Photography: © Robin Batista © Robin Photography:

NATIONAL BUDGET BRIEF 2019/2020

KEY MESSAGES

Zanzibar has recorded impressive of the approved budget for FY 2019/20, economic growth averaging 6.8 per cent with the two vital sectors, the economic over the last fi ve years. As a result, and social sectors taking up only 17 and the nominal government budget has 37 per cent respectively. signifi cantly expanded, growing by 69 per cent from TSh 841 billion in Current relative shares of the health FY 2016/17 to TSh 1,419 billion in (7.7 per cent) and education (13.8 per cent) FY 2019/20. sectors in the national budget remain lower than international targets (Abuja The 2019–20 Household Budget Survey declaration 15 per cent and Education for indicates that a quarter of the population All 20 per cent). To keep up with infl ation (25.7 per cent) and one third of children and population growth, the proportion (30.1 per cent) live in monetary poverty of the government budget allocated to which makes adequate investment in health and education needs to reverse its the economic and social sectors vital for downward trend. achieving Zanzibar’s medium and long- term development goals. The relative Budget execution has improved, share of general public services in the with the expenditure rate rising to national budget is high, at 42 per cent 86 per cent in FY 2018/19. Indeed, a

1 signifi cant improvement was observed (OCGS), to ensure that data is reconciled in the performance of the development before publication. Moreover, this budget from 41 to 70 per cent between step will contribute towards improving FY 2016/17 and 2018/19. The Ministry transparency and accountability of the of Finance and Planning (MoFP) should public fi nance system. produce quarterly and annual budget execution reports in order to regularly The COVID-19 pandemic has resulted in monitor actual expenditure and address massive pressure on the government to low budget performance issues during the secure adequate fi nancial resources to budget implementation stage. cover costs related to the health sector response (COVID-19 Preparedness and The overall budget analysis was affected by Response Action Plan) as well as economic several challenges in terms of accessibility recovery measures (Economy Recovery and quality of budget data. Therefore, Plan) including social protection. Therefore, it is recommended that a Budget Data it is imperative to develop and implement Management Committee be formed with a sound resource mobilization plan and members from all institutions that have the COVID-19 response contingency responsibility for the management and plan. The RGoZ, in consultation with the dissemination of budget and economic Ministry of Finance in Mainland , data. The members should include the should consider additional borrowing as MoFP, the Planning Commission, the a prime resource mobilization option, of Tanzania, the Zanzibar using available global resources including Revenue Board, and the Zanzibar Offi ce the IMF, the World Bank, and the African of the Chief Government Statistician Development Bank.

1. INTRODUCTION and to formulate key messages that can inform budgeting policy and decision-making This Zanzibar national budget brief update processes going forward. explores the extent to which the budget addresses the needs of children under 18 years. There are two other budget briefs 2. MACRO AND for the same fi scal year focusing specifi cally SOCIO-ECONOMIC on government spending in the education and health sectors. This brief contains CONDITIONS an analysis of the size and composition of budget allocations for the fi scal years 2.1 Macroeconomic review (FY) 2017/18 to 2019/20. It also offers some insights into the effi ciency, equity and Zanzibar is an autonomously governed adequacy of past spending. On some issues, part of Tanzania, with a recent track record the analysis also covers the FY 2016/17 of high economic growth, moderate rates budget. The main objective of the brief is to of infl ation and growing levels of real provide an overview of the budget so that it per capita GDP.¹ In line with the overall can be easily understood by all stakeholders goal under Vision 2020 of achieving lower

1 Zanzibar is classifi ed as a lower-middle income country according to both the World Bank and the United Nations 2 Photography: © UNICEF Tanzania © UNICEF Photography:

Figure 1: GDP at current and 2015 constant prices (billion TSh) and annual rate of infl ation (%)

