Tanzania A Macroeconomic Analysis

12/15/2011

Submitted by

Aritra Sengupta, 10B

Bibaswan Banerjee, 16B

Karan Malhotra, 25B

Om Pashupati, 31B

Partha Chandra, 32B

Rajesh Jaddu, 38B

1

CONTENTS

Sl. NO. TOPIC PAGE NO. 1.

General Overview

2

2.

Macroeconomic Performance in the recent past

3

3.

Macroeconomic Difficulty-1 Overview Possible Solutions

8 10

4.

Macroeconomic Difficulty-2 Overview Possible Solutions

12 13

5.

References

14

2 The United Republic of Tanzania is a nation in Eastern Africa which was formed in 1964 with the union of two states Tanganyik a and Zanzibar . In the following section we present an overview of the nation from the political-economic-social-technological-ecological-legal (PESTEL) perspective.

Tanzania-Political Environment

Tanzania has a relatively stable political environment as compared to the countries neighbouring it. The nation has a multipa rty democracy in place. The Revolution party has been in power since independence and the union with Zanzibar on April 26, 1964 which led to the formation of United Republic of Tanzania. The President, who along with the members of the unicameral National Assembly, is elected by direct popular vote for a five year term, is the head of state and he selects the cabinet of ministers and also

appoints the Prime Minister who represents the Government in the National Assembly. Mr. Jakaya Kikwete, a veteran of the country’s CCM (Chama Che Mapinduzi) party has been president o f Tanzania since 2005. He won a fresh five year term in October 2010. Although, multiparty democracy is in place, CCM is the dominant party (more than 75% of National Assembly Seats) with t he opposition being too weak to pose any serious challenge.

The Union with Zanzibar makes for a very unique form of government in the nation. The relationship can be best described as semi-autonomous. Zanzibar has a separate 76 member House of Representatives in place. This body can make laws for Zanzibar but not for Union designated matters. Five members from Zanzibar are also present in the National Assembly.

In matters of international relations, the Tanzanian government has maintained good relationships with the West and the investment climate is favourable regards to FDI and investment by foreign companies in Tanzania.

Tanzania-Economic Environment

Tanzania has a mixed economy which blends together free market and state controlled economies. The system has evolved out of the state centered socialist policies that were in place from 1961 till 1986 when economic reforms were implemented. Since 1986,

investment interest in Tanzania has increased rapidly across all sectors. Another major development was the authorization of foreign banks in 1991 which strengthened the ba nking industry and made it more competitive. The 29 licensed banks in the country include names like Standard Chartered Bank, Stanbic Bank, Citibank, Bank of Africa Tanzania, Diamond Trust Bank, Exim Bank, National Bank of Commerce and National Microfinance Bank. The relatively stable Tanzanian Shilling is the trading

currency but prices are more often than not indicated in US Dollars. Agriculture is the mainstay of the economy accounting for more than half of the nation’s GDP, three fourths of the total

exports and it also employs an equal proportion of the country’s workforce. Tanzania is blessed with large quantities of nat ural reserves including gold, diamond, nickel, chrome, iron, coal, platinum among many others. Tanzanite is a rare gemsto ne mined

only in the country. Natural gas is also abundant. Despite such abundance, mining and extraction currently contribute towards a small fraction of the country’s output. Great variety in wildlife, world renowned sanctuaries like Serengeti and scenic places like the Kilimanjaro peak makes tourism a huge industry in Tanzania which is otherwise dependent mainly on agricultural processing

and manufacture of light consumer goods.

Tanzania-Social & Cultural Environment

Tanzanian culture draws heavily from Arab, Western and tribal Bantu cultures. Tanzania has a large power distance with distinct hierarchies and inequalities in organizations and firms. Employees are cautious about disagreeing with their superiors, who a re more often than not autocratic. Mos t interactions are of a formal nature and the communication gap is significant. East Africa

ranked 34-36/74 together with Peru and Thailand in Hofstede´s Power Distance Index. Also, Tanzanian culture is classified as one with low uncertainty avoidanc e or the people are open to new things and are

not resistant to change. They have lower levels of anxiety and stress as compared to several other nations. East Africa ranked 52/74 in the Uncertainty Avoidance Index.

