Were 2020/21 National Budgets Ceremonial? A commentary of how this year’s budgets missed the Bigger Picture

National budgets are statements of how the government plans to raise and spend public money. They are based on fundamental economic parameters which inform planning.  Looking at the budget proposals and given the unusual current economic realities that the Finance Ministers found themselves in, this year’s budget can be described as largely ceremonial after all. In This brief commentary, we show why.

By Moses Kulaba; Governance and economic analysis centre

On Thursday, 11th June 2020, the Finance Ministers in Tanzania, Kenya and Uganda presented their annual budget estimates for the year 202/21.  While Tanzania pitched its budget as one for nurturing industrialisation for economic transformation and human development, the Kenyan Budget was presented as a budget for growth while Uganda’s budget was presented as one for consolidation and continuity towards achieving the Five-year development plan.

Conservatively defined, a national budget is a statement of how government plans to raise and spend revenue or public money collected from various domestic and external sources. Domestically, the government largely raises revenues through taxation and externally through borrowing and grants.

Looking at the budget proposals and given the unusual current economic realities that the Finance Ministers found themselves in, this year’s budgets can be described as largely ceremonial after all.  The macro economic parameters of which the budget projections were based are hollow when subjected to the test of COVID 19. There were all indications that the Ministers would soon come back to parliament asking for supplementary budgets before the end of this financial year.

Indeed, the Finance Minister, Mathia Kasaija told Uganda’s Parliamentarians, that the COVID 19 pandemic had necessitated changes to the budget and he would come back seeking  approval for a supplementary budget to reflect the true realities. A similar sentiment was echoed by Kenyan legislators and policy experts, who expected the Treasury Minister, Mr Ukur Yatani, to return to parliament sooner than later with a more aligned budget.

The Daily Nation newspaper summed up the Kenyan National proposals as a ‘Budget for bad times’, while the Kenyan Standard described it’s a ‘Nightmare budget’, stressed with Corona virus, lost jobs, empty coffers, shrinking revenues, huge debts, funding gaps, which all combined to under cut the treasury’s ambitions. In summary, the budget added more pain to the already suffering Kenyans.

So what was contained in the budgets which make them peculiar, largely symbolic and ceremonial.

Key items of the budget frames

Budget Item Kenya Tanzania Uganda
Economic Growth projections 2.5 % 5.5% 3.1%
Total Proposed  Budget 3.4trln ($27Bln) 34.88tln ($20bln) 45tln ($12Bln)
Domestic Revenue 2.79trln 24.07trln 25.5trln
Deficit ( to be financed thru external borrowing, grants and other measures) 840.6bln (7.5% of GDP) 10.81trln 20 trln
Latest National Debt &  Debt to GDP 63% (6.4trln) 55.43tln (27.1%) USD 13.3bln (Approx 43.6%)  

 

From the figures and proposals contained in the budget speeches, it was evident that the finance Ministers were reading from a script of optimism and perhaps missed a big picture.  Tony Watima, an economist writing for the Standard Newspaper’s ‘Business daily’ concluded that positioning of the Kenyan budget as pro-growth was misguided. Stabilisation should have been the tenor of this year’s National budgets.

The East African was franker in its editorial when it wrote; ‘Finance Ministers owe Citizens the truth on budgets’. The Editor noted that despite the unusual circumstances, the Finance Ministers struck an optimistic positive, calculate perhaps to lift the spirits of a region weighed down by the ripple effects of varying levels of COVID 19 related to lockdowns.

Given, the recent changes to the budget policy and public finance requirement, clearly the Finance Ministers, perhaps could be excused. They were caught between the law and COVID 19, the Finance Ministers found themselves in a tight corner. Having prepared the budget statements before March, they had to present what they had.

The Kenyan Constitution, for example, requires the government treasury to disclose to the public spending plans two months before the end of the financial year. In Kenya, a court ruling directed that the treasury publishes the finance bill earlier so parliament can debate in parliament. The Annual Budget Policy Statement (“the BPS”) was issued in February 2020 and as the CS rightly pointed out, the economic environment had vastly changed from what they found themselves in June. Similarly, in Tanzania and Uganda, the budget policy framework papers were passed months ago.

Realities of COVID 19 on the economies

The negative realities of COVID 19 on the economies are everywhere.  The key economic sectors have all been affected. Within a short span of three months, nearly 1 million Kenyans had lost jobs, several companies had closed operations while many were on the edge. Revenue collections had plummeted and some revenue streams were on the verge of total disappearance. Kenya, East Africa’s largest economy was in free fall with rising unemployment and disruption in major economic sectors. Uganda’s economic fundamentals were in tatters while Tanzania appeared to live in self-denial of the current and long-term adverse economic effects of COVID 19. The Minister admitted that COVID19 had affected the economy but was upbeat that measures had been taken to circumvent the pandemic.

Kenya’s Finance Minister was more optimistic with an estimate of the growth at 2.5% in 2020 and 5.8% in 2021. Pre-the pandemic the economy was projected to grow at 6.1% up from 5.4% in 2019. The IMF projected that global economies were expected to contract by as much as 3% growing to 5.8% in 2021 and Kenya was expected to grow at 1% in 2020.  Kenya’s revenue collection by April 2020 was Ksh 20.1 Billion-lower than the same month last year and below target. The fiscal deficit in 2019 was 8.3% up from 6.3% in 2018.

In Uganda revenue collection by April 2020 fell by Ush789.8bln below targeted Ush1.8trln. This was the largest deficit ever recorded in a single month. With the lockdowns, there was no way URA could meet its target. Tourism and business sector was largely affected.  80% of agricultural businesses and 41 Manufacturing had reduced production and employment. Yet, these contribute to the largest share of tax revenue. Agriculture accounts for 45% of exports and employs 64% of all Ugandans. Uganda expected to receive US128bln grants from donors but had only received Ush28bln. All projections were below target.

In Tanzania, the affected areas included tourism, business (wholesale and retail), traditional export crops such as cotton, cashew nuts and coffee. On 8th of June, just three days to the budget day, Tanzania’s Dar es Salaam Stock Exchange (DSE) recorded zero tradings at its equities counter. This signified an economy under distress and barely recovering from loses of COVID 19. Yet, Tanzania’s Finance Minister projected an increase in revenue collections from 14.0% in 2019/20 to 14.7% in 2020/21.

Response measures are taken

The governments undertook some fiscal and tax administration reforms and provided some stimulus packages aimed at cushioning the economies against the pandemic. However, when deeply analysed, the measures were based on shaky economic grounds, expensive in revenue foregone, difficult to achieve and can not guarantee to reverse the negative impacts of COVID 19.

Summary of some COVID 19 related response measures taken in 2020/21 budgets

Kenya Tanzania Uganda
Concessional Loans from External Lenders (IMF & WB) amounting to USD 739Mln and USD1Bln Negotiated debt relief of USD14.3Mln and potentially up to USD25.7Mln under IMF Catastrophe Containment Relief fund. Ongoing negotiations with other donors Concessional Loans (IMF & WB) –USD100Mln in 2020 and 90 Mln in 2021 and negotiation for debt relief.
Reduction of CBR from 8.25% to 7% and Cash Reserve Ration from 5.25% to 4.25%-Releasing 35bln to commercial banks Reduction of BoT Discount rate from 7% to 5% , Lowering statutory Minimum Reserve Rate (SMR) from 7% to 6% Reduce BoU Central Bank Rate from 9% to 8%
Turn over tax rates reduced from 3% to 1%, Allowance for restructuring and rescheduling of distressed loans by commercial banks and lenders Reduce the cost of Mobile Money transactions by Increasing daily minimum transfers from 3Mln to 5Mln and Minimum balance from 5mln to 7 Mln Extension of time to file Income taxes or presumptive tax  for six months
KSH 10 Bln for Kazi Mtaani Vijana Program targeting 200,000 youth, recruitment of teachers and health workers Zero-rating of import duty on raw materials for COVID 19 Manufacturers sanitizers, PPE Masks Local Manufacture and purchase of PPE for free distribution to all Ugandans
Reduction of VAT from 16% to 14%, Reduction of Corporate tax from 30% to 25% 100% allowable deductions on contributions in support of government’s COVID 19 response Ush130bln for vulnerable but able-bodied persons affected by COVID19
Reduction of PAYE for low earners of up to Ksh 24,000 per month Allowing loan restructuring and rescheduling, VAT exemption on Agricultural Crop insurance Ush1.045bln to UDB for low-interest credit to manufacturers agribusiness
500 mln for purchase of locally made hospital beds and 600mln for purchase of the locally assembled vehicles Abolishment of over 144 levies charged by MDA and Local Authorities for an improved business environment. Ush138 to UDC to facilitate public-private import substitution investment
Ksh18.3bln to support local manufacturing, 3bln for Agric Credit Guarantee schemes, 400 million in food and non food commodities to household affected by COVID 19 Subventions to TANAPA, NCAA, TMWA to meet their operational expenses,  Increase minimum threshold of Primary SACCOS liable to income tax for 50,000,000 to 100,000,000 Provide Credit through SACCOs and Micro-Finance Institutions

 

What was missed?

The plans and fiscal reforms were taken as if the economy would be normal.

The trend shows that the finance Ministers planned normally and even increased their budgets estimates, despite the odds and indications that the outturns were likely to be suppressed by COVID 19. The law firm Bowman’s noted that Budget speeches did not necessarily provide any solutions to the perineal challenges the countries faced and in some ways simply repeated what we have heard before.

What have been the budget trends?

Country 2017/18 2018/19 2019/20 2020/21
Kenya Ksh 2.3bln Ksh 2.5bln Ksh3 trln Ksh 3.4trln
Tanzania Tsh 31.7trln Tsh32.4trln Tsh 33.11trln Tsh 34.88trln
Uganda Ush 29 trln Ush 32.7 trln Ush 40.487trln Ush45 trln

 

The actual budget out turns has fallen short of projections. Kenya, which is the biggest economy in the region has missed targets for the past eight years. In 2018/19 Tanzania recorded a shortfall in budget outturn only achieving 88% of its targeted revenue collection. Tanzania had collected 26.13trln (93.4%) of its budget by the end of April 2020. Uganda Tax Revenue Authority had perennially missed its targets. In the current environment, it is very unlikely that the economy will bounce back before 2021 and by all accounts, 2020 was going to turn out the tough year.

In Uganda, the budget was not significantly different from the previous Budgets.

Table of Uganda’s sectoral allocations

Sector Allocation Approved Budget 2020/21 % share Approved budget 2019/20 % share
Works  & Transport 5,846.00 12.85% 6,404.60 15.82%
Security 4,584.68 9.90% 3,620.80 8.94%
Interest Payment 4,086.50 8.98% 3,145.20 7.77%
Education 3,624.06 7.97% 3,397.60 8.39%
Health 2,772.91 6.10% 2,589.50 6.40%
Energy & Minerals 2,602.60 5.72% 3,007.20 7.43%

 

In Kenya, the 10 bln stimulus packages offered youth employment under the Ajira Mtaani program appears generous. However, experiences from the past indicate that stimulus packages never trickle down to the real people who need them. This was the case with the maize stimulus package passed during the maize shortages in 2017. The scandals that have rocked the National Youth Service program for years further underscored the weakness of Kenyan institutions in managing affirmative budget programs such as these. Kenya’s imposition of tax on pensioners was clearly off the mark as it indicated that perhaps the government was robbing from the elderly to reward the youth and wealthy.

The agricultural sector which had already been devastated by the floods and locusts a received a raw deal in Kenya and Uganda. The post-COVID 19 scenario presents the region with significant food insecurity. There is likely for a surge in food prices, squeezing further on the household incomes.

Yet, in Uganda, the Ush 1.3trln (2.9%) budget allocated to the agricultural sector was equivalent to that allocated to Uganda’s Public administration. Uganda’s Parliament accounted for Ush 667.78bln equivalent to half of the total budget allocated to the Agricultural sector. 

