Tanzania 2010/2011 budget countdown: How the stimulus money was spent

16 March 2010, The Citizen
URL: http://www.thecitizen.co.tz/component/content/article/37-tanzania-top-news-story/681-20102011-budget-countdown-how-the-stimulus-money-was-spent.html

Dar es Salaam:  The Bank of Tanzania (BoT) had by last December disbursed half of the Sh1.7 trillion set aside to cushion the economy from the adverse effects of the global economic downturn. Documents seen by The Citizen show that BoT has disbursed a total of Sh870.8 billion, equivalent to 51 per cent of the allocation. The figures are largely in line with the current Budget.

This money, according to the guidelines for the preparation of medium-term plan and Budget framework for 2010/11-2012/13, was set aside in response to the global financial and economic crisis, which reached its climax last year.

The lion's share of the stimulus package was utilised by the government with private firms receiving only fraction of it.  The disbursement has, however, been criticised by an economist, who noted that it was misguided.

According to budget guidelines, the money was as compensation for losses mainly incurred by cotton buyers, guarantee for debt rescheduling, price subsidisation for cotton, guarantee schemes, loan to ARTUMAS, domestic borrowing and balance of payment support.

Detailed analysis on how the package was used indicates that domestic borrowing by the government, mainly to cushion revenue collection shortages, consumed Sh473 billion as of the end of December 2009.

"In June 2009, the Government borrowed Sh323 billion from the domestic market, equivalent to 1.2 per cent of GDP (gross domestic product), to finance revenue shortfall in 2008/09. Also in July 2009, the Government borrowed Sh150 billion as part of 1.6 per cent of GDP to finance its 2009/2010 budget," reads part of the guidelines seen by The Citizen.

Furthermore, in June 2009 the government received a $245 million (Sh325.9 billion) loan from the IMF, through the Exogenous Shocks Facility (ESF). The funds, which compensated for a shortfall in foreign exchange earnings, were also included in the package.

A total of 35 cotton-buying firms requesting to be compensated and applications for losses totalling Sh28.6 billion were scrutinised. A final figure of Sh26.9 billion was arrived at, and Sh19.9 billion had been disbursed to compensate for losses incurred by cotton traders by the end of last December.

On guarantee for debt rescheduling, the document notes that a total of Sh15.8 billion was disbursed as loan rescheduling guarantee. "The guarantee is aimed at enabling borrowers to access loans from commercial banks to finance their economic activities, especially buying crops from farmers during 2009/10 season," say the guidelines.

On price subsidisation, it has been reported that the government disbursed Sh20 billion in July 2009 for stabilisation of cotton prices. Under this arrangement, cotton farmers, through the Tanzania Cotton Board, have been receiving Sh80 per kilogramme during the 2009/10 season. BoT said the subsidy was an incentive to cotton farmers.

Some Sh6.2 billion was disbursed by the government to expand loans for the Export Credit Guarantee Scheme (ECGS) and another Sh6.2 billion to increase availability of loans through SME guarantee schemes.

According to the document, the government also extended a Sh10 billion loan to ARTUMAS last September. The loan was extended through the Tanzania Investment Bank following the company's failure to raise capital from international financial markets after the value of its shares dropped sharply.

The loan is intended to finance investment in the energy sector in Lindi and Mtwara regions.

An economist, Dr Honest Ngowi, told The Citizen that it may be too early to say with a great degree of certainty that stimulus packages and bailout plans were having the desired impact.

"It takes time to carry out the required evaluation with a view to making an objective and scientific assessment of the impact of the interventions on the recovery process," he pointed out.

He said the package could only compensate commodity exporters who incurred losses and bail out banks that could collapse due to defaults caused by the crisis, noting it would be wrong to use the funds to stimulate further production.

"The crux of the matter is the demand side of the economy. It's wrong to attempt to fix it by addressing the supply side of the economy by giving funds to acquire more farm inputs for cotton growers for example," Dr Ngowi said.

He added that the problem that was supposed to be fixed by the stimulus funds was the inability to export, not inability to produce.

"Unfortunately, Tanzania cannot solve the current demand side problems in the short term as they are out of its reach and need to be addressed by the country's trade partners. This country cannot, for example, stimulate American or European consumers' interest in Tanzanian goods."

A result of the crisis, borrowing from the domestic market might be predictable but not desirable, Dr Ngowi said.

"It's likely to squeeze out the private sector from the money market. It's also likely to increase interest rates due to increased demand for loans amidst decreasing or at best constant loan supply.

"If the private sector is squeezed out due to government borrowing in the domestic market, its noble role of taking the country to the road to recovery would be a missed opportunity."

Last year the government set aside Sh1.692 trillion as a response to the global financial and economic crisis, to mitigate the adverse impact of the crisis on the economy.

Among the measures proposed in the plan were compensation for losses due to a fall in demand and prices of commodities in the world market, guarantee for debt rescheduling, price subsidisation, expanding ECGS, increasing capital for SME guarantee scheme, improving railway and roads infrastructure and ensure food security.