UKWELIYAKINIFU
Member
- Oct 6, 2020
- 27
- 50
A shadow economy is very detrimental to any nation, especially in the long run. That is mainly due to revenue losses suffered by government through rampant tax avoidance and tax evasion. Of course, on the other hand however the dominant class of shadow-economy billionaires may in the short run also have some “positive” trickle-down effect onto the small traders in the informal as well as formal sectors of the economy; and hence, arguably, an increase in per capita income of society in general.
I recall that in 2013, when I was serving in the Parliamentary Committee for Economy, Trade and Industries, the Police Force Authority officially testified that there existed about 30 illegal ports along the coastline between Bagamoyo and Dar es Salaam, a distance of a mere 70 kilometres. How on earth had that become possible? Of course, that had become possible simply due to systemic rampant institutional corruption that involved a syndicate of government officials, including some most senior ones, who looted the economy with impunity as the syndicate had become a virtually legitimized part of the formal system.
It may be worth noting that it was during those very days that tax exemptions also had become not only over-granted but also hugely misused! Tanzania, which was ranked second in size of economy in East Africa, was ranked top with regard to tax exemptions. Tanzania’s tax exemptions exceeded 4% of Gross Domestic Product (GDP), while those of Kenya never exceed 1% of GDP and those of both Uganda and Rwanda not more than 1% of respective GDP.
The implications of reduced tax exemption rates are very obvious. As reported in the 2018 Controller and Auditor-General’s (CAG’s) report, the Tanzania government has reduced tax exemptions from 4% to 1% as per audited accounts for years ended 2016 and 2017. That has had huge implications to both business and the economy.
In an economy of around $50bn, a sharp reduction of tax-exemption from 4% to 1% obviously implies a reduction of over $1.5bn from the profit margins that businesses had enjoyed merely by virtue of the previously reigning tax exemptions comfort zone.
Undoubtedly, a significant number of businesses had for years survived (if not indeed thrived) under the previously reigning tax exemptions comfort zone. It is therefore not astonishing that sharp reduction in tax exemptions undertaken by the currently incumbent administration greatly shook and shocked a number of those businesses.
Inevitably, some had to collapse; most of them were much disturbed in one way or another, as they had previously for years thrived under the easy-come and easy-go terms and conditions of the said tax honeymoon.
Notwithstanding how much those businesses had benefitted, it is my opinion that the paradigm shift (from shadow economy to real economy) must necessarily have had some previously unprecedented effects in business trend and national economy at large.
The outcome of all the above decisions, which were accompanied by major cuts of unnecessary government recurrent expenditures and their re-allocation to strategic development projects as well as debt servicing, had some profound consequences in the whole national economy and daily trend of business performance.
It is a matter of fact that the government had previously grossly misused public funds, and had been ineffective at tax collection. The size of the national debt, which was 75% foreign, continued increasing significantly ― with very low pace of debt servicing. That’s why there was no other remedy than the present administration having to take the hard path of radical budgetary overhaul. Otherwise the government could have failed to finance even the wage bill, as indeed likewise what is impending in the case of our neighbour Zambia.
In great contrast, through the current administration’s measures of enforcing strict tax compliance, the government is now collecting an average of 1300bn (which is an increment of 50%), an amount enough to finance monthly debt as well as the wage bill. It should be remembered that all these efforts made had nothing to do with any new laws, but rather merely rigorous application of government strict enforcement of tax compliance!
Of course, the bold steps taken by the government caused a paradigm shift in the business environment as the money circulation and supply got shaken temporarily. The paradigm shift severely affected such then famous companies as Home Shopping Centre, a major supplier (at the Kariakoo business centre) of products from China.
That business had all along been repeatedly rumoured to be implicated with numerous corruption scandals of tax evasions. As the paradigm shift unfolded, Home Shopping Centre disbanded its until then core business; it ventured into other businesses, using other business companies (or rather using some other business names).
The very obvious observation here is that the paradigm shift did not only unfavourably affect the shadow economy culprit business billionaire tycoons, but also many medium sole proprietors and small traders in the informal sector whose businesses were connected with the networks of those very tycoons.
Notwithstanding the transitional adverse effects upon the businesses of medium sole proprietors and small traders in the informal sector, the net beneficial result was that the national economy was ultimately back onto reasonably sound and sustainably stable track.
For instance, the currency in circulation is now more than it was prior to the current administration’s overhaul of the national economy. According to Bank of Tanzania’s Monthly Economic Review, currency in circulation in April 2018 was TSH (Tanzania shillings) 3.7trn ― compared to TSH 3.4trn in April 2017, TSH 3.1trn in April 2015 and TSH 2.7trn for the month of April 2014.
