This Selected Issues paper reviews developments in Tanzania in the main fiscal indicators and related structural reforms to explain the success in fiscal management. The paper contains a brief overview of the structure of the public sector. Main developments in revenue and expenditure are covered. The paper concludes that the rationalization of expenditure programs and the progressive shift from domestic to foreign financing were at the core of Tanzanian macroeconomic stabilization in the second half of the 1990s, contributing to a sharp reduction in inflation.


This Selected Issues paper reviews developments in Tanzania in the main fiscal indicators and related structural reforms to explain the success in fiscal management. The paper contains a brief overview of the structure of the public sector. Main developments in revenue and expenditure are covered. The paper concludes that the rationalization of expenditure programs and the progressive shift from domestic to foreign financing were at the core of Tanzanian macroeconomic stabilization in the second half of the 1990s, contributing to a sharp reduction in inflation.

I. Fiscal Developments and Issues1

A. Introduction

1. Following years of loose fiscal policy and high inflation, in the second half of the 1990s fiscal management shifted radically in Tanzania. The government, with assistance from the donor community, embarked on an ambitious stabilization and reform agenda. In the fiscal area, efforts focused on strengthening fiscal management via broad-based policy and administration reforms. At the same lime, increased transparency and coordination with donors on macroeconomic policies and structural reforms helped mobilize financial support. The resulting decline in the size of the overall deficit position and, most important, the contraction in the government’s domestic financing needs led to a steady fall in inflation (Figure I.1).2 Building on these successes, and, more recently, in the context of the Initiative for Heavily Indebted Poor Countries (HIPC Initiative), the government has been increasingly using fiscal policy to promote growth and channel resources toward poverty reduction.

Figure I.1.
Figure I.1.

Tanzania: Fiscal Performance and Inflation, 1991/92-2001/02 1/

Citation: IMF Staff Country Reports 2003, 002; 10.5089/9781451838343.002.A001

Source Tanzanian authorities1/ Fiscal year runs from Jury to June Data for 2001/02 are preliminary.

2. While significant progress has been achieved in a number of reform areas, major challenges remain ahead. This section reviews developments in the main fiscal indicators and related structural reforms to explain the success in (and the remaining vulnerabilities to) fiscal management. The structure of the section is as follows: Subsection B contains a brief overview of the structure of the public sector. Main developments in revenue and expenditure are covered in Subsections C and D, respectively. Government financing and domestic debt are in Subsection E. Subsection F concludes.

B. Structure of the Public Sector

3. Tanzania’s fiscal consolidation efforts have taken place against a background of a traditionally large and dominating public sector—the legacy of socialist policies pursued since independence through the early 1990s. The gradual economic liberalization and the government’s progressive disengagement from various economic activities deeply affected fiscal performance.3 The tax base gradually moved away from a large, easy-to-tax public sector to the private sector, which still remains largely informal. On the expenditure side, as the parastatal sector was downsized, the government was called to take over guaranteed debt, provide funding for retrenchment costs, and cover the recapitalization costs of ailing financial institutions.

4. Despite the reduced role of the government in the economy the structure of the public sector remains complex. Comprehensive data on central government operations are available on a timely basis; attempts are being made to provide consolidated fiscal accounts for central as well as local governments (Box I.1).

Institutional Structure of the Government Sector and Data Framework

Central government. It consists of the central administration (presidency, ministries, and the National Assembly), 20 regions, and various commissions and offices, including the Tanzania Revenue Authority, which was established in 1995 as a semiautonomous agency under the general supervision of the Ministry of Finance. These entities are covered in the state budget. Monthly “flash reports” on central government operations (revenue, expenditure, and financing) are available on a timely basis, usually three weeks after the end of the relevant month. While data include transfers to local governments and other government institutions, the overall operations of these institutions are not covered by the central government data. Budgetary central government data for Tanzania mainland also include transfers to Zanzibar, but not union taxes collected in Zanzibar.

Local governments. There are currently 114 “local authorities” (urban, district, and municipal councils), created under the 1982 Local Government Act, which provided for the devolution of political, administrative, and financial powers to them Elected councils were empowered to, among others, enact by-laws, collect revenue, and formulate and execute local budgets. Local authorities have also the primary responsibility for the delivery of social services in the areas of primary education, primary health, local water supply, local roads, and agriculture extension. Following the establishment of a Ministry for Regional Administration and Local Governments in 1998, a revamped Local Government Reform Program started to be implemented in 1999.

