TANZANIA ECONOMIC UPDATE The Efficiency and Effectiveness of Fiscal Policy in Tanzania Issue 19 2023 Tanzania Economic Update The Efficiency and Effectiveness of Fiscal Policy in Tanzania Issue 19 2023 THE WORLD BANK GROUP | EAST AND SOUTHERN AFRICA REGION MACROECONOMICS, TRADE AND INVESTMENT GLOBAL PRACTICE © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclu- sions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Publication design and layout by The Word Express, Inc. TABLE OF CONTENTS Acronyms and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi 1. Recent Economic Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Economic Activity and Poverty Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Monetary Policy and Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Fiscal and Debt Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Balance-of-Payments Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 2. Macroeconomic Outlook and Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Global Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Outlook and Risks for Tanzania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 3. Special Focus: The Efficiency and Effectiveness of Fiscal Policy in Tanzania . . . . . . . . . . . . . .27 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Benchmarking Public Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Historical Overall Expenditure Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Expenditures by Economic Classification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 Budget Credibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 Expenditures by Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 The Efficiency of Public Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 Benchmarking Tax Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 The Historical Performance of Tanzania’s Tax System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Indirect Taxes: Key Trends and Assessment of Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Direct Taxes: Key Trends and Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Revenue Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40 iii The Distributional Impact of Fiscal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 The Distributional Effects of Taxation and Public Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 The Progressivity and Marginal Contribution of Each Tax and Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 The Findings of the CEQ Analysis in Historical and International Context . . . . . . . . . . . . . . . . . . . . . . . . . .47 Annex 1: Core Macroeconomic Data Sources for the Report . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Annex 2: Zanzibar Recent Economic Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .53 Annex 3: Summary of Special Focuses from the Latest Tanzania Economic Updates . . . . . . . . . . . .57 Annex 4: Composition of Government Subsidies by Project, Tsh, FY2021/22 . . . . . . . . . . . . . . . . 59 Annex 5: The DEA Efficiency Frontiers Show a Direct, Positive Relationship between Per Capita Health Spending and Key Health Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Annex 6: The DEA Efficiency Frontiers Show a Similarly Positive Relationship between Per Capita Education Spending and Education Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63 Annex 7: The DEA Reveals that Tanzania’s Health Expenditures Are Less Efficient than those of Many Comparable Countries … and its’ Education Expenditures Are Among the Least Efficient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Annex 8: Government Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Annex 9: Public Spending, FY2017/18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 List of Figures Figure 1 GDP Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 2 GDP Growth by Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Figure 3 Cement Consumption and Electricity Generation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 4 Deviation in Growth, Historical vs. 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Figure 5 Headline Inflation by Component . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 6 Drivers of Inflation, Tanzania and Sub-Saharan Africa, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Figure 7 Monetary Aggregates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 8 Growth in Private Credit and its Drivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Figure 9 Revenues of the Central Government of Tanzania, FY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 10 Breakdown of Recurrent Expenditures, FY2022/23. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 11 Tanzania’s Public Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 12 Concessional External Debt by Component. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 13 The Current-Account Balance and its Drivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Figure 14 The Growth of Goods Exports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Figure 15 Tourism Receipts and Arrivals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 16 Tanzania – Imports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 17 Global Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Figure 18 Real GDP Growth Forecasts under Alternative Scenarios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 iv TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA Figure 19 Trends in Government Spending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Figure 20 Composition of Development Expenditure by Sector. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Figure 21 Sources of Financing for Public Spending and Top 10 Sources of Finance for Development Spending, FY2020/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Figure 22 Total Public Spending in Tanzania and Comparator Countries, 2020 or Latest Available Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Figure 23 Composition of Government Spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Figure 24 The Wage Bill in Tanzania and Comparator Countries, 2020 or Latest Available Data. . . . . 30 Figure 25 Public Spending on Goods Services in Tanzania and Comparator Countries, 2020 or Latest Available Years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Figure 26 Composition of Capital Expenditures by Sector, 2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Figure 27 Approved and Actual Expenditures by Budget Type, FY2017/18–FY2020/21. . . . . . . . . . . 32 Figure 28 Budget Execution Rates for Development Projects by Financing Source. . . . . . . . . . . . . . . . 33 Figure 29 Functional Composition of General Government Spending. . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Figure 30 Social Spending in Tanzania and Comparator Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Figure 31 Tax Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Figure 32 Tax Collection vs. Tax Capacity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Figure 33 Historical VAT Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Figure 34 Income Level and VAT Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Figure 35 VAT C-Efficiency, 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Figure 36 The Excise Tax Mix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Figure 37 Share of Wealth Owned by Households in the Bottom 50%, the Top 10% Excluding the Top 1%, and the Top 1% of the Income Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Figure 38 PIT Revenue and Income Level, 2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Figure 39 CIT Revenue and Income Level, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Figure 40 CIT and PIT Productivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Figure 41 CIT Collection, Rate and Productivity in Selected Countries, 2018. . . . . . . . . . . . . . . . . . . . . . 39 Figure 42 Marginal Effective Tax Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Figure 43 Property Taxes Revenue, 2010–2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Figure 44 Limited Liability Corporations and VAT-Registered Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Figure 45 Registered Taxpayers, FY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Figure 46 TADAT Scores, Tanzania and Comparators, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Figure 47 PEFA Indicator 19: Revenue Administration, 2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Figure 48 PEFA Indicator 20: Accounting for Revenue, 2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Figure 49 Inequality Indicators Across CEQ Income Concepts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Figure 50 Kakwani Index for Individual Taxes and Expenditures Relative to Market Income Plus . . . . 46 Figure 51 Main Sources of Household Power by Welfare Decile in Mainland Tanzania. . . . . . . . . . . . . 47 Figure 52 Difference in the Progressivity of Fiscal Interventions Between FY2011/12 and FY2017/18. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Figure 53 The Redistribution Impact of Fiscal Policy, Tanzania and Comparators. . . . . . . . . . . . . . . . . 49 Figure 54 Poverty Headcount at Market Income and Consumable Income, Tanzania and Comparators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 List of Boxes Box 1 The State of Tanzania’s Economy in Six Charts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Box 2 Recent Inflation in Tanzania vs. Regional Countries: Some Observations. . . . . . . . . . . . . . . . 6 Table of Contents v Box 3 Government Expenditure Arrears: Current Status and Revised Arrears Management Strategy (2022). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Box 4 Preliminary Budget Analysis for FY2023/24. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Box 5 External Competitiveness in Tanzania. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Box 6 Tanzania’s Declining Official Foreign-Exchange Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Box 7 Tanzania’s PFM Challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 List of Tables Table 1 Priority Reforms to Improve the Efficiency and Effectiveness of Fiscal Policy . . . . . . . . . . . . xvi Table 2 Central Government Fiscal Operations, % of GDP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Table 3 Medium-Term Outlook, 2021–2025. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Table 4 Poverty Indicators Across CEQ Income Concepts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Table 5 Simulated Results of Broadening the VAT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 vi TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA ACRONYMS AND ABBREVIATIONS AEs Advanced Economies H1 First Half AGO Angola IMF International Monetary Fund BoT Bank of Tanzania KEN Kenya BWA Botswana LGA Local Government Authority CAD Current Account Deficit SSA Sub-Sharan Africa CAG Controller and Auditor General TADAT Tax Administration Diagnostic CCT Conditional Cash Transfer Assessment Tool CEQ Commitment to Equity TRA Tanzania Revenue Authority CG Central Government Tsh Tanzania Shilling CIT Corporate Income Tax TZA Tanzania CMR Cameroon UAE United Arab Emirates COVID-19 Coronavirus Disease of 2019 UGA Uganda CPI Consumer Price Index UMICs Upper-Middle Income Countries CY Calendar Year US United States DEA Data-envelopment Analysis US$ United States Dollars DR Dominican Republic LHS Left Hand Side DSA Debt Sustainability Analysis LICs Low-Income Countries EFD Electronic Fiscal Device LMICs Lower-Middle Income Countries EFF Extended Fund Facility LSO Lesotho EMBI Emerging Markets Bond Index MFO Macro, Finance, Outlook EMDEs Emerging Markets and Developing MoFP Ministry of Finance and Planning Economies MOZ Mozambique FDI Foreign Direct Investment MPO Macro Poverty Outlook FY Fiscal Year MUS Mauritius FYDP Five-Year Development Plan MUSE Mfumo wa Ulipaji Serikalini GDP Gross Domestic Product M3 Extended Broad Money Supply GHA Ghana NAM Namibia HBS Household Budget Survey NBS National Bureau of Statistics HCI Human Capital Index NDA Net Domestic Assets vii NFA Net Foreign Assets ppt. Percentage Points NGA Nigeria Q1/4 Quarter 1/4 No. Number RHS Right-hand Side OCGS Office of the Chief Government RWA Rwanda Statistician SMEs Small and Medium Enterprises PAYE Pay As You Earn SOE State-owned Enterprises PEFA Public Expenditure and Financial VAR Vector Autoregressive Accountability VAT Value Added Tax PFM Public Financial Management WB The World Bank PFMRP Public Financial Management WDI World Development Indicators Reforms WEF The World Economic Forum PIT Personal Income Tax y/y Year-over-Year or Year-on-Year PMI Purchasing Managers’ Index ZAF South Africa PPG Public and Publicly Guaranteed 5M The first five Months PPP Purchasing Power Parity 4-qma Four Quarter Moving Average viii TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA PREFACE T he Tanzania Economic Update (TEU) is a Economist, EAWDR), and Revocatus Washington biannual report describing the recent evolu- Paul (ET Consultant, EAEPV) provided input on tion of Tanzania’s economy, and each edition poverty trends. Sergiy Kasyanenko (Economist, highlights a subject of critical interest to policymakers. EPGDR) prepared the section on global economic The TEU series is also designed to reach a broader conditions. Box 1 (The State of Tanzania’s Economy audience of stakeholders that includes the private in Six Charts), Box 2 (Recent Inflation in Tanzania sector, the government’s development partners, and vs. Regional Countries: Some Observations) and the public. To ensure that the TEU is accessible to Box 5 (External Competitiveness in Tanzania – as wide a readership as possible, each edition is Where Does it Stand?) were prepared by Saadia presented in a relatively nontechnical style. Refaqat (Senior Country Economist, EAEM1), while This nineteenth edition of the TEU was prepared Box 3 (Government Expenditure Arrears: Current by a team from the World Bank’s Macroeconomics, Status) and Box 4 (Preliminary Budget Analysis for Trade and Investment (MTI) Global Practice, with FY2023/24) were prepared by Xu Dong (Consul- contributions from several other Global Practices. The tant, EAEM1) and Saadia Refaqat (Senior Country overall effort was led by Saadia Refaqat (Senior Coun- Economist, EAEM1). Box 6 (Tanzania’s Declining try Economist, EAEM1) and Emmanuel Mungunasi Official Foreign-exchange Reserves: Challenges (Senior Economist, EAEM1). The analysis benefited and Solutions) was written by Xu Dong (Consultant, from advice provided by William Battaile (Program EAEM1) and Emmanuel Mungunasi (Senior Econo- Leader, EAEDR). mist, EAEM1) and Box 7 (Tanzania PFM System Saadia Refaqat (Senior Country Economist, Challenges) was authored by Benjamin Ndazi EAEM1) authored the sections on monetary Mtesigwa (Governance specialist, EAEG1) and policy and inflation, balance-of-payments position Emmanuel Mungunasi (Senior Economist, EAEM1). and macroeconomic outlook and risks, while the Salman Zaidi (Consultant, EAEM1) adapted sections on recent economic activity, fiscal and the special focus section of the report from the World debt developments, and Zanzibar recent eco- Bank’s Tanzania Public Expenditure Review FY2022 nomic synopsis were co-authored by Xu Dong titled the efficiency and effectiveness of fiscal policy (Consultant, EAEM1) and Saadia Refaqat (Senior in Tanzania. The expenditure-benchmarking section Country Economist, EAEM1). Pedro Olinto (Senior in the larger report was authored by Emmanuel Mun- Economist, EAEPV), Rob Swinkels (Lead Country gunasi (Senior Economist, EAEM1) and Irina Capita ix (Consultant, EMFTX). The revenue-benchmarking managed the printing process for this edition of the section was co-authored by Jaffar Al-Rikabi (Senior TEU, with support from Loy Nabeta, who assisted with Economist, EMFTX), and Joseph Massad (Consultant, external communications. Sean Lothrop was respon- EMFTX). The section on the distributional impact of sible for the overall editing of the report. The pictures fiscal policy was written by Rob Swinkels, Ercio Munoz used were procured for this report unless otherwise (Consultant, EAEPV), Elineema Kisanga (Consultant, acknowledged. EAEM1), Vincent Leyaro (Consultant, EAEPV), and The findings, interpretations, and conclusions Josephat Hongoli (Consultant, EAEPV). expressed in this publication do not necessarily reflect Hassan Zaman (Regional Director, EAEDR), the views of the World Bank’s Executive Directors or Asad Alam (Regional Director, EECDR), Abha Prasad, the countries they represent. The report is based on (Practice Manager for MTI, EAEM1), Nathan M. information current as of early August 2023. Belete (Country Director, AECE1), and Preeti Arora The World Bank team welcomes stakeholder (Operations Manager, AECE1) provided guidance feedback on the content of the TEU. Please direct all and leadership throughout the preparation of the correspondence to Saadia Refaqat (srefaqat@world- report. Rehema Mercy Mashayo, Catherine Audax bank.org) and Emmanuel Mungunasi (emungunasi@ Mutagwa, Juma Bruno Ngomuo, and Karima Ladjo worldbank.org). x TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA EXECUTIVE SUMMARY G lobal growth is projected to slow sig- term, as weakening demand, persistent inflation- nificantly in 2023 as continued monetary ary pressures, and high interest rates prevent a tightening constrains the credit supply. more robust expansion. The headline inflation rate is Inflationary pressures remain strong across much expected to remain moderate and close to the cen- of the world, and headline inflation rates continue to tral bank’s target, though elevated global food and exceed policy targets in most inflation-targeting econo- fuel prices will continue to exert upward pressure. mies. Stubbornly high inflation has resulted in higher The current-account deficit is projected to decline borrowing costs, tighter credit conditions, and elevated gradually over the medium term and will be largely financial stress, particularly in commercial real estate financed by concessional external borrowing and for- and other sectors that are highly sensitive to interest eign direct investment. The fiscal deficit is expected rates. Global economic activity is expected to weaken to narrow as the economic recovery boosts domestic substantially in 2023, with the global growth rate revenues while the growth of public spending slows, projected to fall to just 2.1 percent before recovering and the public debt stock should fall from 43.8 per- modestly to 2.4 percent in 2024. Growth in emerging cent of GDP in 2022 to about 38 percent over the markets and developing economies (EMDEs) is also medium term. expected to slow significantly this year due to softening Tanzania has enjoyed a strong post- external demand, intensifying credit constraints, and pandemic recovery, but recent growth has been weaker spillovers from China. The aggregate growth concentrated in sectors that employ few work- rate among EMDEs excluding China is projected to ers from poor households. Wealthier households drop from 4.1 percent in 2022 to 2.9 percent in 2023. with greater human capital and productive assets Meanwhile, the risk of debt distress is rising across have been better positioned to seize the opportuni- EMDEs, especially low-income countries. ties generated by rapidly growing sectors such as Tanzania’s economy has performed rela- construction, information and communications tech- tively well despite a challenging external environ- nology, and real estate. This imbalance in economic ment. The GDP growth rate reached 4.6 percent in opportunities has widened the income gap. Mean- 2022 and is expected to rise to 5.1 percent in 2023, while, job creation is becoming increasingly urgent as supported by an improving business climate and the a young and growing workforce intensifies pressure implementation of structural reforms. Growth is fore- on the labor market. Nevertheless, Tanzania’s pros- cast to average about 5.8 percent over the medium pects for reducing poverty are cautiously optimistic, xi and the national headcount poverty rate is projected contraction in 2020. Its modest risk of debt distress to gradually decline as the recovery continues, though offers some space to prudently utilize debt financing. unstable external conditions, delays in implement- The government’s fiscal position remains relatively ing pro-poor economic policies, and the escalating strong and stable, and international reserves are at effects of climate change could threaten the country’s a comfortable level. To capitalize on its sound mac- hard-won progress on poverty reduction. roeconomic policy environment and to lay the foun- The anticipated recovery of agricultural dation for robust, inclusive, and sustainable long-term output, coupled with an expanding services sec- growth, the government should seize the opportunity tor, is expected to stimulate growth and poverty to implement a more ambitious human capital devel- reduction over the medium term. The government opment agenda. Creating adequate fiscal space to has significantly increased the budget for the agricul- invest in human capital in a context of persistently tural sector, which employs nearly 70 percent of rural high poverty rates, significant downside risks to the workers. As the regional drought subsides, the sector’s economic outlook, and limited budgetary resources growth rate is expected to rise from 3 percent in 2022 will require reforms both to revenue administration to 5 percent in 2025. Greater agricultural output will and public spending. Given the indispensable role of boost household incomes in rural areas, with positive fiscal policy in realizing Tanzania’s ambitious devel- implications for poverty and inequality. Meanwhile, opment vision, this report devotes special attention the rapid expansion of retail and repair services is to understanding how policymakers can effectively expected to drive growth in the services sector, bolster- mobilize additional resources while maintaining sta- ing the incomes of informal urban workers. Finally, the ble budgetary and debt dynamics. continued growth of tourism should support further Closing compliance gaps can help bolster poverty reduction both in urban and rural areas. revenues while establishing a fairer, more efficient The government recognizes that a dynamic tax system. Improved tax collection helped narrow private sector fueled both by domestic and the tax gap from 8 percent of GDP in 2000 to 5.6 per- international investment is crucial to increase cent of GDP in 2017. The government can further productivity, accelerate job creation, and sup- increase tax productivity by adjusting rates, rational- port more inclusive and resilient growth. In 2018, izing exemptions, expanding the tax base, leveraging the authorities adopted the Blueprint for Regulatory digital technologies to enhance tax administration, Reforms to Improve the Business Environment, which and improving compliance management. Introducing focuses on increasing administrative efficiency and a more rigorous system for taxing income from capital promoting transparency in the public sector. The and immovable property could bolster the govern- country’s Third Five Year Development Plan prioritizes ment’s revenue position, while updating cross-border macroeconomic stability, industrial development, and taxation policies could reduce the risks associated trade integration, emphasizing the private sector’s with base erosion and profit-shifting by multinational role in leveraging Tanzania’s geographic position and corporations. Strengthening tax administration at the resource endowments to boost production and sup- top of the income distribution would improve the tax port inclusive growth. These initiatives are consistent system’s equity while increasing revenue mobilization with the National Development Vision 2025, which and reinforcing the social contract. Building the capac- envisages Tanzania as a middle-income country in ity of the tax authorities will be essential to expand which well-developed human capital and an ample collection efficiently and equitably and could lay the supply of high-quality livelihoods yield broad-based groundwork for further reforms. The authorities can gains in living standards.1 complement the ongoing e-filing rollout by enhanc- Tanzania has several macroeconomic ing the integrity of the taxpayer database, which will advantages that could support a successful tran- sition to middle-income status. It is one of the few economies in the region that did not experience a 1 https://mof.go.tz/mofdocs/overarch/vision2025.htm. xii TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA BOX 1: THE STATE OF TANZANIA’S ECONOMY IN SIX CHARTS FIGURE B1.A • Spillovers from Russia’s war in FIGURE B1.B • Tanzania’s import-dependent Ukraine have significantly altered economy continues to face the macroeconomic outlook challenges on the external front across Sub-Saharan Africa. due to the war, the global economic slowdown, and Sub-Saharan Africa Outlook – Anticipated vs Realized elevated commodity prices. 