It is noteworthy that not only currency in circulation has tremendously increased, but similarly also the money supply. According to the very same Bank of Tanzania reports, the extended broad money supply has increased to TSH 24trilion in April 2018 from TSH 18trilion in April 2015 and TSH 16trilion in April 2014.
This corroborates the fact that now the economy is out of the austerity cycle as it had been indicated by the International Monetary Fund (IMF) country report of 2016. With improvement in extended broad money supply and currency in circulation, it is obvious that the currency velocity and business activities are in take off stage; and the government financial positions as well as crucial macro-economic indicators are all favourable.
Although some economists have expressed serious concern regarding the trend of national debt growth, it remains reasonable to maintain that the case is not that much serious compared to most African nations (Cf. IMF report 2018 regarding debt situation). According to IMF, around half of African countries are in debt distress. This is a very sharp increase of 50% from the statistics of 2013. In fact, according to IMF, it is our neighbours Kenya and Zambia who are entangled in serious debt distress.
Tanzania has for the first time commissioned the global credit agency Moody’s to conduct her credit rating, to measure our economic strength and credit worthiness. According to the credit agency’s report, which was posted on Moody’s website on 4th of March 2018, Tanzania ranked B1 (though with negative outlook). That ranking of B1 was the highest in East Africa. As Kenya and Uganda scored B2 respectively, Tanzania is therefore more lendable than its peers in East Africa.
A curiously heated debate arose in connection with Tanzania’s scoring better ranking than Kenya. In Tanzania, the debate raged regarding the “negative outlook” expressed in connection with Moody’s B1 ranking ― which in fact resulted from government’s new policy position on natural resources, as elaborated in the Mining, Oil and Gas Acts as well as the Natural Resources Act, that were for the first time made with much sense of sovereignty after decades of indiscriminate economic liberalisation
Despite seemingly incredible fast growth of the mining sector, as is so well known, its economic contribution in terms of GDP was discouragingly minute. That was one of the key reasons to why higher growth of the economy had little economic impact on poverty reduction. Actually, such fastest growing sectors like mining had little trickle-down effect during the regime of former laws and regulations. It is significant that the credit rating agency (Moody’s) was much concerned about those new laws; it considered them detrimental to the economy, as they would scare prospective investors who would thus be reluctant to pump their money into such sectors due to what it considered an unpredictability of Tanzania’s policy and legal framework.
Should Tanzania, for the sake of appeasing some “reluctant” prospective foreign investors, have continued with the “business as usual” regime of the policy and legal framework of the previous administrations? To what extent, and in which manner, does Tanzania’s newly adopted policy and legal framework on minerals and other natural resources really deter prospective foreign investors, and how much does Tanzania comparatively lose thereby (country-wise and with regard to prevailing policy and legal framework, etc.)?
I wish to see in our debate evidence and conclusions of a properly conducted comparative analysis of our laws with those of other countries, spared from the so-called natural-resource curse and ranked higher in enjoyment of their natural resources (e.g. Botswana and Norway).
Meanwhile, it is significant that President Magufuli’s decision to demand more from mining companies is considered an alarm bell for the peoples of a number of African countries (including Democratic Republic of Congo, Zambia and Angola) where their endowment of minerals and other natural resources has always been considered a curse to them.
Magufuli’s endeavours to revamp Tanzania’s economic development can be justified from the vintage point of all macro and micro economic fundamentals. Now the government is less expensively (indeed most cheaply) securing funds via Treasury Bills. Under the regimes of previous administrations, the government used to borrow funds through T-Bills of 365 days at a rate of 17%; now the government is able to borrow via the very same T-Bills of 365 days at the rate of 5%.
Besides, as a consequence of the newly adopted financial policy framework, commercial banks (which previously were used to harvesting very huge profits by investing in high interest rate Treasury Bills) have now started redirecting their loaning endeavours to the domestic private sector, which is the rightful core business for banks. Indeed, now that T-Bills rates (always used as benchmark) are much lower, the commercial banks are vigorously competing through reduction of their lending interest rates, to capture more domestic private sector customers.
When interest rate of T-Bills stood at 17% it was not easy for commercial banks to charge the private sector an interest rate below that for the T-Bills, which always acted as benchmark because loans to government are considered risk-free. Not astonishingly, therefore, commercial banks imposed high interest rates to the tune of 21% (and more) for loans to the private sector. With the interest rate for T-Bills currently being 5%, it is not any miracle that interest rates for loans of some commercial banks to the private sector have dramatically from the previous 21% to the now prevailing 11% (or thereabout).
