CHANGES AT AIR TANZANIA
The Government has retired seven top executives (including the General Manager and the Director of Finance) and has demoted the Di rector of Operations and the Technical Director of Air Tanzania Corporation. This action followed within a few days of the appointment at the beginning of June of a new Chairman of the Board of Directors – Principal Secretary in the Ministry of Communications and Transport, Mr Richard Mariki.

The Government has also taken over Shs 12.4 billion accumulated debt. It is believed that a substantial percentage of the work force will be laid off and private investors will be invited to buy shares in the company.

The Corporation has announced increases in domestic tariffs of between 50 and 100% effective August 10, 1992 – Dally News.

THE 1992-93 BUDGET
The budget speech of the Minister for Finance was delivered in the National Assembly on June 18 1992 by Professor K A Malima who had recently exchanged jobs with Mr Steven Kibona as Minister of Planning. Thus, as Professor Malima generously acknowledged in his speech, a large part of the preparatory work had been supervised by his predecessor.

The underlying purpose was stated to be to continue the reforms towards greater market orientation and institutional financial responsibility set in motion in successive economic recovery programmes. Inevitably, therefore. a considerable part of the speech was devoted to a survey of reforms already begun or accomplished. The object of these changes was to open up the economy to private enterprise, to reorganise parastatal organisations on self-sustaining commercial lines, to expose the banking system to competition, to remove from the banks the severe handicap of non-performing assets and to institute various measures aimed at trade liberalisation and a wider access to foreign exchange. The full effect of these changes was likely to become visible only in the medium term. but already some encouraging results were emerging. In comparison with the previous year. the dollar value of exports was expected to show an increase of 7.4% Agricultural production was showing encouraging signs of expansion.

At the centre of the reforms needed was a progressive reduction of the Government’s dependence on external financing to balance not only the domestic budget , but also the country’s foreign trading and payment s account. Revenue in 1991-92 only financed two thirds of recurrent expenditure. the balance being made up out of foreign loans and grants, while export earnings only paid for about a third of minimal import requirements. The bulk of these deficiencies will eventually be made good as a result of economic growth, but a significant contribution was expected as a result of the institutional reforms now in train, or in prospect, and a generally enhanced regard for efficiency and productivity.

The continuing expansion of Government activities in recent years, beyond the limits of available revenue has led to a deterioration in the quality of Government services. an increase in the number of incomplete projects and neglect of preventive maintenance. It was therefore intended that the role of Government should be redefined with the aim of reducing its scope to a size capable of being financed out of revenue based on a small and highly efficient civ11 service. Government would withdraw from activities that could effectively be carried out by the private sector. Central to the remaining functions of Government will be law and order and the provision of economic and social services. In the case of the social services an element of consumer contribution is envisaged.

An element in the reform of Government business is the search for simpler procedures. In future the customs tariff will only contain four rates instead of five and excise duty only two in place of eight. But a notable change announced in the speech is a substantial reduction of customs duty, sales tax, income tax and company tax. The objectives here are to reduce costs of production, to alleviate the burden on consumers and bring about a reduction in tax avoidance . The effect on consumers is of special significance in view of the adverse effect of inflation on personal incomes. The abolition of customs duty and sales tax on all industrial raw materials will not only reduce costs, but also help industries to compete effectively in home and overseas markets. Other taxes have been abolished either because they are obsolete or because they are at odds with present policies. Examples are the 20% levy on the value of air tickets for foreign travel and a 1% tax on share capital.

A number of reasons were given in the budget speech for the decision to reduce taxes. It has been observed that, in view of the narrow tax base and the constant increase in Government services, it had become necessary to raise taxes by substantial amounts in order to balance the books. The result had been a marked reduction of the take-home income of the workers and a decline in revenue collection through tax avoidance. The tax burden was also adversely affecting industrial productivity.

The widespread reduction of customs duties and sales taxes and their abolition on certain items has prompted the Government to discontinue all exemptions hitherto enjoyed by Central Government, Local Government, political parties, religious institutions (except for items used in worship), Non-Governmental Organisations and charities. Local NGO’s and charities will not, however, have to pay tax on materials and commodities given them as donations to be passed on as free gifts to the needy and the poor.

The budget included the customary civil service salary increases to compensate for inflation. It was admitted that salaries were inadequate in view of the high cost of living and that efficiency had been impaired by a lack of appropriate working tools and poor remuneration. While little specific provision appears to have been made in this budget to ameliorate these underlying problems, it may be assumed that planned reduction in the scope of Government services will provide the necessary opportunity.

