Identifier
Created
Classification
Origin
06DARESSALAAM1006
2006-06-21 09:49:00
CONFIDENTIAL
Embassy Dar Es Salaam
Cable title:  

KIKWETE'S BUDGET: NO DEFICIT OF PLANS TO SOLVE

Tags:  ECON PGOV TZ 
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VZCZCXYZ0002
PP RUEHWEB

DE RUEHDR #1006/01 1720949
ZNY CCCCC ZZH
P 210949Z JUN 06
FM AMEMBASSY DAR ES SALAAM
TO RUEHC/SECSTATE WASHDC PRIORITY 4183
INFO RUEHKM/AMEMBASSY KAMPALA PRIORITY 2776
RUEHNR/AMEMBASSY NAIROBI PRIORITY 0119
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
C O N F I D E N T I A L DAR ES SALAAM 001006 

SIPDIS

SIPDIS

STATE AF/E FOR B YODER AND AF/EPS FOR T HASTINGS
PLEASE PASS TO TREASURY FOR L KOHLER
PLEASE PASS TO MCC FOR M KAVANAUGH, G BREVNOV, L BLACK

E.O. 12958: DECL: 06/20/2011
TAGS: ECON PGOV TZ
SUBJECT: KIKWETE'S BUDGET: NO DEFICIT OF PLANS TO SOLVE
SURPLUS OF PROBLEMS


Classified By: Economic Counselor, Mary B. Johnson, for reason 1.4(d).

C O N F I D E N T I A L DAR ES SALAAM 001006

SIPDIS

SIPDIS

STATE AF/E FOR B YODER AND AF/EPS FOR T HASTINGS
PLEASE PASS TO TREASURY FOR L KOHLER
PLEASE PASS TO MCC FOR M KAVANAUGH, G BREVNOV, L BLACK

E.O. 12958: DECL: 06/20/2011
TAGS: ECON PGOV TZ
SUBJECT: KIKWETE'S BUDGET: NO DEFICIT OF PLANS TO SOLVE
SURPLUS OF PROBLEMS


Classified By: Economic Counselor, Mary B. Johnson, for reason 1.4(d).


1. (U) SUMMARY. With paint still drying on the brand new
Parliament building, the Minister of Finance, Zakia Meghji
delivered the Government of Tanzania's (GOT's) 2006/07 budget
speech on June 15. Overall, the budget speech introduced few
surprises, striking a balance between plans to fulfill 2005
election promises and measures to address key issues slowing
Tanzania's economic development. The budget reflected revised
macro-economic targets and a shift in priorities from social
services to infrastructure as well as a focus on empowering
public participation in the economy through increased access
to credit. Also new in the 2006/07 budget was a small but
stand alone reference to an allocation for environmental
protection.


2. (U) With domestic revenue accounting for only 51 percent
of expenditures in 2006/07, Tanzania's dependency on external
resources was as apparent as ever. Noting Tanzania's
relationship with multilateral development partners such as
the International Monetary Fund (IMF) and the World Bank,
Meghji singled out the United States as a bilateral donor,
with a reference to the Millennium Challenge Corporation
programs. Finally, although there were encouraging signs of
greater parliamentary participation in the budget process,
one has to admit the legislative role is still modest. As
one Member of Parliament put it, "We are still in effect,
passengers on a bus." END SUMMARY.

A Budget of "Firsts"
--------------

3. (U) In sync with the budget speeches of its East African
neighbors, Kenya and Uganda, Tanzania's Finance Minster
tabled the 2006/07 budget on June 15 at 4 p.m., in a series
of firsts. The budget marked the first step of the Kikwete
government to implement its election manifesto, the first
budget session to be held in the brand new "Bunge" or
Parliament building, and the first major address by the
country's first woman Finance Minister, Zakia Meghji. After

Minister Meghji delivered her address, the Parliament
recessed until June 19 and 20 when Parliament would
reconvene, discuss and approve the proposal for 2006/07
expenditures and revenue.

Budget Setbacks in 2006
--------------

4. (U) Before introducing the GOT's 2006/07 budget
framework, Meghji reviewed the GOT's progress implementing
2005/06 fiscal policies. Meghji noted Tanzania's
"satisfactory" economic performance with a growth rate of 6.8
percent in 2005. As a result of various economic setbacks
including a drought and resulting food shortage in early 2006
and steadily increasing oil prices, inflation rose by 2.6
percent, from 4.3 percent in July 2005 to 6.9 percent in
April 2006. Although the GOT achieved the expected level of
expenditures and domestic revenue collection in 2005/06, an
internal re-allocation of expenditures was necessary to
address the food and power crises which emerged in the middle
of the fiscal year (January 2006).


