Enhancing Domestic Resource Mobilization: What are the Potentials?

At a nation, we can still enhance on the effective and equitable strategies for domestic resource mobilization. The impetus for such emanates from considerations of possible tools and process of financing our development, it basically calls on us to step up our efforts to collect more taxes to achieve development and growth plans that we have set before us, especially the one for achieving a middle income status within this decade. To reach there, we need to constantly engage in these discussions, especially those related to potential impediments—political and structural—in raising domestic resources.
The challenge of mobilizing domestic taxes should be considered against the funds required to achieve our development goals. To achieve the development target funds required. For instance, to achieve targets in education, health, roads, railway, electricity, water and sanitation requires an annual growth of at least 15 percent of GDP until 2030.
Where are we on mobilizing taxes domestically?
According to the publicly available data, in these last 4-years, direct tax collection has increased by about 7 percent, while the number of taxpayers has grown by 20 and 3 per cent for individuals/sole proprietorships and corporate types of direct taxes respectively. Direct taxes contribute about 40 percent of our total tax revenue.
Much as there are noted progress, we still have a low taxpayer base even as a percentage of the total population. Only 2.75 million have a TIN and of these, 21,000 have filled for VAT and about 300,000 file income tax returns. Only 5 per cent of the population pays direct tax, which is very low compared to 30 per cent in Botswana, 25 per cent in Namibia, 20 per cent in Mozambique, etc.
On average, our tax-to-GDP ratio has risen by about 3 percentage points of GDP in these past few years, which is higher than the average rate for Sub-Saharan Africa (SSA) countries, which ranges between 2 and 3 percent. That said, we are still among the 10 countries in SSA where the tax-to-GDP ratio is below 15 percent. Thus, whatever angle this debate takes, the level of tax capacity requires enhancing for us to ensure sustainable growth.
So far, higher indirect tax collections, have been driven primarily by rising revenues from value-added tax (VAT) and domestic duties, despite the significant revenue potential from international trade taxes. Revenues from corporate income taxes have held up at less than 5 percentage points of GDP. These revenues are less than what we can potentially mobilize because of profit shifting by multinational companies.
A key question for us, going by this argument, is whether the increased reliance on VAT and duties causes the overall tax system to become regressive to the detriment of the poor. Unlike in advanced economies, the ratio of direct tax revenues to indirect tax revenues has remained broadly unchanged.
What seems to be the problem?
Let us consider the political economy of taxation. While there has been noted improvement in these past few years, and there is still room for further improvements in the techniques of tax administration, the fundamental problems in revenue mobilization, across a wide variety of sources, are sometime rooted in inequitable power structures. These power structures create widespread perceptions of unfairness, corruption, and a lack of transparency, which compromises compliance and enforcement mechanisms. In some cases, political forces exempting the rich and powerful compound the already difficult technical problems of bringing large, informal sectors into the tax net. The “tax culture” that many advanced societies rely on, in part to ensure regular tax payments across smaller taxpayers, does not exist. This gap opens a vicious circle of distrust in the government: low resource mobilization means services are not provided regularly and efficiently, and the lack of service provision discourages tax payments. This the one major area that the current government is facing head on and we all can observe the positive outcome coming out of it, and we remain grateful.
Essentially, the social contract needed to make any revenue effort more credible can be broken by the above. Like it is in many of our countries, the general populous is unclear about the benefits of paying taxes and is skeptical about their social duty to contribute to a revenue system where they see large and powerful players—be they individuals or corporations—opting out, sometimes because of tax exemptions. The economically powerful in a country can sometimes keep even the tax authorities at bay. We are however, much grateful that this is no longer the case.
Is there a sustainable solution?
There are a variety of solutions to the challenge of domestic resource mobilization. They include increasing resources for audits; establishing well-resourced large taxpayer units; simplifying tax processes to lessen the administrative burden; using digital technologies for better record-keeping, monitoring, and auditing; increasing transparency in granting tax exemptions; and harmonizing tax policies across sectors. These are all well-known recommendations and can potentially assist tax authorities in mobilizing more revenue.
What’s next?
Implementing these measures, costs money and takes time. Difficult choices are made and will have to be made—tax authorities are victims of low tax revenues just as other government service providers. What advice can one give to craft effective strategies for inculcating a tax culture that will provide the domestic resources needed for the pressing human and physical infrastructure needs of the country? That’s the question that is being answered through action following various strategies implemented by the current government. Obviously, the room for improvement is large.

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Stock Markets, Investments and a Good Society

