Time to notch up Tanzania-European Union investment ties has been saved
Time to notch up Tanzania-European Union investment ties
One thing that Tanzania has going for it, is its fairly diversified economy. When COVID-19 was ravaging the global economy and destroying tourism-dependent countries, mining (particularly gold mining) kept Tanzania’s balance of payments and the shilling buoyant. Three years prior, when gold exports dropped dramatically, tourism kept the economy and the shilling afloat. Not to mention the agriculture and manufacturing potential that Tanzania has, given its strategic location in the continent as a gateway to the East and Central Africa region.
In its semi-annual economic update published this month, the World Bank reported Tanzania to be performing better than its regional peers in almost every metric. Both the pandemic and the conflict in Ukraine have had negative consequences for inflation and agricultural inputs. But Tanzania’s inflation is well below its regional peers. The relatively stable exchange rate likely mitigated the impact of adverse global trends in domestic inflation. The better news is that according to last year’s World Bank Report, even manufacturing exports are on an upward trajectory (32.3% growth during the first three quarters of 2021), reflecting Tanzania’s improving relations with EAC member states and other regional neighbours.
Whilst it is safe to say that Tanzania’s economy has vast potential left, two metrics remains stubbornly concerning. One it the minimal decline in poverty rates, which has hovered around 26%-27% for a very long time. While economic growth is important, prosperity should also be shared, and there is quite a bit Tanzania can do about it. The other is the relative decline in the levels of Foreign Direct Investments (FDI) in absolute terms since 2015. It is on the second item, that I would like to turn my attention to the trade and investment relations between the European Union and Tanzania.
The European Union has been a historically strong economic partner for Tanzania. In a report issued last year, 12% of Tanzanian imports originated from EU states whilst 10% of exports went the other way. The EU consolidated contribution to overseas development in Tanzania stood at a significant 27%. In addition to that, there are significant EU investments in agriculture (particularly in Arusha) as well as tourism. Data suggests that EU investors’ focus seem to be long-term, given the industries they tend to invest in.
In the EU-Tanzania business forum kicking off this week, delegates, leaders, policy makers and businesses will be keen to explore the potential for deepening business relations between the two parties. This is welcome news for Tanzania as it seeks to attract FDI with the view of fostering shared prosperity. The EU-Tanzania business forum kicks off at the time when the EU is stepping up its offer to its partners with major investments in infrastructure development around the world. Between 2021 and 2027, EU institutions and EU Member States jointly are expected to mobilise up to €300 billion of investments in a range of sectors, including digital, climate and energy, transport, health as well as education and research.
But it is not just about European FDI, it is also about how Tanzania can benefit, trade-wise, from linking with European businesses. But for us to make that happen, I think two things must happen.
1. Make fiscal policy stable and predictable
The first is to make fiscal stability stable and predictable. In a report issued less than a year ago, EU businesses were asked their key challenges in working and investing in Tanzania. You may have guessed that ‘tax policy and administration’ was the number one issue, with 94% of the surveyed firms saying it was their primary bottleneck.
Fiscal policy, particularly tax policy is always a balancing act. With an economy like Tanzania with half of it being informal, conventional measure simply won’t cut it. The measures must incentivise formalisation while raising enough revenues to keep the exchequer afloat.
There has been progress in making tax paying easy with the use of technology in recent years, with technology implementation effectively transforming tax paying in Tanzania, albeit with some glitches along the way. If there are any improvements from a procedural perspective, they would be around the capacity of the TRA’s network and the challenges that come with the system being overloaded; but Tanzania is heading in the right direction.
From a tax-payer engagement perspective, we are beginning to see some deliberate effort to include us into the debate. In January this year, there was a national tax dialogue led by the Minister of Finance to discuss challenges around paying taxes. Initiatives like these will go a long way to foster voluntary compliance, and also enrich the quality of legislation coming through our parliament.
However, from a policy perspective, there are some salient points to address. The majority of the investment coming from the EU will be cross-country investments, and we currently do not have a many current double tax agreements with European countries. In addition, there are specific change of control provisions that make offshore investments and disposals tricky. This certainly has to be looked at given the declining FDI trend since 2015.
Connected to policy, though not fiscal, is the need make regulators ‘facilitators’, rather than ‘frustrators’ of businesses. This is where a well-coordinated Tanzania Investment Centre (TIC), Business Registration and Licensing Authority (BRELA), Fair Competition Commission (FCC) and other regulatory bodies must come in. The mindset must be that of facilitation as opposed to just being a watchdog.
2. Execute timely
Having resources and potential is fantastic, but the game changer is how quickly one executes in taping into those resources. With the world and its technology changing so fast, it is important to know that the resources will not be relevant forever. At the moment, three projects will have a significant impact of FDI flows into Tanzania. The EACOP project, the LNG project and the Kabanga Nickel Project. All of the projects have their financing linked to European entities or parent companies.
The key message here is that these big projects require timely execution to get off the ground. The changing geopolitical demands, including climate politics may mean that if there is a significant delay in getting the investment in place, the projects may not pick up, resulting in an incredible loss of transformative economic potential.
There has to be a sense of urgency in execution of some of these major projects. Indeed, there has to be a sense of urgency broadly, whether that is with a TRA official getting clearances or finalising audits as quickly as possible, or a traffic police working hard to ensure the road is clear for cargo passing to make its way.
The European Union offers a fantastic opportunity for Tanzania. Our history with European investment means that these waters are not unchartered. There appears to be a political will with the Global Gateway for the EU to contribute to narrowing the global investment gap worldwide. We just need to intensify the economic cooperation for us to be able to attract, not just investment, but also markets into that part of the world.
Samwel Ndandala is an Associate Director with Deloitte Consulting Limited. The views presented are his own and not necessarily those of Deloitte. He can be reached at email@example.com