A New Dawn Of Business And Economic Prosperity Awaits

Tanzania’s business community (especially the financial sector) has sustained a relatively mixed year this year, faced with a declining currency, bad loans, and a nationwide demand for mortgage financing. But, considering that the East African Community (EAC), which Tanzania is a member of alongside Kenya and Uganda, is in the advanced stages of integrating, the region’s and Tanzania’s economic future seems promising.

The East African Community (EAC) has a futuristic “Financial Sector Development & Regionalisation Project” whose main objective is to establish a single market in financial services among partner states.

This entails the strengthening of market participants to make a broader range of financial services and products available to a more diversified client profile. It also involves the harmonisation of financial laws and regulation, in terms of banking and accounting, securities markets, insurance and pensions, investment funds, and the integration of the financial market infrastructure, while developing a regional bond market.

Following the ratification of the Common Market Protocol, the EAC received a $16m grant from the International Development Association to push forward the project. With this plan in place, Tanzanian businesses and individuals ought to be riding the wave and taking advantage of this increased mobility and government support. But so far it has not been that smooth-sailing. Some notable successes have been achieved on the business and economic fronts over the last decade, but the country could do far, far better.

Critics, such as the Dar es Salaam-based independent researcher, Brian Cooksey, trace the malaise to the fact that “50 years after independence, Tanzania remains undecided as to whether it is or is not part of the global capitalist economy”. According to Cooksey, “neither the state nor the private sector has an industrial strategy, designed to exploit the country’s natural resources in a responsible manner through the mobilisation of both local and external capital.”

He explains that for a country to accumulate capital internally, there has to be some perceived commonality of interests between the ruling elite (in the case of Tanzania consisting largely of Africans) and the business class, who (in Tanzania) are largely non-Africans.

“Where the interface between the state and the private sector has traditionally been based on mutual mistrust,” Cooksey says, “it is difficult to develop a strategic industrial policy with sound incentives and enforceable penalties. The challenge is to develop an indigenous (ie, black) business elite that is not simply dependent on state patronage and that will survive in a competitive business climate.”

Private sector

With the aid of history, Cooksey explains that Tanzania’s political trajectory over the last 50 years of independence has left a strong residue of mistrust for the type of capitalism that the mass of the population experienced at the bottom of the colonial and post-colonial pecking order.

Even today, “Africans [ie, native Tanzanians],” he says, “generally view merchants and traders from racial minorities (Indians, Arabs) as ‘greedy’ and ‘unscrupulous’. Unlike neighbouring Kenya, no strong black capitalist class emerged in Tanzania to make the post-colonial state more ‘market-friendly’.

“Ujamaa [founding President Nyerere’s cooperative economics, based on the traditional African society’s ‘familyhood’ principles] appealed to the ordinary African citizen’s sense of injustice and marginalisation [under British rule].”

When Ujamaa was replaced by IMF and World Bank-imposed harsh economic reforms after 1985 under the country’s second president Ali Hassan Mwinyi, the then cash-strapped government had no choice but to implement them. But the hardships induced by the reforms left a very bitter taste in the mouths of the citizens. As such, “to date,” says Cooksey, “liberalisation is widely viewed as an external agenda with little local buy-in”.

Though Tanzania has achieved economic growth in the last few years, it has come “without significant poverty reduction, particularly in rural areas”.

According to Cooksey: “This seems to support the view that the private sector is not automatically the friend of the ordinary citizen.”

But, like everywhere else, Tanzania’s private sector is not homogenous. “At one extreme,” Cooksey explains, “there are many thousands of micro-enterprises providing most livelihoods for millions of Tanzanians in both urban and rural areas.

“At the other extreme, there are a few, mostly foreign-owned, large companies in banking, retailing, energy, mining and telecoms. In virtually all sectors, there is a serious lack of medium-sized farms and firms to absorb the growing supply of labour.”

The power problem

Compounding the problems, an endless electricity rationing process over the last several years has cut into profits and put some small companies out of business.

The government’s plan is to increase electricity generation to 2,780 MW by 2015. It hopes to achieve this by upgrading old distribution lines and constructing new ones; improving power transmission to rural areas; enhancing natural gas development projects; and fast-tracking bio-fuel development projects.

According to Raymond Mbilinyi, the acting executive director of the Tanzania Investment Centre (TIC) – which acts as a one-stop shop to attract and facilitate investment in the country – “an enabling legislation and institutional framework is now in place to allow the private sector to engage in electricity generation, transmission and distribution”. He says opportunities abound in hydro, gas and wind.

The country’s total unexploited hydro power potential alone is estimated at 4,500 MW. If you add other sources of green energy – such as wind, solar, gas and thermal – the sky is the limit.

But these need huge investment, which cannot be provided by the state alone. Some years back, Artumas, a private Canadian company, took the lead in private electricity generation and distribution, a model which President Jakaya Kikwete says can be replicated.

“I believe there are tremendous opportunities for private investment in generating electricity and selling it to the national grid,” the president has said. “The government does not have the resources to build a 2,000 MW power station. So there is no alternative. We need investors to come in and take advantage of our resources, in a win-win venture.”

Even with stiff electricity rationing, Tanzania’s economy has grown steadily in the first half of this year at 6.3%. The IMF had initially cut its 2011 growth forecast for Tanzania from 7.2% to 6%, saying frequent power outages, along with food and fuel prices could push inflation up further. However, in recent weeks, the IMF changed its forecast, saying the country’s growth for 2011 could be “a bit more than 6%”, thanks to the strong performance of its telecoms, construction, and financial services sectors.