2022 outcome relative to annual meetings MPO, 2021 50 12 Tanzania – Current Account and Inflation = Average changes (RHS) 10 6 6 Percent changes, ppt. 40 42 No. of countries 8 5 5 30 27 28 8 4 4 20 21 20 8 3 3 10 8 2 2 6 0 0 1 1 Deteriorated Deteriorated Deteriorated Improved Improved Improved 0 0 2016 2017 2018 2019 2020 2021 2022e Current account, Inflation, GDP growth, Inflation, average % change % of GDP % average % annual Current account deficit, % of GDP Source: WB-MPO, Annual 2021 and Springs 2023, WB staff estimates. Source: NBS, WB staff estimates. FIGURE B1.C • Despite these external headwinds, FIGURE B1.D • A robust recovery in the tourism economic activity remains strong, sector, coupled with elevated with prudent macroeconomic demand for private credit, management contributing to continues to support growth. sustained increases in output. Tanzania – Tourist Arrivals & Private Credit Tanzania – High-frequency Economic Inidcators 180 30 levels, 2020 = 100 150 25 Intermediate goods, imports Capital goods, imports 120 20 Arrivals in '000 Manufactured goods, exports 90 15 y/y % growth Manufacture of paints 60 10 Electricity generation 30 5 Voice traffic 0 0 Net cement consumption Feb-19 Jun-19 Oct-19 Feb-20 Jun-20 Oct-20 Feb-21 Jun-21 Oct-21 Feb-22 Jun-22 Oct-22 Feb-23 Jun-23 0 50 100 150 200 250 Tourist arrivals (left axis) 2019 2021 2022 Private credit (right axis) Source: NBS, BoT, WB staff estimates. Source: NBS, BoT, WB staff estimates. (continued on next page) Executive Summary xiii BOX 1: THE STATE OF TANZANIA’S ECONOMY IN SIX CHARTS (continued) FIGURE B1.E • These improvements FIGURE B1.F • To unlock the economy’s full notwithstanding, Tanzania’s potential, the government will recent growth momentum need to deepen reform continues to lag many of its peers. implementation with support from its development partners. Trend in Real GDP levels, Q4–2020 = 100, 4-qma Governance, Social & Competitveness Indicators 125 levels Water Productivity (2015.US$ Per Cubic Meters) 120 Market Cap of Listed Domestic Companies (% of GDP) 115 Domestic Credit to Private Sector (% of GDP) 110 Access to Electricity (% of Population) 105 Individuals using the Internet (% of Pop) Vulnerable Employment, 100 Total (% of Total Employment) Time to Export, Documentary 95 Compliance (Hours) Q4–20 Q1–21 Q2–21 Q3–21 Q4–21 Q1–22 Q2–22 Q3–22 Q4–22 0 20 40 60 80 100 Tanzania Sub-Saharan Africa Lower middle income Rwanda Botswana Benin Kenya Uganda Tanzania Ghana Mozambique Source: WDI-WB, WEF, WB staff estimates. Note: CBM stands for Cubic Meters, Pop stands for Population, and Emp stands Source: Haver Analytics, WB staff estimates. for Employment. be necessary to expand registration. Improving data ment controls. These issues can be addressed by collection and data analytics, adopting a risk-based improving the reliability of the budget, strengthening approach to compliance management, and hiring and internal controls, and allocating resources on a training more auditors could help ensure that all regis- medium-term basis in line with national priorities. tered taxpayers report and pay their true tax liabilities. Tanzania’s fiscal system substantially A combination of limited fiscal transpar- reduces income inequality, while public spending ency, low budget-execution rates, and a weak on social services more than offsets a moderate public financial management system undermines increase in poverty. By international standards, the impact of public spending in Tanzania. While Tanzania’s fiscal system has a highly positive impact the government has increased expenditures in recent on inequality, and the modest observed increase in years, total public spending remains well below the poverty is consistent with the experience of compa- averages for Sub-Saharan Africa and lower-middle- rable countries. Tanzania’s direct taxes are highly income countries worldwide. Moreover, low spending progressive, and its value-added tax (VAT) also levels do not necessarily imply that expenditures are appears to be moderately progressive, unlike VATs in efficient, and a recent report from the Controller and many comparable countries. Several excise taxes are Auditor General’s office highlighted key weaknesses regressive, including those on wine, spirits, tobacco, in budget credibility, cash management, and commit- and kerosene, but these taxes may reduce the xiv TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA consumption of products associated with negative been accounted for, fiscal policy reduces the pov- social and health consequences. Broadening the VAT erty rate. base would reduce inequality, and the additional VAT Tanzania’s most urgent reform priorities revenue could be used to offset a marginal increase include measures to improve efficiency and in the poverty rate. Implementing a standard VAT effectiveness of expenditure programs and boost rate for water and petroleum products would slightly tax-revenue mobilization. The government should increase poverty by expanding tax liability, but its assess and regulate budget transfers to state-owned distributional impact would be progressive. Expand- enterprises to ensure their sustainability. An analysis ing the VAT base is consistent with improving its fiscal of the implementation capacity of ministries with low efficiency, as exemptions distort relative prices, and it expenditure execution rates could inform efforts to could generate additional revenue to finance social improve procurement systems and strengthen monitor- services, but an increase in conditional cash transfers ing and evaluation. Improved data collection at the will be necessary to shield poor households against local level could help assess the efficiency of local gov- rising tax liability. ernment spending on education and healthcare. The Tanzania’s conditional cash transfers are government should adjust VAT, corporate income tax, progressive, as are public education and the and excise tax rates to increase revenue mobilization, healthcare services provided at outpatient facili- and excise taxes on tobacco should be reevaluated ties. Consistent with their core purpose, conditional to balance revenue and public health objectives. cash transfers are the most progressive government Strengthening taxation on wealthier households is expenditure. Other expenditures that disproportion- vital to improve the equity of the tax system. Reinforc- ally benefit poor households include the provision ing the tax administration’s auditing capacity will be of public primary education, public preschool, and necessary to boost collection efficiency and enhance healthcare at outpatient facilities, as well as public distributional equity, and registration thresholds should assistance for school uniforms. Spending on most also be adjusted to broaden the tax base. The Commit- forms of post-secondary public education is slightly ment to Equity (CEQ) methodology could be used to progressive, except for public vocational schools. assess the impact of proposed fiscal policy changes Once the public provision of social services has on household income, poverty, and inequality. Executive Summary xv Priority Reforms to Improve the Efficiency and Effectiveness of Fiscal Policy TABLE 1 •  Issue Recommendation Time Frame Public Expenditures • Carry out a rapid assessment of the implementation capacity of ministries with low rates of expenditure execution, especially for donor-financed development Development spending. expenditures • Improve public procurement planning to accelerate project implementation. • Strengthen the process for conducting mid-term reviews of budget execution and improve the execution of donor-funded development spending. Local government • Improve data collection on actual public spending by local governments. spending Government spending • Assess the efficiency of public spending on education and healthcare at the local on education and level to identify the causes of the poor performance of social spending. healthcare • Assess the sustainability of recurrent and capital transfers to SOEs based on regulatory fees and standard operating costs. Budget transfers • Based on this assessment, adjust fees or reduce SOEs operating costs within an to state-owned agreed timeframe. enterprises (SOEs) • Gradually eliminate budgetary transfers to commercial SOEs, or, where justified, convert such transfers to loans with specific and transparent tenures and rates. • Require regular financial reporting by all SOEs. Tax Revenues Excise taxes • Re-evaluate excise taxes on tobacco to increase revenue and support public health on tobacco objectives. Productivity of • Consider adjusting the VAT, CIT, and excise tax rates to boost their productivity indirect and and mobilize additional revenue. direct taxes Equity of the • Strengthen taxation on households at the top of the income distribution to tax system improve the tax system’s equity and mobilize additional revenue. Tax • Strengthen the tax administration’s auditing capacity to expand collection administration efficiently and equitably. capacity Tax • Broaden the tax net by realigning registration thresholds. registration thresholds Distributional Impact of Fiscal Policy • Use the CEQ methodology to review proposed changes in taxation and public CEQ analysis expenditure policies, including subsidies, to assess their potential impact on household income, poverty, and inequality. • Broaden the VAT base and use a portion of the revenue generated to increase VAT base funding for social services. Conditional • Consider increasing conditional cash transfers to compensate poor households cash transfers for the negative impact of an expanded VAT base or other fiscal policy changes. Key Short term Short to medium term Medium term xvi TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA 1 RECENT ECONOMIC DEVELOPMENTS Economic Activity and Poverty the overall growth of crop production slowed from Trends 3.6 percent in 2021 to 2.7 percent in 2022. Due to the government’s involvement in the production of forest Despite unfavorable global and regional develop- products to ensure sustainable harvesting, the growth ments, Tanzania’s economy continues to expand of the forestry subsector ticked down from 3.5 percent at a moderate pace. During 2022, the real GDP in 2021 to 3.1 percent in 2022. Meanwhile, the growth growth rate was 4.7 percent year-on-year (y/y), slightly of fishery output fell from 2.6 percent to 1.9 percent. down from 4.9 percent in 2021. This slight decelera- By contrast, livestock production, which accounts for tion reflected a modest decline in the contribution of about 7 percent of total output, has grown steadily at the agricultural sector, while all other sectors broadly a rate of about 5 percent per year over the past two sustained their contributions from the previous year years. Consequently, the aggregate value of agricul- (Figure 1). However, growth was not constant across all tural production declined from 3.9 percent in 2021 to subsectors, and accelerations in some compensated 3.3 percent in 2022. In recent years, the Tanzanian for slowdowns in others (Figure 2). On a sequential authorities have taken important steps to address the basis, real GDP growth bottomed out at 3.5 percent country’s climate-related challenges.2 Tanzania is a in the fourth quarter (Q4) of 2022 before rebounding major food producer in East Africa, but the increasing to 5.6 percent, the highest y/y quarterly growth rate since 2020, in the first quarter (Q1) of 2023. 2 This included the preparation of National Climate Irregular rainfall negatively affected Tanza- Change Response Strategy 2021–26, which entails a nia’s major crops during 2022. According to the set of adaptation and mitigation interventions in major economic sectors. In addition, through national planning National Bureau of Statistics (NBS), crop production— envisaged under the Third National Development Plan, which represents 13 percent of GDP—grew by an authorities are prioritizing the strengthening of the average of 2 percent in the second half of 2022, down systems for environmental protection and sustainable from 6 percent in the second half of 2021. As a result, use of natural resources. 1 GDP Growth FIGURE 1 •  GDP Growth by Sector FIGURE 2 •  (% y/y change, contribution in ppt.) (% y/y change) 6 Other services Arts, entertainment and recreation Health 5 4.9 4.7 Education Real estate Administrative & support ser. Services Professional, Sci. & Tech. 4 Public administration Financial & insurance Information & communication 3 Transport & storage Accommodation & restaurant Trade & repair 2 Construction Water Industry Electricity 1 Manufacturing Mining & quarrying Fishing Agriculture Forestry 0 Livestock Q1-20 Q2-20 Q3-20 Q4-20 Q1-21 Q2-21 Q3-21 Q4-21 Q1-22 Q2-22 Q3-22 Q4-22 Q1-23 2021 2022 Crops 0 2 4 6 8 10 12 Net taxes Services Industry 2022 2021 Agriculture GDP Source: NBS, WB staff estimates. Source: NBS, WB staff estimates. Note: Sci. refers to Science and Tech. refers to Technology. frequency and severity of extreme weather events and sector’s annual growth rate rose from 5.0 percent other climate-related economic disruptions pose a in 2021 to 5.2 percent in 2022, driven by the strong serious threat to its agricultural sector.3 performance of the finance and insurance, accom- The growth of the industrial sector edged modation and restaurant, transportation and storage up from 5.4 percent in 2021 to 5.5 percent in subsectors (Figure 2). Broadly, the underlying increase 2022. Construction led the sector, followed by mining in transport, accommodation, and trade reflected the and manufacturing. Construction grew by 4.4 percent impact of easing travel restrictions adopted during the during the year, representing about two-fifths of the pandemic and normalizing domestic and international total increase in industrial output. As construction demand for trade-related services, as underscored by activity expanded, domestic cement manufacturing the rapid growth of transport and tourism during the rose by 14.9 percent, with a similar increase in cement year.5 However, despite a sustained recovery in eco- consumption during 2022. Meanwhile, the related nomic activity and rising commodity production, the credit offtake also surged by 25 percent. Accelerated growth of subsectors such as information and com- coal production continued to drive growth in the munication, and administrative and support services mining sector. According to the NBS, coal output slowed between 2021 and 2022. increased by almost 2.5 times between 2021 and 2022 amid shortages of crude oil and natural gas caused by Russia’s war in Ukraine.4 As a result, the 3 According to the IMF database, the number of flood- mining sector’s total output growth accelerated from related climate disasters in Tanzania rose from 9.4 percent in 2021 to 10.9 percent in 2022. By con- 10 reported during 2000-10 to 21 in the last ten years. trast, the growth of manufacturing output slowed from 4 According to the Ministry of Minerals, coal production 4.8 percent in 2021 to 4.2 percent in 2022, which increased from 0.98 million tons in 2021 to 2.5 million was partly evident in a deceleration of the growth of tons in 2022. According to the Bank of Tanzania, export of coal recorded at US$160.4 million in 2022, compared manufacturing exports from 32.9 percent in 2021 to to only US$13.2 million in 2021. 18.3 percent in 2022. 5 According to export data from Bank of Tanzania, transport- The services sector was responsible for related exports grew by 20.2 percent in 2022, while almost half of overall GDP growth in 2022. The travel receipts nearly doubled from the previous year. 2 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA Cement Consumption and Electricity FIGURE 3 •  FIGURE 4 • Deviation in Growth, Historical vs. 2022 Generation (% annual change, historcial averages for 1990–2019) 8,400 28 Burundi 7,200 24 Malawi Zambia 6,000 20 Uganda 4,800 16 Mozambique 3,600 12 Zimbabwe Tanzania 2,400 8 Mauritius 1,200 4 Seychelles Kenya 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Congo DR 2021 2022 2023 Cote d’Ivoire Rwanda Domestic cement consumption, tones (left axis) Electricity generation, % y/y growth (right axis) 0 2 4 6 8 10 2022 Historical average Source: NBS, WB staff estimates. Note: Only positive electricity generation growth was represented in the yellow dots. Source: WB-WDI, MPO Springs 2023, WB staff estimates. After slowing in Q4 2022, economic activity in Q1 2023. Since July 2022, tourism arrivals have accelerated in Q1 2023, driven by the industrial consistently surpassed their pre-pandemic averages, and services sectors. Real GDP rebounded to rebounding by 41.4 percent in Q1 2023. Meanwhile, a robust 5.6 percent in Q1 2023, up from a low of travel receipts rose by 51.6 percent in Q1 2023. The 3.5 percent y/y in Q4 2022 and 5.5 percent in Q1 growth of voice-traffic minutes (a proxy for value 2022. The industrial sector’s growth rate rose from addition in the information and communications 6.6 percent in Q1 2022 to 7.7 percent in Q1 2023, subsector) rose to 24.3 percent in Q1 2023, up from a reflecting a 6.2 percent surge in the construction sub- still-robust 22.3 percent in Q4 2022. sector and a double-digit expansion in the mining and Although Tanzania has experienced a quarrying subsector. Supported by the rapid growth of sustained post-pandemic recovery, the economy the trade and repair (+6 percent, y/y) and finance and is still operating below its long-term potential. insurance (+13 percent, y/y) subsectors, the growth Between 2009 and 2019, Tanzania’s annual real GDP rate for the services sector rose from 5.0 percent in growth rate averaged about 6.3 percent, close to the Q1 2022 to 5.7 percent in Q1 2023. average for the previous ten years. While economic High-frequency data confirmed the accel- growth has accelerated in the wake of the pandemic, erating expansion. The average output index for driven by two years of strong domestic demand, it selected industrial subsectors was higher in Q1 has yet to return to its historical long-term trajectory 2023 than in Q1 2022, consistent with the growth (Figure 4). Supported by rising investment, the growth of manufacturing. While domestic cement consump- of domestic demand rose from 4.9 percent in 2021 tion contracted by 1 percent in Q1 2023 due to to 6.8 percent in 2022.6 Moreover, Tanzania’s post- base effects, demand remained robust by historical pandemic recovery continues to lag those of many standards, driven by the growth of related construc- regional peers. The deviation of the country’s growth tion industries. Electricity generation increased by path from those of its closest comparators reflects 9.3 percent in Q1 2023, albeit down from 17 percent in Q1 2022 (Figure 3). Meanwhile, skyrocketing 6 Domestic demand is defined as the sum of total tourism-related services and communications activity consumption and investment. These estimates were helped boost overall services output and net exports prepared by World Bank staff. Recent Economic Developments 3 the country’s large infrastructure and social-spending in 2022—exceeding 4 percent for the first time since needs, including mounting health and education costs 2017. Almost 40 percent of the increase in domestic driven by rapid population growth.7 inflation during 2022 can be attributed to higher food Robust economic growth in the pre- prices (Figure 5),9 as the spike in food-price inflation pandemic era had only a modest impact on caused by Russia’s war in Ukraine compounded the reducing poverty rates. Between 2012 and 2018, effects of a protracted regional drought. Food makes GDP per capita surged by 21 percent, yet the poverty up about 28 percent of Tanzania’s consumer basket, rate fell by just two percentage points. The weak and cumulative food-price inflation increased from effect of economic growth on poverty reduction is 4.3 percent in 2021 to 7.3 percent in 2022. During due to growth being primarily focused in sectors that the same period, the energy, fuel, and utilities compo- employ relatively few workers, especially those from nents of headline inflation increased by 6 percentage poor households. Furthermore, urban areas have points, from 3.1 percent in 2021 to 9.1 percent in seen poverty rates increased from 16 percent in 2012 2022, reflecting rising global energy prices.10 to 21 percent in 2018, while rural areas continued While headline inflation accelerated, core to grapple with lower welfare levels than their urban inflation remained subdued throughout 2022. counterparts. By 2021, the economic downturn Cumulatively, the core inflation rate fell from 4.1 per- caused by the pandemic had reduced median con- cent in 2021 to 3 percent in 2022.11 Retail prices for sumption per adult equivalent by 10 percent from its clothing and footwear, which make up about 11 per- 2014 level while increasing the national basic-needs cent of the CPI basket and are a major component poverty rate from 26 to 27 percent. In 2022, no signifi- of core inflation, fell from 4.6 percent in 2021 to cant change in the poverty rate is anticipated. 2.5 percent in 2022. Similar trends were observed in Looking ahead, the prospects for poverty other core prices, especially those related to services. reduction in Tanzania are modestly optimistic. The In aggregate, services-related inflation dropped from GDP growth rate is forecast to rise to 5.1 percent in 3.1 percent in 2021 to 2.8 percent in 2022. By contrast, 2023 and reach its long-term potential rate of 6 percent goods prices increased from 4.1 percent to 5.3 per- by 2025. The poverty rate is expected to gradually cent over the period. Despite its subdued growth, core decline from 27 percent in 2022 to 26.5 percent in inflation accounted for half the increase in headline 2023, 26.3 percent in 2024, and 25.9 percent in 2025.8 inflation during 2022, as core prices represent a large However, major threats to the macroeconomic outlook, share of Tanzania’s CPI basket. including an unstable external environment, delays Despite headwinds, inflation in Tanzania in domestic policy implementation, and the adverse remained substantially lower than in many other effects of climate change, could derail the anticipated regional economies. According to the latest IMF decline in poverty rates. Poverty-reduction policies should concentrate on investing in human capital, 7 Tanzania’s population growth rate was estimated at enhancing agricultural productivity among smallholder 3 percent in 2022, versus a 2.6 percent average for East Africa and a 2.4 percent average for all of Africa. Source: farmers, fostering job creation by improving the busi- United Nations World Population Prospects. ness climate, and expanding women’s access to 8 An upcoming comprehensive household budget survey economic opportunities and productive assets. in FY2023/24 will provide fresh data on the official poverty rates. 9 For example, as against general decline observed in Monetary Policy and Inflation 2021, domestic maize prices on average increased by 73 percent while rice prices grew by 52 percent in 2022. Driven both by global and domestic factors, Similar trends were reported in other food crop prices. Source: Bank of Tanzania. headline inflation in Tanzania has risen, albeit 10 Domestic pump prices for petrol and diesel experienced at a slower pace than in many peer countries. 28 percent and 38 percent increase in 2022, respectively. Cumulatively, headline consumer price index (CPI) 11 According to Bank of Tanzania, core inflation excludes inflation rose from 3.7 percent in 2021 to 4.4 percent unprocessed food, maize flour, energy, and fuel. 4 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA Headline Inflation by Component FIGURE 5 •  Drivers of Inflation, Tanzania and FIGURE 6 •  Sub-Saharan Africa, 2022 (% y/y change, contribution in ppt.) 6 (% y/y change) 5 Restaurants and hotels 4 Transport Housing, water, 3 electricity, gas and other fuel 2 Clothing and footwear 1 Food and nonalcoholic beverages 0 Headline Jan-21 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Dec-22 Mar-23 Sep-22 Jun-23 2021 2022 inflation 0 10 20 30 40 50 Energy, fuel and utilities Unprocessed food Tanzania Regional range* Core Headline inflation Source: NBS, WB staff estimates. Source: NBS, WB staff estimates. * Includes Uganda, Mozambique, Kenya, Rwanda, Ghana, Cameroon, Botswana. estimates, headline inflation rates in Sub-Saharan and utilities accounted for one-quarter of the overall Africa (SSA) averaged about 14.5 percent in 2022, increase in consumer prices, but by June these items almost 3.3 times higher than in Tanzania.12 Cross- were no longer a source of significant price pressures. country data show that all major inflation components Nevertheless, rising domestic food prices continue to were lower in Tanzania than in SSA during 2022. keep overall inflation elevated (Figure 5). Cumulatively, Food-price inflation, for example, ranged between CPI inflation rose from 3.9 percent in H1-2022 to 4.4 13 percent and 37 percent across the region, while percent in H1-2023. reaching just 7.3 percent in Tanzania (Figure 6). Simi- Though inflation remains well below the lar trends were observed for fuel-price inflation, core central bank’s medium-term target of 5 percent, inflation, and other components. Policy interventions, monetary policy remained relatively tight in early including price subsidies for fuel and fertilizer, contrib- 2023. The central bank’s less-accommodative stance uted to Tanzania’s lower inflation rates.13 In addition, is slowing the growth of monetary aggregates. The the relative stability of the Tanzanian shilling vis-à-vis growth of reserve money, a key policy target, slowed the US dollar contrasts with the broad depreciation from 17.3 percent at end-2021 to 15.8 percent at end- observed across other regional countries (Box 2). 2022. Similarly, the growth rate of the extended broad Inflation has slowed since the start of money supply (M3), an intermediate target for the central 2023. Driven by the core and non-core components of the CPI basket, headline CPI inflation hovered at 12 IMF, World Economic Outlook April 2023. around 4.9 percent between Oct-2022 and Jan-2023. 