OPINION & ANALYSIS: Key messages from Tanzania’s FY-2020/21 budget

Monday June 15 2020

 

By PAUL KIBUUKA

Just two months ago, the IMF in its World Economic Outlook predicated a 3 percent contraction in global growth in 2020 due to the coronavirus (Covid-19) pandemic. Contrariwise, in January the IMF had projected a 3.3 percent expansion for this year - and also sounded a warning over complacency.

The slump in global growth principally echoes the downward revision of Tanzania’s growth, as announced by Finance Minister Philip Mpango during his FY-2020/21 budget speech in Parliament last Thursday.

Demand for transportation services, traditional export crops, tourism and hospitality services, and wholesale and retail buyers has taken a nosedive - coupled with a decline in private sector credit growth to 5.8 percent in the year that ended April 30, 2020 (c.f. 10.6 percent in the same period in 2019).

There are downward risks arising from Covid-19 and the 2020 general election—in the context of which investors maintain a wait-and-see approach to investments in the hope of greater stability and clarity regarding the policy framework.

But amid these risks, investors have tremendous opportunities to develop Tanzania’s health sector value chain and to clinch good business and investment deals before confidence is restored to the Tanzanian market.

Moreover, investors can take a leap of faith in the government’s plan to “allocate adequate resources for election expenditure with a view to strengthening democracy and good governance.”

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Tanzania’s real GDP growth is expected to slow down to 5.5 percent in 2020 (from initial forecast of 6.9 percent) compared to actual growth of 7.0 percent in 2019. The top growth drivers of growth, investment and consumption were hurt by several factors, to wit: Covid-19’s impact on trading partners (notably, China, India, and the UK), and rain-triggered floods which destroyed critical transport infrastructure and dawdled implementation of some projects.

In a package of measures aimed at promoting investment and spurring economic growth, the government of Tanzania started to officially implement a business environment improvement blueprint in FY-2019/20. The blueprint will continue to be implemented during the new FY-2020/21.

Additionally, through its central bank, the government introduced in May 2020 some key monetary policy measures to safeguard financial market stability and to offset the impact of Covid-19.

Budget 2020/21 is woven around the theme ‘Stimulating the economy to safeguard livelihoods, jobs, businesses and industrial economy.’ In keeping with the theme, the government foresees a rise in spending and the budget will likely have a deficit of 2.6 percent of GDP in FY-2020/21, higher than the estimate of 2.3 percent in FY-2019/20 but below the current deficit ceiling of 3.0 percent, as defined by the macroeconomic convergence criteria agreed in the East African Community.

One of the reasons for this higher deficit is the lower than originally forecasted real GDP growth (5.5 percent as against a 6.9 percent prediction). Nevertheless, in his book ‘Fully Grown: Why a Stagnant Economy is a Sign of Success,’ Dietrich Vollrath fascinatingly says that slow growth is not always bad news in times of stability.

Taking into account the importance of improving domestic revenue mobilisation to finance infrastructure development and other priority expenditure and government operations, it is projected that in FY-2020/21 tax revenues will account for 12.9 percent of GDP from a likely outturn of 12.1 percent in FY-2019/20. This target calls for reforms to improve tax administration.

The reforms envisaged in the Budget include creating a business-friendly environment for taxpayers; enhancing the capacity of tax adjudication forums; and improving the ability to enforce tax laws. These reforms are welcome due in part to a common complaint amongst businesspeople that some officials of the Tanzanian tax administration were meting out harsh treatment.

Based on the need to shrug off current malaise in the economy, the government plans to spend a total of Sh34.88 trillion in FY-2020/21 for recurrent and development expenditure, higher than Sh33.11 trillion in FY-2019/20. The spending is projected at 22.1 percent of GDP in FY-2020/21. As an important element of the policy package representing a milestone in budgeting, the government would emphasise the completion of projects already in progress before committing to new ones.

In accordance with the National Development Plan 2020/21, the Budget focuses on infrastructure; health; education and skills; and clean water and sanitation; agriculture and industry (with emphasis on local raw materials utilisation to promote value chains); and business environment improvement. Although parliamentary debate is still in progress, this Budget reflects Tanzania’s clear priorities for this year.

Meanwhile, the government has announced that it would continue to finance the implementation of national strategic projects that are already envisaged. These projects include the standard gauge railway; the Julius Nyerere Hydropower project; national air carrier (ATCL); the Hoima (Uganda)-Tanga (Tanzania) Crude Oil Pipeline; and electricity/gas production, transmission and distribution.

To finance these and other mega infrastructure projects without delays—and perhaps without any immediate increase in government spending or debt—the government can leverage private capital through public/private partnerships (P/PPs) by further improving the business environment to garner positive market sentiment.

An old adage ‘Better late than never’ quite squares with the government’s well-intended effort to heighten public awareness about the advantages of investing in government securities and in shares of companies traded on the Dar es Salaam Stock Exchange. By providing income tax relief to employees, Budget-2020/21 may encourage investment in shares.

This budget is good in content - given the prevailing national and global circumstances. However, the issue of budget implementation has long been a source of concern. Whether or not the government fulfils the financial and economic aspects of the outlays in Budget-2020/21, only time will tell...

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Paul Kibuuka (tax@paulkibuuka.com), a tax and corporate lawyer based in Dar es Salaam