Tanzania Comoros Tanzania at a Glance: 2001-02

COUNTRY REPORT

Tanzania Comoros Tanzania at a glance: 2001-02

OVERVIEW The ongoing negotiations between the ruling Chama Cha Mapinduzi (CCM) and the opposition Civic United Front (CUF) have helped to contain political tensions, and there has been no return to violence on Zanzibar or the mainland. However, given the intractability of both sides, it is unlikely that the negotiations will lead to a long-term solution to the crisis. The recent death of the mainland vice-president, Omar Ali Juma, has created a power vacuum within the CCM, leaving the president, Benjamin Mkapa, somewhat isolated. The main features of the 2001 budget statement, which was published in June, are greater fiscal discipline and increased donor- funded expenditure on health and education. Key changes from last month Political outlook • The UK and Tanzania have become embroiled in a controversy over Tanzania’s decision to buy a US$40m air traffic control system from the UK’s BAE Systems. The IMF and World Bank argue that Tanzania should not borrow more money to fund a defence system it does not need. The World Bank could decide to set the specifications of the new system as one of the conditions for its financial support, but this move is unlikely. Economic policy outlook • The 2001/02 budget was published on June 14th. There is little change in overall policy, but there is a new emphasis on the social sector, particularly health and education, where donor funds will be used to support a number of new initiatives. Economic forecast • The value of the shilling fell sharply, by around 11%, in the first five months of 2001, from TSh805:US$1 to TSh896:US$1. However, the currency stabilised in June and July and is expected to average TSh872:US$1 in 2001 and TSh907:US$1 in 2002.

August 2001

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Contents

2 Summary

Tanzania

5 Political structure 6 Economic structure 6 Annual indicators 7 Quarterly indicators 8 Outlook for 2001-02 8 Political outlook 9 Economic policy outlook 11 Economic forecast 14 The political scene 19 Economic policy 24 The domestic economy 24 Economic trends 26 Agriculture 26 Mining and energy 28 Infrastructure 29 Foreign trade and payments

Comoros

32 Political structure 33 Economic structure 33 Annual indicators 34 Quarterly indicators 35 Outlook for 2001-02 35 Political outlook 36 The political scene 39 Economic policy and the domestic economy 41 Foreign trade and payments

List of tables

11 Tanzania: international assumptions summary 12 Tanzania: forecast summary 19 Tanzania: budget 20 Tanzania: new fiscal measures 21 Tanzania: financing the 2001/02 budget 22 Tanzania: AIDS statistics, 1999

24 Tanzania: real gross domestic product growth 29 Tanzania: exports 30 Tanzania: tariff bands 40 Comoros: selected economic indicators

List of figures

13 Tanzania: gross domestic product 13 Tanzania: real exchange rates 25 Tanzania: exchange rate, 2001 27 Tanzania: major African gold producers, 2000 34 Comoros: foreign trade 34 Comoros: foreign reserves 36 Comoros: gross domestic product 36 Comoros: real exchange rates

Summary

August 2001

Tanzania

Outlook for 2001-02 The political tensions on Zanzibar have remained muted in the wake of negotiations, between the ruling Chama Cha Mapinduzi (CCM) party and the opposition, Civic United Front (CUF), to normalise the situation on the islands. However, since neither side is willing to concede on its main arguments, progress towards a solution is unlikely. Internal dissent within both parties will continue, and the opposition will become increasingly weak as a result. Tanzania’s economic programme will continue to be led by the poverty reduction and growth facility (PRGF) agreed with the IMF. Real GDP growth will be led by growth in agriculture, mining, manufacturing, and tourism. Although exports are expected to rise, higher imports will result in current- account-deficits of US$314m (3.4% of GDP) in 2001 and US$413m (4.2% of GDP) in 2002.

The political scene On July 4th one of the country’s two vice-presidents, Omar Ali Juma, died, following a heart attack. Although seen in some circles as a possible successor to the incumbent president, it is unlikely that he would have succeeded Benjamin Mkapa. The Dutch government has made donations to the Institute of Multiparty Democracy in Africa, an agency which will support Tanzania’s opposition parties. The CCM have objected, claiming that this constitutes interference in Tanzania’s domestic affairs.

Economic policy The government’s budget for 2001/02 confirms Tanzania’s commitments under the poverty reduction and growth facility and the heavily indebted poor countries initiative. Its main thrust is to improve fiscal discipline and providing donor-supported social services, particularly in health and education.

The domestic economy Preliminary estimates show that real GDP growth was only 4.9% in 2000, a modest increase over the 4.7% in 1999, owing to the poor performance of the agricultural sector. By contrast, mining was the most dynamic sector of the economy, and is estimated to have grown by 13.9% in 2000. Meanwhile, the slide of the shilling stabilised in June-July, following intervention by the central bank.

Foreign trade and payments Overall commodity exports fell by 2.8% year on year in 2000. This was due to a decline in cashew nut and sisal exports, which have suffered from problems with the buying price and limited markets. By contrast, non-traditional exports grew by 39.5%. Most of this increase can be attributed to the growth in mineral exports due to the start of production at the Geita and Golden Pride mines.

Comoros

Outlook for 2001-02 A bloodless military coup d’état on Anjouan is likely to speed up the resolution of Comoros’ twin crisis of Anjouan separatism and unconstitutional rule in Moroni, which has been delayed, mostly as a result of Anjouanese objections. The new rulers have indicated their support of the Fomboni accords, and the Comorian president, Colonel Azali Assoumane, who has used the past delays and political uncertainty to prolong his rule will no longer be able to drag his feet on their implementation. Despite the positive effect the coup may have on events, it is unlikely that the problems of the isles will be solved in the near term. The Comoros economy is expected to remain depressed, despite the resumption of financial assistance by donors following the signing of the OAU- brokered agreement. Major structural deficiencies will constrain overall economic growth.

The political scene A bloodless military coup d’état on Anjouan has ousted the civilian government of Said Abeid Abderemane, which has ruled the island since 1999. The coup leaders have announced that they support the Fomboni accords and have promised to continue that process and hand over power to a democratically elected government once it is complete and Anjouan is ready to rejoin the federation. The events on Anjouan may have the effect of speeding the resolution of the crisis in the isles, as President Assoumane will no longer be able to use the current impasse in negotiations to extend his grip on power.

Economic policy and the According to recent IMF data, Comorian economic performance was weak in domestic economy 2000. Real GDP declined by 1.1% as a result of a slowdown in donor support, irregular electricity supplies and a lack of investment in the main agricultural export commodities. The prospect of a return to political stability has led the Comorian authorities to formulate a comprehensive IMF staff-monitored programme (SMP) for July 2001-June 2002, to address the most pressing problems. Fiscal performance was mixed in 2000. Total revenue fell by 9%, from 11.8% of GDP in 1999 to 10.2% of GDP in 2000. In response, the government has sharply reduced expenditure and improved the management of its payroll, reducing its wage bill by 5% on 1999. Consequently the overall domestic deficit (excluding foreign-financed expenditure and on a commitments basis) remained low, at 0.2% of GDP.

Foreign trade and payments Total exports increased by a hefty 55% in 2000 owing to higher international prices for Comoros’ main export commodities. Imports continued to reflect financial constraints. This, combined with higher earnings from tourism, reduced the current-account deficit from 4.1% of GDP in 1999 to 0.4% of GDP in 2000.

Editors: John Arthur (editor); Pratibha Thaker (consulting editor) Editorial closing date: August17th 2001 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

EIU Country Report August 2001 © The Economist Intelligence Unit Limited 2001 Tanzania 5

Tanzania

Political structure

Official name United Republic of Tanzania

Form of state Republic, formed by the 1964 union of Tanganyika and Zanzibar

Legal system Based on English common law, the 1977 Union and 1985 Zanzibari constitutions, as amended

National legislature National Assembly, comprising 269 members (232 directly elected and 37 women appointed); elected members are chosen by Union-wide adult suffrage every five years; Zanzibar has its own House of Representatives of 59 members (nine women appointees), which legislates on internal matters

National elections October 2000 (legislative and presidential); next elections due in October 2005 (legislative and presidential)

Head of state President, elected by universal adult suffrage every five years

National government The president, vice-president and Council of Ministers; last cabinet reshuffle October 2000

Main political parties The ruling Chama Cha Mapinduzi (CCM); Civic United Front (CUF); National Convention for Construction and Reform (NCCR-Mageuzi); United Democratic Party (UDP); Chama Cha Demokrasia na Maendeleo (Chadema)

President Benjamin Mkapa Vice-president Ali Mohammed Shein Prime minister Frederick Sumaye

Key ministers Communications & transport Mark Mwandosya Community development, women’s affairs & children Asha Rose Migiro Defence Philemon Sarungi Education James Mungai Energy & mineral resources Edgar Maokola Majogo Finance Basil Mramba Food & agriculture Charles Keenja Foreign affairs Jakaya Kikwete Health Anna Abdallah Home affairs Mohamed Seif Khatib Industry & commerce Iddi Simba Justice & constitutional affairs Harith Bakari Mwapachu Labour & youth development Juma Kapuya Lands and human settlement development Gideon Cheyo Natural resources & tourism Zakia Meghji Science, technology & higher education Zabein Mhita Water & livestock development Edward Lowassa Works John Magufuli

Central bank governor Daudi Ballali

Economic structure

Annual indicators

1996 1997 1998 1999 2000 GDP at market prices (TSh bn) 3,767.6 4,703.5 5,710.3 6,524.4 7,238.5 GDP (US$ bn) 6.5 7.7 8.6 8.8 9.0 Real GDP growth (%) 4.5 3.5a 4.0 4.7 4.9a Consumer price inflation (av; %) 21.0 16.0 12.8 7.9 5.9 Population (m) 30.5 31.3 32.1 32.9 33.7 Exports of goods fob (US$ m) 764.1 715.3 589.5 539.9 661.4 Imports of goods fob (US$ m) 1,213.1 1,164.5 1,365.3 1,416.0 1,334.5 Current-account balance (US$ m) –510.8 –629.8 –956.4 –807.1 –370.7 Foreign-exchange reserves excl gold (US$ m) 440.1 622.1 599.2 775.5 974.2 Total external debt (US$ bn) 7.4 7.1 7.6 8.0 7.4b Debt-service ratio, paid (%) 19.1 13.2 20.8 15.6 18.8b Exchange rate (av) TSh:US$ 580.0 612.1 664.7 744.8 800.4

August 10th 2001 TSh:892:US$1

Origins of gross domestic product 2000a % of total Components of gross domestic product 1999 % of total Agriculture, forestry & fishing 48.4 Private consumption 81.7 Mining 2.3 Government consumption 7.8 Manufacturing 8.4 Gross fixed capital formation 18.1 Construction & utilities 4.6 Increase in stocks 0.2 Services 34.9 Exports of goods & non-factor services 16.5 GDP at factor cost incl others 100.0 Imports of goods & non-factor services –24.5 GDP at market prices 100.0

Principal exports 2000a US$ m Principal imports 2000a US$ m Cashew nuts 84.4 Machinery & transport equipment 225.6 Coffee 83.7 Consumer goods 410.0 Minerals 150.0 Oil 134.1 Manufactures 43.3 Industrial raw materials 152.5 Cotton 37.5

Main destinations of exports 2000a % of total Main origins of imports 2000 % of total India 21.4 Japan 5.6 UK 5.1 South Africa 11.7 Japan 6.5 UK 8.7 Germany 8.3 US 3.2 Netherlands 8.0 India 7.1 Kenya 5.3 Kenya 8.4 a Official estimates. b EIU estimate.

