VZCZCXRO7270
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHDR #0836/01 3380610
ZNR UUUUU ZZH
R 040610Z DEC 09
FM AMEMBASSY DAR ES SALAAM
TO RUEHC/SECSTATE WASHDC 9105
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHJB/AMEMBASSY BUJUMBURA 3021
RUEHKM/AMEMBASSY KAMPALA 3558
RUEHLGB/AMEMBASSY KIGALI 1491
RUEHNR/AMEMBASSY NAIROBI 1449
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHLMC/MCC WASHINGTON DC
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