Ways to tackle illicit financial flows, strengthen Tanzania’s budget

Dar es Salaam. Tax and budget experts have proposed key measures to curb illicit financial flows (IFFs) and strengthen Tanzania’s national budget.

These include strengthening legal frameworks, improving agency coordination and increasing transparency.

The Tax Working Group (TWG) shared the proposals during a recent breakfast debate organised by the Policy Forum, titled Illicit Financial Flows: A Burden on Tanzania’s National Budget.

Among the suggestions, the TWG called for implementing advanced tax monitoring tools, enhanced international cooperation, increased budget allocations for agriculture and timely fund disbursements.

They also recommended strengthening civil society oversight.

The Youth Partnership Countrywide (YPC) executive director, Mr Israel Ilunde, presented the group’s key recommendations to address IFFs in Tanzania.

He urged the ministry of Finance and the Attorney General’s Office to work together on a comprehensive review of tax laws, focusing on those that allow multinational corporations to shift profits offshore.

“The review should involve the Tanzania Revenue Authority (TRA) and amend the Tax Administration Act and Investment Act to ensure tax incentives are transparent, time-bound and performance-based,” he said.

He further proposed the establishment of a public registry to disclose the true beneficial owners of shell companies and the strengthening of whistle-blower protection laws to encourage reporting of financial crimes.

Furthermore, Mr Ilunde called for the development of a centralised electronic database to enable institutions such as the Bank of Tanzania (BoT), TRA, and the Financial Intelligence Unit (FIU) to share real-time financial data.

A new task force should be formed to conduct joint audits in high-risk sectors like mining, trade, and banking.

He also recommended wide-scale digital monitoring, including mandatory e-invoicing, AI-driven forensic auditing, and the creation of a unit for continuous system upgrades within the TRA.

The FIU should be enhanced with advanced data analysis tools, and a national risk assessment on money laundering and terrorist financing should be carried out.

“The legal framework should be amended to fully criminalise these activities in line with international standards,” said Mr Ilunde.

According to him, an IFF recovery fund should be established, with recovered funds directed toward agricultural development and smallholder farmers.

He said an independent oversight body should monitor the use of these funds.

Mr Ilunde, speaking on behalf of the TWG, called for increased support for civil society organisations (CSOs) and investigative journalists to enhance transparency in Tanzania’s financial system.

Highlighting the gravity of IFFs, Mr Ilunde revealed that Tanzania loses an estimated $1.83 billion (approximately Sh4.67 trillion) annually due to IFFs, depriving critical sectors such as education, health, and agriculture of essential resources.

“This loss could bridge Tanzania’s fiscal policy gap and support vital services and infrastructure development,” he said, noting that the agriculture sector, in particular, has suffered due to insufficient funding for key programmes.

Mr Ilunde warned that unchecked IFFs could hinder Tanzania’s development goals by contributing to poor budget implementation, low revenue collection, and reduced economic growth.

The TWG also identified weak governance structures and insufficient oversight in key institutions as major factors facilitating tax evasion, corruption, and fraud, noting that these gaps enable illicit financial activities that drain public resources.

International research supports these findings as the Global Financial Integrity (GFI) estimates that over $1 trillion was lost globally due to IFFs between 2010 and 2020, with trade mispricing being a significant factor.

The Organisation for Economic Co-operation and Development (OECD) reported in 2022 that tax evasion alone costs countries $240 billion annually.

In Africa, the losses are particularly severe with a high-level panel of leaders estimating that Africa lost $50 billion to IFFs in 2015, later revising the figure to $88.6 billion, equating to 3.7 percent of the continent’s GDP, according to the United Nations Conference on Trade and Development (UNCTAD).

Impact of IFFs to Tanzania

In Tanzania, the impact of IFFs was evident in the 2022/23 budget shortfall, which saw a deficit of Sh360 billion.

Despite collecting Sh41.48 trillion, the government could not meet its approved budget of Sh41.84 trillion.

Mr Ilunde argued that tackling IFFs could have not only covered this deficit but also increased funding for vital sectors, especially agriculture.

Furthermore, Tanzania’s national debt has increased from Sh64.5 trillion in 2021 to Sh82.2 trillion in 2022/23, partly due to reliance on loans to fill budget gaps.

He called for stronger anti-IFF measures to reduce dependence on external borrowing and ensure sustainable funding for development, particularly in agriculture.

Despite international commitments, Tanzania has struggled to meet the 10 percent agriculture budget target outlined in the Malabo and Maputo declarations, resulting in the sector’s chronic underfunding.

A discussant and lecturer at the University of Dar es Salaam (UDSM), Dr Richard Mbunda, highlighted the alarming financial losses in Africa, which exceed inflows from Official Development Assistance (ODA) and Foreign Direct Investment (FDI).

He said Africa receives approximately $48 billion annually in ODA and $54 billion in FDI, yet billions are lost through IFFs, including tax evasion, corruption, smuggling, and money laundering.

Dr Mbunda stressed that these losses have a severe impact on developing nations like Tanzania, which struggle with weak regulatory frameworks and global financial secrecy.

“These issues drain resources, impede development, and leave countries vulnerable, preventing them from asserting economic sovereignty,” he said, noting that tax evasion is often a result of systems unfriendly to taxpayers.

He pointed out the TRA electronic filing system and the Tax Administration Diagnosis Assessment Tool as efforts to improve tax compliance despite challenges that remain ineffective in addressing evasion.

The UDSM don stressed that the $1.83 billion lost annually through IFFs could be used to enhance Tanzania’s agricultural sector, particularly by investing in smallholder farmers and local industries.

Financial expert, Mr Salum Lupande, emphasised the need for policies that attract foreign investments while upholding sustainable development principles.

He warned against accepting illicit funds that could harm the country’s long-term prosperity.

Freelance journalist and lawyer, Mr Pascal Mayala, raised concerns about aid money flowing back to donor countries instead of benefiting Tanzania.

He cited the Standard Gauge Railway (SGR) project, where regime changes led to the withdrawal of funding from the Chinese-backed plan.

“We need to adopt a self-reliant approach. The country should rely on its expertise and set the terms for foreign partnerships,” he said.

Mr Clay Mwaifwani from the Legal and Human Rights Centre (LHRC) pointed out that Tanzania receives far less aid than the amount lost through IFFs.

Despite attracting foreign investment, especially in mining, Tanzania continues to experience significant capital outflows.

“Botswana has a more equitable model with multinational companies, ensuring the country has shares with parent companies, not just subsidiaries. This allows for participation in all decision-making meetings,” he said, suggesting that Tanzania should aim for greater ownership in such ventures.

A senior official from the National Audit Office of Tanzania (NAOT), Dr Danato Mayo emphasised the need for better coordination and audits to curb IFFs.

He recommended strengthening TRA’s oversight of the more than 120 multinational companies operating in Tanzania to ensure compliance with local laws.

A local entrepreneur, Ms Aziza Frank, stressed the importance of discipline, accountability, and transparency in tackling IFFs.

She called for reforms to tax holidays for investors, which she argued deprive the government of crucial revenue for development projects.