EIU Country Report August 2001 © The Economist Intelligence Unit Limited 2001 Tanzania 7

Quarterly indicators

1999 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Central government finance (TSh bn) Revenue & grants 274.88 236.05 318.97 240.75 262.18 262.82 308.89 269.65 Expenditure 330.99 286.72 285.38 261.06 335.62 279.68 332.25 278.60 Adjustment 30.74 –31.02 –2.34 9.65 20.07 –22.84 41.04 –43.18 Balance –25.36 –81.69 31.25 –10.66 –53.37 –39.70 17.68 –52.13 Prices Consumer prices (1995=100) 173.1 167.2 169.7 184.7 183.4 176.8 179.3 194.4 % change, year on year 8.3 7.5 7.0 6.3 6.0 5.7 5.7 5.3 Financial indicators Exchange rate TSh:US$ (av) 707.62 786.80 797.39 800.03 799.64 799.36 802.61 818.66 TSh:US$ (end-period) 737.00 797.90 797.33 800.50 799.54 799.12 803.26 860.66 Interest rates (%) Deposit (av) 7.76 7.34 7.92 8.57 8.53 7.28 5.17 4.97 Discount (end-period) 12.20 18.00 20.20 20.10 13.10 13.10 10.70 10.30 Lending (av) 22.01 22.00 21.53 20.70 20.30 22.34 22.97 22.08 Treasury bill (av) 6.42 10.52 15.00 15.13 10.90 8.40 4.70 3.70 M1 (end-period; TSh bn) 508.99 548.92 632.58 578.50 601.23 642.01 695.01 653.85 % change, year on year 5.7 9.1 16.0 13.2 18.1 17.0 9.9 13.0 M2 (end-period; TSh bn) 1,035 1,120 1,218 1,203 1,259 1,307 1,398 1,425 % change, year on year 9.2 15.9 18.6 17.8 21.7 16.6 14.8 18.5 Sectoral trends Productiona (annual totals; ‘000 tonnes) Coffee ( 46.6 ) ( 48.0b ) n / a Seed cotton ( 104.9 ) ( 105.0b ) n / a Cotton, lint ( 31.5b ) ( n / a ) n / a Sisal ( 24.0 ) ( 22.0b ) n / a Foreign trade (TSh m) Exports fob 56,067 77,784 196,990 139,189 103,046 107,429 181,393 152,440 Imports cif –252,781 –339,105 –336,199 –286,030 –314,175 –314,176 –327,984 –333,593 Trade balance –196,714 –261,3215 –139,209 –146,841 –211,129 –206,747 –146,591 –181,153 Foreign reserves (US$ m) Reserves excl gold (end-period) 604.6 666.6 775.5 761.0 751.5 888.1 974.2 1,008.7 a Crop year, ending year shown. b Provisional.

Sources: FAO; Bank of Tanzania, Economic Bulletin; IMF, International Financial Statistics.

Outlook for 2001-02

Political outlook

Domestic politics The political environment on the islands of Pemba and Zanzibar, and hence in Tanzania, has remained calm since the violence which shook the isles in January 2001. The decline in violence is largely due to attempts by the ruling party, Chama Cha Mapinduzi (CCM), and the main opposition party, the Civic United Front (CUF), to reach an agreement through dialogue, although the CCM has also permitted the opposition to hold political rallies. In an important step, the rival parties signed an accord intended to end violence on Zanzibar and to provide a basis for fuller negotiations on a long-term solution to the crisis. However, progress is likely to be slow, and ultimately unsuccessful, because neither side is willing to give ground on its basic position.

The pace of the negotiations is liable to become even slower following the recent death of vice president, Omar Ali Juma. Dr Juma, a Zanzibari, played an important behind-the-scenes role in the talks between the CCM and CUF. His successor, Ali Mohammed Shein, will require a fairly lengthy period in which to familiarise himself with the negotiations and acquire the recognition of the mainland party.

The lack of progress in the current dialogue, is a pressing issue more for the CUF than for the CCM. This is because the CCM faces no real problems if the political status quo is maintained, and it can continue to present itself as a progressive, reformist governing party. Thus, unless international pressure is brought to bear on the CCM, there is little prospect of a compromise. In contrast, the options open to the CUF are very limited. The party continues to claim that the Zanzibar election was rigged and that a full re-run should be held. It also refuses to recognise the legitimacy of the Zanzibari president, Amani Karume. Meanwhile, factions of the CUF have denounced the talks and accused their leaders of betrayal for taking part. This sentiment has been so strong among some members that they have formed a breakaway political party, the National Alliance Party, which is in the process of being registered. Such factionalism will only grow if the talks are dragged out and this splintering is likely to play into the hands of the CCM, weakening the opposition further.

Taking these factors into consideration, it is doubtful whether the CCM-CUF talks will produce a lasting solution to the problems in Zanzibar, and negotiations will probably drag on throughout the outlook period. But, given the antipathy generated by the recent violence, it is possible that disillusioned members of the CUF will adopt a radical stance and return to political violence or terrorism as seemingly the only viable alternative. Meanwhile, in an attempt to appease the opposition and to maintain good relations with international donors, the CCM is likely to make symbolic concessions, such as preparing a code of conduct for the next presidential and parliamentary elections (scheduled for 2005). On a more positive note, after securing guarantees from the Tanzanian government that they would not be harassed, substantial

EIU Country Report August 2001 © The Economist Intelligence Unit Limited 2001 Tanzania 9

numbers of the refugees who sought sanctuary in Shimoni, Kenya, after the violence and killings which took place in Zanzibar on January 27th, have begun to return to Pemba. All but a small minority are now expected to return in the coming months.

Election watch So far, the Zanzibar crisis has not had any significant impact on the credibility of the president, Benjamin Mkapa, within the CCM, and this is unlikely to change unless violence or bombings spread to the mainland. However, the reputation of the mainland as a haven of peace in a troubled region has been tarnished, although this is unlikely to affect investor confidence or to threaten the rising aid and foreign direct investment (FDI) inflows that the Economist Intelligence Unit is currently forecasting. The crisis in Zanzibar has led to press reports of potential splits within the CCM, but any reports that the CCM is about to collapse are wild exaggerations. The CCM has long been riven by different factions. This situation remains unchanged, although in the past strong leaders such as the former president, Julius Nyerere, aided by a quiescent press, were able to suppress dissent. The fact that President Mkapa is constitutionally prevented from running for another term as president raises the possibility that he may become a “lame duck” president if the crisis in Zanzibar worsens and he is unable to resolve it quickly. In the meantime, any immediate challenge to his position is unlikely—most potential presidential candidates are happy to wait until campaigning starts in earnest for the next presidential election.

International relations Given Tanzania’s heavy dependence on foreign aid to support current economic policies, the government will continue to place considerable value on maintaining good relations with donor governments and smoothing over the political problems in Zanzibar and Pemba. In addition, there is little doubt that the government is becoming increasingly concerned with the deteriorating political situation in the Great Lakes region. This is not only because the resurgence in violence in the region often spills over into conflict and acts of lawlessness in Tanzania’s border regions, but also because the refugee problem continues to be a major drain on the government’s time and resources. The government will therefore continue to support all efforts aimed at increasing political stability in Burundi, Rwanda and the Democratic Republic of Congo, while trying to ensure that its own refugee problem remains high on foreign governments’ lists of humanitarian concerns.

Economic policy outlook

Policy trends The Tanzanian government has made considerable progress towards achieving macroeconomic stability in recent years. With inflation now under control, attention will focus on establishing a more rigorous fiscal policy, and notably on widening the government’s revenue base. Tanzania’s broader economic policy orientation during 2001-02 will be led by a poverty reduction and growth facility (PRGF) agreed with the IMF in April 2000. The main goal of the PRGF is to create a favourable macroeconomic climate to achieve real GDP growth rates of at least 6% per year, which, coupled with higher spending in

the social-services sector, should allow the country to reduce poverty significantly. This is an ambitious target, especially considering the structural constraints to achieving the rapid growth in the agricultural sector that will be required.

Under the PRGF and the IMF-World Bank heavily indebted poor countries (HIPC) debt-relief initiative, the Tanzanian government has produced a poverty reduction strategy paper (PRSP) outlining the measures necessary to provide a credible basis for sustainable improvements in the lives of the poor. The government has identified four main areas in which strategic action will need to be taken: reforms aimed at improving market efficiency and productivity (especially in agriculture); the promotion of exports; increasing investment; and the efficient channelling of government resources towards key poverty- alleviation projects. The government’s seemingly improved commitment to reform should lead to more efficient implementation of these measures than in the past, but progress will be slow, with gains measured over many years. However, there are signs that Tanzania will remain a strong favourite of international donors, and that budgetary and balance-of-payments support will remain substantial.

Fiscal policy Tanzania appears to have had a relatively strong fiscal position in recent years, but the overall situation is masked by high levels of donor inflows. Without these, Tanzania would have suffered from very large fiscal deficits, principally as a result of its low fiscal revenue/GDP ratio. The government is committed to increasing its tax revenue in coming years, but taxes on the small formal sector of the economy are already relatively high, so any increase in revenue will need to come from better tax administration and the broadening of the tax base. There has been some progress on this, but it has tended to be slow and piecemeal. The government’s fiscal discipline has improved since the introduction of a cash-budgeting system, which has imposed tight spending constraints on ministries. This system will be eased in over the next 12-24 months as the government introduces a more flexible cash-management and planning system. However, expenditure will prove increasingly difficult to control, not only because large increases in expenditure are forecast in coming years, but also because much of the increased social-services expenditure must be channelled through local government structures, which are very weak. Following the budget statement for 2001, announced on June 14th, we forecast a fiscal deficit of 2.8% of GDP in 2001, dropping to 1.2% of GDP in 2002.

Monetary policy In recent years, large donor inflows have enabled the government to run a modest fiscal deficit which has meant that, unlike in many other African countries, the full burden of fighting inflation has not been transferred to monetary policy. This situation is unlikely to change and monetary policy in 2001-02 will continue to aim to achieve and sustain a low rate of inflation, while allowing adequate growth in credit to the private sector to support investment and economic growth. (The exact targets for each year are set out in the Bank of Tanzania’s annual monetary policy statement, published in June with the government budget). The main problem facing the central bank in terms of monetary policy is likely to be the exchange-rate policy, most notably

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the need to ensure that the shilling remains competitive during a time of sustained donor inflows, and to smooth any sharp downward falls which may occur in the exchange rate. The bank is also keen to narrow the gap between lending and savings rates, to reflect the fact that inflation in Tanzania appears set to remain low and stable in the outlook period. However, progress in this area could prove difficult and will rely largely on moral pressure being exerted on banks to reduce their lending rates.

Economic forecast

International assumptions The global economy is experiencing its most severe deceleration since the 1974 oil price shock. In 2000 world growth averaged 4.9% (weighted using GDP at purchasing power parity exchange rates), the fastest pace of world growth since 1984. However, we estimate that global economic growth in 2001 will slow to an average of only 2.7%, the slowest rate recorded since 1998, at the height of the Asian crisis.