The accounts of the central government are not consolidated with those of the local governments. The consolidation is in pan impeded by differences in the fiscal year at central and local levels—the latter follows the calendar year. Steps are being taken to promote such consolidation for example, local authorities have started submitting standardized reports on their operations, although consolidated reports are yet to be published.

Executive agencies. These government institutions perform essential public functions not carried out by ministries, such as the Civil Aviation Authority and the National Bureau of Statistics. The main objective is to perform regulatory functions and ensure efficiency in the delivery of public services through better financial management, while allowing private-sector-like terms and conditions of employment. Out of the ten executive agencies currently operating, only two are self-financed (the Tanzania Civil Aviation Authority and the Business Licensing and Registration Authority); the others are partly financed from transfers (block grants) from the stale budget.

Other government institutions. These are institutions with a semiautonomous status, including research, training, and academic institutions, such as the University of Dar-es-Salaam. They typically receive transfers from the state budget, primarily for salary costs.

Sources: IMF (2002); and Tanzanian authorities.

C. Revenue

5. Total revenue has shown a mixed pattern over the last decade (Figure I.2). As a share of GDP, it steadily declined from 14 percent of GDP in 1991/92, but recovered somewhat in the mid-1990s, rising to 13.5 percent of GDP in 1996/97. Since then, it has hovered around 12 percent of GDP. While Tanzania’s revenue performance still remains below that of other countries in the region (Table I.1), two qualifications apply:

Table I.1.

Regional Comparison of Fiscal Performance, 1999/2000

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Sources: Tanzanian authorities; and IMF, various documents.

Fiscal year runs from July to June.

For Mozambique and Zambia, includes statistical discrepancy.

Indicative, it refers to different years across countries.

Figure I.2.
Figure I.2.

Tanzania: Revenue Developments, 1991/92-2001/02 1/

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2003, 002; 10.5089/9781451838343.002.A001

Source: Tanzanian authorities.1/ Fiscal year runs from July to June. Data for 2001/02 are preliminary.
  • The erosion in the tax base since 1996/97, at a time when the economy has been growing at an average of almost 5 percent, can be explained by three main factors: (i) with the role of parastatals in the economy declining, the emerging informal economy has largely remained outside the tax net;4 (ii) tax collection and administration have not kept pace with the rationalization of the tax system and tariff reform (see below): and (Hi) exemptions and tax incentives for some sectors (such as mining and tourism, which account for an estimated 3 percent and 10 percent of total economic activity, respectively) have taken a further toll on tax revenue.

  • Furthermore, Tanzania’s economic structure differs from that of other countries in the region. Tanzania has the largest share of the primary (subsistence) sector in its economy among its comparators (Table I.1), which limits its tax base given that the primary sector is often informal and cannot be taxed effectively. In fact, Tanzania’s share of revenue over monetary GDP—which accounts for about 70 percent of total economic activity—would be higher, at more than 17 percent.5

Within the general trend outlined above, performance has varied considerably across different taxes, mainly reflecting the net impact of various policy changes (Figure I.2).6

6. Indirect taxes (value-added tax, excises, and import duties) remain the most important revenue group, accounting for about 60 percent of total tax revenue. Among these taxes, the role of import duties has shrunk considerably over time owing to trade liberalization (Table I.2), which involved a reduction of the nonzero tariff bands from seven in 1996/97 to three in 2001/02, a reduction in the maximum tariff rate from 40 percent to 25 percent, and a corresponding decline of import duties as a share of GDP from 1.8 percent of GDP to I percent over the same period (Table I.3). Further reductions in import duties are to be expected from the implementation of regional trade agreements in which Tanzania participates, notably the Southern African Development Community (SADC) and the East African Community (EAC).

Table I.2

Tanzania: Nonzero Tariff Rates, 1996/97-2001/02 1/

(In percent)

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Source: Tanzanian authorities.

Fiscal year runs from July to June.

Table I.3.

Tanzania: Indirect Taxes, 1997/98-2001/02

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Sources: Data provided by the Tanzania Revenue Authority; and IMF staff calculations.

VAT was introduced in July 1998; data for 1997/98 refer to the sales tax.

Defined as a ratio of VAT revenue to GDP, divided by the VAT rate.

