Accra Dar es Salaam Harare Johannesburg Lagos London Nairobi Perth. An africapractice assessment of the Government of Tanzania s 2016/17 Budget

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1 An assessment of the s 2016/17 Budget - July 2016 Accra Dar es Salaam Harare Johannesburg Lagos London Nairobi Perth An assessment of the Government of Tanzania s 2016/17 Budget Since President John Magufuli s election in October 2015, Tanzania has undergone seismic political changes, driven by the new Head of State s ruling style and political agenda. His administration s first budget is a reflection of a clear government commitment to improving governance, driving development and fully enforcing tax and regulatory standards. However, it has also raised questions around how spending increases will be funded, and what the impact on business will be. The government is faced with an array of challenges in reducing inequality, addressing infrastructure shortfalls, improving the country s poor education and health systems, and tackling corruption and excessive bureaucracy. Since coming to office, Magufuli s government has been true to its word and campaign motto of Hapa Kazi Tu ; Time for Work. The President has made popular moves to cut down on unnecessary public spending and has called for greater accountability from civil servants. He has also launched a major drive to increase revenue collection and prevent the circumvention of tax and regulatory requirements, scrutinising business activity far more than the previous administration. However, at times his decisions have been driven more by personal conviction than informed consultation and can therefore appear impulsive or not properly thought through. The budget tabled on 8 June, carrying the slogan Industrial Growth for Job Creation is aimed at addressing critical areas of concern for the country. It is interesting to note that an optimistic 40% of the budget of USD 5.4bn (Tsh trn) is focused on capital expenditure on key development projects, again reflecting positive aspects of the Magufuli ruling approach. Nevertheless, this 40% appears optimistic given the history of government failing to dispense allocated funds, save for some strategic infrastructure and public works projects. This was highlighted in the 2015/16 financial budget in which Tsh. 32.7bn (USD 15m) was allocated to agricultural development, but only 15.9% - equivalent Tsh. 5.2bn (USD2.4m) - was delivered by April 2016 to the Ministry of Agriculture. In sum, the 2016/17 budget envisages a spending increase of 31% against forecast GDP growth of 7.2%. Yet with a rising fiscal deficit and public debt levels in recent years (servicing for the USD 17.93bn in public debt is budgeted at USD 3.6bn this year), there remains an ambition to cut the budget deficit over time. This stood at 4.2% of GDP in the last financial year and is forecast to rise to 4.5% in the new budget but the government has expressed an intent to reduce this to 3% going forward. Given that donors, who contribute roughly 12% of budgetary support are unlikely to be increasing their contributions, much of this budget plugging is likely to come from domestic and international borrowing, in addition to the continued drive to increase revenue collection domestically, potentially creating threats and challenges to business. Although regrettable, the non-implementation of some key capital spending plans may have the side-benefit of easing deficit pressures. 01

2 An assessment of the s 2016/17 Budget - July 2016 Table 1, Tanzania s Allocation vs Disbursement of Development Funds for 2015/16 Key Sectors vs 2016/17 Allocation Sector Allocation towards Development Projects 2015/16* Actual funds dispensed in 2015/16* Percentage of allocated funds dispensed 2015/ /17 Funds Allocation* Works bn 1.081trn % 2.176trn Transport bn bn 53% 2.496trn Communications 15.80bn 2.77bn 17.51% 92.73bn Water and Irrigation bn 81.42bn 19.06% bn Agriculture 32.71bn 5.19bn 15.9% bn *All figures are in Tsh and rounded to the nearest 100m. Some of the development projects that had benefitted from the budget for financial year 2015/2016 are highlighted below. Most of these projects are ongoing and financed by the government through commercial loans and Public Private Partnerships (PPPs). Name of project Funding (USD) Nature of project Tanzania Intermodal and Rail Development Project (TIRP) USD 300m Government project, loan by African Development Bank Transport Sector Investment Programme -TSIP 1 USD 5.6bn Government and development partners Dar es Salaam rapid transit Kinyerezi - II 240 MW Power Station Kinyerezi - III 300 MW Power Station USD 290m USD 344m USD 389.7m Funded by the African Development Bank, World Bank and the Loan from Japan Bank for International Corporation (JBIC) and Sumitomo Mitsui Banking Corporation (SMBC) and Government. SHANGTAN partnership between TANESCO and Shanghai Electric Power Company 1 TSIP is a program to invest in the development of Roads and Bridges throughout the country. Phase I was between ( ), the program is currently in Phase II ( /17) 02

3 An assessment of the s 2016/17 Budget - July 2016 Major infrastructure development projects planned to benefit from the 2016/17 financial budget: Name of project Funding (Tsh)* Nature of project Construction of Airports 2 Acquisition of New Aircraft Air Tanzania Company Ltd. Procurement and Rehabilitation of Marine Vessels Dar es Salaam - Chalinze-Morogoro Expressway (Dar es Salaam - Chalinze Section) De-congestion of Dar es Salaam Roads DSM Road Flyovers and Approaches Masasi-Songea-Mbamba Bay Road 200bn (100bn from development partners) 500bn 50.5bn 12.63bn 38.97bn 36.71bn bn, European Investment Bank, Arab Bank for Economic Development in Africa, ORIO Infrastructure Facility (NED), Asian Development Bank, HSBC, JICA, JICA, African Development Bank *All figures are in Tsh rounded to the nearest 100m. 2 Kigoma, Mpanda, Tabora, Songwe, Mwanza, Mtwara, Sumbawanga, Shinyanga, Kilimanjaro International Airport (KIA), Msalato, Bukoba and Terminal III (Julius Nyerere International Airport) 03

