Economists wish government would cut taxes to spur growth in 2017/18

Dar es Salaam. As the government is tabling its Budget on Thursday, economists think investment should be scaled up, projects duly implemented, over taxation avoided and spending increased to improve economic growth and enable the citizens to enjoy its benefits.

Although Tanzania’s economy has been growing at an average of seven per cent annually over the past two decades, challenges have emerged; threatening its expansion.

Tight liquidity, which is possibly prompted by the government’s austerity measures and its decision to shift deposits from commercial banks to the Bank of Tanzania, has hit lenders, forcing them to reduce the issuance of loans.

Many companies have been unable to borrow and repay their credit, leading to an increase in non-performing loans which are estimated at 10 per cent of the gross loans compared with 5 per cent which is globally acceptable. When he came to power in 2015, President John Magufuli embarked on a campaign to fight corruption, tax evasion and wasteful spending.

Some businesses have closed up shop and others laid off staff as tight liquidity bit.

That triggered a debate on whether Tanzania’s economy was built on a sound or weak foundation.

Importance of stimulating spending

Prof Delphin Rwegasira, of the University of Dar es Salaam’s Economics Department, says Tanzania needs a budget with counter-cyclical measures to stimulate spending. By so doing, the economy will be re-directed.

He says the best way to stimulate spending is by executing plans and projects faster as contained in the budget.

“The budget should avoid squeezing people with increased taxes and if possible it can consider lowering some taxes to encourage spending and expand investment.”

According to him, the allocation of resources can go to some priority areas like education and health sectors but the most important point is to be in favour of investment growth, encourage consumption and accelerate project implementation.

Economics professor Honest Ngowi, of Mzumbe University, says a budget containing expansionary fiscal policies and instruments is needed. According to him, the government should consider reducing the number of taxes and lowering their rates. “Unfortunately, we are unlikely to get what we need in the coming budget. Most likely, taxes and their rates will shoot up because the budget itself is ballooned,” says Prof Ngowi. “The revenue authority is tasked to collect Sh2 trillion more than in the current financial year and that is a clear indication that taxes will increase.”

For Prof Haji Semboja, of the University of Dar es Salaam’s Economics Department, Tanzania’s tax policies are normally perfect but the government needs just to fix tax administration and execute budget implementation properly.

“If the budget is properly implemented accompanied with monitoring and evaluation measures, it will address many challenges including the money supply and job issues.”

According to him, the government also needs to put in place a clear strategy of trading with the private sector, which has been complaining of uncertainty. “The government needs also to get funds abroad instead of pressing Tanzanians who are no more taxable,” he says.

‘Bubble economy’?

“It’s true that corruption, tax evasion and wasteful spending brought a sort of excessive liquidity and spending. What the President did was very correct and the contraction we see is a short-term impact. However, the government needs to take measures to cure the economy. That can be done by re-directing it to support aggregate demand,” says Prof Rwegasira. Prof Ngowi adds that some businesses were established on the basis of tax evasion, hence creating a ‘bubble economy’. Experts say the ‘bubble economy ‘ is one that becomes very successful very quickly, and which usually fails very suddenly

However, for Prof Semboja, the changes have no relation with the economic trend at all as a large share of the economy is influenced by agriculture performance and commodity prices. He says the current situation in Tanzania’s economy is similar to many other African countries which are not performing well. “Remember, the world is also changing and the changes in the world economy influence what is happening locally. Our economy depends much on agriculture by employing about 70 per cent of the population but the sector is producing just 30 per cent of what it’s supposed to do. Now, Budget as a government tool for mobilizing resources must make sure it attracts financing from foreign resources.”

He says Tanzania’s macroeconomic indicators are almost under control and in some cases better than those of other African economies. “The GDP growth, inflation rate, exchange rate and revenue collections are all reasonable. On the balance of payments, Tanzania imports more than what it exports, but that is the characteristic of developing economies.”