United Republic of Tanzania: Selected Issues

Field: Economics, Econometrics and Finance (Social Sciences)

This Selected Issues paper was prepared as background to the 2016 Article IV consultation with Tanzania.The Article IV discussions focused on how to sustain high growth and implement the new government's priorities while preserving fiscal sustainability.The paper benefited from the authorities' comments. 2.Tanzania experienced macroeconomic stabilization and significant structural change over the last three decades, including two major waves of reforms, first in the mid-1980s and more importantly in the mid-1990s.Chapter I ("Productivity, Growth, Structural Reforms, and Macroeconomic Policies in Tanzania") shows that both reform waves were followed by total factor productivity (TFP) and growth spurts.Over the recent period, TFP growth decreased, which coincided with a less strong reform drive, and growth became more capital intensive.The paper suggests that a TFP-led growth model is superior and that vigorous reforms are needed to foster further structural transformation of the economy and sustain high productivity gains and investment.The paper also argues that fiscal and monetary policies can first and foremost contribute to macroeconomic stability, which is a prerequisite for maintaining economic growth.At the microeconomic level, through well-designed tax and spending policies, fiscal policy can boost employment, investment, and productivity. 3.Raising more revenue and spending well will be critical to implement the new government's priorities while preserving fiscal sustainability.Chapter II ("Tax Revenue Mobilization in Tanzania") shows that the tax-to-GDP ratio, at about 12 percent, is low, even by low income countries' (LICs) standards.Using the peer analysis and stochastic frontier approach, the revenue gap in Tanzania is estimated at about 4 percent of GDP in 2009-13-and 2-3 percent of GDP considering the increase in the tax revenue ratio in 2015/16-, implying a significant potential to raise revenue.The analysis suggests that closing this gap requires comprehensive tax policy and administration reforms.On tax policy, broadening the tax base for VAT and corporate income tax, adjusting specific excise rates regularly, and developing property taxation are proposed.On tax administration, cleaning up the taxpayer registration and accounting, upgrading the IT system, and strengthening compliance risk management are suggested. 4.Chapter III ("Benchmarking and Efficiency of Public Spending in Tanzania") provides an overview of public expenditure in Tanzania and its efficiency in a cross-country perspective, and shows that there is a significant room to improve public spending efficiency.Tanzania's total expenditure was below the average for LICs during 2010-14, and this finding broadly holds across expenditure categories, with the gap being larger for investment spending.The analysis suggests that Tanzania performs poorly in education and investment spending efficiency, while health spending efficiency appears to be in line with the average for LICs.Given Tanzania's social and development needs, improving spending efficiency would help reduce spending pressures.Proposed reforms include improving resource allocations in the education and health sectors and linking them to performance, and strengthening public investment management (PIM) institutions.