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Needed in 2011 - a Radical Budget

Discussion in 'Biashara, Uchumi na Ujasiriamali' started by nngu007, Apr 13, 2011.

  1. nngu007

    nngu007 JF-Expert Member

    Apr 13, 2011
    Joined: Aug 2, 2010
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    The normal national budgetary process for the 2011/12 fiscal year should be under way in Tanzania's ministries, departments and agencies (MDAs) and local government authorities (LGAs). For a budget to be meaningful, it has to reflect the real situation on the ground both at the local and international scenes. Given the current economic situation on the ground, Tanzania's 2011/12 budget should radically depart from the norm.

    The current international economic situation is one of uncertainties posed by the Arab world unrests, the Japanese March 11, 2011 earthquake and associated nuclear dangers as well as sovereign debt crisis in the Euro Zone. All these may derail the rather fragile recovery from the global financial and economic crisis.

    At the East African regional level, the very ambitious and unrealistic goal of EAC Monetary Union by 2012 will affect the budget partly because a number of macroeconomic convergences have to be achieved as covered in an earlier article in this column. The local economic scene is characterized by power crisis, hiked fuel prices, inflation, rising dollar value in relation to the shilling and uncertain rainfall patterns, inter alia. All these call for a very radical budget this time around.

    A normal budget will be abnormal

    Given the economic situation on the ground, it would be abnormal to expect normal revenues to finance the budget. Internal revenues targets via the route of taxation may prove extra difficult to be achieved. With the current inflation rate of over seven per cent, which is some two percentage points higher than the five per cent policy rate, higher taxes will be inflationary. The normal donor dependence for financing the budget up to a tune of over 30 per cent may not be an option in such times as these of a rather recovery from the crisis and of austerity economics in action.

    Radical revenue sources

    Given the situation on the ground, there is a need for a radical departure from traditional revenue sources. These include controversial government borrowing from internal and external money markets. Domestic borrowing may not be good for the private sector as it may be crowded out of the money markets. The borrowing option may also hike interest rates and will surely add up to the already swollen national debt.

    However, the option may be the lesser evil when confronted with a rock on one side and a hard place on the other. Alternative to dependence on donor aid to finance the budget include issuing a Euro bond. It is understood that some measures towards that have taken place in Tanzania. The question is on whether such rating agencies like Poor and Standard, Moody and Fitchs will 'give' Tanzania enough notches to attract the attention of the titans in the money markets.

    Radical review of expenditure

    In as far as expenditure is concerned it would be abnormal to keep the orthodox expenditure posts while the situation on the ground has changed. The expenditure posts should not be treated as if they were cast in stones. A radical review of types of expenditure and amounts of funds allocated to them is needed.

    'Mea culpa' the sin industry?

    Traditionally, the government coffers are filled with tax revenues from the so called 'sin industry'. In the Tanzanian context, money from the 'sin industry' include taxes accrued from alcohol including beer, wines and spirits; cigarettes and cigars; and from nightclubs. In more liberal and sinful or less moral countries (depending on how one looks at things) the litany of the 'sin industry' would include revenues from legalized and formalized sex workers.

    A 'mea culpa' (Latin equivalent of forgiveness) to the 'sin industry' in Tanzania is not foreseen this time around. Technically, the demand for the goods and services in the 'sin industry' is price inelastic and by extension tax inelastic. Consumers keep on paying the indirect consumption tax the tax rate notwithstanding.

    Factor-in exchange rate and inflation

    Among the variables that call for a radical budget in Tanzania during fiscal year 2011/12 is exchange rate volatility and the rising inflation rate. The Tanzanian shilling has been declining in relation to such global reserve currencies as the US dollar.

    On July 22, 2010, one US dollar was about Sh1395. By April 5, 2011, the rate was $1 for about Sh1505. This is a depreciation of about eight per cent in about as many months. This implies that the Sh11.609 trillion revenue for 2010/11 budget was about $0.0083 trillion and the planned Sh11.97 trillion for 2011/12 budget is $0.0079 trillion.

    In dollar terms therefore, the 2011/12 budget is less than the 2010/11 one.
    When considering inflation developments from last year to now and medium term prospects, the implication may be similar to that of exchange rate movement considerations. A radical change that factors-in exchange and inflation rates movements in the budget figures is important if the budget is to be meaningful.

    Too late to change templates?

    Governments being what they are, one is afraid on whether the desired radical changes in the budget can see the light of day in the 2011/12 fiscal year.

    Flexibility, innovation, quick decision making, none-bureaucratic procedures that are needed for radical changes are unfortunately not the strong side of most governments.

    Therefore it may be too late (in relation to June 2011 debate) and too early (to a rigid system that is almost cast in stone) for a budget system characterized by filling budget templates as per the Medium Term Expenditure Framework (MTEF).

    The author is a senior lecturer, researcher and consultant in economics and business, Mzumbe University and Dar es Salaam Business School.
  2. Kobello

    Kobello JF-Expert Member

    Apr 13, 2011
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    I respectfully disagree,2011/12 budget must be a combination of tax hikes and cuts in expenditures,that's radical to me.With imports nearly double as much as the exports,it's hard to get even a D in Standard and Poor's ratings.