BUSINESS NEWS

Exchange rates (August 18): $1 = TShs 612 £1 = TShs 920

World Bank Resident Representative in Tanzania Ronald Brigish told a press conference in May that while the GDP GROWTH in Sub-Saharan Africa averaged 3%, Tanzania was now growing at a rate of 4% p.a. Tanzania had bright prospects and could register economic growth of even 10% like Uganda. The country’s POVERTY was exaggerated, he said. He thought that Tanzanians were probably consuming more than twice the official GDP per capita of $120 p.a. and that the difference was caused because figures for the informal sector, small scale mining and trade were not included in official statistics – Daily News.

Exchange controls by the Central Bank of Tanzania have been removed on the strong recommendation of the IMF. Restrictions on payments and transfers of money whether they be for imports, education, transport, travel or repatriation of investment income were officially removed on July 15 but many observers reacted with caution to the move wondering whether it was in the best interests of the country – East African. The National Assembly ratified on April 24 a 1994 agreement between Tanzania and Britain which gives FAVOURED STATUS to investors from the two countries. The agreement enables the aggrieved party in the case of nationalisation to refer the dispute to the International Centre for Settlement of Investment Disputes or to a special joint arbitration tribunal in the case of other disputes – Daily News.

A USAID STUDY has singled out antiquated socialist-era laws still on the statute book as major impediments to investment. Reference was made to the legal monopoly in grain marketing of the National Milling Corporation even though the government had liberalised marketing through executive directives; these could be contested in court. The stagnation in coffee production was partly due to the Nationalisation Act of 1973 which gave the government powers to seize commercial farms of over 50 acres. Such old laws should be repealed to encourage investors – Business Times.

The new TANZANIA REVENUE AUTHORITY started work on July first. Its Commissioner General is Mr Melickzedec Senare. It is the only body authorised to recommend tax exemptions to the Treasury and is empowered to attach property for auctioning without reference to the courts. It has received a grant of $2.5 million from the USA, $0.49 million from the World Bank and 2.7 million Kroners from Denmark to help with start up costs. The UK firm Coopers and Lybrand assisted it in drawing up its staff scheme of service and remuneration package. World Bank funds are being used for communication equipment to enable it to communicate with all customs posts in the country. At the inaugural ceremony President Mkapa instructed the authority to raise tax collection to an internationally comparable percentage of the GDP. He said that in Tanzania it was only 14.6% compared with 23% in Kenya, 32% in Zimbabwe and 45% in the European Union – Daily and Sunday News.

A 10,000-line computerised DIGITAL TELEPHONE SYSTEM which identifies both fake and genuine subscribers has been installed in Dar es Salaam – Business Times.

The leasing of the SA0 HILLS SAWMILL to a Norwegian company at $198,000 p.a. on May 15 is expected to boost the country’s dwindling wood industry. Nortan AS will pump in $3.4 million for rehabilitation. The parastatal Tanzania Wood Industries Corporation’s (TAWICO) output declined from 21,419 cu.m. in 1991 to 8,515 cu.m. in 1994 and profits turned into losses. The company’s nine other subsidiary companies are to be privatised – East African.

Tanzania has jumped from 16th to 7th position among 20 African countries with the highest income from TOURISM – from 1.3% in 1993 to 2.3% of African tourism revenue in 1994. South Africa, Tunisia and Morocco lead the list – Business Times.
Locally made WINE has virtually disappeared from the market because of the collapse of the Dodoma Wine Company (DOWICO)> The company, which produced a million litres in 1983, has stopped purchasing grapes because of liquidity problems – Business Times.

A Tanzanian company, Superdoll Trailer Manufacturers (STM), has won the International Africa Award which is awarded each year by ‘Editorial’ an international publishing company to companies which produce high quality products and provide good service. Almost 50 companies were represented at the award ceremony in Senegal – Business Times.

CASHEWNUT PRODUCTION has increased dramatically from 17,059 tons in 1990 to 81,000 tons in the 1995/96 season. Farmers are now using sulphur pesticide and improved seeds under the Cashewnut Improvement Programme (CIP) – Daily News.

At a meeting convened on June 18 for the 1,000 strong ‘Tanzania Shop Owners Association1 addressed by the Commissioner of Income Tax, which was designed to allay their FEARS OF THE NEW REVENUE AUTHORITY, less than 50 people turned up; none were from the large Tanzanian Asian membership – Business Times.

