Tanzania is negotiating with development partners for at least $1.4 billion to support its ongoing budget and help forestall tax increases for already struggling businesses.

Donors were expected to support its 2016/2017 budget with Tsh2.8 trillion ($1.4 billion), but only Tsh600 billion ($300 million) out of Tsh3.6 trillion ($1.8 billion) pledged has been realised.

Finance and Planning Minister Philip Mpango said the government was in talks with the World Bank, the European Union, Kuwait, Abu Dhabi and the Organisation of Petroleum Exporting Countries for funds to support the current and next year’s budgets.  

“The government was expecting a commercial loan of Tsh2.1 trillion ($1.05 billion) to finance various development projects, but due to high borrowing costs it did not come through,” Dr Mpango said last week. “We are hoping to complete talks with the African Development Bank on the possibility of grants and soft loans.”

He said the high cost of borrowing and tough loan conditions by financiers were among the challenges the government was facing in raising funds during the first five months of implementing the budget.

“The economic crisis in Europe led to an increase in average interest rates from 6 per cent to 9 per cent in recent years,” Dr Mpango said. After the European debt market became expensive, Tanzania turned to China, India, South Korea and Japan for assistance.

On New Year’s Eve, Dr Mpango said the government was in discussions with Credit Suisse Bank to arrange a commercial loan for infrastructure projects.

“The government has initiated negotiations with Credit Suisse in the United Kingdom for a loan of $300 million following recent improvements in the cost of borrowing in European markets,” Dr Mpango said in his State of the Economy address covering the second half of 2016.  

Temporary hardships

The minister said between July and November last year Tsh287 billion ($143 million) in grants was released, against a target of Tsh1.1 trillion ($500 million).

“A total of Tsh36.1 billion ($18 million) was disbursed by the European Union for the general budget support while Tsh58.4 billion ($29.2 million) was disbursed for a basket fund equivalent to 61 per cent of the target of Tsh95.5 billion ($47.5 million),” he said.

Dr Mpango said the public debt had increased to $21 billion by the end of October, 2016 from $19.861 billion in December 2015.

Early in November 2016, Dr Mpango had tabled in the Tanzanian parliament, a draft of the 2017/2018 budget in which he proposed the spending of Tsh32.9 trillion ($16.4 billion) against the current Tsh29.5 trillion ($14.2 billion) budget.

The proposed budget aims to boost industrial development. Mr Mpango said Tanzanians should be prepared to face temporary hardships from austerity measures the government planned to bolster efficiency.

READ: Brace for a tough year, economists warn Tanzanians

Dr Mpango said the 2017/18 budget is an increase by 11.5 per cent over the current, 2016/17 annual budget.

An MP, Hussein Bashe, said the Tsh32.9 trillion budget proposal will be achieved through a 16 per cent increase in revenue collections as a source of funding and will attract more taxes from both business stakeholders and other taxpayers.

Widen tax base

Prof Humphrey Moshi, an economic advisor to former president Jakaya Kikwete, suggested that the government widen the tax base through incorporation of the informal sector instead of increasing taxes on the formal sector.

“The informal sector can fill the tax gap through a tax harmonisation plan that would attract small businesses to pay taxes. This would create a new tax base,” he said.

“We must develop and revamp agriculture by applying new technology that increases production of food and cash crops, thus opening up new agro-based industries that will generate more revenues and create new jobs,” Prof Moshi said.

In 2015, several donor countries, including the UK, Norway, Switzerland and the Netherlands, withdrew budgetary support to Tanzania leaving the country to depend on China, the AfDB, Canada, Japan and the World Bank. Most of the European donors stopped contributing over the government’s failure to deal with the Independent Power Tanzania Ltd (IPTL) escrow account scam.

READ: More donors pull out of Tanzania budget support deal

The scandal saw $120 million illegally withdrawn from Tanzania’s central bank, in a deal involving senior government officials.

In 2015, donors disbursed only 15 per cent of their pledges, which amounted to $63.2 million out of the pledged $413.8 million.