5. (U) The 2006/07 budget established macro-economic
targets, reflecting the inflationary trend as well as the
slowing of the economy. The 2006/07 budget targeted a real
GDP growth of 5.9 percent in 2006, revised downward from the
7.2 percent target, which had been set by the 2005/06 budget.
While the 2006/07 budget maintained an inflation target of 4
percent, the budget specified reaching that target by June
2007, giving the GOT one year to reverse the upward
inflationary pressure. These 2006/07 targets demonstrated
both the GOT's expectation for slight economic setbacks in
2006 and recovery by 2007.


6. (U) To move toward the above mentioned targets and other
development goals, the 2006/07 budget proposed the following
framework for expenditures and revenue collection:

Total Expenditure: Approximately USD 3.99 billion (Tsh 4.85
trillion)
-- USD 2.57 billion for recurrent expenditures (Tsh 3.12
trillion)
-- USD 1.42 billion for development expenditures (Tsh 1.73
trillion)

Total Revenue: Approximately USD 3.99 billion (Tsh 4.85
trillion)
-- 51 percent from domestic revenue collection

-- 45.8 percent from external concessional loans, grants, and
debt relief
-- 3 percent from draw down on reserves

Expenditures for Economic Growth, Empowerment, and Environment
-------------- --------------

7. (U) Similar to the 2005/06 budget, development
expenditures for 2006/07 will be allocated primarily through
the Mkukuta - the country's widely endorsed poverty reduction
strategy. Among the Mkukuta's three broad clusters (economic
growth, social services and governance),the Kikwete
government will focus on economic growth with an emphasis on
infrastructure. Resources will be allocated among the
Mkukuta's clusters as follows:

-- 45.8 percent of expenditures for economic growth including
infrastructure (6.8 percent increase from 2005/06)
-- 35.8 percent for social services (7.2 percent decrease
from 2005/06)
-- 18.4 percent for good governance (0.4 percent increase
from 2005/06)


8. (U) Development expenditures will also begin
implementation of the 2005 Chama Cha Mapinduzi (CCM) election
manifesto which promised "empowerment" or a better life for
every Tanzanian. With the exception of initiatives to
broaden access to power and introduce national identity
cards, the Kikwete government's approach to empowerment
focused on efforts to increase credit access. Several of the
measures which Minister Meghji mentioned were to transform
the Tanzanian Investment Bank into a development bank,
strengthen credit guarantee schemes and micro-finance
programs, introduce new types of financing such as mortgages,
and establish a special committee comprised of the CEO's of
all banks in the country to review issues relating to the
availability of and access to credit.


9. (U) In addition to expenditures for poverty reduction and
empowerment purposes, the 2006/07 budget made a small but
specific allocation for the environment, an area which had
not been addressed as a stand alone issue in years past. The
GOT will direct Tsh 9.4 billion or approximately USD 7.7
million toward an environmental protection strategy to
safeguard Tanzania's forests, water supply, pasture lands and
livestock. The budget speech also noted several new policies
including a ban on the export of logs, the removal of
livestock from river sources and a ban on the importation of
and production of light plastic bags. The new tax reforms
(summarized para 10) further reflect GOT recognition of the
impact which fiscal policy can have on promoting
environmental sustainability.

Reforming Tanzania's Revenue Deficit
--------------

10. (U) Acknowledging a shortage of domestic tax revenue (by
nearly 50 percent),Meghji pledged to continue reforming
Tanzania's tax administration. Through efforts to broaden
the tax base, strengthen customs, and monitor progress of the
Tanzanian Revenue Authority, the GOT will increase domestic
revenue in 2006/07 by 19 percent, from approximately USD 1.7
billion to 2.02 billion. To reach this revenue target and
also cope with various economic problems, the budget
introduced amendments to ten key tax laws. The majority of
these amendments aimed at either curbing tax evasion,
increasing GOT revenue, decreasing the burden of the energy
crisis or protecting natural resources. Highlights of the
new tax reform policies include:

-- Energy Related Reforms: Removal the Value Added Tax (VAT)
on petroleum products and reduction of the excise duty on
kerosene by more than 50 percent per liter to lower the
burden of high oil prices and encourage use of liquefied
petroleum gas instead of charcoal. Exemption of all solar
powered equipment from import duty to promote alternative
sources of energy.

