Tanzania's recent discovery of huge natural gas fields has put it firmly in the sight of foreign investors. But Benno Ndulu, its central bank governor, warns that the east African country should not become reliant on hydrocarbons. Instead, it should use them to diversify its economy.

Sleepy Tanzania has struggled to rouse much excitement from international investors in the past. Although it is one of Africa's most stable nations, its economy lives in the shadow of Kenya, its northern neighbour. And while Uganda, another east African country, has a smaller gross domestic product (GDP), it has made its financial markets more accessible to foreigners, particularly with regards to fixed-income securities.

Yet interest in Tanzania has risen dramatically in the past two years, thanks in part to the discovery of enormous natural gas fields off its coast. Including the most recent finds in June, it is estimated to have almost 850 billion cubic metres of recoverable reserves, or the equivalent of 5 billion barrels of oil. As in bordering Mozambique, where even more gas has been found, foreign companies are falling over themselves to develop Tanzania's fields. BG Group of the UK is expected to invest up to $20bn in the country by 2020, while Norway's Statoil could spend similar sums of money.

The effect this will have on an economy of just $30bn is difficult to underestimate. Some think that within a few years of gas exports commencing – probably in 2018 or 2019 – Tanzania's GDP could triple. "We have a new magnet for attracting investment in this country," says Benno Ndulu, governor of Tanzania's central bank. "There's no question it will be transformational."

Mr Ndulu, a former World Bank economist who has led the Bank of Tanzania since 2008, says that BG Group’s operations alone could double the revenues collected by the government today.

Yet he is adamant that Tanzanian policy-makers are aware of the pitfalls that often come with newly discovered hydrocarbons. "Natural resources and their benefits are not ends in themselves," he says. "They are really a means that we can use to support the diversification of our economy.

"It would be extremely unfortunate if at the end of their existence, we had an economy that still depended on natural resources to survive. Transformation and diversification have to be the main benefits of the natural resources. We need to think strategically about that diversification even before the resources are flowing. The work starts now," he says.

Training Tanzanians

Politicians will soon start preparing a natural gas law, to make sure the money derived from the commodity is spent wisely. Mr Ndulu says that the government should also consider a sovereign wealth fund and start training Tanzanians so they are qualified to work in the sector. "It wouldn't be a good thing if the contractors that supply services and goods to this industry are all external," he says. "Then we would miss a big part in that transformation."

Crucial to diversifying Tanzania's economy will be the development of its private sector, which remains far less vibrant than Kenya's. Mr Ndulu says the government hopes the infrastructure projects it funds with revenues from natural gas result in more private investment.

One industry he wants to see more investment in is mining. Tanzania's gold sector has grown substantially since the late 1990s and it ranks as one of the four biggest producers in Africa. However, its other minerals are yet to be fully exploited. "We have huge coal and iron deposits," he says. "And we have nickel and uranium in large quantities. All of these are opportunities for investors."

Agriculture hope

Agriculture will be critical to Tanzania's future. Given its large land mass, it has vast tracts of fertile soils. But the country remains a net food importer due to a lack of farming and low productivity. "You can fit Kenya, Uganda, Rwanda and Burundi into Tanzania and still have space left," says Mr Ndulu, referring to the five members of the East African Community (EAC), a customs union. "[So] our agricultural potential is huge. But I think we are not even making use of 25% of our arable land."

Natural resources and their benefits are not ends in themselves. They are really a means that we can use to support the diversification of our economy

Benno Ndulu

Rice and sugar are the crops the government is prioritising. It hopes, partly by getting large agribusiness companies to work more closely with smallholders, to become self-sufficient in rice production by 2015 and triple its growth of sugar in the next seven years. This would enable Tanzania to meet domestic demand and export to other parts of east Africa. "It is not enough for us to produce for ourselves," says Mr Ndulu. "The rest of the region also depends on us, particularly [Kenya] to the north, which frequently has food shortages."

Increasing the production of cereals would also help the Bank of Tanzania achieve monetary stability. Inflation surged from 6% to 20% in 2011 because of a drought early in the year, which led to a poor harvest across east Africa, and rising prices for food imports.

Inflationary pressures have since eased, thanks to better rains and the central bank implementing tighter monetary policies, including raising lenders' reserve requirements on government deposits from 20% to 30% in November. While analysts doubt that monetary authorities will accomplish their goal of reducing inflation to single digits by the end of 2012, it had fallen to 17.4% by June. Mr Ndulu thinks it could decrease to 7% by the middle of next year. "The medium-term target is 5% to 6%," he says.

Looser capital controls

The Tanzanian shilling depreciated heavily last year in tandem with rising inflation, falling 16% versus the dollar between January and November. "We were hit very hard, partly because volatility in Europe created nervousness," says Mr Ndulu. "[East African] currencies came under pressure because of very rapid portfolio flows in and out of the region."

The situation might have been even worse if it were not for Tanzania’s capital controls. These prevent non-resident investors from buying government bonds in the primary market – given the secondary market’s illiquidity, this makes it very difficult to buy them at all – and restrict outward investments from Tanzanians. Nonetheless, analysts say that the country would benefit from liberalising its capital account, which both Kenya and Uganda have done.

The government has set out plans to follow suit, albeit in stages. From next year it will allow EAC residents to take part in auctions of bonds with tenors of five, seven and 10 years, the longest on offer. It plans to open up to investors from the rest of the world by 2015.

But Mr Ndulu, wary of hot money flows, says some restrictions will remain, including a lock-in period for foreign buyers of a year. "We are very mindful of what we experienced last year," he says. "So we are building speed bumps, such as holding periods, so that overnight trades don’t hit us badly. These speed bumps are being considered everywhere around the world given the volatility right now."

Demand from EAC portfolio investors, particularly those in Kenya, for Tanzanian debt is believed to be high. Allowing them and eventually others into the country will increase the government's investor base and enable it to borrow more easily from private sources. A major benefit of this, say analysts, would be to help Tanzania wean itself off aid, which it still relies on heavily.

Eurobond ahoy

Another way Tanzania wants to diversify its funding is by issuing a maiden Eurobond. It recently appointed Citi to advise it on the process and intends to get credit ratings. It is thought to want to raise $500m to $750m, which is well within a $1.6bn limit for non-concessional funding that it has agreed with the International Monetary Fund.

Tanzania is likely to be that much more attractive to international bond investors thanks to its natural gas discoveries. Nonetheless, its economy is already buoyant. Its GDP, driven by increasing private investment in sectors such as mining, construction and agriculture, is forecast to rise 7% both this year and in 2013.

That growth could reach double figures once large-scale gas production begins. While plenty of dangers associated with hydrocarbon riches loom, Tanzania has already taken measures to evade them. Moreover, it has the benefit of treading a path plenty of other countries have gone down. "The advantage of being a late starter is that you can avoid the mistakes made earlier," says Mr Ndulu. "In this respect, we stand a good chance of avoiding any curse associated with natural resources."

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter