?dQ[XR3XbR[^bdaT0dcW^aXiTS ?dQ[XR3XbR[^bdaT0dcW^aXiTS ?dQ[XR3XbR[^bdaT0dcW^aXiTS ?dQ[XR3XbR[^bdaT0dcW^aXiTS THE WORLD BANK GROUP 05A820A468>=<02A>42>=><82B0=358B20;<0=064<4=C JULY 2015  ISSUE 7 http://www.worldbank.org/tanzania/economicupdate The unavoidable need to ½ The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region 97720 RERGI Why Should Tanzanians Pay Taxes? IGSRSQMGHIZIPSTQIRX TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N PAGE http://www.worldbank.org/tanzania/economicupdate b The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Table of Contents Foreword.....................................................................................................v Abbreviations and acronyms................................................................ vii Acknowledgment .................................................................................. viii Key Messages ........................................................................................... ix PART I: The State of the Economy .......................................................... 1 1.1 Recent Developments ............................................................................................... 3 1.2 Outlook: Managing stability in a volatile environment .................................... 13 1.3 Finding new ways to finance Tanzania’s future development .........................17 PART II: Why Tanzanians should be paying taxes ...............................21 2.1 Tanzania needs to collect more tax .....................................................................23 2.2 A brief assessment of Tanzania’s tax performance ..........................................26 2.3 A comprehensive approach ...................................................................................33 Statistical Annexes ................................................................................ 49 1 Key macroeconomic indicators 2010-14 .............................................................50 2 Real GDP growth rates ........................................................................................... 51 3 Shares of economic activity in GDP .....................................................................52 4 Fiscal framework .....................................................................................................53 5 Balance of payments ..............................................................................................53 6 Monthly imports of goods and services .............................................................54 7 Monthly exports of hoods and services ..............................................................54 8 Inflation rates ...........................................................................................................55 9 Monthly food crop prices ......................................................................................56 10 Average wholesale prices ......................................................................................57 11 Interest rate structures ...........................................................................................58 12 Monetary aggregates ............................................................................................59 13 National debt developments .................................................................................60 14 Poverty by geographic regions.............................................................................. 61 15 Tanzania mainland tax revenue collection ` .......................................................62 PAGE http://www.worldbank.org/tanzania/economicupdate i TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N List of Figures Figure 1: Tanzania: The fastest growing economy in EAC ................................................. 4 Figure 2: Tanzania’s sector growth rates in 2014................................................................. 4 Figure 3: Declining inflation...................................................................................................... 5 Figure 4: The Shilling has lost value against almost all major currencies .................... 5 Figure 5: Accelerated depreciation of the weighted nominal and real effective exchange rates in recent months ........................................................................................... 5 Figure 6: Stable international reserves and current account deficit ................................ 7 Figure 7: Stable trade flows but significant shift in their composition between 2013 and 2014 ........................................................................................................... 8 Figure 8: Businesses cost structure determines the impact of ower transport and energy costs.......................................................................................... 10 Figure 9: Stable fiscal deficit ..................................................................................................11 Figure 10: Weak tax performance leads to slower execution rate of spending ............11 Figure 11: Sustained low monetary growth since 2011, stable nominal interest rates, and rising real interest rates ............................................. 12 Figure 12: Composition of monetary growth has shifted towards credit growth to government ............................................................................................................ 12 Figure 13: Slowdown in the increase of public expenditures… ...................................... 18 Figure 14: Caused by weaker revenue performance and lower aid inflows.................. 18 Figure 15: Tanzania’s revenue collection effort is low even adjusted for its per capita income ........................................................................................................24 Figure 16: Average dependence on domestic revenue to finance public spending ...24 Figure 17: Slow improvement in tax collection...................................................................27 Figure 18: The structure of the Tanzanian tax system differs from other low income countries ...................................................................................................27 Figure 19: VAT yields are one of the worst in the world ..................................................28 Figure 20: Sector concentration of VAT collection on domestic transactions .............29 Figure 21: Yield of import duties is at the bottom of the continent .............................30 Figure 22: Regional concentration on Dar es Salaam ...................................................... 31 Figure 23: Why Tanzanians do not pay taxes.....................................................................34 Figure 24: Lower corporate income tax can boost growth .............................................39 PAGE http://www.worldbank.org/tanzania/economicupdate ii The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region List of Tables Table 1: Nominal price indices, actual and forecasts ........................................................ 14 Table 2: Macroeconomic projections ...................................................................................15 List of Boxes Box 1: The pulse of the economy ........................................................................................... 6 Box 2: How can the private sector help deliver public goods..........................................25 Box 3: The cost of a misunderstood VAT ............................................................................32 Box 4: Psychology is key in tax matters ...............................................................................40 Box 5: Do the benefits from tax incentives outweigh the costs in Tanzania? .............42 Box 6: Potential to tax more real property...........................................................................43 Box 7: Prizes for paying taxes, can a lottery incentivize tax payment? .........................44 Box 8: Publish what you pay ..................................................................................................46 PAGE http://www.worldbank.org/tanzania/economicupdate iii TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N PAGE http://www.worldbank.org/tanzania/economicupdate iv The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Foreword Few of us like to pay taxes. Yet, every public services do not produce the revenue day we travel on roads funded by the streams that can make the services government; we depend on hospitals, on commercially viable. And establishing the justice system and on many other public-private partnerships to finance services receiving public funds. Of course, development on a large scale will take time we have the right to complain about issues as there are many remaining deficiencies in of quality regarding public services. Any the legal and regulatory framework. There Government should be able to guarantee is also strong resistance related to ideology that tax payer money is used efficiently and political factors. In any case, it is clear and transparently. While efforts continue that improving the public sector’s capacity to improve quality and efficiency of public to deliver will require improved efficiency services, all of us have to do our share and in public spending, as well as higher tax pay our taxes. revenues. This seventh economic update goes to the The argument presented in this Economic heart of one of the main challenges faced Update is that higher tax revenues will by Tanzania: how can the country finance come only if a comprehensive approach its development? This is a fundamental is adopted. The tax system has to be question when aid is coming down as a affordable, fair, simple, and transparent. proportion of a growing GDP, and as access The government also has to be accountable to financial markets remains limited. One for the money it is receiving. It is only option would be to rely more on the private when these basic conditions are met that sector to deliver education, health, roads, tax compliance will increase. Because a ports and electricity. This is possible as strong social contract between the State demonstrated by many such experiences and its citizens is not yet sufficiently in around the world, and therefore this place in Tanzania, a number of suggestions approach needs to be one important part are proposed in the Update, with the of the solution to finance development. objective of stimulating debate on possible But it cannot be the only answer as many approaches to increase tax revenue. PAGE http://www.worldbank.org/tanzania/economicupdate v TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N The question of how to finance Tanzania’s the Government than to raise domestic economic development has become even revenues. Succeeding in raising revenues more pressing in recent times. Lower than will help the authorities to meet their projected tax revenue and reduced aid financial responsibilities as well as to inflows have forced the government to find the fiscal space to make productive cut its ambitious spending plans. A large investments and to address the needs of amount of arrears has been accumulated all Tanzanians. and their payment, partly through bonds, will increase the Government’s debt Philippe Dongier service in the coming years. To address Country Director for Tanzania, Uganda and these issues, there is no other option for Burundi PAGE http://www.worldbank.org/tanzania/economicupdate vi The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Abbreviations and acronyms AfDB African Development Bank ATAF African Tax Administration Forum BBC British Broadcasting Corporation BoT Bank of Tanzania BRELA Business Registrations and Licensing Agency BRN Big Results Now BTU British thermal unit DAWASCO Dar es salaam Water and Sewerage Corporation DRC Democratic Republic of the Congo EAC East African Community EFDs Electronic Fiscal Devices EITI Extractives Industries Transparency Initiative FDI Foreign Direct Investment GBP Great British Pound GDP Gross Domestic Product HMRC Her Majesty’s Revenue and Customs HMT Her Majesty’s Treasury IMF International Monetary Fund IPTL Independent Power Tanzania Limited LGAs Local Government Authority LNG Liquefied Natural Gas MoF Ministry of Finance NBS National Bureau of Statistics PAYE Pay As You Earn PER Public Expenditure Review PMORALG Prime Minister’s Office Regional Administration and Local Government PPPs Public-Private Partnerships PSPF Public Service Pension Fund TANESCO Tanzania Electrical Supply Company TRA Tanzania Revenue Authority TZS Tanzanian Shilling UDSM University of Dar es Salaam UK United Kingdom US United States USA United States of America USD United States Dollars VAT Value Added Tax WITS World Integrated Trade Solutions PAGE http://www.worldbank.org/tanzania/economicupdate vii TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Acknowledgment This seventh edition of the Tanzania Economic Update was prepared by Mahjabeen Haji (part 1) and Victoria Cunningham (part 2) under the supervision of Jacques Morisset. The authors acknowledge the contributions of Emmanuel A. Mungunasi, Yutaka Yoshino, and Chiara Bronchi; and comments by the IMF Tanzania team, led by Hervé Joly. The report benefited from the insights of Blanca Moreno-Dodson and Marijn Verhoeven. The team received guidance from Albert Zeufack and Philippe Dongier. Irfan Kortschak edited the report, while Justina Kajange provided invaluable assistance during its preparation. PAGE http://www.worldbank.org/tanzania/economicupdate viii The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Key messages Paying taxes lies at the heart of the equivalent of approximately 12 percent fiscal contract between the State and its of GDP. The low level of tax revenue citizens. It is an individual decision for collection reflects systemic issues in policy each taxpayer who will balance her or his and administration. It also has serious incentives and costs to comply with the implications for Tanzania’s economic law. It is also a collective decision that will future. Tax revenues are currently too low to ultimately determine the Government’s finance the country’s ambitious, but vitally capacity to deliver public goods, including necessary, public investment program. At infrastructure and social services. There the same time, other sources of financing is no blue print on how to balance these are increasingly limited, particularly with decisions as tax collection efforts and the decline in the value of aid inflows and policy vary significantly around the world, with the limited availability of loans from even between countries with similar the private sector. income levels. All countries need to secure a source A set of simple rules, based on common of funding to finance their economic sense, can be used to evaluate the quality development. While governments may of a tax system. First, the system should access a range of different sources of be perceived as fair, affordable and funding, depending on the role of State transparent by taxpayers. Second, the level and the availability of alternative sources of tax revenues should be sufficient for of funding in each economy, raising tax the State to satisfy the current and future revenues is unavoidable for all except, needs of its citizens. On both of these two perhaps, a small handful of extremely counts, Tanzania might not be passing the resource rich states. In light of recent bar. economic developments and in light of the growing demand for infrastructure and In spite of progress during the late social services, it appears that Tanzania 2000s, the current level of tax revenues must make significantly greater efforts to in Tanzania remains extremely low, at the improve its tax collection performance. PAGE http://www.worldbank.org/tanzania/economicupdate ix TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Part 1: The State of the Economy so far, partly reversing the trend observed since 2011, proving the resilience of the The Tanzanian economy continues to Tanzanian economy to external shocks. remain on a positive trajectory, with a high rate of growth and a low rate of inflation. However, domestic fiscal challenges Over the past year, the rate of economic are becoming increasingly significant. growth has remained in the range of Due to Tanzania’s worse than expected seven percent, while the rate of inflation performance in tax collection, the has stabilized at around five percent. The Government has made the decision to overall external balance was maintained reduce expenditure compared to the in spite of a decline of about 10 percent in approved budget. By this means, it hopes the level of reserves, with the Government to limit the overall deficit to the equivalent expecting to limit its fiscal deficit to the of 3.8-4.0 percent of GDP by the end of equivalent of 3.8-4.0 percent of GDP by the the current fiscal year. This reduction end of the fiscal year 2015. in expenditure, by the equivalent of approximately two percent of GDP, still Tanzania has maintained a high level of represents a slight increase compared to the economic stability over the past decade. level of expenditures reported in 2013/14, It has maintained this stability despite the but it includes significant cuts to planned volatile international context, characterized investment projects and to transfers to by huge fluctuations in commodity prices local governments. As in the recent past, and exchange rates. As a net oil importer, arrears with contractors and pension the sharp decline in oil prices has reduced funds may increase. These pressures the country’s energy import bill. This need to be addressed in a politically decline initially transmitted into lower local charged environment, with national energy prices but the recent depreciation elections scheduled for October 2015. of the local currency has reversed this trend. As of June 2015, electricity tariffs The short to medium term prospects for had declined by two percent, while the the Tanzanian economy remain positive, price of gasoline, kerosene and diesel is pending the absence of further major about 15 percent less than a year ago. So changes in world commodity prices. It far, the fluctuations in other commodity is also necessary for the Government to prices has had a net neutral effect on continue to commit to fiscal sustainability the trade balance, with some increases and monetary prudence. If these conditions (for example, cashew nuts) being offset are met, the economy should continue to by some declines (coffee, tea). While the grow at approximately its current rate of local currency has lost value, the real seven percent per year, with an inflation depreciation has remained relatively limited rate of approximately five percent. In the PAGE http://www.worldbank.org/tanzania/economicupdate x The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region next two years, the current account deficit 2012/13. In addition, the Government has is projected to remain at the