As Ms Salaam Musumba, a Ugandan political activist said, people, expected a clean cut for political niceties such as for conferences, meetings, benchmarking on foreign travels, health care abroad, etc. However, this was not reflected in the budgets.

In Kenya, the Governors, MCAs and their political handlers account for a substantive portion of the recurrent budget. Kenya’s parliament received a budget twice that of the entire Judiciary. In 2020/21 some political offices such as that of former Prime Minister even received 100% budget (Ksh 71.9Mln) allocations for first time since they were created.

Generally, East African public services are bloated with public servants and money guzzling politicians and their handlers, who have become too expensive for governments to carry, yet, politically costly to offload. As a net effect, the recurrent expenditures have increased tremendously to take care of this political baggage and the entities associated with this. The Finance Ministers could do nothing to reduce taxpayers of this burden.

In Tanzania, the government did not provide much booster to the tourism sector which is a leading foreign earner. The sector has faced the largest hit from COVID 19. The government instead took away powers to collect tourism-related revenues from the authorities Tanzania National Parks Authority (TANAPA), Ngorongoro Conservation Area Authority (NCAA), Tanzania Wildlife Management Authority(TWMA) to Tanzania Revenue Authority (TRA). The revenues collected from these authorities would be directly remitted to the consolidated Fund and disbursed back through normal government budget channels. The government would provide some subventions to keep the operational and development expenses of the authorities afloat.

The Finance Minister acknowledged that Tanzania’s flagship projects aimed at putting Tanzania back to a spurring economic path faced 11 risks including COVID 19, which had affected the global economies and financing environment. The government planned to raise and spend Tsh 12.78 trln (27%) of the budget on mega infrastructure projects. According to the Minister, an evaluation conducted in April showed that the Country had not been badly affected by the pandemic, allowing it to raise its growth forecasts and maintain firm financing for its mega-development projects.

However, the truth is that the real impacts of COVID 19 on countries such as Tanzania, which are not interlinked to the global financial systems take a while to be registered and will likely be evident in the 4th Quarter of this financial year and 1st to 2nd Quarter of the new financial year 2020/21 as distressed economic sectors and business begin filling distressed tax returns for income and corporate tax purposes.

Political –economy risks underestimated

The budgets underestimated the political risks that were associated with the national general elections taking place in Tanzania (2020) and Uganda (2021) during this year’s financial year. Election seasons are largely characterised with politicking and less to production. Investment decisions and external donor commitments tend to be staggered as foreign investors and donors weigh the political barometer and wait for the electoral results and policy directions of the new government.

The electoral environment in East Africa has often been adversarial and conflictual. In Uganda and Kenya, the political environment before and during elections is often characterised with political turbulence and violence to the extent that the fundamentals of the economy, such as insecurity and government paralysis rocks the key production and business sectors of the economy.

Although, the Kenya general elections will take place in 2022, the political tension that characterises Kenya’s electoral politics had been building before being slowed down by the COVID 19 in March. It is likely as soon the lockdowns are eased, Kenyan politicians will be back to their usual political tirades and overtures. Tanzania’s Finance Minister acknowledged that political instability in the neighbouring countries, region and globally was an external risk. It did not acknowledge that it was an internal risk too and did not provide any mitigation against this risk on the economy and investment in 2020/21.

Clearly, the budgets were based on a positive scenario that COVID 19 would end soon. But given the trends, we can ably project that the journey of return to full economic recovery will be quite long. The likely upturn under a suppressed Corona Virus environment would be towards the third quarter of 2021.

Under a suppressed COVID 19 situation, the economy was still expected to shrink further by 1%.  In a worst-case scenario, the economies would shrink by at least 2% significantly affecting the key revenues sources. Governments would lose further revenue through the stimulus packages offered. For example, Kenya expected to lose cumulatively Ksh172bln to cushion vulnerable Kenyans and the economy from the vagaries of COVID19.

It was no wonder that the editor for the East African concluded, that coming against a backdrop of a back to back missed targets by the taxman and uncertainty around COVID 19 and global economy, this year’s budgets are either based on an informed optimism or simply a bluff. We conclude that this year’s budget estimates were symbolic and the Ministers would return.

Recommendations or take waypoints for budget stakeholder.

  • Tax Payers-Ready for engagement with government on real measures that will save
  • Investors- Take precautionary measure and monitoring the economic trends, avoid taking decisions which will worsen the situation further.
  • Governments-Remain conservative in expenditure and open for re-negotiation with taxpayers and adjustments of the budgets to fit the unusual 2021
  • Citizens- Expect changes in the budgets as the effects of COVID 19 bite harder, minimise luxurious consumption and expect a tight budget.

Indeed, as noted by the legendary Economist and tax theorist Adam Smith:

There is no art which one government sooner learns than that of draining money from the pockets of People-Adam Smith

National Budgeting amidst COVID 19:Why 2020/21 National budgets should be revised and steps government could take

COVID 19 has been known for many reasons but for Tanzania and East African governments in general, the pandemic arrived at a very wrong time. Coming in the middle of national economic planning and budgeting for the 2020/21 financial year, the pandemic has totally ripped apart as much as it can all the basic economic fundamentals that governments had banked on in projecting their 2020/21 revenue and economic growth forecasts.

By Moses Kulaba, Governance and economic analysis center

Developed close to five years ago as Five Year National Development Plans, as they are known, the plans were modelled based on a myriad of positive assumptions and designed to achieve stellar economic growth targets.

According to the Ministry of Finance and Economic Planning, Tanzania’s economy was projected to grow at 6.9%. Kenya projected to grow by 6.2% while Uganda expected an outstanding growth of 6.3% during the 2020/21. But going by the havoc currently wrecked by the COVID 19 pandemic and the global statistics so far it is highly likely that these plans will be significantly affected.

According to the World Bank, the global economy will shrink by 3% in 2020 sending millions deeper into poverty. Sub Saharan Africa’s economic growth is expected to contract from 2.4% in 2019 to between -2.1 and -5.1% in 2020, sparking the region’s first recession in 25 years.

McKinsey & Company forecast that East African economy will shrink by 3% and 1.9% during this financial year. In East Africa, Kenya, under a contained-outbreak scenario, GDP growth could decline from an already reduced 5.2 per cent accounting for the locust invasion earlier this year, to 1.9 per cent.

Under a best-case scenario, Kenya is looking at a reduction in GDP of $3billion while South Africa could be whipped to a GDP growth fall from 0.8 per cent to 2.1 per cent, representing a reduction in GDP of roughly $10 billion, the reports indicate. Other sources such as have even made higher projections that East African economies may shrink by 5.4% in 2019. It is clear now that the economic impacts of the pandemic could be more catastrophic than their health dimension.

Why Tanzania should revise its Budget Estimates

In the 2020/21 budget speech delivered to parliament in March 2020 by Tanzania’s Minister of Finance and Economic Planning the government projected to spend Tsh 34.879.8 billion for the implementation of its final year of the Five-Years National Development Plan (FYDP II) 2016/17-2020/21

The Minister highlighted that the Growth Domestic Product (GDP) had shown a positive trend, increasing at an average of 6.9% per annum for the period between 2016-2019 and government revenue collection had increased. The FYDP II indicates the government targeted to raise annual tax revenue collection from TZS 15,105,100 million during the FY 2016/17 to TZS 25,592,631 million during FY 2020/21, which translates into an increase in tax revenue to GDP ratio of 15.9 per cent by 2020.

Although the period between July 2019 and January 2020 witnessed revenue collection targets hitting high levels with TZS 10.62 trillion, which is about 97% of the target for that period which was TZS 10.96 trillion, It is sufficient to anticipate that revenue collection starting the fourth quarter of 2019/20 will experience significant decrease as a result of COVID-19 impact in the economy.

The budget ceilings for the financial year 2020/21 indicate a 5% increase of the national budget from TZS 33,105.4 billion in 2019/20 to TZS 34,879.8 billion in 2020/21. The budget proposals presented in March 2020 by the Minister of Finance and Planning for 2020/21 projected raising domestic revenue collection from TZS 23.05 trillion in 2019/20 to TZS 24.07 trillion in 2020/21 which will be equivalent to 69% of the total budget estimates.

This is despite the clear indications that the 2020/21 budget will experience serious shortfalls never experienced before.  The evidence from the economic shocks encountered so far with the closure of business, transport restrictions and exports such as horticulture, suggest tell that the current government’s economic plans and revenue projections for 2020/21 could be quite zealous and perhaps needed review.

According to the African Development Bank’s (East Africa Economic outlook report for 2019) economic growth in Tanzania and East Africa, in general, has been driven by tourism, services, agriculture and consumption sectors.  Tourism and services sector in Kenya and Tanzania grew and maintained an upward trend for the past five years.

All these vital sectors have been significantly affected and will centris pari bus record negative growth in their last and first quarters of 2020. Both the formal and the informal sector have been massively hit by this global pandemic. The economy will undoubtedly shrink substantially and therefore this should be reflected in the 2020/21 national budgets.

Global projections show that travel, hospitality and services sector will significantly be affected. Kenya, the regional economic powerhouse has so far downgraded key sectors such as the tourism sector to projected growth of about 2% in 2019 and this could even worse.

According to the World Tourism Council, the direct and indirect contribution of tourism was 14% of Tanzania’s GDP in 2014 with USD 6.7bn. This was expected to rise by 6.6% annually in the next 10 years, according to the World Travel and Tourism Council (WTTC).

According to the Bank of Tanzania Monthly Economic Review report, the tourism industry was the main source of foreign exchange receipts by Tanzania in 2018. In the MER report for the year ending December 2018, travel earnings (dominated by tourism) increased due to a rise in the number of tourist arrivals. The earnings reached US$2.44 billion from US$2.25 billion tabled in the same period the previous year.

The total receipts from services recorded a positive trend due to also the increase in the transport sector, which rose from $1.14 billion in 2017 to $1.22 billion in 2018.  MER reported that following an increase in travel and transport foreign receipts, the total foreign exchange receipt from services was $4.01 billion in the year to December 2018, an increase of $182.8 million from the amount registered in the corresponding period in 2017

“Transport receipt increased due to growth in the volume of transit goods to and from neighbouring countries particularly Zambia, DRC, Rwanda and Burundi partly contributed by improved competitiveness at the DSM port, including removal of Value Added Tax on auxiliary services of transit cargo, the bank reported.

The current lockdowns and travel restrictions in the neighbouring countries clearly indicate that these gains will be thrown out of the equation.

Zanzibar as a major tourist destination will be significantly affected and this will pull down the overall national economic growth of the sector and its impacts on the country.

Production and consumption will equally be affected by the economic lockdowns, staff layoffs and economic distress as disposable incomes shrink and consumer’s marginal propensities to spend drastically reduce.

Agriculture which has always been taunted as the backbone of the economy will also be affected by the menacing locusts, floods and disruptions in agricultural chains for inputs and domestic and export markets. Lending towards the sector will likely be affected and large scale production curtailed. The net effect in the wake of this will be potentially increased food insecurity, high prices (food inflation) and famine in large parts of the country.

Government costs of health care and treatment will significantly increase, drawing away resources from investment in other social and development sectors. According to public health experts, COVID 19 is one of the most expensive diseases to treat. It draws a lot of resources as it requires specialized facilities, expertise and treatment to deal per capita patient.

The financial sector will be distressed. Non-performing loans have increased and will increase significantly in defaults, distressed assets and foreclosure. The government could be a net loser too as banks, entities and individuals experience financial squeeze, fall back in tax payments and doing with on matters financial such as the purchase of government fiduciary instruments, such as treasury bills.