13 The FY2022/23 budget included a Tsh50,000 subsidy for However, following five consecutive monthly declines, each bag of fertilizer purchased by farmers, according to the CPI inflation rate fell to 3.6 percent in Jun-2023, the agriculture minister. Media reports and the FY2023/24 down almost a full percentage point from Jun-2022. budget speech also indicate that the government provided a Tsh100 billion monthly fuel subsidy. Complemented by inflation-reducing policy measures, 14 According to the World Bank Commodity Price the easing of global commodity prices has helped Database, global energy, food, and raw material price slow the growth of domestic prices, especially for indexes fell by 30 percent, 10.5 percent, and 12 percent, energy and transportation.14 A year ago, energy, fuel, respectively, y/y in H1-2023. Recent Economic Developments 5 RECENT INFLATION IN TANZANIA VS. REGIONAL COUNTRIES: SOME OBSERVATIONS BOX 2:  Since the end of the acute phase of the pandemic, countries in SSA have faced significant economic challenges due to unprecedented spike in inflation, which has been exacerbated by Russia’s war in Ukraine and its disruptive effects on global prices. To address inflationary pressures, central banks across the region have tightened their monetary policies (Table B2). However, Tanzania’s policy rate remained unchanged in 2022—due in part to the absence of an interest-rate-targeting monetary regime—while the growth of the money supply slowed to a lesser extent than in many other SSA countries. Nevertheless, inflation in Tanzania was significantly lower than in many peer countries in 2022 (Table B2.A). One of the driving factors behind Tanzania’s lower inflation rates may be the economy’s post-pandemic output gap, which likely contributed to the subdued trend in core inflation. Exchange-rate stability is another important factor, as the Tanzanian shilling has remained broadly unchanged against the US dollar since 2020 (Figure B2.B). In contrast to the depreciations observed among many regional currencies, exchange-rate stability has helped moderate prices in Tanzania and kept inflation within its target range. A vector autoregressive (VAR) analysis reveals that a 1 percentage-point appreciation in the nominal exchange rate leads to a 0.19 percentage-point decrease in inflation in Tanzania over a two-year period (Figure B2.C). The effect of exchange-rate stability is much more pronounced than the effect of the output gap. However, in the absence of further reforms, an extended period of exchange-rate stability may have adverse implications for the Tanzanian economy. For example, the lack of significant depreciation could erode the economy’s external competitiveness, weakening its external account position and putting additional pressure on foreign-exchange reserves. Tanzania’s import-dependent economy is especially vulnerable to this risk. TABLE B2.A • Changes in Monetary Policy Instruments, Selected SSA Countries (cumulative changes during 2022) AGO BWA CMR GHA KEN LSO MUS MOZ NAM NGA RWA ZAF TZA UGA Policy rate hike –50 100 100 1250 175 325 265 400 300 500 200 235 0 350 y/y D in Money supply –11.7 –4.8 6.0 6.1 –0.8 –13.3 –20.1 –4.8 1.7 –5.0 3.4 –2.3 –3.5 –1.6 Source: Haver Analytics, WB staff estimates. Note: Policy rate change is presented in basis points; for money supply, y/y change is in percentage points and denote cumulative delta on y/y growth at end of both 2021 and 2022.  eadline Inflation Rates, Sub-Sahara Africa, 2022 FIGURE B2.A • H (% annual change) 40 30 20 East African Community 10 Sub-Saharan Africa 0 Ethiopia Ghana Sao Tome Sierra Leone South Sudan Malawi Burundi Nigeria Burkina Faso Rwanda Comoros Botswana Guinea Gambia, The Mauritius Zambia Mozambique Mali Senegal Mauritania Congo, DR Lesotho Madagascar Cabo Verde Guinea-Bissau Kenya Liberia Togo Eritrea South Africa Somalia Namibia CAR Chad Cameroon Cote d’Ivoire Eq. Guinea Eswatini Angola Tanzania Gabon Niger Uganda Congo, Rep. of Seychelles Benin Source: MPO Springs 2023, WB staff estimates. Note: Simple average after exclduing Sudan and Zimbabwe where annual inflation reached to 164 percent and 193 percent in 2022, respectively. (continued on next page) 6 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA RECENT INFLATION IN TANZANIA VS. REGIONAL COUNTRIES: SOME OBSERVATIONS (continued) BOX 2:  Nominal Exchange-Rate FIGURE B2.B •  Drivers of Inflation in Tanzania FIGURE B2.C •  Depreciation (% response of inflation to one unit shock to...) (+ depreciation / – appreciation vis-a-vis US$, % change) 0.00 Botswana Due to output gap –0.02 Zambia Benin –0.04 Sao Tome Cabo Verde –0.06 Tanzania Due to exchange rate shock Seychelles –0.08 Gambia –0.10 Madagascar Kenya –0.12 Malawi Mauritius –0.14 Nigeria Sierra Leone –0.16 Ghana Ethiopia –0.18 –5 0 5 10 15 20 25 30 35 40 45 50 –0.20 0 1 2 3 4 5 6 7 8 From Mar-20 to Feb-22 From Mar-22 to Feb-23 Number of years Source: Bloomberg, WB staff estimates. Source: WB staff estimates. bank, declined from 15.5 percent at end-2021 to 11.6 sector expanded by 41.5 percent in 2022, building on percent at end-2022. Combined with other policy inter- a 7.3 percent increase in 2021. Despite its relatively ventions, the slowing growth of monetary aggregates modest contribution to overall NDA, net credit to the kept domestic inflation below the central bank’s target. central government increased substantially in 2022, Interestingly, these downward trends continued into the driven both by lending from the central bank and early months of 2023 before abruptly reversed, with the from commercial banks, further highlighting the low growth of reserve money and M3 accelerating to 16.9 level of official external inflows. Meanwhile, credit to and 18.8 percent, respectively, in June, primarily driven subnational governments increased by 22.5 percent, by the rapid expansion of net domestic assets (Figure 7). accounting for about three-fifths of the total increase Trends in monetary aggregates indicate in the banking system’s NDA during 2022. that external pressures remain elevated, as In mid-2023, the decline in NFA slowed while liquidity has primarily come from domestic NDA kept increasing. NFA fell by 7.4 percent in June, sources. After expanding by 30.2 percent in 2021, modest compared to the 12.4 percent contraction the net foreign assets (NFA) of the banking system observed in June 2022 and the 32.4 percent decline contracted by 32.4 percent in 2022. While this at end-2022. This trend was driven by an increase in decline was mainly led by a decrease in NFA held central bank reserves, while NFA held by commercial by the central bank, NFA held by commercial banks banks continued to shrink. By contrast, NDA grew by also experienced a sharp decline. Together, these almost 30 percent in Jun-2023, up sharply from 18 developments reflected the widening current-account percent in Jun-2022. The growth of net credit to the gov- deficit (CAD), low levels of official inflows amid debt ernment and private-sector credit contributed 30 and amortization, and the central bank’s interventions 70 percent, respectively, to the overall increase in NDA. to partially support the balance of payments needs, Despite the moderating growth of monetary which may have reduced foreign reserves. Unlike aggregates, credit to the private sector exhibited a NFA, the net domestic assets (NDA) of the banking broad-based expansion. The growth of private credit Recent Economic Developments 7 Monetary Aggregates FIGURE 7 •  FIGURE 8 • Growth in Private Credit and Its Drivers (% y/y change) (% y/y change, contribution in ppt.) 32 30 25 24 20 15 16 10 8 5 0 0 –5 Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22 Sep-22 Jan-23 May-23 –8 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Others Agriculture Manufacturing Trade Transport and Personal Total Reserve money Extended broad money (M3) communication Source: Bank of Tanzania, WB staff estimates. Source: Bank of Tanzania, WB staff estimates. accelerated from 10 percent in Dec-2021 to 22.5 per- stable revenue collection and the containment of cent in Dec-2022. This trend continued into 2023, and in overall expenditures, the use of cash and other items May the growth of credit to the private sector remained increased by 1.0 percent of GDP, widening the deficit. at 22.5 percent, up from 16.2 percent in May-2022 Total government resources stood at (Figure 8). An analysis of sector-level data shows that 14.8 percent of GDP in FY2022/23, almost the personal loans, which constitute approximately 38 per- same level as the prior fiscal year but 1.1 percent cent of total private loans, drove the growth of private lower than anticipated. Representing 80 percent credit, followed by loans to the trade, agriculture, and of total government resources (Figure 9A), tax rev- manufacturing sectors. The banking system supported enue dropped slightly from 11.9 percent of GDP in the expansion of credit: deposits increased by 11 per- FY2021/22 to 11.8 percent in FY2022/23. The gov- cent in 2022, and the loan-to-deposit ratio was about ernment has implemented structural fiscal reforms 80 percent. Deposits continued to grow at a robust rate and new tax measures over the past fiscal year,16 but of about 16 percent in H1-2023. After a modest decline the downtick in tax-revenue collection relative to GDP of about 35 basis points over the previous 18 months, suggests that those reforms have yet to yield signifi- retail lending rates stabilized at about 16 percent in cant results. Value-added tax (VAT) and import taxes June 2023, encouraging further credit growth. Together, drove revenue growth, contributing more than one-half these factors boosted the domestic credit-to-GDP ratio from a recent average of 12-13 percent to 17 percent 15 The deficit is calculated on a cash basis based on data released by BoT – Quarterly Economic Bulletin (Dec- in 2022. However, while credit growth bolstered the 2022). Please see https://www.bot.go.tz/Publications/Fi​ economic recovery, it also exerted pressure on the lter/2 for more information. FY GDP is World Bank staff external account amid unfavorable global conditions. estimates, which have been recalculated on a quarterly basis and adjusted for seasonal factors. 16 Tanzania has taken various actions to increase its Fiscal and Debt Developments revenue and fiscal space. Some of key measures include (a) expanding the tax base through electronic payments, (b) managing and reducing tax exemptions, Tanzania’s overall deficit, including grants,15 and (c) bringing the digital economy into the tax system. widened from 3.6 percent of GDP in FY2021/22 Source: United Republic of Tanzania, Country Report to 4.4 percent in FY2022/23. Despite broadly No. 23/153, April 2023, International Monetary Fund. 8 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA Revenues of the Central Government of Tanzania, FY FIGURE 9 •  A. Government Resources by Component B. Contributions to Tax Revenues (% of GDP) (% y/y change, contributions in ppt.) 16 20 12 10 8 0 4 –10 0 2018/19 2019/20 2020/21 2021/22 2022/23 2018/19 2019/20 2020/21 2021/22 2022/23 Other taxes (mainly Inland Revenue) Income taxes Grants Non-tax revenue (Inc. LGAs) Sales/VAT and excise on local goods Taxes on imports Tax revenue Government resources Tax revenue Source: Ministry of Finance and Planning, WB staff calculations. and one-third of the overall increase in tax revenue, and sustainable growth, further underscoring the respectively (Figure 9B). VAT collection increased importance of revenue mobilization. The special from 2.0 percent of GDP in FY2021/22 to 2.3 percent focus section of this edition of the Tanzania Economic in FY2022/23, while import taxes remained broadly Update, “The Efficiency and Effectiveness of Fiscal unchanged at about 4.6 percent of GDP. Income tax revenue fell from 4.5 to 4.2 percent of GDP over the period, partly reflecting the slowing growth of 17 The National Panel Survey 2020–2021 – Wave 5 reports household income17 and a decline in tax receipts from that in 2020/21 compared to 2014/15, individuals with private corporations.18 Meanwhile, nontax revenue access to one- or two-income sources decreased by 0.4 and total grants (largely project grants19) remained and 2.1 percentage points, respectively. Moreover, only the stable at 2.6 and 0.4 percent of GDP, respectively. proportion of wage employees increased significantly by However, driven by lower-than-expected revenue from 1.4 percentage points over the period while the proportion of those whose income is sourced from other activities, parastatal dividends & contributions, ministries, and such as agriculture, decreased by 1.7 percentage points. regions, nontax revenue fell 0.7 percentage points This may indicate weakened ability of individuals to mitigate short of its budgetary target. economic shocks while keeping the same spending While the government’s revenue-to-GDP patterns. For more information, please see https://www​ ratio nearly approaches a historic high, the tax- .nbs.go.tz/nbs/takwimu/nps/wave5/NPS_Wave_5.pdf. revenue-to-GDP ratio remains low by international 18 Revenue estimates report for FY2023/24 published by MoFP revealed that taxes from private financial and standards and close to the average for low-income non-financial corporations declined by 23 percent (y/y) countries (LICs).20 Measures that boost revenue from Tsh108.8 billion in FY2021/22 to Tsh82.5 billion in collection efficiently and effectively can help Tanzania FY2022/23. recover from the effects of the COVID-19 pandemic 19 While capital grants are channeled to various general while advancing its goal of becoming an upper- government units, Tanzania National Road Agency, middle-income country with well-developed human Road Fund Board, and Tanzania Railway Corporation account for the majority. capital, an ample supply of high-quality livelihood 20 Tanzania’s tax-to-GDP ratio has remained at about opportunities, and sustainable, broad-based gains 11–12 percent of GDP over the last two decades, close in living standards. Over the medium term, increased to the average for low-income countries, according to public spending will be necessary to ensure inclusive the World Bank World Development Indicators. Recent Economic Developments 9 Policy in Tanzania” offers further details on revenue Breakdown of Recurrent Expenditures, FIGURE 10 •  and spending dynamics. FY2022/23 Tanzania’s government has achieved sig- nificant progress in containing expenditures, as total public spending21 fell from 18.5 percent of GDP in FY2021/22 to 18.2 percent in FY2022/23, well below the budgetary target of 19.4 percent. Other goods, Recurrent spending rose to 10.9 percent of GDP from services and Wages about 9.5 percent over the three previous fiscal years. transfers and 35.8% salaries The increase reflected higher spending across all 45.6% categories, led by other goods, services, and transfers, which represent 36 percent of recurrent spending and rose by almost a full percentage point to 3.9 percent Foreign Domestic interest interest of GDP. Wages and salaries, which represent nearly payments payments 5.3% 13.3% half of recurrent spending, experienced the second largest increase, rising to 5 percent of GDP as inter- est payments reached 1.7 percent of GDP. Domestic Source: Ministry of Finance and Planning, WB staff calculations. debt represented just one-third of the total public debt stock, but due to the highly concessional nature of Tanzania’s external borrowing, domestic debt service to bring the fiscal deficit (including grants) of the CG to accounted for more than two-thirds of total debt service below 3 percent of GDP (Box 4). This will be achieved (Figure 10). Development spending,22 much of which through a combination of revenue enhancing and remains focused on megaprojects,23 fell from 9.0 to expenditure curtailing measures. Interestingly, weight 7.3 percent of GDP during the period. Notwithstand- of consolidation appears to be titled more towards the ing reduced capital investment recently, the Central development spending while making the attempt to safe- Government’s persistent and ambitious infrastructure guard the recurrent side—which is a positive development. investment plan has already resulted in a backlog of Tanzania’s public debt-to-GDP ratio has expenditure arrears (Box 3). Meanwhile, the govern- risen, but its risk of debt distress remains moder- ment has recently begun to increase priority social ate.27 The public and publicly guaranteed (PPG) debt spending,24 which will be vital to close the human capital gap.25 Priority social spending—which comprises 21 The total expenditure and development expenditure mentioned throughout the report include net lending. recurrent and development spending on education, 22 Ibid. health, water, and rural roads, including transfers to 23 For instance, Julius Nyerere Hydropower Project in the local governments—rose from 6.4 percent of GDP energy sector and the Standard Gauge Railway project in FY2021/22 to about 6.7 percent in FY2022/23.26 in the infrastructure sector. Domestic resources played a larger role in 24 According to IMF EFF program for Tanzania, priority social financing Tanzania’s overall fiscal deficit during spending needs to remain at about 6.7 percent of GDP. 25 According to World Bank's Human Capital Index (HCI, FY2022/23. Domestic borrowing, mainly from bank 2020), a child born in Tanzania in 2020 would only fulfill and non-bank sources, covered almost 60 percent of the almost 39 percent of her full potential productivity had fiscal deficit. Net foreign financing amounted to 1.9 per- she enjoyed a complete education and full health, just cent of GDP, with one-third coming from program loans below the SSA-average of 40 percent. For details, see and the remaining two-thirds from development project https://databankfiles.worldbank.org/public/ddpext_do​ loans. This pattern differs from that of the two previous wnload/hci/HCI_2pager_TZA.pdf. 26 United Republic of Tanzania, Country Report No. fiscal years, when the overall fiscal balance was financed 23/153, April 2023, International Monetary Fund. almost equally by foreign and domestic sources. 27 The public sector debt includes central government debt, On June 15, Budget FY2023/24 was submit- central government-guaranteed debt (except for guaranteed ted to the Parliament. It envisions a consolidation effort debt of SOEs and local governments) and central bank. 10 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA GOVERNMENT EXPENDITURE ARREARS: CURRENT STATUS AND REVISED ARREARS MANAGEMENT BOX 3:  STRATEGY (2022) The central government has long struggled with public financial  rends in Central Government FIGURE B3.A • T management (PFM) issues, which have contributed to the accumulation Expenditure Arrears (Tsh trillions of large expenditure arrears.a The World Bank’s 2010, 2013, 2017 (LHS), % share (RHS)) and 2022 Public Expenditure and Financial Accountability (PEFA) assessments all highlighted challenges with PFM, as have multiple 4.5 13.4 14.0 11.7 IMF country reports. The stock of expenditure arrears declined 11.9 marginally from Tsh4.1 trillion or 11.7 percent of total government 3.5 10.0 8.5 expenditures at the end of FY2020/21 to Tsh3.2 trillion or 8.5 percent of government expenditures at the end of FY2021/22. Most arrears 9.0 are owed to suppliers and contractors (Figure B3.A). 2.5 Expenditure arrears are largely unverified and longstanding, and contractual arrears are prioritized for repayment. More than two-thirds 1.5 of the arrears stock at end-FY2021/22 has yet to be verified, while 4.0 over 55 percent of outstanding expenditure arrears were overdue for 0.5 more than a year, and half of those were more than two years overdue by the end of FY2020/21. While most arrears are owed to suppliers, the government prioritized clearing contractual arears in FY2021/22. –0.5 –1.0 2017/18 2018/19 2019/20 2020/21 2021/22 During this fiscal year, almost Tsh1.1 trillion was spent clearing contractual arrears, representing nearly half of all repayments. Supplies (goods & services) Utilities Construction works Staff The backlog of expenditure arrears reflects Tanzania’s infrastructure % of GoT Exp. (R.H.S.) investment ambitions and weak commitment controls. The recent simultaneous development of multiple megaprojectsb contributed Source: WB staff estimates. to the accumulation of arrears. Moreover, the cash-rationing government payment system, MUSE, only allows repayments for expenditure entries occurring in the same month or those below the monthly payment ceilings, whereas a more flexible system of cash planning and commitment control could help prevent the accumulation of arrears. With support from the World Bank, Tanzania has revised its 2022 Arrears Management Strategy to establish expenditure controls and prevent the further accumulation of arrears. The government has already made efforts to speed up the tracking of arrears verification and to reduce the arrears stock as a share of government spending.c However, Tanzania’s large arrears stock inhibits the government’s ability to convey liquidity, predictability, and confidence to the private sector. The government plans to clear Tsh0.43 trillion in arrears in FY2022/23 and another Tsh0.6 trillion every year over the next three years. The government is also working to prepare properly costed budget baselines and realistic revenue projections and has amended the definition of arrears as unpaid claims over 30 days delinquent for goods and services and over 90 days delinquent for construction work.d a Government expenditure arrears are financial obligations that the government has incurred through its operations that remain unpaid beyond the financial year of occurrence. Specifically, they are defined as outstanding claims ageing over 30 days for delivery of goods and services and ageing over 90 days for construction works in Tanzania. b As Tanzania implemented her third National Five-Year Development Plan (FYDP III, 2021/22 – 2025/2026), the government has focused on improving productive infrastructures like roads, railways, ports, water, air transports, and electricity access. Source: United Republic of Tanzania, National Five-Year Development Plan, 2021/22 – 2025/26, June 2021, Ministry of Finance and Planning.. c Noticeably, the share of verified arrears out of total claimed arrears tripled from 10.7 percent in FY2020/21 to almost 33 percent in FY2021/22. Meanwhile, the arrears stock, as a percent of government expenditure, declined from its four-year-average (FY2017/18-FY2020/21) of 12 percent to 8.5 percent in FY2021/22. d United Republic of Tanzania, Country Report No. 23/153, International Monetary Fund, April 2023. stock increased from 41.3 percent of GDP at end- 28 Government converted about Tsh 4.8 trillion (2.8 percent FY2020/21 to 43.8 percent at end-FY2021/22, largely of GDP) on-lent debt of National Insurance Company to equity to strengthen its balance sheet. Source: United due to the government’s efforts to strengthen the Republic of Tanzania, Country Report No. 23/153, balance sheets of state-owned enterprises (SOEs).28 International Monetary Fund, April 2023. However, the public debt-to-GDP ratio remains well 29 While the calculated composite indicator index (a anchored29 and relatively modest by the standards measurement to assess country’s debt-carrying capacity) of neighboring countries.30 At end-FY2021/22, dropped down from 2.94 in August-2022 DSA to 2.92 in the recent DSA, it is remained within the range of the almost 64 percent of public debt was held externally, medium level (2.69 ~ 3.05). while the remaining 36 percent was domestic debt 30 The latest IMF Global Debt Database (2022) reported (Figure 11). The latest joint IMF-World Bank Debt Sus- that Tanzania’s neighboring countries have a higher Recent Economic Developments 11 PRELIMINARY BUDGET ANALYSIS FOR FY2023/24 BOX 4:  On 15 June 2023, Hon. Dr. Mwigulu Nchemba, then Minister for  ector Budget Allocations FIGURE B4.A • S Finance and Planning, presented the budget speech for FY2023/24, (% share, % y/y growth) themed ‘Accelerating Economic Recovery, Climate Change Adaption & Mitigation, and Enhancing Productive Sectors for Improved Live- hood’. This is the second budget under the sixth phase government Economic Development led by President Samia Suluhu Hassan. It comes at a critical time when the government continues to implement ongoing mega proj- Education ects, safeguard the government debt sustainability, manage arrears Water, Housing payment, and promote democracy and economic diplomacy while & Community facing external headwinds and domestic climate change threats. Development Social Security FY2023/24 Budget has five priority focus areas that are aligned with the third and final Five-Year National Development Plan (FY2021/22– Health FY2025/26). These priority areas are aimed to build a competitive and industrial economy for human development. Specifically, the Defence, Public government intends to take solid steps in five areas: (i) realize a Order & Safety competitive and inclusive economy through regulating the financial General Public sector, empowering the agriculture sector, improving key productive Services infrastructures, and transiting to a digital economy; (ii) deepen 0 10 20 30 40 industrialization and service provision, including but not limited to stimulate mining sector and implement electricity distribution 2023/24 2022/23 y/y growth projects; (iii) promote investment and international trade, especially Source: Ministry of Finance and Planning and World Bank staff estimates. in improving business environment and fostering public-private partnerships; (iv) enhance social services in health, water, law and landing sectors; and (v) develop human capital to improve necessary skills for employment creation. These measurements are intended to sustain growth momentum and enhance the economy’s resilience in line with the developing agenda. According to FY2023/24 Budget, the government set six macroeconomic policy targets for FY2023/24,a particularly with a focus on fiscal consolidation through cutting unnecessary expenditures. In FY2023/24, the government is anticipated to collect domestic revenue, at 14.9 percent of GDP, the same as the previous year’s budget target. However, supported by less spending on the development projects, the total expenditure is expected to be nearly one percentage points lower than the FY2022/23 budget, reaching 21.1 percent of GDP. The revenues mobilization enhancement and the expenditures curtailment would help the government achieve a target of fiscal deficit lower than 3 percent of GDP. Meanwhile, the government will continue prioritizing the concessional loans in FY2023/24, ensuring the government debt sustainability. As noted in the speech, the distribution of the Tsh44.4 trillion total expenditure in FY2023/24 will be unevenly across sectors, with a focus on Health, Defence, Public Order & Safety, and Agriculture. The Health sector, representing 13.4 percent of the total budget, enjoyed the most significant budgetary increase of 11.3 percent. This is followed by the Defence, Public Order & Safety sector which enjoyed a 40 percent share in the budget allocation and grew by over 11 percent against last year’s allocation (Figure B3.A). Although the budget allocated to the Economic Development sector exhibited a modest growth of 4 percent in FY2023/24, detailed data suggest a robust budget allocation increase in the Agriculture and Industry & Trade subsectors, with growth rate of 20.5 percent and 14.6 percent, respectively. a These targets are (i) achieve a 5.2 percent real GDP growth in 2023; (ii) contain inflation with a single-digit range between 3 and 7 percent in the medium term; (iii) tax revenue is estimated to reach 12 percent of GDP; (iv) domestic revenue is estimated to reach 14.9 percent of GDP; (v) the budget deficit (incl. grants) is narrowed to below 3 percent of GDP for FY2023/24; (vi) maintain adequate foreign reserves to cover at least four months of goods and services imports. tainability Analysis (DSA)31 assessed Tanzania’s risk of 1.3 percentage points of GDP from the previous overall public and external debt distress as moderate, year. Multilateral loans fell from 18.1 percent of GDP unchanged from the previous analysis. The DSA results to 17 percent and accounted for three-fifths of all exter- underscore the importance of safeguarding debt sustainability by maximizing concessional financing, debt-to-GDP ratio than Tanzania in 2021. For instance, increasing revenue mobilization, and strengthening Kenya’s government debt is 68 percent of GDP, Uganda’s is 52 percent, Rwanda’s is 67 percent. Please see https://​ public investment management by selecting only those www.imf.org/external/datamapper/CG_DEBT_GDP@G​ investment projects with clear socioeconomic benefits. DD/CHN/FRA/DEU/ITA/JPN/GBR/USA for more details. The external PPG debt stock declined to 27.9 31 United Republic of Tanzania, Country Report No. percent of GDP at end-FY2021/22, down almost 23/153, International Monetary Fund, April 2023. 