Tanzania has admitted to facing fresh difficulties in funding its budget with the deficit rising to seven per cent and a bloated wage bill soaking up nearly the entire tax collection.

Still, the government has announced a 7.6 per cent increase in spending for the financial year beginning July that will see the Treasury spend Tsh19.6 trillion ($12.3 billion), a Tsh1.4 trillion ($875 million) jump from this year’s expenditure.

As a result of the shortfall in the current year, development projects at both national and local government levels have been hit hard, with data released by the Ministry of Finance on Thursday showing that the Treasury had only funded 43 per cent of the requirements for local government authorities for the current financial year.

Forced to borrow

“We were not able to meet targets,” admitted Prime Minister Mizengo Pinda while addressing a pre-budget session of parliament.

This means the government will be forced to borrow more to fund its obligations, even as the International Monetary Fund (IMF) cautions that Tanzania’s appetite for short-term, expensive loans is posing a threat to the nation’s debt sustainability.

READ: IMF warns Tanzania over borrowing spree

Tanzania plans to borrow at least $900 million in the next fiscal year, up from $700 million in the current year.

Global lenders

The Treasury also said it will seek $292 million from three global lenders — Japanese lenders Sumitomo Mitsui Banking Corp (SMBC) and Japan Bank for International Cooperation (JBIC) and HSBC — to fund the expansion of Julius Nyerere International Airport. The country has also lined up a $700 million Eurobond for the next financial year.

The Bank of Tanzania (BoT) insists the current debt level, which is 33 per cent of the GDP, is sustainable and the country is still creditworthy.

Details released by the Finance Ministry at a closed-door briefing of the Local Authorities Parliament Committee show that most government collections through Tanzania Revenue Authority (TRA) are used to finance what is regarded as “first note.”

TRA collects around Tsh800 billion ($500 million) monthly, and up to 87 per cent of this, or Tsh700 billion ($440 million), goes into paying salaries, national debts, military activities as well as State House activities.

“This leaves very little for other projects,” said a parliamentarian who attended the meeting. “As you can see, this amount is too meagre to make any meaningful impact on economic activities.”

Although Premier Pinda and Finance Minister Saada Mkuya were upbeat, promising MPs that the government hoped to cut the deficit before the end of the financial year, the lawmakers said that was unlikely.

A number of stakeholders locally and internationally, including the IMF, have cited inability to control expenditure as the main cause of the adverse financial situation.

Rely on commercial loans

In recent years, the government has been forced to rely on commercial loans to finance its economic plans but lack of financial discipline has seen the debts increasing with little to show in terms of an improved economic situation.

“From now on, we are going to listen to advice from you and other people and institutions on how we can improve the situation,” said Mr Pinda, seeking to reassure the legislators that the situation would not recur in the next budget.

The gloomy fiscal data came as the central bank announced a marginal fall in exports in the year to February, caused by a drop in gold earnings.

BoT said the value of exports and services declined by 1.4 per cent to $8.59 billion as at February this year compared with the year ending February 2013 while gold exports declined from $2.07 billion to $1.72 billion over the same period as exports declined by 1.4 per cent. It attributed the situation to a decline in gold and traditional exports.

In its Economic Review for March 2014 released on Thursday, the central bank said the value of exports and services declined by 1.4 per cent to $8.59 billion compared with the amount recorded in the year ending February 2013.

Travel, the leading foreign currency earner, increased from $1.73 billion to $1.91 billion during the period while manufactured goods export value stagnated at $1.05 billion. Tourism, the country’s largest foreign-currency earner, grew from $1.73 billion to $1.91 billion during the period.

Traditional exports however fell from $952 million to $868 million during the 12-month period, according to the report. However, gold exports declined from $2.07 billion in the 12 months ending February 2013 to $1.72 billion in the same period this year.

Look into tax exemptions

Mr Pinda noted that a team of experts formed several months ago has established problems in non-tax revenue collections, especially in local governments.

He said the team has proposed a number of actions that the government will incorporate into the next budget, to be unveiled in the second week of June.

Although he did not go into details, Mr Pinda hinted that tax exemptions would be one area the government would look into to boost revenue.

The latest report by the Controller and Auditor-General shows that, for the year ended June 2012, the government lost Tsh1.81 trillion ($111.7 million) to exemptions, up from Tsh1.02 trillion ($63 million) reported in the audited financial report for 2010/2011.

The exemptions represented 13 per cent of the 2011/2012 government budget of Tsh13.53 trillion, triggering an outcry from small- and