NO SURPRISES IN TANZANIAN BUDGET SPEECH

UNCLAS SECTION 01 OF 02 DAR ES SALAAM 001205

SIPDIS

SENSITIVE

E.O. 12958:N/A
TAGS: ECON PGOV TZ
SUBJECT: NO SURPRISES IN TANZANIAN BUDGET SPEECH


Sensitive but unclassified (SBU). Please protect
accordingly.


1. (SBU) Summary: Finance Minister Basil Mramba delivered
the annual Budget Speech before the national Parliament June
8 in Dodoma. The speech outlines the economic progress
during the 2004/05 fiscal year (which ends June 2005) as
well as the targets for economic growth in the coming
2005/06 fiscal year. Announcing very few significant
changes in this year's budget, Mramba focused the speech on
"the achievements of the Third Phase Parliament and its
Government," meaning the last ten years under President
Mkapa's leadership. The budget reflects a commitment to the
status quo, but local businessmen are disappointed in the
lack of continued economic reforms. Any significant new
direction will be left up to the new administration next
year. End summary.

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Economic Performance in 2004/05
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2. (U) Minister Mramba began his speech by outlining the
"profound achievements" of the "Third Phase Government under
the leadership of President Benjamin William Mkapa." He
focused on Tanzania's steady GDP growth, low inflation,
improved revenue collection, and an attractive investment
climate. Mramba reported that the Tanzanian economy grew by
6.7 percent in 2005, compared with 5.6 percent in 2004 and
that it surpassed the target of 6.5 percent set in last
year's budget speech. He reported that inflation decreased
from 4.8 percent in March 2004 to 4.1 percent at the end of
March 2005, noting that food inflation in particular had
decreased. Mramba also noted that improved revenue
collection (13 percent of GDP this fiscal year) has helped
the government exceed its revenue targets. Still, 41
percent of the annual budget was supported by foreign aid
(compared to 45 percent in the previous year).


3. (U) Tanzania's economic growth was driven largely by the
modest growth (4.8 percent) in agriculture. Mining was the
fastest growing sector, at 15 percent growth, but its
contribution to total GDP growth was only 0.3 percent.
Construction and manufacturing also led with double digit
growth in the last year.

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Goals and Targets for 2005/06
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4. (U) Mramba stated that the thrust of the budget for
2005/06 is to implement the National Strategy for Growth and
Reduction of Poverty. The main economic targets include:

--Attain a real GDP growth rate of 6.9 percent in 2005 and
7.2 percent in 2006. (Note: The government has stated that
with a 3 percent population growth rate, GDP growth must
approach 10 percent in order to achieve its poverty
reduction goals by 2025.)

--Domestic revenue is targeted to reach 14.3 percent of GDP
in 2005 and 14.5 percent in of GDP in 2006.

--An inflation rate of 4 percent by the end of June 2005 and
thereafter a rate consistent with that of major trading
partners.

--Maintain gross international reserves at a level above
seven months of imports of goods and services.

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The Status Quo Budget
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5. (SBU) Changes announced in Mramba's speech include
uncontroversial changes in the minimum wage (to adjust for
inflation) and in a few specific tax provisions. No
significant new policies or programs were announced.
Notably absent from Mramba's speech was mention of the East
African Customs Union, any of its controversial tariff rates
under review, or how Tanzania plans to use the five-year
adjustment period to develop its industrial base.


6. (SBU) Private sector analysis of the 2005/06 budget has
characterized it as "status quo" or "no-win no-loss." One
analyst said, "At least we know what to expect - not much!"
While appreciating the importance of stability in economic
policy, many business people feel the government should do
more to facilitate economic growth, including stepping up
economic reforms. In particular, the private sector has
complained that the government has not done enough to
develop transport, water, and power infrastructure; provide
access to affordable credit; or to stem corruption and
bureaucratic intransigence. (Note: A credit guarantee
scheme for small and medium enterprises was an important
focus of last year's budget speech. No mention was made of
its success or failure.)


7. (SBU) World Bank Country Director Judy O'Connor spoke at
a private sector gathering after the budget speech.
Positive about the new budget and Tanzania's economy in
general, O'Connor praised the focus on poverty reduction and
the on sustaining a predictable economic policy. She said
that Tanzania's macroeconomic stability is just beginning to
show microeconomic effects. She said that the small
reduction of poverty and Tanzania's growth demonstrate that
its economic policies are really working. She urged the GOT
to do more to improve social services and to ensure that
growth is "shared equitably to ensure prosperity."

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Bottom Line
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8. (U) The details of the budget continue to be revealed
throughout the Parliamentary Budget Session this month as
each ministry presents its part of the budget. The bottom
line, according to Mramba's speech, is that the GOT plans to
spend Tsh 4.176 trillion in 2005/06, funded by Tsh 2.067
trillion in domestic revenue and Tsh 2.109 trillion in
external grants and loans, domestic borrowing, and the sale
of parastatal shares.

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COMMENT
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9. (SBU) Comment: Minister Mramba's speech reflects the
position of Mkapa's now lame duck administration, focused on
legacy rather than future vision. Indeed, the
administration can be proud of the dramatic economic reforms
of the last decade and its increasing ability to attract
foreign aid. However, much progress remains to be made in
creating a vibrant market economy and reducing poverty.
Tanzania's aid-dependency is not sustainable, as domestic
revenue cannot even cover the GOT's recurrent expenditures,
let alone its development expenditures. As one analyst put
it, Tanzania is borrowing to consume and that cannot last
forever. Mramba has left it up to the new administration to
figure out how to move Tanzania from aid-dependency to a
reasonable level of self-sufficiency. End comment.

OWEN