12 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA Tanzania’s Public Debt FIGURE 11 •  Concessional External Debt by FIGURE 12 •  Component (% of GDP) 50 (% share, % of GDP) 100 40 80 60 30 40 20 20 10 0 % of total % of GDP % of total % of GDP externl debt externl debt 0 FY2020/21 FY2021/22 FY2017/18 FY2018/19 FY2019/20 FY2020/21 FY2021/22 Multilateral creditors Bilateral creditors External debt Domestic debt Public debt Commercial creditors External Source: DSA(April-2023), WB staff estimates. Source: DSA(April-2023), WB staff estimates. Central Government Fiscal Operations, % of GDP TABLE 2 •  Fiscal year (July to June) 2019/20 2020/21 2021/22 2022/23 Actual Actual Actual Actual Budget Total Revenue 14.5 13.1 14.5 14.4 15.4 Tax revenue 12.0 11.0 11.9 11.8 12.2 Taxes on imports 4.1 4.2 4.7 4.6 4.7 Sales/VAT and excise on local goods 2.6 2.4 2.0 2.3 2.4 Income taxes 4.5 3.8 4.5 4.2 4.3 Other taxes (mainly Inland Revenue) 0.8 0.7 0.7 0.8 0.8 Non-tax revenue (incl. LGAs) 2.5 2.1 2.6 2.6 3.3 Grants 0.6 0.4 0.4 0.4 0.5 Total expenditure and net lending 16.6 16.9 18.5 18.2 19.4 Recurrent expenditure 9.8 9.5 9.5 10.9 11.2 Wages and salaries 4.8 4.7 4.8 5.0 5.4 Interest payments 1.6 1.6 1.7 2.0 1.6 Domestic 1.0 1.2 1.2 1.5 1.0 Foreign 0.6 0.5 0.5 0.6 0.6 Other goods, services and transfers 3.4 3.2 3.0 3.9 4.2 Development expenditure and net lending 6.8 7.4 9.0 7.3 8.3 Overall balance after grants –1.5 –3.4 –3.6 –3.4 –3.5 Adjustments to cash and other items (net) –0.4 –0.5 0.0 –1.0 0.0 Overall balance (cash basis) –1.9 –3.8 –3.6 –4.4 –3.5 Financing 1.9 3.8 3.6 4.4 3.5 Foreign financing (net) 1.6 1.7 1.9 1.9 2.1 Domestic (net) 0.3 2.1 1.7 2.5 1.4 Source: Ministry of Finance and Planning and Bank of Tanzania. Note: Calendar year GDP for FY2018/19 onwards is based on World Bank staff estimates which is converted to quarterly GDP using seasonal factors, from which fiscal year GDP is estimated. Recent Economic Developments 13 nal borrowing during FY2021/22. Commercial loans the CAD during 2022 (Figure 13). While the increase declined from 9.3 to 7.9 percent of GDP (28 percent of in the trade deficit is partly explained by Tanzania’s external borrowing) over the period, while bilateral loans sustained post-pandemic recovery, a significant share rose from 1.9 to 3.0 percent of GDP (Figure 12). Multilat- was also driven by the economy’s weakening terms- eral and bilateral lending constituted almost 72 percent of-trade position.39 of external borrowing.32 The World Bank remained Tan- Goods exports grew modestly during 2022, zania’s top creditor, accounting for almost 42 percent in supported by nontraditional items. Favorable prices total external borrowing. Credit Suisse AG and Exim Bank helped Tanzania’s goods exports grow by a cumulative China were the country’s leading commercial creditors, 6.8 percent during 2022, up from 5.4 percent in 2021.40 each accounting for one-fourth of commercial loans. Nontraditional items like minerals and manufactured Tanzania’s domestic debt stock increased goods accounted for about 70 percent of the increase from 12.1 percent of GDP at end-FY2020/21 to in merchandise exports. The growth of mineral exports 15.9 percent at end-FY2021/22.33 Bonds and was driven by the surge in global demand for coal, other long-tenor instruments34 made up almost 74 per- as Russia’s war in Ukraine disrupted global oil and cent of total domestic borrowing. The share of bonds gas supplies. As a result, the value of Tanzania’s coal rose from 9.2 percent of GDP to 11.7 percent over the exports shot from US$13.2 million in 2021 to US$160.4 period,35 while share of domestic debt held as T-bills million in 2022. Demand for gold—which accounts for remained small at under 7 percent. Domestic arrears, which were previously classified as part of overall 32 This reflects that the external debt portfolio is on contingent liabilities, stood at 1.8 percent of GDP dur- favorable financing terms. ing FY2021/22. Commercial banks, pension funds, 33 This is consistent with one of the debt management and the central bank remained the main domestic objectives: support the development of domestic debt creditors, together holding almost 80 percent of the market. Source: United Republic of Tanzania, Medium government’s domestic debt.36 Term Debt Management Strategy, December 2022, Ministry of Finance and Planning. In FY2021/22, debt service on PPG debt 34 This aligns with the government's strategy of borrowing remained unchanged from the previous year at from medium to long-term instruments to minimize the 5.1 percent of GDP. While almost two-thirds of PPG risk of refinancing and cost of financing while catering to debt is external, external debt service accounted for the market’s needs. Source: United Republic of Tanzania, a smaller share of total debt service.37 External debt Medium Term Debt Management Strategy, December service at end-FY2020/21 amounted to 2.1 percent of 2022, Ministry of Finance and Planning. 35 In December 2021 (the middle of FY2021/22), the GDP, up slightly from the previous year, while domestic MoFP issued a non-cash bond worth Tsh 2.2 trillion debt service remained stable at 3.0 percent of GDP. (about 1.3 percent of GDP) to settle arrears to the Public Service Social Security Fund. Source: United Republic of Tanzania, Country Report No. 22/269, August 2022, Balance-of-Payments Position International Monetary Fund. 36 Source: Monthly Economic Review, Jan 2023, Bank of Tanzania. An uncertain global economic environment con- 37 This reflects Tanzania’s favorable debt structure—as tinued to place significant pressure on Tanzania’s majority of external debt is concessional. external sector in 2022. In particular, rising food 38 The GDP figures used in this section were estimated by and energy prices and other spillovers from Russia’s WB staff. war in Ukraine pushed the country’s current-account 39 According to the National Bureau of Statistics, Tanzania’s deficit (CAD) to its highest level since 2014. The terms-of-trade for goods decreased by 3.1 percent in 2022, while the IMF’s Commodity Terms of Trade CAD widened from US$2.37 billion (or 3.4 percent of database estimates the decline at 6.4 percent. GDP38) in 2021 to US$5.40 billion (or 7.1 percent of 40 In 2022, according to NBS, goods export price GDP) in 2022. The external trade deficit for merchan- index grew by 5.9 percent, and exports increased by dise accounted for almost the entire deterioration in 6.8 percent in value terms. 14 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA The Current-Account Balance and FIGURE 13 •  FIGURE 14 • The Growth of Goods Exports its Drivers (% y/y change) (% of GDP) 6 Mozambique Rwanda 3 Namibia 0 Seychelles –3 Ghana Kenya –6 Cote d’Ivoire –9 Tanzania –12 Uganda 2014 2015 2016 2017 2018 2019 2020 2021 2022 –20 –10 0 10 20 30 40 50 60 Goods Services Primary income Secondary income Current account 2021 2022 Source: Bank of Tanzania, WB staff estimates. Source: Haver Analytics, WB staff estimates. about two-fifths of the country’s total goods exports— was Tanzania’s third-largest tourism source market in also increased significantly during the year.41 As with 2021, and Russian and Ukrainian tourists accounted minerals, favorable external conditions supported the for 10.6 percent of total arrivals. This share plunged to growth of manufactured exports, which rose by 33.5 1.4 percent in 2022. Nevertheless, travel receipts and percent in 2021 and another 17 percent in 2022.42 tourist arrivals are both close to pre-pandemic levels. Meanwhile, traditional exports rebounded, growing Overall, services exports continued to show strong by 22.1 percent in 2022 after contracting by a similar growth momentum, rising by 42.8 percent in 2021 and amount in 2021.43 However, the contribution of tradi- almost 53 percent in 2022. The latest data indicate that tional exports to overall export growth declined, as they this trend has continued in 2023.45 represent just 10-15 percent of goods exports. Despite this strong performance, the growth rate of Tanzania’s 41 Gold exports rose from US$2.74 billion in 2021 to goods exports in 2022 was among the slowest in the US$2.83 billion in 2022, an increase of 3.6 percent. As region (Figure 14). To address this weakness, the gov- international gold prices remained broadly unchanged ernment should attain the priority objectives identified in 2022, the increase in gold exports mainly reflected the by the FYDP (Box 5). positive volume effect. Services exports bolstered the external 42 In 2022, growth rebounded strongly in India and the accounts during 2022. About three-fourths of the United Arab Emirates, which together receive about one-fourth of Tanzania’s total goods exports. In addition, increase in services exports was due to improving travel- key regional export markets like Democratic Republic related inflows, followed by transport-related exports.44 of Congo, Rwanda, and South Africa also exhibited A 58 percent increase in tourist arrivals during 2022 fol- sustained recoveries despite shocks. lowed a 48.6 percent increase in 2021, boosting travel 43 Tanzania’s traditional exports include commodities such receipts (Figure 15). This trend continued in the first as coffee, cotton, tea, cashew nuts, and tobacco. three months of 2023, as both travel receipts and arriv- 44 Transport-related exports increased by 20 percent in 2022 and contribute about 19 percent of overall growth als grew by over 40 percent versus the same period in in exports of services from Tanzania. the previous year. In 2022, about one-third of tourists 45 As per monthly data, services exports grew by visiting Tanzania came from regional neighbours, while 27.3 percent in 5M-2023 on y/y basis. Source: Bank of two-thirds came from advanced economies. Russia Tanzania. Recent Economic Developments 15 Tourism Receipts and Arrivals FIGURE 15 •  years. Similarly, due to a sustained increase in underly- (Levels) ing demand, the growth of consumer imports has also remained robust, and consumer goods accounted for 350 about one-fourth of the growth of goods imports in 2022. 300 Rising global prices and elevated domestic 250 demand have driven up the import bill. For example, the volume of oil imports fell slightly in 2022, yet 200 the value of oil imports rose by almost 70 percent 150 (Figure 16). By contrast, the growth of volume remained 100 a significant factor for non-energy imports, highlighting the sustained improvement in economic activity across 50 all sectors. Overall, goods imports were responsible for 0 about 83 percent of total import growth in 2022. Services Feb-20 Apr-20 Jun-20 Aug-20 Oct-20 Dec-20 Feb-21 Apr-21 Jun-21 Aug-21 Oct-21 Dec-21 Feb-22 Apr-22 Jun-22 Aug-22 Oct-22 Dec-22 Feb-23 Apr-23 imports accounted for the remainder, particularly trans- Tourist arrivals ('000 people) Travel receipts (US$ million) portation services, as rising fuel prices pushed up costs. During 5M-2023, a declining import bill Source: Bank of Tanzania, NBS, WB staff estimates. narrowed the trade deficit, both for goods and services. Cumulatively, the trade deficit dropped by 5.6 percent y/y, falling from US$1.74 billion during Despite the robust recovery of overall 5M-2022 to US$1.65 billion during the same period exports, a sharp increase in the import bill, espe- in 2023. This trend is being driven by slowing goods cially for goods imports, widened the trade deficit. imports, which contracted on a y/y basis in three out of Led by strong demand for capital and intermediate the first five months of 2023 and grew by just 6.6 per- goods to meet development aspirations, the growth of cent on a cumulative basis, down from 37.6 percent goods imports accelerated from 27.7 percent in 2021 to during 5M-2022.46 Intermediate and consumer imports 42 percent in 2022. Reflecting the country’s large infra- structure gap, all major capital-goods imports related 46 Goods imports declined by 19.7 percent in January to transportation, construction, and machinery have 2023, 4.7 percent in February 2023, and 17.6 percent in registered double-digit growth rates over the past two April 2023 on a y/y basis. Tanzania – Imports FIGURE 16 •  A. Total Imports Growth and its Drivers B. Oil Imports Growth and its Drivers (% y/y change, contributions in ppt.) (% y/y change, contributions in ppt.) 60 75 69.5 62.5 43.6 40 50 26.9 25 20 0 0 –25 –20 2019 2020 2021 2022 –50 2019 2020 2021 2022 Capital Intermediate Consumer Oil imports Services Total Due to price Due to volumes Growth Source: Bank of Tanzania, NBS, WB staff estimates. 16 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA both contributed to this decline, while the import of reserves. In 2022, the financial account recorded a capital goods experienced a less pronounced slow- surplus of almost US$3.9 billion (5.1 percent of GDP), down. Led by mineral exports, goods exports grew by down from a surplus of US$4.0 billion (5.7 percent a cumulative 6.2 percent in the first five months of the of GDP) during 2021. Both private and official flows year. This, combined with a 43.4 percent y/y increase contributed to this trend. Slowing private flows, includ- in travel-related services exports drove the narrowing of ing both portfolio and direct flows, reflected growing the trade deficit. global risk aversion toward developing economies, Limited financing flows and a widen- as well as worsening domestic conditions for invest- ing CAD led to a decline in foreign-exchange ment. The slowdown in the official flows, however, has EXTERNAL COMPETITIVENESS IN TANZANIA BOX 5:  Tanzania's overall economic performance has seen notable improvements over the past two decades: the annual GDP growth rate averaged just over 6 percent, while goods and services exports increased by a combined 650 percent. Tanzania’s Five-Year Development Plan (FYDP) for 2021/22 – 2025/26 aims to bolster economic competitiveness by improving the efficiency and productivity of the manufacturing and services sectors. As projected in the FYDP, one of the major expected outcomes of these objectives is the growth of goods and services exports from 16.1 percent of GDP in 2019/20 to 28 percent by 2025/26, increasing Tanzania’s share of exports in global markets from 0.1 percent to 0.15 percent over the period. The FYDP’s export targets appear ambitious, particularly considering current domestic and global economic conditions and the medium-term outlook. However, such ambition is crucial to promote macroeconomic stability. According to World Bank data, Tanzania’s export-to-GDP ratio steadily declined over the last decade, falling from a peak of 22.4 percent in 2012 to 14.3 percent in 2021, while the country’s share in global export markets remained stagnant. While the slowdown in export growth is due in part to the global trade deceleration—a challenge faced by many countries since the 2008 global financial crisis, Tanzania's recent export performance significantly lags those both of its regional neighbors and global peers (Figure B5.A). A Tanzania’s Export Performance FIGURE B5.A •  Export-to-GDP, % Share in world exports, % 30 8 24 6 18 4 12 2 6 0 0 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021 Export per capita, US$ Merchandize export volumes, 2010=100 750 500 600 400 SSA countries range 450 300 300 200 150 100 0 0 2016 2017 2018 2019 2020 2021 2010 2012 2014 2016 2018 2020 Lower middle income Sub-Saharan Africa East African community Tanzania Source: WDI, WB staff estimates. (continued on next page) Recent Economic Developments 17 EXTERNAL COMPETITIVENESS IN TANZANIA (continued) BOX 5:  The trends presented in Figure B5.A highlight the underlying weaknesses in Tanzania’s export structure, especially with regard to merchandize exports. These weaknesses mostly stem from Tanzania’s narrow manufacturing base relative to those of other major regional economies. Another important factor is the lower penetration of credit in the economy (Figure B5.B). Moreover, the share of credit to the manufacturing sector stands at just 11 percent of total lending. These shortcomings have been reflected in a significant decline in total factor productivity over the last decade (Figure B5.C). To address these issues, the FYDP identified several priority objectives, including improved access to markets, the establishment of trade- logistics centers, reforms to lower nontariff barriers, reduced logistics costs through improved transport infrastructure, and the development of a national brand for domestically produced products. The FYDP also provided a comprehensive blueprint for promoting services exports, including tourism. To achieve these goals and improve the economy’s export competitiveness and productivity, however, the authorities will need to swiftly implement the agreed-upon reform agenda with support from development partners. Manufacturing, Credit and Exports FIGURE B5.B •  100 120 Manufatcture exports, % of total 80 90 Private credit, % of GDP 60 60 40 30 20 0 0 0 10 20 30 40 0 30 60 90 120 Manufacturing value-added, % of GDP Exports of goods & services, % of GDP Advanced economies Sub-Saharan Africa Other EMDEs Tanzania Source: WDI, WB staff estimates. Total Factor Productivity FIGURE B5.C •  (% average growth) 2 1 0 –1 –2 1990s 2000s 2010s EMDEs SSA TZA Source: Conference Board. 18 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA larger implications for import-dependent economies ing the first five months of 2023. As a result, reserve such as Tanzania. Net government flows dropped coverage fell from a peak of 7.0 months of imports by 9 percent between 2021 and 2022, falling from in September 2021 to just 4.8 months at end-June 4.0 percent of GDP to 3.4 percent. Due to the nar- 2023. The decline in reserves was due in part to the rowing financial-account surplus and widening direct management of the foreign-exchange market CAD, gross official foreign-exchange reserves fell by by regional economies, as the depreciation of local US$1.2 billion in 2022, reaching about US$5.2 billion currency against the US dollar has been moderate to at the end of the year and continuing to decline dur- high over the past year (Box 6). BOX 6: TANZANIA’S DECLINING OFFICIAL FOREIGN-EXCHANGE RESERVES Tanzania’s official foreign-exchange reserves (OFER)a have fallen by more than 20 percent over the past two years, though remain adequate for managing the balance of payments. OFER fell from a peak of US$6.8 billion at end-September 2021 to US$5.3 billion in June 2023, with import coverb declining from 7.0 months to 4.8 months, remaining above the EAC convergence criteria of at least 4 months. Similarly, the ratio of official reserves to broad moneyc fell over the period but stayed above 27 percent at its lowest, exceeding the international standard of at least 20 percent (Figure B6.A). These two benchmarks indicate that Tanzania’s OFER remains adequate. Like in Tanzania, reserve drawdowns were also observed in most East African countries between 2022 and 2023. Kenya’s OFER fell to US$7.0 billion (3.9 months of imports) in March 2023, their lowest level since 2015. Uganda’s reserves also dropped, from US$4.2 billion (4.4 months of imports) in May 2022 to US$3.5 billion (3.8 months of imports) in May 2023. Official reserve levels in other countries in the region such as Rwanda, Mozambique, and Mauritius also declined to varying degrees over the period (Figure B6.B). Rising costs of imports, interest rate hikes in the US and seasonality of export earnings were key drivers of foreign exchange pressures. Global inflationary pressures caused by pandemic-related supply-chain disruptions and the spillover of Russia’s invasion of Ukraine have raised the costs of strategic imports such as fuel and food. Price pressures also prompted the US Federal Reserve to raise interest rates 11 times since March of last year. Rate hikes in other advanced economies followed, drawing portfolio capital away from emerging markets and developing economies, which saw their currencies depreciate against the US dollar. In addition, the seasonality of Tanzania’s traditional crop exports and tourism receipts exacerbated the abovementioned foreign exchange demand pressures. Official Foreign-exchange FIGURE B6.A •  Regional Peers Trends and FIGURE B6.B •  Reserves, Tanzania US Rate Hikes (Months/US$ Billion (left axis), Ratio (right axis)) (Official Reserve Index, Mar-2022=100 (left axis), Rate (right axis)) 8 60 140 6 6 120 3 40 4 100 0 20 2 80 –3 0 0 60 –6 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 Months of Projected Imports Foreign Reserves (US$ Billion) Tanzania Kenya Uganda Mauritius Seychelle Statutory requirement Foreign Exchange Reserves to M3 (RHS) Mozambique US EFFR (RHS) Rwanda Source: Bank of Tanzania, WB staff estimates. Source: Central Banks, US Fed, WB staff estimates. (continued on next page) Recent Economic Developments 19 BOX 6: TANZANIA’S DECLINING OFFICIAL FOREIGN-EXCHANGE RESERVES (continued) Falling reserves have negatively impacted Tanzania, including through fuel shortages and the emergence of a parallel foreign exchange market. The Bank of Tanzania used reserves in 2022 and early 2023 to help meet building foreign exchange pressures, while keeping the official nominal exchange rate stable. Continued pressures and slowing use of reserves caused a shortage of dollars available to meet importer needs at the official rate, and commercial banks accumulated over US$700 million worth of outstanding Letters of Credit. This caused delays in oil imports, and pump prices rose in Dar es Salaam by 17 percent. Insufficient access to foreign currency among firms and households, combined with the limited flexibility of Tanzania’s official exchange rate, also gave rise to a parallel foreign-exchange market charging a premium of 8 to 10 percent compared to the official rate. The distortion of a parallel market causes significant uncertainty to business and can reduce formal economic activity through reduced importation. It can also deter foreign investment and discourage lending to the government, as investors may be unable to repatriate profits or purchase imports at the parallel-market rate. In May 2023, the Bank of Tanzania (BoT) announced short term measures to help address the decline in official reserves and foreign exchange. The BoT increased sales of foreign exchange on the Interbank Foreign Exchange Market, taken steps to address excess liquidity in financial markets, facilitated the resolution of Letters of Credit, and increased the value of transactions conducted outside the Interbank Foreign Exchange Market. Moreover, the BoT has mopped up excess liquidity in the financial market and allowed more flexibility of the exchange rate in recent months, with the Tanzanian shilling depreciating by one percent between January and June 2023. Continued flexibility will be important going forward, to eliminate the distortive parallel foreign exchange market. The Government can also look for ways to lessen or better time its demand for foreign exchange against available inflows, for example by adjusting the implementation of large capital imports for development projects. More fundamentally, longer term measures are needed to boost forex inflows—such as exports, foreign direct investment (FDI) and remittances—to better manage transitory forex demand pressures. Slowing structural reforms and expanding reliance on public investment in the past decade have reduced private gross fixed capital formation by 2 percentage points of GDP and decreased FDI inflows to 1.3 percent of GDP in 2021 from 5.6 percent in 2010. Exports as a share of GDP has also sharply declined from 20.9 percent in 2012 to 14.3 in 2021. These trends highlight the urgency of Government implementing structural reforms to strengthen the competitiveness of the economy, improve the business and investment environment, and reduce the cost of regulatory compliance. This includes follow-through on key initiatives such as eliminating payment arrears to the private sector, revamping the legal frameworks for investment and public-private partnerships, and improving the resilience of the labor force to shocks. a Official foreign-exchange reserves generally refer to external financial assets used by the central bank for multiple purposes, such as financing the balance of payments, intervening in foreign-exchange markets to stabilize exchange rate, and servicing external debt. These assets usually include foreign-currency reserves (e.g., securities and deposits) and non-foreign-currency reserves (e.g., IMF reserve positions, Special Drawing Rights, gold, etc.). b Different countries use different methods to calculate import cover. For example, Kenya calculates the ratio between OFER (end of period) and the average value of imports over the past 36 months, while Tanzania uses the ratio between OFER and the average projected value of imports over the following financial year. c According to Schanz (2019), Tanzania’s banking sectors has a large share of foreign-currency liabilities at around 36 percent, which makes the ratio of OFER to broad money another important benchmark to measure the reserves adequacy for Tanzania. Source: Schanz, J. F. (2019). Foreign exchange reserves in Africa: benefits, costs and political economy considerations. BIS Paper, (105). 