At a meeting of the ‘Tanzania-UK Business Group’ in London on July 22 Director General of the Investment Promotion Centre Samuel Sitta revealed that an INVESTORS FORUM was being planned for November 5 to 8 at the Sheraton Hotel, Dar es Salaam; he admitted that the ‘One Stop Investment Centre’ had not yet become a reality but hoped that improved and accelerated procedures for investors would be announced at the conference (Thank you Ron Fennel1 for this item – Ed).

The start of work on prospecting for what is expected to be one of the biggest GOLD MINES in the world in Shinyanga Region is being held up by the need to evict 7,000 illegal miners. They will be relocated to other areas. The company has already spent $3.8 million in initial work in the area – East African.

The Kuwait Fund has agreed to finance a $13.8 million TELECOMMUNICATIONS NETWORK in Zanzibar to be installed by the Tanzania Telecommunications Company and Ericsson AB (Sweden) within 16 months.

The COOPERATIVE AND RURAL DEVELOPMENT BANK (CRDB) was privatised in July. It is now owned by 10,000 individuals, cooperative unions and private companies, each limited to not more than 5% of the shares plus the Danish International Agency (DANIDA) which has 30%. They jointly raised $3.4 million to buy the bank – East African.

BUSINESS NEWS

Exchange rates (April 1): $1 = Shs 548 – 570
£1 = Shs 1510 – 1,600

BANK INTEREST RATES have fallen substantially to an average of 15% and lending rates to 30-35%, following a fall in inflation in January to 26.6% – The East African

Minister of Finance Simon Mbilinyi has announced that the DAR ES SALAAM STOCK EXCHANGE will be launched on September 30,1996

THE BRITISH DEPARTMENT OF TRADE AND INDUSTRY has announced that a high profile British Trade Mission is being organised to go to Tanzania (at the time of the Dar es Salaam International Trade Fair) from June 29 to July 4 and that delegates will be entitled to a grant of £600 towards travel expenses.

Differences within the management of Sutton Resources in Vancouver about the strategy for financing the RICH GOLD AND NICKEL-COBALT HOLDINGS it has at Bulyanhulu and Kabanga-Kagera respectively were reported in January by ‘Africa Analysis1. Sutton President Mike Kenyon was reported as having said that he had been approached by companies in the US, Britain, Australia and Africa about development at Bulyanhulu where gold resources were estimated at 1.5-3.5 million ounces and that a sum of about $130 million, which could be raised, would be needed to develop the mine. Kabanga and Kagera would need a far bigger investment of up to $435 million; this project would be be too big for a small company to take all the way to production. Serious talks had begun with at least two major potential partners.

The PARASTATAL DIVESTITURE PROGRAMME is being accelerated. Starting originally with some 440 parastatals Tanzania had already divested 95 by the end of 1994 and now plans to complete the programme by dealing with 82 in 1996, eight in 1997 and the final four including TANESCO in 1998. One of the biggest deals in 1995 was the joint venture agreement between R J Reynolds Tobacco International which purchased 51% of the shares in the Tanzania Cigarette Company for $55 million. China has presented the Tanzania-Zambia Railway Authority with 30 new passenger coaches valued at Shs 5.40 billion on soft loan terms. This has enabled TAZARA to introduce two new express trains on the Dar es Salaam-Kapiri Moshi route – Daily News.

When new Finance Minister Simon Mbilinyi took over the very difficult task of BALANCING TANZANIA’S BOOKS he inherited from his predecessor the following financial projections for the 1995/96 fiscal year:

Revenue 707 US$ million (16.5% of GDP which represented an increase of 37% compared with the previous year).

Expenditure 901 US$ million (20.6% of GDP and including $221 million for development)

Difference: 194 US$ million

Thus, something had to be done. So, on December 31 a MINIBUDGET was announced which included increases in taxation on business licenses, petrol and diesel, alcohol and tobacco which were aimed at removing the remaining budget deficit. Progress so far? In the first quarter – revenue performance slightly better than estimated; recurrent expenditure $7.8 million more than projections because of the election costs and the introduction of a ‘cash budget system’. Release of substantial donor funds is still held up.