Stock markets, to some people are often portrayed as casinos. These sentiments are partly informed by news report that often portrays frantic traders speculating on where prices would go next, almost becoming euphoric if the shares have had a good run up (also called a bull market), or thoroughly depressed if the market is down (a bearish market). Indeed it is fair to say that there are still many people in our societies who regard stock markets as places to make quick money, who spend their lives and money trying to gain short term trading edge over others, not bothering to understand the underlying fundamentals of the business behind the shares.
The image portrayed above is unfortunate because along-side that speculative trader and/or investor, are thousands of value-based investors, (representing retirements and pensions funds, life insurance funds, savers for the future, fund managers, etc), who genuinely try to understand the long term prospects for a company, calculating the intrinsic value for it and then deciding whether to allocate money to the firm to help its growth, expansion, building new factory, make new invents, go into new frontiers, etc.
Through the actions of these value investors, societies benefit from new products, new industries, jobs, wealth creation, etc as money is taken from idle and inefficient activities and reallocated to new frontiers and efficient use. As one can imagine, through this intermediation process — it is not only the government that benefits from the presence of stock market in its midst —but anyone with savings in a pension scheme, or with a life insurance cover, or with savings/investments with relatively lower returns, etc — who wants a portion of that money placed in shares with prospects of high rates of returns (profits and capital gain) over the next few decades.
To meet these societal needs (i.e. capital/funds to finance businesses and investment opportunities, etc) stock markets have evolved throughout the history, especially in the manner in which they are governed and managed, the manner in which they face and manage increased competitions and also the manner in which they evolve with technological innovations and invents that have changed their method of trading so that their trading and securities depository are now much built around sophisticated computer systems that can handle millions of transactions in a day.
As it is, it makes sense to say every society at this age of human history needs diversified level of investors within itself to facilitate and assist businesses growth through tools of mobilization of savings resources and intermediate them into productive use, especially long term projects and enterprises — many investors would prefer to have the liquidity and vibrancy that is offered by stock markets than the difficulty of finding buyers when they need to sell off their businesses and shares (or securities) outside the organized market.
On the same vein, a society needs people who are willing to take risks — either in establishing new business ventures, or expanding current businesses to other new territories, or innovation based on ideas or people with the willingness to provide risky funds to new ventures and ideas. Some financial institutions, by their nature, given their business model and mandates are not willing to accept such risks. Institutions, such as banks — would like to strike deals with companies whereby even if the amount of profits made is small or even in cases where the company makes losses, they still will be paid their interest income on capital advanced to such companies. Furthermore, such institutions usually require collaterals so that if business plans turnout to be not as expected, the bank can recoup its money by selling off property or other assets held under collateral. Holders of other forms of debt capital such as bonds, take similar low-risk (but also low-returns) deals.
One can therefore only imagine if debt (short term or long term) were the only form of capital available for businesses to be established or for financing their further growth. Obviously, if debt was only the source of finance, then very few businesses would have been established or flourished in such a situation because it would be rare for entrepreneurs and business managers to come-up with investment projects (i.e. a new venture, a new product-line, etc) that would offer these lenders the security they need or the certainty and predictable returns they require. Part of the reason why businesses flourish in various uncertain business and economic environment, is because they are also financed by capital whose source recognize that uncertainty and risk taking is part of the business and investment environment. Such fund providers (investors) therefore factors-in such situations in their capital and investment pricing.
It on such bases that the DSE have been pursuing efforts to educate business enterprises to consider using the stock market to access this alternative source of financing, including establishment of the SMEs segment – and now the DSE has introduced the DSE Enterprise Acceleration Program for the purpose of bridging the communication gap between itself and the business community as well as build capacity of SMEs owners/managers to running their businesses in line with the principles of sustainable businesses management.
In my argument above, I have painted a picture that says over-reliance on debt is neither sustainable nor recommendable for the long term growth and sustainability of many businesses in many sectors. However, let me also say I appreciate that it is possible for some businesses to be entirely financed by debt capital, i.e. companies with little uncertainty regarding its future income — such as those dealing with water and energy utility may fall under this group, because they are regulated and bills charged to their customers are highly predictable for a foreseeable future. However, despite such situations, even for such companies, whenever analysis for a new project is carried out — issuance of shares, because of its efficient pricing and hence less costly source of capital, might be one of the considered capital source.
Now, consider a company whose business is continuously cyclical, or a business whose sustainability depends on its clients or customers sentiments or depends on whether or external factors beyond their control— can such a business be purely financed by debt?. Probably no — such a business would require part of its finance be debt and partly equity. That is the non-risk takers can finance part of the business and risk takers can finance it partly — naturally risk takers will want high reward for putting their hard earned savings in such an exposure. In exchange to such risk taking — they would want to have their views on who should be on the board of directors of the company, they would want the power to vote down major moves proposed by the managers. They would also want regular information on the progress of the company they have invested into. One important aspect to note is that these holders of shares, in the success or failure of the enterprise, they do act as shock-absorbers so that other parties contributing to the company, from suppliers and creditors to bankers, do not have to bear the shock of a surprise recession, a loss of market share. This is why it is important for any society to appreciate the relevance of a stock market in its midst.

On the Commoditization and Commercialization of Kiswahili

About two years ago, friends (Ali Mufuruki, Rahm Mawji, Gilman Kasiga) and I wrote a book, themed: Tanzania’s Industrialization Journey, 2016 to 2056. The book attempts to suggest possible solutions on how to go about industrializing our nation – moving from agrarian to a modern industrial state. In the soft side of this attempt is the aspect of cultural changes, and the need leverage on our cultural exceptional cases, particularly Kiswahili exceptionalism, on encouraging and motivating us to take pride by being a Swahili Nation. There are also suggestions on how we can turn this whole pride thing into some form of economic benefits –packaging Kiswahili into a tradable commodity, commercialize it and sell it into the marketplace, to those in demand, as we have it in abundant supply. So, in today’s article, I would like us to focus on this topic, while referring to some of what we said in the book – basically complementing current efforts by our Government in this space.

Let us start by putting the context right: with more than 120 different ethnic groups and tribal languages, Tanzania is genetically the most diverse country in the world, and yet, of all African countries, it is the one that has not had any serious ethnic conflicts because of the unity fostered by Mwalimu Nyerere under Swahili nationhood. Spoken as a first or second national language by more than 140 million people in Tanzania, Burundi, Congo (Kinshasa), Kenya, Mayotte, Mozambique, Oman, Rwanda, Somalia, South Africa, Uganda, UAE and the USA; Swahili is the single most widely spoken language in Africa and one of the top ten most widely spoken languages in the whole world! And there is a significant potential to expand the base of potential Swahili users to far more than the current 140 million. As Henry Ford and later Steve Jobs once said: people don’t know what they want, until you show it to them. We can therefore be entrepreneurs in front-running our Swahili exceptionalism and show to the people of Africa, what they probably want. I hope entrepreneurship by the private sector will complement the Government’s recent efforts.

Let’s proceed — under the leadership of our Founding Father Mwalimu Nyerere, Tanzania deliberately embraced Swahili not only as a national language but also as a way to express our national identity and pride of us, as a people. As a result, proper Swahili writing, grammar and literature are taught in school as mandatory subjects all the way to secondary school. Swahili is used as the default medium of communication in government offices, parliament and now, even in international conferences. Although we have not achieved similar success in finding the way back to our cultural and traditional roots (Christian or Islamic faith institutions have continue to dominate the spiritual space within which we congregate); but we, Tanzanians can claim today to be one of the few African countries that have successfully used a common indigenous language as a tool for the unification of its people into a strong, peaceful and harmonious society.