equivalent of accumulated massive arrears over the past around 9-10 percent of GDP, with no major few years, including in 2013/14 and in changes in capital inflows except for the 2014/15. The plan is to pay those arrears continuing shift from aid to private capital, through the issuance of domestic bonds. including a mix of non-concessional This will clarify the situation but contribute borrowing and foreign direct investment. to a large increase in the Government’s The fiscal deficit is projected to reach a debt-service, from 14 percent of domestic value in the range of 4.2 percent of GDP revenues in 2014/15 to over 22 percent in in 2015/16 and then 3.5 percent of GDP 2015/16 onwards. This extra-burden on in 2016/17, at which levels debt and debt the Government’s finances calls for a close servicing will remain sustainable. monitoring of the fiscal situation. The Tanzanian economy is not immune to Tanzania’s recent fiscal challenges reflect external shocks. The wrong combination of the deep change in the country’s public variations in world commodity prices could finances over the past few years. During impact negatively on the country’s trade the 2000s, the Government was able to balance. For example, given Tanzania’s increase the real value of its spending by position as a net exporter of gold and a an average of approximately 13 percent net importer of oil, the economy would per year, with these increases being made doubtless suffer as a result of lower gold possible by sustained growth in the value of prices combined with higher oil prices. external aid and by improved tax collection. Regional instability could also have a The subsequent deceleration in these two negative impact on the recent expansion sources of financing has led to a slower of the manufacturing export sector to rate of increase in public expenditures, neighboring countries and on the tourism with these expenditures increasing by an industry. Sustained low energy prices on average annual rate of only three percent world markets could affect the decision of in the period from 2010/11 and 2013/14. multinationals to invest in the natural gas This is insufficient to sustain the needs sector. of a rapidly expanding population. In addition to measures to improve revenue On the domestic front, the Government’s collection, it is also necessary to improve commitment to fiscal sustainability may the efficiency of public expenditures to come under further pressure. Already, in improve outcomes. the past two years, the authorities have faced difficulties meeting their target for Tanzania will ultimately have to find a means the overall fiscal deficit, with this target to finance its economic development with being missed by almost one percent in its own revenues, which means improving PAGE http://www.worldbank.org/tanzania/economicupdate xi TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N tax collection. In spite of recent efforts, them as burdensome, unfair and lacking in Tanzania’s record in this regard remains transparency. one of the worst in the world. To meet these three challenges, Tanzania Part 2: Why should Tanzanians pay will need to implement bold and innovative more Taxes? actions that go beyond the traditional administrative measures. Tanzania currently collects approximately USD 6 billion in tax revenues per year, a This adaptation should go in three figure equivalent to around 12 percent of directions: its GDP. This covers approximately three 1. The system must be affordable. quarters of the Government’s expenses. The actual cost of paying taxes is higher This is insufficient, particularly when other than on paper as demonstrated by sources of funding, such as foreign inflows, Tanzania’s poor ranking in the “ease are declining, or limited, such as borrowing of paying taxes” indicator in the World and private sector finance. Bank’s Doing Business survey. Here, the solution is to simplify the system. Tanzania Tanzania’s need for funds is projected to should streamline the numerous small increase dramatically in the coming years, taxes, which impose a high burden on partly due to its rapidly growing population. businesses without corresponding gains To illustrate this, if Tanzania aims to achieve to government revenues. The Government a secondary school registration rate of 60 must also reduce the use of tax exemptions. percent by 2020 and if the current cost of The explosion in the use of mobile devices schooling an individual student remains represents a great opportunity for tax constant, Tanzania’s annual secondary authorities to use accessible, cost-effective school budget will need to double. systems for taxpayers to make payments. Thus, Tanzania, like other low-income Once transaction costs are reduced, tax countries, must intensify its tax compliance should improve resulting revenue collection efforts. Tax collection in higher revenues. With improved performance is obviously linked to compliance, lowering existing statutory prosperity, with a strong correlation rates could be explored as an option to between tax revenues and GDP per capita. promote the development of private sector However, even countries with high rates of activities and so increase the number of poverty can improve their performance in taxpayers in the country. Such a strategy this area if a strong fiscal contract exists has been adopted by some emerging between the state and citizens. A recent countries but should be carefully evaluated survey indicates that many Tanzanians are given the risk for the Tanzanian Government reluctant to pay taxes because they see of losing tax revenues in the short-term. PAGE http://www.worldbank.org/tanzania/economicupdate xii The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region 2. The system must be perceived private sector can play a role. Some major as fair telecom companies in Tanzania have In particular, it is necessary to broaden announced that they will voluntarily publish the tax base. In Tanzania, close to 90 full details of their tax payments. Such a percent of tax revenues are generated by level of transparency should be mandatory Dar-es-Salaam, yet the city contributes to for all public enterprises and agencies. less than 20 percent of the national GDP. The successful Extractive Industries Almost half of Tanzanian VAT revenues Transparency Initiative could be replicated on domestic transactions are collected in other sectors, especially in those from three sectors (telecommunications, dominated by a few operators, such as beverages, and cigarettes). There is a the tourism, finance and communications huge imbalance between the taxation on sectors. labor and capital income. Tax collection should be diversified to under-taxed The implementation of these actions sectors and regions. Property taxes should may test the Government’s political be appropriately used not just to boost commitment. Without doubt, if government revenues but also to improve the measures described above are land management. Smart innovations implemented appropriately, there will be can also modify taxpayers’ behavior. The winners and losers. While these actions introduction of a so-called tax lottery, will provide gains for Tanzania as a whole, where the tax receipt is also a lottery ticket those gains may occur to the detriment of politically powerful vested interests. making the holder eligible for attractive This may make implementation politically prizes, has been successful in China and challenging. Mauritius. Similarly, public recognition of high tax payers can also incentivize Political commitment is essential for tax payment. Of course, stronger and effective reforms to be implemented and sustained. sanctions against tax evaders are also While securing this commitment will by vitally necessary. no means be easy, it is vital if Tanzania is 3. The system must be transparent. to secure the funds it needs to work with The Government needs to publish the private sector to finance economic and comprehensive, accessible reports on social development for the benefit of all its its tax collection efforts. In this area, the citizens. PAGE http://www.worldbank.org/tanzania/economicupdate xiii TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N PAGE http://www.worldbank.org/tanzania/economicupdate xiv The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region 1 The State of the Economy PAGE http://www.worldbank.org/tanzania/economicupdate 1 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Part I: The State of the Economy „ In spite of volatile world commodity prices and increasing fiscal pressures, Tanzania’s economy remains strong, with relatively rapid growth (7 percent); low inflation (around 5 percent); and a stable current account deficit. „ However, the Government has had to reduce its expenditure by the equivalent of approximately two percent of GDP relative to the level approved in its 2014/15 budget. The Government also needs to address significant accumulated arrears with contractors and pension funds. It should aim to achieve this by injecting funds and issuing bonds. „ Prospects for the economy in the short to medium term remain positive. However, the Government must remain committed to fiscal sustainability and monetary prudence. With the national elections scheduled for October 2015, this may become increasingly challenging. „ The gradual decline in the value of aid inflows and the weaker tax collection performance have led to a sharp decrease in the expansion of real public expenditure. The growth rate of expenditure has declined from an average of 13 percent per year during the 2000s to 3 percent since 2010/11. The Government must find new ways to finance vitally necessary economic development. One means by which it may achieve this is through improved tax revenue collection. PAGE http://www.worldbank.org/tanzania/economicupdate 2 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region 1.1 Recent Developments with the rate of growth remaining high and the rate of inflation remaining low. In fact, These are turbulent times for the global the decline in oil prices has generally had economy. World prices of crude oil – a positive impact on the local economy. perhaps the most important of all traded Tanzania is a net importer of oil products, goods – have fallen by about 43 percent so the decline in prices has resulted in a since June 2014. This volatility has had decline in the cost of its import bill. The a dramatic effect on the overall global magnitude of this impact will largely economy, impacting both oil importers depend on the manner in which global and exporters. Other commodities prices are transmitted to local prices and have also experienced a high level of on the period for which oil prices remain volatility, although to a lesser extent. low. In the immediate future, it is expected Major currencies have fluctuated beyond that the Tanzanian economy will continue expectations, with the Euro losing more to remain on the same positive trajectory than a quarter of its value relative to the as in recent years. However, if long-term US Dollar since the start of 2015. These investments in natural gas are affected changes are having significant effects on by lower oil prices, the long-term growth The primary developing economies around the world, prospects for Tanzania may shift course. threat to including those in Sub-Saharan Africa. In Tanzania’s particular, the volatility has had a significant The primary threat to Tanzania’s economy economy comes impact on the major oil exporting nations comes not from global turbulence, but not from global in the region, including Nigeria, Gabon from domestic issues. In particular, low turbulence, but and Angola. However, even countries that levels of revenue, lower than anticipated from domestic are less dependent on oil exports have aid inflows, and the accumulation of issues. been impacted, albeit to a lesser degree. arrears with contractors and pension funds It has been estimated that approximately have disturbing implications for Tanzania’s 90 percent of the continent’s economic fiscal stability. With these issues gaining activity will be negatively affected by the significance since 2012, the Government 1 current commodity price shock. has had to respond through significant cuts in expenditure, at least compared to How has the Tanzanian economy the targets indicated 2014/15 budget. This fared in this highly volatile context? has made it difficult for the Government to At least in the short term, it continues implement its ambitious investment plans, to perform relatively well. The stability despite the urgent need for investments of the Tanzanian economy has not been in infrastructure and social services. The significantly impacted by the recent factors driving monetary growth have turbulence in world commodity prices, also changed in the recent past, with an 1 World Bank, ‘The State of Africa’, April 2015. PAGE http://www.worldbank.org/tanzania/economicupdate 3 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N increase in the level of borrowing by the slightly from the year 2013, when the public sector. In this context, Tanzania communications and electricity sectors urgently needs to find innovative and were also amongst the most rapidly sustainable ways to finance its economic expanding sectors. In terms of contribution development. to GDP, the construction, trade, agriculture and transport sectors remained the most Despite external shocks, Tanzania’s significant contributors in 2014. On the economic trajectory remains stable demand side, the economy has continued Tanzania’s sustained economic growth, to be driven primarily by growth in private which stood at 7 percent in 2014, was consumption, followed by increases in the higher than that of any other EAC level of private investment. By contrast, In 2014, the sectors country (see Figure 1). In 2014, the the level of government consumption has with the highest sectors with the highest rate of growth declined substantially. The decrease in rate of growth were construction, transport and financial the value of the current account deficit in were construction, services (see Figure 2). The contribution 2014 compared to the previous year also transport and of the various sectors to growth varied contributed positively to growth. financial services. Figure 1: Tanzania: The fastest Figure 2: Tanzania’s sector growing economy in EAC growth rates in 2014 GDP Growth Source: Ministry of Finance, NBS and World Bank The rate of inflation has declined over the the implementation of prudent monetary past three years, dropping to 4.3 percent policy and of the recent decreases in in March 2015 but slightly increasing to global food and energy prices. The 5.3 percent in May 2015. This compares recent depreciation of the local currency favorably to the rate of more than 19 has however increased the cost of percent at the end of 2011. The steady imports and contributed to the slight decline in the rate of inflation (Figure 3) increase in the inflation rate in recent is largely due to the combined impact of weeks. PAGE http://www.worldbank.org/tanzania/economicupdate 4 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Figure 3: Declining inflation Source: BoT The value of the Tanzanian Shilling from January to April 2015. Since early May has depreciated sharply against the 2015, the Tanzanian shilling has lost value currencies of the country’s major trade against all media currencies, resulting in a partners over the past year, except for the nominal depreciation rate of approximately Since early Euro (Figure 4). Initially this depreciation 16 percent since March 2014 (Figure 5). The May 2015, the reflected the relative strength of the US real depreciation was about five percent Tanzanian shilling currency on international markets as well as between March 2014 and April 2015, as has lost value the decline in aid inflows. The depreciation the inflation differential between Tanzania against all media of the Tanzanian shilling was also partly and its major trade partners partially currencies, controlled by the Central Bank, which sold compensated for the decline in the nominal resulting in USD 500 million worth of international exchange rate. The recent depreciation of a nominal reserves (about 10 percent of the total the real exchange rate should help improve depreciation rate value of Tanzania’s reserves) in the period the competitiveness of Tanzanians exports. of approximately 16 percent since Figure 4: The Shilling has lost value Figure 5: Accelerated depreciation of against almost all major currencies the weighted nominal and real effective March 2014. exchange rates in recent months Source: World Bank, BoT PAGE http://www.worldbank.org/tanzania/economicupdate 5 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Box 1: The pulse of the economy The views of the business managers of the top 100 mid-sized companies in Tanzania have been collected every six months since April 2013. This data is collected by KPMG through electronic questionnaires and responses are anonymous. As of May 2015, only one third of managers evaluate that the economy is performing better this year than last year, while up to 43 percent report deterioration. Looking forward, only one-third are optimistic for the economy and their own businesses. How do you believe the Tanzanian economy is performing compared to last year? „ In May 2015, only 34 percent of managers believed than the economy performed better in the last 12 months that last year. „ The rate of unfavorable views rose by 9 percent between December 2014 and May 2015. How do you expect the Tanzanian economy in the coming year? „ In May 2015, 34 percent of managers expected the economy to perform better in 2015/16 than in 2014/15, against 55 percent in November 2013. „ As of May 2015, one-third of managers anticipated a deterioration of the economic performance over the next 12 months, up from 10 percent in November 2013. How do you think that your own business will perform during the next 12 months compared to its current level of performance? „ In November 2013, 85 percent of managers expected an improved performance of their company during the next 12 months. This rate fell to only 32 percent by May 2015. Source: KPMG/World Bank, November 2013 – May 2015. PAGE http://www.worldbank.org/tanzania/economicupdate 6 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region In spite of the fluctuations in international percent of GDP, largely due to a resumption exchange rates, Tanzania’s balance of of budget support after a slowdown in payments is expected to remain relatively disbursements at the beginning of the stable, at least in the short-term. The fiscal year.2 As in previous years, the value current account deficit is expected to decline of aid relative to private capital inflows (FDI to the equivalent of 9.5 percent of GDP in and public non-concessional borrowing) 2014/15, down from 10.9 percent in 2013/14 has continued to decline. The overall value (see Figure 6), with this decline being the of Tanzania’s international reserves is result of result of both stable exports and expected to remain at the level of around the low cost of energy imports. At the same USD 4.0-4.5 billion by the end of June 2015, time, the value of capital inflows should a level sufficient to finance the equivalent remain roughly stable, at the equivalent of 12 of approximately four months of imports. Figure 6: Stable international reserves and current account deficit The change in the composition of imports was largely due to the 15 percent decline in the energy import bill. Source: IMF, BoT However, despite the stability in the import bill (see Figure 7). At the same current account, there has been a time, the total value of exports increased significant shift in the composition of slightly by one percent over the same time both imports and exports. While the period. However, the composition of these total value of imported goods remained exports also changed, with the value of approximately constant from 2013 to the export of agricultural commodities 2014, the relative proportion of consumer declining by five percent and that of goods increased, while the proportion of minerals by 18 percent. By contrast, the intermediary goods declined. The change value of manufacturing exports and other in the composition of imports was largely exports increased by 16 percent and 33 due to the 15 percent decline in the energy percent respectively. 