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AfricaMay 1 2006

Tanzania sets a small example

James Eedes reports from Dar es Salaam on the factors fuelling Tanzania’s recent vigorous growth.
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Tanzania often has to play second fiddle to other members of the East African Community. Kenya is the bigger economy (US$16.9bn versus Tanzania’s $12.1bn), has a more sophisticated private sector and is the better-known travel destination. Though smaller economically, Uganda has been praised for its reforms and received generous donor support.

But as both Kenya and Uganda teeter on the edge of uncertainty, Tanzania is politically stable, growing rapidly and winning praise from the International Monetary Fund (IMF) for its prudent government policies. Elections in December last year saw President Benjamin Mkapa bow out at the end of his constitutional two-term period in office, to be replaced by Jakaya Kikwete. In Africa, such a smooth transition is a democratic triumph.

Tanzania has an equally good economic story to tell. In February, Bank of Tanzania governor Daudi Ballali forecast economic growth of between 7% and 8% in 2006, up from the estimated 6% recorded in 2005. The economy is enjoying a construction boom and new mining projects have come on stream.

Drought threat

The governor did warn of risks posed by high fuel costs and drought, both of which could drive up inflation. Tanzania is heavily dependent on hydro-electricity and poor rains had forced load-shedding earlier this year. However, good rainfall in April had eased fears as well as boosting prospects for the agriculture sector, which accounts for 44% of GDP.

In April, the IMF completed the fifth review of Tanzania’s economic performance under a three-year borrowing arrangement, concluding that the authorities deserved credit for their market-oriented policies and appropriate macroeconomic management, which had helped to sustain economic growth.

In this environment, Tanzania’s banks are having an easy time. Banks’ pre-tax profits ballooned to Tsh143.1bn ($116m) in 2005, up about 58% on the year before. However, earnings

accretion can for the most part be attributed to interest income on government paper. Yields on short-term instruments were rising in 2005 as the central bank moved to curtail liquidity; in response, banks’ investment in government securities was up nearly 80%.

Predictably, this had a ‘crowding-out’ effect on private sector credit, which grew far more modestly. Mayank Malik, Citigroup’s country head and also chairman of the Tanzanian Bankers’ Association, points out that legal and judicial constraints restrict lending as it is difficult to enforce security against loans. He is optimistic, pointing to new laws and measures to improve the operations of commercial courts. Just recently, banks agreed to share customer information with a view to establishing a credit bureau. “Bank assets as a percentage of GDP are about 10%, which is very low even by African standards. So there is a lot of potential,” he says.

The industry is not static. Rabobank led an investor consortium of three Tanzanian partners to acquire a 49% stake in the National Microfinance Bank (NMB), which was fully owned by the government. It is the only bank in Tanzania that has an extensive national network, comprising more than 100 branch offices, and is predominantly an infrastructure for payments. At the end of 2004, NMB had 1400 employees and a balance sheet total of $570m.

The benefits of privatisation are compelling. South Africa’s ABSA Bank acquired a 55% stake in National Bank of Commerce in 2000. In contrast to other banks it aggressively grew its loan book in 2005, citing a desire to do “real banking”. ABSA’s extensive experience in South Africa is clearly being applied, stirring up the market.

Structural reform

With a GDP per capita of $323 (in Kenya it is $513; Uganda, $308) and ranked 164th out of 177 countries on the UN Development Programme’s Human Development Index, Tanzania is one of the poorest countries in the world. As the IMF notes, Tanzania will need to maintain sound policies and steadily pursue key structural reforms for many years to remove numerous impediments to broad-based growth and achieve lasting inroads against poverty. Sustained reform efforts will be needed to stimulate private-sector led growth, particularly in such areas as infrastructure, energy, governance and the business environment.

“Nudging Tanzania from its achievement of macroeconomic stability to difficult structural reforms will be one of President Kikwete’s main challenges. The private sector and foreign investors are still regarded with some suspicion and vested interests will also try to impede this transition,” says Andrea Bohnstedt of World Markets Analysis.

Mr Kikwete has committed himself to reform, even if some suspect he secretly harbours socialist convictions. The early signs are encouraging and there is renewed emphasis on privatisation and cutting red tape, though it is too early to judge the new president. However, with overwhelming political capital and a full term ahead, Mr Kikwete has every opportunity to get it right.

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Read more about:  Africa , Tanzania