SPEECH BY THE MINISTER FOR FINANCEHON. BASIL P. MRAMBA (MP.), INTRODUCINGTO THE NATIONAL ASSEMBLY THE ESTIMATES

OF GOVERNMENT REVENUE AND EXPENDITURE

FOR THE FINANCIAL YEAR 2003/2004ON 12TH JUNE, 2003

INTRODUCTION:

1. Mr. Speaker, I beg to move that this esteemed House now resolves to debate and approve Government proposals for Revenue and Expenditure estimates for the Financial Year 2003/04. The Government budget has been consolidated into four volumes. Volume one presents revenue estimates, volumes two and three contain recurrent expenditure estimates for ministries, government departments, and regions, including urban and district councils. The fourth volume contains the development expenditure estimates for the ministries, government departments, regions, and councils. In addition, there is the 2003/04 Finance Bill.

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2. Mr. Speaker, before I table the 2003/04 budget, allow me to express my appreciation to all those who participated in the preparation and finalization of this budget in various ways. In particular, I would like to thank the Finance and Economic Committee of the Parliament and all other Committees, for keenly scrutinizing the budget estimates with a high standard of professionalism. The invaluable advice offered by these committees greatly assisted in finalizing the budget proposal being presented today.

3. Mr. Speaker, the budget preparation process involved consultations with a broad range of stakeholders, both within and outside the Government. Let me take this opportunity to thank the staff of various ministries, independent government departments, regions, councils, non-governmental organizations, the private sector, national and international organizations for their invaluable contributions to the preparation and finalisation of this budget. Furthermore, I would like to thank the Office of the Attorney General for

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preparing the bills and legal notices for this budget. I would also like to express my gratitude to my colleagues from the Ministry of Finance, in particular, the Deputy Ministers for Finance, Hon. Abdisalaam Issa Khatib (MP) and Hon. Dr. Festus Limbu (MP); the Permanent Secretaries, Mr. Gray Mgonja and Mr. Peniel Lyimo; and Deputy Permanent Secretaries, Mr. Ramadhani Khijjah and Mr. Wilfred Nyachia; and all Heads of Department and staff of the Ministry of Finance including all institutions under this Ministry. Let me also thank the Government Printer for the timely publication of this budget speech, the budget books and Bills related to this budget. Finally, my thanks go to the various experts and all who shared their insights and recommendations regarding policies in particular tax measures. Their views and comments have been taken into account in this budget.

4. Mr. Speaker, the Government has continued to use the budget as an instrument for implementing macroeconomic and fiscal policies,

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as well as community development policies in line with the Manifesto of the Ruling Party - CCM. In the fiscal year ending this month, there have been great achievements in economic growth and macroeconomic stability, as well as interventions for poverty reduction as noted by Hon. Dr. Abdallah Kigoda (MP) Minister of State, President’s Office-Planning and Privatisation, who comprehensively explained the economic policies, goals, achievements, and shortcomings in his speech to the National Assembly this morning.

5. Mr. Speaker, in this fiscal year we have witnessed the formation of a Joint Finance Commission for the Union Government, under Article 134 of the Constitution of the United Republic of Tanzania. This Commission comprises members from Tanzania Mainland and Zanzibar. Let me take this opportunity to congratulate Hon. William Shelukindo, the Member of Parliament for Bumbuli, for being appointed as the first chairman of this Commission. I would also like to

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congratulate the seven members appointed to the Commission. It is my expectation that this Commission will work with both Governments of the Mainland and of Zanzibar, in implementing its responsibilities in line with the Constitution of the United Republic of Tanzania and that all financial issues relating to the Union will be addressed accordingly.

6. Mr. Speaker, other important events that occurred during this fiscal year include Tanzania’s participation in the High-Level Forum on Harmonization of development assistance (ODA) that took place in Rome, Italy in February 2003. In that important gathering, His Excellency President Benjamin W. Mkapa who was the guest of honour, officially inaugurated the forum and participated in the discussions. Tanzania has been in the forefront in harmonization of processes related to aid delivery as detailed in the Tanzania Assistance Strategy (TAS). In October 2002, the International Monetary Fund (IMF) opened its first regional capacity building centre in Africa, the East African

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Regional Technical Assistance Centre (East AFRITAC) to provide technical assistance on financial and economic matters. The Centre with its headquarters in Dar es Salaam provides technical assistance to Eritrea, Ethiopia, Kenya, Rwanda, Uganda, and Tanzania. For the first time, our country has had an opportunity to host the International Investors Round Table Conference. The first international investors conference was held in Dar es Salaam on 17th July 2002 and the second one was held in Zanzibar on 27th May, 2003. We also hosted the Commonwealth HIPC Ministerial Forum in Dar es Salaam between 26 – 28 February, 2003. Currently, Tanzania is in the chair for this forum. These are important events for Tanzania’s economic development as they attract investments, increase revenue from tourist activities, increase employment opportunities, reduce poverty, and ultimately expand the tax base for Government revenue.

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7. Mr. Speaker, we can recall that in May 2003, by-elections were held for Members of Parliament and Representatives for seventeen Electoral Constituencies in Zanzibar and four Electoral Constituencies in Tanzania mainland. I would like to take this opportunity to congratulate all those elected as Members of Parliament and to welcome them to this Budget Parliamentary session. In addition, I would like to congratulate the four nominated members of Parliament for special seats from the ‘Civic United Front’ (CUF), namely Honourable Asha Ngede, Hon. Adelastela Mkilindi, Hon. Aisha Magina and Hon. Zamda S. Bozzen for being reinstated to the Parliament.

REVIEW OF IMPLEMENTATION OF BUDGETARY POLICIES FOR 2002/2003

Economic Situation

8. Mr. Speaker, the review of the implementation of the fiscal and macro-economic

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policy targets for 2002/03 reveals that Tanzania has continued to attain significant achievements. During the period under review, the economy grew by 6.2 percent in real terms compared with 5.7 percent in year 2001. The inflation rate fell from 5.2 percent in year 2001, to 4.5 percent in June 2002 and 4.2 percent by end-March, 2003. Official foreign exchange reserves increased from USD 1.3 billion at the end of March 2002 to USD 1.5 billion at the end of March 2003, equivalent to about seven and a half months of imports of goods and services. Regarding tax revenues, the improvements in the tax structure has led to an increase of revenue collection to about Shs. 100 billion per month at present, which is four times greater than that in the 1990’s.

9. Mr. Speaker, the main thrust of the fiscal policies for the year ending June 2002/03 included policies related to revenue and expenditure as well as foreign loans and grants. The objectives of these policies were to enable the Government to collect domestic revenue of 12.3 percent of GDP;

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allocate adequate resources to priority sectors; increase productivity; increase the per capita income; improve social and economic services; and to improve financial management systems including management of foreign and domestic debts. These policies aim at empowering individuals to participate in economic activities; providing support to the Private Sector through the Export Credit Guarantee Scheme (ECGS); specifically for non-traditional crops; and enhancing foreign reserves.

REVENUE10. Mr. Speaker, on the revenue side, the Government focused on increasing domestic revenue so as to gradually reduce dependence on foreign grants and loans. In order to enhance efficiency in revenue collection and to create a conducive environment for economic growth, the Government undertook several measures, namely: strengthening the administration of VAT; controlling tax exemptions issued to various beneficiaries; curbing tax evasion on imports,

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especially of petroleum products; improving the tax structure by introducing fiscal incentives for priority sectors and eliminating nuisance taxes; and reviewing suspended duty on imports with a view to enhancing the business environment.

11. Mr. Speaker, as regards non-tax revenue, the Government undertook specific measures to strengthen revenue collection by the Ministries and Government Departments under the retention scheme, with the objective of removing the current impediments. Other measures included preparing and implementing a strategy for harmonization and rationalization of local government taxes and levies so as to create a conducive environment, particularly in rural areas, for people to engage in productive activities as well as putting in place a predictable tax system so as to reduce transaction costs to both tax collectors and taxpayers. Further, in accordance with the EAC Treaty, the EAC Partner States have agreed to complete negotiations on launching the Protocol for the

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Establishment of Customs Union in November, 2003. 12. Mr. Speaker, during 2002/03 customs duty was revised and the changes included lowering tariff rates on selected kiln components from 15 percent to 10 percent, lubricating greases from 25 percent to 15 percent, pen nibs from 25 percent to 15 percent and introducing a tariff of 10 percent on imported mosquito coils. These changes were aimed at protecting domestic industries from unfair competition and eliminating discrepancies in the tariff structure.

13. Mr. Speaker, the Government has prepared a plan for the gradual elimination of suspended duties by 2007/08. As a result, suspended duties on various goods will be phased out yearly until they are completely removed by 2007/08.

14. Mr. Speaker, with respect to income tax, the Government amended the arrangement for assessing capital expenditure on investments by

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replacing 100 percent first year expensing of capital expenditure, with 50 percent first year expensing for all classes of assets, to be followed by 37.5 percent for class I investments, 25 percent for class II investments and 12.5 percent for class III investments.

15. Mr. Speaker, other measures which were taken include allowing interest deduction on capital loans; removal of the five year limit for carrying forward losses of investors; removal of withholding taxes on transport services for holders of a Taxpayer Identification Number (TIN); increase the minimum threshold of taxable income under PAYE from Shs. 45,000 to Shs. 50,000; increase of the minimum threshold for taxation of “benefit in kind” to employees from Shs. 1,000 to Shs. 50,000; removal of withholding tax on long term bonds of more than 3 years which are listed on the stock exchange; and introduction of withholding tax of 10 percent on non-full time Board Directors.