2 While project and basket support was maintained, budget support was temporarily suspended in the context of the corruption scandal that took place in the energy sector. After resolution by the Government, including the resignation of two Ministers and the Attorney General, donors decided to resume budget support in March 2015. PAGE http://www.worldbank.org/tanzania/economicupdate 7 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Figure 7: Stable trade flows but significant shift in their composition between 2013 and 2014 Change in Exports Change in Imports Source: BoT Note: ‘Other’ exports include: edible vegetables, oil seeds, cereals, cocoa, raw hides and skins, woods and articles thereof. In this context, the resilience of the imports accounting for approximately 15 Tanzanian economy can be explained percent of this parastatal’s total costs. by a combination of several factors. The sharp decline in international First, as stated above, the fluctuations oil prices has also been partially The decline in oil in commodity prices on international compensated for by the accelerated prices has had only markets have offset each other in terms of depreciation of the local currency with a limited impact on the impact on the country’s trade balance. respect to the US dollar and this has the Government Second, the decline in oil prices reduced the impact on local prices.4 The budget. Most taxes has had only a limited impact on transmission from global to local prices is imposed on oil are the Government budget. Most taxes affected by two main factors: first, there determined by unit imposed on oil are determined by unit is a lag in the period of transmission from quantity rather quantity rather than by value. 3 On the international to local oil prices due to than by value. other hand, lower imported oil prices will shipping and contracting times. Second, reduce the Government’s own energy a specific price formula (including a bill, which stands at approximately TZS constant term for taxes, levies and a fixed 11 billion per year. It will also improve retail mark-up) is applied to imported TANESCO’s financial situation, with fuel fuel for the conversion into local prices. 3 The increase in levies collected on diesel and fuel announced during the Budget Speech on June 11, 2015 will increase revenues for the Government. 4 Local prices of fuel and electricity are regulated by EWURA. PAGE http://www.worldbank.org/tanzania/economicupdate 8 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region This mitigates price volatility over time, as the poorest households, who spend up especially for local operators. As a result, to 10 percent of their monthly budget on the prices of gasoline and diesel have kerosene for cooking and lighting. But even only declined by 12 and 16 percent in the latter case, the 21 percent reduction respectively in the period from July 2014 in kerosene prices would only have resulted to June 2015, while the price of kerosene in a decline in total household costs of 5 fell by 21 percent. It should be noted that about two percent. electricity tariffs declined by only two The direct impact of lower energy prices percent during this period, with regulators has certainly been more significant for determining these tariffs on the basis of the business sector, at least in the case a number of considerations, including of businesses with high transportation Energy and exchange rate fluctuations, in addition to and electricity costs. For sectors such transport only oil prices. as horticulture and food processing, account for a The decline in the local prices of in which the cost of transportation small proportion energy-related products, while still is a significant component of total of total household significant, has had a relatively limited expenditure (see Figure 8), lower fuel expenditures for impact on most Tanzanian households. prices will result in savings. For example, the majority of The main reason for this limited impact a decline in fuel prices of 12 percent households. Less is that energy and transport only would lead to a potential reduction of than a quarter of account for a small proportion of total about 8 percent in the costs of operations the population household expenditures for the majority in the horticulture sector, where the cost has access to of households. Less than a quarter of the of transportation constitutes up to 75 electricity, while population has access to electricity, while percent of total costs. 6 Industries such the share of the share of transportation in the average as shipping, cement, steel and trucking transportation consumption basket is only 2.6 percent. In companies, where fuel is a direct and in the average fact, the impact of the decline is more likely significant cost, may also benefit from consumption to be felt by households at both extremes cost reductions. On the other hand, basket is only 2.6 of the economic scale. It may have had a industries such as communications and percent. more significant impact on the wealthiest services are not likely to be significantly households, who own private cars; as well affected by lower energy prices. 5 The lowest prices were reported in March 2015 but they rebounded as the result of the depreciation of the local currency and the slight increase in crude oil prices on international markets. The local price of gasoline increased by 19 percent between March and June 2015. 6 This assumes that fuel prices account for approximately 90 percent of transport costs. PAGE http://www.worldbank.org/tanzania/economicupdate 9 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Figure 8: Businesses cost structure determines the impact of lower transport and energy costs Source: World Bank calculations, MIGA Growing challenges in Fiscal and the corruption scandal in the energy sector. Monetary Policies To meet the fiscal objectives set out in the approved budget, the Government has Over the past few years, Tanzania cut public expenditure by the equivalent has increasingly faced challenges in of approximately two percent of GDP achieving its desired level of fiscal deficit. compared to the approved 2014/15 budget Concurrently, there has been a marked figures. However, the total value of executed change in the composition of monetary expenditures is still projected to be about This shortfall in growth, with a relative increase in the value four percent higher in real terms than revenues has been of credit to government and a relative it was in 2013/14. The Government has exacerbated by the decline in the value of net foreign assets. responded by slowing down the execution decline in the value Fiscal policy: The Government remains of public expenditure. This was done by of inflows of budget committed to an overall fiscal deficit of reducing both investment and non-wage support, with this the equivalent of 3.8-4 percent of GDP recurrent expenditures, including transfers decline being at for 2014/15. However, it has collected to local governments, who are responsible least partially significantly lower values of domestic for the delivery of most social services the result of the revenue than initially anticipated in the throughout the country. Although these corruption scandal approved budget. This shortfall in revenues cuts are necessary, they have reduced in the energy sector. has been exacerbated by the decline in the the Government’s capacity to deliver and value of inflows of budget support, with this expand public and social services and to decline being at least partially the result of develop necessary infrastructure. PAGE http://www.worldbank.org/tanzania/economicupdate 10 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region The Government has borrowed to value of arrears to suppliers stood at close compensate for the shortfall in domestic to TZS 2 trillion. With pressures resulting revenues and budget support. Total public from the upcoming scheduled elections, debt is projected to reach the equivalent the Government may face pressure to of 33 percent of GDP by the end of the accumulate an even greater value of current fiscal year, a slight increase from arrears. The vast majority of arrears have the figure of approximately 31 percent in been accumulated with road contractors 2010/11.7 The total cost of servicing public and pension funds. This situation is not debt now accounts for almost 14 percent sustainable, with the accumulation of The total cost of domestic revenues, compared to the arrears already affecting road construction of servicing figure of six percent in 2008/9. While these and leading to financial distress in a major public debt now figures are undeniably increasing, they are public pension fund (PSPF). To address accounts for still consistent with Tanzania’s objective of this issue, the Government has developed almost 14 percent remaining at low risk for debt distress. an arrears clearance strategy, which will of domestic involve a combination of cash injections The Government has also continued to revenues, and the issuance of a series of bonds. accumulate arrears. As of June 2014, the compared to the figure of six Figure 9: Stable fiscal deficit Figure 10: Weak tax performance leads to slower execution rate of spending percent in 2008/9. Source: MOF, World Bank Monetary policy: Over the past year, the In December 2014, the Central Bank annual growth rate of extended broad reduced the reserve requirements for money supply (M3) has remained relatively commercial banks from 10 to 8 percent. stable at approximately 13.6 percent in the This created a higher level of liquidity in the first quarter of 2015, accelerating slightly financial system. This measure was applied from an average rate of 12.9 percent in only temporarily, with a reversion to the the first quarter of 2014 (See Figure 11). original requirement in June 2015. 7 This figure does not include the expected conversion of arrears into debt through the issuance of bonds. This conversion will increase the public debt level by approximately five percent of GDP. PAGE http://www.worldbank.org/tanzania/economicupdate 11 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Figure 11: Sustained low monetary growth since 2011, stable nominal interest rates, and rising real interest rates Source: BoT, IMF The composition of monetary growth has to the first quarter of 2015. This compares changed over the past few months (See to an increase of 28 percent in the period Figure 12). While the rate of growth of M3 between the same points in 2013 and has remained relatively stable at around 15 2014. Over the same period, the rate of While the rate of percent, this growth is largely the result of expansion of credit to the private sector growth of M3 has a sharp increase in public borrowing, which has remained stable, at between 16 to 20 remained relatively was partly offset by the sale of international percent. This change in the composition stable at around 15 reserves. The total value of credit to the of monetary growth may lead to some percent, this growth Government increased by approximately crowding out of credit to the private sector is largely the result 50 percent from the first quarter of 2014 in the future. of a sharp increase in public borrowing, Figure 12: Composition of monetary growth has shifted towards credit growth to government which was partly offset by the sale of international reserves. Source: BoT, IMF PAGE http://www.worldbank.org/tanzania/economicupdate 12 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region With rising real interest rates and stable World Bank (see Table 1). It also assumes nominal rates, the cost of credit has that the Government remains committed steadily increased for the private sector to fiscal sustainability and monetary since 2012 (Figure 11). As in many prudence. If these assumptions hold true, developing countries, nominal lending the Tanzanian economy is forecast to grow interest rates in Tanzania appear to be at the rate of approximately seven percent relatively inelastic in the context of changes per year, with inflation stabilizing at an to monetary growth. As a matter of fact, annual rate of approximately 5 percent nominal interest rates have remained in the (see Table 2). As a matter of range of 14-17 percent since 2003, largely fact, nominal The main drivers of economic growth due to the limited level of competition interest rates have should continue to be the construction, between commercial banks, excessive remained in the communication, finance, and transport transaction costs, and a high level of risk. range of 14-17 sectors, with all of these sectors percent since 1.2 Outlook: Managing benefiting from increased urbanization 2003, largely due stability in a volatile and higher average living standards. to the limited level environment Sustained low international energy prices of competition will be gradually transmitted to local prices, Tanzania’s overall macroeconomic between reducing transport and energy costs for situation is not expected to change commercial Tanzanian businesses and households. dramatically in the short to medium banks, excessive However, the recent depreciation of the term. Sustained low international energy transaction costs, local currency with respect to the US prices may even stimulate economic and a high level of dollar has partly offset the initial decline. activity by reducing pressure on the local risk. The announcement by the Government currency as a result of a reduction in the of higher levies on fuel will also increase current account imbalance. However, the price of energy products locally. As a the country is not immune to further result, as stated in the previous section, volatility in the commodity markets and these impacts are not likely to be extremely may also be affected by regional instability. significant. Furthermore, the authorities are facing serious fiscal challenges that will be The current account deficit is expected difficult to address in the context of the to narrow as a result of low world oil upcoming elections. prices. The decline in the cost of imports of petroleum products should compensate Short to medium term prospects for the relative stagnation in total exports, The baseline scenario is built on the with the decline in the value of traditional assumption that world commodity exports expected to offset the increased prices will remain at their current levels value of manufacturing and services for the next two years, as forecast by the exports. The current account deficit will PAGE http://www.worldbank.org/tanzania/economicupdate 13 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N continue to be financed by a combination higher levies on fuel, and a series of of aid and private capital inflows, with the administrative reforms aimed at reducing value of the former continuing to decline tax exemptions and broadening the tax in proportion to the latter. The overall base. Increased tax revenues should level of international reserves should assist the Government to finance the remain relatively stable, increasing to wage bill, which is expected to increase approximately USD 5 billion in 2016/17. as a result of higher minimum wages and the need to hire more teachers and If the Government maintains fiscal health workers to meet the country’s control, the overall fiscal deficit is need for basic services. The level of projected to be approximately 4.2 capital expenditures is projected to The payment of percent of GDP in 2015/16 and fall remain stable in percentage of GDP. The arrears, financed to 3.5 percent of GDP in 2016/17. payment of arrears, financed through the through the This trajectory is consistent with issuance of a series of bonds in 2015/16, issuance of a series the Government’s commitment to will increase the deficit in 2015/16 and of bonds in 2015/16, maintaining fiscal sustainability and contribute to a jump in the Government’s will increase the stabilizing the debt to GDP ratio over time. debt level and debt servicing costs, which deficit in 2015/16 The authorities are expected to slightly are expected to reach the equivalent of and contribute increase their tax revenues through the 39 percent of GDP and 23 percent of to a jump in the implementation of the new VAT Act, total revenues by the end of 2016/17. Government’s debt level and debt Table 1: Nominal price indices, actual and forecasts (2010=100) servicing costs. PAGE http://www.worldbank.org/tanzania/economicupdate 14 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Table 2: Macroeconomic projections (% of revised GDP unless otherwise indicated) 2012/13 2013/14 2014/15 2015/16 2016/17 (p) (p) (p) Real GDP Growth (%) 6.2 7.3 7.1 7.1 7.1 Inflation (CPI, %) 7.6 6.3 5.0 5.0 5.0 Overall fiscal balance -5.0 -3.4 -4.0 -4.2 -3.5 Current account balance -10.3 -10.9 -9.5 -8.3 -8.0 Gross official reserves 4,357 4,634 4,265 4,600 4,950 (USD million) Source: World Bank External risks: Volatile commodity prices account, uncertainties around future and regional instability aid inflows might also create tensions, specifically if private capital inflows slowed The above projections assume that down as the result of higher borrowing external risks remain limited for costs on international markets. Tanzania. Although Tanzania has been Although relatively isolated from the recent In the medium to longer term, low oil Tanzania has been fluctuations in commodity prices, its and mineral prices may have a negative relatively isolated economy is not fully immune to future impact on the Tanzanian economy. The from the recent fluctuations as illustrated by the recent country is expecting massive foreign fluctuations in movements in the exchange rate markets. investment in its near-shore gas sector commodity prices, Of course, the increasing diversification of to take place in the medium term future. its economy exports, with the increasing significance of While a number of international oil is not fully manufacturing and services, has provided companies are currently negotiating with immune to future a welcome buffer. However, the wrong the Government, no final investment fluctuations as combination of commodity price volatility decisions are expected to be made before illustrated by the could result in a severely negative impact. 