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Finance Minister Professor Kighoma Malima shocked Tanzanians on January 2nd 1994 when he announced a series of drastic measures in a mini-budget designed to balance government income and expenditure and deal with a serious shortfall in revenue. He proposed to cut expenditure by no less than 40%.

In the following article Roger Carter explains the background to the financial crisis and the measures the government is taking.

LONG TERM INTERESTS AND SHORT TERM NECESSITIES

In common with other Countries at a similar stage in development, Tanzania is faced by a continuing conflict between important long term interests and urgent short term necessities. There can be little doubt that the expansion and enrichment of primary education and the extension of primary health care are among the prerequisites of rapid economic growth. The road and rail systems need radical improvement, the telephone network to be more reliable and responsive. Much capital investment of this kind, for example on schools, health centres, or roads, brings in its train new charges on the recurrent budget for the purposes of operation and maintenance. But it is these costly services that are being starved of resources on account of the pressing need to balance the budget and to bring down inflation.

CONTROLLING INFLATION

Inflation has immensely damaging consequences. As wage increases lag behind price rises, inflation impoverishes the wage earning section of the population and may well cause social unrest. As an indicator of the government’s inability to fund its expenditure out of revenue, inflation undermines investor confidence both at home and abroad. Inflation introduces uncertainties into all forward planning and complicates the task of exporters. As inflation means that the value of the currency is falling, bank balances and contracts denominated in local currency lose some of their value and saving is discouraged.
The importance of controlling inflation has been acknowledged in successive budgets. One major cause of inflation has been the willingness of the government and the National Bank of Commerce to finance the deficits of lossmaking parastatals, notwithstanding warnings by the government that the practice must end. Having no idle surpluses, the government and the Bank have been obliged to rely on inflationary measures involving the creation of new money to meet this need. There are of course circumstances in which a parastatal is providing an essential service and cannot be replaced in the short run. In the case of some crop parastatals the first step has been to remove their monopoly powers and to expose them to competition. Survival then depends on the ability of these parastatals so to reorganise themselves as to operate efficiently without government subventions. The government has set up a Parastatal Sector Reform Commission to advise on the future of parastatals generally, whether by reorganisation as joint venture companies, outright sale to the private sector, or in some cases liquidation. In this matter the government is guided by the intention in the medium term to divest itself of direct responsibility from all productive enterprises.

THE SHORTFALL IN REVENUE

The immediate goal, then, is to end support for loss-making concerns and to balance the budget without resort to borrowing from the Bank, or other inflationary devices. Unhappily, this aim has received a setback with the discovery for the second year running of a serious shortfall in revenue, notwithstanding measures announced in the budget speech to enhance collection and improve motivation among collectors. It was estimated that income by the end of the financial year on 30th June would be some 12% short of the budget figure of Shs. 235.6 billion. Expenditure was also running ahead of estimates. A major cause of the shortfall in revenue is believed to have been inadequate collection of customs duties and steps have been taken to ensure strict adherence to the customs tariff and to put an end to illegal import practices. Increases in customs duties on commodities otherwise produced locally were announced and a 10% duty on industrial raw material, lifted in the budget, was reimposed. On the expenditure side, a decision to undertake the phased closure of 12 embassies and to begin the process by a reduction of home-based and local staff was announced. Foreign visits by government officers funded by government and all transfers of civil servants were suspended. Departmental accounting officers were to see that budget provision was not exceeded; cheques and warrants not covered by balances into the Paymaster General’s account would not be honoured.

The government hopes that these measures will restore revenue collection to the level foreshadowed in the budget without significant damage to current economic reforms. Understandably the reaction of the trading community was one of shock. Some of the increases in duties, such as those on drugs from 10% to 40%, were seen as favouring the rich, while the proposed 10% duty on industrial raw materials was a setback for the domestic economy. Representatives of the Confederation of Tanzanian Industries and of the opposition party CHADEMA led by Mr. Edwin Mtei, the former Governor of the Bank of Tanzania, took the view that the budgeted revenue target would be reached if adequate steps were taken to deal with tax evasion and corruption. The government’s proposals met with a hostile reception in Parliament. Summing up for the government the Minister for Finance announced reductions in the rates of duty previously announced. Imported drugs were now to face an import duty of 15%, while duties on raw materials used for the local manufacture of medical and veterinary drugs were to be limited to 5%.