In April 1996 the Government published its BUDGET ESTIMATES FOR 1996/97 which make grim reading and indicate that recurrent expenditure can be increase by only 8.6% (in US$ terms) to $960 million compared with inflation at some 27%. Thus no improvements can be expected in the hard pressed social services sector. Education expenditure as a percentage of total recurrent expenditure will be only 2.1% – an increase of only 0.1% over 1995/96. 2.8% of the budget has been allocated for health. These figures compare with the largest single item – 36% of recurrent expenditure for servicing public debt! Defence claims the next highest amount (Shs 45.8 billion) followed by the Police (Shs20.2 billion) health (Shs 16 billion) and education (Shs 12 billion). No money has been allocated to any parastatal company. Qn the revenue side the Government hopes to collect $976 million. The budget is being planned under the assumptions recently agreed between the Government and the IMF ie. GDP growth 5%; reduction of inflation to 15% – Business Times. The passenger TRAIN SERVICE between Moshi and Voi in Kenya which was suspended 18 years ago after the collapse of the East African Community and the Lake Victoria Boat service from Mwanza to Kisumu were restored in January – Daily News.
The troubled NATIONAL BANK OF COMMERCE’s percentage of nonperforming
loans has increased to 62% over the past year compared with 57% previously but vigorous efforts are being made to recover $240 million owed to the bank. As part of its restructuring programme the bank has sold more than a dozen buildings and is in the process of retrenching some 2,500 staff – East African.

UGANDA’S GREENLAND BANK opened a branch in Tanzania on February 12.

WILLIAMSON DIAMONDS is producing in one month almost the same amount of diamonds as it produced in a year before the new plant was commissioned. 15,226 carats were produced in the whole of 1994 but 44,742 carats were produced between August and December 1995 – Business Times.

TANZANIA AND THE DONORS

In ‘Habari’ the journal of our Society’s sister organisation in Sweden (No.3 of 1995) there is an article entitled “Nordens adoptivland gar kraftgang” (Scandinavia’s adopted country goes backwards). The article notes that Tanzania has received 16 milliard dollars of aid during the past thirty years, but that nevertheless it appears to be as far away as ever from becoming economically self-supporting. The special relationship with the countries of Scandinavia began when Julius Nyerere and Olof Palme together hammered out a programme of growth towards a goal of self-reliance. All the Scandinavian countries contributed generously to this end and there are many evidences of their open-handed treatment of the needs of Tanzania, one of the poorest countries in Africa. In the sixties and seventies, in spite of setbacks, the donor community continued its support, having in mind not only the external nature of many of the adverse influences that had dogged the Tanzanian economy- the two oil price rises, the break-up of the East African Community and the war with Idi Amin – but also the severe drought of the middle seventies and the adverse terms of trade in some of Tanzania’s traditional exports.

During the first twenty years of independence there were certain aspects of the economic situation that at the time ere not clearly understood. First, in spite of strenuous efforts to extend the educational system, a shortage of manpower trained and experienced in certain fields persisted and became more acute as development projects multiplied. Secondly, the critical importance of the maintenance of equipment and infrastructure went largely unrecognised. Thirdly, economic planning often failed to take account of the recurrent cost consequences of investment. The result in many cases was a rapid deterioration of plant and communications, poor economic performance and, in an economy characterised by state enterprise, growing burdens on the budget. The notion that the pace of development depended on the rate at which human and financial resources could be made available did not appear to enter into the calculations of the Government, or, for that matter, of the donors, who tended at that time to compete with one another for scare resources.

The consequences of planning failure can be seen in the educational system itself. In the Five Year Plan for 1969-74 it was envisaged that primary education would be expanded year by year, reaching the goal of Universal Primary Education (UPE) in 1989. The target date was set in accordance with estimates of the rate of growth of the economy, in other words, what could be afforded. In 1975, however, it was decided, in response to the policy of villagisation, apparently without the benefit of cost calculations, to bring forward the date of UPE from 1989 to 1977. The result was an attempted leap forward for which neither adequate funds, nor the necessary trained teachers, could be made available. External shocks, the growing rigidity of the economy and rising inflation put economic growth into reverse i the late seventies. Donors took the view that widespread structural adjustment was needed and sought compliance with a programme of reform mapped out by the International Monetary Fund. The rigid conditionality associated with IMF funding, however, proved unrealistic in a number of countries, sometimes provoking riots, and for a while the proposals of the IMF were resisted. In 1985 amid conditions of continuing economic decline and some softening of the IMF8 s requirements, the Tanzanian Government agreed to follow the prescriptions of the Fund. There followed a resurgence of donor support and growing coordination between donors.

The Government’s structural adjustment programme has brought a number of benefits, notably a resumption of economic growth. But in 1994 it became evident that revenues were flagging and that a growing budget deficit financed by borrowing from the Bank was causing inflation to rise. Serious concern about this trend among the donor community was compounded by the announcement by President Mwinyi on 9th. November 1994 that Shs 70 billion of revenues from import taxes has been lost on account of tax evasion and corruption. Tanzania had earlier been widely regarded hitherto as a country mercifully free from corruption and in President Nyerere’s day strenuous measures were taken against corrupt practices. It was therefore with alarm and shock that the donor countries learned of the extent of corrupt dealings. The consequence has been a suspension of significant parts of the donor programme.