Price forecasts for Tanzania’s main exports will vary during the outlook period. The price of gold is forecast to decline from US$279/troy oz in 2000 to US$255/troy oz by 2002. The price of Arabica coffee is also predicted to fall dramatically, from US$0.87/lb in 2000 to US$0.57/lb in 2002, as a result of production surpluses and rising stocks. The price of cotton will fall from 59 US cents/lb in 2000 to 57 US cents/lb in 2002, as the forecast global cotton deficit causes stocks to fall and prices to rise.

Tanzania: international assumptions summary (% unless otherwise indicated) 1999 2000 2001 2002 GDP growth World 3.6 4.9 2.7 3.7 OECD 3.1 4.0 1.4 2.4 EU 2.5 3.4 2.0 2.5 Exchange rates (av) US$ effective (1995=100) 116.4 120.8 129.7 124.8 US$:SDR 1.37 1.32 1.26 1.30 Financial indicators ¥ 2-month private bill rate 0.27 0.24 0.18 0.10 US$ 3-month commercial paper rate 5.18 6.32 4.04 4.75 Commodity prices Oil (Brent Dated; US$/barrel) 17.9 28.5 26.8 25.5 Gold (US$/troy oz) 278.8 279.3 263.0 255.0 Coffee (Arabica, US cents/lb) 103.9 87.1 66.0 57.0 Cotton (US cents/lb) 53.1 59.2 53.8 57.3 Food, feedstuffs & beverages (% change in US$ terms) –18.6 –6.1 1.2 15.0 Industrial raw materials (% change in US$ terms) –4.6 13.4 –3.5 3.8

Economic growth Official data for real GDP growth in Tanzania show that it reached only 4.9% in 2000, with the agricultural sector expanding by only 3.8% as a result of structural impediments and climatic constraints. Economic growth in the outlook period will continue to be led by the agricultural sector, but, despite

various government and donor initiatives to try to overcome these constraints and impediments, improvements will be slow. However, growth in the sector is forecast at 4.4% in 2001 and 4.5% in 2002. These rates could possibly be higher if growth in non-traditional agricultural exports such as cashew nuts, horticulture and fish take off. In addition, GDP growth will be supported by increased gold production, donor-funded investment (as part of the PRSP), and increased FDI, especially in the mining and energy sectors. However, structural impediments may also have an impact outside agriculture; for example, the rationing of power has constrained growth in manufacturing in late 2000 and the first half of 2001. Taking all these factors into account, we currently forecast a modest pick-up in real GDP growth, to 5.2% in 2001 and 5.4% in 2002.

Tanzania: forecast summary (% unless otherwise indicated) 1999a 2000a 2001b 2002b Real GDP growth 4.7 4.9 c 5.2 5.4 Gross agricultural production growth 4.7 3.8 c 4.4 4.5 Consumer price inflation Average 7.9 5.9 5.7 5.6 Year-end 7.0 5.5 6.1 5.5 Short-term interbank rate 21.9 21.6 17.7 17.3 Government balance (% of GDP) 0.7 –1.5 –2.8 –1.2 Exports of goods fob (US$ bn) 0.5 0.7 0.8 0.9 Imports of goods fob (US$ bn) 1.4 1.3 1.6 1.8 Current-account balance (US$ bn) –0.8 –0.4 –0.3 –0.4 % of GDP –9.2 –4.1 –3.4 –4.2 External debt (year-end; US$ bn) 8.0 7.4d 6.4 5.8 Exchange rates TSh:US$ (av) 744.8 800.4 872.0 906.8 TSh:¥100 (av) 653.8 742.8 710.5 734.3 TSh:¤ (year-end) 801.0 754.2 810.0 919.1 TSh:SDR (year-end) 1,094.3 1,046.6 1,136.0 1,209.8

a Actual. b EIU forecasts. c Official estimate. d EIU estimate.

Inflation Having averaged 5.9% in 2000, inflation has remained low in the first four months of 2001 owing to a combination of tight monetary policy, the modest fiscal deficit and stable food prices. Although the fall in the shilling in the first quarter of the year will lead to a rise in the inflation rate in the next six months, the average rate is now forecast to be only 5.7% in 2001 and 5.6% in 2002. While this is a downward trend, we do not expect the rate to fall significantly below this level. In contrast, the government and central bank have often set themselves inflation targets of 4-4.5% per year. Our pessimism is based on the fact that inflation will remain vulnerable to increases in food prices and potential falls in the value of the currency. In addition, it is unlikely that inflation will be reduced much further during the outlook period because of the structural impediments in the economy, the limited scope for running tighter monetary policy, and the fact that growth and government spending will remain strong. However, at under 6% per year in 2001-02, the inflation rate is still modest and will not impact on macroeconomic stability.

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Exchange rates The Tanzanian shilling was remarkably stable in 2000, but there were strong indications that in real terms it had become overvalued. As a result its value fell sharply, by around 11%, from TSh805:US$1 at the start of January 2001 to TSh896:US$1 by the end of May. There are various reasons why falls such as this occur; in this instance the decline was attributed to a sharp drop in export earnings, reflecting the poor export performance of cashew nuts and other commodities. However, the currency stabilised in June and July, and we expect it to remain steady throughout the second half of 2001, as export earnings recover and aid inflows remain strong. However, just as the rate fell in mid- 1999 and early 2001, it will remain vulnerable to sharp downward falls. We currently forecast average an exchange rate of TSh872:US$1 in 2001 and TSh907:US$1 in 2002.

External sector Tanzania has a chronic structural deficit on its current account (the deficit averaged 14.9% of GDP during the 1990s). In 2000 the current-account deficit fell substantially, to only 4.1% of GDP. This was mainly because of an unexpected fall in the level of imports, rising current transfers and a fall in service debits. Although we expect this structural change to persist, we forecast that the current-account deficit will grow modestly during the outlook period from 3.4% of GDP in 2001 to 4.2% of GDP in 2002. This reflects the fact that, while export growth will be strong, import growth is set to be stronger. At present we forecast that exports will grow to US$819m in 2001 and to US$862m in 2002, against a background of recovering cotton prices, rising gold production and increasing non-traditional exports. Strong GDP growth and increases in investment will cause imports to increase during the forecast period, from US$1.44bn in 2001 to US$1.6bn in 2002. Current transfers will remain strong, owing to high levels of donor support, and service credits will grow as tourism picks up further.

The political scene

The vice-president dies On July 4th one of the country’s two vice-presidents, Omar Ali Juma, died following a heart attack. He had been seen in some circles as a possible successor to the incumbent president, Benjamin Mkapa, although it is unlikely that this would have happened. Though he would have been one of the key figures within the ruling Chama Cha Mapinduzi (CCM) to decide who should succeed Mr Mkapa. Juma’s death will create an immediate power vacuum in the party, and may leave Mr Mkapa feeling isolated, since he has lost a trusted confidant. However, by the time the race to become the CCM’s presidential candidate is in full swing, towards the end of 2003, Juma’s death will no longer be seen as important.

Juma’s death is an immediate problem for the president in that, as he was the country’s Zanzibari vice president, he was an important behind-the-scenes figure in the negotiations between the CCM and the main opposition party, the Civic United Front (CUF), which are aimed at resolving the current political crisis in Zanzibar. Progress in the negotiations could well be hindered until the new Zanzibari vice-president, Ali Mohammed Shein, grows into the role. This is especially likely given Mr Shein’s lack of political experience and the fact that he does not command the same level of support within the mainland section of the CCM. On the other hand, being a relative newcomer to mainland politics, it is possible that Mr Shein could be in a position to put a fresh impetus into the talks and push them forward. What is clear from his early statements after being sworn into office is that he is strongly committed to the current union between Tanzania and Zanzibar, and to promoting a peaceful end to the current political crisis. Speaking after his appointment, he pledged to continue with the good work started by Dr Juma, and to finding an amicable solution to the crisis in the national interest.

Ali Mohammed Shein

The new vice-president was born in 1948 in Chokocha village in Pemba. After studying biochemistry at universities in the Soviet Union and in the UK, Mr Shein worked his way up steadily, but not spectacularly, through the Chama Cha Mapinduzi (CCM) party and the Ministry of Health in Zanzibar. Following the October 2000 elections, he was appointed minister of state in the president’s office, in charge of constitutional affairs and good governance in the new Zanzibar administration of Abeid Karume.

Although a number of suitable candidates for the post of Tanzania’s vice- president were put forward by the press and leading politicians—some as high profile as the outgoing secretary-general of the Organisation of African Unity (OAU), Salim Ahmed Salim—there is little doubt that the president, Benjamin Mkapa, favoured a lesser-known politician. This would allow him to maintain a strong influence over the peace talks between the CCM and the main opposition party, the Civic United Front (CUF). Mr Shein also fitted President Mkapa’s view of who would be a suitable candidate for this role, as he is strongly in favour of the union, even though Chokocha in Pemba is a CUF stronghold. Although some opposition politicians have expressed reservations

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over his appointment, most have indicated that they will refrain from criticising him until he is firmly established in office. Mr Shein was overwhelmingly voted into office by parliament, winning 240 out of 247 votes.

The first refugees return to Although the ongoing dialogue between the CCM and the CUF has continued Pemba and Zanzibar without any apparent positive outcome to date, the Zanzibar political refugee crisis now seems well on the way to being resolved. This has more to do with the role of United National High Commission for Refugees (UNHCR), than the actions of the government of Tanzania. Following an announcement by the government in February that the refugees would be given an amnesty and guarantees of security by the UNHCR, in early May the UNHCR announced that 680 refugees from Zanzibar and Pemba, who were then in a refugee camp in Shimoni in Kenya, had stated their desire to return home. This first group, which included 17 legislators, returned to Pemba and Zanzibar in late May. When the remaining refugees still refused to return, the UNHCR conducted its own monitoring mission to the islands of Pemba and Zanzibar and has managed to use this to convince the remaining 506 refugees that they could return safely. Their return, which was initially scheduled for late June, now looks as if it could occur sometime over the next few months.

Tensions still simmer on Although the political situation in Zanzibar and Pemba has calmed the islands considerably, the potential for it to re-ignite cannot be ignored as long as the ongoing talks between the CUF and CCM do not produce any tangible results. The simmering tensions that remain beneath the surface were clearly highlighted in a CUF report on Zanzibar, which claimed to reveal the “truth” about the political violence that swept Pemba and Zanzibar earlier in the year. The party also used the report to push forward its demand that the Tanzanian government form an independent commission of inquiry to examine the whole issue in detail. The Tanzanian government was also kept under the spotlight in June, when Amnesty International published a report claiming that large numbers of CUF political activists had been arbitrarily arrested in the run-up to the elections. The report also accused the police of brutality in its attempts to control the political violence that followed the elections. Amnesty claimed that two members of the CUF are being held by the island’s authorities over the murder of a police officer in Pemba. The men, Juma Duni Haji and Machan Khamis Ali, who are both leading members of the CUF, claim not to have been on the island at the time of the death. Following a meeting with the Belgian ambassador to Tanzania, the Zanzibar president, Abeid Karume, has denied the claim that they are holding prisoners of conscience. This is not surprising as he does not view the two as political prisoners but rather as common criminals involved in the murder of the policeman. Mr Karume, who has stated that “the law will take its course as regards those that have committed common crimes”, has invited Amnesty International to visit Zanzibar to look into the situation.