7. A value-added tax (VAT) was introduced in July 1998—the most important tax reform measure over the last five years—with a rate of 20 percent, replacing a multirate sales (turnover) tax. While the liberalization of the petroleum sector had a positive impact on VAT performance (see below), VAT collections, excluding petroleum products, have stagnated over the period, as indicated by its stable share of GDP at around 3.3-3.4 percent of GDP. At the same time, the VAT efficiency ratio (excluding petroleum products) has remained at around 0.16; meanwhile, although the overall VAT efficiency ratio has slightly increased to 0.2, this level still compares unfavorably to the average for sub-Saharan Africa of 0.27 (Table I.3).7

8. Exemptions are largely accountable for the low VAT efficiency ratio. They are regulated by two schedules in the 1997 Value-Added Tax Act and its subsequent amendments: the Second Schedule, which lists a number of exempted goods (imported and not) and services, such as unprocessed agricultural products, financial services, education services, and others; and the Third Schedule, which provides reliefs, that is, a list of exempt organizations (government entities and NGOs), as well as inputs used by both VAT-exempt suppliers and nonexempt suppliers (such as mining) on the basis of their exempt status under the previous sales tax. The scope of exemptions has increased since the original provisions in the VAT Act. The number of “Exempt supplies and imports” under the Second Schedule increased from the original 15 to 21 in 2001/02; over the same period, “reliefs” granted under the Third Schedule rose from the original 13 to 18. The main findings from a recent study (Tanzania Revenue Authority, 2002) on exemptions are summarized in Box I.2.

Exemptions Granted at Customs

Tanzania’s tax regime allows for various exemptions. Exemptions granted at the customs level (covering import duties, as well as VAT and excises levied on imports) account for the largest share of forgone tax revenue. Based on a recent study by the Tanzania Revenue Authority in 2000/01, the loss in tax revenue resulting from customs and VAT exemptions (excluding income tax, for which data were not available) amounted to about T Sh 200 billion (2.6 percent of GDP, or 23 percent of gross collections); out of this amount, T Sh 165 billion (or about 84 percent of total exemptions) was granted at customs (see table below) While still very large, in 2000/01 the size of customs exemptions declined markedly relative to previous years (from above 40 percent to 27 percent of total gross collections), as a result of the elimination of VAT exemptions on petroleum imports.

Ratio of Exemptions to Collections at Customs Level, 1997/98-2000/01

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The distribution of customs exemptions by beneficiaries reveals a drop in the share of parastatals and an increase in the share of government (see table below). While the share of NGOs has declined since a peak in 1998/99 due to a tightening of eligibility criteria for charitable institutions—covering both NGOs and religious organizations—this seems to have affected the former more than the latter, whose share has actually increased since. Private companies and individuals remain the largest beneficiaries, accounting for about 40 percent of all exemptions. Finally, the distribution of exemptions granted at customs by product shows that materials and motor vehicles are the largest categories. The exemption regime for motor vehicles seems to be in need of a review: “for every shilling collected from motor vehicles, a little more than a shilling was exempt” on another motor vehicle (Tanzania Revenue Authority, 2002). However, a proposal to eliminate these exemptions for civil servants, announced in the 2002/03 budget speech in June 2002, was later rejected by the National Assembly.

Table 2.

Distribution of Exemptions Granted at Customs, 1996/97-2000/01

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Exemptions are being streamlined. In addition to the elimination of the VAT exemptions on petroleum, all VAT exemptions on government purchases were eliminated in the context of the 2001/02 budget; government exemptions from excises and lands were eliminated in the context of the 2002/03 budget. These measures should help eliminate a potentially important revenue loophole, as taxes can be evaded by disguising otherwise taxable transactions as government purchases In addition, the authorities are considering the introduction of a treasury-check system for administering exemptions for NGOs and motor vehicles imports from qualified civil servants, starting in January 2003.

Source: Tanzania Revenue Authority (2002).

9. Excises have been considerably streamlined in the last few years. Their number was reduced from 52 to 6 in 1999/2000 (for more detail on the current tax system, see Statistical Appendix Table [32]). As a result, collections from nonpetroleum excises almost halved in the last five years, to 1 percent of GDP in 2001/02; in the same year, total collections from excises accounted for just above 2 percent of GDP more than half of which, therefore, are accounted for by petroleum products (Table I.3).

10. The liberalization of the petroleum sector had a positive impact on tax revenue. The government monopoly on the importation of refined petroleum products was abolished in April 1997, followed by the liberalization of retail prices in June 1999 and the closure of the state-owned refinery at end-1999. As a major step to limit tax evasion, VAT exemptions on imports of petroleum products were eliminated as of July 2000, and a number of levies and charges, which used to be transferred to the state-owned petroleum company, were included in the excise tax. Currently, three taxes are levied on petroleum products: (i) the VAT; (ii) specific excises (on the VAT-inclusive base), and (iii) the fuel levy, an earmarked specific excise for the Road Fund.8 While a 5 percent import duty used to be collected on imported petroleum products, this fell away when the 5 percent tariff band was removed in July 20019 Petroleum contributes to a large share of revenue, equivalent to 2.4 percent of GDP in 2001/02 (Table I.4).