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16. Mr. Speaker, regarding VAT, several amendments were implemented in a bid to protect farmers’ incomes. Consequently, the procedure for refunding the VAT paid by farmers on transportation, processing and packaging material for export crops has been re-instated. VAT refunds are now effected through cooperatives or other farmers’ associations registered with TRA for VAT purposes. Such farmers are required to join cooperatives or other farmers’ associations as they might not have been registered for VAT individually.

17. Mr. Speaker, with respect to local government taxes, there are persistent complaints from the general public as well as local and foreign investors regarding the multiplicity of taxes and fees imposed by local governments authorities, both in urban and rural areas. Also, there has been an influx of licences and permit fees which have been used as sources of revenue contrary to the regulatory goal of issuing licences. The numerous taxes and the collections procedure have become

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a major annoyance for the public. Moreover, many tax collection bottlenecks pose a problem to society. In dealing with this situation, the Government prepared a strategy to guide districts and urban councils regarding new ways of approaching taxes and levies with the objective of lowering and rationalizing them. I will shortly announce measures to be taken in this regard.

EXPENDITURE

18. Mr. Speaker, in 2002/03 the Government reinforced its commitment to prudent management of public expenditures so as to attain the envisaged goals. The Public Finance and Procurement Acts passed by Parliament in 2001 have continued to be implemented keenly and have strengthened our performance. The procurement regulations are being reviewed in order to make them simple and user friendly. The Government continues to strengthen the Integrated Financial Management System (IFMS)

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so as to ensure revenue and expenditure reports are captured directly through the computer network which connects all Ministries, Central and Regional Government Departments.

19. Mr. Speaker, the cash budgeting system continues to be used and has turned out to be very useful in developing fiscal discipline. This system is constantly improved and currently funds are allocated on a quarterly basis to poverty reduction priority sectors as was the case in the previous fiscal year. Other sectors continue to receive monthly allocations. Thus poverty reduction sectors identified in the Poverty Reduction Strategy (PRS) have continued to receive priority allocations in the distribution of budget resources. In addition, resource allocations to those sectors have been published in the media. Beginning this fiscal year, the Government began paying taxes for all taxable procurements. Despite this resolution, problems cropped up in a number of sectors, specifically in the roads and water sectors, due to the fact that their budget estimates did not

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consider impacts on the new policy. In light of these difficulties, and cognizant that infrastructure is critical to boosting people’s incomes, in April 2003 the Parliament passed amendments to the VAT Act in order to remove this tax from infrastructure development projects undertaken by the government.

REVIEW OF BUDGET EXECUTION FOR 2002/03:

20. Mr. Speaker, In general, the budget trend for 2002/03 has been positive. Monthly domestic revenue has exceeded the targeted levels on average. Expenditures, on the other hand, have not performed well as expected due to the slow implementation of development projects and poor understanding of the procurement procedures, as well as delays in the disbursement of donor funds for a number of projects. Nevertheless, budget support has been received as projected, except in the case of the World Bank and the African Development Bank. Budget support from these two institutions has been below the projected

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levels due to delays in meeting the prior actions attached to these loans. Nevertheless, these funds are expected to be disbursed before the end of the current fiscal year as all actions have now been met.

21. Mr. Speaker, Tanzania has good economic relations with many developed countries and international financial institutions. However, due to historical reasons, there is still lack of local ownership to a certain extent. In view of this, information on aid flows is not adequate as most development assistance is channeled outside the exchequer system. It is however encouraging that many development partners have now accepted the need to harmonize procedures to improve aid effectiveness. The government continues to encourage all development partners to harmonize aid procedures, largely through the government’s budget system to ensure accountability and monitoring of the implementation of development projects.

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22. Mr. Speaker, during July 2002 – March 2003, actual collections of domestic revenue reached Shs. 901,546 million compared to estimates of Shs. 862,362 million. This level of collections was above the target by Shs. 39,184 million or 4.5 percent. This increase is attributed to VAT, especially for domestic goods and services, and income tax. The VAT collections on domestic goods and services were projected at Shs. 113,546 million during the period under review. Actual VAT collections reached Shs. 131,947 million an increase of Shs. 18,401 million or 16 percent compared to the estimates for the same period. The main reason for this increase was the efforts made by the VAT Department to improve efficiency in curbing tax evaders. With regard to income tax, collections reached Shs. 201,403 million compared to estimate of Shs. 175,290 million, representing an increase of Shs. 26,113 million or 15 percent. The major source of over performance of the income tax collections was P.A.Y.E.

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23. Mr. Speaker, customs duty collections were below the projected levels for the period under review. Actual collections reached Shs. 220,119 million below the estimated level of Shs. 234,295 million, a shortfall of Shs. 14,176 million. In addition, non-tax revenue collections reached Shs. 81,518 million which was higher than the target level of Shs. 74,317 million. In comparison to the previous fiscal year (2001/02), for the period of July to March, collections for this fiscal year were 17.3 percent higher than collections for the same period in 2001/02.

24. Mr. Speaker, during July 2002 – March 2003, grants and concessional financing for budget support reached Shs. 247,993 million when compared with pledges of Shs. 246,865 million, representing an increase of Shs. 1,128 million. Debt relief from multilateral financial institutions and Paris Club creditors under the enhanced HIPC Initiative amounted to about Shs. 80 billion. Nonetheless, grants and loans for development projects registered large shortfalls as only Shs.

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170,248 million was recorded to have been received which is 36 percent of the projected amount of Shs. 468,349 million. As I stated earlier, there is a high likelihood that a large share of assistance for development projects has been disbursed by various donors, outside the budget system and it takes a long time to reconcile the aid data. As previously stated, the government continues discussions with its development partners to ensure that all development assistance is either directly channeled through the government budget system or captured in government records as soon as disbursements are effected.

25. Mr. Speaker, for these reasons, the pace of development expenditure was not in line with expectations. Other reasons for the slow pace include the low capacity for project implementation and limited understanding of the new regulations for the procurement of goods and services. During the period from July 2002 to March 2003, expenditure reached a total of Shs.

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1,225,497 million compared to projections of Shs. 1,583,530 million. Out of this amount Shs. 989,068 million was recurrent expenditure and Shs. 236,429 million was for development expenditure. Of the recurrent expenditure, Shs.131,518 million was used on domestic and foreign amortization. The Wage Bill amounted to Shs. 299,278 million compared to estimates of Shs. 308,327 million. This represents a shortfall of Shs. 9,049 million arising from delays in introducing the new recruitment policy in the government. Development expenditure of Shs. 236,429 million for the nine month period is low as compared to estimates of Shs. 540,095 million, equivalent to a shortfall of Shs. 303,666 million or 56.2 percent.

26. Mr. Speaker, it may be recalled that Tanzania reached the HIPC Completion Point in November 2001, and qualified for external debt relief amounting to about USD 3 billion over the next 20 years. This relief will reduce the debt service burden on the Government’s budget in the future. Debts that have been cancelled include

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multilateral debts and Paris Club debts. The Government is negotiating with other non-Paris Club members with a view to securing debt relief that is in line with the Paris Club agreement. To date, only Kuwait has provided debt relief under the HIPC framework. China and India have cancelled some debts although not under Paris Club terms. The Government has initiated dialogue with Zambia and Libya but no commitments have been made to date. To a large extent, the debt service burden has been reduced.

27. Mr. Speaker, the performance of the budget for this fiscal year has been positive overall, although there are signs that some development projects were not implemented fully. In light of the current trend, domestic revenue is expected to reach Shs. 1,183,700 million at the end of June 2003, compared to previous estimates of shs. 1,172,297 million. Expenditures are also expected to reach the projected budget levels because actual disbursement data is being received at a faster rate in this final month.

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OTHER IMPORTANT LESSONS LEARNED DURING IMPLEMENTATION OF THE 2002/03 BUDGET:

28. Mr. Speaker, in addition to the above explanations, the implementation of the budget for 2002/03 raises a number of challenges, namely:

(i) 45 percent of the Government’s budget is still dependent on foreign aid;

(ii) Despite the upward trend, domestic revenue only accounts for 12.3 percent of GDP;

(iii) There are still numerous tax loopholes, which deny the Government a large sum of revenue;

(iv) The Government’s implementation capacity, particularly in accounting, engineering, and even supervision, is still limited and the pace of implementing development projects is lower than expected;

(v) Unemployment, especially of the youth in urban and rural areas, is high.

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These challenges and others of a similar nature have received serious consideration and remedial measures are being put in place as I will explain shortly.

BASIS, POLICIES AND OBJECTIVES OF THE 2003/04 BUDGET

29. Mr. Speaker, the main thrust of the budget for 2003/04 is to sustain macroeconomic stability targets which include:

(i) Attaining a real GDP growth rate of 6.3 percent in 2003 and 6.6 percent in 2004;

(ii) Reducing the inflation rate to 4.0 percent by end-June 2004, and thereafter to maintain an inflation rate

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consistent with our major trading partners;

(iii) Maintaining foreign exchange reserves at a level above 6 months of imports of goods and non-factor services;

(iv) Controlling the expansion of broad money supply (M2) consistent with economic growth and inflation targets; and

(v) Increasing the tax revenue to GDP ratio from 12.3 percent in 2002/03 to 13.3 percent in 2003/04.