Any substantial increase in rates of duty must have two adverse consequences for the economy. First, it is likely to create difficulties for industrial concerns already experiencing cash flow problems, with a risk of insolvency in some cases. Secondly and more importantly, by increasing costs it will tend to put up the rate of inflation and in this way to frustrate a primary object of government policy. The government is aware that morale in the public service is just as important as fiscal changes. Rewards in the public service are now much too low as a result of the decline in the value of the currency and the result has been a tendency towards poor performance, absenteeism, and unpunctuality in an environment offering temptations for corruption, while overstaffing has created a financial burden well beyond the government’s means. It is planned to reduce the size of the service during the current financial year by 20,000 civil servants, taking advantage of the progressive reduction of government responsibilities in the productive sector. It is expected that it will be possible to create a more adequate salary structure when the public service has been reduced to a more sustainable size.

NOT ALL GLOOM

In spite of these problems Tanzania has been able to record some notable achievements. The administration of foreign exchange under the supervision of the Bank of Tanzania is going well. The rehabilitation of the road network is proceeding with energy. As a recent World Bank report shows, agricultural production has been increasing at an average annual growth rate of 5.3% between the years 1987 and 1991. Associated with this rate of growth has been an 8.3% real increase in producer prices between 1981-83 and 1989-91, followed by further increases in subsequent years. The ending of the marketing monopoly of the National Milling Corporation has given farmers direct or indirect access to local markets and cash on the nail instead of the long, discouraging delays in payment that previously often prevailed. An important consequence of the rise in rewards for agricultural producers has been a wider dispersal of the proceeds of production among the population in general.

So in spite of immediate problems all is not gloom. But the revenue crisis has once again illustrated the immense difficulties faced by a country at Tanzania’s stage of development in undertaking the capital and recurrent financing of vital infrastructure and services in the face of immediate demands on resources. Such crises can arise in a variety of ways. In the previous financial year, the government was obliged to resort to inflationary borrowing, as drought had undermined the electricity supply at Kidatu dam, bringing industry repeatedly to a standstill over a period of several months and seriously interfering with tax revenues. Before that, serious floods in the Lushoto and Korogwe areas forced the government to make provision for emergency relief. Over all of these unexpected demands on resources hang the increasing needs of a population estimated to be growing at about 3% per annum.

As successive finance ministers have shown, balancing the budget comes high in their lists of priorities. Some of the measures needed to be taken, such as the reduction in the size of the civil service, are inevitably unpopular. But it is clear from the budget speech and its endorsement by Parliament that the nettle has been grasped and that a fall in inflation, bringing with it important benefits both to the economy and the population in general, could now be a realistic expectation.

J Roger Carter

DAMAGE TO SCHOOLS

As a reflection of the financial situation some schoolchildren have been protesting violently about the ‘bad food’ being provided in schools – Uqali and beans every day. Ifakara secondary school students have set fire to school buildings and have caused Shs 6 million damage. Kwiru school had to be closed after serious vandalism and 46 students at Arusha school were suspended after unrest in the school.

Exchange Rates (April 14, 1994):
US$ = Shs 502 – 513
£ Sterling = Shs 745 -764

EAST AFRICAN BANK GOVERNORS REACH AGREEMENT.
Governors of the central banks of Kenya, Uganda and Tanzania have reached agreement on a series of measures on inter-state trade and the removal of currency restrictions. It is not known how long it will take to implement the governors’ recommendations.

LESS RED TAPE NEEDED.
Speaking at a dinner meeting of the Tanzania-UK Business Group in London, Mr Patrick MC Laughlin, the Minister with Special Responsibility for Africa in Britain’s Department of Trade and Industry, said that Tanzania’s economy could reap big benefits if the authorities dispensed with current bureaucratic practices when doing business with foreign investors. If it did not, “UK Investors would continue to find the pursuit of many opportunities a wearisome task” he said.

PACE OF PRIVATISATION.
Among recent investments in Tanzania are the five-star hotel under construction on the golf course in Dar es Salaam (financed by the Aga Khan Fund for Economic Development and Britain’s CDC), provision of a local and international mobile telephone service (Tanzania Posts and Telecommunications and a Malaysian firm, Technology Resources Industries) and a restructuring of the Ministry of Agriculture (Islamic Development Bank). But, Arab and Asian investors have expressed the view that the pace of privatisation has been slow in Tanzania because there are not enough black African entrepreneurs involved to satisfy oldguard socialists who fear a return to market control by ‘outsiders’ – African Business, March 1994.