Tanzanian culture is a collectivistic one which has been transitioning to individualism. Traditionally, collectivistic cultures encourage the development of group identities by teaching communal sensitivity and cooperation . Individualism on the other hand refers to people being more self-centric and individual goal oriented. East Africa ranked 49-59/74 in the Individualism Index.

Tanzanian culture is characterized by both masculine and feminine features. According to the Masculinity Index, East Africa ranked 54/74 meaning that the countries in East Africa, including Tanzania are qualified as countries with higher feminine features.

Tanzania-Technological Environment Technology is a huge driver for business and overall development of a nation. Tanzania’s technological environment is develop ing

at a rapid pace. As the country continues to grow, speedier and more efficient methods of communication are in demand. Technological innovations in the field of telecommunications and the internet are assuaging this need. Optical Fiber cables have

3 made internet cheaper, faster and more accessible. Computer l iteracy too is on the rise with ever increasing IT education and with more people being able to afford ac computer and an internet connection. Technology has been effectively utilized in improving overall productivity in manufacturing processes, providing technical information to entrepreneurs and extending their potenti al to

earn more and upgrading the technical skills of workers in various domains of the economy. The establishment of Tanzania Commission for Science and Technology (COSTECH) in 1986 and the Centre for the

Development and Transfer of Technology (CDTT) in 1994 is some of the efforts made to ensure proper integration of transferred technology from other countries and promote indigenous R&D in the nation so as to further speed up growth .

Tanzania-Ecological Environment

Tanzania currently lacks a comprehensive environmental law system and Environmental Impact Assessment Regulations are not mandatory in the country. Post the 1992, Rio Conferenc e, awareness levels about the importance of a healthy ecological environment have increased in the country however, this has not resulted in any significant change in rules and regulations. Businesses and corporations view environmental regulations as detrimental to the competitiveness of Tanzania as a destination

for FDI and link the same with inefficiency and increased producti on costs. The Tanzanian Government is keen on maintaining the country’s image as an investor friendly destination and consequently the implementation of the current environmental laws and regulations that are in place is exceedingly poor.

Tanzania-Legal Environment EU, UN and WTO have tried to create a homogenous foundation for international trade but in parts of Asia and Africa, the proc ess

of integration has been extremely difficult. Tanzania uses a common law system which is based on the English Common Law System, a direct consequence of the country’s colonial past. The law system is a combination of precedent, custom and interpretation by the courts of law. The four levels in the Tanzanian judicial System, according to the Hauser Global School Program at New York University, School of Law in 2006, are The Court of Appeal of the United Republic of Tanzania, the High

Courts for Mainland Tanzania and Zanzibar, Magistrates Courts (Resident Magistrate Courts and the District Courts) both of wh ich have concurrent jurisdiction. Primary Courts are the lowest in the judicial hierarchy. Zanzibar, the union partner has a very similar judicial structure. It too has four levels, which are Court of Appeal, High

Court, Magistrate Court (or Kadhi s Appeal Courts) and Primary Courts (or Kadhi s court).

Macroeconomic Performance in recent past

1. Growth Performance

Year

Gross domestic

product, constant

prices

Gross domestic product,

constant prices (growth)

Gross domestic

product, current

prices

Gross domestic

product, current

prices

2006 12,474.63 7.042 16,953.28 14.332

2007 13,341.54 6.949 19,444.84 15.185

2008 14,315.13 7.297 22,865.04 19.028

2009 15,274.82 6.704 26,497.16 20.956

2010 16,258.62 6.441 30,150.23 22.543

2011 17,253.40 6.119 34,577.71 23.197

2012 18,310.90 6.129 39,529.87 24.128

2013 19,617.64 7.136 44,646.86 26.211

2014 21,088.57 7.498 50,320.76 28.678

2015 22,670.86 7.503 56,758.59 31.405

2016 24,225.67 6.858 63,647.22 34.207

4

Economic policy in Tanzania in 2011-2012 will be mainly focussed on growth. Economic growth is expected to be robust for the

