Can one of Africa’s rising stars cement his reputation with his first budget?
Tanzania’s recently-unveiled budget goes a long way towards meeting President John Magufuli’s campaign promises of revitalizing and increasing the breadth of the country’s infrastructure, particularly its aging roads and ports. In fact, Magufuli’s first official visit abroad took place in Kigali, symbolizing his administration’s emphasis on integrating the region’s economies through better transport and trade links.
Whenever a developing country sees a huge proposed budget increase – 31% in the case of Tanzania – the question becomes: where is the money coming from? In this case, the money seems to be coming from a vast increase in public sector borrowing from local financial institutions, as well as a boost in revenue collection.
The former can be easily be done. In fact, some local borrowing might be prudent, especially as Dar es Salaam is still waiting for its maiden dollar-denominated sovereign bond issuance to take place, and the cost of eurobond borrowing for emerging markets like Tanzania having risen significantly in recent months. However, it is unclear how much “crowding out” – reductions in credit to small businesses and other local borrowers – will take place as a result, and more importantly, how sustainable the subsequent debt payments will be in the long-run.
The revenue side is key
When it comes to revamping revenue collection, Magufuli has already tried to implement reforms within the Tanzania Revenue Authority (TRA) and other government institutions tasked with collecting tax, customs fees, and other revenue. But this isn’t something that happens overnight. It involves instilling financial transparency, bringing in businesses from the informal sector to the formal sector, incentivizing tax payments and settling arrears, convincing taxpayers that their funds are well accounted for by government institutions and, in short, changing the revenue collection culture.
It is unclear how much revenue can be raised this year by improving these revenue-collection capacities – the government’s projection of $8.1 billion looks more rosy than realistic – although it must be noted that Magufuli’s administration should be commended for significantly boosting the TRA’s monthly collections thus far.
It is perhaps not a coincidence that this large increase in proposed infrastructure spending comes shortly after the American Millennium Challenge Corporation (MCC) cancelled a previously highly-touted $472 million rural electrification program due to the electoral impasse in Zanzibar. This caught many by surprise, as the MCC doesn’t usually act so abruptly, and it was the first time in four years that the agency revoked a foreign funding package.
The budget can thus be seen as a way for the government to pick up the slack in foreign aid (from the MCC and possible future reductions in aid from other development partners) and to act on its pledge to reduce its dependence on external development assistance.
Magufuli is undoubtedly also eyeing Tanzania’s future energy prize from recent offshore and onshore discoveries of large natural gas deposits, as well as last month’s massive helium find in the country. But we are still far from seeing the eventual shift from gas development to gas production, not to mention being anywhere close to extracting this helium, so the government should be wary of spending tomorrow’s money today.
Protectionism is always popular
What might be a bit more troubling to some and encouraging to others is the proposed budget’s support for certain state industries that have had a hard time competing for years, like Air Tanzania and General Tyre.
The state has already pumped millions into once-defunct General Tyre, East Africa’s second-largest domestic tyre manufacturer. This year’s budget allots $910 million more to the enterprise, which has the potential of tapping into a large and growing automotive sector in Tanzania and beyond, but will have a hard time competing with cheaper Chinese and Indian imports.
In addition, Air Tanzania will receive three new aircraft from Canadian aviation giant Bombardier. However, this development might be at odds with the government’s pre-election talk of selling a stake in the national carrier, and competition in the East African aviation market has only been increasing of late – one needs to only look at the recent entrance of FastJet to the market. Pumping more money into the airline will be seen as a welcome investment in boosting the country’s air infrastructure by some, and an echo of maintaining the corruption-ridden Tanzania Railways to others.
It remains to be seen whether this budget, equal parts committed and conventional, will lay the foundation for Magufuli’s legacy during his first full year as Tanzania’s head of state.