Table I.4.

Tanzania: Taxation of Petroleum Products, 1997/98-2001/02

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Source: Tanzanian authorities.

Excludes custom duties, which were reduced from 5 percent to zero in July 2001.

11. Taxes on income registered the weakest performance over the period. As a share of GDP, income taxes declined from about 3 percent in 1997/98 to 2.7 percent four years later (Table I.5). Part of the decline since the peak in 1999/2000 can be attributed to the substitution of the windfall tax on petroleum in July 2000 with VAT and excises on petroleum (although a small portion of windfall tax due was still collected in 2000/01) Income tax collections declined despite a number of revenue-enhancing reforms in 1999/2000, including the reintroduction of a 10 percent capital gains tax, the elimination of the exemption on interest from treasury bills and its replacement by a 15 percent tax, and the reform of the personal income tax system.10

12. Among taxes on income, the corporate income tax (including private companies and parastatals) was the weakest performer; its marked decline, from 1.3 percent of GDP in 1997/98 to 0.7 percent of GDP in 2001/02, is mainly attributable to the frequent changes in incentives regime for investors (Box I.3).11

13. The pay-as-you-earn (PAYE) tax, levied on salaried employees, was the best performer. Its increase as a share of GDP at a time of disappointing performance of overall income taxes would seem to indicate that some of the sectors that have been growing fast (like mining and tourism), but which remain largely outside the tax net because of their exempt status, carry a significant revenue potential.

14. Following a pattern similar to tax revenue, nontax revenue declined after the mid-1990s but recovered somewhat in the last three years, when it stabilized at about 1.2-1.3 percent of GDP (Figure I.2). Nontax revenue (whose largest component is the transfer of profits from the Bank of Tanzania, along with dividends from privatized parastatals in which the government retained a share) is collected from more than 60 sources, including—in the form of fees for government services and charges for licenses—ministries, regions, and other government institutions. Of these, 5 ministries (with 15 sources) account for more than 75 percent of collections.

15. Important reforms in tax administration have also been implemented in recent years: introduction of a new duty drawback system in April 2000; introduction of the taxpayer identification number (TIN) in 2000, which paved the way for the elimination of the withholding tax on goods and services for the TIN holders in the context of the 2001/02 budget,12 computerization of the PAYE; and biomarking of petroleum products in 2001, as a measure to reduce smuggling and fraud in goods in transit. A Large Taxpayer Department (which covers the largest 100 taxpayers in Dar-es-Salaam) and a unified tax appeal mechanism started operations in November 2001.

Tax Incentives

The evolution of tax incentives for investors in Tanzania during the last decade can be classified into various phases:

  • During 1990-97, the taxation regime for investors was governed by the 1990 National Investment Promotion and Protection (NIPPA) Act, which granted income tax holidays to the holders of Certificates of Approval from the Investment Promotion Center (IPC).

  • In 1997, a new Investment Act was enacted, which discontinued the tax holiday regime but grandfathered it for existing investors.1 At the same, the Tanzania Investment Center (TIC) replaced the IPC. Benefits for TIC certificate holders included capital expensing of no more than 100 percent of the original cost of investment, indefinite loss carryforward, and reduced import duties on capital goods. However, the criteria for the issuance of TIC certificates remained loose for a number of reasons: (i) specified investment thresholds were too low to be binding, (ii) the 12 specified priority sectors eligible for TIC certificates could in practice encompass the whole economy; and (iii) TIC certificates were not only available to newly operational companies, but also to old companies that made new investments. This allowed some of the largest parastatal taxpayers (such as the brewery and the cigarette company) to enjoy the tax benefits simply as a result of their privatization (which allowed their treatment as “new” companies).

  • In 1998, a new Mining Act established tax privileges for investors in the mining sector: 100 percent capital expensing coupled with additional 15 percent capital expensing, exemptions from import duties and the VAT, indefinite loss carryforward, deferment of royalty payments, and refund of paid royalty in case of negative cash-operating margins.

  • In order to reduce inequality across sectors, 100 percent capital expensing was extended to all investors as of July 1999, but loss carryforward was limited to five years; at the same time, the deduction for interest expenditure was withdrawn.

  • The 2000/01 budget harmonized the withholding taxes on interest earnings, dividends, and royalties for future recipients of TIC certificates holders with those of other taxpayers. With this measure, the TIC certificates ceased to grant any tax advantages to their holders, although the benefits for existing TIC certificate holders were grandfathered. In addition, the 2001/02 budget did not extend the additional 15 percent capital expensing provided under the Mining Act to new investors.