I recall that in 2013, when I was serving in the Parliamentary Committee for Economy, Trade and Industries, the Police Force Authority officially testified that there existed about 30 illegal ports along the coastline between Bagamoyo and Dar es Salaam, a distance of a mere 70 kilometres. How on earth had that become possible? Of course, that had become possible simply due to systemic rampant institutional corruption that involved a syndicate of government officials, including some most senior ones, who looted the economy with impunity as the syndicate had become a virtually legitimized part of the formal system.
It may be worth noting that it was during those very days that tax exemptions also had become not only over-granted but also hugely misused! Tanzania, which was ranked second in size of economy in East Africa, was ranked top with regard to tax exemptions. Tanzania’s tax exemptions exceeded 4% of Gross Domestic Product (GDP), while those of Kenya never exceed 1% of GDP and those of both Uganda and Rwanda not more than 1% of respective GDP.
The implications of reduced tax exemption rates are very obvious. As reported in the 2018 Controller and Auditor-General’s (CAG’s) report, the Tanzania government has reduced tax exemptions from 4% to 1% as per audited accounts for years ended 2016 and 2017. That has had huge implications to both business and the economy.
In an economy of around $50bn, a sharp reduction of tax-exemption from 4% to 1% obviously implies a reduction of over $1.5bn from the profit margins that businesses had enjoyed merely by virtue of the previously reigning tax exemptions comfort zone.
Undoubtedly, a significant number of businesses had for years survived (if not indeed thrived) under the previously reigning tax exemptions comfort zone. It is therefore not astonishing that sharp reduction in tax exemptions undertaken by the currently incumbent administration greatly shook and shocked a number of those businesses.
Inevitably, some had to collapse; most of them were much disturbed in one way or another, as they had previously for years thrived under the easy-come and easy-go terms and conditions of the said tax honeymoon.
Notwithstanding how much those businesses had benefitted, it is my opinion that the paradigm shift (from shadow economy to real economy) must necessarily have had some previously unprecedented effects in business trend and national economy at large.
The outcome of all the above decisions, which were accompanied by major cuts of unnecessary government recurrent expenditures and their re-allocation to strategic development projects as well as debt servicing, had some profound consequences in the whole national economy and daily trend of business performance.
It is a matter of fact that the government had previously grossly misused public funds, and had been ineffective at tax collection. The size of the national debt, which was 75% foreign, continued increasing significantly ― with very low pace of debt servicing. That’s why there was no other remedy than the present administration having to take the hard path of radical budgetary overhaul. Otherwise the government could have failed to finance even the wage bill, as indeed likewise what is impending in the case of our neighbour Zambia.
In great contrast, through the current administration’s measures of enforcing strict tax compliance, the government is now collecting an average of 1300bn (which is an increment of 50%), an amount enough to finance monthly debt as well as the wage bill. It should be remembered that all these efforts made had nothing to do with any new laws, but rather merely rigorous application of government strict enforcement of tax compliance!
Of course, the bold steps taken by the government caused a paradigm shift in the business environment as the money circulation and supply got shaken temporarily. The paradigm shift severely affected such then famous companies as Home Shopping Centre, a major supplier (at the Kariakoo business centre) of products from China.
That business had all along been repeatedly rumoured to be implicated with numerous corruption scandals of tax evasions. As the paradigm shift unfolded, Home Shopping Centre disbanded its until then core business; it ventured into other businesses, using other business companies (or rather using some other business names).
The very obvious observation here is that the paradigm shift did not only unfavourably affect the shadow economy culprit business billionaire tycoons, but also many medium sole proprietors and small traders in the informal sector whose businesses were connected with the networks of those very tycoons.
Notwithstanding the transitional adverse effects upon the businesses of medium sole proprietors and small traders in the informal sector, the net beneficial result was that the national economy was ultimately back onto reasonably sound and sustainably stable track.
For instance, the currency in circulation is now more than it was prior to the current administration’s overhaul of the national economy. According to Bank of Tanzania’s Monthly Economic Review, currency in circulation in April 2018 was TSH (Tanzania shillings) 3.7trn ― compared to TSH 3.4trn in April 2017, TSH 3.1trn in April 2015 and TSH 2.7trn for the month of April 2014.