4 An assessment of the s 2016/17 Budget - July 2016 Industry Policy The government s first budget indicates that it appears to be actively pursuing a drive towards self-sufficiency via increasing taxes and excise duty, reducing the country s dependence on foreign aid. As part of the amendments to the Tax Administration Act (CAP. 438) Section 86(3), in the 2016 Financial Act; A person who fails to demand or report a denial of issuance of a fiscal receipt or fiscal invoice upon payment for goods or service, commits an offence and shall be liable on conviction to a fine not less than 2 currency points or to imprisonment for a term not exceeding six months. Encouragingly for local players, there are moves by the government in line with the East African Community (EAC) aimed at promoting local industry, with the cement, sugar and steel industries, to mention but a few, seeing an increase on excise duty on imports aimed at promoting the local industry. The government has made attempts to improve fiscal terms via the following measures: 1. Improving VAT mechanisms between the mainland and Zanzibar, and resolving issues of refund claims between the Zanzibar Revenue Board and the TRA. 2. Granting VAT exemption on a range of aviation licenses including helicopters, aeroplanes, satellites and other sub-orbitals to promote the growth of the aviation industry. 3. Placing a ban on all plastic manufactured with less than 50 microns, promoting environmental conservation. 4. Duty remission for inputs or raw materials used in the manufacture of solar equipment. 5. Reducing the minimum Pay as You Earn (PAYE) from 11% to 9%. 6. Charging an excise duty of 35% instead of 25% for one year on cement recognised under HS Code (portland cement, aluminous cement, slag cement, super sulphate cement and similar hydraulic cements, whether or not coloured or in the form of clinkers) in order to encourage and protect local cement producers against cheaper import competition. 7. Progressive reduction of import duty remission levels on sugar and sugar confectionery from the current rate of 10% systematically by 5%, resulting in a gradual increase in duty levels to 25% in 2018/19. The move is due to the current rate undermining local production and promoting importation. 8. Revision of excise duty on steel and iron-based material, promoting local industry while being cognisant of materials that are not manufactured in the region. 9. The imposing of excise duty on unprocessed edible oils under HS Code (unprocessed palm oil and its fractions, whether or not refined, but not chemically modified) for one year in order to promote the local production of oil seed and growth of the edible oil industry. 04

5 An assessment of the s 2016/17 Budget - July 2016 On the other hand, there are some moves that have received criticism from analysts and the wider population: 1. Imposing VAT on tourism services while using Kenya, Rwanda and South Africa as comparisons may be considered detrimental to the industry. Prof. Wolfgang Thome, a renowned tourism expert in East Africa criticised the move by stating: In neighbouring Kenya the 16 percent VAT was removed in the current budget for the same services Kenya had introduced VAT on tourism services three years ago after it was finally recognized that the move had a devastating effect on arrival numbers and revenues, forced job losses in their thousands and had tourists opt for cheaper safaris, notably in Tanzania. 2. With the government planning to reboot the tourism industry, the additional VAT may see the government shoot itself in the leg. 3. The government plans on setting aside Tsh trn for development projects in 2016/17, which is 40% of the total budget. The concern with this equation is that save for the public works/infrastructure sector, other sectors and ministries have historically been left wanting with agriculture, the highest contributor to the nation s GDP (at 29% in 2015/16), receiving only 15.9% of the development projects funds. Most commentators in any case believe that capital expenditure plans are wildly optimistic with a high likelihood of unimplemented budget. 4. Introduction of VAT on fee-based financial services, and the extension of excise duty on charges or fees payable by a person to a telecommunications service provider in respect of money transfers, may lead to the loss of traction gained in promoting financial inclusion in the country. This is evident from past increases in charges being translated to the customers as an increase in the transaction fees. The government has given a directive to the telecoms regulator (TCRA), tax agency (TRA) and Central Bank (BoT) to work together to ensure that the fees charged to customers of the banking and mobile banking industry are fair and not transferred onto the customers, but it is yet to be seen how this scenario will play out. 5. Removal of exemption on non-investment assets (shares) listed in the Dar es Salaam Stock Exchange (DSE) that are owned by a resident person or a nonresident person who either alone or with other associates control less than 25% of the controlling shares of the issuer company. Though the move aims at increasing the government tax base, it may be seen as a move that can affect the conditions for listing on the DSE. Oil and Gas Sector According to our sources in the oil and gas industry, IOC s are unhappy with the decision to raise Income Tax on the industry to 35% from the current rate of 30%. This is mainly due to the fact that all but two of these companies are currently investing large amounts of capital at exploration stage. IOC s have again been disappointed with regards to Withholding Taxes, where they are to be charged 15% whilst mining companies are charged just 5%. As an industry that could oil-price permitting prove transformative for the country, there is a need for the government and the IOC s to find common ground in order to ensure a smooth development of the industry, which is in a nascent stage. 05

6 An assessment of the s 2016/17 Budget - July 2016 Conclusion Following the initial successes of the Magufuli administration in reducing losses and leakages in the public sector, and ensuring stronger tax and regulatory compliance, the new budget is broadly progressive with an emphasis on capital expenditure. In particular, it demonstrates a commitment to driving development and industrialising the country. However, for businesses there will remain concerns over how aggressively and at times arbitrarily the fiscal regime is applied as the government seeks to fund its increased spending plans. Greater uncertainty in the tax, regulatory and even stakeholder environment may have a negative impact on investment. Meanwhile, the government will need to ensure that a widening budgetary deficit and rising public debt levels remain manageable, and that the budget is better implemented than previous efforts these are big asks in the Tanzanian context and will be a significant test of Magufuli s leadership and his administrative team s competence. Contact Charles Washoma Country Manager Tanzania Limited cwashoma@.com Anna Rabin Senior Consultant Intelligence and Analysis arabin@.con James Buberwa Mukurasi Analyst Intelligence and Analysis jbuberwa@.com