Donor import support was allowed to expire without renewal, creating a critical shortage of foreign exchange. But the most serious consequence lay in shortfall in counterpart funds offered by traders in payment for foreign exchange. For this shortfall has led to a widening of the budget deficit, increased resort to Bank lending and in consequence a rise in inflation. Sweden, once the most generous of the aid donors, was also coming to realise that much project aid had been misdirected, for example for example, in the case of the Mufindi Paper Mill and the imaginative but unsuccessful sister industry programme. Something was going wrong and the Swedish government to put in hand a detailed review of the aid programme. Similar studies were instituted by the Netherlands and Finland.

The Scandinavian reaction reflected not only concern about corruption, but also a recognition that the conditions making for successful aid were most complex. What one writer has called the ‘aid bombardment’ could have negative effects by weakening local effort and encouraging the growth of a dependency culture. It can be argued that Tanzania’s sovereignty has already been impaired by aid amounting to almost half of the GNP and financing and financing a substantial part of the budget deficit and the import bill. Nobody was suggesting that aid should be abolished overnight, but greater care was needed to ensure that the effect was to promote self reliance and, in the long run to publish the necessity for aid. It is unlikely that the donors will resume exactly where they left off.

The approach of elections in October, inevitably led to a pause in new economic initiatives, but it was greatly hoped in donor circles that a strong government, armed with a renewed mandate would reactivate the reform programme. Recent events had set back progress towards a more self-sustaining and balanced economy, which only last February had seemed possible. Inflation, one of the most potent causes of poverty, remained at unacceptably high levels and must be brought under control as a matter of urgency.

With the reform programme again on track, donor aid, including that of the UK, is likely to follow, though not perhaps on the scale reached in recent years. For the donors, a commitment to the reform programme and to resolute measures to contain and wherever possible eradicate corruption will decisively influence their support. The donors for their part will need to understand the severe practical difficulties faced by the Tanzanian authorities – the shortage of trained personnel, the effects of population growth, the complexity of necessary changes, such as those in the banking system, and the political repercussions of civil service reform, not to mention the extreme sensitivity of a small economy to external influences and the vagaries of climate. It is also necessary to remember that corruption feeds on inflation and that the control of corruption is likely to be frustrated unless inflation is brought under control.

Above all the situation calls for a renewal of mutual confidence, which has been damaged by recent events. At the time of writing the signs were encouraging. The Netherlands renewed its contribution to import support in November and it is likely that other donors will do likewise following the election of the new President and evidence of a stern and consistent stand against corruption. Import tax evasion has been investigated by the Controller and Auditor General on the instructions of the former President Mwinyi. Prosecutions and dismissals have followed, many of the bonded warehoused have been closed and substantial unpaid taxes have been recovered. In February it was calculated that aid in the sum of $1.13 million would be needed for the remainder of 1994-95 and the financial year 1995-96. It no remains to be seen whether the new administration in Dar es Salaam can justify a renewal o support of this order.
Roger Carter

BUSINESS NEWS

Exchange rates (November 24): $1 = Shs 610 – 635
£1 = Shs 920 – 1,020

The National Bank of Commerce increased its INTEREST on lending from 32% to 40% on August 1. The discount rate at which it borrows from the Central Bank is 50.3% – Business Times.

In a major step towards the RE-INTEGRATION OF EAST AFRICA the governors of the central banks of Kenya, Tanzania and Uganda have agreed to make their currencies freely convertible from December 31 1995 – The East African.

The British Council has launched a SERVICE CENTRE in Dar es Salaam containing rooms fitted with business software and communication facilities to assist development project specialists and consultants – Daily News.

The Shs 2.7 billion NATIONAL SHIPPING AGENCIES CCMPANY (NASACO) building, which was opened in February 1993 and which also accommodated the offices of a department of the Commission of Customs and Sales Tax, was gutted by fire on August 17 – Daily News.

The European Union has committed Shs 93 billion under LOME IV for Tanzanian projects in AIDS control, water supplies in Mwanza and Iringa, environmental protection, road rehabilitation and coffee research in the Ruvuma and Mbeya regions, plus general import support – Business Times. Tanzania should have a STOCK EXCHANGE by June 1996 the Director of the new Capital Markets and Securities Authority (CMSA) Dr. Fratern Mboya said recently. It would be able to enhance the liquidity of state-owned firms now being privatised, and would be established with the help of the government but be placed in private hands within three years – Daily News.