  • In the context of the 2002/03 budget, further changes took place: the 100 percent capital expensing was replaced by 50 percent expensing followed by a depreciation schedule based on three different classes of assets; interest deductibility was reinstated; and loss carryforward was made indefinite. These recent changes do not apply to the mining sector, which continues to be governed by the regulations described above.

1 As tax holidays had a five-year limit, they will have all expired by end-2002.Sources: 2001/02 and 2002/03 Budget Speech, and information provided by the Tanzanian authorities.

D. Expenditure and Expenditure Management

16. Expenditure remained quite stable as a share of GDP over the last five years, but the share of interest payments and wages declined markedly in favor of other recurrent and development expenditure (Figure I.3), particularly in poverty-reducing expenditure (see below). The level of expenditure, which averaged about 17-18 percent of GDP in the last five years, remains much lower than that in other countries in the region (Table I.1).

Figure I.3.
Figure I.3.

Tanzania: Expenditure Developments, 1991/92-2000/01 1/

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2003, 002; 10.5089/9781451838343.002.A001

Source: Tanzanian authorities.1/ Fiscal year runs from July to June. Data for 2001/02 are preliminary.

17. Wages and salaries declined from a peak of 4.7 percent of GDP in 1997/98 to about 4 percent of GDP in 2001/02. While initial efforts aimed at reducing the size of the civil service and keeping the wage bill under control, the medium-term civil service reform (Box I.4).targets an improvement in the quality of services and gradual increase in civil service salaries—which are reportedly below private sector salaries by a factor of up to ten

18. Interest payments declined considerably, from above 3 percent of GDP in the mid-1990s to 1.5 percent of GDP in 2000/01. Savings have arisen both on domestic interest payments (owing to the virtuous cycle of smaller borrowing requirements, lower inflation, and lower nominal interest rates) and external interest payments, reflecting the debt relief provided, including recently under the HIPC Initiative (see also Section IV).

19. Expenditure composition has gradually shifted in favor of poverty reduction programs, reflecting Tanzania’s Poverty Reduction Strategy. Within a steady increase in expenditure on goods and services—from 4.5 percent of GDP in 1997/98 to almost 9 percent of GDP in 2001/02—nonwage recurrent expenditure on priority sectors increased from 1.3 percent of GDP in 1997/98 to 3.5 percent of GDP in 2000/01; over the same period, the share of priority sector recurrent expenditure (including wages) in total recurrent expenditure increased from about 30 percent to more than 50 percent (see Statistical Appendix Table 15).

20. Increased foreign financing for social sectors (Figures 1.3 and 1.4) was mostly channeled to development expenditure, which increased from the officially reported 3.8 percent of GDP in 1997/98 (the lowest level during the decade) to 4.3 percent of GDP in 2001/02; about 80-90 percent is foreign financed.13 Given the difficulty of tracking donor project flows, which in most cases are not channeled through the budget, the actual level of development expenditure remains uncertain. For the same reason, the apparent increase in development expenditure may also reflect better recording of these flows (Box I.5).

Civil Service Reform


The first phase of civil service reform started in 1993, aiming at reducing the size of both the civil service and the wage bill. Its main achievements were as follows:

  • The number of civil servants declined from a peak of 355,000 in 1992 to 264,000 by 1998/99—a payroll reduction of about 90,600, including 16,000 “ghost” workers.

  • Control over employment levels and the aggregate wage bill improved. For example, the wage bill exceeded the budget level by 40 percent in 1994, but only by 2 percent in 1999.

After a two-year interruption due to budgetary constraints, the second phase of the reform resumed in lime 2000, focusing on improving services and increasing salary scales. In particular:

  • A performance management system was introduced to allow rationalization of ministries’ functions.

  • The pay structure was rationalized and some decompression achieved.

  • A Selective Accelerated Salary Enhancement (SASE) scheme, funded by donors, was introduced for key government positions.

The wage bill in 2001/02 reached about TSh 340 billion (just below 4 percent of GDP; and TSh 10 billion lower than budgeted as prospective hiring has not fully materialized as envisaged). The average basic salary was TSh 82,064 (about US$82) in 2001/02 (sec table below).

Civil Service Wages, 2001/02 Budget

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Source: Tanzania Civil Service Department.