4,500.0 4,132 8.00% 6.70% 3,663 4,000.0 5.60% 7.00% 5.70% 3,228 3,078 3,500.0 6.00% 2,748 2,874 3,000.0 2,491 2,684 2,357.0 5.00% 2,500.0 3.90% 4.00% 2,000.0 2.70% 3.00% 1,500.0 1,000.0 2.00% 500.0 1.00% 0 0.00% 2015 2016 2017 2018 2019

Nominal GDP Bn TZS Real GDP Bn TZS Infl ation %

Sources: OCGS

Table 1: Macro and socioeconomic outlook 2019/20

Indicator 2018 2019 Indicator 2018/19 2019/20 forecast forecast

GDP at current prices 3,663 4,132 Government expenditure 33.2 31.3 (billion TSh) as % of GDP

GDP at constant prices 2,874 3,078 Total government 1,315 1,419 of 2015 (billion TSh) expenditure (billion TSh)

Real GDP growth rate 7. 1 7. 0 Total government revenue 1,101.8 1,152.46 (percent) (billion TSh)

3 Indicator 2018 2019 Indicator 2018/19 2019/20 forecast forecast

GDP per capita at 2,323 2,549 Tax revenue (billion TSh) 675.8 786.5 current prices (‘000 TSh)

GDP per capita at 1,823 1,898 Grants (billion TSh) 81.31 66.86 constant prices of 2015 (000 TSh)

Unemployment rate (%) 143 N Public debt (% of GDP) 244 NA

GDP per capita (USD) 1,026 1,114 Loans (billion TSh) 386.11 299.10

Infl ation rate (%) 3.9 2.7

Sources: MoFP: Budget speech (2017, 2018 and 2019), MoFP- MTEF from 2016/17 to 2019/20 (projections of revenue, loans and grants); Plan & Budget Guideline 2019/20 to2020/21 and OCGS Statistical Abstract 2017 from ILFS 2014

middle-income status, Zanzibar’s gross Currently, the RGoZ is developing a 5-year domestic product (GDP) has been forecast development plan (known as MKUZA IV), to reach TSh 4,132 billion in 2019 in nominal which is a critical document with a focus on terms and TSh 3,078 billion in real terms achieving the goals of Vision 2050. It aims (Figure 1). In real terms the economy grew by to transform and diversify the economy of 30.6 per cent between 2015 and 2019. Over Zanzibar by fostering more productive sectors the last fi ve years economic growth has like manufacturing. This development will averaged 6.8 per cent, and prior to Covid-19, strengthen economic resilience by reducing the forecast for FY 2019/20 had been dependence on tourism, which has proven to 7.4 per cent, making Zanzibar one of the be vulnerable to the Covid-19 pandemic, as best performing economies in Sub Saharan well as other global economic shocks. Africa (SSA)2.

Impact of COVID-19 pandemic on Zanzibar’s economy:

Sharp decline in Slowdown in formal Reduction in foreign tourist infl ows and informal sector direct investment business (FDI)

Reduction of Decline in demand foreign trade for services

2 World Economic Outlook (2019), IMF, Washington DC. 3 ZOCGS Statistical Abstract 2017 from ILFS 2014 4 Budget speech 2019/20