A new MINERAL INFORMATION CENTRE has been set up in Dar es Salaam which has computerised most of the geological data collected in the country in the last 100 years, for the benefit of potential investors. It was launched through a World Bank loan and has already been used by over 100 foreign companies – Guardian.

Administrative costs have been slashed at AIR TANZANIA CORPORATION by cutting board members from 10 to 5 – Business Times.

The newly established TANZANIA REVENUE AUTHORITY began work on September 2. It has been designed to stem what was described by an official as the ‘pathetic’ tax administration of the country. The Chairman is Prof. Benno Nduliu who was a director of the Nairobi-based Africa Research Consortium.

A NEW BANK – the Eurafrica Bank – began operations in September, the seventh bank to be established in Tanzania since 1991. Under the chairmanship of Professor Simon Mbilinyi the bank is 30% owned by Banque Belgolaise of Brussels, 20% by the World Bank affiliate the International Finance Corporation and 9% by the Tanzania Development Finance Corporation. It has a staff of 53 Tanzanians and 3 expatriates – The East African.

Another bank – THE AKIBA COMMERCIAL BANK – is in the process of formation. It aims to finance Small and Medium Scale Enterprises (SME’s) and has so far raised capital as follows: Shs 400 million from individual Tanzanians, Shs 275 million from Tanzanian public institutions and Shs 330 from overseas financial institutions. A large Netherlands bank – Rabobank – which has a triple ‘AAA’ rating will manage the Akiba bank in its early stages – Business Times.

Tanzania’s NATIONAL BANK OF COMMERCE is undergoing major restructuring by closing 34 of its 179 branches and trimming its 6,000-man workforce by 46%. The bank hopes to start operating profitably within 18 months after. – Daily News.

Sales from Zanzibar’s highly successful SEAWEED INDUSTRY totalled Shs 492 million last year which compares with only Shs 289 million from tourism. But the employment needs of the seaweed industry are beginning to affect school attendance in the areas where the crop is harvested – Business Times.

BUSINESS NEWS

Exchange Rates (April 1995):
US$ = Shs 605
£ Sterling = Shs 966

The STANDARD BANK INVESTMENT CORPORATION OF SOUTH AFRICA (STANBIC) took over the collapsed Meridien BIAO Bank on June 2 and customers were assured that all their deposits would be safe and due interest would be paid. STANBIC said it would retain most of the 150 members of staff at the three branches in Dar es Salaam and Arusha but not open additional branches. The total losses incurred – $34 million – are being covered by Ministry of Finance Bonds ($18m), the Central Bank ($10m) and STANBIC ($6m) – The Dar es Salaam Guardian (May 3) and Daily News (July 17).

PARASTATAL REFORM was going well the Reform Commission’s Chairman Mr George Mbowe said recently. 95 firms had been divested in the last two years and by the end of this year 145 firms would have been either partly or wholly sold, liquidated or subjected to a performance contract. In some cases production had picked up from zero to 75% of capacity. Very positive results were being seen in the leather, beer, hotel and pharmaceutical industries – Daily News.

The WORLD BANK’S IDA has granted an additional credit of $10.9 million for financial sector reforms and for the restructuring, privatisation and downsizing of three banks including the Bank of Tanzania and for the development of capital markets – World Bank News.

The recent BUSINESS FORUM in Zanzibar attracted 190 participants and was a great success. Of the 90 projects presented 62 have materialised, involving an investment of $81.5 million. “What Singapore is for Asian countries Zanzibar could do for East African countries and activate an Afrodollar market” said Finance Minister Amina Ali. The government has put together an attractive investment package including 100% foreign ownership, exemption from import or sales tax on many importations, a IQ-year tax holiday on dividends and a quota- free environment as far as the export of garments to the US and Europe is concerned – Business Times (July/August),

The World Bank Group’s INTERNATIONAL FINANCE CORPORATION will invest $24.4 million in Tanzania Breweries to help the company to increase output and meet international health, safety and environmental standards – World Bank News (June 1).

A newly formed NGO, the ECONOMIC AND SOCIAL RESEARCH FOUNDATION (ESRF) will conduct at least six studies by the end of next year on the effects of the stabilisation and structural adjustment programmes on Tanzania’s policy reform process – East African (April 17).

