Tanzania - Smaller Deficit Will Not Deter Government Tax Crackdown


Monday, August 28, 2017 1:05 PM / BMI

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Although the fiscal deficit in the current fiscal year will come in below the government's target and our forecasts, the government will press ahead with its tightening of the tax regime. We expect further tax disputes between businesses and the authorities. Nevertheless, the fiscal deficit is set to expand rapidly in FY17/18 as spending efficiency improves and the authorities will therefore remain committed to maximising revenues by clamping down on instances of tax evasion.

Tanzania's fiscal deficit will narrow to a greater extent than we previously anticipated in the 2016/2017 fiscal year, (which ends at the end of June) but this does not mean the government is likely to abandon its drive to boost tax collections from businesses Indeed, the better than-expected fiscal performance is entirely related to poor implementation of development spending plans rather than outperformance in revenue collection.

With spending poised to ramp up in the coming quarters, we expect authorities will likely forge ahead with its tax crackdown in order to bring revenue collection closer to target and prevent the fiscal deficit in FY17/18 and beyond from rising too rapidly. As a result, we are forecasting budget deficits of 4.0% in FY17/18 and 4.3% in FY18/19, up from a revised estimate of 1.5% in FY16/17.

Improved Fiscal Profile Will Not Ease Pressure On Businesses

We have revised our estimate for the FY16/17 fiscal deficit downwards to TZS1.5trn (1.5% of GDP) from a previous estimate of TZS3.8trn (3.6% of GDP) but this apparent improvement will not lead to an easing in the government's aggressive policy adjustments to increase its tax take. Our revision is based on latest available data which show that development spending continues to come in well below target. However, each component of revenues, with the exception of VAT, has also come in below target, albeit to lesser extent than the spending projections.

We continue to believe that capital spending efficiency will improve in the coming fiscal years (see 'Development Expenditure To Widen After Downturn', March 3 2017) and are therefore expecting the fiscal deficit to rise notably in FY17/18 and beyond. The authorities have big infrastructure investment plans which include construction of a regional standard gauge railway line and the addition of two new container berths to Dar es Salaam port.

Against this backdrop, we do not believe that the smaller-than-expected fiscal deficit in FY16/17 is unlikely to lead the government to ease up in their drive to increase the tax take. Recent measures include a government-instituted export ban on copper and gold ore exports in March amid a tax dispute with Acacia Mining, the largest foreign miner in Tanzania, while a tax dispute with Nigerian cement company Dangote over the course of 2016 almost resulted in the firm ceasing operations in the country. Given the outlook for the fiscal accounts, we expect the government to press ahead with its tax regime.

Tanzania has long benefitted from an attractive business environment for foreign investors, with measures such as tax incentives encouraging foreign firms to commit investment to the country. However, recent events suggest the business environment is becoming less attractive.

While the measures might lead to an increase in revenues in the short term, they could be counterproductive over the longer term as lower investment leads to weaker economic growth and lower tax income. A case in point is Statoil's decision to delay investment in the country's flagship LNG project owing to uncertainty over the regulatory environment. As such, the government's efforts may lead to higher fiscal account deficits in the long term.

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