The industrialization agenda mooted by the government five years ago will significantly be affected as foreign capital to investment becomes difficult to mobilise. The major source countries of FDI inflows into Tanzania such as China, Europe and the United States and South Africa have been the epicentres of the pandemic and struggled to cope.

The turbulence in the global stock markets in the key financial centres such as New York, Tokyo, Frankfurt and London has worsened the situation further as major companies saw their net value and investments wiped within a short span of two months. The balance sheets and bottom lines of major companies shrunk significantly and remain extremely stressed. During and immediately after the COVID 19, investors and companies will be conservative to invest en masse and choosy in which markets and type of business they invest.

It is based on these realities that the Governance and Economic Policy Center and other Civil Society Organisations (under the umbrella of Tanzania Tax Justice Coalition) caution that the government needs to be precautionary in its projections and conservative in its estimates. As stated above that chances for the economy to shrink and domestic revenue mobilisation will adversely be impacted. It is likely that investment and revenues from key sectors such as tourism, construction and the extractive sector will likely be affected.

What governments should do

  1. Revise the previous and current budget projections to take care of the negative effects that COVID 19 will have on the economy and revenue mobilisation. (The World Bank and IMF both project that the African economy will shrink between 1.9% -3%). The new budget projections should factor this into their models to avoid a serious shortfall.
  1. Reduce VAT from the current 18% to 16% for the year 2020/21 to encourage production, tax rebates for manufacturers producing products for fighting Covid19, such as sanitisers, soap, masks and a well-reduced price for products hence increasing the purchasing power by consumers.
  1. The government should suspend all debt payments and re-negotiate future debt servicing in the context of COVID-19.
  1. Businesses and self-employed individuals in sectors hard-hit by the crisis or with serious repayment difficulties related to it should be allowed to reschedule their loan repayments or defer payments for a limited period (3 months). This will enable businesses and self-employed individuals in sectors hard-hit by the COVID-19 crisis or with serious repayment difficulties to remain in control.
  1. Halt or pause or stagger large expenditure on some large ongoing and proposed strategic projects such as infrastructure projects this year and reschedule the respective fund to short-term productive sectors for the economy and saving people’s lives.
  1. Set up an emergency fund or reserve fund at the Central bank capable of shielding the economy from the longer effects of COVID- 19 and the CB increase more liquidity into the banks to facilitate cheap lending.
  1. Businesses adversely affected by the COVID-19 should be given temporary tax payment relief in this regard. This should, however, be closely to avoid misuse.
  1. The governments need to earmark existing or additional funds to reinforce all mechanisms to fight COVID-19.
  2. Protect the public and consumers from hoarding, price hikes and disruptions in the supply chain of vital goods and services, which could gradually drift the country into structural inflation, affecting further the poor and extremely economically vulnerable.
  1. Consider pay cuts for highly paid public servants transfer some of these savings towards the national fund to finance COVID 19 response mechanisms
  1. Take measures that shield the private sector from collapse, protect jobs and hence protecting the government’s vital tax base.
  1. External borrowing at this stage to fight COVID-19 could be extremely dangerous as it is not exactly known when the situation will return to normalcy and the economy could be badly beaten after COVID-19 and not able to meet the ability for the government to pay its debt without default.

East African governments have been victims of ambitious budgeting appetites, whose targets are never achieved. According to a review of budget trends by GEPC in 2018/19 showed there were perpetual shortfalls between what was projected and what was collected. The trend showed that budgets estimates had been increasing over the years with every year’s budgets touted as the highest since independence. However, the actual budget out turns had fallen short of projections.

Kenya, which is the biggest economy in the region had missed targets for the past seven years while Uganda was a perpetual budget crusher with key ministry asking for supplementary budgets midway.

In 2018/19 Tanzania recorded a shortfall in budget outturn only achieving 88% of its targeted revenue collection. This was attributed to a number of factors, decline in domestic revenue, tighter global conditions, decline and delayed disbursement in government.

Generally, governments were net beggars, relying heavily on domestic and external borrowing to fill their budget deficits. Very little was saved. For this year, the signs are all over that the economies are glaring into the abyss. Cautionary budgeting could save the economies from further meltdown.

 

2020 General Elections: Key Electoral Reforms Tanzania must take

Tanzania has made progress on a number of democratic fronts compared to its peers in the region. However, when ranked on the common standards and guidelines for electoral management and regulation of political parties developed by European Commission for Democracy, Tanzania scores unfavourably on a number of major aspects whose reform would be helpful in strengthening Tanzania’s electoral governance credentials ahead of 2020 General elections

By Moses Kulaba, Governance and Economic Policy Center

Compared to its peers in the region, Tanzania’s Electoral Management Body (EMB) and Offices of the registrar of political parties only ranks in equal measure with its comparative peers in the respect that they are Constitutional bodies headed by persons of high integrity at a level of a judge or retired judge.

In our comparative analysis gaps are found in the following aspects whose reforms would place Tanzania at a higher pedestal in matters electoral governance;  The finality of decisions of its EMB (the National Electoral Commission) and Office of Registrar of Political parties, whereby their decisions are final and cannot be challenged in court, Election of NEC’s commissioners is not subject to a parliamentary vetting process, NEC’s mandate is limited to Presidential elections and local elections organised and supervised by local government executives under the Minister responsible for local government. The EMB and Office of Registrar of political parties’ reports to the responsible Minister compared to its comparative Countries such as South Africa and Nigeria where these institutions are answerable to parliament.

Mandate and powers of the Electoral Management Bodies and Political Party Regulation

National Electoral Commission Office of Registrar of Political Parties
The National Electoral commissions is mandated by the law (Article 74 of the Constitution of the United Republic of Tanzania (URT)) to supervise and coordinate, conduct of presidential, parliamentary and councillor’s elections (mainland Tanzania), review (electoral) boundaries and demarcate the URT into various areas for parliamentary elections, supervise and coordinate the registration of voters and conducting of voter education. Has mandate to conduct Civic and Voter education Mandated to register and de-register political parties, Monitor political parties’ adherence to political parties Act, Scrutinize political parties’ constitutions and regulations, advice to government on political party matters, mediate inter and intraparty conflicts, promote political tolerance between and among parties, and coordinate political party activity.
The Constitution of the URT and the Elections Act distinguishes the roles of the NEC and the Zanzibar Electoral Commission (ZEC). The NEC has the mandate of overseeing the President and Parliamentary elections while the ZEC is mandated with organizing elections for the President of Zanzibar and Members of Zanzibar’s House of Representatives. Also mandated to register political party symbols and ensure ethical conduct of political parties

Mandated to receive and disburse government subsidy to qualified political parties, oversee the financial management of political parties, including initiating and receiving audited accounts and statements.

Strengths and limitations of Tanzania in Comparative to South Africa, Kenya and Nigeria

  1. Curtailed powers to conduct local or grassroots elections. Tanzania’s electoral commission is provided with limited or restrained powers to organising only the Presidential, Parliamentary and council elections. The Local Government Act of 1982 gives the Minister responsible for local government the mandate to organise and coordinate local government and municipal elections. The minister appoints returning officers. The District and Municipal directors who are public servants directly answerable to the Minister for local government are the returning officers.

        This is viewed as a weakness in Tanzania’s electoral management laws since the Minister responsible for local government is appointed by the President from the  ruling party. By virtue of his or her party affiliation, the Minister can have an ‘invisible’ influence in the results of local government and municipal elections. The principle of impartiality of the process is jeopardized[1]

This was experienced during the 2015 mayoral elections in Dar es Salaam where the Minister for Local Government was perceived by the opposition to have been determined to influence the outcome of the mayoral results in favour of the ruling party CCM by appointing none eligible people and Members of Parliament as councillors to vote for the mayor.  It is for this reason that there have been appeals from civil society and other political parties for expanded powers to be given to the Electoral Commission to conduct national and local government elections.

A High court on May 10th in  2019 declared unconstitutional electoral laws that gives Municipal towns and District Executive Directors (DEDs) powers to supervise local government elections on behalf of the Electoral Commission. The Court ruled that sections 7(11) and 7(3) which empower DEDs to supervise and coordinate registration of voters for presidential, parliamentary and council elections offended the Constitution, which also bared people affiliated to political parties from running elections. Lady Justice Atuganile Ngala said the sections contradict sections 74(14) of the constitution for not setting limitations to ensure independence and accountability of DEDs and directors of towns, municipalities or city councils who double as returning officers during elections. The ruling was in favour of a petition filed by activists and the opposition party, CHADEMA.[2]  This ruling has however been overturned by a Superior court which ruled that the independence and partiality of the District Executives is guaranteed by the oath of allegiance they take to remain nonpartisan.

  1. Overarching Presidential powers to appoint top EMB and ORPP leadership. The powers granted to the President to appoint the top leadership of the commission and the Office of Registrar of Political parties without due nomination and vetting process from an independent, representative body like parliament is judged as a major lacuna in Tanzania’s electoral management process. The current system is perceived as bias, providing room for political influence or unsolicited return for political favors by the presidential appointees.

Indeed, this has been a ground for discontent which has been raised in the past by opposition political parties (such as Dr Augustine Lyantonga Mrema’s TLP, Late Christopher Mtikila’s DP and CHADEMA). The strength of these perceptions is increased, especially where high ranking officials from the EMB and ORPP have expressed interest or contested for political office on a ruling party ticket, CCM, shortly after leaving office.

  1. The prerogative of finality of decisions made by the NEC, ZEC and ORPP is considered a major lacuna in Tanzania’s electoral law compared to Kenya’s system. NEC and ZEC have the exclusive powers to announce Presidential and parliamentary election results. After being declared by the NEC and the ZEC in the case of Zanzibar, Presidential results cannot be contestable in any Tanzanian court of law. This is perceived as an infringement on common standards of democratic practice, rule of law, natural justice and democratic rights to a fair hearing[3]. The exercise of finality of decisions can also be confusing, especially where it concerns matters that can be of concern to both institutions. The Kenyan system emerges as superior in this area as it allows decisions made by the EMB and ORPP to be contested in an appropriate court and further requires the courts to act expeditiously in determining cases of this nature.
  2. Lack of clarity on the role of ORPP during the elections campaign period. In Tanzania the law clearly gives the NEC overriding powers during the election period. For example, it is not clear whether the ORPP can actively observe election campaigns, comment and take any action without accreditation and approval of NEC. ORPP is not a member of the Electoral ethics committees. It appears like the powers to supervise political party behaviour during elections are temporarily taken over by the electoral commission. The Kenyan system is also not clear either and the ORPP suggests that clarity in this area would improve the functional relationships between the two institutions
  3. Lack of clarity on the role of ORPP during or in conducting civic education. The ORPP in Tanzania mentions providing civic education as one of its functions but this is not mentioned in the law. Civic education is clearly in the ambits of the National Electoral Commission. The Kenyan system appears to have clarified this role by clearly mandating the ORPP to conduct civic education but according to the ORPP, the resources to provide civic education of this nature are not guaranteed and as such this role has remained largely symbolic
  4. Adhoc mechanisms and structures for coordination and potential functional conflict resolution. According to Tanzania’s NEC, the committees like the electoral code of conduct committees, ethics committees and stakeholder’s meetings are adhoc and others are need based. This is aimed at reducing operational costs. The Kenyan system appears to have attempted to circumvent this weakness by establishing a permanent Political Parties Liaison Committees, however the functioning of this body is still weak and structured intra and inter –agency coordination structures are still non existent

 

  1. Perceived mistrust, suspicion and weak collaboration between the institutions. This perception is more pronounced in the Kenyan system where the ORPP perceives to be excluded from major decisions taken by the EMB and feels treated as a subordinate body to the EMB.

Therefore, the key reforms Tanzania must take ahead of the 2020 general elections are:

  1. Review of current election coordination mechanisms with a view of minimizing election disputes and overlaps between NEC, Office of Registrar of Political parties and other government departments.

