12 June 2018

Tanzania: Expectations From Tanzania's Budget 2018/19

Photo: Daily News
Dar es Salaam port (file photo).
analysis

Finance minister Philip Mpango will present the National Budget of Tanzania for the fiscal year 2018/19 this week on Thursday, 14 June. This budget is going to be the third budget of the Magufuli government since it assumed power on 5 November 2015 and the third-last budget presented under the government's current five-year term.

The Finance Minister would be presenting at a time when, according to government data, the country's real GDP growth rate is estimated to have declined in 2017 due to slow expansion in consumption and investment, and there is a wait-and-see mood. This article therefore discusses hopes and expectations from the forthcoming Budget.

But first, since no country can live as an isolated island, let us have a look at the current situation and prospects for the world economy. According to the just released "June 2018 Global Economic Prospects: The Turning of the Tide?" report from the World Bank (WB), global growth--after reaching 3.1 per cent in 2017 and this year--is expected to reduce to 2.9 per cent over the next two years as "trade and investment moderate" and "financing conditions tighten".

Growing concern over a slowdown in the Chinese economy, weaker-than-expected commodity and petroleum prices, and falling demand from the United States of America and other countries for petroleum products have started to take their toll on sub-Saharan Africa.

It's hardly surprising that the WB has revised its growth forecast for the region down to 3.1 per cent in 2018, a stark contrast to the annual average of 6.4 per cent between 2002 and 2008.

For Tanzania, the "Monetary Policy Statement: The Mid-Year Review 2017/18" report of the Bank of Tanzania shows that the country's GDP growth rate stood at 6.8 per cent in the first three quarters of 2017, compared to 7.7 per cent during the same period in 2016. Although Tanzania's real GDP is estimated to have slowed in 2017, its economy is one of the fastest growing in Africa today.

With slower global growth seen ahead, the Tanzania government has already identified its key priorities for achieving greater growth. It is hoped that the performance of the economy would improve even further. Nevertheless, there is a lot of unexplored potential for the manufacturing industry sector--a point to which we shall return later.

Many sectors, including housing and real estate, are feeling the bite of weaker demand; and just last week (Thursday, 7 June) this paper ran a front-page story about the failure of TMRC-member banks to fully utilize the Sh54bn World Bank (WB) money to issue housing loans.

TMRC board chairman Ammishaddai Owusu Amoah, who is also the managing director of Bank of Africa (Tanzania), is quoted to have said that, "The banks have failed to utilize WB funds because they do not have customers who intend to buy or construct houses... " Weaker demand is probably the dominant obstacle for investors to invest for the future.

Against this background, how can Tanzania navigate the upcoming terrain and meet its growth target?

A growing consensus is that there is an urgent need for action to spur domestic demand, revive private investments, and boost employment and purchasing power to yield a strong capex cycle because when the cycle is strong confidence increases in the growth story of Tanzania.

Let us revert to our point on the manufacturing industry sector.

The government has two key policy documents: the National Development Vision (Vision 2025) and the Sustainable Industrial Development Policy for Tanzania 1996-2020 (SIDP). Both were formulated to give impetus to industrialization; however, there is a view that implementation of the policies and several frameworks made thereunder is a big challenge for the government.

It is expected that in the forthcoming Budget the Finance Minister will prioritize actions that can realistically support a competitive manufacturing industry sector and shore up exports. This will necessitate taking ease of doing business and cost of doing business reforms deeper. Food manufacturers, for example, wish for reform of the multiple and overlapping requirements imposed by different regulations and agencies.

In addition, and perhaps more importantly, investors feel safe to commit to investment and long-term development of the manufacturing industry sector when there is adherence to the rule of law, and policy stability is maintained.

With respect to tax changes, the following are some of the most desired expectations from Budget 2018/19: reducing the corporate tax burden from the current rate of 30 percent; reducing capital gains tax on disposal of unquoted investment assets by companies to at least 10 per cent that was provided for under the predecessor Income Tax Act, 1973 (the present rate is 30 per cent); introducing indexation allowance (i.e. adjusting of the cost price of investments assets with the time value of money); removing VAT on housing and construction materials to ensure affordable housing and low mortgage rates; and introducing a rebated income tax scheme whereby tax benefits are linked to direct employment created by start-up businesses.

Active inclusion will increase capabilities and allow more Tanzanians to contribute to and participate in the benefits of growth. Incorporating in the new Budget a focus on agricultural productivity, health, education, SME credit, and job creation through entrepreneurship will aid active inclusion.

Apropos entrepreneurship, our education system is not providing the skills that Tanzania's future workforce requires; there is a need to review the system. We need to foster this workforce through better education and skills training. This calls for increased public spending for the education sector.

As earlier noted, the government is completing three years in power this year. There is a growing consensus of opinion for Tanzania to spur domestic demand, revive private investments, and boost employment and purchasing power in order to achieve greater growth and sail through the lingering global growth slowdown.

This is no easy task, especially when you consider that Finance Minister Dr Philip Mpango has to balance the books, in addition to the enormous expectations from corporate Tanzania and other constituents of the Tanzanian public. Nevertheless, a skillful balancing act is expected out of the Minister when he presents his 2018/19 Budget Speech in Parliament on Thursday.

Paul Kibuuka is the managing partner of Isidora & Company Advocates, a corporate, commercial and financial law firm.

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