20 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA 2 MACROECONOMIC OUTLOOK AND RISKS Global Conditions Growth in emerging markets and developing economies (EMDEs) is expected to soften sig- Global growth is expected to slow sharply this nificantly this year amid slowing external demand, year as ongoing monetary tightening and more tighter global financial conditions, and weaker spill- restrictive credit conditions weigh on economic over from renewed growth in China. The aggregate activity. Despite a recent deceleration in global growth rate for EMDEs, excluding China, is projected to headline inflation due to easing supply disruptions fall from 4.1 percent in 2022 to 2.9 percent this year, as and moderating commodity prices, inflationary pres- weaker external demand amplifies the negative impact sures remain elevated across much of the world. In of elevated inflation and tighter monetary policies. The most inflation-targeting economies, inflation rates recovery of the service sectors is expected to drive a remain above the policy target (Figure 17A). Mone- substantial acceleration in the growth of the Chinese tary tightening has been swift and unprecedented, economy, albeit with limited spillovers on global especially in advanced economies, leading to a demand, trade, and commodity prices (Figure 17C). sharp increase in borrowing costs, tighter credit Meanwhile, tighter financing conditions, slower growth, conditions, and episodes of financial stress in bank- and high debt levels are expected to undermine debt ing and interest-rate-sensitive sectors such as com- dynamics across EMDEs, especially low-income coun- mercial real estate. Global economic activity is stron- tries, and further narrow their already constrained fiscal ger than had been expected earlier in the year but is space, increasing the risk of debt distress. still projected to weaken substantially in 2023, with Growth in SSA is expected to moderate, a particularly sharp slowdown in advanced econ- reflecting worsening country-specific challenges omies, reflecting the delayed negative impact of and mounting external headwinds. Aggregate higher interest rates (Figure 17B). Global growth is projected to fall to 2.1 percent this year before recov- 47 World Bank. 2023. Global Economic Prospects. June ering modestly to 2.4 percent in 2024.47 2023. Washington, DC. World Bank. 21 FIGURE 17 • Global Indicators A. Core inflation B. Policy rates 12 15 5 10 4 12 8 3 6 9 2 4 6 2 1 0 3 0 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-23 Mar-23 May-23 Jul-23 Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Global Advanced economies EMDEs EMDEs SSA AEs (right scale) C. Commodity price indexes D. EMDE credit spreads 160 250 12 140 200 10 120 150 8 100 100 6 80 50 4 60 0 2 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-21 Feb-21 Apr-21 Jun-21 Jul-21 Sep-21 Nov-21 Dec-21 Jan-22 Mar-22 May-22 Jul-22 Sep-22 Nov-22 Feb-22 Apr-22 May-22 Jul-22 Aug-22 Oct-22 Dec-22 May-20 Jul-20 Sep-20 Nov-20 Jan-23 Mar-23 May-23 Jul-23 Jan-23 Mar-23 May-23 Jun-23 Aug-23 Mar-20 Agriculture Metals and minerals Energy (right scale) EMDEs SSA Source: Bank for International Settlements; Haver Analytics; JP Morgan; International Monetary Fund; World Bank. Notes: AEs =Advanced economies ; EMDEs = Emerging Markets and Developing Economies ; SSA = Sub-Saharan Africa. A. Figure shows the median 3-month-on-3-month annualized percentage change of core inflation. Sample includes 31 advanced economies and 45 EMDEs. Last observation is July 2023. B. Unweighted averages. Sample includes 16 advanced economies, 21 EMDEs (Argentina was excluded as its high inflation distorts the average), and 8 SSA economies Last observation is July 2023. C. Pink Sheet data for energy, metals, and agricultural prices indexed to January 2021=100. Last observation is July 2023. D. Percentage points. Figure shows JP Morgan Emerging Markets Bond Index (EMBI); SSA indicates median for 9 economies. Last observation is August 16, 2023. regional growth is projected to bottom out at 3.7 per- (Figure 17D). High living costs across the region are cent this year, with only a moderate improvement to projected to continue to weaken private consumption, 3.9 percent anticipated for 2024. The ongoing energy while limited fiscal space and tight monetary policies crisis in South Africa and persistent challenges in are likely to constrain investment growth. In addition Nigeria’s oil sector are expected to continue to hinder to external and domestic headwinds, many SSA overall growth in SSA. While accelerating economic countries also face increased fragility due to insecurity activity in China could boost exports in some coun- and political instability, as well as persistent poverty. tries, particularly metal exporters, limited access Many SSA economies, already coping with the nega- to external borrowing will weigh on the recovery as tive consequences of climate change, lack the fiscal borrowing costs and financing needs remain elevated resources necessary to strengthen climate resilience. 22 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA Outlook and Risks for Tanzania Real GDP Growth Forecasts under FIGURE 18 •  Alternative Scenarios While Tanzania’s economy is projected to grow (% y/y change) by 5.1 percent in 2023, this projection has been 9 adjusted downward to reflect the impact of wors- 8 ening global economic conditions and insufficient rainfall in agricultural areas. In 2022, the post-pan- 7 demic economic reopening, coupled with sustained 6 6.1 5.5 tourism inflows, boosted domestic demand, helping to 5 5.1 offset a modest increase in inflation and a slowdown 4.3 4.6 in external demand. Meanwhile, public investment in 4 megaprojects contributed to capital formation. Growth 3 is likely to edge up further to 5.5 percent in 2024 as 2 the business climate improves and domestic reforms 2 take hold. However, medium-term growth is expected 1 to average about 5.8 percent, as the impact of pent- 0 2020e 2021e 2022e 2023p 2024p 2025p up demand subsides while inflation remains elevated and higher interest rates temper domestic demand. Source: WB staff estmates. Note: These estimates are based on growth scenarios and risk profiles that use The annual GDP growth rate is not expected to return different assumptions for global uncertainty and domestic policy implementation. The to its potential until 2025, when the cyclical recovery lighter bands indicate less likely outcomes, while darker bands indicate the most likely outcomes, and the central black line is the baseline scenario. will close the output gap. This projection assumes that the government’s reform agenda will be successfully implemented. Without mitigation measures, the coun- Price pressures are expected to moderate try’s long-term growth potential could weaken, with over the medium term. The headline inflation rate is GDP growth ranging from 4.5 to 5.5 percent (or 1.6 to expected to fall to 4.2 percent in 2023, far below the 2.6 percent per capita) in 2023 under alternative sce- official target of 5 percent. Elevated global food and narios (Figure 18). A deteriorating external environment fuel prices, exacerbated by Russia’s war in Ukraine, and the delayed implementation of domestic reforms will continue to drive inflationary pressures. The global are the major risks to the macroeconomic outlook. shift to less-accommodative monetary policies has led The expansion of agriculture and services to tighter global financial conditions, rising capital out- activities is expected to drive growth and poverty flows, and currency depreciation among EMDEs. These reduction over the medium term. Agricultural out- external developments have affected Tanzania largely put growth is expected to accelerate from 3 percent to through a deterioration in the terms of trade and rising about 5 percent by 2025, while the growth of services inflationary pressures. The country’s monetary authori- is expected to rise from 5 percent to 7 percent. The ties will adhere to their mandate of ensuring price stabil- agricultural sector, which employs nearly 70 percent ity and are expected to anchor expectations and keep of the rural workforce, is expected to benefit from inflation within the target range. Going forward, infla- increased government spending on irrigation infra- tion is expected to taper gradually as global commodity structure and extension services, boosting agriculture prices moderate, planned investments in agriculture productivity and incomes of the people. In FY2022/23, are completed, and an interest-rate-based monetary the government almost doubled agricultural spending framework is implemented.48 from about 0.4 percent of GDP in previous years to The fiscal deficit is projected to narrow about 0.7 percent. Meanwhile, the rapid expansion of in the near term as the economic recovery retail and repair services is expected to boost incomes bolsters domestic revenues and the pace of among urban informal workers. The continued expan- sion of tourism could also increase incomes and 48 This framework is expected to be established as part of support poverty reduction in urban areas. the IMF-ECF program. Macroeconomic Outlook and Risks 23 public spending slows. The central government’s Significant downside risks cloud the growth overall fiscal deficit is projected to narrow slightly to outlook. Key domestic risks include the slow or 3.4 percent of GDP in FY2023/24. While the fertilizer incomplete implementation of structural reforms, subsidy program, additional hiring in the education particularly those relating to private-sector develop- and health sectors, and recent increases in the wages ment and women’s economic empowerment, as well and salaries of civil servants49 are expected to keep as the impact of climate change on the agriculture recurrent expenditures elevated, rebounding eco- and tourism sectors. The medium-term outlook hinges nomic activity and enhanced revenue mobilization on the implementation of the reform agenda. On the are expected to improve the fiscal outlook over the external front, synchronous monetary policy tightening medium term. The completion of large hydropower by major central banks, combined with global fiscal projects will help moderate capital spending and aid tightening, has triggered a sharper-than-expected the consolidation effort, and the central government’s downturn in growth and increased the risk of a global overall deficit is projected to narrow by 1 percentage recession. Meanwhile, mounting financial stress could point of GDP by end-2025. Growth and fiscal consoli- exacerbate existing fiscal and financial vulnerabilities. dation are expected to reduce the public debt stock Adverse shocks could weaken business and consumer from 43.8 percent of GDP in 2022 to 41.9 percent in confidence and temper private investment and con- the near term and about 38 percent in the medium sumption, which are key drivers of growth. As global term. However, outstanding VAT refunds and domes- economic activity slows, external demand will continue tic expenditure arrears50 were estimated at about to weaken, with especially negative implications for 3-4 percent of GDP at end-2022, and implementing the manufacturing sector. A continued commitment the recently approved Arrears Management Strategy to priority reforms will be critical to strengthen the will remain critical to strengthen fiscal management. economic recovery, preserve macroeconomic stability, The CAD is expected to narrow over the and support sustainable and inclusive growth. medium term and should be financed largely by concessional external borrowing and FDI. The 49 This includes a 23.3 percent increase in the number of robust recovery of tourism, coupled with slowing public servants anticipated in the FY2022/23 budget. import growth and easing global commodity prices, 50 The authorities have made progress in reducing could help narrow the CAD by almost 2 percent- VAT refund arrears, which stood at Tsh 681 billion (0.4 percent of GDP) at end-December 2022, of which age points of GDP by 2025. After approving a key unpaid verified refund claims were only Tsh22 billion. investment law, the government is now preparing its Policies to address this longstanding domestic arrears implementing regulations, which should help attract problem are being supported by both the World Bank more FDI over the medium term. and the IMF-ECF program. 24 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA Medium-Term Outlook, 2021–2025 TABLE 3 •  (Annual % change unless otherwise indicated) 2021 Est. 2022 Est. 2023 Fcst. 2024 Fcst. 2025 Fcst. Real GDP Growth (at constant market prices) 4.3 4.6 5.1 5.5 6.1 Private Consumption 2.3 4.8 2.2 3.3 3.3 Government Consumption 9.0 8.4 10.7 6.2 11.3 Gross Fixed Capital Investment 7.8 9.3 5.3 5.4 5.3 Exports, Goods and Services 5.2 10.2 13.8 10.4 10.2 Imports, Goods and Services 9.6 23.7 6.8 4.2 3.6 Inflation (consumer price index) 3.7 4.3 4.2 4.1 3.9 Current Account Balance (% of GDP) –3.2 –5.6 –5.1 –4.4 –3.5 Net Foreign Direct Investment (% of GDP) 1.6 1.8 2.1 2.6 2.9 Fiscal Balance (% of GDP in FY) –3.8 –3.5 –4.0 –3.4 –2.9 Gross Nominal Debt (% of GDP in FY)a 41.3 43.8 40.9 39.2 37.8 Source: World Bank Staff Estimates. Note: Est. stands for Estimates and Fcst. stands for Forecasts. All variables are based on calendar year unless otherwise specified. Fiscal Year (FY) runs from 1st July to 30th June a As is the same in the published WB-IMF Joint Debt Sustainability Analysis in April 2023. For details, see United Republic of Tanzania, Country Report No. 23/153, April 2023, International Monetary Fund. Macroeconomic Outlook and Risks 25 3 SPECIAL FOCUS: THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA Introduction Benchmarking Public Expenditures Public spending in Tanzania has increased, led Historical Overall Expenditure by development expenditures, but remains low Performance by the standards of comparable countries. At about 17 percent of GDP, total public spending is Given the limited scope of Tanzanian monetary below the average for SSA (18 percent), LICs (21 per- policy, the government relies heavily on fiscal cent), and lower-middle-income countries (LMICs) policy to achieve its growth and stabilization (28 percent). Closing compliance gaps can help objectives. However, this does not imply that an Tanzania increase revenue collection and establish expansionary fiscal stance is necessary to acceler- a fairer, more efficient tax system while increasing ate growth. While fiscal stimulus will likely increase public expenditures, including priority social spend- ing. The distributional impact of its revenue and 51 The BOOST database project initiated by the World expenditure policies indicates that Tanzania’s fiscal Bank in early 2010 aims to increase the transparency system substantially reduces income inequality, while and efficiency of public spending across the world by public spending on social services more than offsets improving access to government expenditure data and linking expenditures to relevant outcomes. a moderate increase in poverty. The analysis of the 52 The CEQ methodology provides a comprehensive efficiency and effectiveness of Tanzania’s fiscal policy assessment of how taxes and social spending affect presented below is based on the BOOST51 database income inequality and poverty. These assessments are and the Commitment to Equity (CEQ)52 methodology. comparable across countries and over time. 27 Trends in Government Spending FIGURE 19 •  Composition of Development FIGURE 20 •  Expenditure by Sector (% of GDP) 20% (% share) 18% 100% 90% 16% 5.6% 80% 4.4% 4.0% 7.7% 6.1% 7.2% 14% 70% 3.9% 6.5% 6.1% 5.9% 6.1% 60% 12% 50% 10% 40% 8% 30% 20% 12.9% 12.5% 12.4% 11.2% 11.5% 6% 10.6% 10.0% 10.3% 10% 9.8% 9.9% 9.9% 4% 0% FY2016/17 FY2017/18 FY2018/19 FY2019/20 FY2020/21 2% Education Healthcare General public services 0% Defense, public Economic Social protection 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 order and safety development Water, housing and Recurrent Development social development Source: MoFP and WB staff calculations. Source: MoFP and WB staff calculations. aggregate demand and boost economic activity in which continued into the early 2010s. Expenditures the short term, investments that address binding broadly stabilized as a share of GDP from FY2012/13 supply constraints will be vital to raise potential onward. The shift toward development expenditures output and support economic growth over the reflected the priorities outlined in the government’s medium term. In recent years, political uncertainty second Five-Year Development Plan,53 which aims to has increased public expenditure volatility, nega- accelerate the economy’s structural transformation tively affecting Tanzania’s economic performance. by addressing the infrastructure gap and building In addition to greater expenditure predictability, human capital. regulatory reforms and improvements in PFM can Between FY2016/17 and FY2020/21, enhance the impact of fiscal policy on economic recurrent spending averaged about 10 percent activity. Effective sectoral policies, both in the pro- of GDP. Meanwhile, development expenditures ductive and social sectors, are a critical complement averaged 6.5 percent of GDP, up from 4.8 percent to sound macro-fiscal policies. Finally, rationalizing during FY2011/12–FY2015/16 (Figure 19). Between recurrent spending, prioritizing public investments, FY2016/17 and FY2020/21, more than 60 percent strengthening public investment management, and of development expenditures were directed to the enhancing tax collection will also be crucial to accel- real sector. These expenditures mainly consisted of erate and sustain economic growth. infrastructure investments in the Standard Gauge Public spending has broadly stabilized as a Railway, the Rufiji hydroelectric power plant, and other share of GDP since FY2012/13, and the growth transportation and electrification projects. (Figure 20). of development expenditures has outpaced the General government revenue remains growth of recurrent spending since FY2016/17. the primary source of financing both for recur- Government spending increased significantly from rent and development spending. The share 12.6 percent of GDP in FY2000/01 to about 19 of foreign financing in total government spend- percent in FY2005/06 as the authorities ramped up ing has increased over time, but donor support priority expenditures to achieve the Millennium Devel- remains highly fragmented. Between FY2016/17 opment Goals. Buoyant revenues and strong donor assistance facilitated Tanzania’s fiscal expansion, 53 https://mof.go.tz/docs/news/FYDP%20III%20English​.pdf. 28 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA Sources of Financing for Public Spending and Top 10 Sources of Finance for Development FIGURE 21 •  Spending, FY2020/21 (% share) Source of Financing/Donor % of Total 100% Government of Tanzania 79.0% 95% World Bank 10.1% African Development Bank 3.2% 90% Basket Fund 1.4% DFID 0.8% 85% KOICA 0.4% South Korea 0.4% 80% JICA 0.4% 75% Global Fund 0.4% FY2016/17 FY2017/18 FY2018/19 FY2019/20 FY2020/21 SIDA 0.4% GoT Donors French Development Agency 0.3% Source: WB BOOST dataset. and FY2020/21, donor financing accounted for an Total Public Spending in Tanzania FIGURE 22 •  average of about 20 percent of total development and Comparator Countries, 2020 or Latest Available Year spending or 9 percent of total government spending. However, over 30 development partners disbursed (% of GDP) funds in FY2020/21, many with engagements span- 35 32.9 ning several sectors, which required government 30 29.0 28.9 27.7 ministries and agencies to engage with multiple 26.4 25 24.7 stakeholders. (Figure 21). 21.4 21.1 The size of Tanzania’s general government 20 17.9 17.2 is relatively small by the standards of structural 14.5 15.4 15 peers and comparable income-group averages. Total government spending was estimated at about 10 17.2 percent of GDP in 2020, below the SSA average 5 of 17.9 percent (Figure 22). Among structural peers, 0 Tanzania has the third lowest level of public spending Tanzania Kenya Ghana Uganda Ethiopia Bangladesh Philippines Rwanda SSA LIC LMIC UMIC as a share of GDP after Ethiopia (14.5 percent) and Bangladesh (15.4 percent). Source: IMF Fiscal Monitor (April 2022), WB-WDI. Expenditures by Economic Classification The composition of public spending has remained cent of total spending, while the wage bill represented relatively stable over time, with the wage bill ac- an average of 25 percent, and capital expenditures and counting for a large share of expenditures. Recur- grants made up another 20 percent (Figure 23). rent transfers and subsidies are the largest contributor Wages and salaries account for most to total spending, followed by the wage bill. Between of the government’s personnel costs, though FY2016/17 and FY2020/21, recurrent transfers and social security contributions are nontrivial. subsidies accounted for an average of about 32 per- At 4.2 percent of GDP in 2020, spending on the Special Focus: The Efficiency and Effectiveness of Fiscal Policy in Tanzania 29 Composition of Government FIGURE 23 •  The Wage Bill in Tanzania and FIGURE 24 •  Spending Comparator countries, 2020 or Latest Available Data (% share, % of GDP (RHS)) 100% 20% (% of GDP) 90% 15.9% 15.9% 16.0% 16.4% 18% 80% 17.6% 16% UMIC 70% 14% LMIC 60% 12% 50% 10% LIC 40% 8% SSA 30% 6% Rwanda 20% 4% 10% 2% Philippines 0% 0% Bangladesh FY2016/17 FY2017/18 FY2018/19 FY2019/20 FY2020/21 Ethiopia Uganda Ghana Other Capital expenditure Interest Kenya % of GDP (RHS) and grants payments Tanzania 4.2 Recurrent transfers Goods and services Wage bill and subsidies 0.0 3.0 6.0 9.0 12.0 Source: WB BOOST data and WB staff calculations. Source: WB BOOST data, WB staff calculations, WB-WDI. public-sector wage bill was significantly below the Capital expenditures and capital grants SSA average (7.1 percent), and Tanzania was tied have remained relatively stable, while subsidies with Uganda for the third lowest wage-bill-to-GDP and current transfers are the largest expendi- ratio among structural peers54 after Ethiopia (1.7 per- ture components. Capital grants are channeled to cent) and Bangladesh (2.1 percent) (Figure 24). various central government units, but three budget However, Tanzania’s wage bill represents a large entities—the Tanzania National Road Agency, the share of total government spending, ranking fourth Road Fund Board, and the Tanzania Railway Corpo- highest among structural peers after the Philippines ration—accounted for about 70 percent of the total (38.5 percent), Kenya (36.2 percent), and Ghana capital transfers in FY2020/21. Meanwhile, on-budget (35.6 percent). capital expenditures mainly comprised investments After a slight contraction in FY2016/17, in defense, economic development, and healthcare spending on goods and services stabilized at (Figure 26). 