Growing pains: Tanzania's regulatory reforms

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Growing pains: Tanzania's regulatory reforms

As Magufuli pushes his anti-corruption reforms forward, the Tanzania business community has been hit by targeted taxation, increased political opacity and censorship. Reform is undoubtedly necessary, but the current cost is high. To take advantage of Tanzania's multiple investment opportunities requires a careful understanding of the nuanced political situation.

Tanzania's President John Magufuli was elected on the basis of his strong anti-corruption rhetoric and policies. Since coming into power in 2015, he has introduced a range of effective anti-corruption measures that target frivolous and unnecessary government expenditure. In the first year of his presidency, Magufuli purged some 10,000 ghost workers on the civil service payroll and redirected funds intended for Independence Day celebrations to anti-cholera projects.

As part of its anti-corruption drive, over the last four years the Tanzanian government has placed an emphasis on reducing tax evasion and increasing revenue collection. To do this, Magufuli replaced the entire board of directors of the Tanzania Revenue Authority in 2016. The government assigned monthly revenue targets to customs officials and levelled large retrospective tax bills against individuals and companies. The enforcement of the new taxation regime is rumoured to be politically motivated. In some cases, tax bills have crippled local businesses that were unable to pay the mandatory upfront fee required to appeal the bill. There is also the high-profile case of Acacia Mining, which was handed a $190 billion tax bill by the Tanzanian government in July 2017. This bill is still in the process of being settled.

Magufuli’s reforms have been effective at undermining what were previously common corruption schemes in Tanzania. For instance, trade misinvoicing, which has historically robbed the government of several billions of dollars in tax revenues, is now much more difficult to execute due to stricter customs checks. Overall, the enforcement of anti-corruption legislation and regulations has improved significantly in Tanzania under Magufuli’s leadership.

However, this anti-corruption drive has come at a political cost. In support of his ambitions, Magufuli has taken unprecedented steps to centralise his executive powers and restrict political activity. Several opposition members of parliament have been arrested and a number of them physically attacked. Prominent investigative journalists have disappeared and self-censorship is increasing.

As a result, any hopes that Magufuli’s anti-corruption reforms would invigorate the investment environment in Tanzania have been dashed. Instead the political and compliance risks associated with doing business in the country have increased. These risks are compounded by Magufuli’s leadership style, which prioritises centralised and personalised decision-making over transparency and stability. Some foreign companies have responded to this uncertainty by scaling back their operations or putting investments on hold.

Nonetheless, many of the political risks that are affecting Tanzania and undermining investor confidence can be mitigated. Access to first-hand, on-the-ground information from sources that understand the intricacies of the country’s business environment is key. These sources offer a more nuanced approach that acknowledges that the current political and economic developments in Tanzania are merely one part of a longer cycle of development. This is pertinent in a country that is still in the relatively early stages of shedding its socialist roots.

The longer-term impact of Tanzania’s anti-corruption reforms will to some extent be dictated by the next general election, which is scheduled for October 2020. Magufuli and his long-standing ruling party, the Chama Cha Mapinduzi (CCM), look set for victory. The opposition is fractured and divided. What remains unclear is whether Magufuli will stick to his populist anti-corruption agenda when he is no longer encumbered by imminent electoral politicking.

Published: 11th March 2019