remainder of 2011-2012, underpinned by the construction, mining and services sector. Construction growth will be driven by

donor-funded infrastructure development- notably in road building and power sector and by the commercial and residential

development in major cities. Gold exports will rise steadily, bolstered by telecommunications and transport, and financial services

will benefit from the banking sector’s relative isolation from the global markets. However growth in 2011 will be affected by poor

rain and shortage of electricity, factors that will have a major impact on growth in agriculture and manufacturing, respectiv ely. The

latter problem has been compounded by high oil prices, which make transport and private electricity generation more expensive.

Overall GDP Growth is forecast to dip to 6.3 % in 2011 from 7 % in 2010.

Growth is expected to rebound to 6.9 % in 2012 assuming more favourable weather conditions and a gradual improvement in the

policy environment. However the constraints by poor energy supplies and the limited transport infrastructure, as well as by the

country’s excessive bureaucracy, cannot be solved in the shor t term and so they will continue to restrain economic growth. As a

result the growth levels projected are below potential and will not translate into any major increase in income per head.

2. Inflation

Year

Inflation, average

consumer prices

Inflation, average

consumer prices

Inflation, end of period

consumer prices

Inflation, end of period

consumer prices

2006 124.933 5.612 126.6 6.82

2007 132.742 6.251 133.978 5.827

2008 143.9 8.405 146.412 9.281

2009 160.918 11.826 162.05 10.681

2010 177.807 10.496 173.765 7.229

2011 190.305 7.029 192.726 10.912

2012 208.196 9.401 203.574 5.628

2013 218.693 5.042 213.727 4.988

2014 229.593 4.984 224.403 4.995

2015 241.105 5.014 235.678 5.025

2016 253.193 5.014 247.52 5.025

Chart Title

Gross domestic product, current prices

Gross domestic product, constant prices

5

There has been a steady increase in the inflation rate since October 2010, with the most recent data showing that prices rose by

13 % year on year in July. Much of the rise has been driven by an increase in food prices, which is normal at this time of year,

especially following the weak rains. Meanwhile, rising oil prices are also having an impact and the economy is facing ongoing

structural rigidities against a background of robust growth and the overhang of loose fiscal and monetary policy in 2009 -2010. The

BoT has been reluctant to tighten the monetary policy so far in 2011, given slower growth, but some movement here will be

needed if the BoT is to meet its June 2012 single-digit inflation target. The recent jump in inflation has led to increase the fore cast

for overall inflation in 2011 to 10.7 % (from 9.7 % previously). Assuming a reasonable harvest combined with slightly tighter

monetary policy and lower international fuel prices, inflation in 2012 is expected to ease to 8.8 %.

3. Balance of payments

Year

Current account balance

Defici t (Billion)

Current account

balance (% change)

2006 1.084 -7.561

2007 1.523 -10.031

2008 2.114 -11.112

2009 2.13 -10.164

2010 1.973 -8.753

2011 2.046 -8.82

2012 2.463 -10.21

2013 2.386 -9.103

2014 2.215 -7.724

2015 2.29 -7.29

2016 2.052 -5.998

Inflation, average consumer prices

Inflation, end of period consumer prices

6

Tanzania’s structural trade imbalance will keep the overall current account balance in deficit during 2011 -2012. The value of gold-

exports which account for more than 1/3rd

of total exports will be boosted by steady i ncreases in production and high prices.