2016. If oil prices remain depressed over recent movements For example, a simultaneous increase the longer term, the investment plans in the exchange in oil prices and a decline in gold prices of multinational companies in the near- rate markets. would result in a serious trade imbalance. shore natural gas sector may be affected. Without further diversification, Tanzania’s While oil and gas prices are not fully linked, fate to some extent will be determined there is nonetheless a strong correlation by luck, since commodity prices are between these two prices, as liquefied determined exogenously and are almost natural gas (LNG) contracts are generally entirely outside the control of Tanzanian heavily indexed to oil prices. It is estimated policy makers. On the side of the capital that the construction of the LNG plant in PAGE http://www.worldbank.org/tanzania/economicupdate 15 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Tanzania will remain cost effective as long campaign and allocate an increasing share of as the price of gas remains above USD 10- its spending to cover its debt service. Given 12/mm BTU, which is equivalent to an oil the history of increased expenditure in pre- price of about USD 70-80/bbl. In the shorter election periods, this may be very difficult term, the decline in gas prices, and the to achieve. Revenue projections also need prospect of lower profits, may complicate to be realistic. In the last three approved the negotiations between the Government budgets, the authorities forecast large and potential investors. In the context increases in domestic revenues. In 2013/14 of lower commodity prices, a number of and 2014/15, revenue collection targets mining operators are considering scaling were missed by a wide margin. This forced down their activities across the world. subsequent cuts to public expenditure and Eventually, some mining operations may led to the increased accumulation of arrears. also be scaled back in Tanzania. In order to restore fiscal credibility, A further risk for Tanzania is regional the Government must clear arrears instability. Regional trade has been on accumulated with the private sector The Government the increase, accounting for 40 percent and pension funds. While the authorities will have to control of total exports in 2013, up from only 24 have acknowledged arrears to contractors its expenditure percent in 2009.8 This increase has played amounting to a value of USD400 million during the an important role in mitigating the impact and to pension funds to a value of USD700 election campaign of lower commodity prices on Tanzania’s million, it remains unclear how and when and allocate an exports. However, some neighboring these arrears will be settled. The envisaged increasing share of countries, such as Burundi, have been solution, which involves a combination its spending to cover suffering from political instability, while of cash injections and debt issuance, will its debt service. others, such as Uganda and DRC, have doubtless influence the fiscal framework. Given the history scheduled national elections. This may These arrears will not only absorb public of increased negatively impact Tanzania’s trade and its resources in the short-term, they will also expenditure in current account. increase the debt servicing costs of the pre-election Government into the future. Domestic risks: Fiscal slippages periods, this may be very difficult to The main risk for Tanzania is domestic There is a significant degree of achieve. fiscal challenges. The Government has uncertainty regarding the value of committed to maintaining its fiscal deficit liabilities and contingent liabilities at the equivalent of approximately three accumulated by the Government. At this percent of GDP in the coming years. However, stage, it remains unclear how arrears have to achieve this, the Government will have to accumulated between the Government control its expenditure during the election and contractors since June 2014. 8 World Integrated Trade Solution (WITS) database. PAGE http://www.worldbank.org/tanzania/economicupdate 16 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region The total value of arrears with pension from 32 percent of GDP in 2013/14 to 33 funds and the cost of future payments percent of GDP in 2014/15, the conversion to pre-1999 pensioners still need to be of existing arrears into debt will add finalized. There are also a number of another 6 percent of GDP to this level. contingent liabilities, such as the arrears The level of debt-service will also jumped accumulated by public enterprises. The from about 14 percent to over 22 percent value of the arrears accumulated by of Government’s revenues. Such a ratio is The recent the publicly-owned energy company high and will leave little flexibility in the slippage of (TANESCO) increased to USD 260 million in allocation of public resources within the Tanzania March 2015, after declining to approximately budget in the coming years. If Tanzania in several USD 175 million in September 2014. The wants to continue to be classified as a international financial situation of the water utility low debt distress country by the IMF and governance (DAWASCO) and of the Rural Electrification the World Bank, fiscal prudence, as well indicators Agency also remain unclear. as efficient debt management, will be suggests that it necessary in the coming years. is by no means In addition, there is uncertainty unlikely that 1.3 Finding new ways to regarding the level of budget support other corruption finance Tanzania’s future that the Government will receive in scandals will development the future. For example, the recent IPTL occur in the corruption scandal resulted in a decline future, which may The Government has played a critical role in this support. While donors have begun accelerate the in facilitating the growth performance to resume support, this episode illustrates decline in of the economy over the past decade. that the magnitude of external aid is external aid. Using simple growth accounting, the influenced by the quality of governance in public sector contributed to approximately Tanzania. The recent slippage of Tanzania one third of economic growth during the in several international governance 2000s. The most visible indicator of this indicators9 suggests that it is by no means contribution has been the steady increase unlikely that other corruption scandals will in the value of government expenditures, occur in the future, which may accelerate which have grown by an average of the decline in external aid. 13 percent per year in the period from So far, the Government has not borrowed 2000/01 to 2009/10. This expansion excessively on the domestic and has stimulated the economy which can international markets. It must continue to be explained largely in terms of simple resist the temptation to do so. While the Keynesian economics: increased public stock of public debt is projected to increase spending creates additional demand and 9 For example, Tanzania deteriorated from 92th to 119th in the ranking of Transparency International between 2006 and 2014. PAGE http://www.worldbank.org/tanzania/economicupdate 17 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N enhances economic activities through the shifted away from infrastructure and social multiplier effect. Furthermore, the increase services. For example, at the end of June in capital expenditure and in expenditure 2014, the development budget had an on the social sectors has helped to improve execution rate of 62 percent, with public the country’s stocks of infrastructure expenditure on development amounting and human capital, creating positive to the equivalent of only 4.8 percent of supply-side effects on the local economy. GDP, its lowest level in the last five years. This is in clear contradiction to the stated However, in recent years, fiscal policy objectives of the Big Results Now initiative, has been increasingly challenged. The which mandates increased expenditure average annual rate of expansion in public on capital development. Expenditure cuts Clearly, the public expenditure declined to a rate of three percent have also impacted the LGAs’ capacity to sector has not been in the period from 2010/11 to 2013/14.10 deliver social services, particularly in the as strong an engine Clearly, the public sector has not been as health and education sectors. The decline of growth as it was strong an engine of growth as it was in the in expenditure on these sectors reduces in the last decade. last decade. Not only has the expansion the country’s capacity to grow in the longer Not only has the in real public expenditure declined, but term.11 expansion in real the composition of the expenditure has public expenditure Figure 13: Slowdown in the increase of Figure 14: Caused by weaker revenue declined, but the public expenditures… performance and lower aid inflows composition of the expenditure has shifted away from infrastructure and social services. Source: IMF and World Bank Calculations 10 While there had been a sharp increase in real expenditures in 2012/13, it was realized at the expense of a larger fiscal deficit (the Government missed its fiscal target by almost one percent of GDP). If targets were met in 2012/13, the real increase in expenditures would have been only 7 percent instead of the reported 17 percent. 11 The share of LGA budgets allocated to non-salary recurrent spending has continued to decline in the 2014/15 budget. Only around 10 percent of the LGAs budget is projected to be spent on non-salary recurrent spending, which is less than half of what was spent in 2009/10 and 2010/11. PAGE http://www.worldbank.org/tanzania/economicupdate 18 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region The decline in the real rate of growth expected to again be significantly lower than of public expenditure has been caused initially anticipated. Such adjustments, while by a combination of two factors. Firstly, necessary to maintain fiscal sustainability as stated in previous sections, official aid over time, have not been cost free for the inflows are declining, while the Government’s Tanzanian economy. These adjustments performance in the collection of domestic have been implemented in a non-transparent revenue has weakened over time (See way, without parliamentary supervision, Figure 14). The value of external aid grew and have led to reduced spending on at an average annual rate of 20 percent infrastructure and social services. It has in the period from 2001/02 to 2007/08, also had a significant impact on planning, but decelerated by an annual rate of five with the prioritization of expenditure percent from 2008/09 onwards. While the being difficult when the budget envelope authorities were able to collect a higher changes within the course of the fiscal year. level of domestic revenues, with the value In this context, the Government must of these revenues increasing by an average improve both the collection of domestic annual rate of 15 percent in real terms in the revenues and the efficiency of public period from 2001/02 to 2007/08, this rate of expenditures. Both these measures are vitally growth has decreased to seven percent per necessary in view of the country’s existing year (to less than half), in the period from Any nation that and future needs. Any nation that aims to 2008/9 to 2012/13. aims to climb the climb the ladder of economic development ladder of economic The Government initially attempted to must be able to finance a significant share of development must compensate for the decrease in external aid its public expenditure through the collection be able to finance and the deceleration in the rate of increase of domestic revenue. a significant of domestic revenues by borrowing more The next section of this update will explore share of its public on both domestic and foreign markets. in detail why it is now vital for Tanzania to expenditure The Government actively pursued this improve its tax collection performance and through the approach in the period from 2009/10 to how this goal can be attained. In addition collection of 2012/13, which led to a significant increase to the end goal of raising revenues, the domestic revenue. in the levels of public debt and debt service. process and impact are both key. This goes Subsequently, the Government, realizing to the heart of the principles of a “good tax that it was not able to finance its fiscal gap, system” proposed by R. Musgrave 50 years opted to reduce its expenditures. In 2013/14, ago. He argued that a good tax system the level of public expenditures was lower, should not only generate enough public by the equivalent of almost 2.5 percent of revenues but also help to promote private GDP, than initially projected in the approved sector development, to ensure the efficient budget. Similar cuts have taken place in the allocation of resources and contribute to current budget, with the level of expenditure reduced inequalities. 12 12 Musgrave, Richard A, ‘The Theory of Public Finance: A Study in Public Economy’, Publisher: McGraw-Hill,1959 . PAGE http://www.worldbank.org/tanzania/economicupdate 19 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N PAGE http://www.worldbank.org/tanzania/economicupdate 20 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region 2 Why Tanzanians should be paying taxes PAGE http://www.worldbank.org/tanzania/economicupdate 21 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Part II: Why Tanzanians should be paying taxes „ Tanzania collected approximately USD 6 billion worth of revenues in 2013/14. This covers almost three-quarters of government expenditures. However, this is not enough, particularly when other sources of funding, such as aid, are declining and when the Government has limited access to loans and private sector finance. As the population grows, the demand for public services will only increase. Put simply, Tanzania must collect more taxes. „ Tanzania’s tax system relies on a combination of VAT, income tax, import duties and excise tax. Reliance on these four main taxes is not unusual in low income countries. However, Tanzania’s performance in the area of the collection of VAT is one of the worst in the world. „ Tax collection is very concentrated, with revenues derived primarily from only a few sectors and from the Dar-es-Salaam region. In addition, compliance costs are high. „ The Government must implement a series of bold and innovative actions, in addition to the traditional administrative measures, to make the current tax system affordable, fair and transparent. Robert does not pay taxes. “Why should necessary public services or to redistribute I give money to the Government? It will wealth to the poorest. only benefit corrupt politicians! Besides, nobody in my village is paying taxes. Unfortunately, the Tanzanian state Why should I?” Taxation is an issue that and its citizens have yet to establish lies at the heart of the fiscal contract a working fiscal contract. The overall between the State and its citizens. As in value of collected taxes, which reached most countries around the world, many the equivalent of only 12 percent of GDP Tanzanians would be prepared to pay taxes in 2013/14, is one of the lowest in the if they perceived that their contribution world (see Figure 15). Furthermore, the was reasonable, fair and equitable and if real tax yield might be closer to six percent they felt that the money would be used of the national income when the informal efficiently by the Government to provide economy is factored into the equation.13 13 This figure is illustrative since, by definition, it is hard to estimate the size of the non-official economy. For an estimate of the non-official economy in Tanzania and other developing countries, see, H. Ahumada and F. Alvaredo, The Monetary Method and the Size of the Shadow Economy,: A critical Assessment, Review of Economy and Wealth, Series 53, N. 2, 2007 or F. Schneider and D. Enste, ‘Shadow Economies around the World: Size, Causes, and Consequences’, IMF working paper, 00/26. PAGE http://www.worldbank.org/tanzania/economicupdate 22 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region To put it simply, the average Tanzanian possible rather than the pursuit of the only pays USD 120 in taxes per year, while optimal.” Nonetheless, bold and innovative the average Senegalese or Kenyan pays actions are essential. more than USD 300. 2.1: Tanzania needs to collect There is no blue-print for the ideal level more tax of taxation. However, it is well accepted What level of public expenditure is that taxes should be sufficient to finance desirable for a developing country at a large proportion of the Government’s any given level of national income? Only expenditure on public goods. In Tanzania, when this question has been answered can To the extent the low level of tax collection is problematic the next question, which relates to setting that external and because the needs of the country are the ideal level of tax revenue, be addressed. private financing significant and expanding. The rapid Unfortunately, the vast literature on remain limited, population increase and the increase in optimal tax theory provides little practical the Government living standards have put pressure on guidance on how to integrate the optimal will have no other the delivery of infrastructure and social level of tax revenue with the optimal level option than to services. Several billion US dollars will have of government expenditure.14 rely on its own to be found to finance expenditures in these Currently, the Tanzanian Government revenues. areas over the next decade. To the extent collects approximately USD 6 billion each that external and private financing remain year in domestic public revenue, of which limited, the Government will have no other taxes account for about 90 percent.15 option than to rely on its own revenues. In 2013/14, collected taxes financed 73 This second part of the update explains percent of total public expenditure, with the why Tanzania will need to increase its tax remainder being met by both concessionary revenues if it is to finance the country’s and non-concessionary loans, grants and growing needs adequately. It then follows the accumulation of arrears. Tanzania’s with a diagnostic of the recent performance dependence on domestic revenues for of the Government in taxes and points to a the financing of its public expenditures is number of weaknesses in this effort. Lastly, about average compared to other African or it concludes with an agenda for actions. low income countries, but relatively low in This agenda is built on the principle that comparison to more developed economies “a good tax policy is more the art of the (see Figure 16). 