 

  1. Expedite independent mechanisms for dispensation and resolution of election-related cases and offences. Nigeria and South Africa have established legal organs in the form of Electoral Courts and Tribunals headed by high court judges to enforce the code of conduct and preside over disputes whenever misunderstandings occur

 

  1. Implement or review and adopt merits in Court decisions current and previous in regards to election-related matters such as independent candidates in Presidential elections and the role of local government executives or civil servants in election management.

 

  1. Increase avenues for transparent and objective dispute resolution. These should be documented and formalised in law. South Africa has developed detailed operational guidelines for better communication and clarity on the roles of the two institutions. These have been enacted in a detailed law which provides a basis for better coordination

 

  1. Adopt and adopt best practices from the comparative countries such as South Africa on matters related to election management and coordination, including opportunities to legally challenge the finality of decisions by the election coordination mechanism.

 

  1. Address some of the concerns of political parties through some kind of a national convening and dialogue process ahead of the 2020 general elections

 

[1] OSCE/ODIHR & Venice Commission: European Commission for Democracy through Law (Venice Commission), Political Parties Regulation, adopted by the Venice Commission at its 84th Plenary Session, Venice (15-16th October 2010)Principle 8

[2] https://www.thecitizen.co.tz/news/Ruling-raises-hope-of-free-polls-body/1840340-5110172-ag1x2cz/index.html

[3] Ibid, Section XIII: Monitoring of Political Parties: Impartiality and Neutrality in Elections, paragraph 218

How to curb transfer pricing , tax dodging and illicit financial flows in extractive sector

Tackling tax dodging and illicit capital flight in the extractive sector can be a challenge for tax officials and policymakers in new extractive resource-rich Countries such as Tanzania, Uganda and Kenya, whose tax and extractive governance regime is just in its formative stages and local expertise in its pupilage stage

Tax and development:  How to curb transfer pricing and illicit financial flows in the extractive sector

By Moses Kulaba, Governance and economic analysis centre, Dar es Salaam-Tanzania 

This brief highlights some of the basic strategies that can be used by tax authorities and governments to tackle aggressive tax planning and dodging in the extractive sector.  It touches on basics such as understanding corporate and financing structures synonymous with extractive MNE’s and how these are used as conduits for base erosion, tax-avoiding and illicit financial outflow. We conclude with a case scenario to facilitate discussion. The brief is in response to feedback from our readers reacting to our previous posted online article and in which we touched on the basics of understanding illicit capital flight in the extractive sector. After highlighting the problem, our readers have challenged us to also share some solutions.  The brief targets sector practitioners, policymakers and leaders, professionals, students and other stakeholders.

In recent years there have been legislative and policy reforms in Countries to ensure that governments have a firm grip and maximize their take from their extractive wealth. However, as governments celebrate these attempts, experience and practice suggest lacunas still exits and the current reforms maybe not enough in curbing the tax avoidance and illicit capital flight menace.

According to Global Financial Integrity (GFI) and the Mbeki High-Level Panel Report on IFFs latest reports, shows that IFF’s from the African continent have been increasing with losses estimated between USD50 Million and USD 80 Million over the past years. Corruption and the extractive sector has constantly provided a major conduit for tax avoidance and illicit resource outflow from Africa. Alarming evidence from leaked documents such as the Panama papers now shows, Multinational companies, have taken advantage of their titular counterparts in government to structure complex aggressive tax planning arrangements used to evade, avoid and ship out potentially taxable income, denying government and local billions of dollars in revenue and development. The arrangements can be so complex and entwined, making it a nightmare for tax authorities and governments to crack.

Even with the new negotiations and deals signed between governments and extractive MNEs, governments have to constantly up their game and mantra to ensure that the old normal does not evolve into just the new normal as the old saying goes “monkeys do not change. They only change their forests’.

So what are some of the basic measures which can be taken

The debunking of Corporate Structures

Governments can tackle tax dodging and illicit flight by debunking and constantly monitoring the corporate structure of the extractive MNE’s.  The corporate structure can determine whether an entity is a resident or non-resident entity for tax purposes. The rules applied for taxing resident and non-resident entities are different and the status of the MNE may be favourable depending on its resident status and the corporate vehicle and form that it chooses to take.

Extractive MNEs have corporate structures with their parent companies located in one Country as Headquarters and subsidiaries located in more than one country or tax jurisdictions, depending on the interests of the company and its shareholders.

The MNE’s headquarters or major subsidiary may be located in low or non-tax jurisdictions, such as Jersey, Guernsey, Isle of Man, Mauritius and in recent years Middle East Countries and Cities such as Bahrain, Dubai have been added on the infamous list of tax havens.  As these Middle East countries compete to economically diverse from Oil and develop themselves as a global investment and financial centres, they have created low or non-tax regimes as incentives for attracting foreign investment.

MNE’s whose corporate structures have footprints in these Countries need to be subjected to extra scrutiny and background checks to determine whether they are not used for aggressive tax planning measures.

Corporate restructuring, takeovers through mergers or acquisitions or buying shares or stakes in other companies (also known in the petroleum industry as farming in or farming out). Quite often this may be used to ensure that the company diversifies its investment portfolio and minimizes its risks by spreads its operations and ownership in other profit-making business. However, this presence in multiple companies creates a spaghetti of ownership structures which may be difficult for the tax authorities to trace and effectively control for tax purposes. Imagine, a nonresident entity operating in your country but with stakes in more than 20 companies and over 300 projects.

Debunking Management structures

Extractive MNE’s also structure the management in a manner which can likely reduce their tax and labour related obligations.

Governments, therefore, need to examine and understand, where the extractive MNE’s key decision is taken and how staff are recruited.  An extractive MNE with operations in Tanzania but whose majority board members are nonresident and board meetings take place outside Tanzania, would easily pass for a non-resident entity.  The income tax rules treatment and obligations for such a company would obviously be different from a fully registered resident entity.

As a channel for reducing employment tax and labour law obligations, extractive MNEs can outsource Human Resource and Employment related services to management companies. The outsourced Management companies handled staff contracts on behalf of the extractive company in return for a management fee.

Here two things can happen.

The Management Services can be handled by the company’s subsidiary located outside the Country, either at the Company’s headquarters located in low or non-tax jurisdiction or another subsidiary, whose majority shareholders could be domiciled in a low or non-tax jurisdiction.  The fees charged by the subsidiary or parent company can be overinflated to reduce the profit and tax burden in the country of operation and channelled out of the country to low tax jurisdiction.

Secondly, the Management Company can be a local entity paid to handle all Management and Human Resource services on behalf of the MNE.

The Management Company reduces the MNE’s employment tax obligations by directly recruiting and providing short term contracts or jobs to staff which are paid below the labour market in the extractive sector.  The MNE pays the Management Company a fee for this service and has no overall tax obligations thereafter on the staff it receives supplied by the Management Company.  The staff are literary employees of the management company and not the extractive MNE. Therefore, any tax obligations such as employment taxes or income taxes on services including labour rights issues such as negotiations, compensations for damage or loss are handled by the Management company. The MNE, therefore, reduces its employment tax obligation by minimizing the amount it pays to the staff through the management company.

A debunking of Financing Arrangements

Multinational Extractive Companies finance their operations through arrangements structured across multiple financial institutions.  These financing arrangements can be structured in a manner which ensures that payment of interests on the loan is too high and leaves the company with a very little taxable income. In most countries, interest payments on loans are nontaxable.  Although governments have been tightening their tax laws on thin capitalization rules by ensuring that the debt to equity ratios are within the limits, companies may also restructure the financing through a complex web of financing institutions that make ultimate taxable income in the extractive resource-rich countries is left low. Debts may be sold and restructured to take longer than earlier conceived and therefore prolong the period for the company starting to pay taxes.

Remedy for adjusted tax assessments

An adjusted assessment basically refers to a notice to reduce or increase the amount of tax imposed on an entity by the tax body. The government has the power to conduct an adjusted assessment based on new or additional information which may come in the public knowledge or purview of the tax authority, even after the Company’s accounts have been implemented. The adjustments, however, need to be fair, transparent and based on solid evidence of aggressive tax planning and evasion.

Use advance tax rulings

The tax authority can issue advance tax ruling specifying how specific extractive transactions will be treated for tax purposes. Current income tax statutes and practice notes provide for this. However, the existing rulings have been too general and subject to abuse. These ruling should clear and time-bound, to ensure that the extractive MNE does not abuse them.  The government also needs to increase surveillance during this period to ensure that the MNE is not using this period to circumvent the law by either over importation or exportation, dumping overstocking or mis-invoicing aimed to reduce either current or future tax liabilities or achieving a predetermined tax benefit.

For example, if a Company receives an advance tax ruling on the importation of certain capital goods such as heavy-duty Caterpillar tires or heavy-duty mining machinery, surveillance should be put in place to ensure that the company imports and pays an amount which commensurately matches its required operation. 

Implementation of legislative reform to curb potential lacunas

There is a need for an evaluation of the legislative and fiscal reforms so far passed to seal lacunas in the Country’s fiscal and policy regimes governing the extractive sector. 

Despite being passed over the years, have remained largely unimplemented.  The Resource Governance Index released by the Natural Resources Governance Institute (NRGI) shows that Tanzania lagged behind by 26 points in the implementation of its extractive policies and legislation. Transparency and potentially tax avoidance curbing measures such as   Contract disclosure and Beneficial ownership has remained unimplemented. Smooth exchange of information for tax purposes between less developed countries where mining operations take place and the OECD countries where the Companies are headquartered has remained poor and curtailed by ridiculous international law and treaty restrictions.

Tax incentives need to be properly awarded and managed. The government has to ensure that jobs will be created and revenue will be collected from these jobs. Fiscal, legislative and policy reforms have to be predictable and applied in a non-arbitrary way to avoid uncertainty and shocks in the extractive sector. Companies have to know in advance the consequences of flouting the rules and the burden for actions such as tax avoidance, evasion and illicit outflow.

Review of Double Taxation Agreements (DTAs)

Double Tax Agreements are treaties signed between two contracting states ensuring that nationals and residents of the two states are not taxed twice. They are primarily supposed to facilitate the international flow of capital, technology, services by eliminating taxation of income and other taxes through a bilateral arrangement and occasional resolution of income. DTAs prescribe whether the income will have taxed at the source where the income is made or where the taxable entity resides (resident principle) or a combination of both. They also provide for exchange of information for tax purposes

Despite their underlying intentions, DTAs are used as conduits for tax evasion as they facilitate income to flows from less developed countries where MNEs derive it to developed countries where MNEs are resident. Since less developed countries are resource-rich and not capital-rich, essentially, income flows substantively from one directions from developing countries as a source to the developed countries as a residency country.

DTAs allows aggressive tax planning schemes such as ‘treaty shopping’ where a Company registers a subsidiary in a country with a wide treaty network and invests through it to enjoy treaty benefits. Round tripping where investments, capital, income and profits obtained in one Country are re-routed back into the Country through low tax havens as investment from abroad to enjoy tax treaty protection.

A study by the Tanzania Tax Justice Coalition in 2016[1] revealed that the current DTAs are old and contain taxation regimes that surrender Tanzania’s treaty powers in favour of economically developed partners. DTAs have capped withholding tax rates that can be levied on interests, dividends and royalties Although the current DTAs have rated higher than 10% set in Tanzania’s income tax statutes, there are potential risks for tax loss in the future.

Establish transfer pricing methods to be used in determining the arm’s length price of transactions between related extractive MNEs and training tax officials to master them.

Tax avoidance and illicit financial outflows in the extractive sector largely take place through transfer mispricing arrangements. In principle, transfer pricing is not bad in business, however, when it is used as an aggressive tax planning measure by manipulating the transfer price (mis-pricing) to achieve a tax benefit, it becomes problematic.

Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided. Transfer pricing allows for the establishment of prices for the goods and services exchanged between a subsidiary, an affiliate, or commonly controlled companies that are part of the same larger enterprise. Transfer pricing can lead to tax savings for corporations. A transfer price is based on market prices in charging another division, subsidiary, or holding company for services rendered.

However, companies have used inter-company transfer pricing to reduce the tax burden of the parent company. Companies charge a higher price to divisions in high-tax countries (reducing profit) while charging a lower price (increasing profits) for divisions in low-tax countries.

Transfer prices that differ from market value will be advantageous for one entity while lowering the profits of the other entity. Multinational companies can manipulate transfer prices in order to shift profits to low tax regions.

To remedy this, regulations enforce an arm’s length transaction rule that requires pricing to be based on similar transactions done between unrelated parties. Several methods can be used by MNEs and tax authorities to determine the accurate arm’s length pricing for transactions between related MNEs.  The OECD has outlined five major methods which can be used these include; The Comparable uncontrolled price method (CUP), the resale price method, the Cost plus method, Transactional net margin method (TNMM) and the transactional profit split method. According to the OECD, the option that an organization chooses to use depends on the particular situation. It should take into account the amount of relevant comparable data that is available, the level of comparability of the uncontrolled and controlled transactions in question, and whether a method is appropriate for the nature of a particular transaction (determined through a functional analysis). We will discuss this subject in detail in another tax and development bulletin which will be released soon.

In recent years there have been legislative and policy reforms in Countries to ensure that governments have a firm grip and maximize their take from their extractive wealth. However, as governments celebrate these attempts, experience and practice suggest lacunas still exits and the current reforms maybe not enough in curbing the tax avoidance and illicit capital flight menace.

According to Global Financial Integrity (GFI) and the Mbeki High-Level Panel Report on IFFs latest reports, shows that IFF’s from the African continent have been increasing with losses estimated between USD50 Million and USD 80 Million over the past years. Corruption and the extractive sector has constantly provided a major conduit for tax avoidance and illicit resource outflow from Africa.

Even with the new negotiations and deals signed between governments and extractive MNEs, governments have to constantly up their game and mantra to ensure that the old normal does not evolve into just the new normal as the old saying goes “monkeys do not change. They only change their forests’.

We conclude with a fictitious case scenario which can be read for further discussion and reflection on the subject.

Extractive Company Corporate Structure and Tax Case Scenario

 

Indemen Resources Plc is a large mining company with interests in Mining and Petroleum.  The Company was registered with its Headquarters in Jugoland but has subsidiaries in Temboland, Caconia, Alsania and Mende Islands. One of these, Mende Islands is renowned for its secret laws to protect the identity of investors, it provides a litany of investment facilitation incentives, including o% tax on corporate income. In Mende Islands, an investor does not have to be physically present to establish a company.

In 2017, Indemen Resources acquired Mining Interests in Temboland where it started operations. It established   Shamudulio Energy Plc as a subsidiary in this country to take care of the Mining and Oil & Gas fields which been operational for the past 5 years. The Company’s subsidiary, Matecash Intl located in Mende Islands manages its accounts, banking and legal affairs on behalf of the other subsidiaries.

Most of its operations have declared losses for the past ten years.  However, the books of accounts of its subsidiary, Matecash in Mende Islands have continuously improved with large volumes of transaction emanating from engaging in business with its other related subsidiaries.

In the Year 2018 the company Shamudulilo Energy Plc in Temboland farmed into Calabash resources located in Alsania where it acquired 30% of its shares and therefore becoming the second-biggest shareholder.  Comodore Oil is a majority shareholder in Calabash resources and its Headquartered in Conundrum Iand which is also a renowned tax haven.  Comodore Oil owns 20 per cent in Conglomerate LLC which is located in Caconia.  Shamudulilo also owns 10% of Conglomerate LLC. Metcash, Idemen’s subsidiary in Mende Island owns 70% of Commodore Oil.

The board of Indemen Resources only sits and makes decisions in Jugoland and has only 1 of its directors from each of its subsidiaries sitting on the board as a non-executive board director.

Recently, it outsourced Labour Management to contract to Luguburious Consulting. Luguburious Consulting is registered and located in Conudrum Islands and has shares in Metcash Intl and Commodore Oil.

Luguburious Consulting is responsible for the recruitment and placement of staff in all Indemene’s subsidiaries. The staff are recruited on a 6 months’ contract, only renewable upon satisfactory assessment and passing of a regular test. Luguburious also provides copyrighted hi-tech technology to Indemene’s subsidiaries, including Shumudulilo Energy Plc in return for a fee. It also sells water purification equipment to conglomerate LLC.

Jugoland, where Indemene Resources comes from, has a Double Taxation Agreement with Temboland and under which Income taxation on dividends, interests, royalties are capped. Management or expert director fees from these Countries are exempt. Also, 100% of income repatriation from these Countries is allowed and exempt from Taxation.

In 2011, Jugoland, as a sign of reassurance of the bilateral cooperation between the two countries and has committed 100 bln dollars to support the Country’s fiscal reforms for the next five years.

Indemene Resources has been declaring losses in your Country, Temboland and in Jugoland. But recently, you have heard that Conglomerate LLC has intentions to buy Indemene Resources through either a Merger or Acquisition which will make it the biggest Company in the region. The deal valued at 890 billion dollars is the largest ever recorded in recent history.

As a Tax justice campaigner, a Tax Administration Officer or Policymaker, you have been asked to examine and brief the President on this entire scenario

What are the key issues would you bring to the attention of the President? What are the potential legal and taxation issues do you see?  What would be the appropriate transfer pricing methods you could apply in determining the arm’s length price of transactions between these companies. What policy, legislative and actions would you recommend for the government to take without necessarily being exposed to litigation and sparking of accusations of the government as being against foreign investors?

 

 

[1] Moses Kulaba:  Double Taxation Agreements: Gain or Loss to Tanzania? A study by Tanzania Tax Justice Coalition, May 2016

 

SADC in Economic Meltdown; Can Tanzania be German of the Region?

On Saturday 17th August, Tanzania assumed the chair of the South African Development Cooperation (SADC), amidst disturbing economic figures indicating that the region was facing a serious economic meltdown. Can Tanzania be the ‘German’ of the region, playing the economic big daddy role by calling the other states into political order and bailing out the struggling member states?

By Moses Kulaba, Governance and Economic Analysis Center, Dar es Salaam, Tanzania

The SADC is a 16-member state regional economic block established with among others promoting sustained economic growth and sustainable development amongst its objectives. However, the recent economic data indicates that region is witnessing an economic meltdown with most of its member states, except perhaps Tanzania, positing negative or stunted economic growth over the past years.

According to the economic and social indicators data compiled and released by its secretariat the the SADC region posted an estimated average growth rate of 1.4% in 2016 compared to 2.3% in 2015. At country level Tanzania registered the highest growth of 7% among the member states followed by Botswana with a far below rate of 4.3%[i].  

In 2017 Tanzania recorded an economic growth of 7.1% followed by Seychelles (6.3%) whilst Angola registered negative growth for the second consecutive year in order of 2.5%[ii] The region’s growth was increasing at a decreasing rate since the post global period in 2009.

The region’s economic giant South Africa has witnessed rapid economic slowdown, bring along its small neighbors and trading partners under its weight.  Countries such as Zimbabwe were collapsing under the weight of economic sanctions, Namibia and Angola recorded negative annual real GDP (at market price) of 10.8% and -2.5% respectively in 2017 due to the slump in commodity prices and other related risks. Botswana at 2.4% did not perform well either. The region posted an overall trade deficit with rest of the world of USD6.7bln. 

The AfDB report for 2018 warned that the economic outlook for Southern Africa region was cautious[iii]. Broad based economic activity was expected to recover at slow pace, but the outlook remained modest given the diverging growth patterns for the region’s economies. Upper middle income countries turned in low and declining rates of growth meanwhile lower income transitioning economies recorded moderate and improved growth, albeit at reduced rates.

Despite the improvement, economic performance remained subdued as the region’s economic outlook continued to face major headwinds. High unemployment, weak commodity prices, fiscal strain, increasing debt and high inflation.

Real GDP was estimated to have grown at an average of 1.6% in 2017 before increasing to a projected 2.0% in 2018 and 2.4% in 2019.

The future regional growth was expected to be bolstered with primary expectations of increased investment in non-oil sectors such as electricity, construction and technology in large infrastructure projects, mining as well as continued recovery in commodity prices.

However, the latest figures show that the region was not well on that front either.  The decline in commodity prices in recent years reaching the lowest point in 2015 translated into significant income loses for the economies, implying a negative impact on public and private sector spending and therefore growth in employment.

Before the 2008-2009 global recession, the region experienced moderate growth, though individual countries contributed differently. For example, Angola, Mozambique and Namibia exhibited robust growth that collectively outpaced the regional group.

Thereafter, Angola, the region’s foremost oil producer and former raising economic star received the worst bashing with its economy experiencing adverse economic growth effects due to weak oil prices.

Overall the region experienced negative GDP growth with Swaziland (-10.08%), Zimbabwe (-8.38%),  and Angola (-6.31%)  being among the worst hit[iv]  Other Countries such as Zambia, Namibia , Mozambique and Malawi were not performing better either. South Africa reported the highest public debt soaring in billions dollars followed by Angola.

South African Institute of International Affairs observed that intra-regional investment and trade levels had declined markedly since the commodity slump in 2013. Moreover, the trade and economic growth in the region remained imbalanced, exacerbating political strains among member states. Non-tariff barriers and other factors had adversely affected intra-regional trade and investment in recent years.

Assuming the mantle, at the end of its 39th Summit held in Dar es Salaam, Tanzania’ President John Pombe Magufuli was furious with against the Secretariat for having not provided adequate and alert to the political leadership that the region was experiencing an economic meltdown with reduced or stunted growth and an expanding trade deficit.

Speaking at the SADC People’s forum on the sidelines of the main summit in Dar es Salaam, the South African Professor, Patrick Bond, described the situation as alarming, catastrophic and turbulent and yet no one was bold enough to speak about it.

He was perhaps communist in view and radical in approach, blaming what he described as the capitalistic enterprise and its puppeteers for under mining economic justice, risking lives of by putting profit before the people and causing climate change whose effects were ravaging SADC but remained quite revolutionary in suggesting that the ordinary people perhaps needed to send a clear signal to its political leadership that all was not okay. The economic fundamentals were tattered and the regional leaders needed to wake, Prof. Bond lectured.

Can Tanzania emerge and become the ‘German’ of the region?

With this state of the Union, the question therefore arose can Tanzania emerge and become the ‘German’ of the region, playing the economic messiah role by providing both political leadership and economic bail out to its neighbors. 

In 2013 up to 2015 when the European Union experienced economic turbulence, Brussels turned to German to liberate it from the gigantic economic Dracula which was tearing down its economic block and leaving some of its small states indebted and facing bankruptcy. German wrote cheques in financial bailouts, provided guarantees and political prop up for economically struggling states such as Greece, Portugal and Italy.

German relied on its economic prowess and its political might as the industrial central pillar of the European Union. The charismatic leadership of its Chancellor, Ms Angela Merkel, was a distinct asset. Even at the risk of her own political career and constant onslaught from the German far right, Merkel could not tolerate any nonsense and was not ready to allow Europe to fall back.

In the face of the similar economic doldrums which seems now to face SADC, can Tanzania afford such muscle or a German equivalent?

Tanzania has done it before. In the 1960’s until 1990’s when the region was facing serious political, Tanzania pulled up its resources and committed it to the liberation struggle. It hosted training camps and provided pupilage to thousands of liberation fighters. Dar es Salaam became to the political headquarters of Frontline States where the idea of SADC in its current form was initiated and a spring for independence for many of the current South African states.  For some, therefore SADC at 39 years, just came back home.

