By Joseph Sabas

The financial crisis has availed us of a golden opportunity to see the two major schools of political and economic thought being played out in an open arena and the divergence in approach to solutions.

The school on the right characterised by the Conservative Party in the UK, Republican Party in USA and the CDU in Germany offers a simple and clear approach of allowing the recession to take its course. (The left call this “the do nothing approach”). This school also believes in protecting individual liberty, private property, in fiscal conservatism and small government and fewer taxes. To them a country is a sum of individuals rather than societies.
The left school of thought characterised by the Democrats in USA, the Labour party in the UK and the Social Democrats in Germany believes in Government interventions in economic activities to safeguard economic prosperity and to act as a safety net for the people. The left believes a country is made up of societies hence unions and such overused phrases like “hard working families”.

While the left, led by President Obama and Prime Minister Brown favours increased government spending and bailing out failing key companies, the Right led by Mr Cameron in the UK and the seemingly leaderless Republicans in the USA are vehemently opposed preferring instead to encourage the opening of lines of credit to viable business while allowing bad businesses to fail, which is a good case of “constructive destruction”.

In most countries these two schools of thought tend to converge and form a more or less identical centre-right/centre-left position with the demise of socialism and the rejection of pure capitalism offering a more amenable form of governance.

In Tanzania, with the exception of the Mwalimu phase, the IMF engineered policies that bear no resemblance to either school. Interestingly, CCM’s core belief remains that of “Socialism and Self Reliance” which is centred far to the left. God knows what it means in today’s CCM world. The opposition parties fare even worse. The irony here is that the IMF prescribes economic and social medicine but bears no political or economic responsibility for the consequences.
Over the period of Mr Kikwete’s presidency we have witnessed a restrained approach in diversifying the remaining major companies and utilities still in government hands. The government has intervened directly: in Air Tanzania by breaking the partnership with South African Airways, appointing a new management, and loaning it over Shs 5 billion of taxpayers’ money; in the Port Authority, the Telecommunication company (TTCL), TANESCO and the postal service by issuing directives on the way forward; in the National Insurance Corporation (NIC) the government has underwritten a NIC reorganisation; and, in TRL employees’ benefits have been improved.

In most countries the conclusion from the convergence of the two schools of thought is that the state is a bad allocator of capital and therefore the best job for the government is to legislate and regulate business and not to run it. This is only possible if the government policy framework is credible and sets clear objectives and there is an understanding of the conflicting goals of government and private investors/shareholders. In the words of Adam Smith in ‘The Wealth of Nations’ “it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner but from their regard to their own interest”.

There is no doubt that most of TRL’s many problems emanate from these sorts of conflicts.
One cannot blame President Kikwete for trying to prop up the Mwalimu era of publicly-held companies and utilities. As he directs from the state house pulpit, summons CEO’s for a dressing-down and makes surprise visits to the port to highlight inefficiencies he also notes their critical importance to the country. But in this year of the 200th anniversary of Darwinism the nature of human beings in pursuit of self interest in the course of survival comes very much into play. This human behaviour has tested Mwalimu’s structure of governance at a huge cost to the country let alone the tax payer.

In this structure the taxpayer owns the companies, the President appoints the Chairman and Chief Executive with the respective Minister constituting the Board. The management bear no risk to the capital they are charged to employ and stand not to receive rewards for taking risks as they are serving at the pleasure of the appointing authority. So no matter what the President may promulgate, their goals are always short term. In the private world of owners and managers there is increasing professionalism (business competence, audit committees, independent non-executive directors). Rewards are linked with ownership through share option schemes. This is not perfect as seen in the case of the Royal Bank of Scotland but at least it addresses the key weaknesses. Now the government’s shares in public and partly privatised firms are vested with the Treasury Registrar and very few if any in government can claim to have either the knowledge or the professional experience to run major businesses.

The shenanigans emanating from the THA, NIC, TANESCO, the TTCL, the Postal Service, TRL, etc are almost guaranteed.

Vesting these shares in government-owned but independently and professionally run companies similar to the UK Financial Services Authority may go a long way in safeguarding taxpayers’ money, and creating value, while removing direct political interference.

Bob Geldof, IMF Managing Director Dominique Strauss-Kahn and President Kikwete share a joke at the IMF conference (Photo Stephen Jaffe/IMF/Getty Images)

At a meeting organised by Tanzania and the International Monetary Fund (IMF) in Dar es Salaam from March 12 to 13 President Kikwete said that the consequences of the world economic crisis were not yet too pronounced in Tanzania but the country was being affected. Examples: the postponement of a $3.5 billion investment in aluminum smelting and a $165 million nickel mining project. A Swedish company, SEKAB, which had leased 40,000 hectors of land in Bagamoyo and had invested $250 million in an effort to produce ethanol (see TA No 91), had now decided to abandon the project.