30. Mr. Speaker, Government efforts to bring about economic and social development in the country continue to record successes. The economy is growing at an acceptable rate although the rate is still below the level required to rapidly eradicate abject poverty. It is also encouraging to note that macroeconomic stability has been sustained for quite some time and investments continue to rise in various sectors of the economy. Improvements in the social and

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economic sectors are on-going, new roads are being constructed while the existing roads are being repaired. Moreover, the Household Budget Survey (HBS) of 2001 revealed that income poverty has decreased slightly over the last decade. The outcome of the survey indicates that 19 percent of Tanzanians were below the food poverty line in 2000/01 compared to 22 percent in 1991/92. Similarly, about 36 percent of Tanzanians fell below the basic needs poverty line in 2000/01 as compared to 39 percent in 1991/92. The implementation of the Poverty Reduction Strategy has started to register successes particularly in primary education, health, water and roads sectors. Manufactured goods are now available at reasonable prices and in sufficient quantities compared to the 1990s.

31. Mr. Speaker, despite achievements attained to date, the rate of growth is still not high enough to ensure a rapid reduction of poverty. The productive sectors, especially agriculture which contributes about 50 percent of GDP and employs

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about 80 percent of Tanzanians, is still weak and requires immediate transformation. The Government has taken several measures to revamp the agricultural sector, including the preparation of the Agricultural Sector Development Programme (ASDP) and the Rural Development Strategy (RDS). It is high time that we start implementing the policy and the strategy so as to revive the sector. Also the industrial sector has not performed well and concerted efforts are needed to revamp it. Accordingly, a strategy for strengthening the industrial sector has been prepared. Moreover, our country does not provide adequate power and water supplies both for the industrial sector and domestic consumption. Power tariffs are still high and adversely affect industrial development in Tanzania. Indeed, it is important to address these problems and strengthen the sector to enable Tanzania to competitively benefit from the EAC, SADC, AGOA (US) and EBA (EU) markets.

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32. Mr. Speaker, discussions on establishment of a Customs Union for the East Africa Community are in final stages and it is expected that the Protocol on Customs Union will be signed in November this year. Areas under discussion include the common external tariff and the institutional, administrative and legal framework for the Customs Union. The Customs Union will enlarge the East Africa market, increase trade, attract investment for the three East Africa countries and ultimately stimulate the development of the peoples of these countries.

33. Mr. Speaker, macroeconomic stability has heightened hope for our country to achieve the Development Vision (2025). We should not be complacent, however, as a stable macroeconomic environment alone, for a poor country like ours, cannot alleviate poverty. We thus require a stable macroeconomic environment with higher economic growth rates, in order to raise per capita income. The Government recognizes this fact and has started to take measures, including motivating

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and enabling individuals to engage in income generating activities for their own welfare. Furthermore, the Government has decided to identify a few strategic areas as growth centres that will be given high priority in the Budget in order to speed-up economic growth and increase the capacity for the country to effectively fight poverty. Everybody now agrees that agriculture deserves to be accorded the first priority in this regard, as about 80 percent of Tanzanians depend on agriculture, while the sector contributes about 50 percent of GDP, and more than 50 percent of our export earnings. It also provides raw materials for our industries as well as a market for our industrial products. Hence, in addition to boosting production in agriculture, it is imperative that we also promote agro processing industries in order to enable people dependent on subsistence agriculture to diversify and get employment in the industrial sector.

34. Mr. Speaker, as will be elaborated by the Honourable Ministers of Agriculture and Food

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Security, Water and Livestock Development and Cooperatives and Marketing, the Agricultural Sector Development Strategy aims at:-

i) Enabling individuals to engage in business activities without hindrances and to allow them to sell their agricultural produce outside their Districts or Regions, and even to export their produce to other countries after going through simplified and transparent procedures;

ii) Earmarking and advertising land for commercial farming so as to attract investors;

iii) Improve access to credit. In this regard, the recently established export credit guarantee scheme that guaranteed cooperative unions has been very successful, and will be enhanced further. A new fund for

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guaranteeing micro-credit to small-scale farmers, small scale fishermen, small scale livestock keepers, small scale manufactures, and small scale business will be established;

iv) Initially, each district will be required to identify one food crop and one cash crop for special support through the Government Budget;

v) The Government will provide modern superior seeds to farmers at affordable prices. In addition, the Government will subsidize fertilizer prices for Rukwa, Mbeya, Iringa and Ruvuma Regions so as to boost maize production and eliminate the risk of famine in the country;

vi) Issues of land ownership will be addressed in a bill to be tabled in

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Parliament in October or November of this year;

vii) The tax systems in villages and towns will be reviewed with a view to increase villagers’ incomes and remove hindrances;

viii) To promote traditional irrigation systems;

ix) To enable small farmers to purchase farm inputs under Government guarantees as I explained earlier;

x) The Government will finalise plans to start a bank that will cater for the requirements of large and medium scale fishermen, livestock keepers and farmers;

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xi) The Government will introduce a fund to cater for livestock development starting with this budget.

Other strategies for reviving agriculture will be announced by the Honourable Ministers for Agriculture and Food Security, Water and Livestock Development, Cooperatives and Marketing, and Lands and Natural Resources.

35. Mr. Speaker, the Government will continue to implement and improve policies and plans aimed at achieving sustainable poverty alleviation, particularly in the sectors of agriculture, roads, health, education, and water, as well as in the improvement of services in rural areas. As I have explained, the Government has already started to take measures for the revival of agriculture, and plans to take similar measures in support of tourism, mining, commercial fishing, and small and medium scale enterprises in order to boost foreign exchange earnings and generate more employment opportunities with a view to

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alleviating poverty. The objective of all this is to sustain progress made in the respective areas and to rectify any shortfalls to ensure that the set targets as outlined in the CCM 2000 Election Manifesto and the Poverty Reduction Strategy are met. Overall, these measures are aimed at creating a conducive economic environment for the improvement of the welfare of Tanzanians.

36. Mr. Speaker, other areas to be given priority include, infrastructure development, micro-businesses with high employment potential, i.e small scale and medium scale industries, production for exports, and other services that will have short term impact on the economy so as to develop experience. The private sector is expected to play a key role in facilitating the achievement of these targets.

37. Mr. Speaker, you will recall that the Privatization Trust was established in 1997. This Trust was established with the goal of holding in trust Government shares that remain in privatized

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companies in order to ultimately transfer them into a Unit Trust, where they will be distributed to the wider public. The purpose behind this decision was to enable many people, especially those with low incomes, to participate in the privatization of state parastatals. The lifetime of the Privatization Trust will come to an end on 15 June 2003. Under the law that established the Trust, at the end of its existence it is supposed to be transformed into the Unit Trust of Tanzania. I would like to inform you that all preparations for the establishment of the Unit Trust of Tanzania have been completed, and the Unit Trust is expected to commence operations on 16 June 2003.

THE STRUCTURE OF 2003/04 BUDGET Revenue38. Mr. Speaker, during the financial year 2003/04, the Government plans to collect Shs. 1,393,026 million from domestic sources or 13.3 percent of the Gross Domestic Product. This amount of revenue represents an increase of 1 percent when compared with the projected

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amount of 12.3 percent for the current financial year. The Government aims at enhancing domestic revenue collection efforts so as to gradually reduce budgetary dependence on foreign aid. Accordingly the following measures will be employed to achieve the revenue target:

(i) To amend the tax system and administration so as to improve and put in place a conducive environment for paying taxes and to remove impediments to tax compliance. These changes are contained in the TRA five year (2003/04 – 2007/08) Corporate Plan, which will be implemented henceforth;

(ii) To strengthen revenue collection by Ministries and Government departments, especially those under the retention scheme;

(iii) To institute substantial changes in the taxation system of local governments;

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(iv) To amend various tax laws, including enacting a new income tax law that meets the present economic and business requirements;

(v) To introduce administrative reforms with a view to increasing productivity in revenue collection;

(vi) To curb tax evasion using various strategies; and

(vii) To ban the exportation of raw Tanzanite outside the country. Henceforth, Tanzanite exports will be restricted to cut gemstones. The Honourable Minister for Energy and Minerals will provide further explanations concerning the implementation of this government directive.

39. Mr. Speaker, due to the importance of improving the collection of domestic revenue and the achievements recorded from the implementation of the retention scheme, the

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Government will continue strengthening the scheme and ensure that revenue reports are accurate and produced in a timely manner.

40. Mr. Speaker, following good policies, and good management of the economy and the poverty reduction strategy, our relations with development partners and international financial institutions are much better than they had been in the past. In spite of our goal to be self-reliant, we still need foreign aid to assist us to build our capacity for self- reliance. Thus, Tanzania continues to receive foreign grants and concessional loans from Development Partners who have expressed their intention to continue supporting our effort in the war against poverty and to bring about development in our country. I would like to take this opportunity, on behalf of the Government and the people of Tanzania, to express our sincere gratitude to these countries and their people, and to the international financial institutions for the aid they have extended to us and their continued commitment to provide

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assistance. In the financial year 2003/04 we expect to receive grants and concessional loans totaling Shs. 1,175.821 billion from our Development Partners. From this amount, budget support amounts to Shs. 405.047 billion, which includes support from Canada, Norway, Denmark, Ireland, Finland, Germany, Sweden, Netherlands, UK and the EU, as well as the World Bank and the African Development Bank. Support to basket funds and projects is expected to be Shs. 667.349 billion, while we expect to receive HIPC Debt Relief from our Multilateral donors amounting to Shs.103.425 billion.