9 percent of total spending, but the transparency Current transfers to SOEs and local gov- of spending has deteriorated. The goods and ernment authorities (LGAs) accounted for about services category is broad, but spending is largely one-third of total spending over the analyzed concentrated in eight items: domestic and foreign period. According to the official budget data, most travel and training (16 percent); utilities, supplies, and capital transfers in FY2020/21 went to SOEs, primar- services (13 percent); medical supplies (7 percent); ily to finance energy-related projects and support the maintenance (4 percent); fuels, oil, and lubricants operations of the Tanzania Electric Supply Company (3 percent); military supplies and services (3 percent); Limited (Annex 4). Similarly, the largest shares of rent and communication (3 percent); and food sup- recurrent transfers were dedicated to education plies (1 percent) (Figure 25). However, half of all (44 percent) and healthcare (12 percent). goods and services expenditures in FY2020/21 were classified under “other operational expenses,” which may signal an erosion of fiscal transparency within 54 Structural peers are countries with economies similar in this category. size to Tanzania’s. 30 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA Public Spending on Goods Services in Tanzania and Comparator Countries, 2020 or Latest FIGURE 25 •  Available Years (% share) (% of total spending) 100% 12% 90% UMIC 80% 10.9% 10% LMIC 70% 9.6% 9.4% LIC 8.9% 8% 60% 8.4% 50% 6% SSA 40% Rwanda 30% 4% Philippines 20% 2% Bangladesh 10% 0% 0% Ethiopia FY2016/17 FY2017/18 FY2018/19 FY2019/20 FY2020/21 Uganda Rent and communication Maintenance Ghana Military supplies and services Medical supplies Kenya Other expenses Food supplies Tanzania 8.9 Travel and training Fuel, oils, lubricants Utilities, supplies and services % of total expenditures 0.0 10.0 20.0 30.0 40.0 Source: WB BOOST data, WB staff calculations, WB-WDI. Composition of Capital FIGURE 26 •  the government’s implementation capacity.55 Over Expenditures by Sector, 2021 the past four years, the execution rate for develop- (% share) ment expenditures averaged 67 percent, with large 35% fluctuations both between and within years. The sig- 32% 30% nificant under-budgeting observed in FY2017/18 and FY2018/19 likely indicates weaknesses in strategic 25% 22% planning, budget preparation, and/or expenditure 20% 17% 14% execution. For example, planned activities may have 15% a limited connection to proposed budgets, or policy- 11% 10% makers may be unable to adjust initial budget requests 5% 5% to reflect approved allocations. Deficiencies in the 0% 0% budget process likely undermine the efficiency and Education &'(') !" *('++,'-,.-'(/01* ( )* + Healthcare ),- . General public services effectiveness of development projects. This problem Defense, public Economic Social protection has also been pointed out in the latest Controller and order and safety development Water, housing and Auditor General (CAG) report (Box 7). social development While the execution rate for domestically financed development spending has improved, Source: WB BOOST data, WB staff calculations, WB-WDI. execution rates for donor-financed projects remain low. The execution rate for domestically financed projects rose from 60 percent in FY2017/18 Budget Credibility to 85 percent in FY2020/21, while aggregate Budget execution rates are low, particularly for 55 While budget execution is often used to measure development expenditures (Figure 27). The gap absorptive capacity, it may reflect a combination of between the approved and executed budgets offers challenges in planning, budgeting, and execution, as insight into the quality of the budget process and well as political uncertainty. Special Focus: The Efficiency and Effectiveness of Fiscal Policy in Tanzania 31 Approved and Actual Expenditures by Budget Type, FY2017/18–FY2020/21 FIGURE 27 •  (Recurrent expenditure, Tsh Trillion) (Development expenditure, Tsh Trillion) 18 14 16 12 14 10 12 10 8 8 6 6 4 4 2 2 0 0 FY2017/18 FY2018/19 FY2019/20 FY2020/21 FY2017/18 FY2018/19 FY2019/20 FY2020/21 Approved Executed (Development expenditure by sectors,% share) 100% 83.5% 80% 71.4% 71.6% 65.7% 60% 51.0% 37.2% 40% 20% 0% Education Healthcare General public Defense, public Economic Water, housing services order and safety development and social development Source: WB BOOST data, WB staff calculations. execution rates for donor-financed projects averaged ture; energy, mining, manufacturing, and construction; just 58 percent (Figure 28) due to delays in contracting transportation, communication; and other industries. non-concessional loans and the slower-than-expected Meanwhile, spending on general public mobilization of concessional loans. services rose to 4.3 percent of GDP, reflecting mounting interest payments. After a combined Expenditures by Sector increase of 1 percentage point between FY2018/19 and FY2019/20, public spending on education, Economic development is Tanzania’s largest expen- healthcare, social protection, and other social services diture category by far, while health and education declined again in FY 2020/21. Relative to GDP, public sectors remain relatively underfunded (Figure 29). health and education spending in Tanzania is below General government spending on economic develop- the averages for SSA, LICs, and LMICs (Figure 30). ment reached 4.6 percent of GDP in FY2020/21, At 3.3 percent of GDP, Tanzania’s level of education driven by investments in the transportation and energy spending is the third lowest among structural peers sectors. Economic development includes expenditures after Bangladesh (1.3 percent of GDP) and Uganda on general economic, commercial, labor affairs, agricul- (2.6 percent of GDP). 32 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA Budget Execution Rates for FIGURE 28 •  Functional Composition of General FIGURE 29 •  Development Projects by Financing Government Spending Source (% of GDP) (% of execution rate) 100% 100% 90% 90% 85% 80% 3.8% 4.4% 4.6% 4.9% 80% 70% 72% 67% 60% 2.2% 2.3% 2.3% 2.2% 70% 58% 60% 58% 58% 58% 50% 60% 40% 3.0% 4.3% 4.3% 5.4% 50% 30% 0.9% 1.4% 1.1% 40% 20% 1.2% 30% 10% 3.2% 3.5% 3.2% 3.2% 20% 0% FY2018/19 FY2019/20 FY2020/21 FY2021/22’B 10% Education Healthcare General public services 0% Defense, public Economic Social protection FY2017/18 FY2018/19 FY2019/20 FY2020/21 order and safety development Water, housing and Domestic Foreign social development Source: WB BOOST data, WB staff calculations. Source: WB BOOST data, WB staff calculations. Social Spending in Tanzania and Comparator Countries FIGURE 30 •  (Public education spending, % of GDP) (Public health spending, % of GDP) UMIC UMIC LMIC LMIC LIC LIC SSA SSA Rwanda Rwanda Philippines Philippines Bangladesh Bangladesh Ethiopia Ethiopia Uganda Uganda Ghana Ghana Kenya Kenya Tanzania Tanzania 0 2 4 6 0 2 4 6 Source: WB BOOST data, WB staff calculations. The Efficiency of Public Spending government spending on education and healthcare in Tanzania and compares it to the rest of world. The efficiency of public spending can be ana- “Technical efficiency” implies that public spending lyzed both from an allocative and a technical delivers the greatest marginal benefit for a given perspective. The findings can assist the government level of resources. For example, increasing value for in improving public health and educational outcomes money in public procurement, strengthening bid- without the need for additional resources. The follow- ding processes, mandating cost-benefit analyses, ing analysis focuses on the technical efficiency of or tightening controls on fraud and corruption could Special Focus: The Efficiency and Effectiveness of Fiscal Policy in Tanzania 33 increase the technical efficiency of public spending. improve key health outcomes by 11 percent without the A data-envelopment analysis (DEA) of the relative need for additional resources. The scope to improve the efficiency of various national healthcare and edu- overall efficiency of spending is much greater. Tanzania’s cational systems can situate Tanzania’s experience efficiency score is 20 percent, implying that 80 percent in the international context. An output-oriented DEA of overall technical inefficiency can be attributed to model can simulate maximal improvements in key the mismanagement of resources. Because efficiency sectoral outcomes (e.g., life expectancy at birth and estimates are expressed relative to a given level of infant mortality) without altering per capita health spending, it is possible for a country to be fully efficient spending. The scatter matrix of the input and output while remaining below the outcome levels of countries variables shows that, across countries, higher levels with greater health and/or education expenditures. of per capita healthcare spending are associated with longer life expectancy at birth and lower infant mortal- ity rates (Annexes 5 and 6). Benchmarking Tax Revenues All Tanzania has significant scope to achieve efficiency gains both in education and health The Historical Performance of Tanzania’s spending. The country’s efficiency score of 89 percent Tax System implies that technical inefficiencies reduce health sys- tem outcomes by 11 percent relative to their potential Tanzania made steady progress in expanding tax level (Annexes 7 and 8). In other words, if the health collection between 2000 and 2015, but these gains system operated at maximum efficiency, Tanzania could have not been sustained. From collecting less than BOX 7: TANZANIA’S PFM CHALLENGES The 2022 PEFA report identified the lack of a reliable and credible annual budget as the most important challenge facing Tanzania’s PFM system. Deficiencies in the core aspects of the PFM, such as budget credibility, cash management, and commitment controls, have continued to undermine budget execution as well as the monitoring and management of domestic payment arrears. Despite recent improvements, the execution rate for the development budget has remained around 70 percent, and in December 2022 the stock of payment arrears was between 3 and 4 percent of GDP. The monitoring of arrears and accounts payable is weakened by the cash-rationing system, as MUSE restricts payments when expenditures exceed the available cash in a given month. Moreover, the CAG report for FY2021/22 revealed significant gaps in the effectiveness of Tanzania PFM system. The CAG report found major irregularities in government spending, including a sharp increase in unsupported expenditures and trivial expenses. These irregularities are largely driven by weak governance and accountability systems across all levels of government. Moreover, significant weaknesses continue to be observed in public procurement, including unlawful preferences in uncompetitive bidding processes, the unfair evaluation and removal of bidders, the unlawful cancellation of contracts, and unplanned procurements. While the cash-rationing system has helped maintain aggregate fiscal discipline, it has also undermined the strategic allocation of resources and weakened service delivery. The introduction of MUSE yielded substantial improvements in the PFM system, including introducing more modern and flexible methods of cash planning and commitment control, which can help strengthen the predictability of the budget while controlling the fiscal deficit. These improvements complement recent reforms designed to ensure that salary payments and regular recurrent expenditures are fully financed each month. Further progress could be made in smoothing development expenditures and non-regular recurrent expenditures, which remain subject to monthly cash controls. Subnational procurement systems are also in need of improvements, including increased digitalization and the use of competitive bidding systems. With support from its development partners, the government is implementing the sixth phase of the Public Financial Management Reform Program (PFMRP VI) during FY2022/23-FY2026/27, which should help to address remaining weaknesses in the PFM system. Improving budget credibility, cash management, and procurement is critical to ensure that the Tanzania PFM system maintains aggregate fiscal discipline while allocating resources in line with strategic priorities and promoting efficient service delivery. Previous phases of the PFMRP have yielded important gains in regulatory reform, human-resources capacity, and the adoption of IT systems, the introduction of the electronic payment gateway and MUSE. The challenge for the PFMRP VI will be to comprehensively address the remaining weaknesses in PFM while maintaining the high standards achieved in other aspects of the PFM system. Source: Tanzania PEFA 2022 report and CAG 2021/22 report. 34 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA Tax Revenue FIGURE 31 •  Tax Collection vs. Tax Capacity FIGURE 32 •  (% of GDP) (% of GDP, % share RHS)) 25% 25% 100% 20% 20% 80% 15% 15% 60% 10% 40% 10% 5% 20% 5% 0% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Tax capacity (LHS) Tax revenue (LHS) Tanzania Pakistan Vietnam SSA LIC Tax gap (LHS ) Tax effort (RHS) Source: WB analysis, data from TRA 2022 and ICTD 2020. Source: WB analysis, data from TRA 2022, ICTD 2020 and WDI 2020. 10 percent of GDP in tax revenue between FY2000/01 enue is collected exclusively from formal workers, who and FY2004/05, Tanzania improved its tax-to-GDP ratio tend to be better off than their informal counterparts. to 13.3 percent in FY2015/16 (Figure 31). Increasing Tanzania’s VAT is also progressive, unlike the VATs of revenue collection helped Tanzania formally achieve many comparable countries. This is due in part to its LMIC status in 2020,56 though the tax-to-GDP ratio narrow base, as many low-turnover businesses need remains close to the LIC average. Between 2000 and not register for VAT. The VAT turnover threshold was 2020, Tanzania’s tax-to-GDP ratio was below the level approximately 47 times GDP per capita in 2020, far of structural comparators such as Pakistan and Nepal, higher than the thresholds in other large middle-income as well as aspirational peers such as Vietnam, and the countries with significant informal sectors.59 However, a SSA average. Nevertheless, Tanzania did experience a clear increase over the period. Rising tax effort has boosted Tanzania’s 56 See World Bank (3rd March, 2021) Press Release – Maintaining Tanzania’s Lower Middle Income Status tax-to-GDP ratio, and significant progress has Post Covid-19 Will Depend on Strengthening Resilience. been made in closing the tax gap. Tanzania’s tax Available at: https://www.worldbank.org/en/news/pre​ ss- effort has steadily increased since 2000 (Figure 32),57 release/2021/03/03/maintaining-tanzanias-lower-mi​ddle- with the tax gap narrowing from an average of about income-status-post-covid-19-will-depend-on-strengt​hening- 8 percent of GDP from 2000 to a low of 5.6 percent resilience#:~:text=DAR%20ES%20SALAAM%2C​ % 20 in 2017. Between 2000 and 2017, the growth of March%203,%2Dmiddle%2Dincome%20country​%20status. 57 Tax effort is expressed as the share of tax revenue personal income tax (PIT) and corporate income tax collected divided by the stochastically predicted amount (CIT) drove the increase in total tax revenue, while the (tax capacity) that could be collected given a country’s contributions from VAT and excise taxes declined. GDP per capita, GDP per capita squared, and trade as a Together, these four instruments account for about percentage of GDP. 80 percent of total tax revenue.58 As a result, Tanzania 58 The TRA’s National Statistics Dataset offers a granular has increased its total tax revenue while shifting to a review of tax revenue collected both in mainland Tanzania and Zanzibar from 1996/97 to 2020/21 across greater reliance on direct taxes over indirect taxes. 11 tax instruments. Tanzania’s tax system is progressive, but the 59 For example, the VAT threshold is approximately 10 tax net is very limited. The PIT, which is based on a times average GDP per capita in Thailand and 20 times graduated rate structure, is very progressive, and rev- average GDP per capita in the Philippines. Special Focus: The Efficiency and Effectiveness of Fiscal Policy in Tanzania 35 FIGURE 33 • Historical VAT Performance FIGURE 34 • Income Level and VAT Revenue (% of GDP) 16 6% 14 5% 12 4% 10 3% 8 2% 6 1% 4 0% 2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0 0 2 4 6 8 10 12 14 SSA LIC Tanzania Log of GDP per capita, 2017 Source: WB analysis, data from TRA 2022, ICTD 2020, and WDI 2020. Source: WB analysis, data from ICTD 2020 and KPMG 2020. holistic poverty and equity assessment of fiscal policy Tanzania’s 2017 C-efficiency ratio61 was would be necessary to estimate the net impact of all about 27 percent, well below the SSA average of taxes and transfers. Other fiscal policy instruments, 37 percent and the LIC average of 39 percent, including conditional cash transfers and public primary indicating substantial room for improvement education, are far more progressive than VAT. (Figure 35). Poor collection performance and a rela- Tax collection fell at the start of the COVID-19 tively high VAT rate drive down Tanzania’s C-efficiency pandemic. The government largely refrained from ratio,62 while the relatively small share of final con- imposing strict mobility restrictions, but slowing eco- sumption in GDP fails to offset this effect. nomic activity still reduced tax revenue. In addition, the Low VAT revenue collection stems from government granted tax relief, which contributed to rev- policy and compliance gaps. Between 2013 and enue contracting more sharply than GDP. As a result, 2017, VAT revenue increased by about 3 percent, the tax-to-GDP ratio fell by nearly 0.75 percentage much slower than the VAT revenue growth observed points. A cross-country analysis shows that the recovery in comparable countries between 2013 and 2018. of tax revenue is likely to lag the economic recovery, as Tanzania has a long list of exemptions in the tax code tax noncompliance tends to worsen during economic (food, machinery, education, etc.) and some items are crises, and tax morale may be difficult to reestablish.60 60 For further analysis and recommendations for addressing Indirect Taxes: Key Trends and Assessment noncompliance during economic crisis, see: Brondolo, J. (2009), “Collecting Taxes During an Economic Crisis: of Performance Challenges and Policy Options,” IMF Staff Position Note. 61 C-efficiency is a popular metric used to evaluate the VAT revenue underperforms in Tanzania relative to efficiency of the VAT. It is calculated by dividing VAT comparators, and there is room for improvement. revenue as a share of GDP by the product of the statutory VAT revenue peaked in FY2005/06 at 4.2 percent of rate and household final consumption as a share of GDP. GDP (Figure 33). Since 2006, it has accounted for For a full discussion of how the C-efficiency indicator can be used to measure VAT effectiveness, see Keen, 3.4–3.9 percent of GDP, or an average of approximately M. (2013). The Anatomy of the VAT, IMF Working Paper 30 percent of TRA Mainland’s tax revenue (Figure 33). No. 13/111. Trendline analysis indicates that it should expect to 62 C-efficiency ratio measures the efficiency of tax generate more than 5 percent of GDP (Figure 34). collection. 36 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA FIGURE 35 • VAT C-Efficiency, 2017 FIGURE 36 • The Excise Tax Mix (% of GDP) (% share) 14% 100% 1,200 12% 1,000 80% 10% 800 60% 8% 600 40% 400 6% 20% 200 4% 0% 0 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2% 0% Tanzania SSA LIC Mobile phone Cigarettes Beer VAT VAT gap Spirits Soft drinks Bottled water Other domestic excise taxes Total (RHS) Note: only countries with data are included, so for SSA (n=16) and for LIC (n=10). Source: WB analysis, data from TRA 2022, ICTD 2020, and WDI 2020. Source: WB analysis, data from Tanzania Tax Statistics Report 2017/18. improperly exempted, reducing a substantial amount beverages, tobacco products, natural gas and of GDP.63 VAT exemptions result in direct revenue petroleum products, to advance environmen- foregone when they apply to final consumption, but tal and public health objectives. The wide array of have more ambiguous impacts when they apply to excise types and tariff structures presents a tradeoff earlier stages of the value-chain. A long list of VAT between the targeting of policy goals and the com- exemptions also complicates administration of the plexity of the tax system. The share of excise tax reve- VAT, which is associated with higher noncompli- nue in total tax revenue fell between 2000 and 2020, ance64 and higher costs of administering the VAT. The and its composition shifted, with the contribution of country’s high VAT threshold narrows the VAT base, mobile phones rising while that of tobacco declined. increasing progressivity but reducing revenue. Small Between 2006 and 2017, total excise revenue grew and medium firms below the threshold pay some by an average of 18.3 percent each year, with mobile embedded VAT on the inputs they purchase from firms phones contributing 33.5 percent, beer 27.7 percent, above the threshold. However, the effective VAT rate that applies to these smaller firms is typically lower 63 In the 2017-2018 fiscal year, 15 agricultural products than if they were formally part of the VAT system and were exempted from VAT and reduced tax revenue by so were mandated to charge VAT on their final sales over Tsh21 billion or 0.02 percent of GDP. World Bank and to credit the VAT on their inputs. Moreover, just (2020) Tanzania Public Expenditure Review FY20: Policy as with a long list of exemptions, a high VAT threshold Options for Improving Revenue Mobilization. 64 Complexity tends to result in higher rate of compromises the application of the VAT as it means noncompliance due either to unintentional mistakes many transactions are excluded from it, complicat- arising from taxpayers’ misinterpreting the regulations or ing the task of managing VAT compliance. Finally, to the willful exploitation of complexity to evade taxation. widespread informality (54 percent of the economy) 65 See the MIMIC estimation method in Elgin, C., Kose, further diminishes VAT collection.65 Informality both M. A., Ohnsorge, F., & Yu, S. (2021) Understanding results in lower VAT potential, due to its impact on firm Informality, CAMA Working Paper, 76/2021, September 2021, Centre for Applied Macroeconomic Analysis productivity and growth, and lower VAT collection, (CAMA), University of Crawford. Available at: https://ca​ due to its association with higher non-compliance. ma.crawford.anu.edu.au/sites/default/files/publication​ The Tanzanian government imposes excise /cama_crawford_anu_edu_au/2021-09/76_2021_elg​ duties on a variety of items, including alcoholic in_kose_ohnsorge_yu.pdf. Special Focus: The Efficiency and Effectiveness of Fiscal Policy in Tanzania 37 Share of Wealth Owned by FIGURE 37 •  FIGURE 38 • PIT Revenue and Income Level, 2018 Households in the Bottom 50%, the Top 10% Excluding the Top 1%, and (% of GDP) the Top 1% of the Income Distribution 16 (% share) 14 40 12 35 30 10 25 8 20 15 6 10 4 5 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 4 5 6 7 8 9 10 11 12 Top 1% Top 10% (excl. top 1%) Bottom 50% Log of GDP per capita Source: WB analysis, data from WID 2022. Source:WB analysis, data from TRA 2022, ICTD 2020, and WDI 2020. and tobacco 12.9 percent (Figure 36). Lower con- revenue is much lower, than in most comparable tributions from tobacco excise taxes reflect the fail- countries. Income taxes increased their share in Tan- ure of specific duties on tobacco products to keep zania’s total tax revenue from 25 percent in FY2000/01 up with growth and inflation. The resulting increased to over 35 percent in FY2020/21. PIT and CIT are the affordability of cigarettes represents a missed oppor- largest categories of direct taxes, together amounting tunity to raise revenue while advancing public health to roughly 4 percent of GDP. This share is consistent objectives.66 with Tanzania’s income level (Figure 38, 39). However, Tanzania’s CIT and PIT are less productive68 than those Direct Taxes: Key Trends and Performance of its regional and income-group comparators, result- ing in lower revenue collection (Figure 40). Income and wealth inequality are widening. In 2018, Tanzania’s Gini coefficient67 was 40.5, plac- ing it in the bottom quartile of countries that year. Moreover, income inequality had increased signifi- 66 Tobacco use is one of the most common risk factors cantly since 2000, when the Gini coefficient was 37.3. for non-communicable diseases (NCDs). The WHO Wealth inequality is also substantial and increasing, estimated that NCDs accounted for 27 percent of all deaths in Tanzania in 2010. as households in the bottom 50 percent have seen 67 Gini coefficient is a measure of income inequality, and their share of total wealth fall from over 5 percent in the coefficient is a number between 0 and 1, where 0 2000 to roughly 4 percent in 2020, while the share corresponds with perfect equality (where everyone of total wealth owned by households in the top 1 per- has the same income) and 1 correspond with perfect cent rose from 25 percent to 34 percent (Figure 37). inequality (where one person has all the income and More effective taxation of income and wealth could everyone else has zero income). 68 Productivity here is defined as collection from a enhance fiscal equity. particular tax instrument as a share of GDP divided by Tanzania collects the total amount of income the top statutory rate for that tax instrument. For PIT, for tax that would be expected given its level of GDP example, this would be PIT revenue as a share of GDP per capita, but PIT revenue is much higher, and CIT divided by the top marginal bracket rate of PIT. 38 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA FIGURE 39 • CIT Revenue and Income Level, 2018 FIGURE 40 • CIT and PIT Productivity (% of GDP) (% ratio) 7 14% 6 12% 5 10% 4 8% 3 6% 2 4% 1 2% 0% 0 Tanzania ( 2017) SSA (2018) LIC (2018) 4 5 6 7 8 9 10 11 12 Log of GDP per capita CIT productivity PIT productivity Source: WB analysis, data from ICTD 2020 and KPMG 2020. Source: WB analysis, data from ICTD 2020 and KPMG 2020. CIT Collection, Rate and Productivity FIGURE 41 •   by CIT incentives, including reduced rates and tax in Selected Countries, 2018 holidays or exemptions.69 These incentives tend to (% of GDP, rate and productivity, (RHS)) disproportionately advantage some firms, multina- 4.5% 35% tional corporations, and high-income households, 4.0% thereby worsening income inequality and distorting 30% competition among firms. 