1974 saw the legendary “Rumble in the Jungle” fight take place in Kinshasa between Mohammed Ali and George Foreman. 2021 has seen a couple of “Rumble in Dar” boxing events. Following this year’s Budget, might we also see a “Rumble in Dodoma” event?
But before I get there, what about the economic perspective. Well, despite the pandemic, Tanzania had positive GDP growth in 2020 - put at 4.8% (2019: 7.0%) according to official statistics (higher than figures from the IMF and World Bank). Whatever the case, the consensus is that Tanzania has weathered the pandemic storm much better than many others; by way of contrast, 2020 saw negative average rates for sub-Saharan Africa (-1.9%, 2019: 3.2%) and globally (-3.3%, 2019: 2.8%).
Nevertheless, a glance through the reported financial statements published online by companies listed locally or their holding companies overseas reveals a reduction in turnover in 2020 for many companies, including the two largest manufacturers (TBL, TCC) as well as the two largest mobile phone operators (Vodacom, Millicom (Tigo)) and this after a challenging (pre-pandemic) 2019. Food for thought as these sectors are amongst the biggest generators of taxes.
So where did the growth come from? According to the December 2020 Quarterly Economic Bulletin of the Bank of Tanzania (“BoT”) in the nine months to September 2020 the fastest growing sectors were construction (13.0%), mining and quarrying (9.5%), information and communication (9.0%) and transport and storage (8.9%); agriculture and manufacturing also showed reasonable growth (4.8% and 4.6% respectively); on the other hand, accommodation and restaurants showed a decline (-13.8%).
But to understand the real sectoral contribution to overall growth you need to adjust for the respective weighting of sectoral contribution to the economy –which is shown in the same BoT report by a chart with the percentage contribution to real GDP growth by major economic activities; with the top four being construction (42.6%), agriculture (24.6%), transport and storage (14.7%), and mining and quarrying (8.7%). In other words, two thirds of the growth (67.2%) was from construction and agriculture, with construction growth driven by public funded infrastructure work and agriculture predominantly small-scale agriculture.
The hospitality sector has been particularly affected by the pandemic, and the extent of the downturn is made stark in the BoT’s May 2021 Monthly Economic Review (“MER”) which showed a collapse in tourism earnings to USD0.7bn in the year to April 2021 (as compared to USD2.2bn and USD 2.5bn in the years ending April 2020 and 2019 respectively). In the same period traditional exports have also declined significantly (to USD 0.6bn, as compared to USD 1.0bn in the year to April 2020).
And yet, the currency has remained stable. How? Well, riding to the rescue has been the mining sector. Exports of USD 3.0bn in the year to April 2021 (as compared to USD2.4bn, and USD1.7bn in the years to April 2020 and 2019) have helped balance the current account - with this increase driven fundamentally by the increased gold price rather than production. The current account side has also been assisted by a reduction of outbound travel (with service payments for travel reducing to USD0.1bn from USD 0.6bn).
The mining sector - in particular, the two largest gold mines (Geita and North Mara) - has also played a role in stabilizing Government revenues. Top line revenue increase, apart from adjusting the base for royalties, will also have gone straight to the bottom line and resulted in windfall payments in terms of corporate tax (applied at 30%). For example, Anglogold Ashanti Plc’s 2020 ESG and Sustainability Data Workbook discloses total tax payments borne and generated by Geita of USD326m (up from USD190m in the prior year).
Despite the boost from mining, BoT MER reports indicate that tax revenue collections in the ten months to April 2021 were 1% below prior year, with taxes on imports slightly up, consumption taxes (local supplies) flat, and income taxes down. Given the results reported by the major consumer goods and services companies, these numbers are not a surprise.
Against this background, the Budget targets (total revenue TZS 36.3trn, including tax revenue TZS 22.1trn) look ambitious bearing in mind that the tax revenue budget is 9.1% higher than the 2020/21 budget, and 20.4% higher than the 2020/21 forecast. Interestingly, the speech highlighted the Government’s intention to finalise the sovereign credit rating process in order to facilitate the issuance of sovereign bonds or Eurobonds on international financial markets.
What were the tax measures introduced? Well, as a first point I congratulate the Minister on the TZS100 adjustment on fuel taxes. No doubt this change will trigger a lot of debate - but if you accept the concept of inflation, then it is logical to adjust fixed tariffs to maintain their real value - especially for a product the demand for which is less elastic than other products, and so in practice is an efficient mechanism to collect tax in an economy that is highly informal. In addition, fuel is one of the country’s largest import costs - so maintaining the real value of fuel taxes can also be a mechanism to manage demand. Fuel taxes were last adjusted in 2017, and before that in 2015 and 2013. The changes now introduced take these taxes back to similar levels as at the time of the last adjustments (whether you apply an inflation adjustment or devaluation adjustment) and so should not be contentious.