41. Mr. Speaker, the IMF-supported Poverty Reduction and Growth Facility (PRGF) is ending in June 2003. The Government has finalized negotiations with the IMF for another three year PRGF programme. The benefits of the PRGF include increasing our foreign reserves and assisting the Government to implement its economic policies. Furthermore, most donors depend on the IMF reports to assess economic

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policies pursued by countries they assist, as a prerequisite for continued support.42. Mr. Speaker, in line with the new National Debt Strategy, total new borrowing - domestic and foreign - for fiscal year 2003/04 is expected to reach Shs. 1,080 billion. Out of this amount, Shs. 631.9 billion is domestic loans and Shs. 448.2 billion is foreign loans. The bulk of the domestic borrowing will be used to redeem maturing Government Securities. Table number 4, contains details of loans expected for the fiscal year 2003/04.

EXPENDITURE

43. Mr. Speaker, the Government will continue to strengthen management and discipline in Government expenditure in order to ensure sufficient accountability. Government intends to amend the Public Procurement Act and the associated regulations to enhance accountability by separating the regulatory functions from the supervisory functions, and to strengthen capacity

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of the implementers. As for the Public Finance Act of 2001, the Government has improved its regulations in order to increase operational efficiency. Government will also continue to strengthen the application of the Integrated Financial Management System (IFMS) for preparation of the budget and to effect payments. This measure will assist Government to increase efficiency in the allocation of funds needed to procure equipment and services in a more transparent way. In the next financial year, Government will roll out the IFMS to the Offices of the Regional Administrative Secretaries and the National Defense Forces.

44. Mr. Speaker, in planning the budget allocation for the fiscal year 2003/04, the followings issues have been taken into consideration:

i) To continue giving priority in allocating financial resources to those areas that target poverty reduction and income

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generation, particularly agriculture, education, health, roads and water, and those which increase income through employment.

ii) To improve the agricultural sector as an important measure in implementing the poverty reduction strategy. Measures that have been undertaken in the 2003/04 budget include allocation of funds to finance the development of agricultural programmes at the district level. These funds will be disbursed directly to the accounts of agriculture departments in the respective district councils. Also, the Government has allocated funds to subsidize transportation costs of important agricultural inputs, especially fertilizer, so as to increase food crop production with a view to increasing food self sufficient. In addition, in cognizance of the success attained so far in the Export Credit

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Guarantee Scheme, the Government has allocated more resources for the scheme. The Government intends to increase the allocation of funds to this scheme for special projects focusing on economic growth, employment creation, and exports.

iii) The Government has allocated emergency funds for purchases of food, if such a need arises. Already, Lindi, Manyara and Mtwara regions, and some districts in west and central Tanzania have indicated the need for such assistance.

iv) The Government recognizes the problems facing small traders, including women, in securing loans from commercial banks for their businesses. In this regard, some amount of funds has been allocated in the 2003/04 budget to guarantee loans for this sector (small and micro enterprises)

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as I have said earlier. The Bank of Tanzania (BOT) in collaboration with the Small Industries Development Organization (SIDO) will manage this fund. The procedures and conditions governing the operation of this fund will be announced later.

v) The 2003/04 budget has set aside additional resources for the education fund so as to support children with academic ability but whose parents fail to pay schools fees due to poverty. This policy and its procedures of implementation have been made very clear by Ministry of Education and Culture. During this year a total of 6,019 children have benefited from this fund.

vi) In order to enable the District Commissioners to execute their duties more efficiently, allocated funds, with effect from next financial year, will be

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channeled directly to their respective districts and not through the Regional Administrative Secretaries. However, the Regional Administrative Secretaries will continue with the responsibility of monitoring and supervising expenditures in the respective districts. The Regional Administrative Secretaries will directly administer resources allocated to their offices only.

vii) The Government will continue adjusting the salary structure for Civil Servants. The 2003/04 budget has made a special allocation for this purpose, that will also include salary adjustments for Government institutions. The Minister of State, President’s Office, Civil Service Department will give more details on this.

viii) Village Government and Ward officials are a key link between the Central Government, Local Government and the

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people. Given this important fact, the Government, with effect from fiscal year 2003/04, will start paying salaries to village Government and Ward officials whose employment terms will be on contract basis. Implementation of this arrangement will start in January 2004, after completing the necessary preparations. The Minister of State, President’s Office, Regional Administration and Local Government, and Minister of State, President’s Office, Civil Service Department will provide more details on this.

ix) This budget has allocated 4.5 percent of external revenue from programme assistance to support the budget of the Revolutionary Government of Zanzibar. This is in line with the consensus reached in the past. It is hoped that the Joint Finance Commission of the Union which has been established, will play a key role

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in advising our Governments on a permanent arrangement for allocation of the Union financial resources.

x) In line with the decision of Government to set aside domestic revenue resources for the construction of regional road networks in the country, the 2003/04 budget has allocated a total of Shs. 44.5 billion for this purpose. As a whole, the road sector has been allocated Shs. 126.6 billion during 2003/04 from domestic revenue and foreign aid.

xi) During the fiscal year 2003/04, Government has set aside Shs. 4,000 million for payment of terminal benefits to employees who will be retrenched in certain key parastatal organizations under privatization, and employees who will be retrenched from District Councils.

xii) Mr. Speaker, you may also wish to note that the budget for 2003/04 has set aside

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Shs. 5,000 million to start construction work of the new National Assembly Hall.

xiii) In recognition of the importance of sports, the 2003/04 budget has set aside Shs. 5,000 million to meet the initial costs of construction of a modern sports complex.

xiv) Given the recent increase in incidences of crime, the 2003/04 budget has increased allocation to security agencies to enable them to confront all sorts of crimes. The Police Department is allocated Shs. 70,786 million as compared to Shs. 55,176 million allocated in this fiscal year.

xv) The Government is intending to create an environment whereby pensioners’ benefits will be improved and all nuisances related to their pension payment will be addressed. Beginning next fiscal year, Government will increase the minimum pension entitlement to

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reach Shs. 20,000 per month. Furthermore, other levels of pension entitlements will be adjusted accordingly. However, this increase in pensions will not involve amendments of the Pensions Act and therefore lumpsum payment of pensions will cease. The Government will continue with the existing arrangements of six months payment to pensioners, and will continue to improve record keeping. The Government decided to take this measure on account of the invaluable contribution of pensioners while in service and also taking into consideration the outcry of both the pensioners and honourable members of parliament.

THE STRUCTURE OF 2003/04 BUDGET ESTIMATES

45. Mr. Speaker, in line with economic policies and objectives explained earlier, on the basis of

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the existing tax structure, the Government projects revenue collections totaling Shs. 1,388.63 billion.

46. Mr. Speaker, on the expenditure side, for the fiscal year 2003/04 expenditure is projected at Shs. 2,607.21 billion. Considering the expected revenue of Shs. 1,388.63 billion based on the existing tax structure, a gap of Shs. 1,218.6 billion emerges. As I explained earlier on, total projected grants and concessional loans (including debt relief) amounts to Shs. 1,175.82 billion. These external financial resources from development partners reduce the gap to Shs. 42.78 billion.

47. Mr. Speaker, the Government intends to drawdown its reserve with the Central Bank by Shs. 21.36 billion. In addition, in the fiscal year 2003/04, the Government intends to realize Shs. 17.0 billion from sale of some of its shares held in public enterprises. These measures reduce the gap to Shs. 4.41 billion. This gap will be covered

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from tax reform measures and other sources of Government revenue.

OUTCOME OF THE TAX SYSTEM REFORMS FOR 2002/03

48. Mr. Speaker, before explaining the measures which the Government is planning to take on tax reform, tax law and tax procedures, I would like to briefly explain the outcome of the implementation of the 2002/03 revenue measures.

49. Mr. Speaker, in the 2002/03 budget, the Government undertook certain measures that were aimed at increasing Government revenues and creating a conducive environment for investment and to combat tax evasion. The measures have shown positive results, which include:-

(i) Importation of modern processing equipment for oil seeds such as palm oils, groundnuts, simsim, cotton oils and sunflower has

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started. Importation of such processing equipment has increased the demand for oil seed products and now there is a shortage of oil seeds in the local market. In addition, such measures have contributed to alleviation of problems faced by peasants in accessing markets for their products. I would like to take this opportunity to request the peasants to continue producing these farm produce in large quantities because there is now a reliable market. Also, this imported processing equipment will enable our domestic oil processing industries to compete in the harmonized East Africa market, as well as reduce the importation of olein oils.

(ii) Improvement of the control of tax exemptions following the introduction of the Treasury Voucher System (TVS). To a great extent this system has helped to control requests for tax exemptions by non-government organizations and civil servants.

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Within the first six months (January – June) of its operation, the value of tax exemption through TVS is expected to be Shs. 1,500 million as compared to the estimates of Shs. 13,500 million (equivalent to 11% of the estimates).

