In light of new gas finds and significant international investment, how can resource-rich Tanzania continue to unlock its potential, asks Paige McClanahan.


New gas discoveries over the last few years have quickly transformed Tanzania into a major player in natural gas production, potentially rivalling traditional gas heavyweights like Australia and Qatar.

The Tanzanian government claims that 43 trillion cubic feet of gas – worth roughly US$430bn – lies beneath the seafloor off the country’s coast. Commercial interest in exploiting those reserves has been high: Total, Statoil, Royal Dutch Shell and BP are among the foreign majors that have expressed interest in investing in the country’s budding natural gas sector.

Meanwhile, the government is still putting the final touches to the legislation that will govern natural gas production. The government released an initial draft law in 2012 and produced a second version earlier this year; it plans to make the rules final before the end of 2013.

Legislation aside, infrastructure is critical to the development of Tanzania’s natural gas sector, and one big project is already in the works: a 532-km gas pipeline which will connect the southeastern region of Mtwara to the main port in Dar Es Salaam. Construction of the US$1.2bn pipeline, which is being funded by the China Export-Import Bank, began in November and is expected to be completed mid-2014.

Other infrastructure projects are also on the way: Statoil announced in March that it is planning to partner with UK-based BG Group to build a two-train, US$14bn processing facility for liquefied natural gas (LNG) somewhere along the Tanzanian coast.

Looking beyond natural gas, other hard commodities – notably diamonds, gold and the precious gemstone tanzanite – are continuing to support the Tanzanian economy. Tanzania is now among Africa’s top five gold producers, behind South Africa and Ghana, and roughly tied with Mali. Overall, Tanzania’s exports of both soft and hard commodities are expected to grow by 9.7% in 2013, following solid growth of just over 10% in 2012.

A foundation in agriculture

Natural gas may be grabbing the headlines for now, but the Tanzanian economy remains firmly grounded in agricultural production. Indeed, soft commodities – namely tobacco, cotton, coffee, and cashew nuts – make up roughly 85% of Tanzania’s exports, and 28% of the country’s GDP.

But while Tanzania’s agricultural production is holding steady, there is certainly room for improvement. Mechanisation of the sector has dwindled, with only 23 tractors per 100km2 of arable land in 2005, compared with 32 in 1961.

The government is eager to encourage activity in the agricultural sector, which employs roughly 75% of the Tanzanian workforce. With that in mind, the government is continuing its Kilimo Kwanza (“transforming agriculture”) initiative, which was implemented in 2006 and 2007. The initiative aims to modernise the agriculture sector and encourage crop-growing and livestock-raising across the country.

Attracting new agribusiness investment is also a priority for the government, which has recorded some success on that front. Tanzania’s rice production is expected to grow by 30% between now and 2017, while coffee production is forecast to increase by a staggering 143%, according to the 2013 Tanzania Agribusiness Report.

“Although this eye-catching growth [in coffee production] can partly be attributed to base effects, the sector is benefiting from investment in improved disease-resistant trees, and from incentives to small producers,” the report says.

The financial environment

On the financial front, Tanzanian banks have more company from foreign-owned banks these days, and consumers are reaping the benefits.

“The entry of the international banks to the Tanzanian banking sector has increased competition among banks, leading to improved services and charges,” says Faustine Rutoryo, head of trade and financial institutions at Barclays in Tanzania, adding that “borrowing in foreign currency has been easy with the help of the international banks, who mostly have easy access to foreign currencies when compared to local banks”.

Low reserves of foreign currencies are still a hindrance for local banks. “Most local and regional banks struggle very much to get dollar currencies,” Rutorya says. “This increases their dollar lending prices leaving international banks in a competitive advantage.”

Growing demand for foreign currencies, especially the dollar, is being driven by consumers’ increased appetite for oil imports for electricity generation, according to the African Development Bank (AfDB).

In terms of financing for international trade transactions, the most common approaches include documentary credits such as letters of credit (LCs), documentary collections, and drafts, according to a 2011 report from the US Department of Commerce. Local sellers tend to prefer prepayment, cash with order or cash-in-advance, the report found.

According to Rutoryo at Barclays, the market is ready for more innovative financing solutions. He comments: “The market currently does not offer back-to-back LCs, but the demand keeps increasing given involvement of third parties in the mining business. Secondly, there is also a demand for a commodities finance product with very few banks offering the same perhaps in a non-convincing way.”

