TANZANIA ECONOMIC ROUND-UP APRIL 2009

UNCLAS SECTION 01 OF 03 DAR ES SALAAM 000221

SIPDIS

DEPARTMENT FOR AF/E JLIDDLE; INR/RAA FOR FEHRENREICH, AF/EPS
STATE PASS USAID, USTR
COMMERCE FOR BECKY ERKUL
TREASURY FOR REBECCA KLEIN

E.O. 12958: N/A
TAGS: EAGR EAIR ECON EIND ENRG TZ
SUBJECT: TANZANIA ECONOMIC ROUND-UP APRIL 2009

REF: A) 2008 Dar es Salaam 130 B) Dar es Salaam 153 C) Dar es Salaam
175


1. Summary:

-- Energy: Tanzania Faces Power Crisis; New Investment a Challenge
-- Aviation: Air Tanzania Fuel Debt Indicates Deeper Troubles
-- Mining: Report Questions Mining Sector Tax Practices
-- Finance: Check Capping, Interbank Transactions Slow Business
MOF Convenes Forum on Global Financial Crisis
IMF Supports Tanzanian Stimulus Package
-- Agriculture: Government Addresses Food Shortages





Tanzania Faces Power Crisis; New Investment a Challenge
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2. Tanzania is facing a growing power crisis as demand far exceeds
supply and prospects for new investment to boost production are dim.
The parastatal Tanzania Electric Supply Company (TANESCO) estimates
that it needs to add 105 MW to the national grid annually in order
to meet demand. TANESCO currently produces up to 600 MW, compared
to peak demand of over 780 MW. (Note: About ten percent of Tanzanian
citizens have access to electricity. End note.)


3. One result of the power shortage is that any factor affecting
TANESCO's operations is immediately felt by customers. For example,
the company announced on March 25 that residents of Dar es Salaam
would be without power from 10am-2pm and 6pm-10pm daily for an
unspecified period. TANESCO attributed the rationing to a shortageMmf!!4S%vgQ%%bHQ#SQ|AQQfact that routine repair of one turbine can affect power supply
to the country's largest city demonstrates the extreme fragility of
the system. The March rationing is not an isolated incident. In
January, TANESCO implemented load shedding after an equipment
malfunction at a major hydropower station. During this incident,
Dar es Salaam underwent emergency rationing over a period of three
days.


4. Compounding the challenges of a sub-capacity grid, near term
prospects for investment in the sector are dim. Press reports
recently cast doubt on a much talked about large-scale project aimed
at producing 300 MW. The alleged withdrawal of a key investor,
Barrick Mining Company, seems to have thrown the project off course.
Canadian firm Artumas Group Inc, had plans to produce the power
from natural gas at Mnazi Bay - where the company estimates a gas
potential of three trillion cubic feet - and then transport it to
the national grid. Recently, however, Artumas and TANESCO announced
Barrick's withdrawal from the deal. Barrick, in turn, claimed it
never entered into a formal agreement with Artumas but had been
interested in the project only as a purchaser of the power to supply
its mining operations. Reports indicated that Barrick was to make a
USD 400 million investment, about half of the projected overall
cost. On March 21, Minister of Energy and Minerals William Ngeleja
announced GOT plans to rescue the project, but it is unclear how the
ministry would finance the project.


5. The proposed GOT rescue of the Artumas project came on the heels
of a recent failed plan for TANESCO to purchase turbines - with 100
MW generation capacity - from Dowans Holding Company. Talk of the
planned purchase caused a heated debate within the government and
parliament. Opponents argued that procurement of second-hand
equipment would violate public procurement law and that it would be
improper for the government to buy turbines that Dowans acquired via
the highly controversial Richmond deal (See reftel A). Proponents
argued for purchase of extant capacity as the most expedient and
logical solution to the looming power crisis. TANESCO appears to
have closed debate on the issue, announcing on March 6 that it would
withdraw the plan to purchase the turbines.


6. Tanzania's abundant untapped coal deposits are a potential source
for future power. Currently, Tanzania obtains only one percent of
electricity generation from coal. Tancoal, a joint venture between
Pacific Corporation East Africa of Australia and the National
Development Company of Tanzania, recently announced it is conducting

DAR ES SAL 00000221 002 OF 003


a feasibility study for construction of a 400 MW coal-fired power
station and high voltage transmission line. With the substantial
investment involved (an estimated USD 1.2 billion to develop coal
feedstock),coal power will not have a short-term impact on
Tanzania's power woes.

Air Tanzania Fuel Debt Indicates Deeper Problems
-------------- ---

7. Total Oil Ltd. recently filed a USD 1 million lawsuit against
parastatal Air Tanzania Corporation Ltd (ATCL). Filing suit in the
High Court's Commercial Division, the oil company demanded payment
of outstanding debt plus interest accrued from supplied jet fuel.
ATCL is defending another suit in the same court brought by South
African Airways (SAA). SAA is suing for payment of USD 4 million in
unsettled loans following the failure of the partnership between the
two airlines (See reftel B).


8. ATCL's legal woes are symptomatic of its deep financial trouble.
ATCL continues to fly only a handful of domestic routes - not nearly
enough to make it profitable. The International Air Transport
Association recently listed ATCL among 38 airlines around the world
in danger of ceasing operations due to financial constraints.