(iii) Increase of Government revenue following the decision to pay taxes on all Government purchases. The Government revenue collection reached Shs. 901. 854 billion in the period of July, 2002 – March 2003, an increase of 18.1 percent, as compared to Shs. 763.6 billion collected in the same period in the fiscal year 2001/02.

(iv) Due to changes made in the fuel levy, the Road Fund managed to collect more revenue to cater for its road maintenance activities. The revenue from this source increased from Shs. 41.7 billion in the period of July, 2001 – April 2002 to Shs. 46.8 billion for the same

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period in fiscal year 2002/03, representing an increase of 12.2 percent.

(v) Increase of Government revenue resulting from the decision to impose a 5 percent excise duty on mobile phone services. Up to the month of December 2002, this measure realized an amount of Shs. 2,177.2 million which is beyond the annual target of Shs. 2,000 million by 9 percent.

REFORM OF THE TAX STRUCTURE, FEES AND REVENUE MEASURES

50. Mr. Speaker, in an effort to improve the tax structure and tax administration, I propose to take various measures in the following areas:

(a) The Customs Tariff Structure(b) The Income Tax Structure(c) The Value Added Tax Structure(d) The Excise Tariff Structure(e) The Stamp Duty Structure(f) Levies and Fees collected by the Local

Government54

(g) Levies and Fees Collected by Ministries and Government Institutions

(h) Control of Petroleum Taxes(i) Control of Tax Exemptions(j) Amendment of Various Laws

The Customs Tariff Structure51. Mr. Speaker, with respect to the customs tariff structure, I propose to make the following changes:

Tariff Rates:

I propose to adjust import tariff rates for selected goods and raw materials. The proposed new rates of import duty compared with current rates are as follows:No. Description of Goods Current

Tariff RateProposedTariff Rate

1. Plastic Toothpaste Tubes (HS Code 3923.90) 25% 15%

2. Radial Tyres for Buses and Trucks 15% 10%

3. Motor Vehicles Spare Parts 15% 10%

4. Completely Built Trailers 0% 10%

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5. Bleached Cotton Cloth 10% 15%

6. Enzymes (HS Code 3507.10 and 3507.90) 15% 10%

7. Pigments used for Manufacture of Paints (HS Code 3212.90)

25% 15%

8. Mosquito Coils 10% 15%

9. Mosquito Nets 0% 10%

10. Other Printed Matter (HS Code 4911.99.00)

0% 10%

11. Petroleum Jelly 0% 15%

12. RBD Refined Olein (fractionated and refined)

10% 25%

13. RBD Refined Stearin (fractionated and refined)

10% 15%

14. Unassembled Chassis of Buses fitted with engines

15% 0%

15. Walkie talkie 25% 0%

I propose to exempt customs duty for water drilling machines and equipment.I also propose to abolish the requirement for tourist hunters to pay 5 percent import duty monthly on temporary importation of guns.

These measures are expected to promote fair competition between imported and domestically produced goods, and bring the

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tariff structure in line with the principle of degree of processing. They are also intended to promote tourism and make available the supply of water to the people.

Suspended Duty:

52. Mr. Speaker, in this area I am proposing to make the following changes:(i) To abolish suspended duty of 10 percent on

edible oil in "Crude Stearin" form used in the manufacture of soap.

(ii) To abolish suspended duty on edible oil in "RBD Refined Stearin" form used in the manufacture of soap.

(iii) To reduce suspended duty on petroleum jelly imported from the East Africa Community (EAC) Partner States from 20 percent to 10 percent.

(iv) To amend suspended duty for goods imported from the EAC in order to ensure that the total tariff rate for such goods does not exceed the total tariff rate (import duty

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plus suspended duty) for goods imported from outside the EAC. The amendments will be effected to 10 categories of goods.

(v) To amend the Third Schedule to the Customs Tariff Act of 1976 in order to provide customs duty and suspended duty exemptions on jute bags used for packing wattle exports.

These proposals are intended to encourage utilisation of locally produced raw materials and promote fair competition for goods imported from within and outside EAC. These changes also take into account the agreement reached with the IMF on the Poverty Reduction and Growth Facility Programme (PRGF) and with EAC Partner States. All these measures are expected to earn the Government new revenue of Shs. 133.8 million.

The Income Tax Structure53. Mr. Speaker, I am proposing to repeal the current Income Tax Act No.33 of 1973 and enact a

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new Income Tax Act. The aim of this measure is to put in place a new law which will cater for the modern economic and business environment. The current Income Tax Act has a number of shortcomings which makes it difficult to administer. The new Act will become operational from 1st of January 2004. This measure has no immediate revenue implication, but is expected to earn the Government more revenue in the future.

54. Mr. Speaker, in order to remove impediments in the fisheries sub-sector, and the problem of smuggling of fish, I propose to reduce withholding tax on sale of fish from the current 2 percent to 1 percent.

55. Mr. Speaker, alongside the proposed new Act, I propose to adjust presumptive income tax rates as follows:

Sales Turnover (shs.) Proposed PresumptiveIncome Tax Rate (shs.)

0 - 3,000,000 20,000 per year

3,000,001 - 7,000,000 50,000 per year

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7,000,001 - 14,000,000 165,000 per year

14,000,001 - 20,000,000 385,000 per year

This measure will reduce tax inconveniences to small scale businesses. Currently they are paying presumptive income tax with a minimum Shs. 3,000,000 per year. This measure will have no significant effect on government revenue in the fiscal year 2003/04 but it will provide an enabling environment for expanding the tax base.

The Value Added Tax 56. Mr. Speaker, in this area I propose to make the following amendments:(i) To abolish Value Added Tax (VAT) special

relief for vehicles imported or purchased by non-religious NGO's, in order to curb tax evasion.

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(ii) To shift milk packaging from Second Schedule of the VAT Act of 1997 to the Third Schedule of the same Act, because it was misplaced in the Second Schedule.

(iii) To amend Section 7 of the Third Schedule to the Value Added Tax Act of 1997 in order to also include the sub-contractors employed by the mining companies in the VAT Special Relief. These amendments have considered the nature of mining activities which require different specialized skills and therefore the need to engage sub-contractors to undertake various mining activities. In this connection, I propose that the mining sub-contractors be accorded the same VAT special relief accorded to the mining companies.

(iv) I propose to include ambulances in the item 5 to The Third Schedule of the VAT Act since they are also part of medical equipment.

(v) To delete Section 11 to the Third Schedule of the VAT Act of 1997 which provides for VAT special relief to NGOs since item 9 of the

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same Schedule already provide special relief to the same.

These amendments are aimed at improving the Value Added Tax structure and minimizing loopholes for tax evasion. These measures have no implication on government revenue for the financial year 2003/04.

The Structure of Excise Tariff 57. Mr. Speaker, in this area, I propose to make amendments in four major areas and take specific measures as follows:-

(i) I propose to adjust for inflation, the specific excise duty rates on the following products:-(a) Carbonated soft drinks from the

current Shs. 35.70 per litre to Shs. 37.50 per litre.

(b) Beer from the current Shs. 220.50 per litre to Shs. 232.00 per litre.

(c) Wine produced with at least 75 percent locally grown grapes content

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from the current Shs. 350.00 per litre to Shs. 367.10 per litre.

(d) Wine produced with less than 75 percent content of the locally grown grapes from the current Shs. 708.00 per litre to Shs. 743.40 per litre.

(e) Spirits from the current Shs. 1,050.00 per litre to Shs. 1,102.50 per litre.

(f) Cigarettes containing tobacco of length not exceeding 70 millimetres, with the domestic tobacco content exceeding 75 percent from the current Shs. 3,601.00 per 1000 cigarettes to Shs. 3,781.05 per 1000 cigarettes.

(g) Cigarettes containing tobacco of length equal to 70 millimetres or more, with domestic tobacco content exceeding 75 percent from the current Shs. 8,495.50 per 1000 cigarettes to Shs. 8,920.30 per 1000 cigarettes.

(h) Other cigarettes containing tobacco from Shs. 15,435.00 per 1,000

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cigarettes to Shs. 16,206.75 per 1,000 cigarettes.

(i) Cut rag/filler from the current Shs. 7,794.00 per kilogramme to Shs. 8,183.70 per kilogramme.

(ii) I propose to introduce excise duty at a rate of 15 percent on imported and locally manufactured plastic bags. The objective of this measure is to reduce health and environmental hazards. It is the Government’s intention to phase out the use of disposable plastic bags which are not biodegradable and encourage the use of paper bags or durable plastic bags.

(iii) I propose to reduce the excise duty on Liquefied Petroleum Gas (LPG) from the current Shs. 228.00 per kilogramme to Shs. 114.00 per kilogramme. This measure will facilitate environmental conservation since the majority of the people in Tanzania are using firewood and charcoal in cooking and

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they will now be encouraged to use LPG instead of firewood and charcoal.

(iv) I propose to increase the excise duty on mobile phones airtime from the current 5 percent to 7 percent in a move towards harmonization with other East Africa Community countries.

These measures are aimed at harmonizing tariffs gradually among the East Africa Community Partner States to earn revenue and protecting the environment. This measure is expected to earn the Government new revenue to the tune of Shs. 4,267.2 million for the fiscal year 2003/04.

The Stamp Duty Structure58. Mr. Speaker, I propose to abolish stamp duty on sales of fish. The aim of this measure is to accord the same treatment to fisheries products as those provided to agricultural produce.

