tenuous trajectory

Tanzania: Magufuli-era fiscal discipline slowly slipping away

By George Bodo

Posted on January 24, 2023 09:21

 © Tanzania’s President Samia Suluhu Hassan at the White House in Washington, U.S., April 15, 2022. REUTERS/Elizabeth Frantz
Tanzania’s President Samia Suluhu Hassan at the White House in Washington, U.S., April 15, 2022. REUTERS/Elizabeth Frantz

In Tanzania, much of the fiscal discipline that was instilled by the late President John Magufuli is slowly slipping away under current President Samia Suluhu Hassan.

Opinion outside of Tanzania remains divided over the legacy of the late President Magufuli. Even so, there is one thing you can’t take away from his legacy: his fiscal discipline. Much of that, however, is fading away.

In the current fiscal year 2022/23, Tanzania’s fiscal deficit is set to rise to about 7% of its gross domestic product (GDP), compared to just about 2% in fiscal year 2019/20.

Under Magufuli, who was keen to restore order to Tanzania’s public finances, the fiscal deficit narrowed to from 6.5 % in fiscal year 2012/13 to just 2% in 2019/20. The narrowing of the fiscal deficit also meant his appetite for borrowing waned.

When he took over in 2015, public debt stood at 38.8% of GDP. By the close of fiscal year 2019/20, that figure had only moved to 47.4% of GDP. He also slowed down on external budgetary financing and kept external debt under a third of GDP throughout his first term.

‘Third of government revenues into public debts’

Budget figures from the ministry of finance for the current fiscal year 2022/23 show that a third of government revenues will go into public debt service. This compares unfavourably to an average of 11% in Magufuli’s first term in office, and reflects a gradual build-up of public debt sustainability pressures.

For Samia Suluhu, the rapid fiscal expansion reflects the need for a public-sector led economic growth.

Much of the late Magufuli’s successes revolved around sealing revenue loopholes (and fiscal pilferages). To improve domestic revenue mobilisation, he instituted revenue administration reforms.

A key highlight of the reforms was the reduction in the generous tax exemptions and rebates granted in the past, and a hidden cost in public finances. The result was impressive: tax exemptions and rebates declined from a whopping 4.4% of gross domestic product (GDP) in 2012 to under 1% in 2019.

He also enforced the use of Electronic Fiscal Devices (EFDs) as well as the introduction of value-added tax (VAT) and customs reforms.

Another highlight was his face-off with the multinationals and other entities operating in the country’s lucrative extractive sector, which comprises minerals and oil and gas, over revenue understatements. His face-off worked and the multinationals budged.

The broad result was:

  • aggregate revenue outturn, which measures the extent to which aggregate revenue receipts reflect the amount originally approved in the budget, greatly improved with collections rising from 85% of total revenues budgeted in 2014 to 95% in 2016;
  • as a percentage of GDP, tax collections improved from 12.8% of GDP in fiscal year 2014 to 15% in 2019/20.

‘Need for public-sector led economic growth’

For President Hassan, the rapid fiscal expansion reflects the need for a public-sector led economic growth. In the current fiscal year (2022/23), infrastructure spending will constitute 16% of total expenditure with key projects, including the Standard Gauge Railway (SGR) and a number of new electric power generation projects.

However, her fiscal trajectory is looking tenuous at best. Domestic revenue mobilisation is still projected to stagnate at 15% of GDP over the medium term, while expenditures will rise to 22% of GDP. To fund the deficit, there will be continued sourcing of external funding in the form of grants, concessional and non-concessional loans.

Over the medium term, external funding will constitute about 20% of the total budget. Consequently, the share of external debt to GDP will rise to 30% in the medium term, reflecting the need to accelerate implementation of development projects (in the face of domestic revenue mobilisation pressures).

However, the success of this funding strategy lies on continued preference for grants and concessional borrowings, which is budgeted at two-thirds of total external financing in the current fiscal year. The medium-term debt strategy paper also identifies this strategy as the most desirable in terms of cost and risk trade-off.

If well executed, then external debt service is seen at below 1% of GDP over the medium term, which gives the current government a fair amount of fiscal space to respond to pandemic-like shocks to the economy.

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