Indeed, gold exports will be further boosted by an upgrade to the forecast for prices in 2011 -2012, amid greater global economic

uncertainty. However prices for Tanzania’s other commodity exports will fall back in 20 12 and so overall exports receipts will

stagnate. The import bill will remain significant, especially as capital import growth for infrastructure is scaled up. Never theless, a

reduction in oil prices will act as a brake on import growth in 2012. The surplus on the services account will widen in line with a

pick-up in tourism on the back of the global economic recovery, but this recovery will only be gradual, as western markets remain

depressed. The deficit on the income account is expected to widen as gold-mining companies repatriate higher profits. The surplus

on the account transfers account will remain large, reflecting continued donor support. The overall current-account deficit is

forecast to fall to 7.8 % of GDP in 2011 (down from 8.3 % GDP under the previous gold price forecast), before the deteriorating of

the trade balance sees it increase to 8.1 % of GDP in 2012

4. Trade Deficit

5. Exchange Rates

After a volatile couple of years the shilling began to stabilise at around TSh 1500: US$1 in early 2011. However the new stability

has proved fragile against the background of a sharp rise in inflation in the first half year and in June it began to weaken

significantly against the US dollar in line with the other East African Shillings. What is not clear is whether the fall in June will spill

over into a general depreciation in the second half of 2011 or at around TSh 1600: US$1 level. At present the latter seems mo re

likely given that inflation should ease and that overall economic performance will remain rob ust. In 2012, given the scale of the

shilling’s fall in recent years it is likely to be more stable assuming that inflation is lower monetary policy tighter and fiscal

consolidation makes some progress, although currency may fall modestly in view of continued large current account deficit.

Overall therefore the shilling is expected to average between TSh 1533: US$1 and TSh 1620: US$1 in 2012.

Current account balance Defecit (Billion) 2006

2007

2008

2009

2010

2011

2012

Trade Balance Deficit

Exports (FOB in US $ m)

Imports (FOBin US $ m)

7

6. Public Finances (Like fiscal and budgetary deficits).

Year General government revenue General government total expenditure Budgetary Defici t

2006 3,036.29 3,873.26 -836.96

2007 3,691.92 4,475.21 -783.29

2008 5,215.97 5,217.18 -1.22

2009 5,632.55 6,907.28 -1,274.73

2010 6,204.88 8,311.80 -2,106.92

2011 7,354.25 10,283.03 -2,928.78

2012 9,163.30 11,726.55 -2,563.25

2013 9,948.33 12,354.46 -2,406.13

2014 11,179.04 13,292.23 -2,113.20

2015 12,546.43 14,709.47 -2,163.04

2016 13,962.77 16,341.74 -2,378.97

7. Fiscal Policy The government has allowed fiscal discipline to slip substantially in recent years, which has led to a widening of the deficit to an

estimated 6.5 % of GDP in fiscal year 2010-2011. As a result, the next few budgets will have to focus on a gradual reduction of the

deficit. As detailed in the recently published 2011-2012 budget and five year development plan, this will have to focus on gradual

pick-up in GDP growth, but the government is also likely to have to announce new measures aimed at widening the tax base. It has

mooted plans to raise the mining taxes, but pushing these through against likely opposition from the mining industry will be

difficult. The other priority will be to keep recurrent expenditure notably wage spending under control, which also seeking to

boost development spending. As a separate issue, the government will need to address capacity constraints, as a result of which

development expenditure comes in below target. With steady, if unspectacular, progress along these lines, the fiscal deficit is

expected to fall back to 5.8 % of GDP in 2011-2012.

Disquiet among donors over the corruption scandals and the slow pace of reform, as well as their own budgetary pressure means

that direct budget support will not keep pace with growth in domestic revenue. Despite this, project support will remain vigo rous.

In addition, there is still considerable issuing a debut Eurobond, although meantime it will carry borrowing at non concessional

terms from international banks.

General government revenue

General government total expenditure

8

8. Monetary Policy In recent years the main thrust of the monetary policy of the Bank of Tanzania has been to control the growth of broad money

supply and credit growth to the private sector, in order to keep inflation down and support economic growth. However, the

situation is complicated by the high weighting of food in the inflation index and the volatility of money s upply growth, as well as

the latter lagged impact on the inflation rate. Despite strong growth in lending to the private sector, the BoT has long stan ding

concern about the lending rates charged by commercial banks. Over the past few years these rates have moved little, regardless of

what the central bank has done in terms of the monetary policy. To this end the BoT is expected to push ahead with what it te rms

as ‘second generation’ of financial reform. However to make a real impact the government will also need to implement difficult

reforms such as making it easier to use land as collateral.