The CUF continues to The potential for the situation to rapidly deteriorate was also highlighted demand progress in talks following a CUF rally in Pemba on July 22nd, when the CUF chairman, Professor Ibrahim Lipumba, warned that if the CCM only supported the negotiations in order to pacify donors, and continued to drag out the dialogue,

the CUF would withdraw from the talks. He also reiterated the CUF’s viewpoint that the elections in October 2000 were neither free nor fair. In addition, he re- stressed the CUF’s position that there should be an outcome to the talks by July 31st. However, the Economist Intelligence Unit expects that there is some flexibility to this deadline, which could be justified by Juma’s death and the need for his replacement to become fully involved in the talks. Nonetheless, the CCM was sufficiently worried as the July 31st deadline approached that it published a press statement following the meeting of its central committee on July 21st. In the statement it reiterated its commitment to the talks, stressing that they would take time as any solution to the Zanzibar crisis had to take into account the country’s national interests, or those of national unity, national tranquillity and the promotion of democracy. Moreover, the statement said, given the delicate nature of the negotiations, the parties should not feel pressured by outside interests to speed up the talks, and should exercise restraint. While this is no doubt true, it is also clear that the CCM sees it in its interests to drag the talks out so that it can argue that it is seeking a peaceful resolution to the issue. While the July 31st deadline may well have been too soon to expect a solution, there is a good case for setting a series of mutually agreed deadlines so that all parties can see that the talks are making progress.

A new registrar brings a On April 27th President Mkapa named a new registrar of political parties, John new approach Tendwa. Since his appointment, he has clearly followed a different strategy than his predecessor, George Liundi, in that he has positively demonstrated to the opposition parties that he will actively support them. In contrast, Mr Liundi often seemed intent on putting hurdles in the way of opposition parties, as if competing against the entrenched power of the CCM was not a sufficient barrier. One move that will make the new registrar popular is that he has recognised the legitimacy of the leader of the Tanzanian Labour Party (TLP), Augustine Mrema, which will unlock the government funding that accrues to his party based on its representation in parliament. He also seems committed to promoting greater political vibrancy in Zanzibar, as he accused its president, Mr Karume, of obstructing opposition parties’ campaigning in the islands. He has also told mainland opposition parties that they have to open offices on the island (an important part of the Tanzanian constitution is that all political parties must be all-union parties).

The Dutch get into trouble Mr Tendwa has also stepped into a potentially more difficult row to solve, that over opposition funding of the external funding of political opposition parties. Speaking at a conference on “Network democracy: enhancing the role of political parties” in the Hague on 24-25th April 2001, the Dutch minister for development and international co-operation, Evelien Herfkens, announced that the Dutch government would provide financial assistance to the Institute of Multiparty Democracy in Africa, which has the stated aim of helping all political parties in Africa with the ultimate goal of promoting multi-party democracy. However, given that financial constraints are not usually a problem for ruling parties, there can be little doubt that the Institute will concentrate its efforts on supporting opposition parties. As the Dutch minister specifically mentioned Tanzania as a country where opposition parties are weak, it was perhaps not surprising that

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the Tanzanian press reported that the Dutch government was to support opposition parties. This, predictably, drew a sharp response from senior members of the CCM who, with some justification, considered such a move a direct interference in the domestic politics of another country.

Although the Netherlands has defended its position on the grounds that the funds are not be used in election campaigns, even Ms Herfkens has been forced to admit that it is not clear what would be part of an election campaign and would not. While we have strongly argued that one of the problems facing Tanzania is the weakness of the opposition parties, which is partially a funding issue, the reality is that there are a much wider range of factors that contribute to their weakness. These include poorly thought-out policies and personal rivalries both within and between parties. These problems have made it difficult to form effective alliances and often cause the parties to split. Furthermore, many parties have been set up by charismatic businessmen and dissidents from the ruling party, who like the idea of heading up their own political party but do not command any real popular support. Therefore, while funding may help, it is not the only issue. Financial support for opposition parties must be extremely carefully monitored and only released for specific and limited projects. Donor support may be better directed at ensuring that national institutions set up to supervise elections and promote overall multiparty democracy are better funded, and their staff suitably trained.

Opposition parties remain The potential weakness of the opposition in Tanzania was further highlighted, weak and divided in May, when the Chama Cha Demokrasia na Maendeleo (Chadema) member of parliament, Christopher Tumbo, crossed over to join the ruling CCM party. The founder of the Tanganyika People’s Congress (TPC) party in 1962, before Tanzania became a one-party state, Mr Tumbo has long been a strong critic of the CCM and was instrumental in the process which saw the reintroduction of multiparty democracy in Tanzania in the early 1990s. His defection to the CCM highlights that the opposition parties are often their own worst enemies and riven by constant infighting and personality clashes.

The government commits As part of its commitment to improving education under the country’s poverty more to education reduction and growth facility (PRGF), and its poverty reduction strategy paper (PRSP), the government has indicated that it will substantially increase the number of teachers in the next two years and ensure that salaries are both increased and paid on time to boost morale within the profession. In an additional development, the government has also decided to re-introduce free primary education to all children. Although both moves will cost considerable amounts of money, they should be relatively easy to fund given the large aid inflows forecast to come into the country over the next few years, and savings in debt servicing fees under the heavily indebted poor countries (HIPC) initiative. For example, to meet the cost of the fees foregone, the government has budgeted an additional TSh11bn (US$12.4m). In the budget the government also announced the creation of an education fund, with an initial capital of TSh5bn to help children from extremely poor families to attend higher education.

The government has presented the moves to improve primary education as an attempt to prevent child labour in Tanzania and to improve literacy. However it is also under pressure from donors to improve the education system, and there is little doubt that it sees the new initiatives as vote-winners. Many of the electorate look back to the days of the Nyerere regime, when education was free, as its golden era. Moreover, with the decline of the public education system there has been a rise in fee-paying, religious schools, mainly Christian, which has left the rapidly growing Moslem population, especially in Dar-es- Salaam feeling that the government is ignoring its education needs. As there is time for this greater commitment to education to have an impact before the election, it will only harm the CCM’s electoral chances if it completely backfires or if implementation is appalling.

New army heads are At the end of June President Mkapa appointed two new soldiers to top military appointed positions. Major-General George Marwa Waitara (now promoted to General) has been appointed chief of staff of the People’s Defence Force, while Major- General Idd Saleh Gahu (now Lieutenant-General) is now the new chief of staff of the People’s Defence Force. The two new appointments replace the retiring generals Robert Mboma and Gideon Sayore, respectively. There is nothing particular surprising about the appointments, as the two retiring generals had reached retirement age, but it has afforded the president a chance to appoint new faces which he will hope can address the issue of corruption within the armed forces. This has been a growing source of contention in Tanzania in recent years, with numerous stories about various corrupt practises in the military being published in the local press. The appointments have come at a time when the government has started to step up its drive against corruption, with the launch of a nationwide campaign to explain to the public how they can help the government curb corruption. The campaign aims to run anti- corruption seminars involving councillors and citizens as well running a nationwide, anti-corruption poster campaign.

Peace in the Great Lakes The government has stepped up its attempts to push forward the peace process region remains elusive in the Great Lakes region, which it ultimately hopes will ease the refugee burden in the country and reduce the growing number of violent incidents on its border with Burundi (these are both criminal and politically motivated). In early May 2001 the presidents of Tanzania, Uganda and the Democratic Republic of Congo (DRC) held a one-day meeting in Dar-es-Salaam to discuss the situation in the DRC. This followed on from the fifth in a regular series of meetings between the chiefs of the Tanzanian and Burundian armies in Tanzania, and was followed by the ninth meeting of the tripartite commission looking at the issue of refugee repatriation from Tanzania (consisting of the Tanzanian and Burundian governments and the UNHCR). In mid-June, President Mkapa also paid a one-day state visit to Rwanda to push forward attempts to resolve the twin issues of peace and refugees in the region. Speaking in parliament in mid-July while presenting the budget details for his ministry, the foreign minister, Jakaya Kikwete, once again emphasised the financial burden of having so many refugees in an already poor country, noting that Tanzania currently hosted some 500,000 refugees from Burundi, 130,000 from the DRC and 20,000 from Rwanda.

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Economic policy

The 2001/02 budget is As with the ministers of finance in Kenya and Uganda, on June 14th 2001 presented Tanzania’s new finance minister, Basil Mramba, presented his first budget to parliament. Given the constraints imposed on the finance minister by the country’s poverty reduction and growth facility (PRGF) agreement with the IMF, and with both the Fund and the World Bank under the heavily indebted poor countries (HIPC) initiative, the budget was always likely to be fiscally incremental and orthodox. In other words, there would be a modest deficit, with the main aims being to increase efforts to increase domestic revenue generation against a background of donor-supported increases in expenditure on social services, namely health and education. This, in the end, was exactly what was produced. The budgeted deficit for 2001/02 represents a marked fall, despite a large projected increase in expenditure—up from our estimate of TSh1,494bn in 2000/01 to TSh1,765bn in 2001/02, because of the large increase in donor support.

Tanzania: budgeta (TSh m) 1999/2000 2000/01 2001/02 Actual Estimateb Budget EIU forecast Revenue 1,057,952 1,265,971 1,674,827 1,569,827 Domestic revenue 777,645 912,906 1,025,184 1,025,184 Grants & loans 280,307 353,065 649,643 544,643 Expenditure 1,168,780 1,493,899 1,764,737 1,676,500 Budget balance –114,472 –203,081 –89,910 –106,673 % of GDP 1.5 2.8 3.1 1.2 Budget balance (excl grants)–127,382 –391,135 –580,993 –651,316 Overall adjustment –3,644 24,847 0 0

a Fiscal years July-June. b Official.

Source: 2001/02 Budget speech, EIU.

Spending is set to rise Perhaps the major worry is on the expenditure side. In the past, attempts to increase expenditure as rapidly as has been forecast in the budget have foundered. This is because of the poor implementation capacity of the civil service, especially when the increases are not in wages (the total wage bill is to increase by only 10%). As a result, the Economist Intelligence Unit is forecasting that the actual outturn in 2001/02 on the expenditure front will be lower than that predicted by the minister. There are a number of complicating factors, however. First, it remains unclear how the government will fund its promise of free anti-retroviral drugs from the start of 2002 (see below), and this could push up expenditure considerably. Second, expenditure can rise very rapidly at times when the government is making considerable commitments to boost it, such as the proposed increase in both teachers and teachers’ salaries. While some of this has been fully budgeted for, such as the abolition of primary school fees from 2002, others will have slipped through the net.

In contrast, on the domestic revenue side the government’s projections look broadly realistic. It estimates that proposed changes to various taxes will increase revenue by TSh33bn (US$38m), with most of this increase coming from proposed amendments to the Value Added Tax (VAT) structure. Although it has proposed the abolition of VAT in a variety of areas, these will be offset by its decision to impose VAT on government and its institutions. In other words, it will require all government offices and department to pay VAT on their purchases. This is important as exemption of such purchases from VAT had previously been used for the illegal practise of government purchases being sold on into the domestic market. The reduction in the number of non-zero import tariff bands, from three to four, was also welcomed as a simplification of the tax structure, as was the reduction in the number of excise taxes on petroleum products (there are now three: excise duty, VAT and a fuel levy).

Tanzania: new fiscal measures (revenue changes; TSh bn) Amendment to custom tariff structure –21.830 Amendment to income tax structure –15.737 Amendment to VAT 51.458 Amendment to excise tariff 11.934 New gaming tax 6.417 Amendment to airport service change structure 2.640 Amendment to stamp duty –0.896 Total 33.986 Source: Budget speech.

