Workshop: Fiscal Challenges Facing Tanzania – A second cut at the issues

What are the fiscal policy options for the Tanzanian authorities in the context of increasing pressures on public expenditure and flattening revenue mobilisation rates? A joint IGC-Tanzania and Bank of Tanzania workshop discussed the alternative financing mechanisms available and their implications for Tanzania’s fiscal sustainability.

Workshop background

In December 2011 the Ministry of Finance and Economic Affairs in collaboration with the Bank of Tanzania requested the IGC to undertake a study on Fiscal Challenges Facing Tanzania. The broad objective of the study was to assess fiscal policy options facing the Tanzanian authorities in the context of increasing pressures on public expenditure and flattening revenue mobilisation rates. The study would review and recommend on the alternative financing mechanisms available and their implications for Tanzania’s fiscal sustainability. In addition, the study would also asses the recurrent cost implications of scaling up development expenditure to finance public infrastructure and social sectors such as education and health.

Specifically, the study would shed some light on the following broad question:

How much ‘fiscal space’ does Tanzania have?
What is the capacity for non-concessional financing, both domestic and external?
What is the scope for alternative financing mechanisms for public infrastructure (BOTs, PPPs etc)

Following this request, IGC consultant David Bevan (Oxford University) worked closely with staff of the Bank of Tanzania and Ministry of Finance to undertake this study, and the draft report was submitted to the Deputy Permanent Secretary, Ministry of Finance (Dr. Likwelile) and Prof. Benno Ndulu, Governor – Bank of Tanzania, in early April, 2012. This timing was good as the 2012/13 budget preparations were on-going and as it turned out, the paper was widely circulated within the Ministry of Finance, particularly to the senior staff who were involved in the budget preparation exercise.

Workshop discussion

Both the Governor and Deputy Permanent Secretary requested the IGC to organise a half-day country workshop to enable thorough discussion of the paper with the wide cross-section of policy makers and stakeholders in the country. Since the workshop was based on the first draft of the paper, participation was narrowly focused on core Government players, with the workshop attended by staff from the Ministry of Finance, Tanzania Revenue Authority and Bank of Tanzania, including the Governor.

During the workshop, David Bevan made a one-hour presentation on the “Thinking about some of the Fiscal Challenges Facing Tanzania: A second cut at the issues”. The presentation was followed by 90 minutes of intensive discussions. It was noted that there is a need to factor into the analysis the prospects of the gas economy and how this may impact on the denominators of debt sustainability analysis (GDP, revenue and exports) to have a more realistic future-looking assessment of the fiscal and debt space that Tanzania may have.

It was also noted that the recommendation offered by the paper on re-examining tax exemptions in Tanzania was very important, and that the 2012/13 budget has taken steps towards this direction. However, a call was made to compare Tanzania (in terms of tax exemptions) with other natural resource economies rather than Kenya and Uganda. This is because exploration and extraction of natural resources which involves huge initial capital may require more generous fiscal incentives than in other sectors, such as financial sector.

It was further noted that the recommendation to consider appropriability of public projects is very useful and the Planning Commission was called upon to seriously consider this advice.

In line with the paper, participants generally agreed that cash budget has served the country very well in the past in terms of imposing fiscal discipline, and that cash budget holds potentials for further improving fiscal discipline in the future, instead of adopting explicit fiscal rules.

Participants pointed out that the paper has raised very important issues regarding Tanzania’s previous experience with public-private partnerships (PPP), which suggests that success on this mode of financing has been dismal. It was felt that such evidence should provide important lessons for the future PPP arrangements, and generally on the efforts towards improving public investment efficiency in the country.