The 27-year old NATIONAL INSURANCE CORPORATION (NIC) increased its gross premium income by 30% in 1994 and made Shs 567 million profit before tax compared with Shs 180 million the year before – Daily News (April 19).

TOURIST ARRIVALS last year were 261,395 and earnings totalled $192 million equivalent to 18% of the country’s exports Daily News.

The Government collected Shs 9.1 billion in May as IMPORT DUTY, SALES TAX, AND EXCISE DUTY – the highest ever.

The World Bank has asked Tanzania to de-regulate its OIL INDUSTRY and to close its oil refinery because it is small and inefficient. The government opposes this and has set up a task force to study the matter – East African (April 24).

FINANCIAL STOP PRESS

The Tanzanian Finance Minister arrived in Paris at the end of July to assure the Paris (donors) Club that tax loopholes had been closed and that the country was committed to the reform process. At stake was $1.2 million that Tanzania urgently needs. The government, whose coffers are empty according to the Daily News, has been forced to increase bank borrowing fourfold in 1994. Mr Kikwete said on his return that several donors might soon release funds but other Treasury sources (quoted in the East African) felt that his mission had not been a success and most donors were still withholding aid.

HOUSING BANK CLOSED
It was announced on August 4 that the Government had terminated operations of the Tanzania Housing Bank for what was described as ‘critical deterioration of the financial condition’ of the bank. Depositors accounts were being transferred to the National Bank of Commerce (NBC) and the cooperative and Rural Development Bank. The Government would spend Shs 9 billion to pay depositors, creditors and employees of the defunct bank.

NEW CAPITAL FOR NBC
Earlier, following a crisis statement from the National Bank of Commerce, the Government announced that it was immediately injecting Shs 11 billion of equity capital, seeking joint venture partnerships with foreign commercial banks for NBC’s international banking services and reducing the bank’s urban branch network. The Bank’s management had stated that it had incurred a loss in 1993/94 and that it had a Substantial portfolio of non-performing loans.

THE BUDGET

Tanzania’s 1995/96 budget was unexciting but did clearly aim to win some popularity for the government prior to the elections. The minimum wage was raised and duties on imported foodstuffs and clothing were reduced. The transport sector was hit hard.

The budget proposed a 14.2% increase in expenditure on last year to Shs 627,688 million – Shs 184.7 million foreign component; Shs 27 million in bank loans. Minister for Finance Jakaya Kikwete said he was assuming that the February pledges of $1 million from donors would be fulfilled. Tax exemption on most capital goods and services enjoyed by foreign investors would be abolished but other tax rates would be adjusted to compensate. Planning Minister Horace Kolimba said that the government would no longer accept foreign aid involving foreign experts; projects would be implemented by Tanzanian experts.

Targets for next year, which many observers considered unrealistic, included a GDP growth of 5%, reduction of inflation to 15%, repayment of Shs 26.8 billion to banks and a self-financing budget by 1997/98. More realistic targets included increasing export levels from $505 million to $606 million.

BUDGET HIGHLIGHTS
* Minimum wage for civil servants raised from Shs 10,000 to Shs 17,500 per month and not taxed; minimum pension to retirees to be raised to Shs 2,000 per month;
* Tax exemption for imports abolished to curb tax evasion; as compensation capital goods and industrial raw materials would be charged only a flat 5% duty instead of 30%; tax holidays intact;
* Sugar, rice, cooking oil and wheat products – 20% import duty (compared with about 50%) and 5% sales tax compared with 30% before; duty on imported clothes reduced from 50% to 30%;
* road toll levy on petrol and diesel up from Shs 40 per litre to Shs 50;
* Vehicle registration fee up from Shs 50,000 to Shs 75,000;
* Foreign companies to pay 20% of profits after tax as ‘branch withholding tax’; corporation tax to be 35% for all (down from 40% for foreign firms);

DONORS PROMISE $1 BILLION – BUT WITH CONDITIONS

Tanzania’s new Minister of Finance Mr Jakaya Kikwete made a good impression at the crucial Consultative Group (donors) meeting in Paris on February 27-28. Donors were impressed by the actions he had taken to improve tax collection. According to the ‘East African’ he returned triumphantly to Dar es Salaam bearing a promise of $1 billion in new commitments of foreign aid for 1995-96. 20-25% would go to balance of payments and the rest to finance development.

A REAL SHOCK
Mr Kikwete said in an interview that the November disaster (TA No 50) had come as a real shock to the government. He understood why donors had felt the need to let off steam ON revenue and corruption issues and admitted that some Shs 70 billion ($140 million) worth of tax revenues had not been collected last year. $40 million of that was tax evasion and $100 million was illegal tax exemptions.