Despite of the above, we still observe some key aspects that require our reflections and intervention in order to make Kiswahili more prominent among us, even in our own measure. For instance, rather than creating and translating works in literature, economics, business, history, etc., in Swahili and encouraging the widespread use of Swahili among political leaders and citizens and in formal education and businesses, we see English as the sign of sophistication, we think that economics and philosophy and technical concepts can only be studied in English, we clamor to name and operate our businesses, schools and research institutes in English and our political leaders use English when foreign delegations use their own languages. We sometimes forget that all major powers that have risen recently/are rising e.g., China, Japan, South Korea, Norway, Malaysia, Vietnam, Sweden, Thailand, Germany, Qatar, UAE, etc., all use their own languages – often with a unique script – for everything and sometimes teach English, but only as a secondary language.

Based on the above, as Ngũgĩ wa Thiong’o (on Decolonizing the Mind) and Frantz Fanon (on the Wretched of the Earth) says, psychological freedom – the rejection of colonizers’ linguistic, cultural and identity forms, and a strong re-adoption of and belief in one’s own – is a precondition for achieving political and economic freedom.
Now for us, we are fortunate that Mwalimu Nyerere sowed the seed of psychological freedom early on and instilled in Tanzanians a sense of self-pride, self-worth and self-love that was independent of the European. He fostered nationalism and mandated the widespread use of Swahili, which has made Tanzania along with Ethiopia and most recently Rwanda, the only countries in Sub-Saharan Africa that use their native languages in the conduct of official government business.
We must therefore actively forge a Swahili/Tanzanian identity of uniqueness, greatness, brilliance, and unity and self-confidence and self-pride in being Swahili/East African (and not striving to be American or British or Chinese). We should find a suitable term for this in Swahili; Uzalendo comes close, as does Rwanda’s Agaciro, but Swahili language scholars can likely find a better-suited word to embody this spirit.

So how do we go about building the structure upon which we can leverage the Swahili exceptionalism into a commodity that could be sold in the market for our mutual economic benefits?, well this will be a follow-on to this one: How do we build Swahili exceptionalism, and get Tanzanians to draw strength from it, feel psychologically empowered and personally invested, triple their efforts to drive the nation forward and make Swahili a tradable Commodity? Below are some of the suggestions, basically starting from looking within:
We need to come up with national values, slogans, aims and disseminate them everywhere across the country as a reminder of Swahili exceptionalism, and the greatness it was always meant to achieve.
We should encourage us to use Swahili everywhere — as Mwalimu Nyerere and Ngugi wa Thiong’o suggest, we have to stop the deliberate disassociation of the language of conceptualisation, of thinking, of formal education, of mental development (at the moment, mostly English), from the language of daily interaction in the home and in the community (Swahili). We need to make them both Swahili. Language is the ultimate creator and preserver of self-identity and self-confidence, as described before, as we speak it every hour of every day. Our government leaders have to lead the way and use Swahili on every platform, local and international. We saw this with the Vietnamese delegation that visited Tanzania earlier this year; clearly they could speak English, but, when addressing the public, they spoke in their own tongue.
We have to grow and make widely available a vast body of professional and academic subjects and texts in Swahili, and encourage study in them. Reproduce and spread widely the works of literature, philosophy, etc., that already exist in Swahili, for example, the works of Shabaan Robert, Muhammed Said Abdulla and Julius Nyerere, as well as more recent writers. Encourage the creation of vast amounts of Swahili works in medicine, law, business, literature, physics, education, mathematics, history, engineering, economics, philosophy, etc.
Why don’t we teach project management, electronics, business studies, medicine, agricultural and factory technician courses in Swahili? This would be the greatest equalizing force in Tanzania, where instead of forcing everyone to learn everything in a language that is not their own, they learn in a native language in which they can excel even further. We need to build our intellectual tradition and glorify it.
We can even translate on a mass scale foreign works into Swahili, e.g.,the works of Professor Ha-Joon Chang’s work on economics like Bad Samaritans and Transformative Industrial Policy for Africa, or Thomas Sankara’s speeches on society, politics and economics in Thomas Sankara Speaks; or translate science texts from Singapore, vocational and technical texts from Vietnam and Germany, medical texts from India and the US, Chimamanda Ngozi Adichie’s novels like Half of a Yellow Sun, the Harry Potter series, etc. We need a healthy fusion of locally produced Swahili work and work from abroad that we translate into Swahili.
We should real set an example for other African nations from this context. As we carry out all the above measures and more, we will become more united, self-confident, proud, and this will accelerate industrialization and growth. Just we have drawn from other nations in building unity and Swahili exceptionalism, so must we assist other African countries in strategizing their way of doing the same. We could even, for example, spread the academic and professional use of Swahili (after we’ve built up the requisite knowledge base in it) throughout East Africa, other parts of Africa and the diaspora, as a way of uniting people and strengthening their senses of identity
Let us learn from other nations.
The above is not an exhaustive list. As done above, we must continue to research what other nations have done to drum up a sense of exceptionalism and nationalism, and adopt what could work for us, and build upon it
Finally, we should remind ourselves that true nation-building is both extrinsic and intrinsic: as we build the external (industries, infrastructure and economy), we must simultaneously strengthen the internal (mindset, identity and confidence) values of our people. One without the other will inevitably lead to failure. Once internalized and understood, can then turn into an aspect of geopolitical-cultural-social-economic tool.

On the Commoditization and Commercialization of Kiswahili

About two years ago, friends (Ali Mufuruki, Rahim Mawji, Gilman Kasiga) and I wrote a book, themed: Tanzania’s Industrialization Journey, 2016 to 2056. The book attempts to suggest possible solutions on how to go about industrializing our nation – moving from agrarian to a modern industrial state. In the soft side of this attempt is the aspect of cultural changes, and the need leverage on our cultural exceptional cases, particularly Kiswahili exceptionalism, on encouraging and motivating us to take pride by being a Swahili Nation. There are also suggestions on how we can turn this whole pride thing into some form of economic benefits –packaging Kiswahili into a tradable commodity, commercialize it and sell it into the marketplace, to those in demand, as we have it in abundant supply. So, in today’s article, I would like us to focus on this topic, while referring to some of what we said in the book – basically complementing current efforts by our Government in this space.