16 14 Tanzi, V. & Zee, H. ‘Tax policy for developing countries’, IMF Economic Issues Paper 27, 2001. 15 Non-tax revenues include royalties on mining, a large variety of levies and other licenses. 16 There are a number of empirical studies comparing tax efforts around the world by comparing countries based on their characteristics (GDP level, GDP composition, poverty, monetization, etc.). However, these studies used for Tanzania the “old” GDP figures and, therefore, cannot be used anymore. See, for example Fenochietto and C. Pessino ‘Understanding Countries Tax Effort’, IMF Working paper, 2010. PAGE http://www.worldbank.org/tanzania/economicupdate 23 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Figure 15: Tanzania’s revenue Figure 16: Average dependence on collection effort is low even adjusted domestic revenue to finance public for its per capita income, 2011 spending, 2013/14 Tax / GDP Source: IMF Looking forward, Tanzania’s relatively traditionally relied heavily on donors. low dependence on its own revenues However, the contribution of external will be increasingly challenged by the aid to the total budget has declined growing demand for infrastructure and from 40 percent to less than 30 percent social services. Assuming that the ratio of in the period from 2008/9 to 2013/14. expenses per secondary student remains This declining trend is anticipated to constant at USD123 per year, the level continue into the next decade. At the However, the of spending on secondary education will same time, the Government is likely to contribution of have to double by 2020 for the country be constrained in its ability to borrow on external aid to to reach a registration rate of 60 percent. domestic and international markets to the total budget If in addition to measures to increase the preserve debt sustainability. One option has declined from enrolment rate, measures to improve the is for the Government to transfer some of quality of education are enacted, the costs 40 percent to less its spending responsibilities to the private will increase even further. In addition, at the than 30 percent sector. This can be done in multiple ways in the period same time, Tanzania will have to spend an for different sectors as illustrated in Box 2. from 2008/9 to estimated USD 2.9 billion annually on roads, However, time will be required to promote 2013/14. electricity and water systems to catch up public–private partnerships and to address with the rest of the developing world.17 the remaining weaknesses in local To finance the provision of basic capacity and in the legal and institutional services of an adequate quality and frameworks for the implementation of of infrastructure, the Government has such partnerships. 17 Shkaratan.M, ‘Tanzania’s Infrastructure: A Continental Perspective’ World Bank Policy Research Working Paper No. 5962, 2012. Available at SSRN: http://ssrn.com/abstract=2002611 PAGE http://www.worldbank.org/tanzania/economicupdate 24 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Box 2: How can the private sector help deliver public goods There are multiple examples of partnerships between the private and public sectors in the delivery of public goods across the world, including in Tanzania. The balance is not always easy to find as policymakers have to account for both “market” and “government” failures Rished Bade, as well as a number of factors that are not always easy to identity and quantify, including cultural, political and social ones. the TRA Below are three examples where Tanzania could rely more on the private sector to deliver Commissioner public services to its population: General, has 1) Skills: Tanzania’s current system relies almost exclusively on the public sector. openly stated Businesses are required to pay an extremely high levy of five percent on the that his vision is wage of their formal employees that will finance a public system of vocational for the Tanzanian and technical training, as well as scholarships. This system discourages formal employment as the burden is very high for private enterprises and the taxpayers to fully Government has not been able to deliver quality services. The alternative would fund the national be to provide incentives to businesses to deliver their own training. budget within the 2) Secondary Education: The rate of registration in secondary schools has and will next five years. continue to increase by approximately 10 percent per year, putting increasing pressure on the public system which does not have the financial and human resources required to respond. The development of private schools has been the answer in many countries and this has started to happen in Tanzania. Of course, the Government and the public have to play a role of regulation and quality control. 3) Transport/energy infrastructure: While not all infrastructure projects can attract private investors, there is sufficient experience in the transport and energy sectors that prove that PPPs can be efficient. The main candidates are ports, airports, and energy generation plants. The key is for Tanzania to get value for money in the delivery of public services both through the Government budget and through private sector provision. Tanzania, in its quest to achieve a revenues amounting to a value equivalent higher level of economic development, to approximately three percent of non- has no other option than to boost gas GDP. However, these revenues will not domestic revenues. Rished Bade, the materialize for 7-10 years, with the actual TRA Commissioner General, has openly value of the revenues highly uncertain and stated that his vision is for the Tanzanian with investors yet to make final decisions. taxpayers to fully fund the national budget within the next five years.18 As a matter of The Government has already recognized basic principle, he is right: there is ample the need to increase its own revenues scope for improving Tanzania’s current during the country’s transition towards tax collection efforts. Tax revenues from a gas economy. Boosting revenue natural gas may also generate additional generation is one of the priorities of the 18 See: Rished Bade’s interview in Citizen, March 2015. PAGE http://www.worldbank.org/tanzania/economicupdate 25 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N President’s Big Results Now initiative. However, this general assessment must However, the Government has missed the be qualified. Revenue collection levels ambitious revenue targets incorporated increased significantly in the 2000s as in the approved 2013/14 and 2014/15 a result of the rapid economic growth budgets by a wide margin. If greater of a number of formal sectors, including realism regarding revenue collections is transportation and communication, and required for effective budgetary planning, of the rapid expansion in imports and local these recent results also indicate that more consumption. It is worth emphasizing that needs to be done for Tanzania to really the taxation of large mining companies improve its tax performance and to meet has been a contributing factor since their its policy makers’ targets. contribution rose to almost 8 percent of total tax revenues in 2011/12 from zero in 2.2. A brief assessment of the early 2000s. With the expected further Tanzania’s tax performance development of the extractives sector, The Tanzanian tax its contribution is projected to increase system might be Compared to other developing significantly. Overall sectoral growth was the worst of two countries, Tanzania performs poorly accompanied by a number of promising worlds: on the in domestic revenue collection. While administrative reforms, including the one hand, taxes such comparisons depend on the legal establishment of a large taxpayers’ are theoretically framework in place in each country and department in 2001; the merger of the quite high, which the structure of each economy, Tanzania VAT and income tax departments into one discourages is close to the lowest rank among non- domestic revenue department in 2005; and taxpayers from oil producers in Sub-Saharan Africa. This the introduction of a new tax operations paying. On the places it in the vicinity of countries with computer system. other hand, weak fragile economies, such as Burundi, where collection efforts capacities have been eroded by years However, this effort has lost momentum result in a failure of war and political instability. Tanzania in recent years. The growth of the tax to of the State to was ranked 148th in PWC’s paying taxes GDP ratio has slowed down since 2007/8, collect the taxes it 19 rankings , far below her East African stabilizing at the equivalent of around 11- needs. neighbors. The Tanzanian tax system 12 percent of GDP (see Figure 17). The might be the worst of two worlds: on the recent increase recorded in 2013/14, of one hand, taxes are theoretically quite the equivalent of 0.6 percent of GDP, is high, which discourages taxpayers from largely derived from the taxation of a one- paying. On the other hand, weak collection time capital gains in the oil exploration efforts result in a failure of the State to sector. The most visible deterioration has collect the taxes it needs. been in the steady decline in VAT revenues 19 www.pwc.com/payingtaxes. This index looks at total cost of taxes borne by the business, the time it takes to comply and the number of tax payments made. PAGE http://www.worldbank.org/tanzania/economicupdate 26 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region observed over the past two years, which one percent of GDP, partly due to the have declined by the equivalent of almost clearance of old VAT refunds. Figure 17: Slow improvement in tax Figure 18: The structure of the collection Tanzanian tax system differs from The low VAT other low income countries, 2013/14 contribution in Tanzania is also unusual compare to other low income countries. Source: TRA and IMF There is no single, optimal tax structure that „ Excise taxes contribute to 15 percent applies to all countries around the world. of gross tax revenues in Tanzania and However, it is accepted in the economic literature are paid when purchases are made on that a balance has to be found between income specific domestic and imported goods. and consumption taxes, and between domestic Tanzania’s dependence on these four and international transactions. This balance is main forms of tax is not unusual among required for efficiency, equity and competition. low income countries. What is less usual is Tanzania’s high reliance on income taxes The Tanzanian tax system is built around rather than on consumption taxes. The four main categories of taxes. These low VAT contribution in Tanzania is also account for approximately 98 percent of unusual compare to other low income total gross tax revenues collected by the countries. The high degree of dependence central Government (see Figure 18): on income tax and the low level of revenue „ Value Added Tax (VAT) contributes to generated from VAT can be explained by the almost 27 percent of total gross tax difference in the current performance of the revenues or 24 percent when adjusted Government to collect each individual tax. for VAT refunds; „ Income taxes contributes to more than Beyond these four main taxes, there are 40 percent of total gross tax revenues, a myriad of small taxes and non-taxes divided between corporate and in Tanzania. These range from the levy individual taxation; on labor income to royalties on mining to „ Import duties and charges contribute to licenses and permits to operate a business. approximately 16 percent of total gross While their contribution to the central tax revenues; and Government’s budget remains limited (at PAGE http://www.worldbank.org/tanzania/economicupdate 27 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N approximately 10 percent of total domestic at the border, particularly at the port of revenues), they finance several public Dar es Salaam. The other half comes agencies and enterprises. The amount of from domestic transactions, with these revenues generated by these other taxes transactions being highly concentrated in and non-taxes remain hard to estimate three sectors - approximately 40 percent because they are not always reported of VAT of domestic transactions is collected effectively and individual data from each from telecommunications, beverages and agency is not easy to get. cigarettes. National accounts data shows that economic activity in Tanzania involves A rapid assessment of the four main taxes transactions in many other sectors beyond is proposed below based on a number of these three, suggesting that some sectors detailed analytical studies.20 are under taxed and many important The Tanzanian government’s per- contributors to national GDP are almost formance in collecting VAT revenues completely left out of the VAT base (see is one of the worst in the world (see Figure 20). Therefore, a concerted effort Figure 19). Despite the application of a must be made to reach sectors which are not relatively high VAT rate of 18 percent, pulling their weight in terms of contributing Therefore, a revenues are equivalent to less than three to the total value of collected VAT. Finally, concerted effort percent of GDP. Almost half of this figure the low VAT collection rate is also explained must be made is collected on international transactions by the extensive application of exemptions. to reach sectors Figure 19: VAT yields are one of the worst in the world, 2012/13 which are not pulling their weight in terms of contributing to the total value of collected VAT. Source: The World Bank, Deloitte. 20 KPMG, ‘2013/14 ‘Tanzania Fiscal Guide’, 2014: https://www.kpmg.com/Africa/en/KPMG-in-Africa/ Documents/2014%20Fiscal%20Guides/Fiscal%20Guide%20Tanzania.pdf. Deloitte ‘Tanzania Highlights’, 2014: http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-tanzaniahighlights-2014. pdf.TRA,Presentation on ‘Tax Administration Reforms in Tanzania – experience and challenges’, 2011: http:// www.imf.org/external/np/seminars/eng/2011/revenue/pdf/kitillya.pdf. Policy Forum ‘The one billion dollar question: How can Tanzania stop losing so much tax revenue?’, 2012: http://www.policyforum-tz.org/files/ ONEBILLIONDOLLARQUESTION.pdf;FIAS ‘Sector study of the effective tax burden in Tanzania’, 2006: http:// documents.worldbank.org/curated/en/2006/05/7242390/sector-study-effective-tax-burden-tanzania PAGE http://www.worldbank.org/tanzania/economicupdate 28 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Figure 20: Sector concentration of VAT collection on domestic transactions, 2012/13 The average import tariff has declined from 18.3 percent in 1997 Source: TRA, NBS, World Bank to 8.4 percent in At 15 percent, the contribution of excise trade liberalization policies implemented 2013. However, the taxes to the total value of collected taxes by Tanzania over the past decade. This yield remains low, in Tanzania is above average compared included the adoption of the EAC common at just over half to other low income countries. The main external tariff and the option for member of the theoretical excise taxes are collected on imports and states to introduce duty free imports during import base domestic sales of cigarettes, fuel and times of emergency. The average import in 2012. alcoholic drinks. As a result of increased tariff has declined from 18.3 percent in rates, excise revenues have grown by 20 1997 to 8.4 percent in 2013. However, the percent per annum in the last couple of years, yield remains low, at just over half of the doubling the rate of growth recorded in the theoretical import base in 2012 (see Figure previous three years. Not only does Tanzania 21). This poor performance is explained apply an unusually high number of excise by the low share of consumption goods taxes with relatively high rates, there are in proportion to total imports and by the multiple rates on sub-categories of products, extensive application of exemptions and which make the system very complex. For rebates. This ratio does not account for example, five different rates are applied on under-reporting and evasion of import cigarettes. Excise taxes can also be specific duties. Losses due to these causes are simply or ad valorem, which adds to complexity. not included in official statistics, which makes determining the exact value difficult. The contribution of import taxes and charges as a share of total revenue is Revenue from income taxes accounts for declining, down to 15.5 percent of total 40 percent of total collected tax revenues tax revenues. In part, this is a result of the in Tanzania, which is above the average PAGE http://www.worldbank.org/tanzania/economicupdate 29 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N for low income countries.21 This relatively of pay-as-you-earn taxes (PAYE), which is high share is largely due to the collection collected from the salary of employees in of corporate income tax, which accounts the formal sector and which accounts for for 37 percent of income tax revenues, and 41 percent of income tax revenues. Figure 21: Yield of import duties is at the bottom of the continent, 2012 In geographical terms, the region of Dar es Salaam accounts for approximately 90 percent of the country’s tax revenues, despite the fact that it accounts for only 17 percent of the total value of GDP. Source: World Bank 2012 This rapid description of the Tanzanian for developing countries, efforts need tax system reveals the major weakness to be made to diversify the tax base. In of the system, which is that the level geographical terms, the region of Dar es of compliance is very weak, with Salaam accounts for approximately 90 low yields in the collection of VAT percent of the country’s tax revenues, and import duties. If overall revenue despite the fact that it accounts for only collection is analyzed in terms of region 17 percent of the total value of GDP and sector, a second weakness becomes (see Figure 22). This means that both apparent. Tax collection is concentrated important sectors of the economy and in only a few sectors and in one location, regions that contribute significantly to Dar es Salaam. Large enterprises (400 GDP, including secondary cities, have companies), primarily based in Dar es been left out of the tax collection effort. Salaam, contribute to almost half of the Weak capacity to collect taxes in LGAs total value of tax revenues. While this may offer a partial explanation for this degree of concentration is not unusual phenomenon. 