The government is still Perhaps the most important point that came out in the budget was the huge, dependent on donors and ongoing, dependence on donor inflows to help finance expenditure. In the budget, foreign loans and grants, including savings as a result of the HIPC initiative, are forecast to amount to TSh649bn (US$733m), or 37% of forecast expenditure. While there is no doubt that the bulk of this will materialise, in the past there have been various delays in disbursements, especially regarding development projects that can easily fall behind schedule due to the weak implementation capacity of the government. (For example, donor funding was targeted at TSh353.06bn from June 2000 to March 2001, but only TSh154.45bn was actually released.) Even if this disbursement rate improves, as we expect, we are slightly less optimistic over the level of foreign support, although it remains extremely high. Without the foreign funding committed in 2000/01 for example, the deficit is estimated to be a high, at 7.2% of GDP compared with 2.8% of GDP. Similarly, in 2001/02 we expect a deficit of 1.8% of GDP with donor support, but 7.3% of GDP excluding donor support.

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Tanzania: financing the 2001/02 budget (TSh m) Foreign grants, loans (concessional) and HIPC relief 649,642 Loans & grants for development projects 302,272 Loans & grants for general expenditure 283,770 HIPC relief 63,600 Deficit after grants and loans –89,910 Drawdown on reserves 69,910 Privatisation proceeds 20,000 Source: Budget speech.

There was considerable disappointment in much of the Tanzanian press that the government had not done more to address the issue of poverty. However, the key for the government remains the maintenance of macroeconomic stability, which will help create the right conditions for sustained economic growth, which will in turn help reduce poverty. This overall goal can be clearly seen in the government’s key macroeconomic policy goals for the year as outlined in the budget:

• to increase the rate of real GDP growth to 5.9% in 2001 and 6.2% in 2002; and

• to reduce inflation from the 4.9% expected at the end of June 2001 to 4.4% by June 2002.

The Zanzibar budget

The Zanzibar budget was a much more low-key affair, given the problems facing the economy—low aid inflows and tourist receipts due to the political violence and the weak performance of the clove industry. The budget did not introduce any new taxes, but promised to try and improve tax administration, notably with the introduction of tax registration numbers, which it is hoped will bring a wider range of income earners into the tax net. The government intends to spend TSh86.4bn (US$97m) on recurrent and development expenditure, representing an increase of TSh11.53bn (US$13m) compared with the last fiscal year. The government also planned to increase the minimum wage for civil servants to TSh30,000 (US$34) a month, although this is still lower than the TSh45,000 (US$52) on the mainland.

A strategy for agriculture As we have consistently argued, for real GDP growth to have an impact on is still awaited poverty in Tanzania, it must be led by growth in the agricultural sector, which is still the largest source of employment. The lower-than-expected growth in 2000, for example, was predominantly the result of a below-forecast performance in the agricultural sector (see economic trends). Agricultural growth is subject to considerable annual fluctuations and constrained by a combination of weather conditions, poor rural infrastructure, lack of inputs and inconsistent and often contradictory reforms to the agricultural marketing systems. It is probably not appropriate to address these issues in the budget, but they should be examined in the proposed agricultural strategy, which is to be unveiled in the next few months. However, even if this is comprehensive, at the minimum it will still take several years to have an impact.

The government steps up In late May the government officially launched its National Investment its efforts to attract FDI Steering Committee (NISC) as part of its efforts to attract increased foreign investment in the country (especially outside of the mining sector). The NISC is to be chaired by the prime minister and comprises the most important ministers, such as of industry and commerce, finance, agriculture, planning and privatisation, as well as the central bank governor and the attorney general. The aim of the committee is to ensure that both overall macroeconomic policy and the investment incentives offered remain attractive to investors and are implemented effectively. Despite efforts to improve the situation in recent years, most investors have found that making an investment in Tanzania is bureaucratic, and they have often been confronted by problems of corruption. Other major issues include: a complicated tax structure; inefficient import procedures; high electricity tariffs; and problems in obtaining work permits. The NISC will also be required to evolve new policies to help attract investment through the creation of a “business enabling legislation”. However, there is some concern that the committee does not include any representatives from the private sector, although the director of the Tanzanian Investment Centre, Samuel Sitta, will act as secretary to the committee. Despite its high-profile membership, only time will tell whether the NISC will be effective.

The president picks up the The president, Benjamin Mkapa, used the UN General Assembly’s special campaign against AIDS session on HIV/AIDS in late June to step up his government’s fight against the pandemic. At various press conferences, he highlighted that the government had embarked on a major, two-year public education campaign about AIDS/HIV, led by the Tanzanian Commission for AIDS (Tancaids), aimed at sharply increasing public awareness about how the disease is contracted and encouraging people to go for testing. On returning to Tanzania, President Mkapa also announced on June 30th that the government planned to make anti-retroviral drugs available to all of Tanzania’s AIDS sufferers. He estimated these to be 3m people, and would increase the total cost of fighting AIDS to around US$1bn a year—a huge sum compared with the government’s current expenditure levels. The first step is to distribute Viruamune free to HIV-positive pregnant women for a period of five years, as research in Uganda and Tanzania has shown this to be most effective in halting the transmission to unborn babies.

Tanzania: AIDS statistics, 1999a No. of adults with AIDS (15-49 years old) 1,300,000 Adult infection rate (%) 8.09 Estimated number of deaths from AIDS 140,000 Number of cases reported since 1983 (year of the first official case)b 112,052

a UNAIDS estimates. b Reporting rates are based on surveillance systems of varying quality; low reporting rates are common in developing countries because of weaknesses in the healthcare and epidemiological systems.

Source: UNAIDS.

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Although the government has established a National AIDS Control Programme and launched its public awareness campaign, these are relatively recent developments and it must be noted that to date the government has a mixed record over the issue of AIDS. At times it seems strongly committed to fighting the disease, and at others somewhat complacent. However, with infection rates at only 8% of the adult population, according to UNAIDS, the pandemic has not yet reached the proportions of many Southern African countries. Moreover, by the standards of many African countries, there is a relatively high level of condom usage—estimated at 40.3% in the 20-24 male age group in 1996. A Tanzanian non-government organisation, the Tanzanian Youth AIDS Awareness Trust Fund, has announced plans to introduce an initial 10,000 condom vending machines in both rural and urban areas. It is clear that if the government pushes ahead with its AIDS programmes it will not be too late for it to have a major impact in stopping the further spread of the disease, and it may even be possible to meet the president’s stated goal of halting it within five years.

Malaria kills 300,000 It should not be forgotten that tackling AIDS is only part of the key to Tanzanians a year improving the general health of the population in Tanzania. Speaking in late June, the director-general of the National Institute of Medical Research, Andrew Kitua, said that over 300,000 people die each year in Tanzania as a result of malaria, a figure that could be substantially reduced through simple preventative measures such as the more widespread adoption of mosquito nets sprayed with insecticide. This compares with the 140,000 people who are estimated to have died of AIDS, according to UNAIDS.

Plans to produce generic HIV/AIDS drugs in Tanzania

Speaking at the UN AIDS summit, President Mkapa announced that, unlike Kenya, Tanzania would not suspend patent rights on anti-retroviral drugs in order to drive the price down. However, the government may find itself forced to review the situation. Although it is likely to receive help in meeting the US$1bn cost of importing anti-retrovirals, there are currently two plans to manufacture anti-retrovirals in Tanzania. The first is by an Indian company, Cipla, which is reported to be in discussion with a number of African governments about the sale of its generic anti-retrovirals, and is keen to establish a production base in Eastern or Southern Africa, which it quite rightly sees as a huge market. According to the Indian Ocean Newsletter, a Tanzanian delegation headed by the foreign minister, Jakaya Kikwete, recently travelled to India to visit the Cipla factory. Second, in late June the local press reported that a pharmaceutical company based in Dar es Salaam, Keko Pharmaceuticals, would start producing its own anti-retrovirals. At a press conference, the executive director of the company, Mercy Kimaro, told the local press that the company was in advanced discussions with a South African company to jointly manufacture and produce anti-retroviral drugs in Tanzania, although few additional details were disclosed. Another local company, Salama Pharmaceuticals, has announced that it will be importing a consignment of generic anti-retrovirals from India which it would price at between TSh60,000 (US$69) and TSh80,000 a month, compared with the TSh350,000-400,000 that a month’s course of drugs currently costs.

The domestic economy

Economic trends

GDP growth is marginally The government targeted a real GDP growth rate of 5.1% in 2000. However, below target preliminary estimates for 2000, presented in the economic survey for 2000 which accompanied the budget, show that real GDP growth was only 4.9%, a modest increase on the 4.7% rate of growth in 1999. Although the trend was still upward, and it could be argued that being only 0.2 percentage points below target, the difference is probably not even statistically significant, the result is still disappointing, as the targeted growth rate is usually a conservative projection which the government hopes will be exceeded. Most worrying is the poor performance of the agricultural sector, which only expanded by 3.4%, the lowest of all the sectors and a drop on the 4.7% recorded in 1999. Mining and quarrying was the most dynamic sector of the economy, driven by the rapid development of a number of large gold mines. This was followed by construction, which benefited from the ongoing infrastructural development of the country which is heavily donor-funded—according to the government’s Economic Survey for 2000 and its medium-term expenditure framework, gross capital formation grew by 18.8% per year between 1995 and 2000, and by 19.9% in 1999 and 20.3% in 2000. However, even the rates of GDP growth predicted by the government are probably not sufficient to have a noticeable impact on poverty over a 2-3 year period, although they would have an impact over a five years or more.

Tanzania: real gross domestic product growth

1998 1999 2000a 2001b 2002b Agriculture 1.9 4.1 3.4 4.2 3.7 Mining & quarrying 27.4 9.1 13.9 15.7 17.3 Manufacturing 8.0 3.6 4.8 5.0 6.5 Electricity & water 5.5 3.9 5.0 6.5 7.1 Construction 9.9 8.7 8.4 8.8 9.7 Trade, hotels & restaurants 4.7 6.0 6.5 6.8 7.7 Transport & communications 6.2 5.8 6.1 6.5 8.7 Financial & business services 5.6 4.1 4.7 5.0 5.7 Public administration & other services 2.7 3.5 3.6 3.7 3.8 GDP at factor cost 4.0 4.7 4.9 5.9 6.2

a Provisional estimate. b Official forecast.

Source: Ministry of Finance.

A real GDP growth rate of 8-10% per year would be required to have a significant effect on poverty; and agriculture would have to grow at a rate double that currently being projected by the Ministry of Finance. In fact, a worrying feature of the government’s GDP projections is the low rate of growth in the agricultural sector, which although forecast to rebound in 2001, is projected to fall back again in 2002. There are also fears that its growth

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projection for the mining and quarrying sector may be overstated, and that an accelerating growth rate will be difficult to achieve over the coming 18 months given the rapid development of the sector in recent years.

Unemployment is nearly Although a high growth rate in the agricultural sector should increase GDP per 40% in urban areas head, it remains unclear whether such a high growth rate would actually increase unemployment or encourage rural youth to migrate to urban areas. At present it is estimated that 80% of the labour force in Tanzania is employed in rural areas. The labour force is estimated to have grown by 2.7% in 2000, concentrated in the 15-29 age bracket, generating 500,000-600,000 new entrants into the labour force. However, the preliminary results of the Manpower Survey for 2000/01 show that overall unemployment was 16% (defined as those with uncertain employment or working for less than 40 hours a week). The rate is 36% in urban areas, but only 9% in rural areas where many farmers eke out a precarious living working for over 40 hours a week but would not consider themselves employed. The survey also estimates that only 8.5% of the country’s manpower has secondary or higher educational qualifications.