Let us start by putting the context right: with more than 120 different ethnic groups and tribal languages, Tanzania is genetically the most diverse country in the world, and yet, of all African countries, it is the one that has not had any serious ethnic conflicts because of the unity fostered by Mwalimu Nyerere under Swahili nationhood. Spoken as a first or second national language by more than 140 million people in Tanzania, Burundi, Congo (Kinshasa), Kenya, Mayotte, Mozambique, Oman, Rwanda, Somalia, South Africa, Uganda, UAE and the USA; Swahili is the single most widely spoken language in Africa and one of the top ten most widely spoken languages in the whole world! And there is a significant potential to expand the base of potential Swahili users to far more than the current 140 million. As Henry Ford (the founder of Ford Motor Company) and later Steve Jobs (co-founder of Apple Inc.) both once said: people don’t know what they want, until you show it to them. We can therefore be entrepreneurs front-running our Swahili exceptionalism and show to the people of Africa and beyond, what they want. I hope enterprise spirit by our private sector and private citizens will complement the recent Government’s efforts.

Let’s proceed — under the leadership of our Founding Father Mwalimu Nyerere, Tanzania deliberately embraced Swahili not only as a national language but also as a way to express our national identity and pride of us, as a people. As a result, proper Swahili writing, grammar and literature are taught in school as mandatory subjects all the way to secondary school. Swahili is used as the default medium of communication in government offices, parliament and now, even in international conferences. Although we have not achieved similar success in finding the way back to our cultural and traditional roots (Christian or Islamic faith institutions have continue to dominate the spiritual space within which we congregate); but we, Tanzanians can claim today to be one of the few African countries that have successfully used a common indigenous language as a tool for the unification of its people into a strong, peaceful and harmonious society.

Despite the above, we still observe key aspects on this matter that require our deep reflections and intervention in order to make Kiswahili even more prominent among ourselves. For instance, rather than creating and translating works in literature, economics, business, history, etc., in Swahili and encouraging the widespread use of Swahili among political leaders and citizens and in formal education and businesses, we see English as the sign of sophistication, we think that economics and philosophy and technical concepts can only be studied in English, we clamor to name and operate our businesses, schools and research institutes in English and our political leaders use English when foreign delegations use their own languages. We sometimes forget that all major powers that have risen recently/are rising e.g., China, Japan, South Korea, Norway, Malaysia, Vietnam, Sweden, Thailand, Germany, Qatar, UAE, etc., all use their own languages – often with a unique script – for everything and sometimes teach English, but only as a secondary language.

Based on the above, as Ngũgĩ wa Thiong’o (on Decolonizing the Mind) and Frantz Fanon (on Wretched of the Earth) both says, psychological freedom – the rejection of colonizers’ linguistic, cultural and identity forms, and a strong re-adoption of and belief in one’s own – is a precondition for achieving political and economic freedom.
Now for us, we are fortunate that Mwalimu Nyerere sowed the seed of psychological freedom early on and instilled in Tanzanians a sense of self-pride, self-worth and self-love that was independent of the European. He fostered nationalism and mandated the widespread use of Swahili, which has made Tanzania along with Ethiopia and most recently Rwanda, the only countries in Sub-Saharan Africa that use their native languages in the conduct of official government business.
We must therefore actively forge a Swahili/Tanzanian identity of uniqueness, greatness, brilliance, and unity and self-confidence and self-pride in being Swahili/East African (and not striving to be American or British or Chinese). We should find a suitable term for this in Swahili; Uzalendo comes close, as does Rwanda’s Agaciro, but Swahili language scholars can likely find a better-suited word to embody this spirit.
So how do we go about building the structure upon this foundation? How do we build Swahili exceptionalism, and get Tanzanians to draw strength from it, to feel psychologically empowered and personally invested, triple their efforts to drive the nation forward and make Swahili a tradable Commodity that can be commercialized and sold in the market place across the continent and beyond? These are some of the suggestions, starting from within ourselves: (i) we need to come up with national values, slogans, aims and disseminate them everywhere across the country as a reminder of Swahili exceptionalism, and the greatness it was always meant to achieve.

We will continue next week…

Municipal Bonds, a Viable Option for Funding Local Governments

In the past five years we, at the stock exchange together with some of our key stakeholders have been engaging local government authorities on the idea of using municipal bonds in the financing of local government projects, especially infrastructure projects. Up to this point, we have, in various forums and platforms engaged with municipalities of Kinondoni, Ilala, Ilemela and Tanga. We have also done the same to city councils in Dar es Salaam, Mwanza and Arusha, as well as Songwe region and in the next few days I will be in Simiyu on the same mission. Unfortunately, it is been five years of engagements and no single municipal bonds have been issues, while at the same time there is no deficit of social economic infrastructure projects that needs funding. In fact, we haven’t gone as far, despite opportunities in some cases of helping identify potential projects and preparations of Draft Information Memorandum framework that could have guided their further consultations. Why efforts such as these are necessary? and why are we still pursuing this cause? I will explain:

Municipal bonds are debt instruments issued by sub nationals such as local government authorities, municipalities and cities. They enable local governments to raise money to fund public projects, paying bondholders interests for the debt as the cost of raising funds. In the U.S, where such bonds were first issued during the urban boom of 1850s, their outstanding bonds issuance by states, cities and other sub-national entities exceed US$ 3 trillion, as of 2018. In Africa, only the Republic of South Africa cities of Cape town, Johannesburg, Ekurhuleni and Tshwane have issued bonds, so as Douala in Cameron. Dakar in Senegal as well as a few cities in some states in Nigeria have tried but so far has been without coming to its finality. It is therefore apparent that municipals and sub-national bonds market is still infant in not only to us, but in Africa, and countries municipals/sub-national entities are not allowed to borrow via issuance of municipal bonds.