It is noteworthy that not only currency in circulation has tremendously increased, but similarly also the money supply. According to the very same Bank of Tanzania reports, the extended broad money supply has increased to TSH 24trilion in April 2018 from TSH 18trilion in April 2015 and TSH 16trilion in April 2014.
This corroborates the fact that now the economy is out of the austerity cycle as it had been indicated by the International Monetary Fund (IMF) country report of 2016. With improvement in extended broad money supply and currency in circulation, it is obvious that the currency velocity and business activities are in take off stage; and the government financial positions as well as crucial macro-economic indicators are all favourable.
Although some economists have expressed serious concern regarding the trend of national debt growth, it remains reasonable to maintain that the case is not that much serious compared to most African nations (Cf. IMF report 2018 regarding debt situation). According to IMF, around half of African countries are in debt distress. This is a very sharp increase of 50% from the statistics of 2013. In fact, according to IMF, it is our neighbours Kenya and Zambia who are entangled in serious debt distress.
Tanzania has for the first time commissioned the global credit agency Moody’s to conduct her credit rating, to measure our economic strength and credit worthiness. According to the credit agency’s report, which was posted on Moody’s website on 4th of March 2018, Tanzania ranked B1 (though with negative outlook). That ranking of B1 was the highest in East Africa. As Kenya and Uganda scored B2 respectively, Tanzania is therefore more lendable than its peers in East Africa.
A curiously heated debate arose in connection with Tanzania’s scoring better ranking than Kenya. In Tanzania, the debate raged regarding the “negative outlook” expressed in connection with Moody’s B1 ranking ― which in fact resulted from government’s new policy position on natural resources, as elaborated in the Mining, Oil and Gas Acts as well as the Natural Resources Act, that were for the first time made with much sense of sovereignty after decades of indiscriminate economic liberalisation
Despite seemingly incredible fast growth of the mining sector, as is so well known, its economic contribution in terms of GDP was discouragingly minute. That was one of the key reasons to why higher growth of the economy had little economic impact on poverty reduction. Actually, such fastest growing sectors like mining had little trickle-down effect during the regime of former laws and regulations. It is significant that the credit rating agency (Moody’s) was much concerned about those new laws; it considered them detrimental to the economy, as they would scare prospective investors who would thus be reluctant to pump their money into such sectors due to what it considered an unpredictability of Tanzania’s policy and legal framework.
Should Tanzania, for the sake of appeasing some “reluctant” prospective foreign investors, have continued with the “business as usual” regime of the policy and legal framework of the previous administrations? To what extent, and in which manner, does Tanzania’s newly adopted policy and legal framework on minerals and other natural resources really deter prospective foreign investors, and how much does Tanzania comparatively lose thereby (country-wise and with regard to prevailing policy and legal framework, etc.)?
I wish to see in our debate evidence and conclusions of a properly conducted comparative analysis of our laws with those of other countries, spared from the so-called natural-resource curse and ranked higher in enjoyment of their natural resources (e.g. Botswana and Norway).
Meanwhile, it is significant that President Magufuli’s decision to demand more from mining companies is considered an alarm bell for the peoples of a number of African countries (including Democratic Republic of Congo, Zambia and Angola) where their endowment of minerals and other natural resources has always been considered a curse to them.
Magufuli’s endeavours to revamp Tanzania’s economic development can be justified from the vintage point of all macro and micro economic fundamentals. Now the government is less expensively (indeed most cheaply) securing funds via Treasury Bills. Under the regimes of previous administrations, the government used to borrow funds through T-Bills of 365 days at a rate of 17%; now the government is able to borrow via the very same T-Bills of 365 days at the rate of 5%.
Besides, as a consequence of the newly adopted financial policy framework, commercial banks (which previously were used to harvesting very huge profits by investing in high interest rate Treasury Bills) have now started redirecting their loaning endeavours to the domestic private sector, which is the rightful core business for banks. Indeed, now that T-Bills rates (always used as benchmark) are much lower, the commercial banks are vigorously competing through reduction of their lending interest rates, to capture more domestic private sector customers.
When interest rate of T-Bills stood at 17% it was not easy for commercial banks to charge the private sector an interest rate below that for the T-Bills, which always acted as benchmark because loans to government are considered risk-free. Not astonishingly, therefore, commercial banks imposed high interest rates to the tune of 21% (and more) for loans to the private sector. With the interest rate for T-Bills currently being 5%, it is not any miracle that interest rates for loans of some commercial banks to the private sector have dramatically from the previous 21% to the now prevailing 11% (or thereabout).
