The pitfalls of economic nationalism in Tanzania

Presidents YKM of Uganda and Tanzania's JPM: 
Friendship at whose cost?

Tanzania is now firmly on an Economic Nationalism path in a bid to create a “fairer economy” for the country and its citizens.  Such policy involves a greater state role in the management of the economy, diminishing the role of markets.

However, there are pitfalls that put the success of the path to doubt: Production of marketable goods requires money, equipment, and technical know-how including management. Without these, resource or economic nationalism is a pipe dream for, investors choose to stay away.

 The Latin American pioneers in that path do not appear to have gained from the windfall of oil price increases in the early 2000s.  In Venezuela, one of the early advocates of natural resource nationalism, more than 70 percent of the population is reeling in poverty today, and the economy has virtually collapsed.

Economic nationalism involves; emasculating dissent, including political opposition, the media or community groups such as non- Governmental Organizations.  The strong arm tactics are also extended to the private sector through legislation that forces them to cow-tow the government line or lose Licenses or be nationalized.

In Tanzania, all the ingredients of economic nationalism are in place: The opposition is effectively emasculated, and the media, both traditional and social media, gagged. And a plethora of laws and edicts have rendered the country’s policy environment for businesses, a tower of Babel. The red flags are flapping!

In the economy, the country has fully exploited what economists call “obsolescing bargain” to the full. The obsolescing bargain is a situation where bargain power shifts from the investor to the host government after an investment has been put in place and cannot be transferred elsewhere. This is blackmail and it helps keep future investors away.

Hoima-Tanga pipeline: three years in negotiations

 In July 2017, Tanzania enacted three laws asserting “permanent sovereignty” over its natural resources including oil and gas while drastically amending the country’s mining code. Together with new regulations, the laws allow the government to renegotiate investor-state contract terms that parliament deems “unconscionable”, and impose quotas for the procurement of local goods and services, and employment of local personnel. The government is also entitled to a free equity interest of between 16 percent and 50 percent in mining groups, which are prohibited from suing the state in courts outside Tanzania.

Changes in the Mining Act established a commission to regulate the industry, overhauled the requirements for the storage, transportation, and processing of raw minerals. It also increased royalty rates and government shareholding in mineral rights.

The laws have both economic and political foundations: they reflect frustration with the pace of economic development model driven mainly Foreign Direct Investment. They are also political in that they are promulgated and enforced by Political parties facing the possibility of a defeat in future elections, experts say.

In the economic sphere, there are headwinds that would unsettle any government. The GDP growth rate, though still robust by all measures, has shrunk from 7.2 percent in 2015 to 6.7 percent last year. The Africa Development Bank, AfDB, in its Outlook 2019, projects that the rate will remain flat at 6.6 percent in 2019 and 2020, an election year.

The Bank says that youth unemployment rose to 7.3 percent in 2016 from 5.3 percent in 2012. Increasing domestic arrears, says the Bank, could also pose a risk. Development partners and investors holding back, there are headwinds ahead.

In Politics, reports Financial Times, the ruling Chama Cha Mapinduzi, CCM, is facing declining fortunes amid growing opposition.  Its support base has declined to 58 percent in 2015 from 80 percent in 2005 and it faces an election next year.  Politics appears to be the driving force for the policy shift.

These are reasons enough for the government to look inside, and play a major role in economic management, to spur progress by way of increasing tax revenue and appease a restless constituency.

In July 2017, the government handed Acacia Mining Plc a $190 billion tax bill, saying the gold producer had falsely declared bullion exports since 2000, a claim the producer denied. The state later settled for a $300 million tentative payment after a meeting between Magufuli and the president of parent Barrick Gold Corp, reports Bloomberg.

 While the politicians say they want to create a “fairer economy,” the business community sees a tendency to create a bureaucratic and obstructive government, says Petroleum Economist, warning that “investors could be forced to think hard before they commit any funds for Tanzania.”

In pursuit of the 2017 Laws, Tanzanian Parliament is reviewing 11 LNG contracts, some 20 years old, with a view to renegotiating clauses found “unconscionable.” Whether the review will yield the desired results remains to be seen. However, it has the effect of slowing down activity in the sector.

The AfDB has warned in its 2019 Africa Economic Outlook, that policy uncertainty could unsettle the private sector, stifling economic growth.

 The on-going review of the LNG contracts could slow down negotiations on the proposed construction of the US$30 billion LNG processing plant at Lindi. The project has been on the drawing board since 2014. The current potential suitor is Equinor ASA.

Equinor, which has sunk US$2 billion in block 2 development, has in a statement cautiously supported Tanzania’s Policy with a caveat:  “An LNG development is a large project that requires large upfront investments,” it said in a statement to Bloomberg. “To ensure that all parties benefit from such a project, stable and predictable framework conditions for the more than 30-year lifetime of the plant is essential. We trust that the government of Tanzania has a long-term view on this major industrial investment,” concluded the firm.

Apart from demanding a larger share in the mining sector, Tanzania is also domesticating multinational corporations. In 2017, telecoms companies were ordered to list at the local securities exchange. Some did, others are still working their way into the listing.

 In the last four months or so, other MNCs have offloaded their majority stake to Tanzanians. Among these is Fastjet, which has sold its majority stake. The local outfit, Fastjet Airlines, is grounded. MultiChoice, the pay-TV giant is also considering offloading its majority stake to a Tanzanian. Its fate remains to be seen.

The headwinds facing fastjet are illustrative of the conditions that must hold for economic nationalism to succeed: The country must have the financial muscle, technical and managerial competencies to replace the deep-pocketed foreigners. And it must also have a large market to sustain the new outfit.  

In mining, the country must have a monopoly over the resource.  In Natural gas, it faces competition from Mozambique. Tanzania has 58 trillion cubic feet of recoverable natural gas. The main discoveries are in the Rovuma Basin, which has yielded 75 tcf in Mozambique, just across the border.

 Mozambique has sanctioned Eni’s Coral South floating LNG project and an Anadarko-led LNG development may not be far behind, reports Bloomberg.  Tanzania's plans are still struggling to get off the drawing board reports, Petroleum Economist.

The publication does not see Tanzania exporting LNG until mid -2020s due to delays in contract negotiations.   

In crude oil transportation, the Hoima-Tanga Crude Oil pipeline is still stuck at the negotiation stage, three years after the project was mooted. Prolonged negotiations frustrate Uganda’s ambition of exporting crude, more than 12 years after commercial deposits were discovered.

Meanwhile, Kenya is moving on with its proposed pipeline from Turkana oilfields to Lamu Port. The port is expected to start operating in November this year. Should Kenya complete its pipeline by 2021 as planned while the Hoima- Tanga Pipeline is still on the negotiating table, Uganda, which initially planned to evacuate its crude through Kenya, could rethink the deal with Tanzania, further frustrating its ambition to export crude oil.

Tanzania is ambitious but lacks the necessary wherewithal to implement its goals and could frustrate stumble its economy further if her volleys with investors continue. She does not have the capital muscle to exploit her resources.  

Whether investors and her neighbours continue patient with her slow pace of negotiations remains to be seen.