In assuming the SADC Chairmanship, President Magufuli warned the Secretariat that it will not be business as usual as of now and for the next one year his interest would be to see that resources placed at the disposal of the Secretariat were not spent on conferences but on meaningful tangible projects which benefited the people. Could this be the kind of approach that region needs to take in order to deal with its increasing economic challenges.

An agile kind of leadership which places the people at the heart of politics and fights with cunning shrewdness against corruption, public waste, nepotism and personal drive to accumulate wealth by those in power.

Over the years these have been some of the vices which have dogged the region and bringing the much needed progress to stagnation and ultimate halt in some member states. Comparatively, perhaps the SADC is the largest economic group in Sub-Saharan Africa. With over an estimated population of 337.1 million people in 2017, is larger than its western equivalent, the Economic Community of West African States (ECOWAS) and obviously bigger than the European Union has a just a fraction of the SADC population yet somehow progress has been considerably steady in the other regions.

According to experts the region was faced by multiple non trade barriers and low intra region trade which still at around 20%.  Technically, speaking, the members are happy to do business with other countries outside the region rather than their economic neighbors partners in SADC. The member states are living alongside each other but not fully economically and trade integrated.

Political uncertainties which has dogged the former economic giants of the region such as South Africa, Zimbabwe, Mozambique and Angola created fertile conditions negative to investment and economic growth.  The governments lost grip on the economic mantle and directed attention towards managing internal politics and mechanics for political survival.  

Xenophobic attacks in South Africa could have also created a sense of fear and caused disarray in a fragile informal sector which was quietly the driving factor or fulcrum on which the South African economy relied. Crushing cost of electricity, turmoil in the extractive sector and stalemate in the platinum industry in 2016 perhaps were also a contributory factor to South Africa’s political woes. 

Overall, according, to Professor bond, the region was just poorly governed and a new leadership impetus led by the people was necessary to bring back the declining glories

For many years SADC was so much preoccupied on political stability. With good success, it has managed to tackle conflicts and bring peace amongst its member states. Overall, political conflict in the form of civil wars in the region has been declining with all except the DRC reporting any semblance of a conventional Civil war in recent years. 

Even, this has significantly been downgraded in recent years. Currently, there is no severe risk of any threat from any member state to destabilize any other through an arms insurrection. The ongoing conflict in the Eastern DRC is largely a war of survival for the remaining tribal and ethnic elements rather than a fully-fledged military configuration to overall and capture power in the DRC. If it can be dealt with, then perhaps the war in the DRC will be over or significantly reduced to minimal levels in many decades.

The future wars of the SADC will therefore be largely economic and perhaps resource based on key issues such as land, water and control of the real means of production and profit. Acute poverty could be the other driver of the masses towards insurrection. For Tanzania therefore, to take up the German challenge will be a touch endeavor.

Tanzania’s economic benefit or contribution to the region is too minimal. According to trade statistics, Tanzania is among the least exporters to SADC and its overall trade balance with its SADC neighbors was still low. It therefore lacks the economic might of German stature.

Over the past three years Tanzania’s political leadership has commitment itself to building its economy first before looking outside. Cutting back on public waste and flogging its population into line to start paying up taxes to finance its public service and infrastructure ambitions, Tanzania is building its economy from within.

Throughout the 1960s to the 1990s Tanzania sacrificed a lot in order to politically liberate virtually all the SADC member states and yet gained very minimal in return.  Political historians have even have even argued with some level of confidence that Tanzania under developed itself in sacrifice for others to develop. Tanzania would be therefore quite cautious in economic diplomatic terms and perhaps uncomfortable at this moment in giving out too much of what it has acquired over the years to salvage its economic neighbors.

The conditions in the region appear to have turned so bad in the past few years with persistent drought raving across the region only to be replaced by wrecking floods leaving behind famine and death in communities along its way.  Approximately over 1000 people dies in the last floods in Mozambique and Malawi caused by cyclone Idai and Keneth. Millions at a risk of starvation.  Essential infrastructure such as road and bridges connecting rural areas to urban centers and across countries such as the port of Beira are badly battered and incapable of supporting economic productivity.

The region has not been able to attract in Foreign Investment into its natural resource wealth and flagship infrastructure projects such as the Mighty Inga dam electro power project in the DRC which would have brought life into the SADC power master plan have remained incomplete for many years now. The region is badly in need of both reconstruction and reconfiguration to sustain itself and its ambitions.

At the end of the summit Tanzania’s former President Benjamin Mkapa advised that SADC member states should stop relying heavily on foreign donors for aid to support or finance their development agenda. Building internal capacity through a reliable market for products from the block, investment in education, technology, domestic revenue collection and unlocking the potential amongst its budging population to drive the economies forward would be a better option. Perhaps the SADC leadership should fine tune an ear to the wisdom of its elders.

The meeting concluded with signing off of three development cooperation programs worth 47 Million Euro deal with the European Union under its European Development Fund (EDF) 11 financing round. According to official statement, the funds will be used over the next five-year period to support improvement in the Investment and Business Environment (SIBE), Trade Facilitation Program (TFP) and Support to Industrial Productive Sectors (SIPS) three programs to be implemented by the SADC over the next five-year period

The SIBE program aims at achieving sustainable and inclusive growth and job creation by transforming the region into an investment zone, promoting intra-regional investments, foreign Direct Investment and a focus on Small and Medium Enterprises. The TFP will contribute to enhance inclusive economic development in the region through deepened economic integration while the SIPs aimed at contributing to the SADC industrialization agenda, improving performance and growth of selected value chains. How this EU injection translates into lifting the region from its economic downward spiral will yet to be found out at the next summit when SADC turns 40. What is clear is that something has to be done.

[i] SADC: Selected economic and social indicators, 2016

[ii] SADC: Selected economic and social indicators, 2017

[iii] AfDB: Southern Africa Economic Outlook, 2018

[iv] https://countryeconomy.com/countries/groups/southern-african-development-community

Election Coordination Mechanisms: A comparative study of Tanzania, South Africa and Nigeria

Proper election coordination is a major factor in successful elections in a multiparty democracy. The findings and key message coming out of a short policy study and governance practice note by GEPC suggests that there is no universal approach to coordination between Electoral Management Bodies (EMBs) and Office of Registrar of Political Parties (ORPPs). Each country has developed some sort of coordination based on its existing political and legal dispensation.

This short policy study and governance practice note sought to undertake a comparative study of Tanzania and South Africa, Nigeria with a view of contributing towards electoral reforms and minimizing of electoral disputes.

However when ranked on the common standards and guidelines for electoral management and  regulation of political parties, Tanzania scores unfavorably on a number of major aspects; Finality of decisions of its EMB (the National Electoral Commission) and Office of Registrar of Political parties, whereby there decisions are final and cannot be challenged in court,

The appointment of Tanzania’s National Electoral Commission (NEC’s) commissioners is not subject to a parliamentary vetting process, NEC’s mandate is limited to Presidential elections and local elections organised and supervised by local government executives under the Minister responsible for local government. The EMB and Officer of Registrar of political parties’ report to the responsible Minister compared to its comparative Countries such as South Africa and Nigeria where these institutions are answerable to parliament.

Tanzania only ranks in equal measure with its comparative peers EMB and Office of the registrar of its political parties in the as Constitutional bodies and its organs headed by persons of high integrity at a level of a judge or retired judge.

The study therefore recommends that as Tanzania prepares for the next local and general elections, the country should practical measures to

  • Review of current election coordination mechanisms with view of minimizing overlaps and election disputes
  • Implement Court decisions current and previous in regards to election related matters such as independent candidates and role of local government executives in election management
  • Increase avenues for transparent and objective dispute resolution. These should be documented and formalised in law
  • Adopt and adapt best practices from the comparative countries on matters related to election management and coordination, including opportunities to legally challenge the finality of decisions by the election coordination mechanism

 

A table summary of salient features of EMB and ORPP structures, functioning and coordination and our ranking based on European Commission (EC) Common Standards & guidelines for Electoral Management and Political parties Regulations [1]

  1. No Issue Explanation Traffic Signal
    1 Constitutional protection of EMB and ORPP Strengthens independence, confidence and performance Green
    2 Presidential Appointment of EMB Commissioners and ORPP heads Bad practice, Creates mistrust and may encourage patrimony Red
    3 Existence of Nomination Panel or Committee  for EMB Commissioners and ORPP Strengthens political and public trust in the institutions Green
    4 EMB and ORPP Chaired by Judge or Justice of high court May strengthen political and public trust that the actions and decision of these institutions are just and fair, but fair outcome is not guaranteed Yellow
    5 Civil Society involvement in Nomination of EMB Commissioners and ORPP heads Widens participation, increases public trust and credibility of the institutions Green
    6 EMB and ORPP embed Roles within a single institution such as IEC in South Africa or INEC in Nigeria May encourage ambiguity, Best to separate but also depends on accountability structures and clarity of the roles Yellow
    7 EMB and ORPP heads accountable to Minister Bad practice, may encourage direct political interference and patrimony Red
    8 EMB and ORPP heads accountable to Public Service Commission May be subject to limitations of public service administrative codes of conduct and requirements Yellow
    9 EMB and ORPP accountable to Parliament Increases accountability and public  scrutiny Green
    10 EMB and ORPP direct participation in nominations and vetting of candidates Encourages the EMB and ORPP to ensure candidate standing for election meet the eligibility criterion and legal requirements Green
    11 EMB and ORPP direct engagement in development of Party and Membership list for political parties Bad practice, Infringes on right of Political parties to determine their candidates Red
    12 Restriction of EMB and ORPP electoral  organization and coordination mandates to Presidential and Parliamentary elections (Tanzania’s case) Bad practice , may encourage direct political influence, foments elections disputes Red
    13 EMB and ORPP enforcement of Separate Codes of conduct or ethics Good to separate political issues from electoral matters Green
    14 EMB and ORPP separate Management of Party subventions, Financing Largely dependent on accountability structures Yellow
    15 Existence of EMB and ORPP elaborate operational procedures and independent guiding  law Provides clarity in operational mandates Green
    16 Existence of other constitutional institutions to support EMB and ORPP in democracy-such as  in South Africa Strengthens independence, trust and performance Green
    17 Decisions of EMB and ORPP Final on electoral and political matters Bad practice, May defeat justice and Fairness Red
    18 Detailed regulations for EMB and ORPP dispute resolution Provides clarity in dispute resolution Green
    19 Existence of formalised PPLC  and other similar bodies  to work with EMB and ORPP Enhances collaboration and potential dispute resolution Green
    20 Existence of an Independent Electoral Court or Tribunal to adjudicate on matters relating to EMB and ORPP Strengthens performance And expedites justice Green

     Comparative thematic analysis of Tanzania, Kenya, South Africca and Nigeria’s EMB and ORPP institutional setup, functions and our ranking based on European Commission (EC) Common Standard & guidelines for Electoral Management & Political Parties Regulation Standards[2]

    Issue Country Analysis Traffic sign
     

     

    Legal Constitution

    		Tanzania EMB Constitutional body, ORPP enacted by law Green
    Kenya EMB  Constitutional Body, ORPP enacted by Green
    South Africa EMB and ORPP Constitutional bodies Green
    Nigeria EMB and ORPP Constitutional bodies Green
     

     

    Appointments

    		 Tanzania EMB and ORPP Commissioners and heads are presidential appointees, without nomination Red
    Kenya EMB and ORPP heads are presidential appointee , upon nomination Green
    South Africa EMB and ORPP Commissioners and heads are Presidential appointee, upon nomination Green
    Nigeria EMB and ORPP heads are Presidential appointees, upon nomination Green
     

     

    Leadership

    		 Tanzania EMB and ORPP headed by a Judge or Retired justice Green
    Kenya EMB and ORPP headed by  none Judges Red
    South Africa EMB and ORPP headed by a Judge Green
    Nigeria EMB and ORPP headed by a Judge Green
     

     

    Roles

    		 Tanzania EMB electoral mandated limited to Presidential and Parliamentary elections, Local elections organised by Minister Red
    Kenya EMB electoral mandate extended to organise all elections Green
    South Africa EMB mandated to organise all elections Green
    Nigeria EMB mandated to organise all elections Green
     

     

    Accountability

    		 Tanzania EMB reports to the Responsible Minister Red
    Kenya EMB reports to Parliament Green
    South Africa EMB reports to Parliament Green
    Nigeria EMB reports to parliament Green
     

    Jurisdiction

    		 Tanzania EMB organise elections partially in Zanzibar. Zanzibar President and House of Representative elections organised by Zanzibar Electoral Commission Yellow
    Kenya EMB has nationwide jurisdictive coverage Green
    South Africa EMB has nationwide jurisdictive coverage Green
    Nigeria EMB has nationwide jurisdictive coverage Green
     

    Dispute Resolution

    		 Tanzania EMB and ORPP decisions are final Red
    Kenya EMB and ORPP decisions challengeable in court Green
    South Africa EMB and ORPP decisions challengeable in court Green
    Nigeria EMB and ORPP decisions challengeable in court Green

    [1] We developed these common standards and traffic signals based on standard democratic and accountability principles, international conventions, international benchmarks and European Commission (EC) guidelines for Political Parties Regulation.