3.5% 25% Business taxation has provided stability for 3.0% investors, but steps need to be taken to reform 2.5% 20% international taxation rules to reduce risks from 2.0% 15% tax avoidance. Tanzania’s overall Marginal Effective 1.5% Tax Rates (METR)70 fell slightly from 19.8 percent 10% 1.0% in 2010 to 19.2 percent in 2020, a decline of just 0.5% 5% 0.6 percentage points (Figure 42), but the broadly stable METR offers a degree of tax certainty to 0% 0% Rwanda Kenya Nepal Malawi Vietnam Tanzania prospective investors. In addition, the difference CIT collection (LHS) CIT rate (RHS) CIT productivity (RHS) between the METRs for services and manufactur- ing is only 1.1 percentage point, far smaller than in Source: WB analysis, TRA 2022, ICTD 2020 and Tax Foundation 2021. peer countries, indicating no substantial bias toward either sector. Tanzania’s low CIT productivity by regional and peer-country standards may reflect 69 See: https://taxsummaries.pwc.com/tanzania/corpora​ policy and/or compliance gaps. Among five com- te/tax-credits-and-incentives. parator countries, only Rwanda has a comparable 70 See Fullerton, D. (1999) “Marginal Effective Tax Rate.” in The Encyclopedia of Taxation and Tax Policy. The METR level of CIT productivity at 4.4 percent (Figure 41). on capital income is calculated by taking the expected Tanzania’s low CIT productivity is likely driven by pretax rate of return minus the expected after-tax rate compliance gaps, in tax registration, filing, reporting, of return on a new marginal investment, divided by the and payment. An additional policy gap is caused pretax rate of return. Special Focus: The Efficiency and Effectiveness of Fiscal Policy in Tanzania 39 FIGURE 42 • Marginal Effective Tax Rates FIGURE 43 • Property Taxes Revenue, 2010–2018 (% rates) (% of GDP) 25 1.6% 1.4% 20 1.2% 1.0% 15 0.8% 10 0.6% 0.4% 5 0.2% 0 0.0% 2010 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 Tanzania Vietnam Africa (GDP weighted) Tanzania South Africa LMIC SSA* LIC* Source: WB analysis, data from UNU-WIDER 2020. Source: WB analysis, data from UNU-WIDER 2020. Note: These samples are greatly influenced by the sample of countries reporting and Note: These samples are greatly influenced by the sample of countries reporting and should be regarded as indicative rather than absolute. should be regarded as indicative rather than absolute. However, Tanzania’s international taxation Revenue Administrator regime is limited, which creates opportunities for tax avoidance that jeopardize tax fairness and The government has expanded taxpayer registra- result in revenue losses. Tanzania has not signed tion, but gaps remain. The VAT was introduced in the Inclusive Framework on Base Erosion and Profit July 1998, but despite its importance as a revenue Shifting,71 which was designed in part to close loop- source, the number of VAT-registered taxpayers and holes in thousands of tax treaties worldwide that have businesses remains low. Certain firms are exempted inadvertently facilitated profit shifting by multination- from VAT registration, including those with turnover als and other forms of tax avoidance. Research has below the threshold (currently Tsh200 million in a shown that large, medium, and small firms all engage in tax avoidance in Tanzania.72 A systematic review of 71 For a full list of signatories, see: https://www.oecd.org​ /tax/beps/inclusive-framework-on-beps-composition. ​ pdf Tanzania’s international tax policy in the context of the 72 See: https://www.dw.com/en/africas-problem-with-tax​ cross-country experience could inform measures to -avoidance/a-48401574. reduce tax avoidance, increase revenue, and improve 73 Outdated international tax treaties created loopholes overall fairness of business taxes.73 in the taxation of multinationals, which allowed them The government could significantly increase to shift profits offshore to minimize their tax liability. revenue collection from property taxes and direct See in Crivelli, E., De Mooj, R. & Keen, M. (2015) Base Erosion, Profit Shifting and Developing Countries, IMF taxes. Between 2010 and 2018, revenue from property Working Paper 15/118; Dharmapala, D. (2014) What taxes averaged about 0.1 percent of GDP per year, close do we know about base erosion and profit shifting? A to the LIC average and just slightly below the SSA aver- review of the empirical literature, Coase-Sandor Institute age (Figure 43). Property taxes can be an effective sub- for Law & Economics Working Paper No. 702, 2014; national tax instrument due to the fixed location of the Aizenman, J. & Jinjarak, Y. (2009). Globalisation and taxable property. In addition, the low productivity of PIT Developing Countries – a Shrinking Tax Base?, The Journal of Development Studies, 45:5, 653-671, DOI: and especially CIT undermines the government’s reve- 10.1080/00220380802582338; and Griffith, R., Miller, nue position. PIT and CIT productivity gaps dispropor- H., & O’Connell, M. (2014) Ownership of intellectual tionately favor wealthy households and well-connected property and corporate taxation, Journal of Public firms, exacerbating wealth and income inequality. Economics, Vol. 112, April 2014, pg. 12-23. 40 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA Limited Liability Corporations and FIGURE 44 •  FIGURE 45 • Registered Taxpayers, FY VAT-Registered Firms (% of population) - (Number of firms) 6% 10,000 9,000 5% 8,000 7,000 4% 6,000 5,000 3% 4,000 3,000 2% 2,000 1,000 1% 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0% 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 Number of new LLCs Change in VAT registered f irms Source: WB analysis, data from Tanzania National Bureau of Statistics 2019 and WB Entrepreneurship 2022. Source: WB analysis, data from Tanzania National Bureau of Statistics 2019. 12-month period) and those that deal exclusively in such as facilitating more efficient, less expensive com- VAT-exempt products.74 In FY2014/15, the Statistical munications with taxpayers at scale.79 Business Register Survey found that almost half of 154,000 surveyed firms were registered for VAT,75 74 As reported in Msangi, S. Y. (2015) Evaluation and though registration rates varied by region.76 Between Analysis of Value Added Tax (VAT) Compliance: A Case Study of Small and Medium Enterprises in Tanzania 2006 and 2018, an average of just under 6,700 limited [Doctoral Dissertation, Faculty of Business and Law, liability corporations were formed each year, while the School of Management, University of Southampton]. number of VAT-registered companies increased by an Available at: https://eprints.soton.ac.uk/404882/1/Fin​ average of 2,200 (Figure 44). al%2520PhD%2520thesis%2520-%2520Salma%2520M​ The adoption of digital technologies has sangi.pdf. yielded some success in increasing taxpayer 75 National Bureau of Statistics, Ministry of Finance and Planning (2016) Statistical Business Register Report, registration. The Electronic Fiscal Device (EFD) was 2014/15 Tanzania Mainland, The United Republic of introduced in 2010, though it was not effectively imple- Tanzania, Dar es Salaam. Available at: https://www.nbs​ mented in mainland Tanzania until January 2011.77 .go.tz/nbs/takwimu/Br/2014_15_SBR.pdf. The largest increase in tax revenue in recent years 76 See the full discussion in Msangi (2015). coincided with the expansion of the EFD to include non- 77 For more information, see Fjeldstad, O.H. et al (2018) VAT-registered businesses (e.g., small-scale traders) in The Customer is King: Evidence on VAT Compliance in Tanzania, ICTD Working Paper 83, Institute of 2013 (Figure 45), but despite the EFD’s advantages, Development Studies. Available at: https://opendocs.ids​ the cost of using it is high and must be borne by .ac.uk/opendocs/bitstream/handle/20.500.12413/140​ firms, which promotes informality and other forms of 93/ICTD_WP83.pdf?sequence=1&isAllowed=y. noncompliance, leading to lower-than-expected VAT 78 For a review of interview responses from SME taxpayers collection.78 Nevertheless, increased digitalization and and TRA officials, please see Appendix 2 in Msangi other reforms can help reduce the administrative bur- (2015). 79 See, e.g., Kira, A. R. (2017) An evaluation of governments’ den of tax compliance. The authorities have attempted initiatives in enhancing small taxpayers’ voluntary tax to reduce the burden of paying taxes by simplifying compliance in developing countries, International processes and gradually introducing automation. Journal of Academic Research in Accounting, Finance Digital solutions can also yield other potential benefits, and Management Sciences, Vol 7(1), pg. 253-267. Special Focus: The Efficiency and Effectiveness of Fiscal Policy in Tanzania 41 TADAT Scores, Tanzania and FIGURE 46 •  PEFA Indicator 19: Revenue FIGURE 47 •  Comparators, 2018 Administration, 2020 (Score, 1 (Worst) to 7 (Best)) (Score: 1 (Worst) to 4 (Best)) 4 Integrity of the registered taxpayer base Accountability and 7 Effective risk transparency 6 management 5 3 4 Efficient 3 Supporting 2 revenue 1 voluntary management 0 compliance 2 Effective tax dispute On-time filing of declarations 1 resolution Tanzania SSA Average MIC Average Accurate reporting in On-time payment declarations of taxes 19.1 Rights and obligations 19.2 Revenue risk for revenue measures management 19.3 Revenue audit and 19.4 Revenue arrears investigation monitoring Tanzania SSA LIC MIC 19. Revenue Administration Source: WB analysis, TADAT (2018). Source: WB analysis, data from PEFA (2020). Weaknesses in revenue administration dis- If the TRA is not able to effectively leverage tort tax policy and encourage informality. A 2014 re- third-party data to cross-check the declarations form effort simplified the VAT system and increased the of existing tax filers, compliance gaps will likely turnover threshold from Tsh40 million to Tsh100 million. remain substantial, and addressing them may The reform narrowed the VAT base to shrink the VAT reg- require a set of complementary reforms. The ister, which had proven difficult for the TRA to manage, ongoing increase in e-filing will likely help Tanzania undermining compliance monitoring and enforcement. lower the cost of tax compliance and improve Despite the higher VAT threshold, ongoing challenges compliance-risk management, but enabling reforms— with VAT refunds highlight unresolved weaknesses in including an effective registration system, third-party revenue administration. Strengthening VAT administra- data verification, and a comprehensive compli- tion will support private-sector liquidity and boost reve- ance-risk management strategy supported by major nue collection by closing compliance gaps, while also investments in technology—are still pending.80 enabling the TRA to broaden VAT collection and support The TRA’s capacity for risk management business formalization by lowering the VAT threshold. and audit investigation hinges on the integrity of Strengthening compliance management the taxpayer base. In the 2022 PEFA assessment, is critical to enhance revenue administration. Tanzania performed relatively well on measures of Tanzania scores poorly on the Tax Administration revenue accounting but poorly on revenue administra- Diagnostic Assessment Tool (TADAT), with the weak- tion, including in the critical areas of risk management est areas being ‘On-time Filing of Declarations’, ‘Accu- and auditing (Figure 47). rate Reporting in Declarations’, ‘Efficient Revenue Management’, and ‘Accountability and Transparency’ 80 Tanzania’s positive experience with using digital solutions to (Figure 46). The accuracy and timeliness of tax-fil- strengthen property tax administration shows that successful ing declarations could be substantially improved, as reforms in this area at the national level are possible. See: McCluskey, W. & Huang, C.Y., (2019) The Role of ICT in Tanzania currently lags many LICs in both areas. The Property Tax Administration: Lessons from Tanzania, CMI weak integrity of the registered taxpayer base further Brief 6, Chr. Michelsen Institute (CMI). Available at: https:// narrows the distribution of the tax burden while under- www.cmi.no/publications/6880-the​-role-of-ict-in-property- mining efforts to analyze taxpayer information. tax-administration-lessons-from-tanz​ania 42 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA PEFA Indicator 20: Accounting for FIGURE 48 •  how individuals and households change behavior in Revenue, 2020 response to taxes and public spending. It similarly (Score: 1 (Worst) to 4 (Best)) does not capture and consider any indirect impacts 4 that occur throughout an economy due to fiscal policy. Despite these limitations, the effects calculated with this method are considered a reasonable approxima- 3 tion of the short-run welfare impact. The analysis uses data from the FY2017/18 Household Budget Survey, as well as administra- 2 tive records on taxes and social spending. It assesses the extent to which fiscal policy redistrib- 1 utes income in Tanzania, as well as the government’s Tanzania SSA Average MIC Average scope to accelerate poverty reduction through 20.1 Information on revenue 20.2 Transfer of revenue changes in taxation and social spending while still collections collections respecting the limits of fiscal prudence. Overall, 20.3 Revenue accounts 20. Accounting for revenue reconciliation most taxes appear to be progressive, but the com- bined effect of taxes and transfers slightly increases Source: WB analysis, data from PEFA (2020). poverty. It should however be acknowledged that redistribution is not the only function of fiscal policy. On top of realizing social goals, fiscal policy seeks These findings indicate that the TRA has to create conditions ideal for growth and a stable limited ability to identify firms that are less likely macroeconomic environment. to be complying with registration, filing, reporting, The policy design, institutional framework, or payment requirements and to prioritize audits and administrative processes that underpin Tan- accordingly. The TRA’s risk-management and auditing zania’s fiscal system are broadly similar to those capabilities can be enhanced in several ways, includ- of many other developing countries. The main com- ing through hiring and training more specialized staff. ponents of government revenues are direct and indi- The success of these reforms will require fundamental rect taxes, supplemented by domestic and external improvements in the integrity of the taxpayer base. loans and grants. In FY2017/18, central government revenue (excluding grants) totaled Tsh17.4 trillion, or 13.5 percent of GDP, just below the regional aver- The Distributional Impact of Fiscal age (Annex 6). The combined revenue of the cen- Policy tral and local governments (including grants) totaled Tsh18.9 trillion, or 15.0 percent of GDP.81 Revenue The Distributional Effects of Taxation and from indirect taxes amounts to 7.5 percent of GDP, Public Spending versus 4.2 percent for direct taxes. Despite Tanzania’s relatively small formal sector, the government collects This section presents the results of a fiscal- significant revenue from taxes on formal employment incidence analysis for mainland Tanzania based and entrepreneurship through the PIT, which includes on the CEQ methodology. The CEQ focuses on PAYE and the Presumptive Tax levied on earned three questions: (i) which types of households pay income.82 VAT is levied at a statutory rate of 18 per- taxes, (ii) who receives direct and indirect transfers, cent on goods and services and accounts for about including utility subsidies and access to publicly funded services such as education and healthcare, 81 The average for 16 regional countries with a recent CEQ and (iii) how fiscal policy affects household incomes, analysis is 18.6 percent. poverty, and inequality. Collectively, this analysis looks 82 Presumptive tax is typically an income tax based on the at what is paid and what is received without assessing accounting records of small businesses. Special Focus: The Efficiency and Effectiveness of Fiscal Policy in Tanzania 43 46 percent of total indirect tax revenue, while excise tive records on taxes and social spending. The taxes83 and import duties contribute an additional 23 CEQ methodology reveals household incomes before and 18 percent, respectively. Indirect taxes may have and after fiscal interventions and shows how taxes, important effects on poverty and inequality as they social contributions, subsidies, and public spending are taxes on consumption and lower-income house- are allocated across households. As a result, it is pos- holds spend a greater share of their income on con- sible to compare income-based measures of wellbe- sumption than higher-income households do. Overall, ing before and after taxes and public transfers. The the total direct and indirect taxes (included in this ana- CEQ includes several discrete income concepts, and lysis) represent approximately 73 percent of total gov- various fiscal instruments (i.e., taxes and transfers) ernment tax revenues in FY2017/18, while total social are added or subtracted to move from one concept expenditure covered represents more than 35 percent to another (Figure 46). Whenever possible, taxes and of total expenditure.84 transfers are allocated to households using informa- Government spending totaled Tsh20.5 tion obtained through the HBS. When such data are trillion in FY2017/18, equivalent to 16 percent of not available, imputation, simulation, or alternative GDP. This level is low by international standards but surveys may be used. in line with the average for other developing countries The CEQ assessment shows that all three in the region. A large share of government spend- poverty indicators worsen when direct and indi- ing is devoted to providing public services such as rect taxes are taken into account, but larger healthcare, education, and national defense, as well changes are observed at the higher poverty line. as covering the recurrent costs associated with the The poverty headcount index increases by 1.1 per- electricity supply, road maintenance, debt service, centage points and 0.1 percentage point with the etc. About one-third of total government spending is national basic-needs poverty line and food-poverty devoted to health, education, and social protection line, respectively. Furthermore, the combination of (Annex 7). While recurrent spending substantially direct transfers and direct taxes and contributions has exceeds capital investment, expenditures have shifted only a modest impact on poverty using the national toward the latter in recent years. However, rising levels poverty lines. of spending on major development projects entail a tradeoff with expanded service delivery. The Tanzanian government uses two official 83 Excise taxes are applied on a specific or ad valorem basis national poverty lines. The basic-needs line, based to a list of specific products (e.g., alcoholic beverages, cigarettes, gasoline, etc.) and services (electronic on the HBS 2017/18, was set at Tsh49,320 per adult communication services, financial services). equivalent per month, or about Tsh1,620 (US$0.70) 84 On the tax side, the analysis did not include the CIT or PIT per adult equivalent per day, which equals US$1.35 due to the limitations of the data and methodology. On per capita per day in 2011 purchasing power parity the expenditure side, not all details about the coverage (PPP) terms. The food-poverty line is set at Tsh33,748 and total expenditure in cash transfers and indirect (in- per adult equivalent per month, or about US$0.92 kind) transfers are available from the household survey data, and the estimates used here are mainly based on per capita per day in PPP terms. The poverty gap social protection expenditures (e.g., cash transfers) and is estimated as the consumption shortfall from the public expenditures on health and education. basic-needs poverty line as a share of the same pov- 85 The CEQ methodology described in Lustig (2018) erty line. In the CEQ analysis, values for these poverty was used to assess the distributional impact of taxes, indicators are estimated using six different definitions transfers, and subsidies across income groups in of income (Table 4).85 Tanzania in 2020 based on household-level data and administrative records on taxes and social spending. The CEQ methodology assesses the dis- Figure 49 presents the main CEQ income concepts and tributional impact of taxes, transfers, and subsi- what fiscal instruments (i.e., taxes and transfers) need dies across income groups in Tanzania in 2020 to be added or subtracted to move from one concept based on household-level data and administra- to another. 44 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA TABLE 4 • Poverty Indicators Across CEQ Income Concepts Amount in FY2017/18 Share of Tax Included in Item (Tsh Millions) Revenue (%) Share of GDP (%) Analysis (Yes/No) Total Central Government Revenue (including LGAs) & Grants 18,875,535 14.6 Central government revenue (excluding grants) 17,403,388 13.5 Tax revenue 15,120,902 100 11.7 Direct taxes, of which: 5,431,192 36 4.2 Personal income tax (Presumptive Tax) 213,418 1 0.2 No Corporate income tax 1,238,076 8 1 No Payroll tax (PAYE) 2,344,699 16 1.8 Yes Property taxes (Rental Tax) 63,764 0 0.1 No Skills & Development Levy 282,840 2 0.2 Yes Indirect Taxes, of which: 9,689,710 64 7.5 VAT 4,476,646 30 3.5 Yes Excise Taxes 2,200,214 15 1.7 Yes Import Duties 1,735,643 11 1.3 Yes Nontax revenue 99,630 1 0.1 No Grants 813,483 5 0.6 No Overall, fiscal policy reduces inequality. The The Progressivity and Marginal Gini coefficient falls from 0.45 for market income plus Contribution of Each Tax and Transfer pensions to 0.34 for final income (Figure 49). Unlike the impact on poverty, this effect is consistent across An analysis of the distributional effects of each income concepts. fiscal instrument reveals that conditional cash FIGURE 49 • Inequality Indicators across CEQ Income Concepts (Gini Coefficient)) 0.6 0.49 0.5 0.45 0.45 0.46 0.46 0.38 0.38 0.38 0.4 0.34 0.3 0.2 0.1 0.0 Market income Market Gross Net market Disposable Disposable Disposable Consumable Final plus pensions income income income income income plus income less income income indirect subsidies indirect taxes Source: NBS HBS 2017/18 and WB staff estimates. Special Focus: The Efficiency and Effectiveness of Fiscal Policy in Tanzania 45 FIGURE 50 • Kakwani Index for Individual Taxes and Expenditures Relative to Market Income Plus CCT income 0.69 Assistance for school uniforms 0.59 Benefits from public primary school 0.58 Benefits from public pre-school 0.53 Healthcare at dispensaries (out-patient) 0.48 PAYE paid 0.46 Diesel excise 0.45 Benefits from public secondary school 0.44 Assistance with bed nets 0.44 Healthcare at hospitals (out-patient) 0.40 Healthcare at health centers (out-patient) 0.39 Healthcare at dispensaries (in-patient) 0.38 All contributions 0.35 Skills development levy 0.35 Petrol excise 0.35 Food assistances, NFRA 0.34 Lubricants and other fuels excise 0.31 Bottled water excise 0.30 In direct effects of taxes on petroleum 0.29 Fertilizer subsidy 0.26 Soda excise 0.17 Soft drink excise 0.17 Assistance for school books 0.12 VAT 0.09 Comm. services excise 0.09 Healthcare at hospitals (in-patient) 0.07 Healthcare at health centers (in-patient) 0.05 Juice excise 0.04 Benefits from public post-s condary school 0.02 Beer excise 0.0 Kerosene excise –0.07 tobacco excise –0.10 Electricity subsidy –0.10 Spirits excise –0.15 Benefits from public vocational school –0.17 Import duties –0.18 Wine excise –0.25 Pensions received –0.34 In direct effects of electricity subsidies –0.38 –1.0 –0.5 0.0 0.5 1.0 Source: NBS HBS 2017/18 and WB staff estimates. transfers (CCTs) are the most progressive; taxes appear to be progressive; while electricity sub- 86 The Kakwani index is a measure of the progressivity of a given social intervention. It is equal to the difference sidies are deeply regressive. The Kakwani index86 in the Gini index for incomes before and after the reveals the relative progressivity of different fiscal intervention. Theoretically, the Kakwani index can vary instruments (Figure 50). The high progressivity of between −1 to 1, with larger index values indicating more CCTs is expected, as the program explicitly targets progressive social interventions. 46 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA poor households. Other expenditures that dispropor- Main Sources of Household Power FIGURE 51 •  tionally benefit poor households include assistance by Welfare Decile in Mainland Tanzania for school uniforms and in-kind benefits such as public primary school, public preschool, and health- (percent) care provided at outpatient dispensaries. In addition, 80 spending on public vocational schools appears to be 70 regressive, while spending on all other forms of post- 60 secondary public education is slightly progressive. 