Public finance & budgeting: Tanzania's route to fiscal reform
at the Andrew Young School of Policy Studies

From the exotic island of Zanzibar to the snow-capped crown of Mt. Kilimanjaro – Africa's highest point – to the shores of Lake Victoria, Tanzania's contrasts in geography and its adventurous history lend the country a mystique enjoyed by readers around the world. For its 36 million residents, however, the reality of this East Africa country is not so romantic.

Tanzania is one of the poorest countries in the world. Its economy is heavily dependent on agriculture, an industry that employs 80 percent of its labor force and provides 85 percent of its exports. Life expectancy for the average Tanzanian is 45 years, with HIV/AIDS and poverty taking their toll.

The government of Tanzania is working to improve these odds by improving its delivery of public services. To this end, in 2002 it turned to the AYSPS International Studies Program to help design a new program of local government finance reform. Since then, ISP's training and technical assistance have helped the country get closer to meeting national objectives for government expenditures: promoting economic growth and reducing poverty.

Decentralization by devolution drives this reform. Although Tanzania's local governments deliver key public services like primary education and basic health care, they have been highly dependent on grant allocations from the central government to meet these needs, according to Jamie Boex, senior associate of ISP and an AYSPS assistant research professor of economics. “Local governments historically have had little to no discretion in implementing their responsibilities,” he says.

International Studies Program the driver

In two years ISP staff members led two key reform projects for Tanzania: after first developing the proposal for reforming the intergovernmental grant system, they aided the country's central and local governments in preparing for the new system. Director Jorge Martinez-Vazquez recently announced that the ISP team will continue providing training, technical assistance and capacity building, and will further research the impact of local government revenues on local government finances. Tanzania's Ministry of Finance has awarded ISP two new contracts valued at $380,000 for this work supported by DANIDA and the World Bank.

“Our continued involvement builds upon the success we've had to date,” says Martinez.

For the first project that addressed education and health care distributions, ISP designed a formula-based system to deliver block grants to the local governments. In their report, “Developing a System of Intergovernmental Grants in Tanzania,” Boex, Martinez, Roy Bahl and Longinus Rutasitara of the University of Dar es Salaam analyzed the shortcomings of the previous system of local government allocations and proposed new equitable, transparent formula-based options.

“We showed the central government the benefits that it would gain in moving away from a system of negotiated budget allocations to one of formula-based allocations,” says Boex. “Funding will be driven by a proven, data-supported level of demand for services rather than through the current supply of teachers or doctors and related infrastructure. We expect this shift in philosophy to prove challenging when implementation begins.”

In February, Boex reports, Tanzania's cabinet approved the reforms proposed in the ISP report. Its ministries then developed allocation factors based on demand, taking the approach that ISP had recommended. Implementation of the reform officially started July 1, the beginning of the new fiscal year.

On the road to reform

Boex says that under the second contract, ISP helped with capacity building leading up to the July implementation kick-off. “It would be nearly impossible to separate policy design issues from implementation issues,” says Boex, “so the government requested we stay on and see this project through this next phase.” This assistance was extended under the new contract through December 2005. The grant distribution reforms will be extended to the areas of agriculture, water supply and local roads.

“The biggest challenge has turned out to be making sure the local governments understand they have a lot more leeway in delivering services and in formulating their own budgets,” Boex says. “We are also helping the central government align its institutional framework, making sure all of the ministries understand the fundamental changes and cooperate.

“A first step was to support the formation of an inter-ministerial working group on local government finance coordination that will include all key stakeholders,” he says. Tanzania's Local Government Reform Programme sent nine of these stakeholders to the Fiscal Policy Summer Training at AYSPS in July.

“There is still a lot of work to be done in making sure these processes work,” says Boex. During the next year or so, a team of ISP policy experts and progressive Tanzanian officials will carry this load, bringing the country closer to meeting its national objectives and improving the quality of life for its citizens.

ISP assists countries around the world

Since 1999, the International Studies Program at AYSPS has provided training and technical assistance to more than 40 countries. On the African continent it has provided services to the governments of Malawi, Nigeria, South Africa, Swaziland, Tanzania and Uganda.

Related Reading

Boex, Jamie and Jorge Martinez-Vazquez. “Developing the institutional framework for intergovernmental fiscal relations in decentralizing LDCs.” Working Paper Number 04-02 (April 2004).

Boex, Jamie. “Local Government Reform in Tanzania: Considerations for the Development of a System of Formula-Based Grants.” Working Paper Number 03-05 (March 2003).

_______. “The incidence of local government allocations in Tanzania.” Public Administration and Development 23(5) 2003: 381-391.