21 Income tax ranges from 0-30 percent depending on 5 income level brackets. It is progressive. PAGE http://www.worldbank.org/tanzania/economicupdate 30 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Figure 22: Regional concentration on Dar es Salaam, 2013/14 Tax Source: NBS, TRA, World Bank The second weakness is that the under the PAYE system and who therefore Tanzanian tax system is excessively need to make their own assessments. complicated and not adapted to the The same complexity also exists in the The same reality of a low income economy. application of import duties, as valuation complexity also The 2013 Afrobarometer found that methods leave room for interpretation and exists in the 72 percent of respondents in Tanzania bargaining. For example, there are huge application of find it difficult to know which taxes and variations in the valuation by customs import duties, as fees they are supposed to pay. 22 Such of basic and homogenous goods such valuation methods complexity is found in the rules governing as rice, maize, fertilizer or cement. 23 The leave room for all of the four main categories of taxes VAT is very difficult to apply fairly when interpretation and described above. The income tax includes almost 90 percent of businesses operate bargaining. several rates, multiple deductions, and in the informal sector even though many complicated rules that are not easy to of them remain below the VAT threshold, understand for the standard Tanzanian and so are subject to a presumptive tax taxpayer, particularly those not operating on small businesses (see Box 3). 24 22 Afrobarometer 2013: http://afrobarometer.org/online-data-analysis/analyse-online 23 By using custom data at the HS-8 classification level, the value of imported fertilizers varied between USD 0.4 and USD 5 per kilogram in 2011. The value of imported butter ranged from USD 2.5 to 166 per kilogram, while the price of imported cement clinkers fluctuated between USD0.1 and 1180 per kilogram. Several recent studies have demonstrated the under and over-invoicing of import values is the main channel for rent seeking behavior by customs (see Anson, Cadot, and Olarreaga, “Tariff Evasion and Customs Corruption: Does Pre-Shipment Inspection Help?”, World Bank, 2007). 24 The VAT threshold is TZS 40 million. PAGE http://www.worldbank.org/tanzania/economicupdate 31 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Box 3: The cost of a misunderstood VAT Let’s assume that a medium sized trader sells USD 100 worth of fabric to a successful merchant in Upanga.25 The payment value would be USD 118 to account for the VAT of 18 percent that will be paid to TRA. Subsequently, the merchant uses the fabric for t-shirts that will be sold at the market for a total value of USD 150 (excluding VAT). Eighteen The complexity percent of USD 150 is USD 27, so the final price of these T-shirts will be USD 177. of the current tax system is partly The question is: How much VAT should the merchant pay to TRA? embedded in the If you respond USD 27, it means that you will be too generous and offer a gift of USD18 fragmentation to TRA. In fact, you should subtract the earlier payment of USD 18 and pay only the difference of USD 9. VAT is only paid on the value added. The merchant should pay USD 9 of the policy to TRA and the trader should pay USD 18 to TRA. decision process and management. In reality, many taxpayers are confused and will pay the total amount to TRA, without claiming the earlier credit. They may also not be able to claim their credit if they do not have a tax invoice for the first transaction. Because the burden becomes very high, many traders might therefore decide not to pay the tax at all, choosing to evade the payment of taxation entirely. Small businesses, with an annual turnover below TZS 40 million, can opt to pay the presumptive tax (a lump sum payment determined by the size of the business) but they will be unable to claim back the VAT on inputs. The complexity of the tax system is and fees collected by public sector further exacerbated by the excessive entities which are not clearly reported application of exemptions. In 2013/14, in the budget. While these charges might the total value of lost revenue resulting be invisible in the Government’s accounts, from tax exemptions amounted to TZS they represent a significant administrative 1,834 billion or 2.5 percent of revised GDP. and financial burden for private businesses. The recent PER study on tax exemptions For example, the recent lab organized by has identified more than 160 exemptions to the Presidential Big Results Now initiative current tax laws. This study recommended has shown that tour operators are subject that half of these should be removed or to more than 25 charges and levies. amended. This will be addressed to some The complexity of the current tax system degree by the new VAT Act.26 However, is partly embedded in the fragmentation many businesses continue to receive of the policy decision process and exemptions. management. As mentioned earlier, many The final layer of complexity lies in the small taxes and non-taxes are created presence of the many small taxes, levies and managed at the sector level by public 25 Both with turnover above the VAT threshold. 26 CRC Sogema, ‘Tanzania PER Tax Exemptions Study’, 2014: http://www.mof.go.tz/index.php?option=com_ content&view=article&id=892:per-tax-exemptions-study-final-report-and-briefing-note&catid=78:per- reports&Itemid=433 PAGE http://www.worldbank.org/tanzania/economicupdate 32 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region agencies and enterprises. Exemptions collection of taxes enables governments are granted by several agencies that to raise money to deliver public services; may not always have aligned incentives. and to redistribute resources more fairly. Such fragmentation contributes to the Tax does not create new money. Rather, proliferation of perhaps well founded it transfers money from private to public individual initiatives that can nonetheless hands. The goal is to find a level of taxation become a heavy burden for the economy which facilitates the achievement of the when taken altogether. They can sometimes two goals stated above while at the same be duplicative or even contradictory (for time being affordable, fair and efficient. example the government is subsidizing the Tanzania has received significant external use of fertilizers whilst taxing them at the inputs on how to improve its revenue border). performance. TRA has accepted many of the recommendations and improvements The transaction costs associated with have been made. Over the last couple of the payment of taxes in Tanzania is very The 2015 Doing years, a particular push has been made high. The 2015 Doing Business report ranks Business report through the Big Results Now initiative Tanzania 148th out of 189 countries in ranks Tanzania and the introduction of a modernized and terms of the indicator measuring the ease 148th out of 189 more broad-based VAT Act. However, the of paying taxes.Tanzanian businesses are countries in terms Government still needs to exert further faced with an average of 49 different tax of the indicator efforts. payments a year, significantly higher than measuring the To ensure the implementation of an the Sub-Saharan African average of 38. ease of paying effective tax system, Tanzania needs to On average, businesses spend 181 hours taxes. develop a strong fiscal contract between each year in the payment of their taxes.27 the state and the citizens. The Government In 2013, 41 percent of firms participating should provide basic services to the in the World Bank Enterprise Survey stated country’s citizens, while citizens should be that the cost of tax administration was a able to demand accountability from the major constraint to doing business. Government regarding its expenditures. If this contract does not exist, citizens 2.3: A comprehensive approach do not feel a moral obligation to pay tax. The collection of taxes is critically Instead they will resent paying taxes, important for all countries, and feeling that they are not getting anything particularly for developing countries. in return and that the revenues generated This is true for two main reasons: the from taxation risk being mis-allocated 27 World Bank, ‘Doing Business Survey’, 2015: http://www.doingbusiness.org/data/exploreeconomies/tanzania 28 African Development Bank, ’Domestic Resource Mobilization for Poverty Reduction in East Africa: Tanzania Case Study’, 2010. PAGE http://www.worldbank.org/tanzania/economicupdate 33 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N through corruption.28 This leads to the costs; (ii) equity and fairness; and (iii) emergence of a vicious circle, in which the transparency and good governance. Government doesn’t have enough funds to These three pillars are corroborated by a provide public goods, which makes citizens recent survey conducted in Eastern and unwilling to pay taxes because they do not Southern Africa (see Figure 22). The main benefit from the existence of public goods. explanatory factors for the low level of tax In this context, the evidence suggests compliance in Tanzania are: (i) high and that there is a link between higher levels unaffordable rates; (ii) unfairness; and (iii) of taxation and greater demands for the sub-optimal use of taxes, exemplified 29 accountability. by poor public services and corruption. These factors appear more important The fiscal contract must find its in terms of increasing levels of revenue foundation in three components: (i) an collection than the use of sanctions and affordable tax burden and low transaction strict controls. Figure 23: Why Tanzanians do not pay taxes The tax burden is high for a business or an individual that wants to pay their taxes, both in terms of rates Source: Ali.M, Fjeldstad.O & Sjursen.I, ‘To pay or not to pay? Attitudes towards taxation in Kenya, Tanzania, and transaction Uganda and South Africa’, World Development, Volume 64. pp. 828-842, 2015. costs. a) Affordable tax burden and lower meet these obligations. Unfortunately, transaction costs these two basic conditions are not currently Most taxpayers will fulfill their tax met in Tanzania. The tax burden is high for obligations if they consider the tax a business or an individual that wants to burden to be reasonable and if the pay their taxes, both in terms of rates and Government makes it easy for them to transaction costs. This diagnosis reveals 29 Baskaran.T & Bigsten.A, ‘Fiscal Capacity and the Quality of Government in Sub-Saharan Africa’, World Development 45, 92-107, 2013. PAGE http://www.worldbank.org/tanzania/economicupdate 34 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region nothing new. So far, the Government’s „ Analysis of whether a combination of response has been principally to streamline lower statutory rates and a reduction in administrative procedures, notably exemptions could broaden the tax base. through the gradual introduction of a new Transaction costs must be reduced. IT system. However, these efforts have To reduce transaction costs the most been slow to achieve material results. obvious action to achieve this would be to streamline the number of small taxes The exclusive focus on administrative that do not generate much revenue for reforms might also be an ineffective the State but which are a major nuisance means of increasing the collection of for businesses. Experience from other To reduce taxes. As explained earlier, transaction countries suggests that the first principle transaction costs costs are the result of the complexity of is to eliminate all redundant charges. For the most obvious the current system. Therefore, the current example, tourism operators are subject action to achieve framework needs to be simplified and to more than 20 taxes and fees, many of this would be adjusted to the realities of a low income which overlap.30 The second principle is to to streamline economy. Such adjustments should start centralize the collection of other taxes. If the number of with the implementation of changes in tax the majority of taxes are collected by TRA, small taxes that policy and with administrative reforms. the transaction costs for taxpayers would do not generate be significantly reduced, as they would The following actions could be considered much revenue not receive multiple visits from inspectors by the Tanzanian authorities: for the State but from several agencies. Of course, the which are a major „ The elimination or reduction in the revenues collected by TRA would have to nuisance for number of small taxes and a simplification be allocated to other agencies. However, businesses. of the system for other taxes; this would place the burden on the public „ A simplification of the system of system, rather than on the private sector. presumptive taxes for small businesses; „ A streamlining of tax payments through High transaction costs are also the use of electronic payment systems, embedded in the complexity of the tax including through the implementation system. A simplification of the system of systems to facilitate all tax payments would reduce these costs and hence online, payment by mobile phones and encourage compliance. Tanzania’s income through partnerships with the private tax is characterized by many different sector; rates, deductions and definitions, resulting „ Educational and awareness raising in a degree of complexity which means activities to ensure people understand that the system can only be understood their tax obligations; and by experts. Similarly, the application of 30 Big Results Now, ‘Lab Report on Taxation, Multiplicity of Taxes, Levies and Fees’, 2014. PAGE http://www.worldbank.org/tanzania/economicupdate 35 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N import duties is based on complicated new system is still excessively complicated, definitions and values that leave room with 10 different tax brackets based on for interpretation, which opens the door annual turnover including five brackets for to corruption and bargaining. In general, entrepreneurs keeping records and five for complexity discourages compliance. While those not keeping records. The difference in this is true in many countries, including the effective tax rates between those who advanced economies such as the UK and keep records and those who do not, with the USA, in Tanzania, small businesses and a higher rate for the latter, is intended to The Government individuals are unlikely to have the financial provide incentives to micro-entrepreneurs needs to actively resources to pay for professional help. to start keeping records and to become promote the more formalized. The reality is that the intensive use Perhaps the most controversial question existence of an opportunity to reduce taxes of presumptive is how to tax small businesses. The by keeping records is not well understood by tax for small Government is aware of this and has been micro-entrepreneurs. In fact, even after the businesses. applying the presumptive income tax system introduction of the nil band, a large number for small businesses (with a threshold of those who are now supposed to be turnover of TZS 20 million or USD 12,000 in exempted from the presumptive income tax annual sales). In July 2012, the presumptive appear to be continuing to pay the tax, either income tax system was reformed and a nil as a result of lack of knowledge of the reform band for enterprises with an annual turnover on the side of entrepreneurs; lack of proper of less than TZS 4 million was introduced. It implementation of the reform on the side is estimated that 84 percent of all household of tax collectors; or both. The Government enterprises qualifying for the presumptive could choose to simplify the regime by income tax would be exempted from implementing measures adopted by other paying presumptive income tax as a result countries with presumptive tax regimes that of the reform. The reform amounted have a flat rate for small businesses, such as to a significant tax reduction for the Belgium, Greece, Bolivia and Angola.31 The average household enterprise, with poorer Government needs to actively promote the households benefiting disproportionately. intensive use of presumptive tax for small However, although more progressive, the businesses.32 31 Bird.R.M and Wallace.S, ‘Is it really so hard to tax the hard to tax?’, International Studies Program of the Andrew Young School of Policy Studies Working Paper No 03-16, 2003; UDSM ‘Poverty and Social Impact Analysis of Proposed Presumptive Tax reform in Tanzania’, 2013. 32 Reducing the costs of transaction for paying taxes –as with the use of a simple presumptive tax- will help incentivize small informal business become formal but it might not be enough. The decision by an entrepreneur to become formal is partly linked to the cost of paying taxes but also to the benefits that formalization will bring to him. Today, those benefits are arguably limited in Tanzania as most small businesses, even formal, have difficulties to access banking credit or secure their property rights –two of the benefits generally associated with formalization. For a more detailed discussion, see World Bank ‘Country Economic Memorandum, Tanzania: Productive Jobs Wanted’, 2014. PAGE http://www.worldbank.org/tanzania/economicupdate 36 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Actions should also focus on informality, large firms could be made administrative reforms. Again, to be responsible for collecting VAT from all effective, these should be implemented at their suppliers. This would improve the same time or immediately following the collection of VAT from firms at the frontier of informality. Such a the simplification of the policy framework. mechanism is at the heart of the VAT Emphasis should be placed on the system but not always applied in following measures: reality. Companies have a role to play „ Electronic payment of taxes: There have in supporting the provision of public been significant efforts in recent years services by paying tax themselves and to develop systems to register and pay encouraging their suppliers, who may VAT online. This should be expanded fall under the radar, to do so. to other taxes. While Electronic Fiscal A system to „ Ensuring that citizens understand Devices (EFDs) have been introduced their tax obligations: Knowledge and facilitate the in Tanzania, the majority of people are awareness of tax obligations have been payment of all not using them. However, of those who found to be positively correlated with taxes using mobile do, 61 percent believe they simplify tax the degree of tax compliance.35 Surveys money should be compliance.33 The use of mobile money show that 55 percent of Tanzanians developed and its has been a step forward, with almost 50 are unaware of their obligation to pay use encouraged. percent of the adult population using VAT, although many unknowingly pay. mobile devices to transfer money.34 A Similarly, 37 percent of those in paid system to facilitate the payment of all employment are not aware of their taxes using mobile money should be obligation to pay income tax. Given the developed and its use encouraged. The correlation between awareness and Government is also in the process of compliance, the Government needs implementing a one stop shop program, to exert greater efforts to raise public with the initial step in this process awareness of tax obligations. This in involving the integration of tax and turn will strengthen the fiscal contract. business registration within the BRELA office. Development partners’ support The reduction in the transaction costs of for the introduction of a new customs paying taxes through the simplification system is welcome. of the system and administrative reforms „ Partnerships with the private sector, should encourage tax compliance, banks and large taxpayers: To tackle and lead to higher revenues for the 33 University of Dar es Salaam, ‘Poverty and Social Impact Analysis of Proposed Presumptive Tax Reform in Tanzania’, 2013. 