50 At 0.09, the Kakwani index for VAT is also progressive. Taxes on formal workers, such as PAYE 40 and the Skills & Development Levy, are very pro- 30 gressive, as formal workers tend to have higher 20 incomes than their informal counterparts. Several 10 excise taxes are regressive, including those on wine, 0 spirits, tobacco, and kerosene, but these taxes have Poorest 2 3 4 5 6 7 8 9 Richest specific objectives other than fiscal equity. Electric- ity subsidies are steeply regressive because only Not connected Electricity grid Solar households in the upper end of income distribution Source: NBS HBS 2017/18. are connected to the electricity grid (Figure 51).87 The Findings of the CEQ Analysis in fiscal inequality, Tanzania’s fiscal policy is one of the Historical and International Context most progressive among comparators (Figure 53).88 Tanzania’ redistributive fiscal policies The key finding from the CEQ analysis is that increase the poverty rate at the international pov- most taxes appear to be progressive. While the erty line by about 2 percentage points. This occurs combined effect of taxes and transfers also reduce because the regressive effect of indirect taxes is not fully inequality, they slightly increase poverty because offset by pro-poor cash transfers and subsidies. Unlike the indirect taxes that account for a large share of the reduction in inequality, the increase in poverty in revenue are taxes on consumption, and lower-income Tanzania is one of the most significant among compar- households spend a larger share of their income on ator countries, exceeded only by Kenya (Figure 54). It consumption. The size of the effect of fiscal policy on should be noted that almost half of the population in poverty is smaller than that observed in FY2011/12, Tanzania lives under this poverty line, and this measure which may indicate that fiscal policy is becoming more is less relevant in the national context.89 pro-poor over time. The progressivity of Tanzanian fiscal policy 87 This finding was also highlighted in the previous CEQ has remained broadly unchanged since the previ- assessment for Tanzania (Younger et al.,2016), which presented a policy simulation showing that eliminating ous CEQ analysis. Most of the Kakwani index scores electricity subsidies would provide opportunities to for taxes and expenditure programs are close to those strengthen the government’s budgetary position while calculated by Younger et al. (2016) based on data from reducing poverty and inequality. the 2011/12 HBS. Moreover, a comparison with 18 pre- 88 Comparability between these studies can differ because vious CEQ analyses reveals that the combined effect of of the share of the fiscal system included in the analysis taxes and transfers in Tanzania reduces inequality to a and differences in methodology, so these results need to be taken only as suggestive. greater extent than in most comparable countries. The 89 The size of the effect in 2017/18 was smaller than that sample group includes South Africa, Ghana, Kenya, observed in 2011/12 (Younger et al. 2016), which may and the average of 17 CEQs previously completed for indicate that fiscal policy is becoming more pro-poor LMICs. Despite the country’s relatively low levels of pre- over time. Special Focus: The Efficiency and Effectiveness of Fiscal Policy in Tanzania 47 FIGURE 52 • Difference in the Progressivity of Fiscal Interventions between FY2011/12 and FY2017/18 Wine excise –0.74 Spirits excise –0.26 Beer excise –0.21 CCT income –0.19 Skills development levy –0.19 Import duties –0.18 Healthcare at health centers (in-patient) –0.17 All contributions –0.13 Communication services excise –0.12 Benefits from public vocatio nal school –0.09 Bottled water excise –0.08 PAYE paid –0.07 Tabacco excise –0.06 VAT –0.06 Fertilizer subsidy 0.00 Soda excise 0.00 Food assistanes , NFRA 0.01 Assistance for school books 0.01 Healthcare at hospitals (in-patient) 0.03 Karosene excise 0.03 Benefits from public pre-school 0.03 Healthcare at dispensaries (in-patient) 0.04 Pensions received 0.05 Healthcare at health centers (out-patient) 0.08 Healthcare at dispensaries (out-patient) 0.11 Benefits from public primary school 0.12 Lubricants and other fuels excise 0.12 Assistance with bed nets 0.16 Benefits from public secondary school 0.20 Electricity subsidy 0.21 Healthcare at hospitals (out-patient) 0.23 Benefits from public pos t-secondary school 0.26 Petrol Excise 0.36 Assistance for school uniforms 0.38 –1.0 –0.5 0.0 0.5 1.0 Source: NBS HBS 2017/18 and WB staff estimates. The CEQ simulation90 shows that broad- very small at less than 1 percentage point (Table 5). ening the VAT base could slightly increase the Meanwhile, the (minor) reduction in the Gini coefficient poverty rate while reducing inequality. The mar- ginal increase in the poverty rate is expected, as the 90 A fiscal simulation tool currently being prepared by the scenario simulates an expansion of tax liability without authors of this chapter could allow for additional policy considering how the resulting revenue would be spent. simulations, such as the removal of electricity subsidies However, the simulated increase in the poverty rate is or an increase in social transfers. 48 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA The Redistribution Impact of Fiscal FIGURE 53 •  Poverty Headcount at Market FIGURE 54 •  Policy, Tanzania and Comparators Income and Consumable Income, Tanzania and Comparators (index level, ppt. (right axis) 0.8 0.25 (index level, ppt. (right axis)) 0.6 16 0.7 0.20 12 0.6 0.5 8 0.5 0.4 0.15 4 0.4 0.3 0 0.3 0.10 –4 0.2 0.2 –8 0.05 0.1 –12 0.1 0.0 –16 0.0 0.00 South Africa LMICs Ghana Tanzania Kenya South Africa Tanzania Kenya LMICs Ghana (2015) (2012) (2017) (2015) (2015) (2017) (2015) (2012) Difference in poverty Market income Consumable Difference in the Gini Market income Final income between market and plus pensions income between market and consumable income final income (right axis) (right axis) Source: NBS HBS 2017/18, CEQ Data Center on Fiscal Redistribution, 2021, and WB Source: NBS HBS 2017/18, CEQ Data Center on Fiscal Redistribution, 2021, and WB staff estimates. staff estimates. suggests that broadening the VAT base would increase terms of its impact on the income distribution, the progressivity of tax policy.91 Further analysis could even if it slightly increases poverty. The resulting simulate how the increase in VAT revenue could revenue could be used to finance poverty-reducing be used to offset the impact on poverty and further expenditures. Based on the CEQ analysis, dedicating improve fiscal equity. Based on the findings of this ana- a portion of the increase in VAT revenue to augment lysis, channeling a share of the revenue through the the funding of the CCT program would likely have a existing CCT program would likely advance both objec- highly positive impact both on poverty and inequality. tives, as the program is among the most progressive and pro-poor elements of Tanzania’s fiscal policy. Implementing a standard VAT rate for water 91 The simulation accounts for the indirect effects of VAT and petroleum products would be progressive in only in the case of petroleum. TABLE 5 • Simulated Results of Broadening the VAT Poverty line (Tsh per month) 49,320* 33,748** Headcount index Poverty gap Headcount index Market Income plus Pensions 26.3 6.3 8.4 + direct transfers (cash, and near-cash such as school uniform and book subsidies) 25.3 5.9 7.5 – direct taxes and contributions (such as personal income tax) 26.3 6.1 7.9 + indirect subsidies – indirect taxes –> Consumable Income 27.4 6.4 8.5 Special Focus: The Efficiency and Effectiveness of Fiscal Policy in Tanzania 49 ANNEX 1 CORE MACROECONOMIC DATA SOURCES FOR THE REPORT Sector Series Latest Data Point Source Measurement Year Tanzania Mainland Real GDP at constant 2015 prices by activity GDP data: Q1 2023 and National Bureau of Statistics, Bank Calendar Year and by demand, MFO Spring Survey 2023, 2022 of Tanzania, Haver, Integrated Labor monthly tourist arrivals at Tanzania Mainland High frequency data: June Force Survey, Welfare Monitoring by Nationality, monthly electricity and 2023 for tourist arrivals Survey, World Bank staff estimates. quarterly cement production data. and Q1 2023 for other data Inflation Inflation (headline, food, non–food, core, June 2023 National Bureau of Statistics, Bank Calendar Year energy), credit to selected economic of Tanzania, World Bank staff activities. estimates. Monetary M3, reserve money, broad money and June 2023 Bank of Tanzania Calendar Year private sector credit Fiscal Revenues, expenditures, grants, financing, FY2022/23 Ministry of Finance and Planning, Fiscal Year expenditure arrears Bank of Tanzania Debt PPG total, external and domestic FY2021/22 Bank of Tanzania, United Republic Fiscal Year of Tanzania, Country Report No. 23/153, April 2023, International Monetary Fund. External BoP, exports and imports of goods and BoP: Q4 2022 Bank of Tanzania and National Calendar Year services. Bureau of Statistics. Trade data: 5M-2023 Outlook Global PMI Index, Global Sentix Index, July 2023 World Bank staff estimates, Calendar Year Commodity Price Indexes, Bloomberg, Haver, Goldman Sachs Financial condition indices, JP Morgan Global Purchasing Manger’s Indexes, World Bank Data (continued on next page) 51 (continued) Sector Series Latest Data Point Source Measurement Year Zanzibar Real GDP at constant 2015 prices by activity, GDP data: Q4 2022 Bank of Tanzania and Office of Calendar Year tourist arrivals the Chief Government Statistician Tourist data: June 2023 (OCGS) – Zanzibar Inflation Inflation (headline, food, non–food) June 2023 Bank of Tanzania Calendar Year Current Merchandise trade data June 2023 Bank of Tanzania Calendar Year account Fiscal Revenues, expenditures, grants, financing H1-FY2022/23 Bank of Tanzania and OCGS – Fiscal Year Zanzibar 52 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA ANNEX 2 ZANZIBAR RECENT ECONOMIC SYNOPSIS Zanzibar Recent Economic Development Overview Zanzibar is an island economy driven by the services sector Zanzibar is a semi-autonomous and heavily dependent on province that united with Tanzania imports. e services industry Mainland to form the United Republic takes the lion’s share, of Tanzania (URT) representing 52 percent of the total GDP, followed by agriculture Its population was estimated at and industry each contributing around 1.9 million (or 3.1 around 20 percent. Tourists in percent of URT’s total Zanzibar make up over 1/4 of 48.4% 51.6% population) in 2021 and its real URT’s total tourist visitors GDP was 2.4 percent of URT’s in 2022 Zanzibar’s economy continues to grow albeit moderately Economic growth e services sector has exceeded pre-pandemic 6.1% 7.6% performance by over 13 percent 2022 2021 Real GDP Growth (% change, y/y) Growth of Key Services Subsectors 8 vis-à-vis 2019 (% change, y/y) 53 7.6 6 6.1 Human health and social work 22.3 4 around 1.9 million (or 3.1 around 20 percent. Tourists in percent of URT’s total Zanzibar make up over 1/4 of 48.4% 51.6% population) in 2021 and its real URT’s total tourist visitors GDP was 2.4 percent of URT’s in 2022 Zanzibar’s economy continues to grow albeit moderately Economic growth e services sector has exceeded pre-pandemic 6.1% 7.6% performance by over 13 percent 2022 2021 Real GDP Growth (% change, y/y) Growth of Key Services Subsectors 8 vis-à-vis 2019 (% change, y/y) 7.6 6 6.1 Human health and social work 22.3 4 Education 13.3 2 Public administration 28.2 Real estate 22.3 0 Financial and insurance activities -0.3 24.5 Transport and storage 5.8 -2 Accomodation and food services 1.5 -4 2020 2021 Wholesale and retail trade 36.8 2022 0 10 20 30 40 Services Agriculture Industry Real GDP Almost 2/3 Most of the key of the GDP growth was subsectors have driven by the services sector bounced back to their followed by industry at 23 pre-pandemic levels percent in 2022 54 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA Tourism remains the primary driver for growth and jobs Tourist Arrivals by Continents, H1-2023 0.5 47% million 65.3% In H1-2023, the In 2022 Zanzibar number of tourist 16.4% 18.3% attracted 0.5 million arrivals soared by over Europe Others Africa tourist arrivals (1.9% 47 percent (y/y) higher than 2021) from H1-2022 Headline in ation has picked up signi cantly Food in ation was 10.7 percent during H1-2023 5.1% Headline in ation stood at 5.1 percent in but 2.7 percent during the corresponding period 2022 compared to 1.7 one year ago percent in 2021 is re ects the escalating prices of... During H1-2023, headline in ation rose +66% +54% +52% to 7.3 percent vis-à-vis (y/y) (y/y) (y/y) 3.5 percent in H1-2022 Maize Beans Rice Zanzibar Headline In ation Trend (% change, y/y) 61% Food and Non-alcoholic Bevarages remained the leading driving force of the in ation, contributing 10 almost 61 percent to the overall 8 increase followed by... 6 4 2 0 Transport Water, housing & -2 electricity Mar-20 Mar-21 Mar-22 Jun-23 May-20 May-21 May-22 Jul-20 Jul-21 Jul-22 Sep-20 Sep-21 Sep-22 Jan-20 Jan-21 Jan-22 Jan-23 Nov-20 Nov-21 Nov-22 In ation Others Transport +15% +13% Food Housing, Water, Electricity, Gas, and Other Fuels ANNEX 2 – ZANZIBAR RECENT ECONOMIC SYNOPSIS 55 Overall balance remains modest Overall balance remained the same Total spending picked up 20 24.4% Wages & salaries 19.7% of GDP of GDP 29.2% 44.6% Other recurrent 2.8% 2.8% expenditure of GDP of GDP Development 26.2% H1-FY2022/23 H1-FY2021/22 0 expenditures H1-FY2021/22 H1-FY2022/23 Improved tax ...and rising development Non tax revenue as a is is driven by revenue collection higher wages spending percentage of GDP 18.3% decline by and salaries 7 7.1% of GDP payments by 2.2 0.5% 14.6% of GDP 10 of GDP percent of 4.1% GDP... of GDP Tsh Tsh 0 0 H1-FY2021/22 H1-FY2022/23 H1-FY2021/22 H1-FY2022/23 Merchandise trade de cit widened because of rising imports Trade balance of goods registered Growth in imports substantially outpaced the a de cit of US$226.5 million in growth in exports H1-2023 compared to US$184.8 million in H1-2022 37.1% H1-2022 6.2% H1-2023 40.5% During H1-2023, exports decreased largest import partners 3 by 40.5 percent UAE China India Major Export for H1-2023 46% 11% 8% Major imports for H1-2023 23.1% 28% Cloves Manufactured goods 41.5% Oil Seaweeds Industrial raw materials 23% 25.9% Others 11.7% Consumer goods 33% Capital goods 13.8% is growth in exports due to decreases in... Goods Imports Growth (% change, y/y) -50.7% -70.4% 50 Imports y/y y/y 40 Consumer goods 38.7 30 Industrial raw materials Manufactured goods Cloves 20 Oil imports 14.7 10 Capital goods 0 e volume e ects dominated -10 H1-2022 H1-2023 the price e ects for cloves while the reverse is true for seaweeds e imports growth is driven by oil and capital goods imports Source: Bank of Tanzania, OCGS and World Bank sta estimates 56 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA ANNEX 3 SUMMARY OF SPECIAL FOCUSES FROM THE LATEST TANZANIA ECONOMIC UPDATES Fall 2022 TEU-18: “Clean Water, Bright Future: Spring 2022 TEU-17: “Accelerating Growth by The Transformative Impact of Investing in WASH” Expanding Women’s Economic Opportunities The provision of near-universal access to water, sani- and Ensuring Equitable Access to Assets” tation and hygiene (WASH) services can drastically Over the last two decades, a growing share of Tanza- improve multiple facets of Tanzania’s population. nian women have entered salaried employment, and Although there has been progress towards increasing an increase in the female labor-force participation rate access to WASH services, achieving the Sustainable (LFPR) has accelerated Tanzania’s transition to lower- Development Goals of the UN will require greater pri- middle-income country. However, women still face oritization. The Water Sector Development Program multiple challenges, including persistent gender gaps (WSDP) has made significant progress; however, the in wage rates and agricultural productivity. Despite current WSDP-3 stands to have the largest impact recent progress, women are less likely to own a home, towards providing near-universal access to WASH exercise secure land rights, hold a bank account, or services yet. Achieving the goals of WSDP-3 would have access to finance. These gender disparities mitigate the high volume of yearly deaths due to inad- prevent women from maximizing their contribution to equate WASH services, would significantly reduce Tanzania’s economic development. economic loss, and would bring substantial increases in job creation and workforce productivity. With a Fall 2021 TEU-16: “The Recovery Resilience, and majority of the population without adequate WASH Transformation of Tanzania’s Tourism Sector” services, the provision of near-universal access will Tanzania’s abundant nature and rich cultural resources be crucial for the development of Tanzania. are a considerable economic opportunity. The tourism 57 sector can support the government’s broader develop- high-quality livelihood opportunities, and broad-based ment objectives by: (i) creating jobs, both directly and gains in living standards. Achieving this will require an through backward linkages to other sectors; (ii) gen- annual GDP growth rate of 8 percent, the creation of erating foreign-exchange earnings; (iii) providing rev- 8 million jobs, and sustained improvements in social enue to support the preservation and maintenance of indicators. While Tanzania aspires to middle-income natural and cultural heritage; and (iv) expanding the status, in the near term it will need to maintain its LMIC tax base to finance development expenditures and status in a context of deep and lasting external shocks. poverty-reduction efforts. However, the COVID-19 cri- This special focus further frames three pillars reflect sis severely impacted Tanzania’s tourism sector as the both the lessons of the international experience and disruption of global travel and tourism activity resulted Tanzania’s unique circumstances and form the basis in job losses and business closures. This prompted for an actionable policy agenda to achieve the goals policymakers, investors, firms, and development prac- of the TDV 2025. titioners to reconsider tourism’s underlying sustain- ability and value proposition. Fall 2020 TEU-14: “The Potential of the Digital Economy” Spring 2021 TEU-15: “Raising the Bar: Achieving The digital economy is growing quickly globally, and it Tanzania’s Development Vision” can support the delivery of stronger policy responses Following two decades of sustained growth, Tanzania and help contain the spread of the virus. However, reached an important milestone in July 2020, when expanding the digital economy depends both on it formally graduated from low-income country (LIC) the interaction of digital platforms and on legislation. to lower-middle-income country (LMIC) status. While Both governments and firms should contribute to reaching LMIC status is a laudable achievement, driving trust and transparency online. This Special Tanzania’s larger development agenda remains unfin- Focus gives a number of recommendations as well as ished. The Tanzania Development Vision (TDV) 2025 interventions that the Government of Tanzania could envisages Tanzania as a middle- income country with consider if the digital economy is to rapidly expand, well-developed human capital, an ample supply of and to respond effectively to the COVID-19 pandemic. 58 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA ANNEX 4 COMPOSITION OF GOVERNMENT SUBSIDIES BY PROJECT, TSH, FY2021/22 Composition of Government Subsidies by Project, Tsh, FY 2022/21 Approved Actual 0000 130,552,120,855 106,567,572,274 3115 – Petroleum Sub-Sector Development Project 25,804,662,000 701,742,356 3121 – Makambako-Sonega 220 kv, 300 km 5,000,000,000 3147 – Transfer to Tanzania Electric Supply Company Limited 25,326,600,000 5,450,206,345 3155 – LNG Development Project 2,200,000,000 3157 – Iringa-Singida-Shinyanga (BPIT) 12,587,640,000 7,587,640,000 3162 – Construction of Natural Gas Pipeline – Mtwara – Dar es Salaam 1,100,000,000 3164 – 150MW Natural GAS Fired Plant Kinyerezi 138,000,000,000 6,231,640,072 3165 – Ruhudji Hydropower Project 6,500,000,000 500,000,000 3166 – North-West Grid Extension Project 50,105,471,000 21,077,489,848 3167 – Rumakali Hydropower Project 6,500,000,000 5,000,000,000 3168 – Kikonge hydropower Project 1,038,480,000 1,038,480,000 3169 – Rusumo Falls Hydroelectric 13,846,404,000 13,846,404,000 3172 – Rufiji Hydropower Project 1,440,000,000,000 1,006,645,129,875 3175 – Singida-Arusha-Namanga Transmission Line Project 30,210,336,000 7,553,668,691 3176 – East African Crude Oil Pipeline Project 261,660,000,000 3179 – Rufiji-Chalinze-Kinyerezi-Dodoma 400kV Trans. Line 12,031,292,000 8,626,428,925 4279 – Expansion of TBC Coverage 5,000,000,000 5,200,106,311 (continued on next page) 59 (continued) Composition of Government Subsidies by Project, Tsh, FY 2022/21 Approved Actual 4486 – Agricultural Sector Development Programme (ASDP) 150,000,000 5421 – Health Sector Basket Fund 2,400,000 5426 – Bugando Medical Sector 1,000,000,000 914,188,739 5427 – Kilamanjaro Christian Medical Centre 1,000,000,000 1,000,000,000 Grand Total 1,900,755,405,855 1,466,800,697,436 Source: BOOST data. 60 ANNEX 5 THE DEA EFFICIENCY FRONTIERS SHOW A DIRECT, POSITIVE RELATIONSHIP BETWEEN PER CAPITA HEALTH SPENDING AND KEY HEALTH INDICATORS (Infant mortality rate) (Life expectancy at birth) 200 200 180 180 Life expectancy at birth country ranked 160 160 140 140 Infant mortality country rank 120 120 100 100 80 80 TZA’15 TZA’19 60 TZA’19 60 TZA’15 TZA’05 TZA’10 40 40 TZA’00 20 TZA’10 20 TZA’05 TZA’00 0 0 0 50 100 120 200 0 50 100 120 200 Per capita health expenditure country ranked Per capita health expenditure country ranked Note: X axis represents country ranking on per capita health expenditure (0 = lowest country spending on healthcare), Y axis represents coun- try ranking on life expectancy at birth and infant mortality (inverse values), respectively (0 = lowest/highest life expectancy/child mortality country ranking). The solid red line going through efficient countries depicts the efficient frontier that represents achieved efficiency. 61 ANNEX 6 THE DEA EFFICIENCY FRONTIERS SHOW A SIMILARLY POSITIVE RELATIONSHIP BETWEEN PER CAPITA EDUCATION SPENDING AND EDUCATION OUTCOMES (School life expectatncy) 120 100 ISchool life expectatncy country rank 80 60 40 20 TZA 0 0 20 40 60 80 100 120 Education expenditure country ranked Note: X axis represents country’s ranking on education expenditure (0 = lowest country spending on education), Y axis represents country ranking on average year of schooling in secondary education (0 = lowest country ranking on schooling). The solid red line going through ef- ficient countries depicts the efficient frontier that represents achieved efficiency. 63 ANNEX 7 THE DEA REVEALS THAT TANZANIA’S HEALTH EXPENDITURES ARE LESS EFFICIENT THAN THOSE OF MANY COMPARABLE COUNTRIES… AND ITS’ EDUCATION EXPENDITURES ARE AMONG THE LEAST EFFICIENT 65 (DEA Efficiency Scores in Healthcare, Tanzania and (DEA Efficiency Scores for Education, Tanzania and Comparators) Comparators) LSO 0.71 Least Efficient TZA 0.2 Least Efficient SLE 0.73 TCD 0.2 SWZ 0.74 CIV 0.74 NER 0.2 TCD 0.75 NGA 0.75 MOZ 0.2 GNQ 0.79 CMR 0.79 … … GNB 0.80 ZAF 0.81 LSO 0.4 NAM 0.81 BDI 0.5 ZWE 0.81 GIN 0.82 PRY 0.6 SDN 0.82 AFG 0.82 MYS 0.6 MLI 0.82 … … PRT 0.8 TKM 0.89 TZA 0.89 … … PNG 0.89 KAZ 0.9 … … JOR 0.97 HUN 0.9 COL 0.97 KGZ 0.97 ALB 0.9 TUN 0.98 VEN 0.98 STP 1.0 POL 0.98 … … WSM 1.0 CRI 1.00 MDA 1.0 BGD 1.00 JPN 1.00 LTU 1.0 ETH 1.00 MOZ 1.00 BEL 1.0 FIN 1.00 Most Efficient Most Efficient Source: DEA efficiency scores based on WDI and WHQ data. Source: DEA efficiency scores based on WDI and WHQ data. 66 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA ANNEX 8 GOVERNMENT REVENUES Amount in Included in FY2017/18 Share of Tax Analysis (Yes/ Item (Tsh millions) Revenue (%) Share of GDP (%) No) Total Central Government Revenue (Including LGAs) and 18,875,535 14.6 Grants Central Government Revenue (Excluding Grants) 17,403,388 13.5 Tax Revenue 15,120,902 100 11.7 Direct Taxes, of which: 5,431,192 36 4.2 Personal Income Tax (Presumptive Tax) 213,418 1 0.2 No Corporate Income Tax 1,238,076 8 1 No Payroll Tax (PAYE) 2,344,699 16 1.8 Yes Property Taxes (Rental Tax) 63,764 0 0.1 No Skills and Development Levy 282,840 2 0.2 Yes Indirect Taxes, of which: 9,689,710 64 7.5 VAT 4,476,646 30 3.5 Yes Excise Taxes 2,200,214 15 1.7 Yes Import Duties 1,735,643 11 1.3 Yes Nontax Revenue 99,630 1 0.1 No Grants 813,483 5 0.6 No Source: Authors’ elaboration based on official data from Tanzania Revenue Authority 67 ANNEX 9 PUBLIC SPENDING, FY2017/18 Amount FY Included in 2017/18 (Millions) Share of Spending Share of GDP Analysis (Yes/No) Total Public Spending 20,468,072.0 100.0% 15.8% Primary Government Spending Defense Spending 1,236,118.9 6.0% 1.0% No Social Spending: Social protection (collective government services) 185,020.0 0.9% 0.1% Social inclusion (individual government services) 582.6 0.0% 0.0% Education, of which: 1,664,157.9 8.1% 1.3% Yes Primary 174,603.5 0.9% 0.1% Yes Secondary 163,112.0 0.8% 0.1% Yes Post-secondary non-tertiary 453.6 0.0% 0.0% Yes Tertiary 1,549.2 0.0% 0.0% Yes Health spending, of which: 5,577,384.0 27.2% 4.3% Yes Government expenditure on health 1,731,800.0 8.5% 1.3% Yes Health insurance 451,836.0 2.2% 0.3% Yes Out-of-pocket payments 1,553,603.0 7.6% 1.2% Yes Housing & urban development, of which: 424,946.6 2.1% 0.3% No Housing 17,152.2 0.1% 0.0% No (continued on next page) 69 (continued) Amount FY Included in 2017/18 (Millions) Share of Spending Share of GDP Analysis (Yes/No) Community Development 35,591.1 0.2% 0.0% No Water supply 371,530.1 1.8% 0.3% No Street lights 673.2 0.0% 0.0% No Non-Social Spending Environmental Protection, of which: 30,945.0 0.2% 0.0% No Protection of biodiversity and landscape 24,845.0 0.1% 0.0% No Other environmental protection 4,002.0 0.0% 0.0% No Energy, of which: Electricity 1,942,402.0 9.5% 1.5% No Non-Electric Energy 9,148.0 0.0% 0.0% No Petroleum and natural gas 23,350.0 0.1% 0.0% No Agricultural development 285,210.0 1.4% 0.2% No Rural roads 771,000.0 3.8% 0.6% No 70 TANZANIA ECONOMIC UPDATE, ISSUE 19, 2023 – THE EFFICIENCY AND EFFECTIVENESS OF FISCAL POLICY IN TANZANIA 1818 H Street, NW Washington, DC 20433