The way forward

Looking ahead, in the 2002/03 budget the wage bill is set to increase to TSh 412 billion (4.2 percent of GDP). It is then projected to progressively increase every year, on the basis of a comprehensive medium-term plan, specifically, if the wage bill in 2001/02 is set equal to 100, it would amount to 212 by 2007/08, At the same time, as government salaries reach targeted levels, the SASE program will be phased out.

Most of the increase in the wage bill will come from higher salaries rather than increased employment. Over the period, the total number of civil servants will increase from the current 264,000 to 277,000, largely at the TGST grade (teachers). Employees at the lower grades will be downsized from the current 34,000 to 7,000. Employment in the health sector is set to remain stable, with a shift of staff from lower into higher grades.

Source: Valentine (2002).

Foreign-Financed Development Expenditure

According to the available data on budget execution, foreign-financed development expenditure remained quite stable, as a share of GDP, over the last five years (with the exception of 1999/2000, when it temporarily increased to 5 percent of GDP). However, recent evidence from a comprehensive survey of foreign-financed projects shows that recorded expenditure (which is defined as the sum of the project grants and loans channeled through the budget) is much lower than actual expenditure, for two main reasons:

  • At the level of budget formulation, it is difficult to capture all donor-funded projects because either implementing government agencies do not submit all the relevant information to the Budget Department or donors do not share this information with the government with sufficient notice to have it incorporated in the budget. To address this problem, the Ministry of Finance completed in May 2002 an inventory of all projects foreseen for the following fiscal year, in coordination with donors. It is for this reason that the development budget for 2002/03 is projected to rise by more than 2 percent of GDP, as it is believed to include, for the first time, a comprehensive list of donor-funded projects.

  • At the level of budget execution, even when donor-funded projects are included in budgetary appropriations, funds are often not channeled through the exchequer system and therefore are not captured in data on budget execution. The problem is obviously exacerbated for in-kind projects, which are based on direct acquisition from donors of goods and services to be passed on to the government. Reflecting these factors, a significant discrepancy has arisen between amounts approved and amounts recorded for donor-funded projects (see table below). Thus discrepancy has narrowed over time, reflecting more realistic budgetary estimates, improved project implementation, and improved reporting on project outlays; still, the share of actual recorded expenditure relative to budgetary appropriations remained below 60 percent in 2000/01.

Execution of Development Expenditure, 1996/97-2000/01

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Source: Utz (2002).

How do budgetary data compare with other data on project assistance in Tanzania? According to the UNDP Development Cooperation Report, Tanzania received about US$990 million in aid in 1999 (the latest data available). Of this amount, about 25 percent was in the form of technical cooperation, 40 percent was investment project assistance, 25 percent was balance of payments (program) support, and 10 percent was emergency and relief assistance. Therefore, excluding the last two categories (program support is not tied to projects, and food aid and emergency relief are generally provided directly to NGOs), the resulting UNDP estimate for technical cooperation and investment project assistance to Tanzania in 1999 was about US$ 640 million—much larger than the US$270 million captured in the budget for that year. The existence of a gap between the two sets of data is not surprising, as part of the US$640 million assistance was channeled to NGOs and the private sector. However, even assuming that half of this assistance was directed outside the budget, this would still leave a gap of US$50 million between budgeted amounts and development aid provided to the central government—an underestimation of about 15 percent. This exercise is obviously purely illustrative, as it is not known what share of donor assistance was intended to go to the central government. It nonetheless highlights the data limitations and remaining challenges in capturing donor-funded projects.

Source: Utz (2002).

21. One of the major factors contributing to improved expenditure control and the related fiscal discipline has been the introduction of a centralized payment system in 1996, under the Central Payment Office (CPO) at the Ministry of Finance, and the institution of a single treasury account at the Bank of Tanzania. These measures were coupled with the adoption of a cash-rationing system, which limits cash spending in line ministries to cash availability. This system prevents spending units from accessing directly central bank overdraft facilities, while placing their spending authority within the limits of cash releases centrally controlled by the Ministry of Finance. These cash releases are decided on the basis of available cash (revenue and net foreign financing flows—while “new” domestic financing is generally not allowed), and are effected on a monthly basis (with the exception of priority sectors, which receive full quarterly cash allocations).

22. The cash-rationing system has not come without costs in terms of budget execution:

  • As revenue (and thus expenditure allocations) were generally overestimated in the past, severe cuts were made under the cash-rationing system.

  • The implementation of the cash-rationing system in the earlier years was not tailored to budget allocations approved by the National Assembly, but was instead mostly affected by decisions made on an ad hoc basis. Charges other than salaries and interest payments were treated as a residual.

