The recent Tanzanian national budget has managed to quickly become one of the most talked-about in years. The balancing act it attempts to achieve is a bold play by President John Magufuli to stamp his vision on Tanzania.
Upon first glance, the budget document – which recently passed Tanzania’s Parliament with all of zero opposition votes – looks as brash as the partisanship that surrounded its development: A $3.2 billion increase from 2015-16, causing a deficit of 4.5% of GDP, is hardly modest given Dodoma’s $21 billion debt level, up 6% from last year. In addition, singling out the tourism sector, which is one of Tanzania’s biggest foreign currency earners and levying it with an 18% VAT duty is playing with fire. Even more so, seeing as neighbouring Kenya recently announced the elimination of its own VAT on tourism services.
Nevertheless, examining some of the budget’s details shows the scope of the “revenue revolution”, the Magufuli administration is trying to kindle.
John Magufuli, President of Tanzania since 2015. Source: DW.com
A “Revenue Revolution”?
The government is taking aim at a number of tax exemptions, which have advantaged investors who realized dividends from shares listed on the Dar es Salaam Stock Exchange, as well as legislators themselves, who benefitted from their end-of-term gratuity payments. Such populist moves will be welcomed by rank-and-file Tanzanians.
Still, the introduction of VAT on bank charges (including ATM withdrawals) will hurt the pockets of consumers. Tanzanians are already slapped with excise duties on a number of bank transactions – this will only add fuel to the fire and hamper the pace of East African financial integration. What is more, an existing 10% excise duty will be expanded on mobile money, a key growth area in the telecoms and banking arena, and one that financially empowers millions of underserved Tanzanians (76% of the population). This choice is especially bizarre, given that mobile banking has been heralded by the government as a means of poverty reduction.
The budget Philip Mpango presented focuses on the Finance Minister’s previous line of work, namely to maximize government revenue by broadening the tax base. Only 1.7 million Tanzanians pay taxes, while roughly 20 million should. Unfortunately, this is easier said than done. For example, reducing the Skills and Development Levy – a tax on employment that in fact does much to hurt Tanzanian skills and development – might reduce collections in the short-term, but increase them in the years to come as job creation is incentivized. However, putting in place yet another tax on alcohol, soft drinks, and tobacco might raise short-term income at the expense of reducing Tanzanians’ purchasing power, which may have negative effects on how much revenue the government collects down the line.
Infrastructure and agricultural development are essential for further growth
The benefits of well-placed infrastructure projects, however, are indisputable. There are significant gains to be had from investing in improvements to the nation’s deteriorating ports and railway, urban bussing, airport expansion, and upgrades to water treatment capabilities, as well as the construction of power plants, natural gas pipelines, and key bridges. And this year’s budget ensures a hefty increase in infrastructure spending, something that is especially needed given the decrease in foreign aid, Tanzania has seen thus far this year.
If anything, spending to address Tanzania’s development needs, of which infrastructure is a large part, needs to be increased. The previous government failed to realize its own goal of setting aside 35% of revenue collection for development each budget cycle, as per its Five Year Development Plan (FYDP). Its successor, FYDP II, which was recently launched by Prime Minister Kassim Majaliwa, aims to boost economic growth from an annual rate of 7% now to 10% in four years’ time, as well as enhance per capita GDP from $1,000 to $1,500 during that same period. If this is to be more than just a pipe dream, more needs to be done to fix the country’s infrastructure deficit. Doing so will help spur on private investment, which has the added benefit of cushioning Dar es Salaam from the volatility of commodity prices.
Furthermore, agriculture, which employs 70% of Tanzanians but only saw 2.3% growth last year, needs to be promoted. As the mainstay of the economy, contributing one-quarter of GDP,, agricultural growth should be over 6% annually, according to the African Union. To achieve this target, a more concerted effort is needed to help farmers in Tanzania fertilize their crops, mechanize their harvesting methods, access seasonal financing, and export their goods.
It is clear that President Magufuli’s budget is a work of compromise between competing economic objectives and political interests. It makes some of the same mistakes previous Tanzanian budgets have made, but it also introduces some novel ideas for revenue creation, while bolstering much-needed infrastructure spending. However, more needs to be done, and new budget might not be sufficiently ambitious to achieve tomorrow’s lofty economic goals given today’s political and economic realities.