I think it is important to appreciate the fact that it is not only the municipal bonds market that isn’t developed as it should, but so are other types of bonds, i.e. government bonds (issued by central governments and backed by national governments); Agency bonds (normally issued by stated-owned-entities, government agents or government sponsored entities); corporate bonds (issued by public and private companies); sovereign bonds (issued in foreign currencies and guaranteed by national governments targeting foreign investors); diaspora bonds (issued by governments and directed to citizens originating from the country but live somewhere else); nor are Islamic bonds (issued by government or Islamic banks and institutions targeting people of Islamic faith) — these are all underdevelopment in most African countries, despite funds mobilization challenges and the need for financing.

In spite of the above, the truth is that our Governments are overwhelmed by the rapid growth of cities, however, strategic planning has been insufficient as it is for the provision for basic services to residents, and the situation isn’t getting any better by the day. For instance, since 1990s, (earlier than that for us) widespread decentralization and devolution has substantially shifted responsibilities for dealing with urbanization to local authorities; yet municipals and local governments across Africa receive just aa small share of the national income to discharge their duties and responsibilities. Responsible and proactive local governments, municipals and city authorities are examining how to improve their revenue generation and diversify their sources of finance. Municipal bonds may be a viable financing option for some capital cities, depending on the legal and regulatory environment, governance and control mechanisms, viability of proposed investment projects, viability of vehicles for implementation of project financing and projects’ implementation, investors’ appetite and the creditworthy of the borrower.

Massive construction programs for roads and pavements, roads rehabilitation and parking, street and traffic lights, shopping malls, downtown markets, bus terminals, waste management facilities, flood management, sewage pipes, environment management as well as other social programs such as school milk programs, free uniforms and computers, etc. all these can be financed efficiently via issuance of municipal bonds by municipals and cities without over-reliance to central government for funding.

I understand that under the current legal/regulatory framework provides for a limited scope to increase resources by way of revenue collections because this role if highly concentrated to the central government, also there are several overlaps between the central and local governments in this space. However, it is also fair to argue that institutions that are closest to the people i.e. local government — must have pro-poor development programs that can be financed using internally determined financing channels such as municipal bonds. Therefore, reforms that will enable cities and municipals to borrow efficiently in the process of reducing their financing dependency on the central government, should be encouraged and pursued.

Much as there exists limited alternatives for raising finances to finance local governments development projects, but the attraction of bonds issuance may be clear, it will enable cities to borrow large amounts in lump-sum at a relatively competitive interest rates from a wide and diverse investor base than what could be provided in bi-lateral commercial borrowings. Once done, this will be a strong signal of determination by local government authorities, municipals and cities not to overly rely on concessional financing and confidence in their abilities to manage large revenue-generating investments. But this requires close leadership by a champion within the local government governance structure, such as a mayors as well as the political and administrative discipline that goes with such initiatives.

Basics of raising capital for startups and SMEs

Capital is the lifeblood of business. If you run out of it and lack access to additional resources, in many a case the game is over. As the founder of a startup, you’ll find that raising capital is a significant part of your efforts and, for better or worse a major challenge. Unless you have a clearly defined plan and a path you will follow, you’re going to end up wasting precious time that could have been spent elsewhere.
So, understanding the basics of raising capital will be critical to your success. If you’re clear on what you need to do to get from where you are to where you want to be, you’ll be less likely to derail while you’re in the thick of it. Here are the factors to consider:
Preparations, Preparations, Preparations
This step is often overlooked but unless you want to be constantly pumping your own resources into your business, you’ll want to assess and address various aspects of your company to ensure its overall readiness. Not only will you need to examine your team’s overall health from every angle, but to research your industry, competitors and the market, define your products prepare financial projections and determine how much money to raise, plus decide whether to tap into debt or equity.
Preparations may be the most time-consuming and effort-intensive aspects of raising capital. But if you know what you want and outline the rationale behind those choices, you’ll find it easier to figure out whom to target and ask for what you need. Remember, as you court investors and financiers, they will be asking the tough questions. So, you’ll have to be equipped with all the relevant information you need that will make them understand the business you’re in closer to how you know it.
Just because you have decided whom you are going to go after and what amount to ask doesn’t necessarily mean you are going to get what you’ve requested when it comes to financial matters, the more options you can identify, the better. That way, you will always have a backup plan when you need it.
Among the different types of investors out there that you may consider are: family, friends, banks, microfinance institutions, venture capitalists, angel investors, private equity firms, business incubators, investment groups, crowd funding pledges and the stock market.
Keeping in mind that some forms of funding are costlier and riskier than others, you can also use lines of credit (i.e. letters of credit and guarantees), bank loans, notes and bonds offerings and the like. These financing options are often last resorts or backup initiatives, as they are more contingent on the condition of your personal finances and assets, versus the value or potential value of your business.
Searching from the web or engaging capital raising consultants will inform you about the necessity of a “pitch deck” (basically a brief presentation, created using PowerPoint, or Keynote which is used to provide your audience with a quick overview of your business plan. Usually used during face-to-face or online meetings with potential investors, financiers, and such business partners) and the ways in which to put an effective presentation. The fundamentals are that your presentation should be used to highlight the most attractive aspects of your business.
Keeping your target audience in mind and knowing what’s important to investors is key.
Generally, 10 to 15 of pitch deck slides containing information your company, your team, competition, target market, milestones, future plans and funding requirements is sufficient. Armed with this information, your prospective investors should be better able to decide on a course of action.
You can never know too many people. While networking, you don’t necessarily need to be constantly promoting your business; you should make sure you are helping other people. This will help you garner a positive reputation, and when you help others get what they want, they will be more likely to help you.
Keep in mind that you will face rejection when discussing your business with others. Some investors may not be looking for an opportunity right now. For other people, your concept simply won’t be the right fit. Knowing this while going in can save you a lot of heartache and stress.
Researching various investment groups and resources online can prove worthwhile as well, especially during this time and age where internet and web searches resources are significantly helpful. Just make sure that you don’t get so much sucked into the bottomless blackhole of the internet. Once you get what you want from the internet, use that in trying to reach out specifically. Such as by making phone calls or sending emails to specific individuals, so that you specifically address what you want while you also remain proactive when reaching out.
This will assist in finding tailored solutions streamlines your process of finding capital and getting the source of capital convenient and aligned to your business objectives and needs while addressing the growth aspect of your business.
It is however important to note that, even with all your ducks in a row, there are no guarantees you’ll get the capital you need from the investors you’re courting. But no problem-solving is part and parcel of entrepreneurship. Knowing all your options and what you can do to get the money you need can give you greater confidence when you encounter bumps in the road. And that is something you unfortunately, can count on.
In line with the above, as one of the interventions to help bridge the gap for the SMEs sector in the context of access to capital, the DSE is considering introducing the “DSE Enterprise Acceleration Program” with the objective, among others, providing capacity building to identified growth-start up and SMEs in order to enhance their capacities in key areas of their growth ecosystem as well as easing their access to various sustainable capital raising and financing options, both locally and internationally.

