Five more years? Business prepares for Magufuli’s second term

In the last five years, Tanzanian President John Magufuli’s combative approach to international business, aggressive domestic policies and unusual response to coronavirus have made him one of the most high-profile and controversial presidents on the continent.

The 60-year-old’s blunt approach – which includes a willingness to intervene in domestic markets – has attracted strong domestic support but spooked some foreign investors and drawn condemnation from Tanzania’s East African partners.

One term in, his overall impact on the economy, however, is far less clear. With the president facing a crucial re-election battle in October and the prospect of a second five-year term, Magufuli’s business and economic record is coming under increasing scrutiny.

Foreign direct investment (FDI) fell by 43% in the year after Magufuli entered office in October 2015, but Tanzanian GDP continued to grow at an average of around 6% a year, backed by a strong performance in sectors including light manufacturing, mining, agriculture and logistics.

Some believe that the president’s campaign against corruption, although understandably popular with ordinary voters, has restricted liquidity. With the state the largest employer in the market, any blockage to illicit channels necessarily affects the individual wealth of Tanzanians and their ability to spend.

The president’s supporters in the business community argue that the lack of confidence in Tanzania’s economy is misplaced. They say that negative political headlines, a controversial coronavirus response and well-documented tension with multinational firms have led to an international reputation lacking nuance.

Despite economic reforms that weigh on the private sector, including the crackdown on corruption and tax rises, many businesspeople in Tanzania tell African Business that they will vote for Magufuli in October.

Pragmatist or populist?

Magufuli’s first term has been marked by a strained relationship with business, with several incidents sending shockwaves through the investment community.

In 2017, Acacia Mining, Tanzania’s largest gold-miner, was slapped with a $190bn retrospective tax bill for failing to pay royalties on alleged undeclared exports. In January this year, Canada’s Barrick Gold – which gained full control of Acacia Mining in 2019 – agreed to settle the dispute by paying the Tanzanian government $300m and ceding 16% ownership of its three mines in the country.

Barrick agreed to create a joint venture with the government, Twiga Minerals, to manage the company’s assets and to oversee a 50/50 economic benefit sharing deal, but outstanding issues are still being worked out, according to Barrick.

Though the deal has restored a degree of confidence in Tanzania’s business environment, the episode – which some saw as a shakedown – has had a long-lasting impact on an investor community that covets predictability.

“After the announcement, some people who were planning to invest in Tanzania decided to relocate to Uganda, the DRC and elsewhere,” says Donath Olomi, CEO of the Dar es Salaam-based Institute of Management and Entrepreneurship Development.

Magufuli’s combative attitude to the natural resources sector can be traced to his experience growing up in a poor village in a mining area near the shores of Lake Victoria in Tanzania’s northwest. It is also a legacy of the socialist past of Magufuli’s ruling Chama Cha Mapinduzi (CCM) – which translates as Party of the Revolution – in which the market and its companies are tightly regulated to ensure that the state is the main vehicle for development.

Despite its controversy, the Barrick saga set the stage for how Magufuli would engage with foreign companies in Tanzania. He has since overturned two agreements with China negotiated by his predecessor Jakaya Kikwete, arguing that they were not good deals for Tanzania. Commenting on a $10bn development to build East Africa’s biggest port in Bagamoyo, 50km north of Dar es Salaam, Magufuli said only a “madman” would accept the terms.

While the aggressive approach has stunted investment in key sectors and projects, Tanzanians applaud Magufuli’s uncompromising attitude, in which he paints himself as a regional champion against neo-colonial interests. His tough approach finds unlikely allies in the country’s private sector.

“There are many countries where foreign investors enter with huge capex, but they don’t pay corporate tax and they leave big holes in the economy,” says Mohammed Dewji, CEO of Tanzania’s largest conglomerate, MeTL, a producer and trader of agricultural and industrial goods.

“Initially Barrick was a bad thing in terms of sending out shockwaves, but now the confidence is coming back. The government has clamped down on exemptions and it has strengthened its revenue collection. Our budget support over the last five years has reduced tremendously. These are all the good things not being talked about.”

Indeed, Magufuli may be more pragmatic than observers think. Although it still remained below the $1.5bn recorded in 2015, FDI had risen to $1.1bn last year. And along with reaching a deal in the mining sector, Magufuli’s government has made concessions to companies looking to develop Tanzania’s offshore gas industry. Estimated reserves stand at around 58 trillion cubic feet – just under half of the estimated potential in neighbouring Mozambique.