The financial sector

Tanzania’s financial sector is monitored and regulated by the central bank – the Bank of Tanzania (BoT) – on behalf of the Ministry of Finance. The sector, mostly privately owned by local and foreign investors, is allowed to freely determine the level of interest based on market forces, under the Banking and Financial Institution Act of 1991.

As the country moves towards EAC integration, banks in particular have been urged to make the most of the EAC integration plan by making inroads in the region. Given that several Kenyan banks are present in Tanzania, such as Kenya Commercial Bank (KCB), I&M Bank, and NIC Bank, it remains a question of why Tanzania’s financial institutions have not responded by extending their reach beyond the country.

Tanzania’s EAC minister, Samuel Sitta, has challenged Rabbobank’s NMB, the country’s second largest bank in terms of customer deposits and its branch network, to expand across the region because it has the capacity to do so.

In response, NMB’s CEO Mark Weissing says: “We already play an important role in financing small-scale farmers and cooperative organisations … and we are moving higher up in the value chain, especially in food and agri-related businesses.”

Despite a few attempts made by local banks to expand beyond Tanzania, only the CRBD bank is getting closer to launching a branch in Burundi. However, Rabbobank expects its partnership with banks like NMB, Zanaco in Zanzibar, BPR in Rwanda, and Banco Terra in Mozambique, to help it engage more with the continent.

The Tanzanian Shilling

For much of this year, a weakening national currency, the Tanzanian Shilling, has continued to drive up commodity prices, leading to increased budget constraints for households.

Between the first and second weeks of March 2011, the shilling declined against the US dollar from 1512.91 per dollar, to 1514.5. By the end of October, the dollar was selling at over Sh1700.

The inflation caused by the dwindling shilling prompted the Central Bank last month to release more foreign currency into the market – which significantly strengthened the shilling against the dollar. The move, however, was criticised by legislators as being a temporary relief to a deeper problem.

In response, finance and economic affairs minister Mustafa Mkulo announced that a grand economic plan would soon be adopted by the cabinet to improve the economy: “We will make the plan public and it will be a long-term strategy to reduce the cost of living”, Mkulo said.

Some suspect that a few banks have been violating the forex-trading rules, selling it directly to importers, and bypassing banks.

“There are banks that have been lending foreign currencies to non-resident entities, leading to shortage and further weakening of the shilling,” explained Prof Benno Ndul, the central bank governor, who vowed that the erring banks would be identified and exposed.

On the whole, banks in the country have been suffering from non-performing loans, mainly due to the absence of credit reference agencies and inadequate personal identification and addresses. This has forced some banks to resort to costly and lengthy legal action.

Last month, AccessBank and NBC announced their intentions to take aggressive measures to recover loans from defaulting customers, amounting (in the case of the NBC) to more than Sh50bn ($570m). While the NBC said it would start an auctioning campaign for defaulters’ property to recover the loans, AccessBank said it would institute legal action against defaulting borrowers who fail to pay their loans within a month from the date of announcement.

According to analysts, the increase of non-performing loans in the country will hurt borrowers, because it will result in higher interest rates, which are already too high for comfort.

Mortgage financing

Last year, it was estimated that Tanzania’s demand for residential properties was more than three million units, against an annual supply of just 8,000 units. In urban areas alone, the estimated shortage of housing exceeds 1.2 million homes, indicating an urgent need for new properties.

Until recently, real estate developers in Tanzania were deterred by the slow pace of returns and high costs of building materials, as well as complicated procedures when registering land titles and securing bank loans. However, the overwhelming gap in supply and demand has attracted banks to the lucrative potential of property financing.

Several banks are now re-examining their financing strategies and limitations. KCB, for example, has started reshaping its business model to encompass mortgage development, including retail mortgages. The group signed three multi-billion shilling mortgage projects with the National Housing Corporation (NHCTZ), Tanzania’s state housing company. Yet the new financing schemes are targeted at developers rather than individual buyers.

Tanzania still lacks a mortgage financing system of its own, which is having adverse effects on the economy, forcing many Tanzanians to build their houses incrementally through their own savings.

“Affordable interest rates and [the]repayment period are issues that need to be addressed urgently. Interest rates of 15 to 20% are very high and unaffordable for mortgage seekers,” says Minister for Lands, Housing and Human Settlements, Anna Tibaijuka.

According to her, it takes up to 10 years for an average Tanzanian family to build a house using its own savings, tying up substantial capital. Most banks in Tanzania are still hesitating to start mortgage financing, she says, while overall lending rates remain high.

However, gratifying solutions are being found, to the delight of many Tanzanians. The state-run Tanzania Refinancing Company says it will start refinancing mortgage lenders before the year ends, while the NHC is planning to build 5,000 low-cost houses, in addition to another 15,000 houses and apartments already built and available for sale.The NHC has also concluded a mortgage finance deal with seven commercial banks (Azania Bank, Commercial Bank of Africa, National Bank of Commerce, National Microfinance Bank, Exim Bank, Bank of Africa Tanzania, and KCB) which will allow people to buy NHC-built houses.

This should ease the previously lengthy mortgage processes, although it does not necessarily mean that prices will be reasonable as more people are seeking new homes.

The past 50 years have been a mixture of success and failure on the business and economic fronts, but Tanzanians hope that the Golden Jubilee celebrations, starting on 9 December, will usher in a new dawn of business and economic prosperity for all.