The budget is a courageous sequel to previous budgets and, in its fiscal provisions , a daring attempt to grapple with deep underlying problems. As a forecast of budgetary performance much reliance is placed on expected psychological reactions, which may or may not eventuate in whole or in part, but the attempt was certainly worth making. Will the new tax structure enhance production , increase efficiency, reduce absenteeism and raise expectations as a result of improvement in morale? Will the more moderate level of taxes reduce tax avoidance? Will simplification of Government procedures result in greater efficiency? All of these outcomes are justifiable hopes and it will be profoundly interesting to read in next year’s budget speech how far hope has been transformed into fact.
J Roger Carter

SOME OTHER BUDGET HIGHLIGHTS
– Minimum wage for civil servants raised from Shs 3,500 to Shs 5,000 (approximately £9 or US $17!) per month; – Abolishing excise duty on locally produced sugar, textiles, garments and cement ; Reducing corporate tax for local firms from 45% to 35%; foreign firms from 50% to 40%;
– Increasing licence fees for birth, death and marriage
– 10% income tax (15% for foreigners) on bank deposit interest ; 20% (once and for all) income tax on dividends;

Until the middle eighties, importers and others requiring foreign exchange had to apply to the Bank of Tanzania and to make out a case for an allocation in competition with other applicants. In practice this procedure had two main disadvantages in conditions of extreme foreign exchange shortage delays were inevitable and widespread and foreign trade was severely hampered; and, centralised allocation was not always found to be an appropriate mechanism for adjudicating between rival claims. With minor exceptions, all foreign exchange holdings had to be surrendered to the Central Bank, or to the National Bank of Commerce, in exchange for local currency.

In 1985 the central control of foreign exchange allocation was breached by removing the legal bar on the possession of foreign exchange in certain circumstances (‘own funds scheme’) and allowing exporters to retain a proportion of their foreign exchange earnings (‘retention scheme’) to meet the cost of importing machinery and raw materials and to import certain consumer items within a specified list deemed to raise public morale and offer an incentive for greater production (‘ incentive goods’) . The combined effect of these measures was to fill the shelves of the shops with goods, albeit generally at a higher retail price in shilling terms, and to raise spirits and expectations.

While these measures bypassed the bureaucratic process for the procurement of some of the imports needed to sustain industrial production, they were not sufficiently wide-ranging to deal with all urgent requirements of foreign exchange. Furthermore, black market dealings , though they provided an informal means of access to foreign exchange, were nevertheless illegal and were depriving the established channels of scarce foreign exchange.

Early in 1992 a new Foreign Exchange Act vested responsibility for management of the country’s foreign exchange in the Bank of Tanzania , including the power to make regulations. It became legal for any person to hold any amount of foreign exchange and to buy and sell it in the open market. In March 1992 the Foreign Exchange Regulations and the Foreign Exchange Bureau de Change Regulations were published in the Official Gazette. Bureaux de Change were set up in Dar es Salaam thus providing a legal basis for most of the transactions hitherto performed illegally. The device was not new, having been tried in a number of countries including Ghana and Uganda to good effect. It was hoped that this mechanism would go far towards undermining the black market and would draw into the public domain resources hitherto sidetracked into black market obscurity.

The rate of exchange is determined solely on a market basis at weekly auctions. As foreign exchange remains a scarce commodity, it is expensive and figures in excess of Shs 700 to the £1 have been quoted. Such figures reflect not only the scarcity of foreign currencies, but also provide holders of foreign currency with a strong motive for selling it to the Bureaux. At the same time, the official rate of exchange fixed from time to time by the Bank of Tanzania continues to govern applications for normal trade purposes through the banking system. This rate is in the region of Shs 500 to £1, revealing a substantial gap between the two rates. The official rate, which, under present policy, is moving slowly upwards in accordance with the rate of inflation, will tend towards stability as inflation is reduced to a figure comparable with that of Tanzania’s main trading partners. The Bureau rate, however, will continue to be the value at which supply is in equilibrium with demand in the Bureau market and in the immediate future is likely to remain well above the official rate.

It would be a mistake to designate either rate as the ‘right’ one as they are the result of different mechanisms and serve differing purposes. The Bureau rate reflects the extreme scarcity of foreign exchange and depends solely on the interplay of supply and demand. Under the present policy, on the other hand, the official rate is much nearer to the value at which the purchasing power of the shilling is in approximate equilibrium with the purchasing power of the dollar. It is the official rate that governs most commercial transactions, while the Bureau rote provides a useful safety valve in cases that cannot command commercial priority, such as international travel costs and overseas purchases for non-commercial purposes, It is, however, the Bureau rate that has less claim to underlying validity , as it is inflated by the present scarcity of foreign exchange.

With the expansion of Tanzanian exports and the progressive narrowing of the unfavourable balance of overseas payments, the difference between the official and the Bureau rates will diminish. Ultimately, when Tanzania’s foreign payments account reaches equilibrium, the exchange rate gap will disappear and present arrangements for the publication of an official rate will be discontinued. As scarcity of foreign exchange will no longer influence dealings, the market rate, as determined by auction, will fall to meet the official rate and thenceforth all dealings, apart from minor adjustments to different transaction costs for different sizes of transaction , will be based on the interaction of supply and demand .
J Roger Carter

(Eight Bureaux de Change now advertise their services in the Dar es Salaam press – Editor)

BIG ATTENDANCE AT LONDON INVESTMENT PROMOTION SEMINAR
A two-page spread in The Guardian called ‘Special Report: Tanzania’, greeted me on Thursday 21st May 1992. A handful of articles and several advertisements extolling the virtues of doing business in Tanzania, were a real surprise to me since I had never seen anything similar before; Nigeria, Kenya or Uganda perhaps, but never Tanzania. I soon realized that this was part of Tanzania’s investment campaign taking place in London with a Confederation of British Industry (CBI)/East African Association Seminar arranged for the following day.

