Africa: Foreign Aid – Can Tanzania Avoid Donors’ Snare?

During the recent budget session in Parliament, Finance minister Philip Mpango opened a Pandora's Box in the presence of a visibly fidgety donor community when he insinuated that Tanzania is considering picking itself up from previous ravages of donor-supported budgets to embrace the self-reliance mode through internal revenue collection, abolition of unnecessary tax exemptions and widening of tax base.

To butress his point, he quoted Sebastian Edward, in his book Toxic Aid: Economic collapse and Recovery in Tanzania (2014). The scholar points a damning finger, saying that after analysing in great depth Tanzania's history during its first two decades as an independent nation, it is clear that the official aid community had a major responsibility in one of the most colossal collapses of a poor country in the history of the modern world.

Tanzania's public debt has steadily been on the rise despite the recent stepped up domestic revenue collection in a bid to lessen dependency on general budget support that has been dwindling over the years.

Since ascension to power of the incumbent president Dr John Magufuli, Tanzania Revenue Authority (TRA) has been surpassing the monthly targets, something that has been hailed by pundits as the right direction.

The government has been waging a three-pronged war on embezzlers of the government revenues in its agencies including Tanzania Revenue Authority (TRA), Tanzania Ports Authority (TPA) as well as plugging holes in recurrent expenditure. The private sector has not been spared for tax evasion either.

The government is also putting in place policies that will cut in the nip the unproductive tax exemptions that have pitted the government against foreign investors over time,, free issuance of electronic fiscal devices (EFD) for revenue collection, hoping to net in extra S1.26 trillion from tax revenue and S.11 trillion from non-tax and Sh521.9 billion from LGAs own sources

Is debt sustainable?

In the fiscal 2015/2016 budget, external and domestic non concessional borrowing stood at Sh6.2 trillion shooting up to Sh7. 46 trillion in 2016/2017 fiscal year, marking an increment of S.3 trillion in the overall borrowing. This financial year alone, the treasury has earmarked a record Sh6.4 trillion external, domestic interest and amortization.

Still, development Partners are expected to continue providing grants and concessional loans amounting to Sh3.6 trillion, equivalent to 12 per cent of the total budget. Out of it, Sh2.75 trillion is earmarked for development projects, Sh372.1 billion sector basket funds and Sh483 billion is General Budget Support (GBS).

Out of the total budget, S7.72 trillion was set aside for recurrent expenditure while S1.82 trillion for development expenditure, equivalent to 40 per cent of the total budget whereas, Sh8.70 trillion is being sourced locally while Sh3.12 trillion will be from foreign funds. The rationale of increasing development budget from last years.

According to finance and, and despite the observed increase in national debt stock, the debt is still sustainable. This is supported by the Debt Sustainability Assessment conducted in September, 2015 which revealed that the national debt is sustainable in the medium and long term.

Pundits argue that what given the choice, the government should borrow less from the domestic market to avail funds for the development of the private sector.

Moreover, public borrowing can only be justifiable if funds are to be invested in the development expenditure. According to Dr Haji Sembuje, an economist, investment in the infrastructure represent future incomes of the Tanzanian people.

"The current regime is correcting the mistakes of the past where borrowed funds supported parasitic consumptions such as travel for the government officials. It is therefore the intention and goodwill that matters. By investing in the development expenditure, measurable results should be able to trickle down to public. Investing so much in the recurrent budget means investing in the future incomes of the Tanzanian people," he said.

Prof Honest Ngowi of Mzumbe University says that although the national debt is within sustainable levels, too much reliance on China that has been offering non concessional loans is like putting eggs in one basket.

He agrees that so long as the funds go to finance the development budget, the country is sure to reap from the human capital, investment and general growth.

"It boils down to whether the funds are invested in development capital rather than recurrent budget. The country can benefit from improved infrastructure, human capital development that it now needs. The debt is so far manageable standing at slightly above 20 per cent of the GDP", he said.

He however cautioned on letting the debt spiral to anywhere near 60 per cent as this would propel the country to the bottom of the global credit rating that base creditworthiness on the likelihood of payment - the capacity and willingness of the borrower to meet its financial commitment on a financial obligation in accordance with the terms of the obligation and assess of default risk of the borrowing country.

"Tanzania plans, and has in the past issued of sovereign bonds to finance development. For posterity, the country should desist from borrowing beyond acceptable levels. We should be cautious. In a situation where a country intends to borrow in future, finance become very costly depending on the risk as rated by say, Standards and Poor because they attract more interest," he added.

Source: The Citizen.