Report Questions Mining Sector Tax Practices
--------------

9. International NGO Action Aid released a report this month
detailing tax evasion techniques used by major mining companies in
Africa. The report, entitled, "Breaking the Curse: How Transparent
Taxation and Fair Taxes can Turn Africa's Mineral Wealth into
Development," argues that mineral rich countries in Africa have not
been able to optimize mining tax revenue because mining companies
are granted too many tax subsidies and concessions and because
companies practice tax avoidance through such measures as secret
contracts, corporate mergers and acquisitions, and "creative"
accounting mechanisms.


10. In Tanzania, the report alleges, only one of six major mining
companies (AngloGold Ashanti) had paid corporate income tax as of
the end of 2008, despite earning tens of millions of dollars over
several years. The report goes on to detail how the companies have
under-declared revenues, negotiated preferential tax deals with the
government resulting in estimated losses in the hundreds of millions
of dollars, and failed to cooperate with government appointed
auditors. Both the Ministry for Energy and Minerals and Barrick
Mining Company made statements refuting the report's findings.


11. Several days before the release of the ActionAid report,
Tanzania's Minister of Energy and Minerals, William Ngeleja,
announced that the country would have a new mining law in place by
June. Ngeleja was vague in addressing details of the new law, but
attempted to downplay its potential effects on investors saying law
would not have a significant impact on existing investments. In
2007, President Kikwete appointed a panel headed by Judge Mark
Bomani to review mining contracts and propose corrective measures.
Although the report was said to have been completed by the summer of
2008, its findings - which would likely be the basis for a revised
law - have not been made public.

Check Capping, Interbank Transactions Slow Business
-------------- --------------

12. In March, Tanzania began implementation of a check capping
system aimed at stemming fraudulent activities and mitigating risks
related to the use of checks. Both company and bank checks in
Tanzania with a face value of Tsh 10 million (approx. USD 8
thousand) and above are no longer being accepted in the clearing
houses. Larger transactions must be effected through an electronic
payment system - the Tanzania Interbank Settlement System (TISS).
Introduction of this measure has proven difficult for many banks,
leading to the piling up of uncleared transactions. Transactions
that would otherwise have taken minutes have been delayed by days or
even weeks. Companies have complained of losing contracts due to an
inability to meet payment commitments, and workers have faced delays
in receiving salary payments. Although the measure is mandated by a
2006 East African Community directive, Tanzania was the first
country in the region to implement the system.

MOF Convenes Forum on Global Financial Crisis
--------------

13. On March 27-28, the Ministry of Finance convened a forum on the

DAR ES SAL 00000221 003 OF 003


state of Tanzania's economy in the international economic crisis.
Government, international organizations and donor countries were
well represented; the private sector was almost entirely absent.


14. Coming on the heels of the Africa-IMF meetings (See Reftel C),
the Forum was intended as a venue to discuss the challenges facing
Tanzania as well as offer solutions. Panelists mostly covered the
conventional wisdom: while Tanzania's financial sector would be
somewhat insulated from the affects of the crisis (due to recent
reforms and because it is not well integrated into the global
market),the country would likely suffer declining demand for its
export products, steep drops in tourism revenue, falling rates of
FDI and potentially development assistance (although donors have
made commitments to continued funding),and declining remittances
(which were small to begin with).


15. Proposed responses were also mainly confined to standard advice:
make a more aggressive effort at revenue collection,Qus on
attracting FDI, continue rigorous surveillance and oversight of the
financial sector, and invest heavily in agriculture and
infrastructure. One NGO suggested that the GOT reduce its
procurement of luxury vehicles, causing some shuffling in seats but
no other response. Although all participants agreed about the
paramount importance of attracting FDI and the topic was discussed
at length, there were no concrete suggestions offered other than a
need for "reform."

IMF Supports Tanzanian Stimulus Package
--------------

16. An IMF delegation visited Tanzania from March 17-21 to conduct
the 2009 Article IV consultation and a review under the Policy
support initiative (PSI). Mr. Roger Nord, the IMF Chief of Mission,
announced a revised estimate for Tanzania's economic growth
predicting percent in 2009, a drop from 7.5 percent in 2008. Nord
also announced the IMF's support for a Tanzanian stimulus package
which would allow the budget deficit for 2008/2009 to widen by about
3 percent of GDP. Last week, the Tanzanian Ministry of Finance
forecast the country's economic growth at 6.5 percent for 2009. The
Bank of Tanzania's most recent estimate is 5-6 percent.

Government Addresses Food Shortages
--------------

17. In response to food shortages in several parts of the country,
the GOT has allowed tax-free imports of 300,000 tons of maize for
three months, through May 31. Agriculture Minister Steven Wassira
told journalists in Dar es Salaam that more than 240,000 people in
Tanzania are in urgent need of food aid, while 12,000 others would
have to get food supplies at subsidized prices as the growing food
crisis takes its toll in some regions. The pending food shortage,
particularly for low income households, results in part from failure
of the 2008 rains in parts of the country that generate 30 percent
of annual national crop production. Because many farmers who lost
their crop during the 2008/2009 season will have trouble obtaining
seed for the coming season, the government also released Tsh 1.7
billion (approx. USD 1.3 million) for the procurement and
distribution of seed in several regions.

ANDRE