The fall in the shilling has The slide in the Tanzanian shilling in the first four months of the year has now stopped come to a halt. Having started in late January (May 2001, page 21), the fall stopped sharply in May. The exchange rate was TSh884.42:US$1 at the end of April and TSh888.62:US$1 at the end of May. The Economist Intelligence Unit now expects the shilling to be relatively stable for the rest of the year. The Bank of Tanzania has not been panicked by the recent fall, arguing that it was a result of lower than expected export earnings. It also probably became concerned that the stability of the shilling in the previous 18 months had led it to become overvalued However, the minister of finance announced that the Bank of Tanzania (the central bank) had intervened in the market, selling US$45.5m of foreign exchange, which had maintained confidence in the market and ensured that the fall was more gradual than it would have otherwise have been.

Agriculture

Coffee production and According to the Tanzanian Coffee Board, 965,083 60-kg bags were exported in exports are up 2000/01 (July-June), compared with 770,000 bags in 1999/2000. Production was also higher, at 970,000 60-kg bags, compared with 797,000 bags in 1999/2000. The aim according to the Tanzanian Coffee Board is to increase production to 1m bags by 2003 by reclaiming previously abandoned coffee plantations and new plantings (August 2000, page 22). However, this could be affected by the current low global price for coffee, which the Economist Intelligence Unit currently forecasts will not change in the coming two years. At present, we forecast an average price of 66 US cents/lb for arabica coffee in 2001 (most coffee produced in Tanzania, is arabica), falling to 57 US cents/lb in 2002. (For details on export value in 2000, see Foreign trade and payments).

Tea production is given a There are hopes for a further increase in tea production following the purchase boost of a 75% stake in Wakulima Tea Company (Watco) by Tanzania Tea Packers (Tatepa), which was listed on the Dar es Salaam Stock Exchange (DSE) late in 1999 (1st quarter 2000, page 21) and is one of the more dynamic and aggressive companies in Tanzania. Watco was established by the Commonwealth Development Corporation through its subsidiary, the Tanganyika Wattle Company, and purchased two tea factories at Mwakeleli and Katumba in Mbeya region in Tanzania’s privatisation programme. This purchase was made in conjunction with 10,000 smallholder tea farmers who have a 25% stake in Watco. Watco’s aim is to expand production at the two factories, starting with Katumba, from their current level of around 1,500 tonnes to 3,000 tonnes by 2004 and to boost the profile of the local tea sold from the factories under their eponymous brands. It will also expand its nursery operations to enable local farmers to obtain high-quality tea seedlings for production.

Mining and energy

Bulyanhulu gold mine is On July 18th President Mkapa inaugurated Bulyanhulu mine in Shinyanga inaugurated region. Total investment by the Khama Mining Company, which is owned by Barrick Gold, in the mine was US$280m, and it is expected to initially produce 400,000 oz in 2002, rising to 500,000 oz in 2003, and with further rises in production possible in the immediate future. Production costs are currently estimated at US$130/oz which makes Bulyanhulu one of the more competitive gold mines in the world, and it will generate substantial profits at even the current low world price for gold. It is Tanzania’s third high-producing mine, together with Anglogold/Ashanti Goldfields’ Geita mine, to the east of Mwanza, and Resolute’s Golden Pride mine in Tabora region. It is estimated that Golden Pride mine will produce 202,000 oz next year, while Geita will produce 500,000 oz. The combined output of the three mines of over 1m oz over the next 12 months, will move Tanzania ahead of Zimbabwe in terms of production, but it is still behind South Africa, Ghana and Mali.

EIU Country Report August 2001 © The Economist Intelligence Unit Limited 2001 Tanzania 27

Although the opening of Bulyanhulu is a positive development for the economy as a whole, it has stimulated the debate over what is expected of multinational mining companies operating in Tanzania. The issue recently revived over the South African company, Afgem, and its mining of tanzanite (May 2001, page 24). Since the conflict between Afgem and small-scale miners of tanzanite erupted early on in the year it has continued to fester with claims and that Afgem is ignoring the needs of artisan miners and is not acting in the best interests of the country. Barrick and other gold miners could easily find themselves facing similar claims, or other disputes, and even become involved in a wider political dispute. Since the opening of Bulyanhulu, local politicians have demanded that some of the revenue from the mines that currently accrues to government is given over to the regional government in which the mine is located. Multinational mining companies are easily drawn into such disputes: witness the report that the beneficiaries of compensation paid by Ashanti Goldfields to villagers that were moved to make way for its mine included not only to the displaced families, but the families of civil servants and Ashanti employees who added the names of their relatives to the list of villagers that were moved.

Although there is considerable concern about the impact of large-scale mining in Tanzania on the livelihood of small-scale miners, on those displaced by the development of mines and on the environment, to date the general consensus is favourable. Many of the mines are making a positive attempt to put back some resources into local communities, for example through microfinance schemes and investment in local schools and hospitals. The investment that the mines have made in roads and electricity provision to rural areas has also had a wider economic impact. On the macro level, export earnings are boosted, although tax revenue will be limited for a while (operators are initially only required to pay an estimated 3% of sales in royalties as they recoup the costs of their initial investment), but this will grow in the future). We therefore expect the leadership of the ruling party to remain supportive of mining projects, although periodically it will raise concerns about the need for mining companies to play a social role as well as earning profits. There are also likely to be periodic outbursts against the companies from a combination of local politicians and backbench members of parliament.

A second oil licensing Following its first offshore oil licensing round which was launched in April round is launched 2000, the government has pushed ahead with its second round. Of the six blocks that were offered in the first round, bids were only received for one, Block 5. This was from Braspetro, a subsidiary of the Brazilian oil company Petrobas (Petrobas has in recent years increased its exposure in offshore Africa in general having also been successful in the recent Nigerian offshore licensing round). The Ministry of Energy and Minerals is to open more detailed negotiations with Braspetro while it puts the other five blocks out for bidding with an additional six blocks to the north and the inshore shallow water block, Latham (see map). The official launch of the round is September 3rd 2001; the closing date is February 1st 2002.

Infrastructure

A 400-mw coal-fired power The Mchuchuma-Katewaka coal and power project has taken an important station is to go ahead step forward during the last quarter, with the signing of an agreement between the National Development Corporation (NDC), Siemens and Grinaker-LTA, both of South Africa, and Cinergy Global Power of the UK. The project, which has been promoted by the NDC for several years, is to develop the coalfields at Mchuchuma-Katewaka to power a 400-mw power station which will feed into the national grid. The project is part of a programme to develop the national grid in southern parts of the country such as Lindi, Mtwara and Ruvuma. Preliminary studies by the NDC have shown that the coalfield has reserves totalling 539m tonnes, of which 158m tonnes can be mined by open-cast methods. NDC has also carried out a detailed environmental impact assessment of the proposed project, so progress should be relatively quick.

Tanesco privatisation will The Mchuchuma-Katewaka project ties in with other attempts by the be delayed until 2004 government to increase the country’s electricity supply and reduce its dependence on hydroelectricity. However, because of the long-term nature of such power projects, the government will only move ahead cautiously with the privatisation of the Tanzania Electricity Supply Company (Tanesco). It has decided to conduct a long-term study into privatising Tanesco, drawing on experience from around the world—the Parastatal Sector Reform Commission is currently charged with short-listing consultants for the study. Parliament also recently passed a bill for the creation of the regulatory body, to be called the Energy and Water Utility Regulatory Authority, that will be responsible for overseeing the privatised electricity sector. The privatisation of Tanesco has now been pencilled in for 2004, one year beyond the government’s date for completing all privatisations.

Tanesco’s tariff rise is Responding to a public outcry, the government has intervened to reverse a reversed recent increase in electricity tariffs. Tanesco raised its rates by 200% on June 8th. Businesses protested against the rise, arguing it increased their costs and reduced their competitiveness. Tanesco claimed that the sharp decline in the value of the currency between January and May 2001 forced it to increase rates in order to pay for imports. However, the widespread view was that

EIU Country Report August 2001 © The Economist Intelligence Unit Limited 2001 Tanzania 29

Tanesco had failed to make its major customers, including government institutions and departments, pay their outstanding bills..

Foreign trade and payments

Commodity exports fall The breakdown of Tanzania’s exports in 2000 has now become available marginally in 2000 following the publication of the budget for 2001/02. It confirms that although there has been a modest recovery in the value of coffee, tea and cotton exports, they remain very low by historical standards, and the scope for further increases in production and exports is considerable. Cashew nut exports fell in value, as the Economist Intelligence Unit forecast, owing to problems over the buying price which led to a fall in production; however, we expect these to rebound: the Cashewnut Board of Tanzania recently announced that it had secured sales to three East Asian markets, Singapore, Thailand and Vietnam, which should help reduce unsold stocks from 2000. The production and export of sisal continues to fall and will continue to do so until new markets and uses for the product are found. Owing to the fall in cashew nut production, overall commodity exports fell by 2.8% year on year in 2000, but the scope for recovery in 2001 remains good.

Tanzania: exports (TSh bn unless otherwise indicated) % change, 1998 1999 2000 2000/1999 Traditional commodities Coffee 108.74 76.62 83.70 9.2 Cotton 47.63 28.50 38.00 33.3 Sisal 6.78 7.26 5.60 –22.9 Tea 30.43 24.60 32.70 32.9 Tobacco 55.39 43.44 38.40 –11.6 Cashew nuts 107.32 100.90 84.40 –16.35 Cloves n/a 19.90 10.00 –52.1 Total 356.29 301.22 292.80 –2.8 Non-traditional exports Minerals 26.30 80.40 185.06 130.2 Manufactured goods 35.69 32.30 43.40 34.4 Fish & fish products 74.28 56.69 76.30 34.6 Horticultural products 8.64 8.88 9.70 9.2 Others 87.16 92.18 62.90 –31.8 Total 232.07 270.45 377.36 39.5 Total exports 588.36 571.67 670.16 17.1 Source: Planning commission and Bank of Tanzania

Gold and fish drive a surge In contrast, non-traditional exports rose by 39.5% year on year. Most of this in non-traditional exports increase was due to a surge in mineral exports, which rose to TSh185.06bn (US$231m) in 2000 because of the start of gold production at the Geita and Golden Pride mines. This trend will continue in 2001 as the Bulyanhulu mine comes on stream, although it will moderate in 2002 as only smaller mines come into production and the three main mines increase their output only

gradually. Non-traditional exports were also boosted by the recovery in fish exports after the EU lifted the ban on importing fish from Lake Victoria.

Non-zero tariff bands are One of the most welcomed aspects of the budget was the reduction in non- reduced to three zero-rated import tariff bands from four to three. This should simplify the import of goods and, as many of the goods now zero-rated are inputs, should help boost investment in the economy.

Tanzania: tariff bands

Current tariff rate Proposed tariff rate Description of goods 0% 0% Inputs for agriculture, animal husbandry & fishing Pharmaceuticals & medicaments for humans & livestock Motor vehicles in CKD form Inputs for manufacturing & pharmaceutical products. 5% 0% Raw materials Capital goods & replacement parts 10% 10% Semi-processed inputs Spare parts other than for motor vehicles 20% 20% Fully processed inputs Motor vehicle spares. 25% 25% Final consumer goods. Source: 2001/02 budget speech.

