail the path it has set in making the hard choices which it views are vital to Tanzania’s prosperity.  

This necessitates political courage and a strong promise to put far-reaching national interests above everything. Compromise and cooperation is needed to get Tanzania on a more responsible and viable pathway. It would be heartening, therefore, if Members of Parliament (MPs) from both the ruling party CCM and the opposition demonstrate such courage and commitment.

Without comprehensive reforms and sacrifices, our children and future generations will be left with large government debts, greater taxes, poorer living standards and a weakened regional and international role for the United Republic of Tanzania.

As noted above, the 2016/17 budget promises to bring a new hope for a better life and to transform the Tanzanian economy into middle income status, but if we remain united, work extremely hard, and appreciate the value of time as a special resource that we cannot store or save for later use.

Paul Kibuuka is the Managing Partner of Isidora & Company Advocates. Email: Twitter: @isidoralaw

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