The International Monetary Fund (IMF) has sounded the alarm over the huge government budget deficit, currently standing at over Sh847 billion. A visiting IMF delegation that assessed the country’s fiscal environment said it was concerned about the government’s failure to align it expenditure with revenue. In a report released after consultations with treasury chiefs, IMF team leader Paolo Mauro advised the government to make realistic revenue assumptions.
Already in its third quota of the current financial year, Tanzania’s budget deficit is Sh847 billion, according to the latest Monthly Economic Review (MER) report by the Bank of Tanzania (BoT) released in December 2013. According to the IMF, revenue shortfalls and subsequent expenditure compression experienced during the current fiscal year reinforce the importance of making realistic revenue assumptions during the upcoming budget cycle.
Experts agree that such shortfalls are the result of the government’s tendency to rely on tax revenues at the expense of non-tax revenue. “The government puts too high revenue targets and at the end fail to meet the goal,” says Dr Haji Semboja, a senior economics lecturer at the University of Dar es Salaam. “This is because of concentrating on taxing formal sources alone and forgetting informal and other sources that could provide enough revenue.” But Bank of Tanzania Governor Benno Ndulu told The Citizen yesterday that the government revenue estimates are real and it is only that some tax measures were not rolled out as expected.
According to Prof Ndulu, the current shortfall is the result of faltering in implementing the new tax measures. He added: “In the past three years, our revenue collection has been very good. In 2010/2011, we exceeded the target and in the following two financial years we recorded between 97 per cent to to 98 per cent revenue achievement. This tells us that the revenue targets are not far-fetched.”
One of the problematic tax revenue uptakes was the Sim Card tax that met stiff opposition from the public and mobile companies and had to be scrapped.
The IMF expects the upcoming mid-year budget review to reduce expenditure allocations to align with available resources. Dr Semboja feels, though, that the same Bretton woods institutions–the IMF and the WB–cannot escape blame. It is advice in the past from the same institutions, he said, that led to poor investment and fiscal policies that affected economic productivity and the government’s self-sufficiency.
“The government has been relying on borrowing to finance part of its budget but these borrowed funds are not invested to generate profits, hence the government continues to rely on borrowing because it does not have development projects that generate revenue,” said Dr Semboja.
According to an IMF delegation that visited Tanzania from February 12 to 25 this year, the expenditure arrears have risen considerably, especially for road projects. “To preserve the credibility of fiscal policy, further policy measures are needed to avoid the accumulation of new arrears and to clear existing ones after verification,” says the IMF report.
Efforts to get the Treasury to comment on the issue proved futile.
The IMF wants the government to preserve macro-economic stability for rapid growth to continue. It advised Tanzania to preserve fiscal space for infrastructure investment and priority social spending while gradually reducing the fiscal deficit to maintain debt sustainability. As of December last year, the foreign and local debt stood at Sh27 trillion.
The IMF believes that the government’s tax policy reforms under preparation, including a review of the value added tax, have the potential to improve efficiency and to mobilise additional resources while sharing the burden more fairly. “Agreement was reached at the technical level on policy measures that, once endorsed by the Government, would permit concluding the final review under the Standby Credit Facility (SCF), subject to approval by the IMF’s Executive Board.
The mission completed the assessment of recent performance under the Standby Credit Facility (SCF) and discussed a possible new Policy Support Instrument (PSI) programme.
The team met Minister of Finance Saada Mkuya Salum, Governor of the Bank of Tanzania Prof Benno Ndulu, and other senior government officials. “Broad agreement was also reached on the general outlines of a programme that could eventually be supported under a new Policy Support Instrument, once detailed discussions are completed,” says the statement.
According to the team, Tanzania’s economic growth remains strong and inflation is expected to further moderate by mid-2014 to the medium term target of five per cent.
The next IMF Executive Board meeting is tentatively planned for late April 2014.