    [2] Ibid. The European Commission (EC) (Venice Commission) guidelines for Political Parties Regulation guideline provide an overview of issues regarding the development and adoption of legislation for political parties’ regulation in democracies.

    ** The full report of this study can also be downloaded from our reports and publications sections

 

One in four people in Africa pay bribes to access services, TI survey says

According to Transparency International (TI) survey report, more than 1 in 4 people in Africa who accessed public services, such as health care and education, paid a bribe in the previous year. This is equivalent to approximately 130 million people.

The tenth edition of Global Corruption Barometer (GCB) – Africa, released on African Anti-Corruption Day by Transparency International in partnership with Afrobarometer, reveals that more than half of all citizens surveyed in 35 African countries think corruption is getting worse in their country. Fifty-nine per cent of people think their government is doing badly at tackling corruption.

The largest and most detailed survey of citizens’ views on bribery and other forms of corruption in Africa, the survey asked 47,000 citizens in 35 countries about their perceptions of corruption and direct experiences of bribery.

The report also highlights that corruption disproportionately affects the most vulnerable, with the poorest paying bribes twice as often as the richest. Young people pay more bribes than those over 55 years old.

“Corruption is hindering Africa’s economic, political and social development. It is a major barrier to economic growth, good governance and basic freedoms, like freedom of speech or citizens’ right to hold governments to account,” said Patricia Moreira, Managing Director of Transparency International. “While governments have a long way to go in regaining citizens’ trust and reducing corruption, these things don’t exist in a vacuum. Foreign bribery and money laundering divert critical resources away from public services, and ordinary citizens suffer most.”

The police is considered the most corrupt institution, with 47 per cent of people believing that most or all police are corrupt. Many citizens also think government officials and parliamentarians are highly corrupt, at 39 per cent and 36 per cent respectively.

As in the previous edition of the GCB for Africa, the police consistently earn the highest bribery rate across the continent. This may be one of the reasons that two-thirds of those surveyed fear retaliation for reporting corruption. On a positive note, more than half of citizens believe that ordinary people can make a difference in the fight against corruption.

“To reduce the heavy burden of corruption on ordinary people, African states that have not done so should ratify and effectively implement the African Union Convention to Prevent and Combat Corruption,” said Paul Banoba, Regional Advisor for East Africa at Transparency International. “Africans believe they can make a difference. Governments must allow them the space to do so.”

Transparency International urges governments to put anti-corruption commitments into practice and to:

  • investigate, prosecute and sanction all reported cases of corruption in both the public and the private sector, with no exception;
  • develop minimum standards and guidelines for ethical procurement and build strong procurement practice throughout the continent with training, monitoring and research;
  • adopt open contracting practices, which make data and documentation clearer and easier to analyse and ensure transparency in hiring procedures;
  • create mechanisms to collect citizens’ complaints and strengthen whistleblower protection to ensure that citizens can report instances of corruption without fear of reprisal;
  • enable media and civil society to hold governments accountable;
  • support political party funding transparency;
  • allow cross border cooperation to combat corruption.

Authorities should also establish public registers that name the owners of shell companies and adopt and enforce laws that address stolen assets.

Additionally, business leaders and boards of companies, including multinational companies operating in Africa, should effectively and transparently implement the highest international anti-corruption and anti-money laundering standards.

The full report can be accessed via: https://www.transparency.org/gcb10/africa

 

 

No fiddling with Civic Space-CSOs affirm at Paris EITI Meeting

We demand that an independent, external review be commissioned to analyse the EITI’s tools to assess civil society participation; and we demand that Myanmar receive “meaningful” rather than “satisfactory” progress during its validation

By Governance and economic analysis centre team, Paris

At the Extractive Industries Transparency Initiative (EITI) global conference which took place in Paris between 17th and 20th of June 2019, Civil Society Organizations (CSOs) warned governments accross the world and vowed that they will not accept anything less than an unequivocal guarantee that Civic space and participation in EITI governance processes will continue to be safe guarded and protected.

This followed what CSOs described as an encroachment on Civic space by selective interpretation and application of the EITI standard.

A collective statement issued by the global CSO extractive transparence movement coordinated by Publish What you Pay observed that Civic space is shrinking worldwide, including many EITI Countries. Civil society is carefully monitoring the situation and gravely concerned with what we see.

The EITI is a global standard for good governance for the oil, gas and mineral resources currently implemented in 52 Countries around the world.

In recent board decisions, the board has taken what CSO view as a double standard or non-balanced approach in interpreting the standard. We have seen some Countries punished for violating the CSO protocol while others are treated with ‘kid gloves’

The Standard requires that member states undergo regular validation on implementation of the EITI Standard after which implementing states are ranked as having achieved either satisfactory or made meaningful progress or suspended for failure to meet the standards. Under extreme conditions countries are delisted from the EITI. The status of the EITI in different implementing Countries can be viewed via:  https://eiti.org/

The Civil society protocol is one of the benchmarks required to be assessed during the EITI validation and implementing countries are required to demonstrate that the operational environment in the country is conducive for civil Society to freely operate and participate in the extractive sector governance.

To achieve accountable management of natural resource citizens must have access to relevant information about the sector is managed. EITI’s main historical purpose is to provide this transparency. Civil Society has been a driving force behind progress in the types of transparency and granularity of data provided by the EITI over the years, most recently with advocacy on contract transparency.

Transparency should be accompanied by meaningful participation. Participation is about the ability of people to have agency in natural resource governance decisions that directly affect them or their livelihoods.

How to interpret and enforce EITI requirements for civil society participation has been contentious and recurring over years. It has been debated in relation to a number of countries such as Equatorial Guinea, Ethiopia, Azerbaijan and Niger. In recent years both Azerbaijan and Niger have withdrawn from the EITI after facing suspension linked to Civic space concerns.

Several times have been made to clarify the interpretation and enforcement of civil society participation; notably with 2015 civil society protocol.

These documents make it clear that EITI is meant to assess the general political environment and that EITI requirements cover any civil society expressing views related to natural resources government (not just MSG-Members) along a spectrum of activities, expression, operation, association engagement and access to public decision making.

None the less, interpreting and enforcing EITI’s requirements regarding civic space remains contentious, more recently with the validation of Myanmar.

Against a backdrop of shrinking space globally, now is the time to review whether EITI’s mechanisms for assessing civic space are fit for purposes and serving the broader objective: Ensuring civil society’s ability to participate freely, independently and meaningfully in the national dialogue on natural resource governance.

According to data provided by the Civicus Monitor indicates that our of 50+ EITI implementing Countries 40 have seriously restricted Civic space, including 2 listed as closed. 13 repressed, 25 obstructed and a further 6 with narrowed Civic space and 5 as open.

Activist working on transparency in the extractive sector are among the most targeted globally. Attacks against activists working on transparency in the extractives include killings, torture and disappearances as well as criminalization of their activists. The business and human rights resource centre has identified attacks on human rights activists working on business related activities in approximately 36% of the 50+ EITI implementing Countries in the last three years.

Myanmar represents a test case for how the board assess requirement 1.3 and will be a bell weather for similar scenarios in Countries like the Dominican Republic. It is important to uphold EITI’s commitment to review the broader environment in which EITI operates and to assess whether the broader objective of Civil society protocol has been fulfilled, Ms Elisa Peter, Executive Director of Publish What You Pay Global CSO Coalition stated.

What Does this year’s budget have for you?  How Tanzania, Kenya and Uganda prepare and manage their budgets differently to minimise perpetual deficit

 

As East Africans continue to dissect and internalise what impacts this year’s national budgets will have on the economy and standards of ordinary citizens, the questions remain whether these budget targets can be achieved. But what are national budgets and how have these coveted statements and speeches resonated with citizens interests over time? The trend and results from previous budgets show mixed feelings and perhaps, it is time to reflect on how national budgets are made. 

By Moses Kulaba; Governance and economic analysis centre

What are national budgets?

A national budget is a statement of how government plans to raise and spend revenue or public money collected from various domestic and external sources. Domestically, the government largely raises revenues through taxation.

The legendary Economist and tax theorist Adam Smith stated that states as sovereign entities have the right to impose taxes and to spend these proceeds from taxation to meet the public financial needs of its citizens. 

The tradition of taxation is rooted in ancient empires which required that every able citizen makes a mandatory contribution to the state and in return the state provides protection and social services.

Taxes in ancient Egypt, Greece and Rome were charged to finance war but the idea of sales taxes, income taxes, property taxes, inheritance taxes, estate taxes, gift taxes are said to be a modern invention. The concepts of taxation that evolved and developed were transported to other empires and cultures where tax ideas took root. This pattern continues through today as nations are influenced by tax practices from other Countries

There is no art which one government sooner learns than that of draining money from the pockets of people-Adam Smith

In commonwealth traditions, proposed government collections and expenditures are articulated in a national budget statement and speech always presented before the state parliament or legislature on the budget day. In Tanzania, this is presented on every second Thursday of June of every year.

What are the key priority areas for this year’s national budgets?

The budgets from the three East African states appears to have been informed by the regional consensus on theme of promoting industrialisation. Driven to achieve this objectives governments have reshuffled its priorities towards agenda with Tanzania and Uganda pushing this through the five-year development plans while Kenya pushes its big four agenda.

Country

2018/19

2019/20

Tanzania
  1. Industrialisation
  2. Agriculture
  3. Social Services
  4. Infrastructure
  1. Industrialisation
  2. Infrastructure development and power generation
  3. Aviation sector

Kenya
  1. Infrastructure
  2. Education
  3. Information, Communication and Technology
  4. Poverty reduction and social protection
  5. Security for investment, growth & employment
  1. Education
  2. Energy, infrastructure, information, communication and Technology
  3. Public Administration
  4. Governance, justice, law and order
  5. National Security

Uganda
  1. Commercialisation of agriculture
  2. Industrialisation and productivity enhancement
  3. Financing private sector investment
  4. Minerals development
  1. Works and Infrastructure investment
  2. Debt repayment
  3. Security
  4. Education
  5. Mineral development

Who are the winners and losers?

Across the East African region, the major beneficiaries were the manufactures. The major beneficiaries in Tanzania are horticulturalists, manufacturers of packing materials and baby diapers. VAT has been exempted on imported refrigeration boxes used for horticultural farming while all imported horticultural products will be charged 35% instead of 25%.  Zanzibaris have a reason to celebrate as supply of electricity services from mainland Tanzania to Zanzibar will be zero rated. The tourist sector has also won big with reductions in taxes on some specific packages such as game hunting. While airline operators will have a sigh of relief airline tickets, flyers, staff uniforms and aircraft lubricants are VAT exempted.

