BANK OF TANZANIA GOVERNOR REVIEWS TANZANIA'S ECONOMY WITH

UNCLAS SECTION 01 OF 03 DAR ES SALAAM 000836 SIPDIS DEPARTMENT FOR AF/E JTREADWELL, INR JBERNTSEN, FEHRENREICH, AF/EPS STATE PASS USAID, USTR, USTDA COMMERCE FOR ROBERT TELCHIN TREASURY FOR REBECCA KLEIN, DAN PETERS E.O. 12958: N/A TAGS: ECON EFIN EAID PGOV TZ SUBJECT: BANK OF TANZANIA GOVERNOR REVIEWS TANZANIA'S ECONOMY WITH DEPUTY TREASURY SECRETARY WOLIN DAR ES SAL 00000836 001.2 OF 003 ¶1. Summary: Bank of Tanzania (BOT) Governor Benno Ndulu reviewed for visiting Deputy Treasury Secretary Neal Wolin the state of the Tanzanian economy and the Government of Tanzania's (GOT) responses to the global financial crisis in a November 2 meeting at the BOT. Ndulu described the GOT's rescue plan as focused on safety nets, including food security, and support for the most affected sectors to prevent spillover to the banks, which had mainly been spared the crisis. Ndulu noted the GOT was seeking private sector involvement in infrastructure and agriculture, and was addressing obstacles to a more welcoming business environment. He said Tanzania was moving towards lifting capital controls. Deputy Secretary Wolin lauded the GOT's response to the crisis, offered technical assistance in several areas, and encouraged Tanzania to make its anti-money laundering legislation national in scope. End Summary. ¶2. Ndulu began by reviewing Tanzania's economic situation prior to the financial crisis. During the first eight years of the decade, Tanzania saw 7.1 percent growth, 5-7 percent inflation, revenue growth increasing 20 percent annually, from 11 to 16 percent of GDP, and expanded spending supported by foreign assistance. The global crisis had reduced projections for 2009 growth from 7.9 percent to 5-5.5 percent, but Ndulu recounted good signs of resumed growth including better than expected tourist arrivals from July to September (tourism is Tanzania's main foreign exchange earner). Inflation, after peaking at around 14 percent early in 2009, had dropped to 12 percent, with the increase driven primarily by food prices, which comprise 56 percent of Tanzania's Consumer Price Index. ¶3. In the financial system, Ndulu said Tanzania's banks were "mainly unscathed" by the crisis, a conclusion shared by a joint mission from the IMF/WB, which recently updated Tanzania's Financial Sector Assessment Program ("FSAP"). While the proportion of nonperforming loans has increased slightly from 6.2 to 7.7 percent, the banks are generally very solid with a high liquidity ratio of 37.8 percent. This reflects a more conservative approach to providing loans, and as of August 2009, annual credit growth was 26 percent, down from the 40 percent average over the past three years. Even the most visible damage of the crisis is fairly limited - three small banks might require recapitalization, but even if further shocks hit the system, recapitalization would cost less than 1 percent of GDP. Because of concerns about a buildup of nonperforming loans resulting from reduced demand for exports, the GOT's rescue plan focused on assisting exporters, especially for commodities like cotton and coffee where prices had collapsed, rather than waiting for banks to get into trouble. ¶4. Ndulu said the BOT had advised President Kikwete on the development and implementation of the rescue plan, which ran to Tsh 1.7 trillion (USD 1.3 billion). The first element involved providing safety nets, through support for jobs in export sectors and food security. On food security, he commented that a good crop in southern Tanzania would have been sufficient to cover shortfalls in the north, but exports to Kenya drove up Tanzanian food prices and contributed to inflation. He said that Tanzania should position itself as a regional food producer. The GOT also protected key social programs, especially in health. Second, the GOT looked to protect key investments for growth, in particular infrastructure. Actions included filling the revenue gap, in part through increased domestic financing (1.2 percent last year and 1.6 percent this year),and filling the foreign exchange gap with almost USD 340m from IMF's Exogenous Shock Facility, USD 240m from the IMF's allocation of Special Drawing Rights, and front-loading of World Bank disbursements for budget support and an emergency food loan. Ndulu acknowledged that front-loading in 2009 had been very useful but that, as a result, the GOT would receive less assistance from the WB and AfDB in 2010. The GOT also compensated exporters and market agents for losses as a result of the crisis, thus preventing spillover to the banks, initiated a guarantee facility that allowed banks to extend loan repayments, and provided emergency food assistance to food deficit areas. In addition, the GOT instituted a fertilizer subsidy voucher program and extended support for leasing agricultural machinery. ¶5. Ndulu explained that prudent macroeconomic policies over the last decade had given the GOT the policy space to initiate its robust response. For instance, Ndulu mentioned that Tanzania's latest Debt Sustainability Analysis showed that government has significant DAR ES SAL 00000836 002.2 OF 003 "headroom" to expand borrowing. Additional borrowing of 1 percent of GDP per annum for 5 years would enable Tanzania to borrow up to USD 1.5 billion while maintaining acceptable debt sustainability. ¶6. Deputy Secretary Wolin commended Ndulu for the GOT's range of responses which were usefully protecting banks and maintaining assistance to the poor and those most affected by the crisis. On sovereign debt, he suggested that capital markets appear to be improving, with lower spreads on bonds for most emerging and developing countries. He offered U.S. technical assistance for Tanzania in the process of its bond offering. More broadly, Deputy Secretary Wolin said that U.S. businesses look for the right climate on issues such as licensing, taxation and infrastructure. ¶7. In response to Deputy Secretary Wolin's question about Tanzania's capital controls, Ndulu replied that there are few controls and no inward investment restrictions or limits on profit repatriation. He then qualified that statement by acknowledging that Tanzania maintains a limitation on foreign purchase of treasury bills, but is moving towards further liberalization. He justified the restriction on short-term government obligations by saying that it is necessary to decrease volatility. He said that the GOT may open its markets but limit volatility by stipulating that investors must hold securities for at least six months. He added that the East African Community (EAC) had an agreed timetable (through 2015) for removing restrictions on Tanzanian citizens' outward investments, which would in effect be global because the other EAC members had no controls. He acknowledged that the current regime of capital controls is imperfect, with foreign investors finding ways to purchase Tanzanian securities. He suggested Tanzania could benefit from technical assistance on dealing with volatility in capital flows. Deputy Secretary Wolin indicated the U.S. would consider such a request and perhaps provide such assistance as part of Treasury's ongoing assistance to the BOT. ¶8. Ndulu turned to the issue of involving the private sector in infrastructure and agriculture, saying that the GOT now had an approved framework for public-private partnerships. He acknowledged that ease of doing business was critical to the success of the framework and noted that President Kikwete had personally convened a technical group on ease of doing business. The private sector had already identified key ease-of-business issues, including land and its disposal, infrastructure, and the transaction costs related to registering a business. ¶9. Deputy Bank Governor Enos Bukuku embarked on an extended criticism of the Millennium Challenge Compact (MCC) for moving slowly and in a bureaucratic fashion and for having eliminated or scaled down several projects, including the Mafia island airport. He asked for U.S. assistance to encourage private sector investment in the rail sector, especially the Central Line, and in development of regional data centers to take advantage of the recently arrived SEACOM fiber-optic cable. He said the SEACOM connection to Africa had huge potential to improve the Tanzanian communications sector, but that Tanzania still needs software to take advantage of it. He noted that Tanzania is working with Microsoft to obtain the necessary software. He also asked for help with the judiciary, which needs a digital management system to reduce delays as well as additional training. Deputy Secretary Wolin thanked Bukuku for his comments and noted that Tanzania's MCC compact is the largest in the world, and while the U.S. understands that there are additional projects the Tanzanians would like to pursue, we believe they should first focus on making the current compact as successful as possible. He also commented that there are areas in which the Tanzanians could move with greater alacrity in moving their projects forward. ¶10. Ndulu made a pitch for information technology assistance to the BOT, saying it needs modernization, integration into the Tanzanian Interbank Settlement System to do daily settlements, and a national switch. He also requested support in involving the private sector in organizational solutions in agriculture, such as outgrower schemes in which small growers use the credit of large farmers and have guaranteed processing. These would enable farmers to raise the standards and quality of their products and make mechanization more feasible. Ndulu said that this expansion of the value chain had worked in the sugar sector and was being expanded to sisal and tea. ¶11. Deputy Secretary Wolin concluded by complimenting Ndulu on DAR ES SAL 00000836 003.2 OF 003 Tanzania's good progress on anti-money laundering (AML),while noting that follow-through on Zanzibar was necessary for effective AML on a national scale. He emphasized that a strong regime would be important for capital market and banking integration. Moreover, Deputy Secretary Wolin said Tanzania should take seriously the recent review by the East and Southern African Anti-Money Laundering Group, which should run its course without government involvement. ¶12. Deputy Secretary Wolin has cleared this cable. LENHARDT