Proposed budget in Tanzania sharpens focus on industry

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A new draft budget released in Tanzania last month emphasises capital projects as a means to further boost industrial activity in what is already one of Africa’s fastest-growing economies.

The draft budget for FY 2017/18, tabled on June 9 by the Ministry of Finance and Planning (MoFP), aims to raise real GDP growth to 7.1% in 2017, up from 7% the previous year, while shrinking the budget deficit from 4.5% to 3.8% of GDP, and keeping inflation within the targeted band of 5-8%.

A country of 52m, Tanzania remains one of the strongest-performing economies in the six-member East African Community, with the IMF forecasting GDP growth of 6.7% this year on the back of robust industrial growth.

Government support for local industry

Under the theme of “Industrialisation for Job Creation and Shared Prosperity”, the government’s new TSh31.7trn ($14.2bn) spending proposal outlines flagship projects such as building a new standard-gauge railway line, revitalising state carrier Air Tanzania, setting up special economic zones to draw industrial investors and developing a $30bn liquefied natural gas plant in partnership with international oil majors.

The draft also proposes a range of fiscal policies aimed at stimulating growth in industry, which has grown by about 8% a year over the past five years and accounts for as much as one-quarter of GDP, according to state agency Tanzania Invest.

One such measure is a proposed cut in corporate income taxes for new assemblers of vehicles, tractors and fishing boats, from 30% to 10% for the first five years of operation.

Another is exemption from value-added tax on procurement and import of capital goods used to manufacture edible oil, textiles, leather and pharmaceutical products, a move expected to support small and medium-sized industries.

Certain import duties would also be reduced or eliminated, including on wheat grain, linear alkylbenzene sulphonic acid (used to make soap), complete knock-down motorcycle kits and materials for shipbuilding.

In a related development, in May the Ministry of Lands, Housing and Human Settlements Development announced the intent to allocate some 33,600 ha of land for industrial development across 14 separate areas in the coming years, saying it had provided roughly 7700 ha for this purpose during FY 2015/16.

New revenue streams

Although these measures offer critical support for long-term industrialisation, the budget plan also includes ambitious revenue collection targets, with tax and duty increases on certain goods.

In its 2017/18 draft budget the MoFP proposed a number of revenue-boosting changes to its import and excise tax regimes. Import duties on flat-rolled iron and steel products such as rods and bars would rise from 10% to 25%, or $250 per tonne, whichever is higher. Duties on paper products would likewise jump from 10% to 25%, while taxes on aluminium products would be introduced for the first time at 25%.

Other measures would affect beverages producers: import taxes per litre would rise on soft drinks and bottled water from TSh58 ($0.025) to TSh61 ($0.027) and on beer made with local ingredients from TSh429 ($0.19) to TSh450 ($0.20). Excise taxes on all other beer would jump from TSh729 ($0.32) to TSh765 ($0.34), and on non-alcoholic beer and energy drinks from TSh534 ($0.23) to TSh561 ($0.25).

Pressure from tax hike

This is expected to have an impact on consumer spending. According to the Confederation of Tanzania Industries (CTI), a similar move in FY 2012/13 that raised excise duties on beer by 25% caused sales to fall by 8% for local producer Serengeti Breweries, thus ultimately lowering state revenues.

As retailers tend to pass such costs on to consumers, the CTI has argued against the move, saying that maintaining current rates would actually boost the tax take on beer, currently at around TSh65bn ($29m). It calculates that a 5% increase in sales volume can lead to a 15% rise in government income from the industry.

Balancing budgets

However, the government’s impetus for the tax increases is fairly simple: a recent budget brief from consultancy KMPG reports that as of April the government had collected TSh29.5trn ($13.2bn), just 70% of its target revenue for FY 2016/17, while its spending had reached TSh15.4trn ($6.9bn), or 87.4% of the target.

Development expenditure, meanwhile, was TSh4.5trn ($2bn), just 38.5% of the amount planned, highlighting the importance of improving revenue realisation and tax regime stability.

While Tanzania has ultimately managed to avoid many of the travails other African markets have faced over the past 18 months – Ghana and Nigeria have both seen widening spending gaps as a result of lower export revenues, for example – the draft budget underlines the government’s desire to aggressively limit any weakening in public finances.

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