DONORS PROMISE $1 BILLION – BUT WITH CONDITIONS

Tanzania’s new Minister of Finance Mr Jakaya Kikwete made a good impression at the crucial Consultative Group (donors) meeting in Paris on February 27-28. Donors were impressed by the actions he had taken to improve tax collection. According to the ‘East African’ he returned triumphantly to Dar es Salaam bearing a promise of $1 billion in new commitments of foreign aid for 1995-96. 20-25% would go to balance of payments and the rest to finance development.

A REAL SHOCK
Mr Kikwete said in an interview that the November disaster (TA No 50) had come as a real shock to the government. He understood why donors had felt the need to let off steam ON revenue and corruption issues and admitted that some Shs 70 billion ($140 million) worth of tax revenues had not been collected last year. $40 million of that was tax evasion and $100 million was illegal tax exemptions.

The Controller and Auditor General had completed work on tax evasion by 20 major importers and found 12 whose collective tax evasion amounted to Shs 17.4 billion ($31 million) of which tax evasion had amounted to Shs 4.8 billion ($8.8 million). He named the companies involved. Since December, nine of the companies had cleared their debts leaving arrears of only Shs 2.3 billion ($ 4.3 million). The investigation had revealed serious institutional weaknesses in the Customs Department and Treasury and negligence and dishonesty among some public officials had been confirmed.

KIKWETE’S TOUGH MEASURES
Measures being taken to recover funds included the arrest of four businessmen, impounding properties and auctioning them, closing some bonded warehouses (the number would be reduced from 177 to 65) and better control of transit trade with neighbouring countries.

Mr Kikwete announced that Tanzania was reviewing tax exemptions offered to attract investment In tourism, agriculture and industry, both to determine who had used them illegally and to limit those it would offer in future. Capital goods would remain exempt but raw materials and spare parts would not, because some investors had been reselling them within the country. The Minister also announced that the Government had stopped all discretionary tax exemptions given by the Minister of Finance.

Donors said that they wanted their relationship with the Tanzania government to ‘get back on track’. The World Bank’s Francis Colaco said that the donors were ‘reasonably satisfied’ on the tax front but that recovery of arrears had not been ‘as full as had been hoped’.

In the following paper, as part of a regular series, on the ECONOMY OF TANZANIA Roger Carter puts these developments into perspective:

An informal meeting is likely to take place in the summer to take stock of the progress resulting from measures agreed in Paris. In the agenda of the meeting there had been one notable omission, the heavy burden imposed by the servicing and redemption of foreign debt. However, this subject, though of critical importance to Tanzania, lies in the domain of another international forum, the Paris Club. Some information on measures taken to reduce the debt burden was given in the September 1993 issue of the Bulletin of Tanzanian Affairs.

The Consultative Group meeting took place under the shadow of the mismanagement and corruption recently disclosed by the President which had gravely affected revenues and led to an increased budget deficit and consequent rise in inflation. The meeting appears to have had some effect towards a restoration of confidence, though it is clear that the position will be closely watched and that a continuation of aid flows will depend on future integrity. The final communique recorded the commitment of delegates to external assistance to Tanzania and, provided that strong measures were completed to deal with tax exemptions and evasions, that the budget was brought into balance without borrowing from the bank and that certain structural reforms were accelerated, particularly, it is assumed, in respect of the banking system, new commitments for 1995/96 could reach at least $1 billion. Whether this goal is attainable will clearly depend on the absence of external shocks to the economy in the near future.

The President’s original response to the crisis had been cabinet changes (TA No. 50) and these have already resulted in a more effective tax collection. It now remains to be seen whether the new government team will be able to address itself to the country’s formidable economic problems and to bring inflation down to single figures by the time of the next regular meeting of the Consultative Group in 1996.

There is indeed no single reform more important than the reduction of inflation to a level at least as low as in Europe. Inflation is the most important single cause of impoverishment. By depreciating the value of money rewards, inflation creates the temptation of corruption. The extension of education and health services, and even the proper maintenance of the existing provision, is well nigh impossible in the paralysing grip of inflation. Inflation damages confidence and limits the flow of investment capital from abroad. The task of exporters and economic planners is greatly complicated and impeded by the need to take account of domestic inflation. It follows that the conquest of inflation is an essential precursor to significant progress in many aspects of the economy.

In 1980 the campaign for universal primary education (UPE) had resulted in an enrolment in primary schools of over 90% of the appropriate age group, but sadly this remarkable achievement was not maintained and by 1980 enrolment had fallen to about 74%. The main cause of this retrogression was the high rate of population growth, the increase in the number of children in the eligible age group by about a third and the failure of available resources to expand in the same ratio. The health services have likewise been suffering severely from a lack of resources. modest reduction of the trend may be possible by increasing the share of resources for health and education by reallocation and economies but any substantial progress must await the conquest of inflation and the emergence of a budget surplus.

One prudential step taken by the government is the pruning of the capital development programme in recognition of the fact that capital projects normally lead to additional recurrent expenditure for operation and maintenance, some or all of which may fall as a charge on the national budget. It seems likely that in the past inadequate attention to the recurrent cost consequences of capital development may have led to the overloading of the capital development programme, leading to the neglect of maintenance and increasing Tanzania’s external debt problems. This is a matter over which donors may have been less than helpful.

The tasks before the new government team are truly formidable. One gratuitous obstacle to fiscal balance has been caused by drought in the regions supplying hydro-electricity to the national grid, leading to load shedding. The shortage of water for the generators in these areas is attributable not only to natural causes, but has been exacerbated by the diversion upstream of water for irrigation. About 75% of Tanzania’s installed generating capacity is from hydro-electric sources, the remainder from diesel powered generators. Before 1992 most of the thermal generators remained in reserve and 95% of power was taken from hydroelectric sources. But severe drought conditions in 1992 led to a resumption of diesel generation to about 18% of the total. TANESCO, the electric power company, reacted to the situation by installing a 36MW gas turbine generator at Dar es Salaam and by rehabilitating diesel generators connected to the grid. Owing to the continued shortage of water for the generating plant, however, these measures proved insufficient and TANESCO was forced to institute load shedding in 1994 and again in 1995.

Load shedding is a disaster for industry and for the economy as a whole. It has seriously adverse effects on Government revenues and damages confidence among potential investors. For the short run the government has started an emergency power project (See Business News – Editor) but in the medium term, plans are in train for the diversification of power sources by the installation of gas fired generators at Songo Songo using natural reserves of gas, and a similar gas-fired installation at Mnazi bay. A power link with Zambia is also being considered. But these additions to capacity, necessary in any case in the face of rising demand, will take several years to materialise.

Another serious burden on the budget is the restoration of the environmental damage caused by the influx of refugees from Rwanda (TA No 50).

Whether in the face of these obligations and difficulties the Government can successfully restore its finances to stability within the next ten months remains to be seen. In April Parliament was scheduled to enact a Code of Conduct for Leaders and it is hoped that this will set the tone for public affairs. The mastery of corruption will only finally be achieved when inflation has been brought under control and money rewards have been stabilised at a reasonable level. But the recent public exposure of corruption will, it is hoped, have had a cleansing effect and have provided the new administration with a springboard from which to bring future dishonest dealings under control.

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