Tanzania: Implications of the FY-2011/12 budget to business in Tanzania

THE Tanzania minister for Finance & Economic Affairs tabled the Government Budget for the 2011/12 financial year in Parliament on June 8, 2011. The budget is currently among the topical economic and business issues of discussion. This is because budget implementation will have different implications upon various groups in the country and beyond.

Some selected implications of the budget on the captains of industry and other business titans are outlined herein below.

Expenditures as business opportunities
The Government plans to spend the sum of Tsh13.5 trillion in the new financial year. This expenditure provides a potential opportunities for the business community, and players in the private sector should take full advantage of the opportunities that unfold with this historical expenditure figure – in nominal terms at least.

Among other things, a relatively huge sum of development expenditure will go into infrastructure in its broad sense. This will include – but is not be limited to – development and improvement of roads, ports, airports and railways.

Other key expenditure posts include a national submarine cable and electricity.

To the extent that Tanzania is a private sector-led economy, the deliverer under these expenditure items will by and large be the private sector. Development of the Public-Private Partnership (PPP) policy and associated strategies and laws will cement these opportunities in some areas that have hitherto been within the realm of the Government. Typically, these include the construction of ports and bridges, as well as other hard and soft public infrastructure.

However, there is a minimum threshold of conditions that must exist for the business community in general, and local business operators in particular, to actualize the potentials. Among the conditions include the capacity of the would-be providers of these services that would constitute public expenditure in FY-2011/12.

The key conditions include a capacity to deliver in its very broad sense. However, the local private sector capacity is likely to be wanting – given the relative infancy nature of this segment of the sector. Delivery capacity building, therefore, may be a prerequisite for the local private sector to actualize the potentials embedded in the opportunities.

All these expenditures will be more meaningful if there will be a ‘substantial’ local content in the procurement aspect of these expenditures.

Domestic borrowing can be a raw deal
The Government plans to borrow to the tunes of Tsh1.2 trillion from the domestic money market in FY-2011/12. Necessary as it may be, borrowing generally and borrowing from the rather small domestic market in particular can be a raw deal for the business community.

Apart from increasing the size of the national debt that will have to be re-paid by taxes in the future, domestic borrowing tends to crowd out the private sector from the money market. This is not healthy for the economy in general and the private sector in particular.

Besides the possibility of drying up what may be limited lines of credit, massive Government borrowing may increase interest rates. This would, in turn, increase the cost of capital. Needless to say, a high cost of capital is an additional constraint to the already long litany of constraints to development of the private sector. In a country with a relatively infant and emerging local private sector, this is not good.

But borrowing is an opportunity, too
At the micro-level, massive Government domestic borrowing is a business opportunity for operators in the financial/banking sector and related businesses. For those who can tap the opportunity to become suppliers of the staggering Tsh1.2 trillion in loans to the Government, this is a windfall in terms of interest rates, transaction costs and other revenues that accrue to banks via extending credits to clients.

Apart from Finance House, players in legal, insurance and other firms could also cash in on the 1.2 trillion borrowing activity.

Since the possibility of a single domestic bank to issue the whole sum as a loan to the Government is rather limited – and should be avoided – most likely the parties involved will opt for loan syndication. Several banks are likely to form a consortium and extend credit lines to the Government as syndicated loans.

Government revenues as business costs
The Government will attempt to raise revenues internally and externally. The internal revenues are mainly paid by the domestic business and public sector through taxation.

As is the case for the public sector, tax revenues are costs to the business community. They reduce realized profits. Businesses, therefore, should scrutinize the taxes that have been either reduced or removed all together and adjust downward their prices accordingly.

For increased taxes – as is the case in the ‘sins industry’ that includes soft drinks, beer, spirits and cigarette – their prices have to be adjusted upwards, thereby losing some competitiveness to alternative suppliers whose taxes (and, by extension, prices) have not gone up.