Macroeconomic Difficulty 1: Unemployment

Overview

One of the most pressing economic challenges facing Tanzania today is its crippling unemployment. The government described th e

issue of unemployment, especially among the youth as a time bomb that is ticking.

Despite having many resources in the country, Tanzania is still facing acute unemployment among its youths, a case that continues to raise eyebrows as such state had stirred unrest in some African countries and ousting top government leaders.

This level stood at 13.4% as of June 2011, with females at 14.3% and males at 12.3%. Specifically, urban unemployment rate, at

16.5% gives particular cause for worry, as opposed to rural unemployment which is significantly lower at 7.5%.

The imbalance between labor supply and demand is particularly highlighted in Dar-es-Salaam, where unemployment levels are at

a crippling 31.5%.

This is primarily due to the fact that the agricultural sector employs about 80% of the 24mn working population and contributes

roughly 28.2% to the overall GDP. Due to seasonal harvesting and poor infrastructure, most of the people in the sector suffer from

seasonal unemployment which is exacerbated by lack of opportunities for retraining and lack of funds to provide education.

The above graphic provides a telling snapshot of the unemployment scenario in Tanzania and has been explained in detail below.

Cause of Unemployment

Frictional Unemployment

This refers to the unemployment resulting from incomplete information about jobs, particularly prevalent in a country like Tanzania which has low internet and newspaper penetration.

Cyclical Unemployment/ Keynesian or demand-deficient unemployment

9 This is particularly relevant for a country like Tanzania, where overall output remains low and sluggish economic growth means that the demand for jobs far exceeds the supply.

Geographical Unemployment

This is the inability of people to relocate from areas with low demand for labour, to areas with high demand for labour. This is prevalent for those caught in the poorer western regions who unable to migrate to the resource rich eastern regions

Structural Unemployment

Considering that Tanzania’s population is concentrated into a few core sectors, this can be a dangerous phenomenon causing lots of long term unemployment if people are untrained for the profession they are a part of.

Consequences of Unemployment

1. Economic costs

This is the most dangerous outcome of high unemployment which results in reduced output and economic efficiency. Resources

are wasted as they are underutilized. Redundancy is als o a probably as people who are trained an educated are unable to find jobs

that make use of their skills. Hence investment in their education is also wasted. Long term unemployment can lead to a serious

loss of skill and motivation. This also greatly affects the government’s finances which are dependent on tax collections and if

people do not earn, they cannot pay.

Additionally, there is a strong link between unemployment and consumer spending. As consumer’s confidence falls, so the

willingness of people to spend declines and people build up their precautionary savings.

These figures are not based on data

pertaining to Tanzania and are not

actual graphs but are illustrations to

supplement the text.

10

Hysteresis effects

The longer someone is out of work, the less attractive they become to a potential employer. The longer someone is out of work

the greater their loss of technical and social skills needed at work. People become less willing to seek work and an increase in

“core” structural unemployment and a consequent rise in the natural rate of unemployment occurs. Some youths in Tanzania have

reported being out of work for up to 4-6 years which has a lasting impact on their future prospects

2. Social Costs of Unemployment

Rising unemployment is l inked to social deprivation leading to negative externalities. Tanzania has suffered from high rates of

crime such as theft, murder and larceny for several years due to the frustration of youths unable to find employment. Tanzania

recorded

Policies to reduce Unemployment-Solutions

1. Macroeconomic policies: policies that affect the economy as a whole with the aim of minimising fluctuation in the business cycle also referred to as demand management or counter cyclical policies

a. Fiscal policy: one of the macroeconomic policies which can influence resources allocation, redistribution income and reduce the

fluctuation of the business cycle, by varying the amount of government spending and revenue, the government can alter the

economic activity, which will influence the economic growth, inflation, unemployment and the external indicators in the economy.

b. Monetary Policy: Is macroeconomic policy which involves action by the Central Bank, on behalf the government, to influence

the cost and availability of money and credit in the economy. It is used to smooth the effects of fluctuation in the business cycle

and influence the level of economic activity, output, employment and price. Used as a long term policy aimed to keeping inflation

low, providing an attractive environment for investment and employment growth.