4 RGoZ expects a decline in economic 4.4 per cent per annum in the period growth down to between 3 to 5 per cent. 2002–2012. Pressures connected to growing Households have faced a reduction in their populations are set to increase rapidly. purchasing power due to the loss of jobs and Currently, poverty affects 25.7 per cent of consequent incomes loss, increased poverty, the population (the monetary poverty rate is a decline in the consumption of goods and higher for children at 30.1 per cent), according services, increased out-of-pocket expenses to the latest household budget survey on health services, as well as a possible prior to COVID-19. Just over 10 per cent of increase in domestic violence. The most the population was extremely poor, with vulnerable groups of the population include 11.4 per cent of children living under the basic poor and near-poor households, people living daily food consumption line. Inequality was with disabilities, people who are chronically moderate to high with a Gini coeffi cient of ill, the elderly, employees in the informal 0.31, which has remained unchanged since sector, and children. Specifi c concerns for 2009–10 (Table 2). children relate to food and nutrition security, At least two thirds of Zanzibar’s children learning, access to essential health services, live in multi-dimensional poverty5 and and social protection. experience high levels of deprivation in sanitation, nutrition and housing. Maternal, 2.2 Socio-economic outlook infant, and under fi ve mortality rates are high at 155 (per 100,000 live births)6 and 45 and 56 Despite relatively high economic growth (per 1,000 live births)7 respectively. Among and progress on poverty reduction prior children under 5, 21.5 per cent are stunted.8 to the COVID-19 pandemic, average Whilst 89 per cent of children enrol in primary incomes still remain low. Zanzibar has a school at the correct age, net enrolment small population projected to be just over rates for pre-primary and ordinary secondary 1.6 million in 2019, with almost half of the education are much lower, at 48.8 and population under the age of 18. The rate 44.8 per cent respectively.9 of population growth was estimated at

62.5 % Only 41.3 % 16.6 %

of the population of the population of the population has access to have adequate still rely on open clean water sanitation facilities defecation11 (Table 2)10

5 OCGS 2019, Child Poverty Report 6 Health Bulletin, 2018 7 Tanzania Demographic and Health and Malaria Indicator Survey 2015/2016 (TDHS-MIS) 8 Tanzania National Nutrition Survey 2018 9 Education statistical abstract 2016–2018 10 Tanzania Demographic and Health and Malaria Indicator Survey 2015/2016 (TDHS-MIS) 11 Tanzania Demographic and Health and Malaria Indicator Survey 2015/2016 (TDHS-MIS)

5 Table 2: Socio-economic indicators for Zanzibar

Total population (2018)[1] 1,579,849 Score on Human Development 0.53 Index (United Republic of Tanzania) (2018)[5]

Children < 18 as % of total population (2018)[1] 49 Gini coeffi cient (2019/20)[3] 0.31

Child population < 18 years (2018)[1] * 743,765 Unemployment rate (%) 14.3 (2014[4] Population 10–19 years (adolescents) (2018)[1] 358,859 Basic needs poverty rate (%) 25.7 (2019/20)[3]

Population < 5 years (2018)[1] 322,050 Fertility rate[2] 5.1

Population 10–19 years (adolescents) as % of 23 Food poverty rate (%) 9.3 total population (2018)[1] (2019/20)3]

Population 15–25 years (young people) (2018)[1] 158,590 Proportion of children (aged 30.1 0–17) living below the national basic needs poverty line (2019/20)[3] Population 15–25 years (young people) as % of 20.3 Proportion of children (aged 11.4 total population (2018)[1] 0–17) living below the national food poverty line (2019/20)[3]

Life expectancy (years) (2018)[1] 67.3 Multi-dimensional child poverty 66 (%) (2014/15)[6]

Sources: [1] National Projection Report 2018; [2] TDHS – MIS; [3] Zanzibar HBS 2019/20 [4] ILFS 2014 [5] Human Development Report 2019, UNDP; [6] OCGS & UNICEF based on 2014/15 HBS [7] Education statistical abstract 2018

TAKEAWAYS

• Zanzibar has demonstrated impressive economic growth averaging 6.8 per cent over the last fi ve years. The 2019 HBS indicates that basic needs poverty affected 25.7 per cent of the total population and 30 per cent of children, prior to the COVID-19 pandemic, and is likely to have increased since then. The government is urged to create fi scal capacity by restructuring spending away from its large administrative sector in favour of investing in the economic and social sectors.

