Just after they had been celebrating the 1994 New Year – on January 2nd – Tanzanians woke up to a shock. Finance Minister Prof. Kighoma Malima suddenly announced a new budget – it became known as the ‘mini-budget’ – to deal with a financial crisis. There had been a severe shortfall in revenue collection and expenditure was surging ahead. Details were given in Bulletin No 48.
As Roger Carter explained in the last Bulletin, when a government cannot balance its books there are all kinds of unhappy consequences. The government must borrow more – public debt in Tanzania increased by 20.3% in 1994/95 compared with the previous year; the government owned National Bank of Commerce, which is the banker for numerous loss-making parastatals, has just had to raise its interest rates from 30% to a prohibitive 39%; the value of the currency will fall – in Tanzania it has fallen from TShs 475 to the dollar in December 1993 to TShs 520 to the dollar today; inflation will increase – it has increased from 19% in 1990 to 23.5% at the end of last year.
CLOSING THE GAP BETWEEN REVENUE AND EXPENDITURE
So, when Finance Minister Malima examined the books before planning his main budget statement in June he again had to deal with the large gap between revenue and expenditure. His budget for 1994/95 envisages the following:
Revenue 292,310 mill TShs
Expenditure 514,284 mill TShs – 20% more than last year
Gap 221,974 mill TShs
The main cause of the proposed increase in expenditure has been internal and external debt servicing and the cost of the restructuring of the financial and parastatal sectors.
The minister announced that he was determined to reduce dependency on foreign donors for recurrent expenditure but he anticipated TShs 168.846 billion still coming from donors in 1994/95 leaving a gap of TShs 53.128 billion. Sweden has indicated that it will contribute TShs 16 billion.
To avoid an increase in inflation the minister stated that he would not borrow any more from the banking system and, in fact, to indicate his determination to deal with the bulging public debt, he intended to reduce his accumulated bank borrowing by shillings 20.16 billion in 1994/95. This, of course, would increase the gap again to TShs 73.288 billion. To reduce it, the minister would raise TShs 36.319 billion by continuing to auction Treasury Bills (a procedure first adopted last year) and thus reduce liquidity and hopefully, inflation; his ambition to bring inflation down from 23% to 10% in one year seems unlikely to be achieved.
The budget gap was now down to TShs 36.978 billion and this last part would have to be raised by painful measures to increase revenue and reduce expenditure.
A whole range of such measures were announced. These included broadening the sales tax base so that contractors, accountants, consultants, tour operators and many others would now pay this tax; an increase in customs tariff from 40% to 50% and reduction in import duty on industrial imports from 10% to 5% to help local manufacturers; a 5% levy on petroleum products to stop smuggling to neighbouring countries; an increase in road toll from TShs 30 per litre to TShs 40 to help cover road maintenance costs; strengthening supervision of collection of revenue, although this is not going to prove easy given the extent of the temptation to corruption it offers; reducing the number of government ministries; strengthening the unpopular ‘cost sharing’ policy (payments made for some previously free education and medical services); and a substantial reduction in the number of government operated vehicles (a particularly heavy drain on the exchequer).
To tighten up revenue collection, regulations governing the use of custom bonded warehouses would be amended; a Revenue Board to scrutinise all tax exemptions would be set up; every taxpayer would be given an identification number; fines for offenders would be increased;
CONFUSION ON INVESTMENT INCENTIVES AND TAX EXEMPTION
The minister was less sure footed in his budget speech when he came to dealing with tax exemptions allowed under incentive schemes to attract foreign investment. These were being misused and abused he said. The minister first said that he was going to abolish all tax exemptions except for a short list including diplomatic establishments, recognised foreign NGO1s, religious institutions and very large new investments (US% 10 million or more). Responsibility for exemptions was being moved from the Investment Promotion Centre to the Minister of Finance who would have sole authority.
BACKTRACKING
Later however, it had to be admitted that where there had been unpalatable tax exemptions these had been authorised by the Ministry of Finance and not by the Investment Centre. Under heavy attack from investors and the press the ministry back tracked on July 14th. All investors whose projects had been approved and been issued with tax exemption certificates before the budget were to be tax exempt. But, future tax exemptions would be ‘expost facto’ i.e. exemption would be granted only after completion of the project and the beginning of production or of delivery of the service. Raw materials, consumer items including spare parts, projects related to transportation of transit cargo, banking, radio, television, restaurants, casinos and tour operators would not qualify for tax exemption. Exemptions would be given for new projects worth more than US$ 5 million or, in the case of projects involving rehabilitation/expansion where they were worth US$ 2.0 million or more.
These instructions disturbed an already not very favourable environment for attracting investment so on August 10th there was further backtracking. ‘Business Times’ reported that President Mwinyi had ordered a revision of the Finance Bill to restore the tax exemption authority to the Investment Promotion Centre. To add to the confusion it was announced that a number of other changes would be made in the budget including the $10 million and $5 million minimum tax exemption qualifications.
It was also decided to amend or repeal the Exchequer and Audit Ordinance so that the Minister of Finance would remain one amongst other institutions and not first among unequals in tax administration. Incentives would also be restored for imports of spare parts and raw materials.
News that an electricity rationing scheme would have to be introduced in Dar es Salaam on August 15th because of the low level of the Mtera dam which provides hydro-power must have sent a further shiver down the spines of investors but longer term prospects for electricity supplies are good with many projects under way and new ones starting.
DRASTIC CUTS IN DIPLOMACY AND VEHICLES
Tanzanian diplomats received a shock when Foreign Affairs
Minister Joseph Rwegasira announced on August 9th that six of Tanzania’s 26 foreign missions would close shortly including, it is believed, Ottawa, Geneva, Paris and Harare following the closure in 1993 of the embassies in Angola, Zaire and Rwanda. In the remaining missions staff would be reduced and no more than four diplomats would man the largest. It was hoped to save $10 million per year. A new embassy has been opened in South Africa.
The government has also announced that three-quarters of its 18,000 vehicle fleet would be earmarked for sale through public auction. There would be a loan scheme for certain government officers. Two vehicles would remain in pools for each ministry and government department.
REVENUE COLLECTION SUCCESS
By late July there was good news. Revenue collected during the fiscal year 1993/94 had reached TShs 242.4 billion, ahead of the government’s target; it was the largest collection ever and gave general satisfaction all round – DRB.