Missed Opportunities and Rethinking -Economic policy for growth

Posted on May 3, 2015 · Posted in Economic Policy
081007-N-8977L-092 TANGA, Tanzania (Oct. 7, 2008) A boy waits with his mother for his malaria lab results at a dispensary in Tanga, Tanzania during a medical civic action project conducted by U.S. Soldiers and Sailors assigned to Camp Lemonier, Djibouti. (U.S. Navy photo by Mass Communication Specialist 2nd Class Johansen Laurel/Released)

TANGA, Tanzania (Oct. 7, 2008) A boy waits with his mother for his malaria lab results at a dispensary in Tanga, Tanzania during a medical civic action project conducted by U.S. Soldiers and Sailors assigned to Camp Lemonier, Djibouti. (U.S. Navy photo by Mass Communication Specialist 2nd Class Johansen Laurel/Released)

The current economic policies have had minimum impact on poverty because the nexus between good governance, trade and taxation as a means for public resource mobilisation for economic development financing in Tanzania is weak.

The governance structures are weak and incapable of redistributing wealth and delivering quality social services as a trigger for broader wealth creation. The tax regimes are not synchronised with modern tax systems or practices and focus on a narrow segment of the population to tax. The taxed private sector is small, over taxed and thus incapable of remitting optimal tax revenue required for the government to achieve its development financing needs. Tax avoidance is common. As a consequence broader economic development is elusive. A number of factors have collectively contributed to this problem.

Bad governance and weak governance structures and practices have contributed towards unfavourable business environment. This has led to poor revenue collection, poor social delivery and low wealth creation and as a consequence driving more people into extreme economic conditions and poverty.

Tanzania’s economic, fiscal and trade policies recognise good governance is a pre-condition for development.  Good governance entails the existence of a combination of tangible and intangible attributes and functions of the government machinery. Over the government has been struggling to find means to address it[1]

However, the citizens have no capacity to effectively participate in the economic governance and fiscal policy processes.  Despite the good intentions outlined in Tanzania’s macroeconomic development plans, trade and fiscal policies, there is struggle between balancing the government revenue maximisation objectives and the private sector growth as engines of the economy.  The private sector and citizens complain of high taxes, repressive and unpredictable fiscal regimes and a colossus of non tariff barriers affecting trade and business yet government is still faced with low revenues.

The government’s capacity to engage internationally is weak. The revenue institutions face acute shortages of skilled staff to confront the new frontiers in taxation. For example, taxing multinationals, taxing the informal sector and taxing the extractive sector. Yet the global trade and taxation system has been changing and in some instances working against the aspirations of less developed countries like Tanzania in favour of powerful multinational corporations and political elites.

The massive financial and public resource leakages through corruption and poor fiscal or legislative regimes (base erosion) have equally affected Tanzania’s abilities to mobilise adequate revenue to finance public expenditure and as consequence stunting development. In 2012 alone the fiscal deficit before grants was Tsh3.67 bln equal to 67% of annual estimates while after grants it was equivalent to 59% of annual estimates[2]. Rough estimates suggest that Tanzania is losing USD 1 Bln a year with trade mispricing alone responsible for around USD500 Mln[3]. TRA estimates that around 40% of firms in the informal sector do not pay taxes, meaning that TRA is missing 40% of presumptive tax revenues. The cost of Tanzania’s tax revenue loses is being paid by the poorest people in the country and the population whose welfare could significantly improve with increased funding to the key sectors such as education, health and agriculture[4].urban-poverty-in-tanzania

Across the globe, and especially in developing countries, a change in trade and taxation policy is considered to have significant impact on development and welfare, as this change will promote private sector growth, create jobs and generate more revenue to finance government expenditure.

The interplay between civil society, private and government is important in leveraging the environment towards superb economic growth and sustained development. Although there is some level of interaction between the government and private sector, the connection with the civil society as an active player has been lacking.

Poor or non commitment to regional economic integration and international governance standards has led to trade diversion and trade deflection to other regions, denying the country (ies) vital opportunities for maximising benefits from regional trade. Good governance, trade and tax for development are the pillars for economic prosperity.

Youth bulge, unemployment and limited economic opportunity

Over the past decade the levels of population growth in Tanzania and the region has increased. In Tanzania the population growth rate increased from around 27 Mln in 2000 to 43 Mln in 2013 and it is estimated to double by 2030. The overall projections are that over 60% this population will be comprised of young people. Also significantly over 30-40% this population will be unemployed and living below the poverty- line.  These projections therefore call for radical policy measures which will promote resource mobilisation, improved social service delivery, entrepreneurship and investment to create jobs to absorb this population. Currently investment as percentage of proportion of GDP remains at 12% which is low by African standards.

As Tanzania stands at the brink of the Millennium it is imperative to encourage more robust private sector investment[5]. Mobilising citizens and private to participate and influence government policy decisions and process is core to achieving these targets.

New thinking and opportunities for growth

 For these ambitions to be achieved there is need for a sustained engagement,  involving inter alia an assessment of the ongoing trade and taxation policy regimes and economic governance structures and processes, establish the gaps and opportunities for reform. Forums have to be created for increased civil society and private sector engagement as inlet towards shaping future policy discourse and practice in this area. There is need for increased explanation and demonstration to citizens and the private sector as to the importance of good governance, trade and taxation as a means for fostering economic development.

There is need for progressive economic policy which stimulates enterprise development and wealth creation for development. Wealth creation and vital investment has to be attracted and sustained. Both local and foreign investors have to be guaranteed of a fair business environment and in return they have to commit themselves to engaging in ethical business and paying fair taxes. The challenges facing citizens and private sector as tax payers have to be interrogated and addressed. Broader engagement and dialogue amongst civil society, citizens, faith constituencies, private sector and government is vital. Fair and robust macroeconomic policies will be vital in translating these ideals into tangible benefits for economic prosperity. Research and critical debate is necessary for shaping or informing these policies.  Tackling these issues will be the Governance and Economic Policy Centre’s agenda for the next future.

[1] GoT: National Trade Policy for a competitive economy and export led Growth, Dar es Salaam, February, 2003

[2] GoT: Poverty Monitoring Report, 2013

[3] ibid

[4] The One Billion dollar question: How can Tanzania stop losing so much tax revenue; Norwegian Church Aid, 2012

[5]  Ndulu B, J and Mutalemwa K. Charles:  Tanzania at the turn of the Century; Background papers and statistics; Unleashing the private sector development for Tanzania’s development