3. NATIONAL BUDGET 25 per cent over the last four years. It reached a peak of 29 per cent of GDP in OVERVIEW FY 2018/19, but declined to 24 per cent in FY 2019/20. Based on the project adjustments, the aggregate government 3.1 Aggregate spending trends budget for FY 2019/20 has declined by 3 per cent from TSh 1,133.6 billion in The actual government expenditure FY 2018/19 to TSh 1,102 billion in FY 2019/20, as a share of GDP has averaged which may be due to the effects of the

6 Figure 2: Government expenditure (except adjusted projection for 2019/20) and ratio of GDP (billion TSh)

1133.6 1200 1102 30% 1000 911.4 25% 800 640.2 20% 600 29% 24% 15% 400 26% 10% 21% 200 5% 0 0% 2016/17 2017/18 2018/19 2019/20 adjusted proj Actual budget expenditure Share of GDP

Sources: UNICEF calculations based on data from the MoFP, approved budget (various years)

COVID-19 pandemic. In nominal terms, the of social sectors in the overall budget. national budget grew by 69 per cent from Overall planned social sector spending in TSh 841 billion in FY 2016/17 to FY 2019/20 was moderate at 37 per cent of TSh 1,419 billion, forecast for total budget allocations, a slight increase FY 2019/20 (Figure 3). In real terms from 34 per cent in FY 2018/19. the national budget has grown from Over the last three years, sector allocations TSh 841 billion to TSh 1,521 billion or a real to health have hovered around the same increase of 48.6 per cent during the same rate, although education has been drastically period. The analysis of actual government reduced from an 18.9 per cent share of expenditure is provided in section 4. the approved budget in FY 2017/18 to 13.8 per cent in FY 2019/20. During the same 3.2 Social sector spending period, a positive trend was observed in the water sector’s share, which underwent a Over the last three years, there has signifi cant increase from 2.4 per cent to been a gradual increase in the share 9.2 per cent. Prioritizing of the water sector in

Figure 3: Total government budget trends in nominal and real terms (constant prices of 2016/17)

1,600 1,419 1,400 1,315 1,200 1,087 1,251 1,209 1,000 841 1,036 800 841 600 400 200 0 2016/17 2017/18 2018/19 2019/20 Total nominal buget (TSh bib) Total real buget (TSh bin)

Sources: UNICEF calculations based on data from the MoFP (Approved Budget)

7 Out of total FY 2019/20 social sector spending of the COVID-19 pandemic, it is advised that spending be increased in this area.

The relative share of the general public Education at services budget was 42 per cent for 13.8 % FY 2019/20, while the vital economic and social sectors accounted for 17 and 37 per cent respectively (Figure 5). Economic sectors such as infrastructure, roads and energy together received 17 per cent in Water at Health at 9.2 % 7.7 % FY 2019/20, having fl uctuated between 15 and 22 per cent in previous fi scal years. Encouragingly, the share of the social sector has gradually increased from 31 per cent the policy agenda refl ects a critical step taken in FY 2017/18 to 37 per cent in FY 2019/20 by the RGoZ. (Figure 5).

However, the share of social protection in The low investment in the economic the budget, including public housing, social sectors, along with low levels of service assistance and other programmes, declined, provision in a country facing ongoing despite a nominal increase, from 0.1 per cent challenges in health, education, social in FY 2017/18 to 0.04 per cent in FY 2019/20. protection and water and sanitation, This low fi gure could be due to coding as it should be a matter of concern and focus for is signifi cantly lower than the 2.99 per cent the government in the future strategy and share budgeted for social assistance in the policy formulation in connection with the FY 2015/16 budget as indicated in the Budget next annual budget. Analysis of Social Protection (MoFP/UNICEF). Given the critical role of social protection in Moreover, spending for the productive sector reducing poverty and mitigating the effects is critical given its potential to increase

Figure 4: Spending on key sectors as a share of total government budget in FY 2017/18 and 2019/20

2019/20 42.0% 4.4% 9.2% 7.7% 13.8% 6.0% 16.7%

2018/19 41.9% 4.4% 5.5% 8.3% 14.8% 5.9% 21.8%

2.4% 2017/18 49.4% 4.4% 7.9% 18.9% 2.2% 14.7%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