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Local Government Fees and Levies 59. Mr. Speaker, despite the Government efforts to reform the sources of revenue for local authorities and its collection mechanisms, still there are complaints from the ordinary people and business entities on the nuisance caused by revenue collectors. There are problems of multiplicity of levies and fees to the tune of 60 in number, the majority of which are of nuisance in nature and have exhorbitant rates. Apart from discouraging the taxpayers, they also weaken its administrative capacity. In view of this, I propose to abolish a number of levies and fees charged by Local Governments and remain with very few of them which are beneficial to the people in rural and urban areas. Mr. Speaker, in doing so, we will review the following levies and fees namely:-

(i) All fees that are levied to poor people for instance bicycle and pulled carts levies, licence for petty businesses;

(ii) All levies and fees whose collection costs exceed the revenue yield;

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(iii) All levies, taxes and fees that are nuisance to the people for instance the burial permit fees in urban areas.

60. Mr. Speaker, together with these measures, it is proposed that taxes and levies should not act as barriers in the productive sectors and especially the agricultural, fisheries and livestock sectors as well as the small scale industries. The directive by the Government that levies on the agricultural produce should not exceed 5 percent of farmgate price must be complied with; the produce should not be taxed more than once, for instance if produce cess has been levied on beans at source, they should not be taxed at the destination. No other levies should be imposed on the same commodity when it enters the market place as the seller of same beans had already paid the business licence to operate at the market.

The aim of these measures is to reduce nuisance fees to the people so as to allow them to

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engage fully in the developmental activities. The levies and fees to be retained are those that can be collected efficiently, which are familiar and acceptable, also encourage compliance and finally enhance relationship between the people and local authorities. These measures will not significantly affect the revenues of urban and district councils although there were many taxes, because the actual revenue from these sources was very small. Therefore the sources of taxes, levies and fees for the local authorities which are to be retained are as shown here below:

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1 Income or Poll Taxes Forest Products Licence Fee 6 Sales or Rent of Council Assets Development Levy (money to be or Products retained at village level) Fishing Vessel Licence fee

Rent of Council Houses2 Product/Sales Taxes Liquor Licence fee

Rent of Council VehiclesCrop Cess -Cap of 5% of price to be Taxi Licence feestrictly enforced Rent of Other Council Assets

Business Licence fee (consolidated)Livestock Auction Fee 7 Taxes Shared with Central

Gun & Bullet Licence (including traditional gun) GovernmentPlying fees

5 Service Charges Hunting Licence3 Asset/Property Taxes

Abattoir Fees 8 Fines and PenaltiesProperty/ Building Tax

Market Fees (including livestock markets) Fines and Penalties4 Regulatory Fees/Licences/Permits

Straying Animal penaltyScaffolding Fee

PROPOSED SOURCES OF REVENUE FOR DISTRICT AND MUNICIPAL COUNCILS TO BE RETAINED

Corrections: (i) Development levy is abolished; (ii) Village Development contributions (money to be retained at village level) Levies and Fees Collected by the Central Government and Other Government Institutions:

61. Mr. Speaker, in this area I propose to adjust rates on certain fees and levies collected by the Central Government and its Institutions. The aim is to reduce tax burden to tax payers. This measure will not lead to reduction in Government revenue, but will enhance revenue collection. Moreover, the Ministry of Industries and Trade is reviewing the business licensing system with a view to removing nuisance ones to both local and foreign investors. This is also consistent with the Parliament decision to have one stop Licensing Centers.

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Gaming Licence Fees62. Mr. Speaker, games of chance sector is one of the potential areas for Government revenue generation. Currently, under the Business Licensing Act, 1972 all business licences are issued by the Ministry of Industries and Trade. Meanwhile, under section 13(1) of the Gaming Act, 2003 the Gaming Board of Tanzania is empowered to issue gaming business licences. I propose that the Business Licensing Act be harmonized and rationalized with the Gaming Act 2003 to remove duplication and enable the Gaming Board of Tanzania, which is responsible for regulating gaming activities to effectively perform its functions by issuing and collecting gaming business licences and fees.

Measures to Control Tax Evasion on White Petroleum Products:

63. Mr. Speaker, despite various measures taken to plug loopholes, the petroleum sector is

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still prone to tax evasion. In order to fight this vice I propose to take eight measures as follows:-

(i) All petroleum products imported into the country shall have their taxes fully assessed at the point of entry and the importers will be issued with invoices for payment of these taxes;

(ii) The importers shall be granted a grace period of 15 days from the date of arrival of the consignment to finalize payment of all taxes involved;

(iii) All imported petroleum products shall be recorded through flow meters, which will be soon installed at the port;

(iv) As for the regions which shares the boarders with Kenya, special administrative arrangements for the importation of petroleum products will be put in place and monitored

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closely by the Tanzania Revenue Authority. In the event of this arrangement proving a failure, other alternative measures will be taken;

(v) All transit petroleum products imported into the country, shall be transported first to the designated depots close to the exit border. All taxes shall however, be payable upon entry, and later the importer shall be refunded the taxes paid after providing evidence to the Tanzania Revenue Authority that the said products have actually been exported out of the country. In the event that petroleum products are exported within a period of 15 days, no taxes shall be payable;

(vi) The provision for issuing of Bond on petroleum products is abolished;

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(vii) Beneficiaries of tax exemptions shall be required to buy petroleum products from pump stations or depots designated by the Tanzania Revenue Authority for that purpose;

(viii) Companies importing petroleum products shall be required to register with the Customs Department of the Tanzania Revenue Authority;

As explained earlier on, the purpose of these measures is to control chronic evasion of taxes on petroleum products and to safeguard Government revenue. It is therefore not anticipated that the Government revenue will be reduced, rather, we expect a large increase in revenue. Together with these measures, the procedure for marking petroleum products (Biocoding) which has shown tremendous results, shall be enhanced throughout the country.

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Reduction and Control of Tax Exemptions:

64. Mr. Speaker, the Government has continued to monitor closely this area in order to ensure that tax exemptions are minimized to a great extent and also to ensure that the granted exemptions have a proper mechanism in place to administer them in order to plug loopholes of tax evasion.

65. Mr. Speaker, during this financial year 2002/2003 I introduced the Treasury Voucher System for Non-Religious Non Governmental Organizations (NGOs) which are entitled to tax exemptions in order to control exemptions, which has proved to be very successful.

66. Mr. Speaker, on the basis of this experience, I propose to take three measures as follows:

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(i) To revoke all Government Notices (GNs) granting exemptions which were issued prior to 1997. I shall grant a grace period up to September, 2003 so that all those with genuine reasons for continuing with this privilege to present their case to the Ministry of Finance. Otherwise, all tax exemptions granted through GNs which were issued prior to 1997 will cease to be valid from 1st

October, 2003.

(ii) As a result of the success shown in the implementation of the Treasury Voucher System, I propose to include Religious Organisations in this system. Currently, the Non-Religious NGOs and Civil Servants are the only groups included in this system. Nevertheless, for Religious NGOs the Treasury Voucher System will start on 1st

October, 2003 so as to grant ample time for preparations. I wish to thank all Religious organizations who advised the Government on how to tighten controls in this area.

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(iii) I propose to abolish tax exemptions granted to Non-Governmental Organizations on motor vehicles in the HS code 8703 and 8702.10.20 and 8702.90.20 with engine capacity of more than 3000 c.c. The aim is to make those who can afford to buy and operate such luxurious motor vehicles to contribute to the Government coffers.

These measures are not expected to increase or decrease Government revenue, but are aimed at controlling tax exemptions in order to safeguard Government revenue.

Other Taxes:67. Mr. Speaker, I propose to establish a Livestock Development Fund and impose a 15 per cent levy on exports of raw hides and skins. The aim of this measure is to encourage local processing of hides in order for the country to benefit from employment creation and earn more foreign exchange as a result of value addition.

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This measure is expected to earn the Government Shs. 1,080 million. However, the proceeds from this levy will be deposited in a Special Fund for the development of the Livestock Sector in the country.

Amendments of other Tax Laws:68. Mr. Speaker, I propose to review miscellaneous tax laws with the aim of updating them and simplifying their administration. Amendments to be effected are detailed in the Finance Bill, 2003.

Effective date of these measures:69. Unless otherwise stated, all revenue measures shall become effective from 1st July, 2003.

Summary:70. The tax measures proposed and their outcome in terms of revenue are summarized as follows:-

Shs. Million

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(i) Amendment of Customs Tariff Structure 133.8(ii) Amendment of Income Tax 0.0(iii) Amendment of VAT 0.0(iv) Amendment of Excise Duty 4,267.2(v) Fees and levies collected by other Ministries,

Departments and Local Government. 0.0 (vi) Control of Tax Exemption of White Petroleum products 0.0

(vi) Reduction and Control of Tax Exemption 0.0Total 4,401.0

The net additional revenue of Shs. 4,401.0 million bridges the financing gap explained earlier and the budget for 2003/2004 is fully financed.