-Once the Central Bank believes there is a stable low inflation, which will have a greater range for reducing the interest rate to

lower the unemployment rate. If the c entral bank feels that the level of unemployment is approaching the natural rate, they will

tighten monetary policy to prevent excessive spending feeding into higher prices and wages.

3. Labor Market reform is by using labour market programmes to improve the flexibility of the labour market to reduce structural

unemployment. It can increase the labour productivity, control cost increases and improve flexibility in the supply of the la bour

market.

1. Microeconomic reform: is the government improving the resource allocation between firms and indus tries, in order to

maximise output and seeking to improve the efficiency and productivity of producer.

a. Supply side policies

i . Reducing occupational immobility of labour

These figures are not

based on data

pertaining to Tanzania

and are not actual

graphs but are

illustrations to

supplement the text.

11 Immobility of labour is a cause of labour market failure and structural unemployment. Policies aimed at reducing this problem aim

to provide the unemployed with the skills they need to find re-employment and also to improve the incentives to find work.

Improvements in the availability and quality of education and work-place training will increase the human capital of unemployed

workers and ensure that more of the unemployed have the right skills to take up the available job opportunities. The free-rider

problem may also contribute to a sub-optimal level of training from society’s point of vi ew.

ii . Benefit and tax reforms

Providing incentives to find work through benefit and tax reforms, a policy that reduces the real value of welfare benefits might

increase the incentive for the unemployed to take a job.

Targeted measures to improve people’s incentives, including the linking of welfare benefits to participation in genuine work

experience programmes or the introduction of lower marginal income tax rates for people on low incomes might by con trast have

a noticeable impact.

Demand-side policies

i . Reflating the economy would lead to greater demand for labour

The government could use macro-economic policies to increase Aggregate Demand and thereby generate a higher level of

national income and employment. The government might also make more active use of policies to encourage inflows of foreign

investment from multinational companies particularly to those areas and regions where unemployment is persistently high.

ii . Regional policies would increase demand for labour in those regions

Firms who relocate to areas of high unemployment can be offered tax breaks and favorable investment opportunities

ii . Employment subsidies

Government could give subsidies for businesses that take on the long-term unemployed or a greater number of unemployed in

the most backward regions

The government can also consider tax breaks on investment in new machinery, research and development and setting up new

businesses to give impetus to new businesses and products to enter the market.

Multi-sectoral approach

The government must attempt reforms in a holistic approach, combating AIDS, unemployment and inflation together and not one by one.

Certain practices unique to Tanzania must be strongly discouraged

- A single person holding multiple paid jobs - Professionals jumping from one industry to another without experience or training.

Reform wages, many youths paid only what is enough to pay for food and transport, poor quality of life, low motivation.

12

Macroeconomic Difficulty 2: Rapidly increasing Fiscal Deficit

Current Fiscal Trends Threaten Fiscal Sust ainability

The rapidly increasing fiscal deficit has been financed with increasingly expensive resources.

The deficit (excluding grants) rose from 1 percent of GDP in 2007/08 to 6.9 percent of GDP in 2009/10. Financing bec ame less concessional, shifting from mostly grants to more use of (concessional) foreign loans as well as (non-concessional) domestic financing. Maintaining current policies could increase the deficit by some 3 to 4 percentage points of GDP by mid-decade. The widening deficit would become increasingly costly to finance. Shallow local capital markets limit the scope for domestic fina ncing,

increasing reliance on non-concessional external financing. As a result, public debt would rise rapidly to 66 percent of GDP in 2014/15. Debt servicing costs would grow concomitantly. Alternatively, keeping borrowing near current levels would require sizeable changes in revenue and spending policies. A projected deceleration in overall foreign aid in coming years is making the

finding of solutions more urgent. 1. With rapid population growth, demand for public services is expanding, particularly in the social and infrastructure areas.

