This year’s budget must pivot toward inclusive growth

Hon Dr Mwigulu Lameck Nchemba, Tanzania’s Minister of Finance, has a tough job in Dodoma today. The collective ears of the nation will be turned to their radios as he lays out the government’s fiscal and monetary outlook, plans, and new tax measures for the coming year. Expectations are rising. We are clearly past the transition triggered by the passing of the late President John Magufuli. In other words, we will now see the economic ideas and posture of this sixth-phase government assert themselves fully.

I am sure the minister will say that the economy has been growing, and he is not wrong. However, GDP is often the main concern of economists. The wider public often cares about how that growth translates into cash in their pockets and mobile wallets. They care about how much their maize flour, kerosene, and beers will cost. Critically, the demographics of this country mean that growth alone is insufficient. Growth must touch the lives of ordinary Tanzanians.

The good news is that all signs indicate that the Covid pandemic is behind us. I was in Arusha last week; the city is buzzing with a visible uptake in tourism this year. This is important because tourism does two things that few sectors manage to do: it employs a lot of people and also keeps the country’s balance of payments buoyant by bringing in foreign exchange. In fact, tourism has been a number one or two foreign exchange earner for quite some time.

According to the Bank of Tanzania, tourist visits increased to 409,082 in the quarter ending March 2023 from 289,372 in the corresponding quarter in 2022.

However, there seem to be fewer investments in new hotel and leisure facilities. In fact, for the period ending March 2023, the credit extended to the hotel and restaurant sectors shrank by 8.2 percent.

This may be the reason why President Mama Samia Hassan made the point at the recent Tanzania National Business Council that players in that sector should build more hotels.

Another foreign exchange earner on the rise is mining and the broader extractive sector.

It is experiencing an upsurge in investments the likes of which we only saw a decade ago. According to the Bank of Tanzania, gold production by large-scale miners increased by more than 10 percent in the quarter ending March 2023, to $443.6 million from $400.6 million in the corresponding last quarter.

This is not quite where it was in the year 2020 ($2.96 billion), but the trajectory for this year’s exports may be higher than the pre-pandemic levels, especially given the recent investments in gold mines.

Looking forward, all the major mines are reporting healthy revenues and profitability. Geita Gold (AngloGold Ashanti) is looking to start using grid power as opposed to diesel power generation by the end of 2023 while its mineral reserves increase due to some positive success in exploration.

Barrick Gold reported more than $1 billion worth of revenues in the year 2022, with increases in mineral reserves for the Bulyanhulu and North Mara mines and the acquisition of the Tembo licences, meaning longer lives for the mines. Non-gold revenues have also increased significantly.

Notably, coal exports have increased more than tenfold in the year ended December 2022 (to over $160 million), driven largely by the increased demand triggered by the Russian-Ukraine crisis.

There has been an equally positive trend in the financial services sector. Credit growth to the private sector grew by a stellar 25 percent in March 2023, with credit growth to mining and quarrying at a high level of 31.8 percent. This trend is perhaps the reason why all the major banks reported record profits in the last year.

What remains stubbornly high in the financial services sector is overall lending rates, which average 16.03 percent, a marginal decline from 16.28 percent. This therefore means that borrowing costs are still quite high in Tanzania, which directly impacts financial inclusion.

You would think that all of that is positive news. However, over 25 percent of Tanzanians still live below the poverty line, with only marginal declines in the last five years. For this budget to be effective and meet the needs of the majority of Tanzanians, it has to address this chronic poverty problem.

This is the reason why it is so critical for this budget to pivot toward inclusive growth.

So, what can the minister do with his budget today? The first thing is obviously to not get in the way of the growth that the country is experiencing.

Mining and tourism are already performing well, which is good for the shilling. These sectors employ many people and therefore have the potential to put a dent in unemployment and poverty levels. In the case of mining, a few things are evidently going to spur even further investments in that sector.

Much has been written about the capital gains tax implications of indirect disposals of mining entities. I would expect the minister to address this in this budget reading.

It may not be a perfect solution, but the minister would be wise to at least exempt local transactions from such capital gains.

I would also expect the Minister to amend the Income Tax Law in such a way that raising funds by way of new partners (equity contributions) is also not subject to capital gains, as this does not really imply a disposal of assets.

Issues persist around the deductibility of corporate social responsibility expenses as well as royalties for tax purposes.

You would be hard-pressed to find a jurisdiction where legitimate expenses, such as royalty expenses, are not deductible for tax purposes. In this sense, Tanzania is not great. And lastly, on mining, given the fact that close to $3 billion will be spent on mining investments in the country, it is likely that quite a lot of VAT refunds will be accrued. I would expect the Minister to allocate adequate funds for VAT refunds to smooth cash flow for the mining companies.

The tourism sector is cash-strapped. Any disruptions are bound to have negative consequences. One pain point for the tourism sector is the payment of VAT upon receipt of deposits. Players in the sector have always sought to have VAT matters specific to their sector addressed to meet their special circumstances.

The other matter pertains to the deductibility of expenses related to employees working in remote areas.

Lastly, for growth to be inclusive, there must be deliberate investments in areas that touch the majority of Tanzanians.

These areas are agriculture and education. The share of banking credit given to agriculture is still very low, representing only 8.7 percent for the period ending March 2023. More must be done to intensify productivity in this sector. Given Tanzania’s demographic profile and the potential for destabilising impacts of unemployment, the Minister must allocate sufficient resources to skilling the young people of this country.

Growth is great and needed if Tanzania is going to continue making economic progress. Countries like Mauritius, which have outperformed most African nations, posted over 5 percent growth for decades before visibly transforming their economies.

Tanzania too is on the path of growth, but we need the growth to be inclusive and meaningful. Tanzania certainly cannot rest on its laurels and must seek to further strengthen and grow the tourism and mining sectors.

At the same time, more deliberate work is going to be needed in order to increase productivity in agriculture so that more of the citizens can enjoy the fruits of this growth.