TANZANIA'S TEXTILES: THE CHALLENGE TO COMPETE

UNCLAS SECTION 01 OF 03 DAR ES SALAAM 001638

SIPDIS

SIPDIS

DEPT EB/TPP/ABT FOR T LERSTEN AND AF/E FOR B YODER
DEPT PASS TO MILLENNIUM CHALLENGE CORPORATION
ALSO TO COMMERCE/ITA/OTEXA M D'ANDREA
USTR FOR HEYLINGER

E.O. 12958: N/A
TAGS: ECON ETRD KTEX TZ
SUBJECT: TANZANIA'S TEXTILES: THE CHALLENGE TO COMPETE

REF: STATE 138090


1. SUMMARY. Tanzania's textile industry faces not only
increased global competition, but also critical domestic
challenges including a lack of reliable power, rising oil
prices and a significant depreciation ofits currency over
the past year. Based on its Poverty Reduction Strategy
Plan, the Government of Tanzania (GOT) has demonstrated
its commitment to enhance Tanzania's overall
competitiveness by improving the infrastructure network.
Two specific GOT strategies pertaining to the textile
industry are to revitalize Tanzania's Export Processing
Zones (EPZs)and to maintain taxes on used-clothing in
an effort to stimulate apparel production for the local
market. The GOT does not appear ready to take measures
against the import of cheap fabric, instead offering tax
exemptions for woven fabric imported from India and China.
While prospects for the textile sector may appear thread-
bare in the face of daily power cuts, with sound investment
policies, sustained infrastructure improvements and trade
preference programs, Tanzania does show the potential to
become competitive in the global textile market.
END SUMMARY.

2005 Textile Data
--------------

2. According to the Ministry of Industry and Trade (MIT),
2005 data on Tanzania's textile sector is as follows:

Total Industrial Production USD 1,848,154,000
Total Textile Production USD 93,638,000

Textile Exports to US (2005-06) USD 5,373,697
Textile/Apparel Imports USD 102,079,754
Textile/Apparel Exports USD 153,473,692

Total Manufacturing Employment 88,713 persons
Total Textile/Apparel Employment 15,000 persons

Key Challenges to Competitiveness
--------------

3. Beyond international competition, high production cost
is the biggest challenge facing Tanzania's textile
industry. High production costs derive in large part
from Tanzania's current energy crisis which emerged in
late 2005. During 2006, January, May and June were the
only three months in which Tanzania's Electricity Supply
Company (TANESCO) did not undertake power rationing on the
national grid. The rising cost of oil and the depreciation
of the shilling against the dollar by approximately 17
percent from 2005 to 2006 (from Tsh 1,150 to 1,350),have
further increased pressure on production costs in the
textile and other industrial sectors. For small and
medium-sized entrepreneurs, access to credit or start up
capital is also an important barrier to entry.


4. According to the Confederation of Tanzanian Industries
(CTI)and MIT, the U.S. and EU restrictions on certain
exports of textiles and apparel from China have not
affected export prospects for Tanzanian manufacturers.
Nor has the GOT implemented safeguards or other measures to
reduce the growth of imports of Chinese textile and apparel
products. To the contrary, the GOT has provided tax
waivers to textile mills importing woven fabrics from both
China and India. In 2005,the Ministry of Finance (MOF)
provided tax waivers on USD2.5 million dollars worth of
woven fabric from China and India. The MOF's tax waivers
benefited three companies: NIDA Textile Mill, Karibu
Textile Mill and Friendship Textile Mill; the latter is
a joint venture between Chinese and Tanzanian partners.
(source:www.mof.go.tz/revenue/exemptionsbenef iciaries/sept05
/html).