The Controller and Auditor General had completed work on tax evasion by 20 major importers and found 12 whose collective tax evasion amounted to Shs 17.4 billion ($31 million) of which tax evasion had amounted to Shs 4.8 billion ($8.8 million). He named the companies involved. Since December, nine of the companies had cleared their debts leaving arrears of only Shs 2.3 billion ($ 4.3 million). The investigation had revealed serious institutional weaknesses in the Customs Department and Treasury and negligence and dishonesty among some public officials had been confirmed.

KIKWETE’S TOUGH MEASURES
Measures being taken to recover funds included the arrest of four businessmen, impounding properties and auctioning them, closing some bonded warehouses (the number would be reduced from 177 to 65) and better control of transit trade with neighbouring countries.

Mr Kikwete announced that Tanzania was reviewing tax exemptions offered to attract investment In tourism, agriculture and industry, both to determine who had used them illegally and to limit those it would offer in future. Capital goods would remain exempt but raw materials and spare parts would not, because some investors had been reselling them within the country. The Minister also announced that the Government had stopped all discretionary tax exemptions given by the Minister of Finance.

Donors said that they wanted their relationship with the Tanzania government to ‘get back on track’. The World Bank’s Francis Colaco said that the donors were ‘reasonably satisfied’ on the tax front but that recovery of arrears had not been ‘as full as had been hoped’.

In the following paper, as part of a regular series, on the ECONOMY OF TANZANIA Roger Carter puts these developments into perspective:

An informal meeting is likely to take place in the summer to take stock of the progress resulting from measures agreed in Paris. In the agenda of the meeting there had been one notable omission, the heavy burden imposed by the servicing and redemption of foreign debt. However, this subject, though of critical importance to Tanzania, lies in the domain of another international forum, the Paris Club. Some information on measures taken to reduce the debt burden was given in the September 1993 issue of the Bulletin of Tanzanian Affairs.

The Consultative Group meeting took place under the shadow of the mismanagement and corruption recently disclosed by the President which had gravely affected revenues and led to an increased budget deficit and consequent rise in inflation. The meeting appears to have had some effect towards a restoration of confidence, though it is clear that the position will be closely watched and that a continuation of aid flows will depend on future integrity. The final communique recorded the commitment of delegates to external assistance to Tanzania and, provided that strong measures were completed to deal with tax exemptions and evasions, that the budget was brought into balance without borrowing from the bank and that certain structural reforms were accelerated, particularly, it is assumed, in respect of the banking system, new commitments for 1995/96 could reach at least $1 billion. Whether this goal is attainable will clearly depend on the absence of external shocks to the economy in the near future.

The President’s original response to the crisis had been cabinet changes (TA No. 50) and these have already resulted in a more effective tax collection. It now remains to be seen whether the new government team will be able to address itself to the country’s formidable economic problems and to bring inflation down to single figures by the time of the next regular meeting of the Consultative Group in 1996.

There is indeed no single reform more important than the reduction of inflation to a level at least as low as in Europe. Inflation is the most important single cause of impoverishment. By depreciating the value of money rewards, inflation creates the temptation of corruption. The extension of education and health services, and even the proper maintenance of the existing provision, is well nigh impossible in the paralysing grip of inflation. Inflation damages confidence and limits the flow of investment capital from abroad. The task of exporters and economic planners is greatly complicated and impeded by the need to take account of domestic inflation. It follows that the conquest of inflation is an essential precursor to significant progress in many aspects of the economy.

In 1980 the campaign for universal primary education (UPE) had resulted in an enrolment in primary schools of over 90% of the appropriate age group, but sadly this remarkable achievement was not maintained and by 1980 enrolment had fallen to about 74%. The main cause of this retrogression was the high rate of population growth, the increase in the number of children in the eligible age group by about a third and the failure of available resources to expand in the same ratio. The health services have likewise been suffering severely from a lack of resources. modest reduction of the trend may be possible by increasing the share of resources for health and education by reallocation and economies but any substantial progress must await the conquest of inflation and the emergence of a budget surplus.

One prudential step taken by the government is the pruning of the capital development programme in recognition of the fact that capital projects normally lead to additional recurrent expenditure for operation and maintenance, some or all of which may fall as a charge on the national budget. It seems likely that in the past inadequate attention to the recurrent cost consequences of capital development may have led to the overloading of the capital development programme, leading to the neglect of maintenance and increasing Tanzania’s external debt problems. This is a matter over which donors may have been less than helpful.

