Improving the efficiency and effectiveness of fiscal policies could help Tanzania boost revenue collection and increase public expenditure, paving the way for stronger human capital outcomes, inclusive economic growth, and prosperity of the citizens, according to a new World Bank report.
The 19th Tanzania Economic Update titled, Enhancing the Efficiency and Effectiveness of Fiscal Policy in Tanzania, which was published on September 19, 2023, shows that Tanzania made some progress in expanding tax collection, with the tax-to-GDP ratio increasing from 10 percent in 2004/05 to 11.8 percent in 2022/23.
Meanwhile, public spending has increased from 12.6 percent of GDP to 18.2 percent of GDP, which is still lower than the average for Sub-Saharan Africa, low-income countries, and lower-middle-income countries.
“Tanzania’s economy has been steadily expanding, and the fiscal policies have been successful in reducing income inequality, but there is still room for enhancing these policies to improve public spending in priority programs,” said Nathan Belete, World Bank Country Director.
“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. If the healthcare system were to operate at its utmost efficiency, Tanzania could enhance critical health outcomes by 11 percent without necessitating additional resources.”
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
This Update 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 percent as continued monetary tightening constrains credit supply.
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.
“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,” said Jaffar Rikabi, World Bank Senior Economist and co-author of the report.
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 percent and 1.2 percent of GDP in FY2021/22, respectively.
These figures fall below the average spending levels of 4.4 percent and 2.3 percent 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 percent in 2023 before rising further to about six percent in the medium term.
However, Tanzania’s outlook is premised on a favorable global outlook and the government’s timely completion of structural reforms to strengthen the competitiveness of the economy, improve the business and investment environment, and reduce the cost of regulatory compliance.
It is expected that Tanzania’s headline inflation will continue to decline and remain significantly lower than many neighboring economies. The inflation rate is projected to decrease from around 4 percent in 2023 to approximately 3.9 percent 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. It is expected that Tanzania’s headline inflation will continue to decline and remain significantly lower than many neighboring economies.
The inflation rate is projected to decrease from around 4 percent in 2023 to approximately 3.9 percent in 2025. This is mainly due to the moderating global energy prices and a stable food supply supported by increased public expenditure in the agriculture sector.