General public services Water Education Economic affair Defence Health Others

Sources: UNICEF calculations based on data from the MoFP (Approved Budget)

8 Figure 5: Shares of general public services, economic affairs and social sectors in the total approved budget in FY 2017/18 and 2019/20

100% 90% 80% 31.1% 34.3% 36.5% 70% 60% 21.8% 50% 14.7% 16.7% 40% 30% 20% 35.0% 41.9% 42.0% 10% 0% 2017/18 2018/19 2019/20

General public services Economic affair Social sectors

Sources: UNICEF calculations based on data from the MoFP growth (through the multiplier effect), reduce 3.3 Budget analysis by economic the high unemployment rate and improve classifi cation earnings by moving people out of low return subsistence agriculture into more productive Recent trends indicate that the recurrent activities. Cuts in the bloated general public and development budgets are nearly on services sector in favour of investment a par, owing to large infl ows of grants in key infrastructure sectors would lead and borrowing to fi nance development to job creation. This action would in turn projects, which may not be sustainable or reduce poverty rates, widen the tax base desirable in the long run. This balance shifted and potentially reduce the very high level of slightly in FY 2019/20 when the recurrent dependence on external loans. share in the government budget increased The resource gap that would need to be from 49 to 59 per cent, compared with fi lled to meet such policy commitments FY 2018/19 (Figure 6). However, as discussed can be estimated through costings of the in sections 4 and 5 below, budget credibility expenditure required for the proposed is weak for the development budget owing measures. The shortfall can be met at least to the low outturns for expenditure fi nanced in part by reallocation of resources from non- by development partners (see Table 3 in 12 essential spending on public administration section 5). Salaries tend to be protected, towards the productive and social sectors. but expenditure on essential purchases of

12 Actual fi nancing (releases) versus approved budgets towards annual national and sector plans commitments is recorded through IFMIS as budget execution. However, money is only topped up through IFMIS – salaries aside which are drawn down monthly – once the money has been spent by the MDA. In other words, if capacity and/or procurement issues are slowing down an MDAs capacity to spend, then available funds (if available) would not be disbursed. In order to assess if this is the case in Zanzibar it is necessary to have data not only on execution rates but on surpluses held by MoFP at the end of the year and what is also left over in MDA accounts. As per the latter it is also necessary to have regulations on whether balances must be returned by MDAs including decentralized government by year end. This is an issue that should be examined in more detail in the full National Budget Brief for 2019/20.

9 Figure 6: Recurrent and development budgets FY 2017/18 and 2019/20

100% 80% 41% 56% 51% 60% 59% 40% 44% 49% 20% 26% 20% 16% 0% 2017/18 2018/19 2019/20 Recurrent budget / Total Development budget / Salaries / Total national budget Total national budget national budget

goods and services, as well as maintenance 28.2 per cent or from TSh 325.9 billion to and monitoring, requires a large increase 417.9 billion between FY 2017/18 and 2019/20. to ensure effective service delivery for the In real terms, it increased by 19 per cent growing population of Zanzibar. during the same period.

Salaries as a share of the total budget A matter of possible concern is that salaries increased to 26 per cent in FY 2019/20 represent 40 per cent of the recurrent budget from 16 per cent in FY 2018/19. Prior to (Figure 7), leaving little room for the purchase FY 2019/20, the overall trend had been of goods and services, or for social transfers, towards a reduction in the share of although the true size of the recurrent budget salaries, which had ranged between 20 and is also underestimated because projects that 16 per cent of the total budget. In nominal are part of the development budget include terms, spending on salaries increased by signifi cant recurrent costs.13

Figure 7: Recurrent budget and share of salaries in FY 2017/18–FY 2019/20

900.0 46% 45% 800.0 40% 700.0 43% 35% 32% 600.0 30% 500.0 25% 400.0 842.4 20% 702.1 300.0 590.8 15% 200.0 10% 100.0 5% 0 0% 2017/18 2018/19 2019/20