The African Union replaces the Organisation of African Unity

The 37th annual assembly of heads of state and government of the Organisation of African Unity (OAU) was held in the Zambian capital, Lusaka, on July 2nd-11th 2001. The Zambian president, Frederick Chiluba, took over the chairmanship of the organisation from President Gnassingbé Eyadéma of Togo. The assembly formally implemented the Constitutive Act of the African Union (AU), following Nigeria’s ratification of the Act on April 26th, allowing the Act to enter into force 30 days after the deposit of the instruments of ratification. The formation of the AU had been agreed at the 36th annual assembly of the OAU, held in Togo in July 2000, and the AU was to replace the OAU following ratification of the Act by the parliaments of two-thirds of the member states.

The OAU’s secretary-general, Salim Ahmed Salim, has said that there will be a transitional period of around one year to allow the AU to become fully operational. Amara Essy, Côte d’Ivoire’s foreign minister for most of the 1990s, will replace Mr Salim in September, having been elected interim secretary- general, but he is mandated to serve only until May 2002. The AU is expected to have an executive Council of Ministers and an assembly comprising the heads of member states, and it is to remain headquartered in Addis Ababa, the Ethiopian capital. The creation of the AU will lead eventually to:

• a pan-African parliament;

• a Union Court of Justice:

• an African central bank;

• an African monetary fund; and

• an African investment bank.

In addition to closer economic ties, common defence, foreign and communications policies will also be established, based loosely on those of the EU. However, the AU’s founding statements stopped short of ending the OAU principle of non-interference, which has been a major hindrance in the resolution of conflicts on the continent. Like some members of the EU, some African states are wary of losing their sovereignty to a super-state.

The OAU was criticised as being ineffectual—little real action resulted from its policy decisions—and for years it was hampered by severe budgetary difficulties. These problems are likely to continue under the AU, and (change of name notwithstanding) it is unclear how the AU’s institutions will be any more effective than those of the OAU.

Comoros

Political structure

Official name République fédérale islamique des Comores

Form of state Federal Islamic republic

Legal system Based on the Napoleonic Code, the 1996 constitution and sharia (Islamic law)

National legislature The Legislative Council has replaced the Council of State set up after the coup of 1999

Head of state President

National government Colonel Azali Assoumane seized power in a military coup on April 30th 1999

Main political parties Since the April 1999 coup the 24 main parties and movements, both conservative and reformist, have come together to form a single political movement whose sole objective is the restoration of civilian rule. Members of this umbrella grouping include the reformist Front pour le redressement national (FRN), the Islamist Front national pour la justice (FNJ), Forces pour l’action républicaine (FAR) and a long-standing conservative alliance, Rassemblement national pour le développement (RND). The RND itself includes Union nationale pour la démocratie aux Comores (UNDC), Rassemblement pour la démocratie et le renouveau (RDR), Udzima, Uwezo, Maecha Bora and Chuma

President Azali Assoumane Prime minister Hamada Madi “Bolero”

Committee of state Civil service, employment & work Miissane Hamdia commissioners Culture, youth, sports & information Ahmed Sidi Economy, commerce, industry & artisans Assoumani Aboudou Equipment & energy Djaffar Mmadi Finance, budget & planning Mohamed Abdou Soimadou Foreign affairs & co-operation Souef Mohamed El-Amine Interior & state institutions Mohamed Abdou Soimadou Justice & Islamic affairs Abdoulbar Youssouf National education & francophonie Moinaecha Yahaya Production & environment Charif Abdallah Public health, population, & women’s affairs Mlahaïli Mistoihi Public works & employment Abdallah Kouati Tourism, transport, posts & telecommunications Saïd Dhoifir Bounou

Central bank governor Mohamed Halifa

Economic structure

Annual indicators

1996 1997 1998 1999 2000 GDP at market prices (Cfr bn) 81.8 84.7 87.2 89.0 90.1a Real GDP growth (%) –1.3 4.2 1.2 1.9 –1.1b Consumer price inflation (av; %) 2.0 3.0 3.5 3.5 –1.9b Population (‘000) 630 650 671 692 709b Exports fob (US$ m) 6.3 5.4 6.1 7.9 10.2b Imports fob (US$ m) 62.1 61.1 53.9 55.1 56.0 Current-account balance (US$ m) –20.1 –11.6 5.2 –4.1 –0.4b Reserves excl gold (US$ m) 50.5 40.5 39.1 37.1 43.2 Total external debt (US$ m) 206 206 203 201 n/a External debt-service ratio, paid (%) 1.4 3.6 6.2 7.7 n/a Exchange rate (av; Cfr:US$) 383.7 437.8 442.5 461.8 533.9

August 10th 2001 Cfr558.2:US$1

Origins of gross domestic product 1999b % of total Components of gross domestic product 1999b % of total Agriculture, fishing & forestry 39.9 Private consumption 87.4 Manufacturing 3.7 Government consumption 12.4 Services 56.4 Gross domestic investment 14.7 GDP at market prices 100.0 Exports of goods & non-factor services 26.1 Imports of goods & non-factor services –40.6 GDP at market prices 100.0

Principal exports 1999c US$ m Principal imports 1999c US$ m Vanilla 3.8 Rice 7.3 Ylang-ylang 1.6 Petroleum products 2.9 Cloves 1.1

Main destinations of exports 1999d % of total Main origins of imports 1999d % of total France 45.5 France 33.9 USA 18.2 South Africa 14.2 Singapore 18.2 Kenya 7.1 Germany 9.1 Pakistan 3.6 a EIU estimate. b IMF and Comoros Directorate of Statistics. c General Directorate of Customs and IMF staff estimates. d Based on trading partners’ returns; subject to a wide margin of error.

Quarterly indicators

1999 2000 2001 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr Financial indicators Exchange rate Cfr:US$ (av) 465.55 469.32 473.92 498.64 527.06 544.04 566.19 533.13 Cfr:US$ (end-period) 476.34 461.29 489.72 514.99 514.83 561.29 528.71 557.03 M1 (end-period; Cfr m) 10,079 12,505 11,662 11,969 13,043 14,093 14,115 14,213 % change, year on year –3.4 3.1 16.4 21.5 29.4 12.7 21.0 18.7 M2 (end-period; Cfr m) 16,823 19,417 18,698 18,766 19,991 21,152 21,415 21,734 % change, year on year –1.1 2.7 18.5 12.6 18.8 8.9 14.5 15.8 Foreign tradea (US$ m) Exports fob 2.23 3.17 3.99 4.10 2.43 3.39 n/a n/a Imports cif –14.94 –12.62 –14.83 –17.50 –15.53 –11.78 n/a n/a Trade balance –12.71 –9.45 –10.84 –13.40 –13.10 –8.39 n/a n/a Foreign reserves (US$ m) Reserves excl gold (end-period) 35.62 40.11 37.15 35.22 38.50 38.16 43.21 43.36 a DOTS estimate.

Sources: IMF, International Financial Statistics; Direction of Trade Statistics.

Outlook for 2001-02

Political outlook

Domestic politics On August 9th a bloodless military coup d’état on Anjouan ousted the civilian government of Said Abeid Abderemane, which had ruled the island since 1999. Soldiers seized control of strategic points, including the airport, sea port and radio stations, and arrested the president and members of the government. The coup was staged while many of Anjouan’s political leaders were on the Comorian island of Mohéli, to discuss a draft constitution to redefine relations between the islands of Comoros.

At the time of going to press, the situation on Anjouan is unclear, but the coup leaders have identified themselves as Commander Halidi Charif (a member of the Tripartite Commission), Commander Hassan Ali Touiliha and Commander Mohamed Bacar. Calling themselves the Presidium, they have stated that they will support the Fomboni agreement and have promised to continue that process and hand over power to a democratically elected government once it is complete and Anjouan is ready to rejoin the federation. To this end they have established a commission on political/military transition charged with steering Anjouan through the constitutional changes set out in the agreement. The period between now and December will be crucial to the resolution of Comoros’ twin crisis of Anjouan separatism and unconstitutional rule in Moroni. The process leading to the resolution of the crisis is running behind schedule. The June deadline for holding a referendum on a new constitution has passed without the referendum being held. Many of the delays to the process are due to the Anjouanese side. The enthusiasm for the Fomboni agreement expressed by Anjouan’s new military leadership may well speed the process. However, the undertaking is further complicated by the fragility of the situation and the instability of state institutions. Many involved in the search for solutions to the Comoros crisis, including the Organisation of African Unity (OAU), are now resigned to the fact that the islands’ seemingly intractable political problems cannot be resolved by the end of this year. Any prolonged impasse will play into the hands of the military ruler, Colonel Azali Assoumane, who will use the political uncertainty to prolong his rule. The tussle on Grand Comoro between the Moroni-based opposition and the régime and between the various opposition groups and leaders will continue to dominate the political stage. Colonel Assoumane is likely to redouble his efforts to woo leading opposition figures in order to strengthen his position. Although the opposition in Moroni acts as if it is unified, various groups and leaders are suspicious of each other. The situation is thus still in flux and may become more complex as the envisaged presidential election approach. Should the current efforts to reconcile the differences between the islands, under the auspices of the OAU fail, it will take much longer to negotiate a new arrangement for the islands. At present the OAU is showing signs of fatigue in its efforts on Comoros. Its endeavours are frustrated at every turn by the intransigence of the Anjouanese separatists. OAU insiders are anxious to point out that, with the organisation’s limited funds and especially at the critical

time of its transformation into the African Union, the OAU cannot be expected to persevere without any convincing signs that Comoros’ twin problems can be resolved in the near future. It is most likely that the OAU may decide to leave the centre-stage, confining itself to the sidelines and allowing the Organisation internationale de la francophonie (OIF) to shoulder the initiative. Should the OIF assume the leading role in supervising the intra-Comorian negotiations, it would be interesting to see how the incoming OAU secretary- general, the Ivorian Amara Essy, would co-ordinate the OAU’s activities on Comoros with those of the OIF, of which his country is a key member. The worst scenario for Comoros would be if the OAU mediation proves to be the last major initiative in solving the crisis. Many fear that should the OAU fail on Comoros, it may influence the international community to turn its back on Comoros, much as it did on Somalia.

International relations The OAU played the leading role in negotiating the reconciliation agreement, but it has been supported by a number of other international bodies, including the international organisation of francophone countries (Organisation internationale de la francophonie) and the European Union. Relations between the OAU and Comoros have improved since the signing of the agreement in Fomboni, on Mohéli; before this the OAU was considering a military solution to the crisis. We expect this enhanced relationship to continue through the outlook period. It is also expected that relations between Comoros and the World Bank and IMF will improve following the settlement.

Economic prospects The Comoros economy is expected to make a modest recovery, following the successful adoption of the Fomboni agreement. With the assistance of the IMF, the Comoran authorities have formulated a short-term economic recovery programme for the period July 2001-June 2002, designed to pave the way for a return to economic stability. The staff-monitored programme contains policies for fiscal and structural reform and improved governance. The improvement in the political situation and a rebound in the production of cash crops is expected to lead to a marginal increase in real GDP of 1% in 2001, compared with a contraction of 1.1% in 2000. Monetary policy will continue to be conducted within the context of the Franc Zone, and inflation is forecast to

remain at around 3%. The current-account deficit is projected to increase to 9.2% of GDP in 2001, owing to a forecast decline in export prices from their exceptionally high levels in 2000 and an expected increase in imports.

