World Bank warns on the Budget

Dar es Salaam. The World Bank has warned that the problem of payment arrears could deal a devastating blow to the government’s budget execution if it is not immediately taken care of.

But there is a nagging problem currently in the Tanzania’s budget implementation that should send shivers down the spine of policy makers.

According to the World Bank’s recent Tanzania Economic Update report, the trillions of shillings in unpaid arrears to suppliers and contractors accumulated over the years threatens to erode budget credibility, making it difficult to bring in important stakeholders to fund the very same budget.

By June 2016, the government had not paid suppliers and contractors about Sh6.5 trillion, which is equivalent to 6.5 per cent of gross domestic product, according to World Bank estimates.

“The accumulation of domestic arrears is a symptom of a dysfunctional budget implementation, with sustained arrears undermining the trust of private sector suppliers, pensioners and potential investors considering patterning with government,” the World Bank says in the report unveiled last week in Dar es Salaam.

The report highlights the puzzle that has had many, including President John Magufuli, wondering: where does the money set aside to pay suppliers, service providers and contractors go?

Tanzania uses the cash-budget system, which means the government spends what it collects in terms of revenue, foreign aid, domestic financing and commercial loans. Whenever the government fails to collect the projected resources as stipulated in the budget it follows that it does not spend. It cannot use the money it does not have. These are the cases when development projects that had been scheduled to begin in a certain financial year are postponed or rescheduled to another year because of failure to meet revenue targets or stalled aid inflows.

Which begs the question: where do the arrears come from? President Magufuli posed this question on March 5, this year, in Mtwara and directed Tanzania Electric Supply Company (Tanesco) to disconnect power to government institutions with huge unpaid power bills.

“The money to pay electricity bills is included in the budgets of every ministry and department every financial year. Where does it go? I direct you to leave out political sensitivities and disconnect power to all those with outstanding arrears. If you find out that the State House has not paid its bills you just go ahead and cut the power. The day I sleep in darkness is the day I will deal squarely with those who were supposed to pay power bills but didn’t,” President Magufuli said.

President Magufuli’s directive might have worked as various government institutions have started to pay their outstanding power bills.

But his government is still laden with the heavy load of other arrears that, according to the World Bank, threaten the budget’s credibility.

Arrears to pension funds remain at around Sh3 trillion (3.3 per cent of GDP), arrears to contractors are about Sh2 trillion (1.9 per cent of GDP) while those to Tanesco and others constitute 1.1 per cent of GDP.

The Controller and Auditor General’s report released last week also said that in the 2015/16 financial year at least 28 agencies had payments arrears amounting to Sh1.8 trillion, which was an 18 per cent increase from the Sh1.5 trillion of the previous year.

About 95 per cent of all arrears were attributed to Tanroads.

Experts say considering the fact that public debt is skyrocketing the accumulation of arrears points to a big problem in Tanzania’s budget execution. It might also serve to curtail the growth of the private sector.

“The government needs to clear these arrears as a matter of urgency in order to restore budget credibility and the confidence of suppliers and potential new investors, especially in infrastructure investments,” the World Bank report says.

An International Monetary Fund report says payment arrears in Tanzania could partly be blamed on unpredictable budgetary financial resource inflow from both domestic and foreign sources, including problems associated with budgeting and budget execution systems.

“Unrealistic budgets and revenue under-performance; weak expenditure controls; weak cash management system are some of the reasons for payments arrears,” the report, specifically commissioned to find ways to help the government deal with payments arrears, says.

Failure by the government to pay businesses in time could lead to delayed payments of salaries by companies or outright reduction of employees, or even downsizing of businesses, experts say. But arrears could also make businesses reluctant to do business with government, or increase prices to mitigate the risk of delayed payments.

Arrears also affect the country’s credit rating leading to additional costs of borrowing to fund the budget.