Recurrent budget total (TSh billion) Salaries / Recurrent budget

Sources: UNICEF calculations based on data from the MoFP (approved budget)

13 Estimating the true costs of the recurrent budget is a challenge across almost all developing countries.

10 TAKEAWAYS

• As a result of the impressive economic growth, the fi scal capacity of the RGoZ has expanded and the share of the social sectors in the government budget has been gradually increased. However, the relative shares of the health and education sectors remain below the international targets (Education for All 20 per cent and the Abuja declaration 15 per cent for health). To keep up with infl ation and population growth, the proportion of the government budget allocated to health and education should be increased. • Given the critical role of social protection in reducing poverty and mitigating the impacts of the COVID-19 pandemic, it is advised that expenditure on social protection be increased. • A major challenge for RGoZ is the imbalance in the budget allocations between the general public services, social and economic sectors. The general public services budget was approved at 42 per cent for FY 2019/20, while the vital economic and social sectors received 17 and 37 per cent respectively.

4. BUDGET efforts are required to bridge the gap between the approved budget and CREDIBILITY actual expenditure. Budget credibility is measured by the difference between the RGoZ has made signifi cant progress budget commitments approved by the in improving the execution rate of its House of Representatives and what the development budget in the last three Government actually spends by the end of years. Reasons for good progress include the fi scal year. Overall budget credibility has the introduction of programme-based improved from 76 to 86 per cent between budgeting as well as improvements in FY 2016/17 and 2018/19. Furthermore, a revenue collection. However, ongoing signifi cant improvement was observed in the

Figure 8: Budget execution performance – Approved versus actual expenditure in FY 2016/17 to FY 2018/19

100% 84% 86% 76% 80% 60% 103% 100% 40% 70% 107% 61% 20% 41% 0% 2016/17 2017/18 2018/19

Recurrent budget executionDevelopment budget execution Total budget execution

Sources: MoFP

11 performance of the development budget, these reports regularly in order to comply with execution rising from 41 to 70 per cent with good practices on transparency and during the same period (Figure 8). accountability. Moreover, better coordination and planning between MoFP and donors can Weak aid and revenue outturns, in contribute to developing more realistic budget conjunction with what appears to projections. be unrealistic planning and capacity constraints, limit the execution of the The overall budget analysis was affected development budget. These factors by several challenges in terms of the result in low effi ciency in the use of the accessibility and quality of budget data. development budget in effecting poverty Therefore, it is recommended that a Budget reduction and socio-economic progress. Data Management Committee be formed Low budget execution rates result from with members from all institutions that have bottlenecks in the procurement process responsibility for budget and economic data and problems regarding modalities and management and dissemination. Members disbursement of donor funding. Further should include the MoFP, the Planning detailed analysis is merited in this area. Commission, the Central Bank of Tanzania, However, in the absence of reports on the Zanzibar Revenue Board, and the Zanzibar quarterly revenue collection and budget Offi ce of the Chief Government Statistician execution, it is diffi cult to confi rm whether (OCGS) to ensure that data is reconciled there are delays in the earlier part of the year before publication. The functioning of such a that create challenges for MDAs in spending committee will also contribute to making the all their approved allocations before the end public fi nance system more transparent and of the fi scal year.14 accountable.

Budget execution performance could be further improved by strengthening budget forecasting and public procurement processes, as well as public expenditure monitoring tools, which should provide disaggregated budget outturn data down to the project level. The monitoring and interpretation of execution challenges will play a critical role in pinpointing the precise Photography: © UNICEF Tanzania © UNICEF Photography: areas of ineffi ciency and wastage that need to be addressed. RGoZ is advised to prepare quarterly and end-year budget execution reports that highlight the areas where reform measures are needed to tackle the challenges in expenditure execution. The MoFP website is a suitable and accessible place to publish

14 Actual fi nancing (releases) versus approved budgets towards annual national and sector plans commitment is recorded through IFMIS as budget execution. However, money is only topped up through IFMIS – salaries aside which are drawn down monthly – once the money has been spent by the MDA. In other words, if capacity and/or procurement issues are slowing down an MDA’s capacity to spend, then their allocated funds would not be disbursed. In order to assess if this is the case in Zanzibar it is necessary to have data not only on execution rates but on surpluses held by MoFP at the end of the year and what is also left over in MDA accounts. As for the latter, it is also necessary to have regulations on whether or not balances must be returned by MDAs, including decentralized government bodies, by year end. This is an issue that should be examined in more detail.