  • The lack of relation between the actual cash releases and the original budget

  • allocations created negative incentives for spending units to devote efforts to improve their budget preparation. Over time, a disconnect has been created between budget formulation and actual spending needs. Spending units at times made use of supplier credit and the accumulation of domestic arrears to smooth out volatility in monthly cash allocations; these arrears were sometimes settled once larger cash releases were received, but some arrears have continued to accumulate (Box I.6).

Accumulation of Domestic Arrears

The practice of tight cash allocations—while successful in limiting recourse to inflationary financing—has at times resulted in a buildup of domestic arrears. The areas most typically affected have been utility payments, food, and upkeep needs (for schools, hospitals, and prisons). Starting in 1998, the European Union has contributed to the clearance of nondefense arrears accumulated through June 1998. As a result of these efforts, the stock of pre-June 1998 audited arrears (TSh 70 billion) has been cleared, half of which funded by the EU.

Arrears accumulated during the period July 1998-June 2001 amounted to TSh 70 billion (largely audited by an external consultant); by end-Jur.c 2002, these arrears were also cleared.

Information on arrears accumulation during 2001/02 remains incomplete. According to the authorities, utility payments would have suffered delays during the fiscal year hut largely been settled by end-June 2002. In order to prevent the reemergence of these problems, a treasury circular was issued in July 2002, detailing a new procedure for utility payments. Commitments for such payments will be centralized through the Integrated Financial Management System at the Accountant General’s Office on behalf of spending agencies. Accordingly, spending agencies will have to abide by such commitments, as it will not be possible to reallocate funds for other purposes.

23. Major reforms in public expenditure management were undertaken in the second half of the 1990s. In addition to the creation of a central payment office mentioned above, in 1998/99 an Integrated Financial Management System (IFMS) was introduced on a pilot basis in ten ministries and then extended to all ministries during 2000/01; regional subtreasuries and the TRA tax collection offices in Dar es Salaam were also connected as of end-2001 This computerized system has greatly enhanced the recording, monitoring, and reporting of central government expenditure. The enactment of the Public Finance Act and its regulations as of July 2001 has allowed the implementation of a commitment control system, supported by the IFMS. In addition, government bank accounts were rationalized, and their reconciliation takes place on a weekly basis. Finally, reflecting better reporting and recording procedures, the closure and audit of accounts has improved.14

E. Budget Financing 15

24. In the second half of the 1990s, as stabilization and liberalization policies and the related reform agenda began to be implemented, the availability of foreign financing increased. This has helped support the government in its resolve not to make use of relatively expensive or inflationary domestic financing, while allowing sufficient credit resources for the private sector and a necessary buildup of international reserves. In addition, as fiscal consolidation took hold, financing needs (excluding grants) generally declined from a peak of almost 9 percent of GDP in 1993/94 (Figure I.4). In the last few years, budget deficits increased considerably to about 7-8 percent of GDP, partly reflecting additional social programs;16 they nonetheless remained below those of comparator countries in the region (Table I.1).

Figure I.4.
Figure I.4.

Tanzania: Budget Financing, 1991/92-2001/02 1/

(In percent of GDP, unless otherwise indicated)

Citation: IMF Staff Country Reports 2003, 002; 10.5089/9781451838343.002.A001

Source: Tanzania authorities.1/ Fiscal year runs from July to June. Data for 2001/02 are preliminary.2/ NDF: net domestic financing; NFF: net foreign financing; Other: recapitalization of banks and parastatals, and amortization of parastatal debt.

25. The composition of foreign financing progressively shifted away from project financing to direct budgetary support (Figure I.4), as donors became more confident in the government’s policies; more recently, the Public Expenditure Review consultations have provided a forum for concerted action and strengthened cooperation between the government and development partners.

26. Owing to increasing foreign financing, domestic financing declined and reached negative levels at the end of the 1990s (Figure I.4). Following a couple of years of small positive levels, domestic financing reverted to negative levels in 2001/02.

F. Summary and Conclusions

27. The rationalization of expenditure programs and the progressive shift from domestic to foreign financing were at the core of Tanzanian macroeconomic stabilization in the second half of the 1990s, contributing to a sharp reduction in inflation. However, the burden of the fiscal adjustment has fallen disproportionately on expenditure. On the other hand, strict expenditure control, with outlays limited to available domestic revenue and external concessional financing, allowed a decline in net domestic financing of the budget in 1996/97-1998/99 and zero or little domestic financing of the budget thereafter. On the other hand, revenue has not kept up with the pace of the growing economy, due to structural policy changes and despite improvements in tax administration.