Stock Markets and the Economy

In last week’s article we covered years of stock market’s experiences for both the UK and the US, covering 119 years for the period starting from year 1900 to date. This was from the recent Credit Suisse which was the eleventh edition dubbed the 2019 Global Investment Returns Yearbook: 119 years of financial history and analysis.
Now, year 1900 was a long time ago. A lot has changed ever since, for instance over 80 per cent of the value of invested assets during then was in industries that are today too small or are extinct altogether, on the other side — a high proportion of today’s equity raising, and listed companies come from industries that were small or non-existent in 1900. But then, we quoted a line from the Biblical book of Ecclesiastes 1:10 which asks and says: Is there anything whereof it may be said, see this is new? It was here already, long time ago – nothing is new under the sun. So, it’s been 119 years of experimentation and experience and nothing new.
As you reflect on 119 years, add this into that — the first stock markets were established in 17th century London coffee houses. During this time, people who were interested in owning commercial shares of businesses came to places like Jonathan’s Coffee House. There, innovators such as John Castaing posted stock and commodity prices for “marketable securities in London,” according to the London Stock Exchange’s historical record. This was the “earliest evidence of organized trading,” moving from coffee houses to an actual exchange on March 3, 1801. Now, compare that to the typical of today’s market with sleek electronics and frenzied trading floors; but even with this, still nothing is new as has been foretold.
Whether new or not, in countries around the world, stock exchanges are being used to help businesses raise capital and give investors opportunities to back new and established enterprises. In recent times, there seem to be no geographical limit or bias to the stock market which means that individuals from a diverse array of countries can use stock markets to build wealth and invest responsibility. By any standard of measure, the functionality and utility of the stock market is becoming universal by the day – now this may be something new. In today’s article we go back into the basics, we will try to answer the question — what is the role and impact of the stock market in the economy?
Raising capital
Stock markets are, first and foremost, financial institutions established to help businesses and entrepreneurs come together to transact (buy, sell and trade) shares for the purpose of providing capital to enterprises that need it. Were it not for stock exchanges, entrepreneurs would be left to their own devices to find investors, and consumers could wind up at the mercy of unlicensed and unregulated financial products with no oversight.
Servicing Investors
Another role of stock markets is to act as an intermediary for large and small investors seeking to make money outside the realm of standard banking institutions. The role of a stock exchange in an economy is to maximize return on savings that might otherwise languish in static bank accounts with low returns. Stock exchanges promise and often deliver higher profits, and in return, investors receive measures of assurance, diverse opportunities and flexibility. Further, a stock exchange offers investors assurances via formal oversight on investments. There is the negative side as well, where for some reason the companies listed in the stock market does not perform as expected, and investors risking losing value of their investments.
Barometer of economic health
A stock exchange can serve as a barometer of a nation’s fiscal health, broadcasting the ups, downs, trends and shifts of the domestic economy. For matured markets, the relationship between a society and its stock exchange is so deeply embedded that analysts can influence both the domestic economy and/or the stock market it relies on by signaling optimistic outlooks, or the opposite.
Good governance and financial accountability
Sophisticated financial market systems require credibility and accountability if they are to function on behalf of businesses and investors as interested in ethics as they are in profits. For this reason, a stock exchange benefits from a formal structure upheld by rules, laws and regulations. Management and operational standards set by governments, bureaucrats and agencies overseeing stock exchange operations add authority and oversight to the institution, giving stockholders, investors and businesses checks and balances necessary for investor confidence.
Economic effects
The direct effect of stock market activity can impact a nation’s economy in multiple ways. Stocks fall, spending stops, consumers lose confidence and a nation’s financial state begins to falter. Conversely, stocks rise, confidence spreads, spending and investments grow. A nation’s mood can rise or fall on stock market activity and performance, which shows how important the role played by a stock exchange can be in a society’s social and fiscal fabric.
Expanding diversity
If one of the stock market’s roles is to bring together like-minded investors, exchanges also serve as fiscal melting pots, giving minority businesses an opportunity to place shares of new company assets before potential stakeholders who might not otherwise learn about diverse new products were it not for the existence of stock exchanges. Few economies can hope to flourish without infusions of new ideas, systems and opportunities — all represented by cash — which is why this confluence of financial needs and wants regularly merges on the floor of a vibrant stock exchange.

