Tanzania is facing a major financial squeeze as it seeks to plug a budget deficit arising from unplanned expenses in an economy where revenues are thinning, hurting growth prospects.

The government is desperately seeking an infusion of millions of dollars to shore up the country’s finances, after a biting power and food shortage nearly emptied Tanzania’s purse. 

Foreign reserves have dwindled to around $3.9 billion, equivalent to about six months’ worth of imports, and the tax man reported a 10 per cent revenue collection shortfall last year.

The situation was made worse after donors slashed funding pledges for Tanzania’s 2010/11 budget by nearly a quarter of a billion dollars due to concerns about corruption and the slow pace of reforms. It is feared the development partners could freeze more funds in the upcoming 2011/12 budget.

Now, economists and public finance experts are saying Tanzania may be forced to apply to the International Monetary Fund for assistance, an option that will inevitably come with a series of conditions.

Servacius Likwelile, Deputy Permanent Secretary at the Ministry of Finance and Economic Affairs, told The EastAfrican in Dar es Salaam last week that the government has written to the donor communities asking for assistance.

Donor funding

“Canada has agreed to start pumping in funds to alleviate the situation,” said Dr Likwelile, adding that the government had also approached Norway, Sweden, Finland, Denmark, Ireland and Germany for assistance. Development partner entities the ministry has written to are DfID Tanzania, the European Union Commission, the World Bank Country Office, the African Development Bank and the embassy of Japan.

Analysts said the country’s financial woes could impact on growth prospects for the economy, which is expected to grow by 7.2 per cent this year, up slightly from an estimated 7 per cent last year, on the back of a strong recovery after the global financial crisis.

The already bleak outlook could be worsened by an expected spell of dry weather this year, which could affect power generation and production of food and cash crops, pushing up commodity prices and stoking new inflationary pressures.

“It isn’t that the government is broke; donors have been supporting us through the General Budget Support, which is an ongoing programme,” said Dr Likwelile.

Permanent Secretary in the Ministry of Finance Ramadhani Khijjah said in a letter to development partners last week that the additional funds will be used to purchase fuel to back up power generation in view of the electricity problems the country is facing.

The letter said that the funding will also be used to purchase food for the national reserve in view of rain failures.

Already, at least 36 districts and 13 regions are facing an acute food shortage.

“Donor funding will also go towards financing the transfer of education functions from the Ministry of Education and Vocational Training to local government authorities, which have caused strains on the government budget,” Mr Khijjah said.

Finance Minister Mustafa Mkullo, last year unveiled a budget of Tsh11.6 trillion ($7.72 billion), with the biggest chunk — Tsh7.7 trillion ($5.1 billion) going to recurrent expenditure and the rest to development.

Mr Khijjah said a mid-year budget review to assess performance and determine the course of action to be taken up to June is underway.

“Challenges have been identified especially with regard to shortfalls in revenue collection and continued lack of rainfall,” said Mr Khijjah. “The government is urging the Tanzania Revenue Authority to look into ways to minimise the shortfall. Encouragingly, the TRA surpassed its own revenue collections target for December. Director for Taxpayer Education Protas Mmanda confirmed to The EastAfrican that the Authority had targeted to collect Tsh570 billion ($380 million) but ended up collecting Tsh572.771 billion ($382 million).

If this trend continues and the government gets a positive response from donors, the projected 7 per cent growth may still be achievable.

Mr Khijjah said that based on the mid year review, the government is examining its expenditure items, especially in the recurrent budget, “to weed out items that will not have a negative impact on the general performance. In mind are items like seminars and workshops among others.”