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World Bank Releases 19th Tanzania Economic Update Focused on Efficiency of Fiscal Policy

Improving the efficiency and effectiveness of fiscal policies could help Tanzania boost revenue collection and increase public expenditure, the update reveals.

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Dar es Salaam. The World Bank on Tuesday released its 19th Tanzania Economic Update, revealing that authorities’ efforts to improve the efficiency and effectiveness of fiscal policies could help Tanzania boost revenue collection and increase public expenditure.

According to the report titled Enhancing the Efficiency and Effectiveness of Fiscal Policy in Tanzania, the efforts could also pave the way for stronger human capital outcomes, inclusive economic growth, and prosperity of the citizens.

The report shows that Tanzania made some progress in expanding tax collection, with the tax-to-GDP ratio increasing from 10 per cent in 2004/05 to 11.8 per cent in 2022/23. 

Meanwhile, public spending has increased from 12.6 per cent of GDP to 18.2 per cent of GDP, which is still lower than the average for Sub-Saharan Africa, low-income countries, and lower-middle-income countries.

Speaking during the launch of the report in the city on Tuesday, Nathan Belete, World Bank Country Director, said that Tanzania’s economy has been steadily expanding, and the fiscal policies have successfully reduced income inequality.

READ MORE: World Bank: Zanzibar’s Economic Growth Doesn’t Translate Into Improved Well-being

However, he noted that there is still room for enhancing these policies to improve public spending in priority programs.

“While additional resources are needed to close the service delivery gaps in social sectors, there is scope to improve the efficiency of spending within the current systems,” Mr Belete said. 

“If the healthcare system were to operate at its utmost efficiency, Tanzania could enhance critical health outcomes by 11 per cent without necessitating additional resources,” he added.

Gloomy outlook

The update released on Tuesday comes at a time when the global and regional economic outlook remains gloomy due to the lingering effects of the COVID-19 pandemic, the war in Ukraine, and regional droughts. 

Global growth is projected to slow significantly in 2023 at 2.1 per cent as continued monetary tightening constrains credit supply. 

READ MORE: World Bank: Gender-based Violence Remains a Serious Concern in Tanzania

Against this background, emerging markets and developing economies like Tanzania have been caught up in global monetary tightening policies that were implemented to soften inflationary pressure. 

These policies have resulted in higher borrowing costs, tighter credit conditions, and increased financial stress. Capital outflows have also impacted countries, causing official gross reserves to deplete and exerting forex pressures. 

The Update shows that countries such as Tanzania can strengthen the efficiency and effectiveness of tax and expenditure policies to improve policy outcomes and support inclusive and sustainable growth.

Jaffar Rikabi, World Bank Senior Economist and co-author of the report, said: “Tanzania should strive for greater expenditure predictability for increased physical and human capital investments, which will drive inclusive and sustainable economic growth over the long term.”

Largest gap

While public spending is low across all expenditure categories, the gap is the largest for social spending, with spending on education and healthcare averaging 3.3 per cent and 1.2 per cent of GDP in FY2021/22, respectively. 

READ MORE: Govt, World Bank Sign Two New Financing Agreements

These figures fall below the average spending levels of 4.4 per cent and 2.3 per cent for lower-middle-income countries.

According to the authors, improving the efficiency and effectiveness of the fiscal policy is needed to address rising income and wealth inequalities and to increase spending on priority sectors, such as education and health, for stronger human capital outcomes. 

It is also critical for remedying low budget execution rates, particularly in the case of development and non-salary expenditures that are often undermined by the quality of the budgetary processes and implementation capacity.

On the economic outlook, the Update shows that despite global headwinds and regional droughts, Tanzania’s economy is projected to expand by 5.1 per cent in 2023 before rising further to about six per cent in the medium term. 

However, Tanzania’s outlook is premised on a favourable global outlook and the government’s timely completion of structural reforms to strengthen the economy’s competitiveness, improve the business and investment environment, and reduce the cost of regulatory compliance.

READ MORE: World Bank Study Identifies Five Areas Zanzibar Can Work On To Improve Its Public Service

Declining inflation

According to the World Bank, it is expected that Tanzania’s headline inflation will continue to decline and remain significantly lower than many neighbouring economies. 

The inflation rate is projected to decrease from around four per cent in 2023 to approximately 3.9 per cent in 2025. This is mainly due to the moderating global energy prices and a stable food supply, which is supported by increased public expenditure in the agriculture sector.

Speaking during the launching ceremony, Finance Minister Mwigulu Nchema appreciated the World Bank for continuing to release Economic Updates, saying that they have been useful to the government in developing various policy reforms to address many of the economy’s challenges.

READ MORE: World Bank: Universal Access to Water Supply, Sanitation, and Hygiene Could Reduce Tanzania’s Economic Losses by US$1.9 billion per year by 2030

Dr Nchemba also mentioned several measures the government is currently taking to boost economic growth, including measures intended to reduce Tanzania’s dependence on foreign aid.

“We want to empower the private sector before thinking of what we get in terms of taxes,” Nchemba, who doubles as Iramba West MP (Chama cha Mapinduzi – CCM), said. “We can’t have new avenues of taxes w/out new economic activities, which is the essence of strengthening economic activities to extend the tax base.”

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