Important Lessons from Years of Equity Markets

Credit Suisse recently published their eleventh edition report dubbed the 2019 Global Investment Returns Yearbook: 119 years of financial history and analysis. The report covers 23 national stocks and bonds markets and almost all financial products, from stocks, bonds, currencies, and indexes that trade in these markets. Countries and markets covered in the report represented 98 percent of the global equity markets in 1900, but still represent 90 per cent of the investable universe as at the start of 2019 – some closely reflecting what is being said in the book of Ecclesiastes 1:10 — “Is there anything whereof it may be said, see this is new? It was here already, long time ago”. And so, here are some of the highlights from the 119 years:
At the beginning of the 20th Century in 1900, the UK equity market was the largest in the world accounting for about 25 percent of the world market capitalization, followed by the US (15 per cent), Germany (13 percent), followed by France, Russia and Austria-Hungary. This hasn’t changed significantly – 119 years later, the US market is now dominating, accounting for 53 per cent of the total world equity market value. Japan (8.4 per cent), and the UK (5.5 per cent).
Then there are some shifts in sectoral concentration in the equity market, but not so stunning. Markets that started in the beginning of the 20th Century were dominated by railroads, which accounted for 63 per cent of the US stock market value and almost 50 per cent of the UK value. Over a century later, railroads have declined almost to the point of extinction in the stock markets listed securities market cap, representing under one percent of the US markets and close to zero of the UK stock markets. It may be interesting to note that, although railroads stocks have declined reflecting the decline in the industry itself, but railroad stocks performance beat the overall market performance and indices in the US market. In fact, railroads stocks outperformed both trucking and airlines since these industries emerged in the 1920s and 1930s. Learning from this, could we finance then, Ok, there is nothing new – should we our SGR and other railroads projects by issuing stocks or infrastructure bonds to the DSE?, or would we be going to the US and UK of the 1900s? Anyways, if we decide otherwise, at least we know this is how history records the financing of railroads whose demand by those countries in the 1900s may be similar to our current case.
Another interesting set of facts presented by the Suisse Report which show the similarities between 1900 and 2019 are: the banking and insurance sectors, which was important then, continue to be important now. Industries such as beverages (including alcohol beverages), tobacco, utilities were largely present in the early 1900s and still survive today, as they continue to be among the top sectors represented in stock markets. In our case, we have only seven listed banks (out of more than 55), no insurance listed company, only one alcohol beverage, only one cigarette company listed – again no insurance company, no soft drinks company, no utilities company among the listed securities at the Dar es Salaam Stock Exchange. Isn’t it odd! Why is this the case at this time and age — with globalization, free enterprising, free markets, broad access to commonly shared prospects via common ownerships, over a century of experience and learning that we could easily be leapfrogged, why are such companies outside of the stock market space?
In the UK, quoted mining companies were important in 1900 just as they are in the London Stock Exchange today. Out of the many mining companies operating in our local environment because of our endowment, and they are very important to us today, but unfortunately none of them is listed in the Dar es Salaam Stock Exchange to form part of the domestic equities and domestic market capitalization. Are we such backward in this perspective to the point of being not closer to the UK and US of the 1900s? – what is the meaning of learning, what about the idea of inclusive growth and citizens economic empowerment?
Deflecting a little from Ecclesiastes, it is similarly interesting to note that of the US listed companies in 1900, over 80 per cent of their value was in industries that are today too small or are extinct altogether. The same situation applies for the UK, for the rate is 65 per cent. Other industries that have declined significantly over this period include textiles, iron, coal and steel. Now, as we pursue these industries, in 2019, should we understand that same industries controlled significant value of listed firms and market capitalization for stock markets in the UK and US in 1900, that citizens in those countries owned companies in these industries and benefited from their common ownerships via the stock market?
However, it is equally true that a high proportion of today’s equity raising and listed companies come from industries that were small or non-existent in 1900; actually, it is 62 per cent by value for the US and 47 per cent for the UK – what prohibits us from pursuing industries such as those in ICT, sciences, etc?
All in all, the value of the Credit Suisse report isn’t some sort of a roadmap of investment returns expectations and opportunities. It instead gives us a better sense of where the equity market has come from and its evolving in these past 119 years. We also should be mindful to the fact that a lot has happened during this period – two world wars, several recessions and financial crises, reshuffling in the global equity, financial markets and economies. If we only could reflect, learn and assimilate – so Ecclesiastes 1:10 implies.

On Expanding the Tax and Taxpayers Base (III)

This is the continuation from last week, and last piece on the topic. As it were, these are personal recommendations, further to what many others have undertaken already, i.e. drawing up accounts of what are considered necessary in the expansion of our tax and taxpayers base. Read on:
On presumptive taxation
In concluding last week’s comments on this aspect – in the ultimate analysis, under no circumstance should a taxpayer be allowed to hide for his entire productive life in the comforting embrace of an unduly favorable presumptive taxation system, or non-filling of returns. Progressive assimilation of these into the tax net should be not only through tax education, but also through increased risk perception regarding the likelihood of penalties being imposed.
It is equally important to ensure that small to medium enterprises which are in the normal tax system should not be allowed to migrate into the simplified system to avoid paying tax. In addition, an effective method to monitor small enterprises that opt for presumptive taxation would be to insist on their filing declaration of their accounts annually and it should be made mandatory for them to issue receipts for each transaction, with serial numbers of course.
On small and medium-sized enterprises (SMEs)
Perceived or real high tax rates, the inability to understand a complex tax system and procedures, and the lack of confidence in government’s efficiency in the use of revenues are usually key reasons for low voluntary compliance. Therefore, tax administration measures to improve SMEs tax compliance could include quick and easy processes for registration and TIN issuance; clear and easily available information on tax registration, filing and payment obligations and procedures; a turnover based regime and audit activities that take into account specific characteristics of different groups of SMEs.
Once compliance behavior is understood, raising compliance is likely to again call for simplified returns, with simple profit and loss statements and a simplified capital allowance so that whichever SME is selected, their audit remains fair and transparent and not prone to disputes. Also, setting up of call centres in major TRA regional offices for responding to and resolving basic queries and visit by specialized officers in a group for SME support could be another milestone.
On retail/small traders
Informal and unorganized small traders often have a tendency not to pay taxes and most are not even TIN registered. A conducive environment and tax culture should be created to encourage them to pay their tax dues voluntarily. In addition to Special IDs that are being distributed to small traders, they could also be encouraged to use debit cards/mobile transaction more extensively, this way they could be attracted to enter the formal sector. Further to that, they also would leave an audit trail of transactions undertaken by them, which could be leveraged for widening the taxpayer base. The small retail traders could also be encouraged to enter the banking network by providing the facility of fast-tracking applications for business, educational, housing loans, etc once they are categorized as tax payers.
On high net worth individuals
Wealth tax base can be increased by following international practices, where revenue authorities, exclusively focus on high net worth individuals (HNWIs). On this, administratively there is need for a separate unit for HNWIs within the revenue authority structure with a view to improving the understanding of different customer needs and behaviours in order to respond to them appropriately, assisting them to get their affairs right and pursuing those who bend or break the rules.
On special tax treatments
Further to what has been the approach in these recent years, there could still be a room for a comprehensive review of exemptions. Both the Ministry and revenue authority could consider measures to phase out some forms of unwarranted tax exemptions that continue in the form of various fiscal preferences. The revenue authority could endeavor to analyze the outcomes of these exemptions and inform better decisions.
Specific economic parameters like growth rates of specific sectors, growth of businesses and households, etc could be identified and analysed for increasing the taxpayer base. Such economic parameters, once selected, could be periodically verified, improved and modified. Cases of broad parameters should be narrowed down into more specific ones as experience in parameter analytics is gathered and consolidated.
Exemptions/deductions based on specific economic areas and industries could be minimized. If at all, investment incentives could receive a tax preference because they directly affect growth; then such incentives should be for specific periods of time. A comprehensive review of exemptions will facilitate the deepening and widening of tax base.
On survey and searches
Surveys and technology-based information and intelligence systems should be used to identify potential taxpayers. Databases from different government agencies could be used to locate those do not file tax return and also those who stopped filling for returns.
Such surveys should be based on growth trend in sectors and industries especially clusters of business units known for use of undocumented and cash transactions; expenditure and lavish life style etc. Tax administrators could develop/use software to zero-in on such behavioral indicators.
Enforcement could be strengthened to heighten the perception of the risk of being caught and of penalty for non-compliance being high. Anti-avoidance provisions should be incorporated in our tax laws and then be implemented with great care and sensitivity.