Laws delay investment

In 2017, the government introduced legislation for the extractive sector that raised taxes, established arbitration in Tanzania and deemed that  “unconscionable” contracts could be unilaterally renegotiated by the government. These laws delayed any possible deal between gas companies Shell and Equinor and the government, further prolonging development.

However, the government has quietly rescinded some of its earlier demands, says Thomas Scurfield, Africa economic analyst at the Natural Resource Governance Institute.

“Early this year the government started to introduce an arbitration act that essentially allows international arbitration with an international body to take place, so long as arbitration is physically taking place in Tanzania,” he says.

This may help to move forward the $30bn project, which has been floundering since 2014. Still, with low gas prices and unfavourable regulation, analysts do not expect the project to come online for several years – delaying an important foreign currency earner for Tanzania.

While Mozambique’s terms are more concessionary, according to Scurfield, some observers argue that Tanzania’s approach is consistent with the country’s historical scepticism towards free market capitalism.  

“Certainly, it slows down foreign investment – some investments would have happened earlier if the process were quicker,” says Jens Reinke, IMF representative in Tanzania. “But I think that is a cost Tanzanians are willing to pay.”

Failure of communication

Many companies argue that Magufuli’s ideological approach to the economy feeds a negative perception in the international press.

“When you go after a conglomerate or multilateral, they are going to push a story that what you are doing is not fair, that it is erratic and unpredictable,” says Fahad Awadh, co-founder of YYTZ Agro-Processing, which processes up to 2,500 tonnes of raw cashew per year from a factory in Zanzibar.

However, like other businesses in the domestic market that spoke to African Business, he points to a faster and more accountable state under Magufuli – so long as you “play by the rules”. He explains that a zero-tolerance policy on corruption has made engagement with the local authorities much easier.

“I just want to know what the rules are and know that if I follow the rules no one will come to harass me and try to extort money and I’ve seen that improve.”

He says that an association of cashew nut producers he set up persuaded the government to remove excise duties and VAT on vacuum bags used to package nuts within six months.

Taxes have been removed in key sectors to encourage industrialisation, and the business community argues that the government has introduced positive reforms and made efforts to shed the less successful parts of its statist DNA.

Jumanne Mtambalike, CEO of Sahara Ventures, an accelerator and tech-consultancy based in Dar es Salaam, believes that Tanzania’s inability to broadcast its positives is a major reason why the country fails to attract foreign investment.

Tanzania only has around 60 tech companies due to a lack of foreign capital, rather than a lack of tech-led innovation, he says. Last year the company held an industry event, Sahara Sparks, which welcomed over 200 Tanzanian startups searching for funding. A technology district known as “Silicon Dar” has begun to emerge on Dar es Salaam’s Bagamoyo Road, consisting of 10 innovation hubs and several large telecoms companies.

“Things are happening here. Young people are running innovation spaces and successful businesses, but our biggest challenge is that we are not telling our stories right. That is one of the strategic advantages they have in Rwanda and Kenya – they know how to tell their stories. I can tell you I have worked with some amazing startups but some of them don’t even have a website.”

The failure to communicate Tanzania’s strengths is partly a product of the Magufuli administration, which too often shows an active disregard for its international reputation. The president prioritises his reputation among a support base of mostly lower income citizens in rural areas. While journalists writing a negative story about Magufuli in Swahili risk jail time, the same story in English – which is less widely spoken – will arouse limited attention.

Magufuli’s seeming carelessness towards his international reputation has returned to the fore during the coronavirus pandemic.

Unlike many other African countries, Tanzania has downplayed the pandemic’s impact and avoided lengthy lockdowns. When Magufuli declared Tanzania “Covid-19 free” in June, he made no effort to rectify a torrent of negative press, even though some claim his statement was taken out of context. His bizarre claim that Covid-19 tests were inaccurate due to a goat, papaya and paw paw testing positive in a lab was allegedly a joke made in Swahili – but was perceived as a serious statement elsewhere.

Such gaffes have obscured real progress made in Tanzania, some say. Local businesses point to Tanzania’s recent graduation to lower-middle income status as defined by the World Bank.

The country also moved up three places in the World Bank’s Ease of Doing Business Ranking last year, although it still came 141st out of 190 countries. The difficult business environment is one of the main reasons that Tanzania’s economy has been gradually dwarfed by that of neighbouring Kenya, which occupied 56th spot in the Ease of Doing Business Ranking.

Despite its bountiful natural resources, its location in a strategic position for facilitating trade to the rest of East and Central Africa and its  larger population, Tanzania has not kept up with its more liberal neighbour. In 2019 Tanzania’s GDP was $63.2bn, almost a third smaller than Kenya’s $95.5bn.