28. Now that macroeconomic stabilization has been largely achieved, the government is in a better position to address Tanzania’s pressing social needs. Accordingly, it has formulated an ambitious poverty reduction strategy, that hinges on substantial increases in the allocations to priority sectors. For this to be possible without jeopardizing fiscal sustainability, there is a need to ensure (i) higher domestic revenue; (ii) sounder public expenditure management; and (iii) continued external assistance.

29. Revenue enhancement is key to the successful implementation of the poverty reduction strategy without relying unduly on foreign assistance. This will require a further rationalization of tax exemptions, a continued improvement in tax administration, and a calibration of future tax reform so as to broaden the tax base and streamline the tax system while safeguarding and enhancing revenue performance.

30. Sounder public expenditure management will allow a gradual phasing out of the tight cash-rationing system, in order to preserve the integrity of budget formulation, execution, and monitoring. Full implementation of the IFMS will be a central piece in this strategy. In addition, the fiscal decentralization strategy undertaken by the government—under which local authorities will receive increased financial and administrative responsibilities, including for the delivery of social services—will need to be accompanied by measures to ensure that funds are used for their intended purposes.

31. In the short to medium term, continued mobilization of highly concessional financing on a large scale will be required for the full implementation of the government’s plans for priority sector spending. Sustained fiscal performance relative to the government’s objectives and targets will need to be underpinned by increased transparency and accountability of the government’s operations, for example by improving data recording and reporting, and by stepping up the government’s current efforts in the fight against corruption.

32. While Tanzania is making substantial progress in all of the above areas, future challenges remain ahead. Significant contingent liabilities could arise from the parastatal sector, both from the consolidation of parastatal debt and from the retrenchment costs of parastatal restructuring (see Section V). Increased devolution of spending power to local governments will need to take place in a general framework of fiscal discipline, in order not to jeopardize the hard-fought achievements in this area. Fiscal policy will therefore be called on to promote the efficient use of available resources, so as to increase productivity in the economy, as well as promote sustainable and equitable growth.


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Prepared by Annalisa Fedelino.


The fiscal year runs from July to June. While, to the extent possible, data cover the 1990s, the analysis will focus on the second half of the decade.


For an overview of liberalization and reforms in the first half of the 1990s, see Gondwe and others (1996). For recent progress in privatization, see Section V.


During the central planning period, revenue targets were usually met by using discretionary measures for public enterprises. See also Gondwe and others (1996).


This conclusion is tentative, since the availability of data on nonmonetary GDP is limited, and their accuracy doubtful.


For a review of tax reforms, see G.G. Johnson and others (1999).


This ratio is generally used as a measure of VAT performance and is defined as VAT revenue to GDP divided by the VAT rate. Tanzania’s efficiency ratio on nonpetroleum products of 16 means that a 1 point increase in the VAT rate would yield an increase of about 0.16 percentage point of GDP in VAT revenue (Ebrill and others, 2001).


The mining sector is exempted from paying taxes on petroleum, with the exception, as of July 2002, of excise duties, which are nonetheless refundable.


This measure was, however, accompanied by an increase in petroleum excises, so as to preserve the revenue base.


The number of tax bands was reduced from 12 to 5; the top rate was lowered to 30 percent, the same level as for the corporate income tax; and all cash allowances were made subject to income tax.


For details on income tax brackets and rates, see Statistical Appendix Table [32].


This tax is an advance payment on income tax (Statistical Appendix Table [32]).


The development budget basically consists of a list of sectoral projects, including their amounts and donor source. While part of the project funds are used for current outlays related to the specific project, all project amounts are classified under development expenditure.


While the 1998/99 Audit Report was published in December 2000, 18 months after the end of that fiscal year—or twice as long as the 9 months required by law—the tabling of the 2001/02 accounts in the National Assembly is expected by March-April 2003.


Debt and debt dynamics in Tanzania are covered in Section IV.


During 1998/99-1999/2000, the budget had to bear the costs of bank recapitalization (almost 3 percent of GDP over the period).

Tanzania: Selected Issues and Statistical Appendix
Author: International Monetary Fund
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    Tanzania: Fiscal Performance and Inflation, 1991/92-2001/02 1/

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    Tanzania: Revenue Developments, 1991/92-2001/02 1/

    (In percent of GDP, unless otherwise indicated)

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    Tanzania: Expenditure Developments, 1991/92-2000/01 1/

    (In percent of GDP, unless otherwise indicated)

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    Tanzania: Budget Financing, 1991/92-2001/02 1/

    (In percent of GDP, unless otherwise indicated)