-- Tax Evasion: Increase of fine for failure to issue
invoices and receipts, for fraudulent evasion and for late
tax payments.

-- Consumer Products: Increase of excise tax on soft drinks,
beer and cigarettes by seven percent; Increase on mobile
phone airtime from five to seven percent, bringing Tanzania
in line with regional rates.

-- Producers/Manufacturers: Exemption of salt producers using

renewable resources from paying royalty; Elimination of duty
on raw materials in the manufacture of paper and welding
electrodes. Reduce duty for palm stearin from 25 percent to
10 percent protecting small scale soap manufacturers.

-- Agriculture: Imposition of 10 percent duty on crude palm
oil to protect local farmers producing alternative oil seeds,
delaying the application of the Common External Tariff rate
of zero percent set by the East African Community; VAT
exemption for locally grown, grounded, roasted or instant
coffee.

Parliamentarians: Polite Passengers or Back-seat Drivers?
-------------- --------------

11. (C) While the reaction to Meghji's 2006/07 budget
speech revealed a relatively weak level of Parliamentary
oversight in the budget process, participation seemed to be
moving in the right direction. Vice Chair of Parliament's
Finance Committee, Hon. Adam Malima, called the budget
"friendly" and "exciting." Malima was particularly satisfied
by Minister Meghji's inclusion of measures to ensure proper
use of government funds at the local level through the
special unit within the Ministry of Finance to track
expenditures up to the final point of disbursement. "Turn to
page thirty four," Malima exclaimed, "this part is all my
contribution!" With a big smile, the Chair of the Finance
Committee, Hon. Abdallah Kigoda, also expressed his approval
of the budget speech, noting that over 70 percent of his
Committee's concerns were addressed.


12. (C) Discussions with Members of Parliament outside the
Finance Committee, however, painted a different picture.
Parliament did not play a role in the planning stages,
offering comments and advice only after the GOT had completed
the lions share of the budget proposal. Hon. Harrison
Mwakembe, Vice Chair of the Trade and Investment Committee,
summarized the fledgling degree of Parliamentary oversight
when he told Econoff on June 16, "Right now we
parliamentarians play more of an advisory role than a
supervisory role. In terms of the budget, we are like
passengers on a bus." On a more optimistic note, Mwakembe
added that the situation was rapidly changing due to the fact
that, "With Samuel Sitta, President Kikwete has appointed a
real Speaker to lead the Parliament."

Special Mention: Millennium Challenge Corporation (MCC)
-------------- --------------

13. (U) Out of the multitude of donors and donor programs in
Tanzania, Minister Meghji highlighted the U.S. sponsored
Millennium Challenge Account Threshold Program and the MCC
Compact process. The U.S. was the only bilateral donor which
she made specific reference to in her speech, indicating the
significant level priority which the GOT has placed in the
MCC programs and Tanzania's relationship with the United
States. Although Tanzania's MCC compact proposal is still in
its preparation stages, the discussions and drafts for the
proposal have thus far focused on infrastructure. This focus
appears in line with the 2006/07 budget trend toward greater
allocation of resources to strengthen the country's
infrastructure network.

Getting On Track to Reach 2007 Targets
--------------

14. (U) Comment: Minister Meghji's 2006/07 budget speech
reflected both the hope symbolized by Kikwete's government as
well as the significant challenges facing Tanzania's economy.
The vision blended the lofty goals of empowerment, Mkukuta
and Vision 2025, while acknowledging the recent set backs -
none more significant than the energy crunch which emerged as
a refrain throughout the Minister's speech. Ultimately, the
challenge for the Kikwete government will be to minimize
economic damage caused by high oil prices and power shortages
in 2006 and to get the economy back on track in 2007, ready
to realize growth targets of seven plus percent and election
promises to "improve the quality of life for every
Tanzanian."


15. (U) Although the budget speech was largely cosmetic, the
speech did reflect strengthened democratic practices in
Tanzania. While Parliament's oversight role is still nascent
to say the least, the incorporation of concerns from the
Finance Committee demonstrated an increasing level of
legislative participation in the budget process. What is
more, the increased level of parliamentary participation
seemed to go hand in hand with an executive branch that is
responsive to Parliamentary advice and concerns.

RETZER