On Expanding the Tax and Taxpayers Base (II)

This is the continuation from ended last week. They are personal opinions to what many have undertaken already to draw up informed accounts of what could be considered necessary for the expansion of our tax and taxpayers base. The broadening of the tax base and greater compliance could boost tax collections, even while the overall tax rate could fall – for resource mobilization and economic growth. Therefore, further to the general observation in the last article, these are high level summarized specific recommendations:
On increasing the number of taxpayers
There is a gap in the number of corporate tax payers registered with the TRA vis-à-vis the number of working companies registered with the Registrar of Companies (BRELA), even though most of them are legally required to file returns mandatorily. The revenue authority should pursue this lead to identify corporates that are registered but are not filling returns.
As we noted last week, 2.75 million have a TIN among us and out of these about 300,000 file income tax returns, i.e. about 89 per cent of registered taxpayers are not filing returns. In here, a mechanism needs to be put in place to ensure the filing of returns by all registered taxpayers. The revenue authority could investigate and carry out a robust analysis on why the percentage of returns filed is so low compared to the number of registrations.
Furthermore, we know that the tax base is not commensurate with the growth in both corporate and individual incomes especially in recent past. An effective mechanism for collecting information from varied sources should be put in place to identify potential taxpayers and bring them into the tax net and broadening the tax base. The compliance system could be made simple and more user friendly to encourage voluntary compliance, thereby broadening the tax base.
On Withholding Tax
The beauty about withholding tax (WHT) is that it leaves an audit trail that acts as a deterrent to tax evasion and in early collection of tax as soon as a transaction takes place; it is also a non-intrusive method of expanding the base. Therefore, regular monitoring of tax deduction transactions therefore could be made and compared with the tax return data to identify whether deductees do file tax returns.
It would be ideal if WHT deductors would file the WHT returns on time, each quarter and must include the details of name of the deductees, their TIN and amount of transaction.
WHT coverage could be expanded to capture more and more transactions, especially those that involve large amounts of cash but remain outside the tax net.
It is however important to note that the taxpayer base may not necessarily increase merely by introduction of WHT unless deductees and deductors file correct returns. To ensure that correct returns are filed, WHT needs to be supplemented by enhanced enforcement methods.
On the cash economy
In my opinion, the cash economy is a major problem in our economic system as large-scale transactions reportedly take place in cash, especially in land dealings, the construction sector, etc. In this aspect, a non-intrusive verification system could be designed so that more cases of capital gains liability are detected and taxed.
Certain measures could also be put in place to discourage cash transactions. For example, local authorities and the revenue authority could be encouraged to bridge the gap between the tax computation rates that is used for property valuation for tax imposition, and the market value of properties (even allowing for a lower property tax rate) and increase the digital footprint of transactions.
Coupled with this, there is also a need to develop better assessment of the “underground economy” both in terms of its size and the economic behavioral factors that motivate the players in that economy. There is no recent study that I have come across on the issue, and if this is generally the case, there is an urgent need to promote research which is Knowledge, Analysis and Intelligence-oriented in this area. That would provide much needed insight into the functioning of the “black economy” and how to harness it with appropriate revenue yielding administrative measures.
Meanwhile, there is no robust instrument at present that captures details of bank accounts/transactions, as they relate to tax payments. The availability of such information could help the revenue authority in widen its information base on the use of black money.
On presumptive taxation
This is the particular area that in recent years has played a major role in enhancing the widening of tax and taxpayers base. However, there is still a large number of individuals in businesses, trade, services and professions, (especially in the informal sector and sectors where large scale transactions take place in cash) who are outside the tax net. Therefore, the presumptive income estimation scheme should further be reviewed based on appropriate analysis and its scope be enlarged with the view of attracting more into the tax net.
Many small businesses are still in the informal economy and remain untaxed. For these groups, in addition to the ongoing efforts following the President’s directive, the tax administration could design, promote, and establish simple, optional presumptive tax schemes, including those based on a compounding (turnover) basis, for example in the service tax that are below a threshold.
Since there is still some scope for presumptive taxation in the Finance Act, currently applicable to only some business sectors with a turnover below a threshold limit, data mining remains crucial for analysis-based strategies to examine if its scope should be expanded.
However, the presumptive taxation scheme should always be backed by taxpayer education programs to bring taxpayers up to the point at which they can enter the regular tax system. The revenue authority has in recent years increased the visibility of tax education and awareness programs; this should continuously be an important goal of the presumptive scheme. To be continued next week.