Motorists and women will obviously take a brunt of the budget as the tax man has increased taxes on driving licence fees from Tsh 40,000 to Tsh 70,000 and registration card fees for all forms of motor cycles from Tsh 10,000 to Tsh20,000. The tax man has targeted women imposing 10% duty on locally produced synthetic hair whereas imported artificial hair will be charged at 25%. VAT on sanitary pads has been abolished.

In Kenya the manufactures are winners with a withholding VAT rate reduced from 6% to 2% and introduction of a refund formula which expedites VAT refunds and ensures a full refund of input tax credit rating to zero rated.  Agriculturalists have reason to celebrate with Ksh 1.0bln diversification and revitalisation of Miraa and Ksh 3.0bln for setting up the Coffee Cherry Revolving Fund, aimed at implementing prioritised reforms in the coffee subsector.  Digital employees have a reason to celebrate as they will enjoy an exempted tax on income earned under the Ajira Program. The measure is aimed at enabling over 1million youth to be engaged as a digital freelance worker. The health sector has some reasons for joy as an additional to Ksh47.8ln is allocated to expand access to Universal Health Coverage from 4 pilot counties to other counties.

Meanwhile drunkards and gamblers will continue to leak their wounds as they ache out an additional 10% in taxes is slapped on betting and 15% on tobacco and alcoholic drinks. Boda Boda and Tuk-Tuk riders will face an uphill task with amendments to the Insurance (Motor Vehicle third party risks certificate of insurance) rules to require all passenger carrying riders to have an insurance cover for passengers and pedestrians.

In Uganda, the works and infrastructure continue to enjoy a good share of the budget with Ush6.4trillion of the budget allocated to it.  The industrialists are perhaps the biggest winners with generous tax exemptions allocated for industrial parks expanded to 10 years for letting, leasing or expanding existing developers with capital of at least USD50Mln and operators with at least USD10 Mln capital.  There has been an introduction of income tax exemption on interest paid on infrastructure bonds such as listed bonds and securities. Removal of withdrawing on agriculture supplies and listing and other similar goods. Exemptions on aircraft insurance services, supply of services.  A beneficial owner and citizen have also been redefined to be in line with the East African Community Court ruling in the case of BAT Vs URA.   The importers of fresh or chilled or cooked potatoes, honey, granite, marble and ceramics are net losers with increased customs duties.

Amidst of all these changes in estimates, significant to note is that new creatives sources of tax revenues were presented.

Governments have perpetually faced narrow taxes bases with potentially same traditional sources facing the tax man. In recent years the government have developed affinity to indirect taxes, despite their regressive nature and inequitably targeting of the poor

What have been the trends?

Country

2017/18

2018/19

2019/20

Kenya

Ksh 2.3bln

Ksh 2.5bln

Ksh3 trln

Tanzania

Tsh 31.7trln

Tsh32.4trln

Tsh 33.11trln

Uganda

Ush 29 trln

Ush 32.7 trln

Ush 40.487trln

The trend shows that budgets estimates have been increasing over the years with this year’s budgets touted as the highest since independence. However, the actual budget out turns have fallen short of projections. Kenya, which is the biggest economy in the region has missed targets for the past seven years

In 2018/19 Tanzania recorded a shortfall in budget outturn only achieving 88% of its targeted revenue collection. This was attributed to a number of factors

  • Decline in domestic revenue
  • Tighter global conditions
  • Decline and delayed disbursement in government

The trends from previous budgets show that the government has been largely a net borrower and net spender. Governments rely heavily on domestic and external borrowing to fill its budget deficits. Very little is saved.

Generally, Government debt as a percent of GDP is used by investors to measure a country ability to make future payments on its debt, thus affecting the country borrowing costs and government bond yields.

Over the years the governments debt to GDP ratios have spiralled reaching record highs.  According to government statistics in Tanzania the debt to GDP ratio hit 34.2 % by end of 2017. The Bank of Tanzania reported that the external debt stock comprising of public and private sector debt amounted to USD 21,529mln at end of March 2019. Uganda’s debt to equity ratio was 41.2%.  Kenya’s debt to GDP ration was at a record 57.5% in 2017 and around 55 % in 2018.

Governments have constantly argued that their debt obligations are manageable and the current borrowing appetite is aimed at achieving a favourable debt mix of short term and long-term loans. The down side of appetite is that as government piles new debts, the maturity period of old debts is too short and puts a lot of pressure on government revenues to pay. In Uganda for example 11% of this year’s budget will be spent on debt repayment.

The debt burden is worsened by the near stagnant revenue growth, the Ugandan Planning Minister acknowledged in 2018. “Our tax base is not growing at the same rate,” he added, putting the tax to Gross Domestic Product (GDP) ratio at 14.3 per cent.

The government spends most of its money on recurrent expenditures such as salaries and its development budget on mega infrastructure such as roads, power generation and aviation have not been quick in generating commensurate revenues, leaving governments with perpetual financing gaps every budget year.

The question then which emerges is why increase budgets when the revenue targets for the previous years have not been met?

Do governments need to adopt a saving culture-amidst all.

As meeting domestic revenue targets becomes doggy and external aid and borrowing stringent, how can governments manage their budgets to ensure that some of the revenues collected are saved and used to cushion future deficits. The governments have options that can be considered.

Adopting a cost cutting

Cutting of nugatory public expenditures spent on running public administration can save governments massive recurrent expenditures on salaries and allowances. While Kenya has adopted a heavy devolution structure costing government billions of shillings to run Uganda has the largest cabinet in the East African region. The Ugandan government has rapidly created economically unviable local government districts, who rely heavily on central government subsidies to survive.

Adopting revenue saving culture

The government can adopt a revenue saving culture. Revenue management is largely a tax policy concern which hinges on economics that revenues from various sources should be spent in a sustainable manner to avoid long-term shortfalls and economic instabilities that might affect the overall economic tax base.

These views are reflected in Hugh Dalton’s ‘principles of maximum social advantage (Marginal Social Sacrifice theory) and  Arthur Pigou’s ‘principle of maximum social welfare benefits’ (Marginal Social Benefit)  theories of taxation and public expenditure which suggest that taxation (government revenue) and government expenditure as two key tools of public finance have to be balanced to achieve maximum social benefits. Neither excess is good for the society.

Sustainable economic growth can therefore be achieved when government balances its short term and long-term public revenue and expenditure needs.  The government does not need to exclusively spend on infrastructure or welfare benefits but it also needs to save and spend on strategic investment to safe guard its future revenue sources.

This saving culture should be embedded in a country’s budget policy and revenue expenditure management system and fiscal regimes governing expenditures of its revenue.

Investing in foreign government financial instruments

The governments can take the Japanese and Chinese approach of investing in foreign government financial instruments.  Globally, the Japanese and Chinese are among the highest investors in the United States government securities. Controversial as it may look, but by investing its wealth in secure foreign government bonds, the government can ensure that the dividends realised are ploughed back into the Country to support its economy.

This type of foreign investment has made it possible for the Japanese able to finance their domestic debt which is almost above 233% of GDP.  The other difference between Japan and other countries is that its debt is held by its Citizens.

Many other countries, including Greece, owe mostly to foreign creditors. However, most of Japan’s debt (including government bond liabilities) are held by its own citizen, so the risk of defaulting is much lower. Japan is still well-off because it can adjust interest rates at low levels so that repayment values stay low relative to the overall debt level.-Forbes

Introducing effective currency management

The governments can adopt the Egyptian model of devaluing its currency to ensure that the country exports more and attracts more foreign currency into the country than it spends in payment and servicing external debt. The attracted foreign income is invested into production to boost economic growth.  As an economy grows to higher level, it becomes able to generate enough revenues to pay off or reduce its debt burden.

Helpful Further Readings and references

  1. Afosa, K. (1985), ‘Financial Administration of Ancient Ashanti Empire’, The Accounting Historians Journal, Vol. 12(2), pp. 109–115.Google Scholar
  2. Blakey R. G. and Blakey, G. S. (1940), The Federal Income Tax, New York, Longman Green and Company.Google Scholar
  3. Crum, R. P. (1982), ‘Value-Added Taxation: The Roots Run Deep into Colonial and Early America’, The Accounting Historians Journal, Vol. 9(2), pp. 25–41.Google Scholar
  4. Garbutt, D. (1984), ‘The Significance of Ancient Mesopotamia in Accounting History’, The Accounting Historians Journal, Vol. 11(11), pp. 83–101.Google Scholar
  5. Jose, M.L. and Moore, C.K. (1998), ‘The Development of Taxation in the Bible: Improvements in Counting, Measurement and Computation in the Ancient Middle East’, The Accounting Historians Journal, Vol. 25(2), pp. 63–80.Google Scholar
  6. Kozub, R.M. (1983), ‘Antecedents of the Income Tax in Colonial America’, The Accounting Historians Journal, Vol. 10(2), pp. 99–116.Google Scholar
  7. Mann, H. (1984), ‘ Thus Spake The Rabbis-The First Income Tax?’, The Accounting Historians Journal, Vol. 11(1), pp. 125–133.Google Scholar
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What is state capture and its impacts on political governance in Tanzania

What is state capture and its impacts on political governance in Tanzania

By Moses Kulaba, Governance and economic analysis centre, Dar es Salaam-Tanzania

State capture can be simply defined as a way in which individuals, corporations, organizations or groups of organizations and interest groups such as political elites, business interests, cartels and criminal gangs influence government decisions, structures and processes through political or quasi political systems and structures with an intention of promoting, protecting and achieving their own interests.

There are two major types of state capture: These are spectrum state capture, which involves individuals having undue influence on decision making processes in government and Oligarchy, which involves organized cartels, organized groups of individuals and syndicates controlling and influencing government decisions and processes. Examples of oligarchies include the famous Russian Oligarchies and cartels include the South American (Colombia and Mexican) drug cartels such as Sinaola drug cartel under the leadership of Joaquin Guzman, famously known as ‘El Chapo’

The impact of state capture on the proper functioning of the state is enormous in a sense that state capture affects government’s ability to function and make proper decisions. State capture has also been with the famous term called kleptocracy, which is essentially stealing from the state coffers for private gain.

State capture leads to creation of a rent seeking state, where corruption shrives, becomes systemic and entrenched in government and public service. In a rent seeking state, key public services such as health, jobs are only received after paying bribes and ‘back shisi’ to government officials and those entrusted to serve the public.

It causes bad public spending as the corrupt secure lucrative public tenders for procurement and supply of essential goods and services to government. The procured supplies or goods may be over priced, of poor quality or never supplied at all.

It creates an unfavorable business environment where the politically connected businesses with influence on the national leadership and state organs manipulate, influence and secure government decisions, regulatory frameworks and protection in favour of their business interests.  Small legitimate businesses either seek protection of the big corrupt businesses or collapse under the weight of unfair competition.

It significantly affects the rules of justice, law and order where by individuals, corporations or groups ‘capture’ institutions of justice and influence judges and high ranking officials of the judiciary, law and order sector through bribes to protect or make decisions in favour of their private interests.

It also affects national security as the corrupt individuals, corporations or groups use their influence to infiltrate the system by ensuring their collaborators secure jobs in the government security apparatus. Through these connections and influence, top national secrets may be shared with these individuals, businesses or cartels for private gain. They are also able to use the government security apparatus and resources such as police, military and arms for protection.

Through illicit political party financing, election fraud and intimidation, state capture may lead to ascension to power of bad leadership.  This is achieved through financing political of political parties and sponsorship of candidates whom they deem to be in their favour. Once in power, the elected political leaders are influenced to make corruption deals, award tenders and protection as reciprocal gesture to their political god fathers.