A strong business environment

A strong financial sector has paved the way for the growth of Tanzania’s economy, which stands out among its neighbours.

“Tanzania’s economy has been resilient to shocks and is expected to remain buoyant with a GDP growth forecast of 6.8% in 2012 and 7.1% in 2013 – well above the regional averages,” the AfDB says in its 2012 African Economic Outlook.

The report found further that Tanzania’s financial sector “remains stable and sound”, thanks to recent government reforms. “The banking sector maintains a healthy capital adequacy ratio, usually above the required minimum level of 10%. Banks’ average liquidity ratio stands at 45% against the required 20%,” the report said.

Among the five countries of the East African Community (EAC), Tanzania ranks second, after Kenya, in terms of the size of its economy. But the country scores better than all of its EAC neighbours on the ‘trading across borders’ measure of the World Bank’s 2012 Ease of Doing Business Index. It now takes 18 days to export a shipping container from Tanzania’s port in Dar Es Salaam, down from 30 days in 2006. (That’s compared to the current rate of 26 days to export in Kenya, 33 days in Uganda, 32 days in Burundi, and 29 days in Rwanda.) Much of Tanzania’s progress on facilitating exports comes down to the fact that the Tanzanian government has begun allowing customs declaration forms to be submitted online,
the World Bank found.

Meanwhile, foreign direct investment is expected to get a big boost this year, growing by 10% from 2012. China, which wasn’t even one of the country’s top 10 investors two years ago, is now Tanzania’s fourth-biggest investor; the United Kingdom ranks first. South Africa, India, Kenya, Canada, and the United States are also major sources of foreign funds. The growth in investment this year is largely due to new projects relating to natural gas, agriculture and infrastructure.

The Tanzanian government is also playing a role in trying to drive more cash into the economy. The country will soon be following the successful example of Zambia by issuing a Eurobond to help finance the development of the country’s infrastructure, particularly its roads. After making some initial noises on the subject last year, the government announced at the end of February that it intends to issue a US$500mn bond, amortised over seven years. Standard Bank of South Africa will be the sole lead manager of the bond.

Infrastructure challenges

One major challenge to Tanzania’s business environment comes in the form of the country’s infrastructure, particularly the power supply.

Indeed, an acute power crisis has been plaguing the country for a number of years. The crisis has been caused by a combination of low rain levels, which have hindered the productive capacity of the country’s hydroelectric plants, and fuel shortages, which have limited the capacity of thermal generation plants.

“Continued interruptions to the electricity supply remain the most serious concern for businesses in Tanzania,” reports the AfDB’s African Economic Outlook. “The demand for electricity exceeds supply by about 28%.”

The situation has not been helped by the fact that the Tanzania Electric Supply Co. (Tanesco), the state-owned power company, is facing serious financial difficulties, having failed to collect some Tsh78bn worth of outstanding bills from public and private clients, according to a recent report from the Tanzania Daily News.

According to the World Bank, serious power shortages led to a dip in the country’s GDP growth in 2011. A 2011 report commissioned by the Confederation of Tanzania Industries found that the country’s manufacturing sector was particularly hard hit by the persistent electricity crisis.

But more power plants – and more electricity – could be coming soon. Tanesco is in talks with Citi and other international banks to secure funding for six gas-powered electricity plants, international press reported in March. The state-owned power company is also hoping to construct a 400-kilovolt transmission
system to move all of that electricity.

And gas isn’t the only option for electricity generation. Tanzania’s deputy minister for energy and mineral resources, Stephen Masele, told the African Review earlier this year that the government is looking to geothermal energy, solar power, and other renewables as possible new sources of electricity to feed the country’s power grid.

Looking beyond the country’s power predicament, Tanzania’s roads and ports are also in need of work. The Tanzania Ports Authority (TPA) has announced that it plans to expand and modernise the country’s ports, increasing the total cargo handling to 12.65 tonnes per annum in 2013, which would mark an increase of roughly 5% from 2012. TPA is building two new berths at the country’s main port at Dar Es Salaam, constructing new ports in the towns of Bagamoyo and Tanga, and upgrading the port in the southeastern city of Mtwara.