12 TAKEAWAYS

• A signifi cant improvement was observed in the performance of the development budget which rose from 41 to 70 per cent between FY 2016/17 and FY 2018/19. However, there is still room for further improvement through measures to improve procurement practices, prepare realistic budget projections, and strengthen public expenditure monitoring tools. RGoZ is encouraged to produce quarterly and end-of-year budget execution reports. • The overall budget analysis was affected by several challenges in terms of accessibility and quality of budget data. Therefore, it is recommended that a Budget Data Management Committee be formed with members from all institutions that are responsible for budget and economic data management and dissemination. Moreover, this move will contribute to improving transparency and accountability of the public fi nance system.

5. FINANCING THE The share of grants increased from 4 per cent to 6 per cent between NATIONAL BUDGET FY 2017/18 and 2019/20. Grant aid is the most desirable form of aid since there are MKUZA III emphasizes the importance of no repayments to be made or interest to developing and implementing innovative be paid. The focus of development partners strategies to improve domestic revenue on supporting the development budget has collection, sustained fi nancial discipline indirectly created more fi scal capacity for in public spending, and effective aid management, which will also be important to domestic fi nancing of the recurrent budget, ensure that the greatest possible benefi t is enabling the government to use its own gained from limited resources. resources for hiring and paying salaries of key social sector staff such as teachers, nurses Domestic revenue, which consists of tax and doctors, and to purchase essential and non-tax income, represents the major goods and services. Developing a fi nancing share of government resources. Figure strategy (sectoral development programmes 9 shows a slight decline in the share and fi nancing models) linked to budget policy of domestic revenue as a share of total resources, from 78 to 75 per cent between could build the confi dence of development FY 2017/18 and 2019/20. In nominal partners about giving greater ownership terms domestic revenue increased by of external resource fl ows to government 21 per cent from TSh 688 billion in the form of programme aid which could to TSh 835 billion. A signifi cant increase also be used for recurrent expenditure, in was observed in borrowing from foreign turn reducing impediments to the delivery of and domestic sources, from 18 to essential social services. 27 per cent between FY 2017/18 and 2018/19. In FY 2019/20, the share Tax and non-tax revenue outturns are in of total borrowing is expected to decline Tax and non-tax revenue outturns are in to 19 per cent. line with projections, though there may be

13 Figure 9: Sources of fi nance for government expenditure in FY 2017/18 and 2019/20

120% 4% 3% 6% 100% 18% 80% 27% 19% 70% 60% 50% 40% 78% 70% 75% 30% 20% 10% 0% 2017/18 Actual 2018/19 Actual 2019/20 Estimate

Tax and non-text Loan Grant

Sources: Approved budget (various)

delays in funds reaching MDAs thus resulting Domestically fi nanced credit, which can particularly in impediments to spending of crowd out private sector borrowing, and the development budget. This is a matter international loans, was on the increase of concern given that the development generally up to FY 2018/19. RGoZ should budget represents investments such as monitor this trend. Although, roughly classroom and health facility construction. 80 per cent of loans are concessional (i.e. However, in the absence of reports on with low rates of interest), there is some quarterly revenue collection and quarterly borrowing from the international markets at budget execution, it is diffi cult to pinpoint higher interest rates, which is risky because precisely the leading challenges for MDAs in of the potential for interest and principal spending all of their allocations. payments increasing at a rapid rate in the