Without explicit policy action, however, revenue growth can be expected to lag behind. The authorities agreed that with little

prospects of increases in foreign aid, maintaining fiscal balance would call for an in-depth reassessment of the current fiscal policy

framework. Government revenue and spending trends

2. Tax revenues have stalled . After years of gains, they have stabilized near 15 percent of GDP, well below potential. Limited

progress has been made to bring the informal sector into the tax base and several budgeted tax reforms have been postponed.

The growing mining sector has so far had little net fiscal impact and this is unlikely to change in the coming years, partly because

of large embedded tax holidays.

3. The authorities implemented major revenue-enhancing reforms over the last decade. In tax administration, a common

taxpayer identification number was introduced, the VAT registration threshold was raised, and a Large Taxpayers Unit created.

Electronic fiscal devices were recently introduced to reduce VAT evasion. The customs department was modernized and risk

assessment improved. In tax policy, the number of brackets of the personal income tax was reduced and the top rate cut to

equate it with the corporate income tax rate. VAT loopholes were minimized and excise rates automatically adjusted to inflati on.

The reforms improved the business climate by reducing red tape in paying taxes and raised annual tax revenue by about 6

percentage points of GDP.

4. Progress has stalled in recent years, and tax revenues have remained broadly unchanged as a share of GDP over the last four

years. The emphasis has shifted to administrative measures which, however, face decreasing returns over time. Efforts to reduce

some tax exemptions ran into stiff opposition and were not successful.

5. Tax exemptions are not well monitored and cost the government 3½ percent of GDP per year. Room exists to reduce VAT,

import duty, and excise tax exemptions and exercise more rigorous control over them.

6. Revenues from the (mostly gold) mining sector are relatively small. Annual gold exports have risen from US$ ½ bil lion to US$

1½ billion (7 percent of GDP) in the last five years due to the rise in the price of gold. Meanwhile, government revenues fro m

major gold mining companies have remained at around US$ 100 million a year (½ percent of GDP). They comprise mainly taxes on

wages and some royalties as the terms of the 1998 mining act and agreements with mining companies have provided significant

corporate income tax holidays. As a result, none of the existing gold projects have paid material income tax to date.

7. Expenditures are rising. They are largely driven by current outlays, which increased from 14.9 percent of GDP in 2007/08 to

18.8 percent of GDP two years later. This partly reflects the counter -cyclical response to the global financial crisis. However, even

before the rec ent stimulus package current spending was rising.

8. Wages have doubled relative to GDP over the last decade and now absorb 40 percent of tax revenue. The increase is due to a

combination of salary hikes and new hires, including in the social sectors. The wage bill does not capture the full cost of public

compensation, as per diems, allowances, and pension contributions are reported under “other” goods and services, and in some

cases wages are included in investment spending. Pressures on the wage bil l are expected to continue given the need to recruit

additional teachers and health workers to build on recent gains in education and health.

13 9. The high level of current spending is crowding out investment. Current outlays, which typically get funded first, exceed the

reliable revenue sources (external budget support and domestic revenue) by over 20 percent. As a result, domestically - inanced

investment depends on the remaining, less stable resources, which leaves it vulnerable to unexpected, cost-increasing, cutbacks.

10. The cash budgeting system has not prevented the emergence of domestic arrears. Recent budgets were based on overly

optimistic revenue projections that provided more spending room than was actually available. A shortage of resources combined with a high level of non-discretionary spending reduced space for short-term borrowing and insufficient commitment controls led to the accumulation of domestic arrears in early 2010/11.over a number of years, there would be strong benefits in ini tiating the effort with the 2011/12 budget, to raise public awareness and bolster credibility. The authorities broadly agreed with this

approach and indicated that they will begin work to obtain the political support that is needed for f iscal restraint.

