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Tanzania considers tax breaks to cushion economy

While the Central Bank, the Bank of Tanzania (BoT) has already issued a stimulus package for commercial banks, the Tanzania Private Sector Foundation (TPSF) is working on an arrangement to save large borrowers from mega defaults that would in effect ripple throughout the economy.

Members of Parliament in Tanzania are urging the government to consider giving tax breaks to businesses in a bid to help them stay afloat.

Alternatively, the government is encouraged, through the Central Bank, to scrap interest on loans so that borrowers do not fall into default.

At the moment, despite the global slowdown, businesses are still operational but they are operating way below their year revenue projections. Already, at the start of the second quarter, the country is facing potentially huge loan defaults by both large corporations as well as small and medium sized companies.

Big businesses are now turning to the government to intervene. While the Central Bank, the Bank of Tanzania (BoT) has already issued a stimulus package for commercial banks, the Tanzania Private Sector Foundation (TPSF) is working on an arrangement to save large borrowers from mega defaults that would in effect ripple throughout the economy.

Commercial banks have already been having trouble with Non Performing Loans (NPLs) in the past, but now they are at risk of the largest loan fall out the country has ever had to face.

While the Bank of Tanzania (BoT) has issued guidelines to help banks curb NPLs, the struggle is an uphill climb. Banks follow the safety precautions that are issued by Credit Reference Bureaus that are meant to protect them against bad credit.

Since the approach is to check the borrowers’ credibility before issuing a loan, banks were never prepared for the coronavirus upset. Even the so called good borrowers are now facing hard times and cant pay back their loans, that is, good credit has suddenly turned to bad credit.

SMEs taking the hit

For this reason, TPSF is even now looking for ways to help small and medium business to stay afloat. The effect of large corporations failing to meet their loan commitments is adverse on small and medium companies that are their contractors and vendors in many cases.

This means that not only would the commercial banks face huge losses in defaulted loans but small and medium sized businesses would also take a hit as they to would be left with defaulted payments by the large companies.

TPSFs Executive Director Mr Godfrey Simbeye said in a phone interview that the agency is very much aware of the threat that SMEs face and they are taking action. TPSF is working to create a fund that will help cushion SMEs.

Which companies will benefit from this special fund and what eligibility criteria will be used remains to be seen. However, it is reassuring that the two tier action is underway; to support large corporations on one hand and to shoulder SMEs on the other.

Tanzania’s Finance Ministry is on record saying a special team is preparing and assessment report of the economic impact of Covid-19 and will subsequently suggest potential policy responses.

The report will give the government recommendations on fiscal and monetary measures to take to stabilize the economy. Among these, it is expected that the government, through the BoT will pass measures to increase the liquidity of commercial banks so that they can continue issuing loans to SMEs and larger corporations as well.

The details of this equation, defaulted loans and refinancing, maybe complicated but what is simple to understand is that, if the banks are not backed they will be pressured to increase borrowing rates which will further hurt businesses.

Due to the delicacy of the matter, stakeholders are urging the government not to go at it alone but rather, to involve the private sector for a joint round table discussion on the best way forward.

The discussion does not end with response to the current crisis but should also deliberate post-pandemic action. Worth noting here is that the government has already engaged with TPSF, the private sector representative body, to come up with solutions and at the moment the Tanzanian parliament is holding its annual budget session. Already the members of parliament have placed priority on the need for a stimulus package.

However even the parliamentary committees that have urged the government to place budget allowance for the stimulus package have not specified the beneficiaries and eligibility.

What they did specify is that the package does not entirely focus on monetary provision but rather tax breaks and tax exemptions or cuts as well as staying of interest on loans. Both approaches offer great relief to businesses, weather it is reduced taxes or removal of interest on loans, businesses will find relief.

These are the suggests but now the government has to balance between its own national development plans that need huge budget allowances and giving tax breaks to businesses. On the one hand the government needs the taxes in place to raise revenue while on the other hand the taxpaying businesses need relief from the taxes to stay operations.

Already the Tanzania Revenue Authority (TRA) is reporting that by the close of the first quarter it has under collected revenue. As if that is not daunting enough, the second quarter USD10 billion target is immense and will probably not be met if tax breaks are granted.

Source: The Exchange

2 comments

  1. Balance should be found. Government should prioritize areas/projects that are only paramount to be carried forward. Projects that can wait, should wait. Tax and loan interests relief should be considered ASAP. It would act as some kind of a negative feedback loop to our dwindling or any unprecedented fall of our economy.

  2. Saving the banks equals to saving the fox in the hen house…
    Money should be given only to families directly (Tanzania luckily could use mPesa-money as synonim of helicopter money). For enterprise only tax exemption.

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