‘The Changing Face of Tanzania: Business Prospects’ stimulated a huge interest. From Tanzania, the Prime Minister John Malecela, brought four ministers, the Governor of the Bank of Tanzania, George Kahama, Director of the Investment Promotion Centre (IPC) , plus numerous other officials. All the senior diplomats were assembled from the Tanzanian embassies in Europe. More than double the usual number of participants at CBI seminars were enrolled. The Conference Administrator reported that the phone had never stopped ringing with enquiries. When asked to explain the popularity of th s conference, she suggested it was due to the friendliness of the Tanzanians.

So, the following morning I joined the 230 men and 5 women to attend the conference at Centre Point. I had discovered a special entry rate of £30 plus VAT was available for members of the Britain-Tanzania Society (BTS) as the regular fee of £282 is certainly beyond my means. Also present from the BTS were Roger Carter and Trevor Jagger. The format of the day was speeches and questions, very ably and smoothly chaired by Tom Brazier, Chairman of the East African Association. Sir David Gilmore started proceedings with a very informative and welcoming speech. This was followed by presentations by the Tanzanian team.

Quite clearly, everything is changing. Tanzania is very keen to welcome business to its shores . Time and again we were reminded of the glorious scenic beauties of Tanzania from Kilimanjaro to the Indian Ocean, from historic Zanzibar to the Serenget1. We were also told of the vast potential for agriculture, fisheries, minerals and natural resources. The businessmen were told several times about the fiscal changes, no tax for five years, freedom to remit profits and dividends, and the assistance available to establish new work in Tanzania.

During the afternoon I attended a Workshop on Industry and Agro-Industry. There was a question posed which for me illustrates in cameo the issues ahead; “I am in the fisheries business based for many years in Mombasa, Kenya. Two years ago, I moved down to Tanzania and am now based in Dar es Salaam. I have orders for ten tons of octopus a month but my current fishing fleet capacity can deliver only one ton a month. I have discovered three fishing vessels in Dar es Salaam that were part of an aid package from Italy some years ago. They are operating at only one tenth of their capability. I need ships, they need more work; how do we create a successful partnership?”

This also illustrates dramatically, the ecological and social issues which were conspicuously absent from the day’s deliberations. Only Alistair Boyd from the Commonwealth Development Corporation spoke of the need to take into account the social and ecological consequences of economic development. This example leaves me asking many questions:

-Will Tanzanians benefit from this change of economic policy?
-Do Tanzanians want all their octopus taken?
-Do Tanzanians want any of their other natural resources exploited?
-Does Tanzania have safeguards in place to protect it from over development ? (which means money and people to monitor activity).
-Who benefits and who loses out?
Judith Holland

POINTS MADE BY PARTICIPANTS:
– Tanzania produces 1% of the total world output of coffee, cotton and tea . Coffee estates are up for sale. Investment is required for cashew nut and pyrethrum processing. Sisal is Tanzania’ s number four foreign exchange earner; Tanzania is soliciting the private sector to purchase or enter into joint ventures with sisal estates – Investment Promotion Centre
– The UK is still Tanzania’s leading trading partner with a 22% share of the market . Our closest competitors are Italy (16%), Japan (13.3%) and Germany (11.7%). In 1991 we exported goods to the value of some £73 million and imported £21 million – mostly tea and coffee. Britain’s Area Advisory Group for the Department of Trade and Industry has designated Tanzania as one of its ‘markets to watch’ and it is possible that it will consider an investigative mission in 1993. Tanzania’s remarkable stability gives it advantages over many of the neighbouring states. It is to be congratulated on its marketing and cooperative reforms, political pluralism, independent press, the record in human rights . . .. But it is a competitive world. There have been changes in banking but no foreign banks are yet operating in Tanzania; none of the parstatals have been sold or liquidated yet; there is need for progress on a double taxation agreement and there is the problem of outstanding commercial debts dating back to 1979 – Sir David Gilmore, Permanent Under-Secretary of State at the Foreign and Commonwealth Office.

– Many people neighbouring Tanzania have found the country to be a safe haven whenever they felt severely threatened in their own countries .. . even the wild game have the same feelings . It is no wonder that Tanzania has 25% of her territory reserved for game parks … ,. It is our intention to make the Investment Promotion Centre a ‘One-Stop-Centre’ to speed up the process of approving investment projects .. . . Between 1990 and April 1992 some 35 projects which are wholly owned by British firms or in partnership with Tanzanian counterparts have been set up …. I really hope that you will be able to look into new possibilities – John Malecela.

– The factors which were most influential in our deciding to increase our investment in Tanzania were the stability and remittability of funds but …. we have encountered some resistance from minor offici also to the implementation of IPC investment approvals and there is continuing uncertainty on who in Government is responsible for privatisation and who we should negotiate with – Tom Brazier, Chairman, Brooke Bond Ltd.