Policies to control Fiscal Deficit -- Solutions

1. There is scope for reducing and streamlining current spending. The 2009/10 fiscal stimulus needs to be unwound and spending on goods and services brought to their pre-crisis level, which was

several percentage points of GDP lower. Existing subsidies (such as transfers to higher education students, subsidies to utility

companies and to agricultural producers) could be better targeted. In addition, the growth in the wage bil l must be stabilized

while providing space for recruitments in social sectors. Determined efforts to increase spending efficiency, including for

investment projects, are needed to make room for necessary expenditures within the spending envelope. The authorities agreed

on the direction of the needed changes. They indicated that a number of task forces have been established, including for example

on wage policy, but have not yet reached final conclusions.

2. Settlement of tax disputes with existing gold mines With continued high gold prices, about ¼ percent of GDP in annual income tax may begin to be collected in the coming years from

existing gold mines, and after mid-decade this may rise to perhaps ¾ percent of GDP. However, net increases in revenue will be

relatively small in the near term because of the offsetting impact of accumulated VAT and fuel tax refund claims. Stepped -up

efforts to bring to resolution past—and highly contentious—tax disputes with existing gold mines, together with improvements in

mining tax administration, as per the commendations of recent TA, could generate some additional revenue. A new mining act

was passed in 2010 but existing gold mines remain governed by their respective agreements.

3. The tax base could be expanded and excise tax rates raised. Exemptions have unduly multiplied, particularly for the VAT, and could be usefully scaled down. The authorities noted they were

aware of the issue but had run into political difficulties when attempting to curtail exemptions. They indicated they were th erefore

putting the onus on tax administration reforms. Staff agreed there was scope for tighter enforcement of current tax laws, but

noted that the yield would likely be diminishing after several years of advances in this area. The authorities indicated they would

carefully study the recommendations of recent IMF TA on tax policy, which detailed the scope for reducing exemptions, suggested

room for raising excise tax rates, and explored options regarding mining taxation.

4. Stronger budget procedures could increase the effectiveness of the cash budgeting system.

The emergence of domestic arrears was a sign of its limitations and that a more realistic budget was needed to avoid

overburdening it. The authorities are studying the recommendations of recent IMF TA to strengthen their cash-budgeting

operations.

5. Public investment management could be strengthened to improve prioritization. The authorities envision developing a medium-term investment plan, setting up a capital projects database, and establishing a

capital investment unit in the Ministry of Finance. Staff welcomed these intended reforms and added that the institutional

responsibilities for project appraisal had to be clarified, with the Ministry of Finance retaining a gatekeeper role.

6. Domestic resource mobilization has significant room for improvement. It is estimated that actual revenue collection (on the basis of the existing tax structure) fell short of potential by an estimated 6

percent of GDP in 2008, compared to a shortfall of 2 percent of GDP in Kenya.1Tan zania’s tax performance lags behind

comparators in nearly all categories: corporate income tax collection is only half as good as in the rest of sub -Saharan Africa, VAT

compliance is substantially lower, and excise tax rates are lower than in other EAC countries.

14

REFERENCES

http://allafrica.com

http://web.worldbank.org

http://imf.org

http://tradingeconomics.com

http://tutor2u.net

http://economywatch.com

http://tic.co.tz

http://africaneconomicoutlook.org

http://usaid.gov

http://unstats.org

http://www.tanzania.go.tz

http://wikipedia.com

http://www.nbs.go.tz/ ( National Bureau of Statistics Tanzania)

http://www.tsed.org/ ( Tanzania Socio-Economic Database)

http://www.bot-tz.org/ ( Bank of Tanzania)

http://www.imf.org ( International Monetary Fund)

http://elibrary-data.imf.org/ ( IMF e-Library)

http://www.ilo.org/global/statistics-and-databases/

(International Labor Organisation - Statistics and Database)

http://www.economist.com (Economist)

http://www.mof.go.tz/ ( Ministry of Finance - Tanzania)