Other negative consequences of the economic downturn were the falling world prices for Tanzanian commodities. The 2009 price of cotton, one of Tanzania’s major exports, had fallen from $0.82 in 2008 to $0.45 this year. Arabic coffee had fallen from $158 to $104 per 50 kilometre bag and Robusta coffee had dropped from $93 to $65. The prices of most minerals except for gold had also fallen and there was expected to be a decline of from 7% to 18% in tourist arrivals in 2009.

Also affected had been Tanzanite where the fall in price was some 80%. In Mererani, Arusha district, the owners of the nearly 200 Tanzanite mining pits had reportedly opted to suspend their operations between October 2008 and January 2009 rather than operate at a loss. The situation had been made worse by political unrest in Thailand, one of the leading markets for Tanzanite gems.

The price of Nile Perch, of which 80% are exported, was likely to fall by 50% in 2009. This situation was complicated by stiff competition from Vietnam – Sunday Observer.

However, on the brighter side, Finance and Economic Affairs Minister Mustafa Mkulo said he expected that Tanzania would be among first the beneficiaries of the $750 million aid package agreed by the G20 powers at their meeting in London. “We have already communicated our interest in the package” he said. “How much we get depends on decisions of the IMF board” – The Citizen.

by Joseph Kilasara
It is stimulus time. Finance ministers in the developed world are reaching for their red boxes trying to tighten or loosen some economic bolts and nuts in order to stimulate their faltering economies.

Reacting to the fallout from the credit crunch, President Kikwete pleaded with them not to touch the aid nut or perhaps try to loosen it a bit further. He went on to point out how our economy could be affected by the fall in future aid pledges, tourism related revenues, fall in demand of exports, increased borrowing costs of foreign loans as well as fall in foreign direct investments as capital markets in the developed world keep turning south.

For his part Governor Ndulu of the Tanzania Central Bank (BoT) assured the nation that the financial stability of the banking system is sound as demonstrated by an increase in private credit lending of up to 48% by September 2008. The banks are also not exposed to the secondary debt market championed in the northern world which has all but dried up and are said to be well capitalised to meet their maturing obligations. With a foreign exchange reserve of about $2.7bn, which is equivalent to about 5 months worth of importation, $1.6bn foreign currency deposits of Tanzania residents and $600m in commercial bank net foreign assets the BoT forecasts that going forward the economy is well cushioned against the potential fallout from the crisis and its ensuing recession.

Despite the Governor’s bold assurance and his immediate follow-up warning to banks against currency speculation, one could sympathize with the banks for making a quantitative interpretation of some of his statements such as: “The robustness of the foreign reserves is important for the stability of the Tanzania Shilling and confidence in the economy” and cause the US dollar to rise against the Shilling from 1,160 to 1,310 in four weeks. Blaming this fall on speculation is much the same as when naked short-sellers were blamed for the falling share price of the UK bank HBOS when its capital was actually inadequate.

Financing of the current account deficit which jumped by 49.1% in 2007 to $2,056.2m equivalent to about 17% of GDP is also a major cause of concern. At this rate of increase the reserve cushion looks very flat. Looking at BoT figures for the year up to August 2008, the structure of imports, where 38% comprise consumer goods and intermediate goods excluding oil means despite being endowed with an abundant level of resources and generous donors we are still borrowing substantially to pay for our daily consumption (see chart).


Breakdown of Imports into Tanzania by value Continue reading →

Exchange rates £1 – TShs 1,994
$1 – TShs 1,259

While western banks are reeling under the financial crisis Tanzanian banks reported a good year in 2007/8. On average, profit before and after tax for each bank increased by about 60% according to the Tanzania Banking Sector 2007 Performance Review by Ernst & Young. All the other banks, the report said, showed significant improvements and of the five loss-making banks of 2006 all recorded profits in 2007.
Among the commercial banks, Citibank recorded the highest interest income while the Dar es Salaam Community Bank was the highest among the non-commercial banks.

As at 31st December 2007 the banking sector comprised 23 commercial banks, three non-bank financial institutions and seven regional unit banks/financial institutions. The industry averages for return on average assets and return on average equity were 3% and 27% respectively, as in 2006. Standard Chartered Bank was the best individual performer in both cases with 8% and 61% respectively. Only one bank recorded a loss before and after tax – Sunday Observer.