BUSINESS SERVICES CENTRE.
A USAID sponsored Business Services Centre will be opening in Dar es Salaam shortly. It is designed to help the local private sector through a combination of training, advisory and information services – Business News, March 4.

STOCK EXCHANGE.
Dr. Charles Kimei, Director, Economics and Statistics at the Bank of Tanzania, has stated that Tanzania has embarked on a law to enable the licensing of securities and capital market dealers. “We are looking towards forming a stock exchange in about two years time” he said and added that a public training programme to this end had already begun – Lloyd’s List February 21.

PRETENDING.
Business Times columnist Joe Dotto has been writing about the recent strikes amongst teachers, medical staff and other workers. ‘Everybody knows’ he wrote ‘that public employees in Tanzania have been on strike for twenty years. The strike began with the famous Clause 15 of the then TANU Party guidelines which threw out of the window the rules of office discipline and overthrew the office boss in favour of the liberation of the workers.. . . .on its part, the government then decided to pay back in kind’. It had started to pay its workers monkey wages – peanuts. A government employee summed up the situation – ” the government pretends to pay us and we pretend to work for it”.

AMERICAN MULTI-NATIONAL COMES TO TANZANIA.
A new multi-billion shilling company by the name of Colgate-Palmolive (Tanzania) Ltd has been established. It is a partnership between the well-known American consumer products company that operates in 170 countries and IPP in Tanzania – Family Mirror

STOWAWAYS.
According to the South African-based Managing Director of P and I Associates (Marine Surveyors) the initial reason why they opened an office in Tanzania before Kenya was the high level of stowaways coming from Tanzania. Once we managed to deal with that problem we found that our services were more in demand from shippers dealing with trade with South Africa – Lloyd’s List February 21.

INCREASING IMPORTANCE OF INFORMAL SECTOR.
Dar es Salaam University economist Nathanael Luvunga has stated that informal sector employment in Tanzania now covers 22% of total employment. There are 1,402,000 informal sector enterprises employing more than 2.5 million people he said. The sector’s contribution to GDP increased from 10.3% in 1985 to 32% in 1991

CHARGES RAISED.
Air Tanzania Corporation (ATC) raised fares and cargo charges for domestic routes by 30% with effect from April 1st because of what the managing director described as the continued depreciation of the Tanzanian shilling against the US dollar and £ sterling.

WITHOLDING TAX.
The Dar es Salaam Merchants Chamber has complained bitterly about the government’s introduction of a 2% witholding tax on the private sector because it involves a lot of extra paper work. But the Commissioner of Income Tax has pointed out that parastatal companies have been paying this tax for some time and that the protests probably reflect a lack of a ‘tax compliance culture’. Honest businessmen would be helped because tax would be payable in instalments rather than in a lump sum at the end of the year. The latest development, as the Bulletin goes to press, is an apparent admission by the Attorney-General, after a request for clarification from the Confederation of Tanzania Industries, that applying the tax to private business would be contrary to the provisions of the income Tax Act (1973). The Government is also said to be considering the introduction of a Value Added Tax to replace sales taxes for industrial and other firms – Business Times.

PRE-SHIPMENT INSPECTION.
The government has appointed Cotena Inspection SA on a three-year contract to carry out preshipment inspection, tax-collection and monitoring of the tax collection services. The aim is to protect Tanzania’s foreign exchange resources and to increase the amount of customs duties collected.

NEW BANK.
A private indigenous bank – the First Adili Bank – which is to emphasise initially merchant and investment banking is hoping to start operations within the next few months.

EXPORT PROCESSING ZONE.
Officials of the Zanzibar Investment Promotion Authority (ZIPA) and the Zanzibar Free Economic Zone Authority (ZAFREZA) report that some 208 projects designed to generate up to 6,000 jobs have been approved. But most of the projects have not gone beyond the feasibility stage. Consultants have expressed reservations about the idea of turning Zanzibar into a free port because of the lack of a core of local investors, managerial ability and a developed labour force. There was also the possibility of processing zones being established around Dar es Salaam where the environment would be more suitable – Business Times, March 4.