Politics as usual?

While Magufuli’s battle against corruption is applauded by many – his tough approach earned him the nickname “The Bulldozer” – his efforts have been framed by critics as a way to persecute political opponents. Since Magufuli came to power, opponents allege that he has disregarded the rule of law and subverted the judiciary by forcing legislation through parliament and using draconian statutes to harass and imprison opponents.

A local journalist, who wishes to remain anonymous, was imprisoned for 13 days for running an unlicensed blog after the authorities imposed a $900 registration fee on all bloggers in 2018. “I wasn’t even critical of the government,” he says.

The concern for the private sector is that Magufuli’s ability to enact laws and evade normal checks and balances is forging an unpredictable actor that can vilify certain sectors and impose his will on individual companies. The business community is closely watching October’s presidential elections for signs of further erosion of the political environment.

A prominent lawyer, speaking on condition of anonymity in Dar es Salaam, says the president’s goal is to secure enough ruling party candidates to amend the constitution to extend term limits.

But the president may not have everything his own way. Semi-autonomous Zanzibar, an opposition stronghold, remains a thorn in the side of the CCM party and is a crucial electoral target for the newly formed ACT-Wazalendo party. At the last election, the Zanzibar Electoral Commission (ZEC) overturned the outcome of the vote when it became clear CCM had lost, opposition figures allege.

A video posted on social media in early September showed multiple army trucks packed with soldiers driving through the island of Pemba, which is part of the Zanzibar archipelago and falls under its administration. In the run-up to the national vote, the government has banned numerous opposition candidates from running in key constituencies and it has attempted to block thousands of Zanzibaris from being eligible to vote.

“CCM will do anything to claim victory,” says Ally Saleh, a Zanzibari politician and ACT-Wazalendo party member.

According to the constitution, Magufuli needs a two-thirds outright majority from both sides of the union to amend the constitution – making these elections about far more than just the next five years.

Along with the almost total subversion of an independent judiciary since 2016, the prospect of an enlarged executive with the ability to amend the constitution worries Tanzania’s private sector.

“We have changes that were brought about by one person, and in so doing they have weakened some of the institutions,” says Olomi from the Institute of Management of Entrepreneurship Development.

“The media, the parliament, the opposition. If you don’t institutionalise this period where Magufuli is making government stricter and more straightforward, then what happens when you have weakened institutions and that spirit is no longer there? Then you have a worse situation.”

Regional issues

Tanzania’s political environment – and Magufuli’s unapologetic stances on controversial issues – are also straining relations with its regional partners in the East African Community (EAC), creating problems for EAC businesses in trade, transport and logistics.

When Magufuli first came to power it seemed he had found a powerful ally in Rwanda’s President Paul Kagame, taking his first international trip to stay at his counterpart’s village retreat. The two leaders agreed to co-finance and build a railway from Tanzania’s northwestern town of Isaka to the Rwandan capital of Kigali, connecting the port of Dar es Salaam with the hinterland.

The relationship has since soured due to Magufuli’s support for Burundi’s late president Pierre Nkurunziza and other disagreements, delaying the project and the possibility of boosting Tanzania’s main port.

Relations with neighbouring states have reached their nadir this year. After Tanzania failed to introduce strong Covid-19 measures, neighbouring Zambia and Kenya, fearing overlapping transmission, closed their borders with the country in May. Kenya then banned direct flights arriving from Tanzania, and Tanzania retaliated by banning Kenyan carriers from its airspace.

The deterioration in relations has impacted Tanzania’s exporters and traders, who are desperate for diplomacy and a return to normality. Awadh reports a fall in cashew export volumes and Dewji from the MeTL conglomerate reports a slowdown in his transnational logistics line.

While flights have resumed to Kenya, Magufuli’s nationalist rhetoric – often imbued with hostility to Tanzania’s neighbours – damages commerce for companies that are focused on the wider region.

Nonetheless, the broad perception of Tanzania’s business sector is that Magufuli has made some important government reforms on corruption and easing some business regulations while pursuing policies that secure Tanzania’s national interest.

The conduct and aftermath of October’s election could prove a turning point in Tanzania’s economic history. The expected decisive win for Magufuli could see his more pragmatic side prevail – or lead him to double down on aggressive policies.   

“Our opposition focus on a one-sided picture that it is all bad,” says Awadh.

“Like everything there is some bad and some good. I cannot say it is perfect. Are we better off – yes. Are things getting better – yes. Has he done some things really well – he has. Does he have things he could improve on? Of course.”

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