The tasks before the new government team are truly formidable. One gratuitous obstacle to fiscal balance has been caused by drought in the regions supplying hydro-electricity to the national grid, leading to load shedding. The shortage of water for the generators in these areas is attributable not only to natural causes, but has been exacerbated by the diversion upstream of water for irrigation. About 75% of Tanzania’s installed generating capacity is from hydro-electric sources, the remainder from diesel powered generators. Before 1992 most of the thermal generators remained in reserve and 95% of power was taken from hydroelectric sources. But severe drought conditions in 1992 led to a resumption of diesel generation to about 18% of the total. TANESCO, the electric power company, reacted to the situation by installing a 36MW gas turbine generator at Dar es Salaam and by rehabilitating diesel generators connected to the grid. Owing to the continued shortage of water for the generating plant, however, these measures proved insufficient and TANESCO was forced to institute load shedding in 1994 and again in 1995.

Load shedding is a disaster for industry and for the economy as a whole. It has seriously adverse effects on Government revenues and damages confidence among potential investors. For the short run the government has started an emergency power project (See Business News – Editor) but in the medium term, plans are in train for the diversification of power sources by the installation of gas fired generators at Songo Songo using natural reserves of gas, and a similar gas-fired installation at Mnazi bay. A power link with Zambia is also being considered. But these additions to capacity, necessary in any case in the face of rising demand, will take several years to materialise.

Another serious burden on the budget is the restoration of the environmental damage caused by the influx of refugees from Rwanda (TA No 50).

Whether in the face of these obligations and difficulties the Government can successfully restore its finances to stability within the next ten months remains to be seen. In April Parliament was scheduled to enact a Code of Conduct for Leaders and it is hoped that this will set the tone for public affairs. The mastery of corruption will only finally be achieved when inflation has been brought under control and money rewards have been stabilised at a reasonable level. But the recent public exposure of corruption will, it is hoped, have had a cleansing effect and have provided the new administration with a springboard from which to bring future dishonest dealings under control.

BANK OF TANZANIA TAKES OVER MERIDIEN BANK

Bank of Tanzania Governor Idris Rashid announced on April 2 that the Bank of Tanzania had taken over the operations of the Meridien BIAO Bank. Its Board of Management had been suspended and the Bank of Tanzania’s advisor John Montgomery had been appointed the new manager. ‘The development followed the earlier take over by central banks of the Meridien Banks in Kenya (March 14) and Zambia (March 28).

‘The Tanzanian bank’s foreign exchange exposure amounted to Shs 17 billion ( US$ 30 million) which had apparently been transferred abroad to support other loss making branches. It was later announced that Tanzania might sue the Directors and management of the Meridien Bank if they fail to return the $30 million.

Mr Rashid assured the public that the Bank would remain in operation and there was no need for panic as the measures taken were aimed at safeguarding macro-economic stability and protecting the interest of depositors. Negotiations were under way with local and foreign firms interested in buying the bank.

Meridien BIAO was the first private international bank to be licensed to conduct business in Tanzania two years ago when banking restrictions were lifted. It soon became the third largest bank in Tanzania after the National Bank of Commerce and the now privatised cooperative and Rural Development Bank. It had 30% of the total business.

BUSINESS NEWS

Exchange Rates (April 1995):
US$ = Shs 560 – 570
£ Sterling = Shs 850 – 910

The WORLD BANK, advised by its representative in Dar es Salaam (who was accused of interfering in Tanzania’s sovereignty) and supported by TANESCO’s Board of Management and the press, has forced the government to change the decision it had made on the award of a tender. This was for the Emergency Power Supply Project urgently needed to relieve the electric power shortages which have been crippling industry during recent months. The Canadian firm Ocelot won the tender. A combined Irish, South African and Malaysian tender had been favoured by the government – Business Times.

Although heavy rain during the last few weeks has led to improved electricity generation TANESCO has warned that rationing will continue because water levels in the main dams had not yet risen substantially – Daily News.

SOUTH AFRICA’S PROTEA HOTELS has recently taken over the management of 20 African hotels outside South Africa including four formerly state-owned hotels in Tanzania – Johannesburg Star.

INFLATION had reached 39.5% by the end of January and there are fears that it will reach 45% by budget time in June; food prices increased by almost 20% during the five months after September 1994 – Business Times.

The TANZAM Railway Authority plans to layoff a third of its 6,000 workers in the next 14 months because of severe competition – Business Times.