Table 3: Domestic revenue, grants and loans in FY 2016/17 and 2018/19

2016/17 2016/17 % 2017/18 2017/18 % 2018/19 2018/19 % Bn TSh Outturn Bn TSh Outturn BnTSh Outturn Tax and non-tax 482.4 675.9 807.5 revenue projection 108 102 93 Tax and non-tax 522.0 688.0 749.0 outturn

Loan projection 34.3 31.0 43.4 210 504 669 Loan outturn 71.9 156.3 290.5

Grant projection 324.8 380.5 464.2 13 10 8 Grant outturn 41.4 38.1 37.1

Sources: MoFP: Budget speech (2017, 2018 and 2019), MoFP- MTEF from 2016/17 to 2019/20 (projections of revenue, loans and grants); Plan & Budget Guideline 2019/20–2020/21 and OCGS Statistical Abstract 2017 from ILFS 2014

14 event of a signifi cant depreciation of the FY 2017/18 to TSh 835 billion projected for . FY 2019/20, revenue collection performance has dropped from 102 to 85 per cent during A better balance between grants and the same period. This trend can be observed loans would result in more sustainable in the ratio of domestic revenue to GDP fi nancing. RGoZ is urged to carry out a which declined from 20 per cent to 18 per Development Finance Assessment, that cent between FY 2017/18 and 2019/20 could inform the development of a fi nancing (Figure 10). Taxes are a critical measure of a framework. nation’s development and governance, and Revenue measures to increase tax collection the tax-to-GDP ratio is used to determine rates are crucial to reduce the dependence how well a nation's government directs its on external fi nancing. Such efforts were economic resources. Higher tax revenues emphasized in the FY 2019/20 budget mean a country can direct more resources to speech, which included a reference to the improve infrastructure, health, and education possible introduction of new tax revenue – key to the long-term prospects of a country’s streams. However, the trend in recent years economy and people. indicates that while the nominal domestic According to the International Monetary revenue has grown from TSh 688 billion in Fund, developing countries should have a tax- to-GDP ratio of at least 15 per cent, to ensure they have the money necessary to invest in the future and achieve sustainable economic growth. Although Zanzibar is above the global benchmark, there are still some structural problems that exist, given the high level of unemployment (14 per cent) and the size of the informal sector, which largely escapes both direct and indirect taxes. Photography: © Julie Pudlowski © Julie Photography: The Covid-19 pandemic, which brought the tourism sector to a standstill in March 2020, is likely to have a major impact on domestic revenue outturns for FY 2019/20 and

Figure 10: Ratio of domestic revenue to GDP (%)

25% 20% 19% 20% 18%

15%

10%

5%

0% FY 2017/18 FY 2018/19 FY 2019/20

Sources: UNICEF calculations based on data from MoFP

15 2020/21 at a time when there is massive mobilization plan for the FY 2020/21 and pressure on the government to secure 2021/22 budgets and the COVID-19 response adequate fi nancial resources to cover the contingency plan. The government should costs related to the health sector response, also discuss with donors the reprioritization as well as economic recovery measures and of existing funds and the mobilization of social protection. Hence, it is imperative to develop and implement a sound resource additional grants.

TAKEAWAYS

• Domestic revenue, comprised of tax and non-tax income, provides the largest share of government resources, in the range of 70–78 per cent over the last three fi scal years. Tax and non-tax revenue outturns are in line with projections. RGoZ is encouraged to strengthen the tax administration system in order to improve tax collection and thereby increase domestic revenue as a percentage of GDP and to ultimately reduce dependence on external fi nancing. • Domestic credit, which risks crowding out private sector borrowing, and international loans were on the increase generally up to FY 2018/19. A better balance between grants and loans requires a more sustainable integrated fi nancing strategy, which can be developed using a development fi nance assessment. • It is imperative to develop and implement a sound resource mobilization plan for mitigating the socio-economic impact of COVID-19. The government should discuss with donors the reprioritization of existing funds and the mobilization of additional grants.

16