Several changes have been made to promote local industry including an excise reduction for beer made from locally grown malted barley and the removal of the 15% refundable additional import duty on sugar for industrial use. In addition, although drinkers will not appreciate the 30% hike in excise duty on spirits - the reality is that if looking at excise duty levels compared to alcohol content, then spirits were previously undertaxed as compared to beer.
Employment taxes charged on employers are comparatively much higher than the rest of the region (EAC or SADC). Positive changes announced in this regard include an increase in the headcount threshold for skills and development levy (“SDL”) to 10 employees (previously 4), and a reduction of the private sector Workers Compensation Fund contribution to 0.6% (from 1%). Reeling from the pandemic the hospitality industry was hoping for some relief from SDL for the sector, even if time bound until business gets back to something like normality - but there was no reference to this. Overall then some steps in the right direction on employment taxes but more could be done.
There were some positive tax administration changes in relation to penalties and interest, and an interesting proposal to collect property tax by embedding into electricity bills so that it is effectively paid by using the prepaid meters (LUKU). A number of beneficial changes were introduced for small scale miners (for example, a 3% income tax rate on the sale value of minerals); however, there was no reference to any changes to address concerns of the large scale mining sector (whether VAT refunds, the overall fiscal structure (modelled by some to result in a government share of around three quarters, and one quarter for the investor, and much higher than other mining jurisdictions), and challenges with the so called “change in control” rules).
So, what about the “rumble in Dodoma”? Well, my question is this: will we see (fighting respectively out of the corners of “Revenue Collection” and “Digital Transformation”) Dr MwiguluNchemba, the Minister of Finance and Planning, and Dr FaustineNdugulile, the Minister for Communication and Information Technology, step into the ring? Why? Well, although there was a positive change announced by way of VAT exemption on smartphones tablets and modems, at the same time new taxes were proposed in the form of a mobile money transaction levy and a new daily SIM card levy - this against a background of telecommunication services taxation that is already the highest in the region.
In the run up to the Budget a compelling case had been made for telecommunications taxes to be reduced; instead there is a proposed increase. As noted earlier the two largest mobile companies have reported declines in turnover, and indeed Vodacom reported a loss for its most recent financial year. Without wishing to sound too harsh, but the imposition of the proposed taxes does seem like “kicking a man when he is down”! The concern ultimately is that, if implemented, such changes will discourage investment in the sector, and work against the digital ambitions very clearly articulated in the new five-year development plan 2021/22-2-25/26 (FYDP III).
Ultimately, tax increases will need to be driven by “growing the pie” - and indeed the Budget speech projects a real GDP growth rate of 5.6% in 2021 (hopefully more accurate than the IMF’s projection, a more modest 2.7%). Initiatives taken by the Government to modernise agriculture (a large part of the economy) and to drive further digitisation of the economy will be key. Equally important is the need for new private sector investment.
One investment awaited with anticipation is the start of construction of the East African Crude Oil Pipeline (EACOP), and the Budget included reference to various income tax and VAT changes to enable this project to proceed. With this cross-border project with Uganda now in the pipeline (forgive the pun!), hopefully we will now overcome our longstanding prevarication in relation to formal ratification of the East Africa double tax treaty (which we signed several years ago).
The World Bank’s most recent Tanzania Economic Update (published in February 2021) stated that “the success of the government’s efforts to improve the investment climate will largely determine whether robust growth can be sustained beyond 2021”. This report highlighted a precipitous drop in foreign direct investment in the period from 2015, as compared to the prior decade. A similar trend can be seen in UNCTAD’s World Investment Report. A recent report by the Controller and Auditor General report (CAG) also highlighted the continued downward trend in the last five years of investments registered by the Tanzania Investment Centre and capital invested in Export Processing Zones. Historically, mining had been a source of significant investment capital but no new large scale mine has come into production in over a decade.
The recent past has seen very significant engagement by the Government with investors to seek to understand practical hurdles to inbound investment and identify potential solutions. Some of the issues are administrative, but others are more deeply structural matters related to fiscal and regulatory regimes. Speak to investors in varioussectors - including mining, oil and gas, telecoms, tourism - and you will hear a consistent refrain that the fiscal structure is not competitive.
Generally, this is not about asking for favours or exemptions, but rather ensuring a scenario that effectively balances the take between Government and the investor and gives the investor an adequate return for the investment risk taken. If not, and the envelope is pushed too far, then the law of diminishing returns is likely to kick in and ultimately work against “Realising Competitiveness and Industrialisation for Human Development” (the theme of FYDP III).
However, given the very real and meaningful ongoing engagement between the public and private sector there is every reason to be optimistic that all parties are committed to a “win win” scenario. Indeed, several changes in this budget are indicative of receptiveness to certain investor concerns. Certainly, the mood of the moment is one of optimism as to thefuture economic prospects. As for the “rumble in Dodoma”, hopefully sense will prevail and we will not need to see the two Ministers in the ring!