THE BUDGET FRAME FOR 2003/04

71. Mr. Speaker, on the basis of the budget structure explained above, the budget frame for 2003/04 will be as follows:

BUDGET FRAME

Revenue TShs. Millions

A. Domestic Revenue 1,393,026

(i) Tax Revenue 1,276,305(ii) Non-Tax Revenue 112,320

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(iii) New Revenue 4,401B. Foreign Loans and Grants

(including HIPC)1,175,82

1C. Drawdown on reserves including

domestic borrowing21,358

D. Privatisation proceeds 17,000Total Revenue 2,607,20

5

Expenditure E. Recurrent Expenditure 1,799,76

5(i) Public Debt 408,600(ii) Ministries 1,014,815(iii) Regions 29,000(iv) Special Expenditure 56,376 (a) Parastatal wages 3,617 (b) Anti- Corruption Campaign 857 (c) Local Government subventions

4,000

(d) Joint Finance Commission 700 (e) Retrenchment 4,000 (f) Government wages 34,516 (g) Contingent Proper 8,686(v) Local Government 290,974 (a) Urban 54,088 (b) Councils 236,886 F. Development Expenditure 807,440 (a) Local Domestic 140,091 (b) Foreign 667,349Total Expenditure 2,607,20

5

CONCLUSION

72. Mr. Speaker, this budget frame shows that the Government Budget is still largely dependent

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on aid. Nearly 45 percent of this Budget depends on donor grants and foreign concessional loans. We will change this situation only when we raise domestic revenue to a higher level relative to GDP. The Third Phase Government has made major economic and institutional reforms, as well as improvements in Tax Administration. Currently, domestic revenue collections have quadrupled the level of collections attained in 1995. However, these collections are still insufficient to cover the Government’s Budget. This is still a problem, but, it is also a sign of improvement. The Budget for 2003/04 is four times larger than the 1995/96 budget. This means that the Government is now undertaking more activities than it was in 1996. The sectoral programmes in health, education, roads, water, agriculture amongst others, are now almost four times bigger than they were in 1996. The bigger part of these programmes is funded by bilateral donors, the United Nations Agencies, concessional loans from the World Bank and the African Development Bank and others.

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73. Mr. Speaker, in this context, the use of foreign assistance is not a bad idea if it is intended to support education, health services, roads, safe and clean water, and food security to our people. Even some countries in Europe and Asia that are now developed also benefited from foreign assistance and World Bank loans. What is important is to properly and effectively utilize the assistance we receive for building our own capacity for self sustainance. Furthermore, it is necessary to recognize that we are in transition from a small economy with low production capabilities to a developed economy, hence requiring heavy investments and robust strategies to cope with the challenging demands. As we all know, you cannot plant a seed and expect to harvest on the same day, instead you allow for the passage of time before harvest. If we effectively utilize the assistance that we now receive, we can surely improve the economic environment and promote faster growth and thus gradually graduate from aid dependency.

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74. Mr. Speaker, in order to build a self sustaining economy, we need to implement the following:

Direct grants and concessional loans to areas that strengthen capacity for self-reliance;

The people’s mind set must change so that they are more proactive and creative for solving their problems instead of seeking assistance for everything;

Work discipline, whether for employed or self-employed individuals, is an important element for developing capacity for self-reliance;

Our plans at all levels, starting with the grass-roots to the national level, should target at activities that have the potential to yield quick results.

The Government on its part is determined to gradually phase out dependency, particularly in recurrent expenditure. For a poor country like ours, dependency on

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foreign assistance for financing development projects is justified, except that the assistance must be directed to projects that support our endeavours for building capacity for a self sustaining economy.

75. Mr. Speaker, the budget that I am presenting to your Esteemed House is aimed at dealing with the various nuisances that face our people as well as creating a conducive environment for them to freely engage in economic activities for their own development. This budget is especially targeting at empowering the disadvantaged, starting with people in our villages, most of whom are peasants. Moreover, this budget has been directed at improving the business environment for petty traders, fishermen, poor people who cannot afford the cost for educating their children and orphans who aspires to continue with their studies. This budget has also addressed the concerns of retired citizens and other groups of our society. The major issue this

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budget has been able to address is to abolish a bigger part of nuisance taxes, levies, duties, etc. and other hassles that our people in villages and cities are facing everyday.

76. Mr. Speaker, this budget has seriously taken into account the valuable advise from Honorable Members of Parliament, especially during the Finance and Economic Committee deliberations. In addition the budget has considered the various proposals and advises given by professionals, the business community, industrialists, tourist operators and many others. I wish to thank them all for their comments and advice.

77. Mr. Speaker, I beg to move.

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Table No. 1Year 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03*1. Exports 519.4 682.9 763.8 752.6 588.5 543.3 714.2 816.1 827.32. Imports 1,309.3 1,340.5 1,212.6 1,148.0 1,382.2 1,368.2 1,389.4 1,560.5 2,242.73. Trade Balance -790.0 -657.6 -448.8 -395.4 -793.6 -825.0 -675.2 -744.4 -1,415.44. Pertoleum Imports 149.0 193.8 158.4 173.0 126.8 148.1 163.9 220.7 282.65. Pertoleum Imports as % of Exports 28.7 28.4 20.7 23.0 21.5 27.3 23.0 27.0 34.2

Note: Statistics have been revised right after the computerisation of the Customs Department of the Tanzania Revenue Authority

Balance of Payments Statistics for 1992 - 1993 has been revised due to time-series reconciliation

* Provisional DataSource: Bank of Tanzania, International Economics Department and Tanzania Revenue Authority

(US $ Million)SOME OF IMPORTANT ECONOMIC INDICATORS FOR EXTERNAL TRADE (1994/95 - 2002/03)

Year 19992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03*Tobacco 24.1 25.8 22.6 28.6 35.4 50.3 37.9 31.8 31.4 31.7 32.7 Cotton 308.3 147.7 125.4 221.2 251.8 202.2 105.9 100.6 123.4 149.1 188.7 Coffee 59.6 34.2 42.0 52.5 43.6 38.0 46.6 47.9 50.0 36.2 50.0 Cashewnuts 39.3 46.6 63.4 81.7 65.4 93.2 103.3 121.1 127.9 67.4 90.0 Pyrethrum 2.1 0.5 1.5 0.9 0.5 0.5 0.5 1.0 1.5 3.5 3.0 Tea 21.0 22.3 25.5 20.5 19.8 26.3 24.8 24.8 25.5 24.7 28.0 Sisal** 21.4 26.3 25.7 22.5 20.1 20.1 20.1 20.6 21.0 23.5 23.6

* EstimatesSource: Crop Boards and Ministry of Agriculture and Food Security

SUMMARY OF CASH CROPS PRODUCED ( IN '000' METRIC TONS)1992/1993 - 2002/2003

Table No. 2

85

Table No. 3 CATEGORY 1994 1995 1996 1997 1998 1999 2000 2001 2002*A. CAPITAL GOODS: 656.5 554.2 501.0 563.6 764.9 693.2 639.2 739.8 721.3 Transport Equipment 242.3 209.7 202.7 253.1 253.1 231.8 228.5 189.8 218.3 Building & Construction 107.5 49.2 42.5 85.1 137.0 121.6 128.8 144.0 134.7 Machinery 306.7 295.3 255.8 225.4 374.8 339.8 281.9 406.0 368.3

B. INTERMEDIATE GOODS: 290.4 608.9 531.0 382.9 303.4 319.6 319.7 440.8 422.9 Oil Imports 149.0 193.8 158.4 173.0 126.8 148.1 142.9 220.7 194.8 Crude Oil 79.8 115.2 69.9 104.8 63.6 148.1 11.0 - - White Products 69.2 78.6 88.5 68.2 63.2 - 131.9 220.7 194.8 Fertilizers 11.7 11.7 23.3 22.6 13.8 10.8 16.8 15.5 20.1 Industrial Raw Materials 129.7 403.4 349.3 187.3 162.8 160.7 160.0 204.6 208.0

C. CONSUMER GOODS: 359.5 377.7 361.8 373.0 520.4 559.9 576.7 534.2 516.6 Food and Food Stuffs 127.5 44.2 52.7 97.0 180.9 230.7 183.0 169.4 147.3 All Other Consumer Goods 232.0 333.5 309.1 276.0 339.5 329.2 393.7 364.8 369.3

D. UNCLASSIFIED IMPORTS: 198.6 - - - - - - - - Total 1,505.0 1,540.8 1,393.8 1,319.5 1,588.7 1,572.7 1,535.6 1,714.8 1,660.8 * Provisional

Note: Imports estimated on the basis of IL/ID forms, custom and PSI reports as well as returns from TPDCImport Statistics for 1997 - 1999 has been revised right after computerisation of the Customs Department of the Tanzania Revenue AuthorityImport Statistics for 1992 - 1993 has been revised due to time-series reconciliation

Source: Bank of Tanzania, International Economics Dept. and Customs Dept. of Tanzania Revenue Authority

TANZANIA IMPORTS (1994 - 2002)

(Million US Dollars)

86

2002/03 2003/04Gross borrowing 1,206.0 1,045.4

Domestic 754.7 597.2T-bills 570.9 472.5T-bonds 183.7 124.7

Foreign 451.4 448.2Project 340.6 303.0Programme 110.8 145.1

Key Sustainability Indicators Jun-2003 Jun-2004Domestic debt/ total debt 17.7% 15.8%External debt/ total debt 82.3% 84.2%Total public debt/ GDP 83.4% 87.0%Total public debt/ domestic revenues 675.7% 665.1%National external debt/ exports 412.7% 458.3%Annualised public debt service/ domestic revenues 75.3% 60.9%