Star Apparel Shuts Down, but New Investments Arrive
-------------- --------------

5. In 2005, Star Apparel closed down and NIDA was on the
verge of collapse. The closure of Star Apparel in March
2005 remains clouded with controversy. According to the
MIT, the factory closed due to "misappropriation of funds"
that led to the company failing to pay its employees'
salaries on time. Strikes and "industrial unrest" ensued
and the company, which is headquartered in Uganda, closed
its nearly brand new operation in Tanzania. NIDA, a
Pakistani textile company established in Tanzania in 2001,

DAR ES SAL 00001638 002 OF 003


has experienced major difficulties over the past several
years, stopping production for several months in 2005 and
operating far below production capacity in 2006. Claiming
that it would not be able to continue operations, NIDA
received an USD 18 million tax exemption on imported
fabrics from the GOT. This tax exemption is part of a
performance contract which NIDA has with the GOT, promising
to increase employment from 500 to 2000 people.


6. In 2006, there have been significant new investments in
the textile industry. Cami Apparel, for example, has
invested in three new apparel factories in Dar es Salaam:
Everfit Apparel, Cami Apparel and Cami Suma. The A-to-Z
Textiles company, based in Arusha, has embarked on a multi-
million dollar joint venture with a large Japanese firm,
the Sumitono Chemicals Company. The new factory will focus
on production of long lasting insecticide-treated mosquito
nets. These new investments from Cami and A-to-Z are
estimated to create 5,000 new jobs by 2007.

GOT Trying to Become Competitive
--------------

7. Under its National Vision 2025, Tanzania spells out both
its commitment and strategy to become a semi-industrialized
country by 2025. With its National Poverty Reduction
Strategy Plan, the GOT has pinpointed infrastructure as
a key priority area for stimulating economic growth and
poverty reduction. The GOT's recent Millennium Challenge
Account Compact proposal reflects the GOT's strategy to
strengthen the infrastructure network with the goal to
increase Tanzania's competitiveness, including in the
industrial sector.


8. Regarding the textile and apparel sector in particular,
the GOT appears to be undertaking two key measures. First,
the Kikwete administration has attempted to revitalize the
concept of Export Processing Zones (EPZ) and Special
Economic Zones (SEZ) which were legally created by legislation
in 2000, but which still lack the necessary infrastructure and
administration to get off the ground. While misplaced,
another GOT strategy aims at levying significant taxes
on used-clothing imports to stimulate domestic textile
production for the local market. In 2005, the GOT placed
75 percent tariff on used clothing. In 2006, the GOT
reduced the tariff to 45 percent but, to date, has
resisted reducing the used-clothing tariff rate any
further.

Trade Preferences Help Tanzania Compete: AGOA, EAC and SADC
-------------- --------------

9. In 2005, Tanzania exported over USD 3 million worth of
textiles to the U.S. market under the African Growth and
Opportunity Act (AGOA). The Sunflag Textiles firm is
responsible for nearly all of these exports. While AGOA
has enabled Sunflag to compete in the U.S. market, other
firms such as NIDA have struggled. In addition to high
production costs, key challenges are to establish market
linkages with U.S. buyers and to increase production
capacity.



10. Tanzania is a member of both the East African Community
(EAC)and the South African Development Community (SADC).
Both the EAC and SADC provide a duty free market for trade in
locally manufactured products, including textiles and
apparel. Moreover, in 2006, the South African Customs Union
(SACU) signed an agreement with the GOT, relaxing strict rules of
origin to allow greater market access to Tanzanian textiles
and apparel in the SACU market. While Tanzania's textile
industry has yet to fully exploit these regional trading
areas, the move toward integration represents important potential
for the Tanzanian textile and apparel sector.

Comment: Key Is Infrastructure and Investment Climate
-------------- --------------

11. Despite several challenges confronting its textile
sector, there is no reason why Tanzania cannot become a
stronger player in the global textile market. Leveraging
trade preferences regionally and with the U.S. and Europe,
Tanzania clearly has potential to increase textile exports
both regionally and internationally. While AGOA and regional
trade preferences do provide important threads to Tanzania's
overall competitiveness, the make or break stitches will be
sustained infrastructure advancements as well as business climate

DAR ES SAL 00001638 003 OF 003


improvements to ensure new investments grow and attract even
more new investors. END COMMENT.
DELLY