Frank Mwakumbe writing in the Guardian noted that almost all banks experiencing the financial crisis in the USA operated as publicly traded companies and were privately owned and managed. He felt that this was a cause for caution about the privatisation process in Tanzania. A study by the ‘African Forum and Network on Debt and Development’ (AFRODAD) on Tanzanian’s experience with privatisation policies published in 2001 had summarised the benefits of privatisation, tersely: ‘Well performing privatised enterprises can contribute meaningfully to government revenue and to the economy as a whole in the form of taxes, increased production of quality goods and services, creation of more employment opportunities and introduction of modern technology. Continue reading →

By Joseph Kilasara
Exchange rate £1 = TShs 2,222

The Budget

The mood from the finance minister Hon. Mkullo about the economy’s performance was both upbeat and optimistic. Coming at a time when his counterparts, particularly in Western Europe and America, are reeling in the fallout from the credit crunch and skyrocketing commodity prices he must be a very optimistic man.

He estimates that the economy will grow at 7.8% this year (2007, 7.1%) and at over 8.1% next year with inflation being controlled at below 7% by June 2009 (9.7% April, 2008). His confidence is evidenced by the increasing availability of commercial bank credit which rose by 42% with lending rates declining to an average of 15.1% to March, 2008. The signing of the US sponsored Millennium Challenge Compact Agreement totalling around US$698m over 5yrs for infrastructure projects will also play a part.

While he identifies inflation as one of the major challenges to the economy, faltering economies of most donor countries could also prove to be another headache, as they are estimated to contribute about 34% of the budget. The falling price of oil may facilitate the achievement of the inflation target but it is likely to affect the level of revenue as oil related taxes contribute up to 20% total revenue projected. Continue reading →

Exchange rate: $1 = 1,250 TShs £1 = 3,300 TShs

A visiting mission from the International Monetary Fund (IMF) in February extolled Tanzania’s economic growth trends despite ongoing global turmoil in trade and industry. The mission was impressed that the country`s economy has grown steadily to 7.5% in 2007/08, even as they noted that manufacturing and construction had continued to experience expansion. The mission suggested that for continued growth to be maintained the government had to strengthen domestic revenue collection efforts and judicious public spending and continue with a quality monetary policy. Monetary targets for end-2007 had been met thanks to improvements in the Bank of Tanzania’s conduct of open market operations; interest rates had declined sharply from the high levels reached in 2007. The outlook for 2008/09 was positive as investment, both foreign and domestic, was expected to remain buoyant, underpinning continued high economic growth. Tanzania faced two major challenges. First, domestic monetary policy had to be seen striving to return inflation to its target level while ensuring sufficient liquidity to allow further healthy growth in bank credit to the private sector.

The agreed priorities should focus on agricultural development, education, health, and infrastructure. The mission welcomed the decisive action taken by authorities to address the recommendations of the special audit of the External Payment Account (EPA) at the Bank of Tanzania. The year 2008 ‘Doing Business Report’ has painted Tanzania positively, although there was still said to be room for improvement. Tanzania improved from the previous year’s performance by 20 ranks, a performance which experts consider to be low compared with the resources potential the country is endowed with. Areas that required immediate improvement, included getting licences; employing workers; registering property and acquisition of credit from financial institutions. In these areas, Tanzania’s performance had not been impressive considering that it scored 170, 151, 160 and 115 positions respectively out of 178 countries.
On the ease of doing business across the globe, Tanzania ranked 130, behind Uganda, with the best countries and their rankings in brackets being Singapore (1), South Africa (35), Kenya (72), Zambia (116), Uganda (118). There had also been no improvements in terms of the duration through which an applicant waited to obtain a business license – 308 days in 2008. In dealing with licences in Tanzania, an applicant has to through 21 procedures – Guardian.

The Government announced in January an increase of the minimum wage for civil servants from TShs 80,760 to TShs 100,000 per month from July. Then, on January 11 it said that it had reduced the minimum wage for workers in export-oriented and labour-intensive private industries from TShs 150,000 to TShs 80,000 per month. The government had had lengthy discussions with stakeholders and the wage board and said that it had to accommodate genuine fears of losing external markets to competitors if exports become too expensive. A proposed increase in the statutory minimum wage from TShs 48,000 to TShs 150,000 alone would have eroded the manufacturing industry’s unit selling price margins by between 73% and 800% – Guardian.