Debt interest 11.2% 9.4%Redemptions 64.1% 51.5%

TABLE No.4: Borrowing Projections in FY 2003/04 (in Tsh Bilion)projections as at end

Projections

87

Jun-2003 Jun-2004

Total 7,921.1 9,126.1Central government 7,401.3 8,605.1Other public sector 519.8 521.0

Domestic 1,402.9 1,445.6Central government securities 894.0 936.7Other public sector 508.9 508.9

External 6,518.2 7,680.5Central government 6,507.3 7,668.4Other public sector 10.9 12.1

Memo items:Real GDP growth rate (for year-ending) 6.3% 6.6%Inflation rate (for year-ending) 4.2% 4.0%Exports of goods & services 1,579.5 1,676.0GDP at current market prices 9,493.5 10,490.3Total domestic revenues (for year-ending) 1,172.3 1,393.0End-period exchange rate (TZS/USD) 1,110.5 1,221.6

FY (budg) FY (proj)Public Debt Flows 2002/03 2003/04

1.0 Debt service 883.2 835.1Domestic 706.1 626.3Foreign 177.1 208.8

1.1 Redemptions/ principal repayments 751.6 706.3Domestic 648.7 554.5Foreign 102.9 151.9

1.2 Interest payments 131.6 128.8Domestic 57.4 71.9Foreign 74.2 56.9

2.0 Gross borrowing 1,206.0 1,045.4Domestic 754.7 597.2

T-bills 570.9 472.5T-bonds 183.7 124.7

Foreign 451.4 448.2Project 340.6 303.0Programme 110.8 145.1

3.0 Foreign grants 527.4 559.6Project 283.9 260.2Programme (PRBS) 163.4 196.0HIPC Multilateral Debt Relief 80.1 103.4

IDAIMFADB/F

Memo:Average period exchange rate (TZS/USD) 1,055.0 1,161.0

stocks as at end-TABLE No 5: Tanzania's Public Debt Stock and Flows in FY 2003/04 (Tsh. Billion)

88

1998/99 1999/00 2000/01 2001/02 2002/03 2003/04Actual Actual Actual Actual Prov. Act Budget

TOTAL EXPENDITURE (INCLUDING CFS) 973.8 1,191.9 1,258.5 1,626.5 2,219.1 2,607.2

TOTAL EXPENDITURE (EXCLUDING CFS) 748.5 925.8 954.7 1,296.1 1,895.6 2,198.6

Total expenditure in priority sectors 342.3 418.6 499.7 761.8 966.2 1,258.1

Education 164.9 218.0 254.9 344.9 414.8 492.8 Health 72.5 81.2 100.7 142.1 172.3 237.5 Water 14.4 14.5 18.3 32.5 58.6 85.7 Agriculture 14.9 21.6 19.1 31.9 62.6 123.5 Lands 3.4 4.2 5.1 8.1 21.2 6.0 Roads 66.7 70.8 92.5 179.6 208.4 258.7 J udiciary 5.5 8.3 9.2 18.8 23.8 32.6 TACAIDS 1/ 0.0 0.0 0.0 4.0 4.5 21.3

Total expenditure in non-priority sectors 406.1 507.2 455.0 534.2 929.4 940.5

TOTAL RECURRENT EXPENDITURE (LESS CFS) 565.9 565.9 668.5 951.4 1,175.6 1,391.2

Recurrent expenditure in priority sectors 235.8 285.4 351.7 497.6 681.6 820.9

Education 117.6 158.9 189.2 282.1 400.0 464.4 Health 50.7 53.9 70.3 90.9 128.6 172.7 Water 7.1 5.4 8.1 15.5 16.9 17.4 Agriculture 8.6 13.7 10.3 17.2 34.2 47.6 Lands 2.8 3.4 4.2 7.4 4.8 5.4 Roads 43.9 42.2 60.7 65.7 73.6 84.3 J udiciary 5.2 7.9 8.8 14.8 18.9 24.8 TACAIDS 0.0 0.0 0.0 4.0 4.5 4.3 Recurrent expenditure in non-priority sectors 330.1 280.5 316.8 453.8 494.0 570.3

TOTAL DEVELOPMENT EXPENDITURE 182.6 359.9 286.2 344.6 720.0 807.4

Development expenditure in priority sectors 106.5 133.2 148.0 264.2 284.6 437.2

Education 47.3 59.1 65.7 62.8 14.8 28.4 Health 21.9 27.3 30.4 51.2 43.7 64.8 Water 7.3 9.1 10.1 17.0 41.6 68.4 Agriculture 6.3 7.9 8.7 14.7 28.4 75.9 Lands 0.7 0.8 0.9 0.7 16.4 0.6 Roads 22.8 28.6 31.7 113.9 134.8 174.4 J udiciary 0.3 0.4 0.4 4.0 4.9 7.8 TACAIDS - - - - - 17.0

Development expenditure in non-priority sectors 76.1 226.7 138.3 80.4 435.4 370.2

CONSOLIDATED FUND SERVICE 225.3 266.1 303.8 330.4 323.5 408.6

Source: Ministry of Finance1/ Government agency formed in 2001 to coordinate AIDS related priority interventions

Table 6: Central Government Expenditure, 1998/99 - 2003/04

(In billions of Tanzania shillings, unless otherwise indicated)

89

Source: Ministry of Finance

Figure 1: Government Recurrent Budget (1993/1994 -2003/2004)

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04Year

Tsh.

Mill

.

Recurrent Revenue Recurrent Expenditure (Excl. Amortization)

Source: Ministry of Finance

Figure 2: Budget Frame for 2002/03 and 2003/04Compared to Actual Requirements

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

2002/03 2003/04

Domestic Revenue Total Expenditure Actual Requirements

90

Source: TRA, Ministry of Finance

Figure 3: Source of Revenue 2002/03

Excise Duty (Local)7%

VAT (Local Goods)13%

Import Taxes42%

Income Tax22%

Other Taxes10%

Non Tax Revenue6%

Source: Ministry of Finance

Figure 4: Sectoral Allocations of the Recurrent and Development Budget 2002/2003

Administration20%

Economic Services23%

Social Services39%

Production6%Defence and Security

12%

91

Source: TRA, Ministry of Finance

Figure 5: Source of Revenue 2003/2004

Excise Duty (Local)7% VAT (Local Goods)

13%

Income Tax22%

Other Taxes8%

Non Tax Revenue12%

Import Taxes38%

Source: Ministry of Finance

Figure 6: Sectoral Allocation of the Budget 2003/04

Admnistration18%

Social Services42%

Economic Services16%

Production10%

Defence and Security14%

92

FIGURE 7: EXPENDITURE FRAMEWORK MAINTAINS POVERTY FOCUS

Social Sector Expenditure(% of Base year 2001/02)

0

20

40

60

80

100

120

2001/02 2002/03 2003/04

*July, 2002 till March 2003

Education Health Water Others

*

Total Social Expenditure (As Percent of Total Expenditure)

0

10

20

30

40

50

60

2001/02 2002/03 2003/04

** proposed Budgetary Allocation

**

FIGURE 8: SELECTED SECTORAL GROWTH RATES

AGRICULTURAL SECTOR GDP 1998-2004 (AT CONSTANT 1992 PRICES)

1998 1999 2000 2001 2002 2003 2004

739942770509 796513 840163 882496 929082

980307

0

200000

400000

600000

800000

1000000

1200000

FISCAL YEAR

MIL

L Ts

hs

MINING SECTOR GDP 1998-2004 (AT CONSTANT 1992 PRICES )

1998 1999 2000 2001 2002 2003 2004

3070033488

3814443293

4890754316

59871

0

10000

20000

30000

40000

50000

60000

70000

FISCAL YEAR

MIL

L Ts

hs

MANUFACTURING SECTOR GDP 1998-04 (AT CONSTANT 1992 PRICES)

1998 1999 2000 2001 2002 2003 2004

126887 131491 137809 144647152812

163369174981

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

FISCAL YEAR

MIL

L Ts

hs

WHOLESALE AND RETAIL TRADE GDP 1998-2004 (AT CONSTANT 1992 PRICES)

2004200320022001200019991998

370888338298

310530288718270567254114239830

050000

100000150000200000250000300000350000400000

FISCAL YEAR

MIL

L Ts

hs

93

Figure No. 9

The burden of servicing public debt is falling which means we have more resources

available for priority sectors

0%

5%

10%

15%

20%

25%

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

Debt service as %of total revenues

Interest paymentsas % of totalexpenditures

Source: Ministry of Finance

Source: Ministry of Finance

Figure 10: Interest rates trend for T. Bills /T. Bonds for the period March 2002/March 2003:

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%

0 2 4 6 8 10

End-Marc 2002End-Dec 2002End-Marc 2003

Years to maturity

94

Source: Ministry of Finance

Figure 11: Fiscal Performance and Inflation 1991/92 - 2002/03

-10

0

10

20

30

40

1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03*

Year

Perc

ent o

f GD

P Inflation

Domestic Financing

Overall Balance After Grants

Source: Ministry of Finance

Figure 12: Comparative total expenditure on priority sectors

414.8

58.6 62.6

23.84.5

201.1

95.133

221.469

172.3208.4

32.61968.141

21.295

492.3

0

100

200

300

400

500

600

Education Health Water Agriculture Roads Judiciary HIV/AIDS

Tsh

s mill

ion

2002/2003 2003/2004

95