Stung by a decision by major donors to withhold $500 million in aid until a corruption scandal is fully investigated and implicated officials punished, the Tanzanian government now says it will not plan for any support in the next budget.

Servacius Likwelile, the Permanent Secretary in the Finance Ministry, said donors had stayed away from a scheduled budget review meeting in November, and that there were no indications of how much money, if any, they would give to reduce the budget deficit for the 2015/16 financial year that begins in July.

“The government has decided that, going forward, we will not continue to depend on donors, and we have come up with other measures to offset this,” Dr Likwelile said.

The new budget guidelines seen by The EastAfrican acknowledge the difficulties the government has faced in accessing promised aid in the first two quarters of the 2014/15 financial year.

“The challenge that the government faced in accessing general budget support (GBS) funds in the first two quarters of the 2014/15 budget has cast a shadow on the realism of projecting GBS funds into the budget,” the guidelines note. “Therefore, GBS funds will be recognised once the disbursements are made.”

Donors withheld $500 million (5 per cent of their commitment in GBS) in budget support, to encourage the government to investigate the irregular removal of $125 million from the Tegeta escrow account at the Tanzanian central bank in 2013.

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The withheld financing has impacted the disbursement of Tsh290 billion ($163,413,000) to the national electoral commission to procure biometric voter registration kits, as well as prepare for a referendum on a new constitution, scheduled for April. Major energy and infrastructure projects have also been affected.

The EastAfrican understands that donors promised about $3 billion for the 2014/15 financial year (35 per cent of the country’s budget), most of which was not affected by the aid cuts and continues to go to the earmarked projects.

READ: US says Tanzania aid grant depends on anti-graft action

Nevertheless, the guidelines say the government intends to borrow Tsh4.2 trillion ($2.36 billion) from both domestic and external sources, of which domestic borrowing for rollover of matured government securities is Tsh1.4 trillion ($789 million) in the next financial year.

Recurrent expenditure is estimated at Tsh15 trillion ($8.45 billion) including Tsh6 trillion ($3.38 billion) for wages and salaries for civil servants, while development expenditure is estimated at Tsh4.8 trillion ($2.7 billion). Of this, locally financed development expenditure is Tsh3.3 trillion ($1.86 billion), and foreign financed development expenditure is estimated at Tsh1.5 trillion ($845 million).

The government says it will try to close the financing deficit by improving tax collection and implementing a new VAT law.

Haji Semboja, a senior economist and lecturer at the University of Dar es Salaam, said Tanzania was not in a position to give up on budget support and the decision may impact the country’s credit rating. 

“There is no country in the world that can survive without financial support from outside,” he said.

Dr Semboja added that the decision could affect plans to pull more Tanzanians above the poverty line, making youths vulnerable to radicalisation by extremist groups.

Sources confirmed that the government had decided to make do with its available resources, and open market debt.

Zitto Kabwe, a former shadow finance minister and parliamentary Public Accounts Committee chairman, told The EastAfrican that he was aware of the decision, and warned of the challenges of developing new revenue streams and the risk of drawing down national reserves that could lead to volatility in the currency markets.

“The next budget will be a populist one due to the forthcoming election. The government after the 2015 election will be forced to introduce a mini-budget immediately after the inauguration,” Mr Kabwe said.

A few government officials, including the Attorney General and former Lands minister Anna Tibaijuka resigned from their positions after being implicated in the escrow account scandal.

However, with the referendum only a month away and a general election in October, the government appears reluctant to play into the hands of opponents by admitting to widespread corruption among senior officials.

Reported by Erick Kabendera and Rosemary Mirondo