The Government has been trying to introduce legislation to commercialise electricity supply in the country. TANESCO has been forced to increase tariffs substantially. It needs TShs 1.6 trillion to improve power production and distribution infrastructure. The 400-MW Kiwira power project, 400-MW Mchuchuma project, and 1,200-MW Stiegler`s Gorge projects should be expedited.
But MP’s opposed a proposed government Bill which they said would open the doors to private players, particularly foreign investors. This would be unfair because of the shaky purchasing power of most Tanzanians and TANESCO’s financial woes. We should first empower the state-owned firm financially and stabilise its performance before allowing in private players,” observed one MP – Guardian. Tanzania has saved almost $1 million since 2004 by substituting imported diesel with locally produced natural gas generating electricity. 12 companies are exploring oil and gas reserves in twelve blocks along the coast from Mtwara to Tanga and villagers in Songo Songo are now enjoying power, clean water and clinics and the project has generated employment for the local population – East African.
At the end of April the Dar es Salaam Water and Sewerage Company (DAWASCO) published the names of prominent people who had not paid their water bills. Those named included the MP for Kyela Dr Harrison Mwakyembe, the Executive Director of the Tanzania Investment Centre, Emmanuel ole Naiko, two permanent secretaries, the Tanzanian Christian Church and a former minister. DAWASCO said that it was losing TShs 2.5billion monthly in unpaid water bills, mostly well-to do customers – Guardian.

The Citizen (November 8th) reported that Tanzania lost at least $33 million (about TShs 40 billion) in uncollected non-tax forest revenue in the fiscal year 2006/07 as a result of the shortage of staff and supporting resources for the collection and prevention of illegal logging. The Head of Cooperation at the Finnish Embassy told a recent general budget review meeting in Dar es Salaam that the low rates of investment and expenditure on forest revenue collection and forest law enforcement also limited the revenue collection from forestry.

The non-tax revenue in forestry consists of registration fees, forest royalty fees, export permits, and penalties for forest law violations.

In royalties of timber sales alone, which account for about 93% of all forestry revenue collected, the Government loses around $23.8 million (TShs32 billion) annually.
Development partners urged the Government to put its house in order and strengthen its revenue collection mechanisms. They said it is incomprehensible that Tanzania should fail to collect so much revenue and still continue to depend on foreign aid to fund its budget.

The Ministry of Natural Resources and Tourism budget was cut by 13.8% for 2007/08 which has directly affected the ministry’s ability to effectively manage the forest resources and the revenue collection.
However, although the forest sector’s contribution to revenue collection increased from TShs 4 billion in 2001 to about TShs 15.2 billion in 2006, Government expenditure on forest activities particularly in relation to revenue collection decreased (Thank you Jerry Jones for sending this – Editor)

In her 2007/2008 budget statement in June, Finance Minister Mrs Zakhia Meghji stated that she would not borrow from the domestic market this year through Treasury bill and government bonds. The East African described this as the most ambitious fiscal target by a finance minister in years. She must have felt under some pressure to do this because large government deficits make it difficult for the private sector to obtain credit and contribute to inflation. Interest rates on Treasury bills are 16% in Tanzania compared with 12% in Uganda and 6% in Kenya. In the previous year the Government took TShs 35.92bn from the Bank of Tanzania.

Mrs Meghji indicated that next year’s revenue should be enough to enable the government not to borrow locally as weather forecasts appeared encouraging. She will be relying on considerable support from the donor community however to do this. Some 42% of the budget would come from donors – up 3% on 2006/2007.

Many of the other measures she announced attracted strong criticism especially a proposed increase of almost 9% on diesel and petrol and also more tax on kerosene which would have seriously affected the poor. Some opposition MP’s described the budget as the worst since independence. Eventually, under heavy pressure from MP’s, she deleted the kerosene tax increase from the budget, and reduced the proposed increase in vehicle licenses for smaller vehicles and increased them for luxury cars.
Priorities for expenditure were: education (18%), roads (12.8%), health (10%) and water (5.1%). She was criticised by MP’s for allocating only 6.2% to the agricultural sector.

Funds were also provided for the identity card scheme which is aimed at facilitating tax collection, accessing bank credit and to help in the war against crime. Income tax for low income earners was reduced from 18.5% to 15%. The budget also had a ‘green’ element. Tariffs for low energy consuming bulbs and solar energy panels were zero rated.
In summary, the Government expects to spend TShs 6.06 trillion, an increase of TShs 1.20tn on the previous year.
Meghji praised the efforts being made in revenue collection and estimated that GDP would grow at 7.3% this year.