Resource nationalism to weaken Tanzania’s business environment

04 February 2019

Tanzania’s business environment continues to deteriorate, as the government pursues a resource nationalist agenda. Firms operating in the mining sector will face stringent regulations and elevated contractual risks. President John Magafuli will continue to dominate politics, although some protests are likely in the run-up to elections in 2019

Security Environment

Tanzania’s political environment is dominated by President John Magafuli and the ruling Revolution Party (CCM). Magafuli has gradually centralised power around himself in recent years, and the CCM is likely to be dominant in local elections in December 2019 and presidential and legislative elections in October 2020. 

While the opposition will remain weak, some anti-government protests are likely ahead of polls. Opposition protests are generally small, attracting fewer than 1,000 people. However, they may result in clashes with security forces, generating collateral property damage, death and injury risks. During parliamentary by-elections in February 2018, one bystander was killed after police fired live rounds.

Terrorism risks are moderately elevated in Tanzania, as networks consisting of local mosques are known to promote jihadist ideology. 

Propaganda material in Swahili is often distributed which highlights the discrimination of Muslims and is designed to generate support among communities in Tanzania’s Coast region. 

As a result, Christian communities and security services may be targeted in small-arms attacks in the Coast region, although foreign-owned assets are not likely to be targeted.

Trading Environment

Government spending will remain elevated in the coming years, as Magafuli pursues a national development plan in the period to FY2020/21. The plan aims to develop critical infrastructure, such as an international standard gauge railway and key ports. 

As a result of this spending, Tanzania is expected to post persistent fiscal deficits in the next 5 years, with a forecasted deficit of 3.4% of GDP in 2019. However, sovereign credit risks will be moderated by a concurrent effort to reduce recurrent expenditures. 

The public sector wage roll is being audited to remove ‘ghost’ workers, while salaries in the civil service were reduced in FY2016/17. Tanzania’s government debt has grown in recent years, and is forecasted to reach 49.4% of GDP in 2019, up from 38% in 2016. However, public debt is sustainable. External debt largely consists of concessional loans, reducing exposure to exchange rate fluctuations.

Government investment in infrastructure will support Tanzania’s economy in the near-term, with real GDP growth forecasted at 6.5% in 2019. Consumer confidence will also be a growth driver, despite an anticipated rise in the inflation rate to 5.4% in 2019, from 3.5% in 2018. 

Tanzania benefitted from bumper harvests in 2018, and this will boost purchasing power in many households, given that the majority of Tanzanians work in agriculture. However, the longer term outlook is more challenging, as a deteriorating business environment will deter foreign direct investment.  

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Investment Environment

Magafuli continues to pursue a resource nationalist strategy that has strained the relationship between Tanzania’s government and foreign investors in the mining sector. In July 2017, a number of changes were introduced to the Mining Act of 2010. These included granting the national assembly broad powers to review and renegotiate agreements, an immediate ban on the export of unprocessed minerals, the removal of international arbitration rights, increased royalty fees and strengthened requirements for local participation in mining companies. 

Further regulations were introduced in January 2018, which expanded local content requirements and required foreign investors to have an account with a Tanzanian-owned bank.

The current administration has also demonstrated a willingness to alter or cancel contracts in the mining sector. In December 2018, Magafuli announced that he had ordered a review into a contract belonging to Petra Diamonds for the Williamson Diamond mine, while in March 2018 licenses were revoked for 13 mining companies in the Lake Manyara National Reserve. 

The Tanzanian government has also been involved in a long-running legal dispute over a USD 190 billion tax bill with the country’s largest gold mining firm, Acacia Mining, which has significantly reduced gold production in the country. In January 2019, the government fined the company USD 130,000 for alleged environmental breaches at its North Mara mine.

CPS Risk Outlook Tanzania

**** Appetite for sovereign risk in Tanzania is mixed, given recent claims and the recent withdrawal from international arbitration

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for DR Congo, China, Mozambique and Ecuador, all of which have been the subject of recent enquiries from JLT's client base.

CPSRO 518x542 Feb 19

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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