Budgeting for resilience?

Resilience”, an ongoing focus area for business leaders, is also a priority issue for political leaders.

There are many dimensions to this burning topic, not least the question of environmental sustainability; but top of mind in recent months have been the very immediate financial uncertainties arising from disruption triggered by the pandemic, and the Ukraine war. Buffeted by these choppy waters, countries have to “reimagine the possible” when thinking through how best to navigate their way so as to ensure sufficient resilience to deal with current and future turbulence.

So, what does this mean for Tanzania? Well, on the macroeconomic side much as our currency has remained relatively stable (unlike our neighbours), the reality is that much of this is thanks to gold (USD2.70bn exports in year to April 2022, representing 38.5% of goods exports) which has stepped into balance the books in a time of fallow earnings from tourism, albeit recovering (USD1.54bn in year to April 2022 (2021: $0.74bn).

But whilst the mining sector and tourism can generate great foreign exchange inflows, they are also subject to significant uncertainty. In the case of mining, it can be about price, ore grade, input costs and availability, and mine life. For tourism, the uncertainties primarily relate to matters that can potentially restrict access, including: health related (as recently experienced with the pandemic); financial (in terms of financial strength of target consumers (currently impacted by inflation as well as general global financial downturn) and product cost (for example, escalated flight costs arising from fuel price increases); and security risks (as experienced by Kenya).

Against this background the focus in this year’s Budget on agriculture and manufacturing, (both with the potential to generate exports but also create employment for a burgeoning population), as well as continued infrastructure spend (also an export generator as it generates service receipts for transport), is timely. To put it simply, if we get our house in order on this front, we create less cyclical and therefore more dependable revenue streams - not least as “come rain or shine” our regional markets will need food and basic manufactured goods. One conundrum though is the question of the exchange rate; much as a “strong” currency sounds good, it is a double edged sword; on the one hand keeping down the costs of inputs, but on the other hand potentially adversely affecting overall competitiveness of our products and services.

Catalysing agriculture is a key part of the strategy including 2030 targets to: increase agricultural exports to USD5bn (from USD1.2bn) and horticulture sales to USD 2bn (from USD0.75bn); significantly expand areas under irrigation (to 8.5m hectares); increase large scale farms (10,000 from 110 in 2020). Other initiatives include encouraging more investment in meat processing industries for the domestic and foreign markets, especially in the Middle East.

For domestic manufacturers a number of supportive measures were announced in terms of customs duty (both in terms of duty on finished goods and relief on raw materials), as well as no increase in specific excise duty rates on production. Importantly, when we speak of manufacturing in the domestic context there is a strong linkage with agriculture as the area of agro-processing should be where we should have a comparative advantage.

Infrastructure development, important not just for domestic business but also for our role as a regional gateway, will include significant ongoing as well as new investments in energy, water and transport. The ramp up of infrastructure spend in the last few years has coincided with increasing Government debt, which as of April 2022 stood at TZS 69.44tn (approximately USD30bn), two thirds of which is external debt (TZS47.07tn) and one third domestic debt TZS22.37tn).

Against this backdrop the need for increased and more diversified sources of foreign exchange (and the role for agriculture, manufacturing, and transport in this regard) is clear. But at the same time, in the short and medium term it is likely that the extractive sector and tourism will continue to be the largest drivers of foreign currency earnings. Yet stakeholders in both sectors have a similar concern that the composition of taxes and various regulatory charges combine to make Tanzania an outlier compared to other jurisdictions in terms of tax and regulatory cost.

The benefits derived from these sectors are of course multifold, including employment (particularly in tourism), multiplier economic impact and taxation. For example, publicly available reports for AnglogoldAshanti and Barrick Gold show the existing large scale mines as contributing something in the region of USD0.5bn in 2021 (including USD242m by Geita (“payments to Government”) and USD204m by Barrick (USD188m tax contributions and royalties; and USD 16m dividends to the Government)).

Yet, the last large scale mine to commence development was 15 years ago (Buzwagi in 2007, with production commencing in 2009). It is positive to hear that new projects are in the pipeline and not just gold (Nyanzaga project), but also other minerals most of which are critical to the global energy transition (including at Kabanga, as well as various graphite and rare earth projects). Importantly, a key part of the energy transition is the role of natural gas as an intermediate fuel and the recent progress in discussions on the potential USD30bn liquefied natural gas (“LNG”) project, with a commitment to complete the Host Government Agreement (“HGA”) negotiations by year end, is another positive development.

In concluding remarks when chairing the recent 13th meeting of the Tanzania National Business Council, President Mama Samia Suluhu Hassan decried a national tendency to carp on about our latent natural wealth, but at the same time not take active steps to create an enabling environment for investment (whether domestic or foreign) to realise this potential. The current momentum to improve the business environment, if maintained, will help realise this potential and in so doing embed greater resilience.