34 Finscope Tanzania 2013. 35 Ali.M, Fjeldstad.O & Sjursen.I, ‘To pay or not to pay? Attitudes towards taxation in Kenya, Tanzania, Uganda and South Africa’, World Development Volume 64 P.828-842, 2015. PAGE http://www.worldbank.org/tanzania/economicupdate 37 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Government. In this context, and to of this sort, simplifying the tax system encourage further private sector activities and applying lower statutory rates, with (see Figure 24), the authorities may want corporate tax rates being reduced from to explore whether it is possible to broaden 25 percent to 15 percent and with income the tax base by reducing the statutory tax rates being reduced from 30 percent rates, considering that Tanzania is at the to 15 percent. In turn, this resulted in The strategy of higher end of existing rates in developing approximately a two percent increase in reducing the countries. For example, the VAT rate of 18 the tax to GDP ratio.38 The strategy led to statutory rate percent means that only 52 countries (out an overall increase in tax revenues and to could become of 169) worldwide and seven countries a boom in private sector activities.39 This effective if it (out of 47) in Africa have higher VAT rates successful initiative proves, if proof is were combined than Tanzania. 36 The proposed reduction needed, that most citizens and businesses with stricter of exemptions will also contribute to are prepared to pay taxes as long as they sanctions increase the effective rates, and possibly see them as reasonable, fair, easy to pay and reduced provide room for a reduction in statutory and useful for their country. That said, given exemptions. rates. The strategy of reducing the the downside short-term risk of this action statutory rate could become effective if it on revenues, additional analysis needs to were combined with stricter sanctions and be conducted to determine whether this 37 reduced exemptions. In 2006, Mauritius action would set the right set of incentives successfully implemented measures in Tanzania. 36 Deloitte ‘Tanzania Highlights’, 2014: http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/ dttl-tax-tanzaniahighlights-2014.pdf 37 As an indication, WAMU countries in West African cut their average income taxes rates from 35 to 28 percent during the second half of 2000 and still registered an increase of 20 percent in these revenues. Mansour.M & Rota-Graziosi.G, ‘Tax Coordination, Tax Competition, and Revenue Mobilization in the West African Economic and Monetary Union’, IMF Working paper, N. 13/163, 2013. 38 www.tradingeconomics.com 39 The current statutory rate of the corporate income tax and the VAT are 15 percent in Mauritius, with limited exemptions. PAGE http://www.worldbank.org/tanzania/economicupdate 38 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Figure 24: Lower corporate income tax can boost growth Source: HMRC, HMT ‘Analysis of the dynamic effects of corporation tax reductions’, 2013. b) Equity and fairness is progressive with the use of five different revenue brackets, and VAT exempts most Equity and fairness are elusive concepts agricultural activities where approximately to agree on, including for assessing a 80 percent of poor households are tax system. For some, taxes should be To promote a concentrated. neutral in the sense that they should higher degree minimize interferences on decisions and The perception that the current tax of acceptance the allocation of resources and factors of system is relatively unfair in Tanzania of the fiscal 40 production. For others, the tax system comes from the low level of compliance contract, should be used to influence this allocation, by the vast majority of taxpayers. To Tanzanians for example in favor of vulnerable groups promote a higher degree of acceptance need to feel or strategic activities that may contribute of the fiscal contract, Tanzanians need to that they are to poverty alleviation. Economists have feel that they are required to pay their fair required to pay been using different instruments to share, but not more. They also want to see their fair share, evaluate if a tax system is fair, but one of that others who should pay are paying. but not more. the most famous has been to measure Understandably, nobody wants to feel that its progressivity or if wealthier people are they are the only person paying tax. Crowd paying proportionally more taxes than psychology and peer group pressure poor people. On paper, Tanzania’s tax can play an important role in promoting system fairs relatively well: the income tax compliance (see Box 4). 40 Other instruments, mostly on the expenditure side, should therefore be used to address inequality and poverty challenges. The Government can promote social protection of vulnerable households, including through targeted programs such as cash transfers, food to education programs and so on. PAGE http://www.worldbank.org/tanzania/economicupdate 39 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Box 4: Psychology is key in tax matters Social norms have a significant impact on behavior. This fact can be leveraged to make tax policy more effective, at little cost. Deciding whether or not to pay taxes is a social issue because individual and group interests are opposed: while each individual may strive to minimize their tax obligations, public goods can only be effectively provided if the majority pay. However, if a critical mass of Tanzanians start to pay taxes, evasion and non-compliance will no longer be socially acceptable. When this occurs, it is likely that peer group pressure will result in a higher level of compliance, with members of the public possibly reporting cases of non-compliance to the authorities and otherwise pressuring non-compliant peers to fulfill their tax obligations. A recent experiment has shown that changing the wording of letters sent to people asking them to pay outstanding taxes can have an impact. People receiving a letter telling them that 90 percent of taxpayers pay their taxes on time were much more likely to respond quickly than those sent a generic letter. If the letter also informed the taxpayer that they were in a minority by not paying on time, they were even more likely The current tax to pay. Although this example comes from the UK, it does illustrate that psychology burden is highly plays a key role in compliance with taxation regimes. inequitable, with Source: HMRC & Behavioral Insights Team, UK Cabinet Office a few sectors contributing While the strategy to ensure that tax „ A modification of taxpayers’ behavior disproportionally, systems are fair is well known, it is often through the introduction of smart and while others difficult to implement. In summary, this innovative incentives; appear to be strategy involves broadening the tax „ The application of sanctions to tax ignored by the tax base, while lowering the statutory rate. evaders, starting at the top. authorities. For Tanzania, this would mean going The most direct way for the Government to beyond “picking on the usual suspects” and broaden the tax base would be to address diversifying tax collection by implementing the excessive concentration on only a a series of initiatives that could include the few sectors and locations. The current following: tax burden is highly inequitable, with a „ Increased tax and non-tax revenue few sectors contributing disproportionally, collection efforts in “under-fiscalized” while others appear to be ignored by sectors (such as agriculture, trade, the tax authorities. At present, the vast mining and construction) and locations majority of VAT is collected from businesses (such as the secondary cities); involved in the trade of food, drinks, „ A reduction in the application of tax cigarettes and telephones. Sectors that exemptions; make a disproportionately low contribution include agriculture, construction, mining, „ An increased emphasis on taxation of and trade sectors (see Figure 20 for fuller land through better enforcement of real details). While many businesses in these estate taxes; sectors are informal, small enterprises PAGE http://www.worldbank.org/tanzania/economicupdate 40 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region which are hard to tax, some are not. For times higher than the proportion of its example, there are over 7000 construction contribution to GDP. By contrast, Mwanza businesses that report five or more contributes to more than 9 percent of the employees and that should therefore be country’s GDP, but to only 1.2 percent 41 quite visible to the tax authorities. “ This of its tax revenues (see Figure 22). The diagnostic is shared by President Kikwete, Government must therefore do more to who said that “there are so many people promote compliance in all regions, with In Tanzania, a who earn so much money in the informal a specific focus on larger hubs. Amongst recent study sector who are not paying anything; there other means, this could be achieved has shown that are big farmers, there are people who have through the establishment of stronger the costs of tax hundreds of cows, and they are selling large and medium taxpayers’ offices in incentives for milk. Others grow a lot of rice! But this is Kilimanjaro, Arusha and Mwanza. Government 42 the sector that is not paying any taxes.” do not usually Decentralization can also encourage There is room to improve tax compliance justify the compliance with tax obligations if in these sectors. The Government should benefits. people believe that the additional consider how to reduce VAT exemptions services provided by LGAs are the result where the benefits do not outweigh the of improved tax and non-tax revenue costs. For big farmers, the way forward collection. However, there is a trade-off could be to substitute the infamous “cess” with efficiency, as centralized systems tend tax by the VAT as it would be economically to be more streamlined than decentralized more efficient and more consistent with systems, with little duplication. The the country’s goal to promote commercial capacity of LGAs to collect revenues is also agriculture.43 It should also crack down weak and needs to be developed. on evasion. Going forward, the authorities While tax exemptions can be justified should also consider how best to collect to promote strategically significant revenues from new, emerging industries, economic activities, their excessive use such as the digital economy. can also result in inequality and a loss of The share of Dar es Salaam in the revenue for the Government. In Tanzania, total value of collected taxes is a recent study has shown that the costs disproportionately high relative to its of tax incentives for Government do not contribution to the national economy. usually justify the benefits (see Box 5).44 In fact, the proportion of total tax Over the past few years, the Government revenues collected in Dar es Salaam is five has placed the reduction of tax exemptions 41 World Bank ‘Country Economic Memorandum, Tanzania: Productive Jobs Wanted’, 2014. 42 Interview of President J.Kikwete, World Bank, May 2015. 43 The cess tax is collected by local authorities on the value of traded agricultural products. Its rate ranges from 3 to 5 percent. PAGE http://www.worldbank.org/tanzania/economicupdate 41 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N on its agenda, with a target of reducing the Zones, to achieve better alignment with value of tax exemptions to the equivalent international and regional best practice. of one percent of GDP in 2015. However, it A number of exemptions should also be is unlikely that this will be achieved in the eliminated, as these are not in line with short term. With Tanzania’s membership the country’s priorities and appear to in the EAC, there is an opportunity to be implemented only to benefit vested revise the system of incentives, such as interests. The implementation of the the generous tax holidays used in the recently revised VAT Act should address Export Processing Zones and Industrial some of these issues. Box 5: Do the benefits from tax incentives outweigh the costs in Tanzania? The World Bank recently looked at a subset of twenty firms in Tanzania to assess whether tax incentives were beneficial. Despite the small size of the sample, the evidence suggests that overall, tax exemptions are not a key determinant of business investment decisions in A number of Tanzania. For the majority of businesses, tax exemptions also do not appear to influence exemptions growth strategies. Furthermore, although the data is limited, it seems many firms have should also be fallen short of their expected targets which they have articulated to obtain tax exemptions. eliminated, as In terms of employment gains, the message is mixed, with some firms generating sufficient employment to justify the exemptions they receive. these are not in line with Unfortunately, the use of complex incentives is prone to abuse. Several studies have the country’s showed a positive correlation between complexity and corruption, notably in customs.1/ In 2013, the Tanzanian Revenue Authority intercepted 200 containers loaded with products priorities and different from what was indicated on the pre-arrival declaration forms. The importers appear to be had declared that the containers had computer central processing units, mosquito nets, implemented computers, solar panels, and aluminum products, which are tax-free. But on physical inspection, the containers were found to have taxable items like khanga and electronics.2/ only to benefit An opaque system offers opportunities for bargaining between importers and custom vested interests. officials. 1/ Anson Jose & Cadot Olivier & Olarreaga Marcelo, 2006. “Tariff Evasion and Customs Corruption: Does Pre- Shipment Inspection Help?,” The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 5(1), pages 1-26, December. 2/ This story is reported by the East African, July 13, 2013. Placing an increased emphasis on the from the salaries of less than two percent taxation of capital and a decreased of Tanzania’s total population. The levy emphasis on the taxation of labor of five percent collected on employees would create a greater sense of is high by international standards, and fairness. Currently, approximately one discourages formal employment. There third of income tax revenue is collected is significant scope for local authorities 44 World Bank ‘Tax Exemptions Case Studies’, 2014. PAGE http://www.worldbank.org/tanzania/economicupdate 42 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region to improve their revenue collection can be increased involves the recent through taxes on real estate. This could introduction of IT systems in a number be achieved by better enforcement, of secondary cities.45 Dar es Salaam has improved reporting and higher levels of also doubled the value of its property tax transparency (Box 6). A positive example revenues through the Big Results Now that demonstrates the manner in which initiative, which adopted a mass valuation local revenues from real estate taxes method for property tax and land rent. A positive example that Box 6: Potential to tax more real property demonstrates As in most countries, Tanzania taxes capital income from real property in several ways. the manner It imposes 10 or 20 percent on the net gains realized from the disposal of land or in which local buildings, depending on whether the seller is a resident or non-resident;46 30 percent revenues from on rental income; and 0.15 percent and 0.2 percent real property taxes collected by local real estate governments on residential and commercial properties in Dar es Salaam. However, the level of compliance with these taxes has been very low. taxes can be increased Although there are not consolidated figures on the amount of revenues collected from involves taxes on real property in Tanzania, a ballpark estimate ranges at 0.1 percent of GDP. As a comparison, the level of revenues from such taxes is 2.8 percent and 4.1 percent of GDP, the recent respectively, in the United States and United Kingdom. introduction of IT systems While Tanzania cannot expect to collect such levels of revenue from real estate, there is ample scope for improvement. This can be illustrated by the following example of the in a number real estate tax in Dar es Salaam, which brought around TZS 10 billion or USD 6 million in of secondary 2013/14. By assuming that half of the city’s area is potentially taxable (1,590 km2) and cities. an average tax rate of 0.18 percent, this means that the taxable value of properties is only USD 4.1 per square meter, far lower than the market valuation. Expanding the tax base can be achieved are not alone in trying to avoid tax. The by changing the behavior of taxpayers. In gap between what is owed and what is turn, this can be implemented through the actually paid is nearly USD 400 billion a application of a combination of incentives year in the USA and about GBP 40 billion and sanctions. In 2007, an independent (USD 70 billion) in the UK.48 It has been external integrity and transparency review estimated that developing countries commissioned by TRA concluded that collectively lose USD 285 billion per year there seemed to be an endemic culture due to tax evasion in the domestic shadow 47 of tax avoidance in Tanzania. Tanzanians economy.49 Tax authorities need to help 45 PMORALG ‘A study on LGAs own source revenue collection’, 2013. 46 KPMG ‘2013/14 Tanzania Fiscal Guide’, 2014. 47 African Development Bank, ’Domestic Resource Mobilization for Poverty Reduction in East Africa: Tanzania Case Study’, 2010. 48 Economist ‘Fiscal Blackmail’, 2014. 49 Cobham.A, ‘Tax Evasion, Tax Avoidance and Development Finance’, QEH Working Paper Series 129, 2005. PAGE http://www.worldbank.org/tanzania/economicupdate 43 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N taxpayers understand their obligations and possibility is to use carrots to incentivize tax to encourage them to pay by realigning payment. For example, some authorities their incentives. Inspiration can be found have introduced tax lotteries as a means of in successful experiments elsewhere. One encouraging compliance (see Box 7). Box 7: Prizes for paying taxes, can a lottery incentivize tax payment? Due to asymmetry of information between the Government and the taxpayer, taxpayers may underreport the amount of taxes they owe. To balance this, the Government needs to devote significant resources to monitoring and reporting economic activity. This problem has been examined in detail in China, where it is estimated that the size of the underground economy from 2000-1 was equivalent to approximately 13.4 percent of GDP. As an innovative means to overcome the problem, the Chinese government introduced a system where an official receipt is printed with a public lottery number. The receipt is not only an official receipt, but also a lottery ticket. Rather, they must Evidence suggests that when this system was piloted in China, business tax revenues be accompanied increased by more than 17 percent, with the real growth rates of business tax and total by the strict tax revenues also increasing by 21.5 percent and 10.4 percent respectively in the areas where the system was piloted relative to control areas. Mauritius has recently followed suit application of with the introduction of a ‘VAT lucky draw’ scheme in February 2014. Under this system, sanctions for individuals with a VAT invoice have a chance to win up to Rs 50,000. evaders, starting The South African Lottery firm, Murhandziwa, has just won a contract to operate a national from the top lottery in Tanzania for five years. With the granting of this contract, there is a potential and including opportunity for the Government to collaborate with this new firm to increase compliance government with tax requirements. The question is whether the negative social costs of gambling will officials. outweigh the benefits of increased revenues. Source: Junmin.W, ‘The incentive to declare taxes and tax revenues: The lottery receipts experience in China’, Osaka University, 2006. For big taxpayers, another incentive might involving significant press coverage. be to grant a high level of recognition This approach should be encouraged. to those fulfilling their obligations. One idea might be to celebrate large When rich people give to private causes, individual taxpayers by naming schools they are lionized for their generosity. The after them.50 However, incentives such as contribution of taxpayers, on the other these might not be enough in themselves hand, is often unrecognized, even when to modify behavior. Rather, they must be their payments go towards highly valued accompanied by the strict application of public expenditures. TRA does have a sanctions for evaders, starting from the system of giving public recognition to top and including government officials, good taxpayers through a public ceremony to guarantee perceptions that the system 50 See, The Washington Post, O’Neil.L, ‘Let’s celebrate the people who pay the highest taxes by naming post offices and schools after them’, March 30, 2015. PAGE http://www.worldbank.org/tanzania/economicupdate 44 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region is being implemented equitably. This is receive them should be made publicly discussed in greater detail in the next available. Both the Ministry of Finance and section. the Tanzania Investment Centre should c) Transparency and good governance be responsible for publishing this data. The Ministry of Finance has committed Improving the level of compliance with to producing reports on tax exemptions the obligation to pay tax can be achieved on a quarterly basis, which is a great step In addition, through self-enforcement and voluntary forward. In addition, measures should be measures compliance. Citizens comply to the extent taken to improve transparency at the local should be taken that they believe adherence to the law level in a decentralized context, with LGAs to improve represents the best alternative among publishing accurate, accessible quarterly transparency at different possible outcomes. Those reports on revenue collection. the local level in possible outcomes will depend on the a decentralized extent to which they believe that their In a highly positive development, efforts context, with tax payments are well utilized by the are also being made to improve the level of LGAs publishing State and that tax evaders are punished transparency in the extractive industries. accurate, by the law. Tanzanian policy makers Tanzania has signed up to the Extractives accessible must work with a sense of urgency to Industries Transparency Initiative (EITI), quarterly ensure positive perceptions in both these which sets standards for transparency reports on areas. To promote good governance and and accountability in extractive industries. revenue transparency, the Government should By joining this initiative, the country has collection. ensure that the following actions are taken: committed to improving transparency in matters related to the collection of natural „ Quarterly publication of revenue resource revenues. The aim is to enable collection data and tax exemptions data public access to comprehensive, quality by region and source; information on Government revenues in „ Verification and full publication of the natural resources sector, with this company payments and government improved accessibility leading to greater revenues from all sectors; and accountability and to reduced corruption. „ Stronger enforcement of sanctions for If successfully implemented, not only will non-compliance. the initiative reduce actual corruption, it To promote transparency, access to will provide a means of demonstrating accurate information is vitally important. that corruption is being addressed, which As demonstrated by the TRA, quarterly is vitally important for improving public reports on revenue collection, broken perceptions. Ultimately, according to EITI down in terms of the source of payments guidelines, details of all revenues paid and geographical locations, should be by companies in the oil, gas and mining published. In addition, all information on industry to the Government should be tax exemptions and the companies that published on a voluntary basis. PAGE http://www.worldbank.org/tanzania/economicupdate 45 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N The approach espoused by EITI could be the peer review process of its current replicated in other sectors, particularly standards. Tanzania is also involved in sectors that are dominated by a few the African Tax Administration Forum large companies. In particular, this could (ATAF). These efforts are not only useful include the tourism sector, but also the for transparency and capacity building telecommunications, electricity, food purposes but they will also contribute and beverage sectors. Reconciling tax to address tax evasion challenges payments between tax contributors and through better regional and international tax administration through voluntary cooperation. The recent Mbeki report, agreements would be a great step forwards albeit controversial, highlights the large in terms of achieving higher levels of amount of tax revenue lost by African transparency and accountability. countries from illicit capital flows and tax evasion by multinationals.51 Tanzania is gradually taking part in Reconciling international initiatives that could help Another complementary approach would tax payments the country with transparency and be for the Government to publish a list between tax capacity building, notably the exchange of both major taxpayers and sanctioned contributors of information across countries. Tanzania evaders. Encouraging private companies and tax is member of the Global Forum on to voluntarily publish full details of their administration Transparency and Exchange of Information tax contributions would be a welcome through for Tax Purposes, but has yet to undergo initiative (see Box 8). voluntary agreements Box 8: Publish what you pay would be a great Governments across the world are taking measures to improve transparency on tax step forwards issues. For example, tax transparency laws passed by the former Australian Labor in terms of Party Government required the national tax office to publish details of the taxes paid by approximately 1,600 public and private companies with an annual turnover of USD 100 achieving million or more from July 2015. Under the new laws, all details related to total income, higher levels of taxable income and income tax payable must be reported. transparency and In Tanzania, some companies are voluntarily publishing similar details. Vodacom Tanzania accountability. announced in February 2015 that it would publish details related to revenue, expenditure, investment, profit statements and operational challenges. This sets a high standard for other Tanzanian companies to follow. It is clear that measures such as these play a strong role in building public perceptions that a particular business is a good corporate citizen, with companies that demonstrate transparency winning trust from the public, including customers and investors. Source: BBC/The Citizen 51 UN Economic Commission for Africa, ‘Illicit Financial Flows from Africa’, 2015. PAGE http://www.worldbank.org/tanzania/economicupdate 46 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Measures to eradicate corruption will concentration of costs and benefits. Due promote higher levels of tax compliance. to this asymmetry, fighting tax evasion Corruption within Government results in may either benefit or harm politicians who non-compliance with tax obligations, as seek re-election.53 taxpayers feel that their tax payments will In addressing tax evasion, a distinction be wasted and that they are under no moral can be drawn between ‘ghosts’ (those obligation to pay these taxes. In contrast, Spot checks can who don’t comply) and ‘icebergs’ if corruption is minimal and services be conducted, (those who only partially fulfill their are delivered, citizens are likely to feel a as tax evaders obligations). In Tanzania, each of these responsibility to pay for the services they are more likely groups should be treated differently, as receive. Studies show that improvements to comply if different solutions may be appropriate. in institutional quality are associated with they believe For ghosts, identification and registration higher levels of tax compliance. 52 there is a high of taxpayers is the first critical step. For probability of Tax evasion can be fought through icebergs, auditing and enforcement are key. being caught specific programs intended to address Tanzania also needs to manage aggressive and sanctioned. areas where tax evasion is likely to be tax planning by large foreign owned enterprises. Transfer pricing is used by highest. For example, since 2007, the multinational corporations to shift profits Italian government has successfully into other jurisdictions. TRA need to ensure implemented the “Ghost Building” that they are closely monitoring transfer program to address the evasion of real pricing and that they have institutions that estate and property taxes. Spot checks are empowered to collect their fair share.54 can be conducted, as tax evaders are more likely to comply if they believe there Finding potential taxpayers is only part of is a high probability of being caught and the solution. Sanctions and appropriate sanctioned. It should be recognized that enforcement are critically important for measures to reduce tax evasion result in ensuring compliance. With limited resources, winners and losers: the measures hurt tax the revenue collection authorities may choose evaders, typically a minority of businesses to pick their battles, targeting larger taxpayers and individuals, while the majority of to maximize the use of their resources. In the population is likely to benefit from considering the allocation of administrative to additional government expenditures successful economic growth, it is necessary or lower tax rates. Anti-tax evasion to ensure social inclusion and ecological policies are thus asymmetric in their sustainability. As the tourism sector grows, it 52 Frey.S & Torgler.B, ‘Tax morale and conditional cooperation’, Journal of Comparative Economics 35 (2007) 136– 159, 2007. 53 Casaburi.L & Troiano.U, ‘Ghost-House Busters: The Electoral Response to a Large Anti Tax Evasion Program’, Stanford University, 2015. 54 http://www.uneca.org/sites/default/files/publications/iff_main_report_english.pdf PAGE http://www.worldbank.org/tanzania/economicupdate 47 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N becomes increatheir tourism. Tax incentives Another, possibly more effective, in Tanzania can or example, an entry park alternative is for the Government to make fee should be collected by local authorities, greater efforts to clearly demonstrate that if this resources, the decision to focus on it conducts its expenditure responsibly the largest taxpayers makes sense. The gain and transparently. In Tanzania, steps have from having a telecoms company pay its taxes been taken to improve the efficiency of public on time, rather than delaying by a few days, spending. The Government has developed will far outweigh that from expanding the a public investment management manual net of smaller taxpayers or formalizing small to facilitate improved project appraisal businesses. However, tax authorities should and prioritization. To familiarize the use of not just follow the path of least resistance. The this manual, the Government is rolling out authorities should not forget that the non- training to all those who need it. However, participation of small and medium size firms more intense efforts to reduce and The Government can reduce the legitimacy of the tax system by eradicate corruption are also necessary. needs to strike making it seem unfair. This threatens the fiscal By whatever means, Tanzania must make the right contract. The authorities need to consider how intense efforts to improve its performance balance between best to implement taxpayer segmentation by in the area of revenue collection. The incentives and size and to tailor tax treatment according to Government needs to strike the right sanctions. To capacity and needs. Compliance challenges balance between incentives and sanctions. some extent, associated with different taxpayer groups To some extent, taxpayers evaluate the taxpayers should be targeted at all levels, given the costs and benefits of paying their taxes. evaluate the different challenges faced. Ultimately, they will pay taxes if they costs and benefits To improve the level of accountability perceive them to be fair, reasonable, and of paying their between the state and the citizen, the without excessive transaction costs. They taxes. use of locally sourced revenues to fund need assurance that their contributions will local services may be considered. Such a be used efficiently and equitably. However, system may facilitate higher levels of local it is not realistic to rely entirely upon the accountability, more flexible decision making moral conscience of taxpayers in this and better local service delivery. The use regard. Tanzanian citizens and businesses of earmarking may also work to overcome need to be aware that if they fail to meet political hurdles. For example, when their tax obligations, they will be punished. Ghana raised VAT from 10 to 15 percent, Political commitment is essential for tax the additional revenues were earmarked reforms to be implemented and sustained. for health and education. However, this While securing this commitment will by approach can limit the ‘optimal’ use of no means be easy, it is vital if Tanzania revenues throughout the economy, as it sets is to secure the funds it needs to finance up parallel incentive structures, which invite economic and social development for the corruption and reduce budget flexibility. benefit of all its citizens. PAGE http://www.worldbank.org/tanzania/economicupdate 48 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Statistical Annexes PAGE http://www.worldbank.org/tanzania/economicupdate 49 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Annex 1: Key macroeconomic indicators 2010-14 (GDP data based revised numbers) Note /1 Fiscal year is used, and it ends June 30th of the mentioned year /2 Calendar year is used, and it ends in mentioned year December 31st. Source: IMF and Tanzania Authorities (MoF, BoT, NBS,). PAGE http://www.worldbank.org/tanzania/economicupdate 50 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Annex 2: Real GDP growth rates 2009-2014 (percent) Source: NBS, GoT PAGE http://www.worldbank.org/tanzania/economicupdate 51 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Annex 3: Shares of economic activity in GDP (current market share) 2009-14 (percent) Source: NBS PAGE http://www.worldbank.org/tanzania/economicupdate 52 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Annex 4: Fiscal framework as a percentage of GDP Source: Ministry of Finance, IMF, World Bank Note: Budget estimates are calculated using the budget figure over the actual revised GDP figure. Annex 5: Balance of payments (percentage of GDP unless other indicated) 2008/9 - 2013/14 Source: BoT, IMF, World Bank PAGE http://www.worldbank.org/tanzania/economicupdate 53 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Annex 6: Monthly imports of goods and services (USD mn) Source: BoT, IMF, World Bank Annex 7: Monthly exports of goods and services (USD mn) Source: BoT PAGE http://www.worldbank.org/tanzania/economicupdate 54 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Annex 8: Inflation rates 2012-2015 Source: BoT PAGE http://www.worldbank.org/tanzania/economicupdate 55 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Annex 9: Monthly food crop prices (Wholesale) Tanzania Shillings per 100kg Source: Ministry of Industry, Trade and Marketing, GoT PAGE http://www.worldbank.org/tanzania/economicupdate 56 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Annex 10: Average wholesale prices: Tanzania shillings per 100kg Source: Ministry of Industry, Trade and Marketing, GoT PAGE http://www.worldbank.org/tanzania/economicupdate 57 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Annex 11: Interest rate structures Source: BoT PAGE http://www.worldbank.org/tanzania/economicupdate 58 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Annex 12: Monetary aggregates (2007/8 – 2013/14) Source: BoT, IMF, WB PAGE http://www.worldbank.org/tanzania/economicupdate 59 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Annex 13: National debt developments Source: BoT PAGE http://www.worldbank.org/tanzania/economicupdate 60 The World Bank Group Macroeconomics and Fiscal Management Global Practice Africa Region Annex 14: Poverty by geographic regions Source: NBS 1/ Monthly expenditure per adult PAGE http://www.worldbank.org/tanzania/economicupdate 61 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N Annex 15: Tanzania mainland tax revenue collection 1996/7-2013/14 Source: NBS 1/ Monthly expenditure per adult PAGE http://www.worldbank.org/tanzania/economicupdate 62 TA N Z A N I A E C O N O M I C U P D AT E J U LY 2 0 15 , 7 T H E D I T I O N http://www.worldbank.org/tanzania/economicupdate