The political scene

The Anjouan government is On Thursday 9th August a bloodless military coup d’état on Anjouan ousted overthrown the civilian government of Said Abeid Abderemane, which has ruled the island since 1999. Soldiers seized control of strategic points, including the airport, sea port and radio stations, and arrested the president and members of the government. The coup was staged while many of Anjouan’s political leaders were on the Comorian island of Mohéli, working on a draft constitution to redefine relations between the islands of Comoros.

Surprisingly, there has not yet been any statement from Moroni, the Comoros capital, about the coup. However, a statement from the French foreign ministry expressed approval that the coup leaders would support the Fomboni agreement, and hoped that there would be no further delays to its implementation. The deposed president, Colonel Abderemane, who was initially believed to be under house arrest, is said to have been flown by the French to the Comorian island of Mayotte on August 12th and is expected to go from there into exile in Europe.

The events on Anjouan may have the effect of speeding the Fomboni accords, as Azali Assoumane, the president of Comoros, has been using the current impasse in negotiations to tighten his grip on power. Since the new Anjouan administration has pledged its support for the negotiations, he may not be able to count on delays or drag his feet. Both the Organisation for African Unity and the Organisation internationale de la francophonie (OIF) have expressed their desire for a swift resolution to the crisis and renewed efforts to implement the Fomboni accords.

Rumours of a coup against Rumours of coup attempts against the regime of Colonel Assoumane have Colonel Assoumane are rife been rife in the past few months. The rumours have revolved around Prince Kemal Said Ibrahim, leader of the Chuma Party, and a former army colonel, Mahamoud Mradabi (also known as Jean Mradabi), formerly head of Société comorienne des hydrocarbures. Both are known to have presidential ambitions and to have links with the French intelligence services, and are known to be in contact with a former mercenary, the infamous Commandant Charles. How- ever, it is difficult to give the rumours credence. First, Mr Mradabi, despite his ambitions, is regarded as a strong supporter of Colonel Assoumane (he was the first person to share power with him). Second, it is highly unlikely that Prince Kemal would work with Mr Mradabi on such an undertaking. Considering Mr Mradabi’s strong personality and his immense wealth, there is no doubt that Mr Mradabi would have dwarfed Prince Kemal’s presidential aspirations.

France is suspected of Many in Moroni believe that the French secret service is engaged in a dirty- sabotaging negotiations tricks campaign against Comoros. They see the French as masterminding the

events in the islands, especially what they see as attempts to sabotage the OAU mediation efforts and in manipulating Comorian politicians. The perception in certain quarters in Moroni is that the French are not well disposed towards the local political leaders, including the former prime ministers, Abbas Djoussouf and Ali Mroudjae, and Mustafa Said Cheikh, the former Maoist leader. The French are said, however, to be in favour of a number of junior politicians. These include Ali Msaidie, a former minister under Mr Djoussouf, who has recently been negotiating his entry into the government and is said to have been chosen by the French since he can be easily handled.

Mr Msaidie and some other junior opposition politicians were ready to join a government of national unity under Azali Assoumane but they have since dropped the idea following the latter’s refusal to offer one of them the post of prime minister. The Msaidie group argued that their inclusion in the government of national unity would facilitate negotiations with the Anjouanese. They further argue that Colonel Assoumane is not displeased with the current impasse, which plays well with his plan to hold on to power.

The OAU fails to end the An OAU delegation led by a Mozambican diplomat Franscisco Madeira, left deadlock Comoros towards the end of July after spending two weeks trying to end the impasse over negotiating a new constitution. The OAU is keen to devise a new strategy to advance the agreement that it brokered on February 17th 2001. Under the agreement a new constitution was to be voted on in a referendum on June 30th, prior to the formation of a government of national unity.

Mr Madeira’s delegation left the islands without achieving success. There has been controversy and tension between the Assoumane regime, the Anjouanese leaders and the Moroni-based opposition parties. A number of issues are thus still unresolved. It is not clear, for example, how a president is to be elected. The Mohélians insist that he should be elected by parliament; the Anjouanese propose that when their term arrives for producing a candidate only the Anjouanese should produce a candidate, who would then be ratified by the national parliament. So far the position of Grand Comorians on this issue is not clear. However, there are indications that they would prefer a president to be elected in a national poll by the inhabitants of all three islands, but on the same basis of rotation. Another contentious issue concerns the system to be followed for the election of the president of the republic. The Anjouanese want a system that would produce a president on an island-by-island rotational basis every two-years. The Grand Comorians, including the opposition demand that the rotation, again on an island-by-island basis, should be of a five-year duration. A further major disagreement has been on deciding a name for the new Comorian entity. The Mohélians have proposed Union des Etats autonomes des Comores; the Anjouanese insisted on Union des Etats indépendants des Comores, recognising Anjouan, Mohéli and Grand Comoro as associate states in the new Comoros entity, and the Grand Comorians favour République des Comores.

In fact, for the past few months following the signing of the Fomboni agreement, the Anjouanese separatist leaders have found cause to clash on a number of issues with the Assoumane regime and to portray themselves as

nationalist heroes to their fellow Anjouanese. In a show of defiance they refused to commemorate Comoros independence on July 6th. In stead they celebrated the anniversary of their declaration of independence on August 3rd.

A new constitution is being Despite the uncertainties, on June 27th the EU sent a constitutional law expert, drawn up Pierre Weiss, to Comoros to advise in drawing up a first draft of the new constitution. Mr Weiss is part of an assorted team of international and Comorian experts appointed by the Fomboni agreement’s follow-up committee to draft the archipelago’s new constitution.

The draft will form the basis for discussions of the committee charged with drawing up the new constitution for the new entity of Comoros, whose work has been delayed by the intransigence of the Anjouanese. The OIF and OAU have also sent representatives. South Africa, which is leading the mediation effort on behalf of the OAU, is also sending an expert to participate in the work of drawing up the new constitution. Their first task is to revive the Tripartite Commission, the body tasked with defining the inter-island status under the new constitution. Earlier fears that the EU might not be able to co-operate smoothly with the OAU, because of reservations about the OAU’s competence to lead the mediation process, appear to have been misplaced. They have been working extremely well together, though during July the EU threatened to leave because of bickering between the parties. The international experts have combined their efforts to put pressure on a former foreign minister, Muzawar Abdallah, a key opposition politician from Grand Comoro, to reconsider his decision to resign from the Tripartite Commission.

Colonel Assoumane seeks to Meanwhile, Colonel Assoumane, taking advantage of the impasse in the remain in power negotiations, convoked the legislative council on July 18th for a period of three months. This organ recently replaced the Council of State which was set up by Colonel Assoumane after he came to power. It is suspected that, should the negotiations remain stalled, Colonel Assoumane might use the legislative council to adopt a new constitution which would prolong his rule. This would be easy to accomplish since most of the members of the legislative council are his own supporters.

Recently, Colonel Assoumane has been having problems with some members of his inner circle. The situation led to the resignation of Mohamed Soilih La Martine, the secretary-general in the presidency, and Hussein Boina Boina, a presidential adviser. Although they are not influential, their resignations were significant as they have been so closely identified with the head of state.

Economic policy and the domestic economy

Economic performance is According to IMF data, Comorian real GDP declined by 1.1% as a result of a weak slowdown in donor support, irregular electricity supplies and a lack of investment in the main agricultural export commodities. As Comoros is a

member of the Franc Zone, with a fixed exchange-rate regime, prices fell by 1.9% in 2000, despite the increase in the price of petroleum products.

Fiscal revenue and The fiscal performance of the federal government was mixed in 2000. Total expenditure fall revenue fell by 9%, from 11.8% of GDP in 1999 to 10.2% of GDP in 2000, because of technical problems in customs, tax arrears incurred by the state- owned petroleum company and the granting of tax exemption for the import of personal effects. In response, the government sharply reduced expenditure on goods and services and transfers. It also improved the management of its public-sector payroll, producing 5% year-on-year reduction in its wage bill. Consequently, the overall domestic deficit (excluding foreign-financed expenditure and on a commitments basis) remained low, at 0.2% of GDP.

Comoros: selected economic indicators

1996 1997 1998 1999 2000a 2001a National accounts & prices (% change, year on year) Real GDP at market prices –1.3 4.2 1.2 1.9 –1.1 1.0 Consumer price index 2.0 3.0 3.5 3.5 –1.9 3.5 Public finance (% of GDP) Revenue 12.3 13.8 11.4 11.8 10.2 12.6 Expenditure 26.4 24.9 22.1 19.1 16.3 20.7 Overall balanceb –5.8 –2.2 –3.4 –0.8 –1.9 –3.8 External sector (% of GDP) Current account balance –8.7 –15.8 –6.1 –4.1 –0.4 –4.8 Total external debt outstanding192.9 189.5 188.1 179.9 111.3 104.1 Gross international reserves 6.5 5.5 5.7 6.1 8.0 7.3

a IMF estimates b Includes grants, commitments basis

Sources: Comorian authorities; IMF, staff estimates and projections, World Bank, Global Development Finance.

Comoros adopts a staff- The unstable political situation and weak macroeconomic and structural monitored programme policies of recent years have led to persistently low economic growth, large fiscal deficits and growing domestic and external payment arrears in Comoros. The onset of a return to political stability, with the Fomboni agreement, has led the Comorian authorities to formulate a comprehensive IMF staff-monitored programme (SMP) for the period July 2001-June 2002 to address the most pressing problems. The SMP aims to begin the process of economic recovery, and details the policies necessary for returning the islands to economic stability. It will also form the basis for a medium-term programme for 2002-04, for accelerating economic growth and reducing poverty. There are quantitative targets and selected structural measures by which the implementation of the programme can be judged. In addition, the authorities intend to prepare a comprehensive poverty reduction strategy with the assistance of the United Nations Development Programme.

Successful implementation of the SMP will play an important role in rebuilding the confidence of international donors, and would help to mobilise external financial support, including the IMF’s poverty reduction and growth facility (PRGF) and the World Bank-IMF’s heavily indebted poor countries initiative.

Staff-monitored programme, 2001/02

The staff-monitored programme contains a number of elements aimed at rehabilitating the economy.

Fiscal sector reforms: The government will attempt to strengthen financial management to ensure expenditure is limited to a level consistent with the country’s resources. The tax system and expenditure management will both be overhauled. A Cash Flow Committee, chaired by the prime minister or minister of finance, has established a monthly plan for controlling expenditure and revenue. Expenditure can no longer be committed until the availability of resources has been verified in the cash flow plan. In addition, all payroll components are to be computerised.

Structural reforms: With the assistance of the World Bank and other donors, the government will pursue a programme of divestiture of public enterprises. The government also intends to review the mechanism used to set the domestic price of petroleum products.

Governance: The government will strengthen the courts and Ministry of Justice. It will also resume the publication of budgets and publish the annual reports of public enterprises.

Donors support the Donors attending a meeting sponsored by the World Bank in Paris on July 5th transition process pledged US$11.5m in support of the transitional process in the Comoros for one year. The Comorian prime minister, Hamada Madi “Bolero”, said at the end of the conference that the funds would support the national reconciliation institutions set up to reinforce the transitional process. These include a committee coordinating the commissions working on the constitution, on heritage and administrative reform and on the national independent electoral commission. Although the commissions had started their work, the prime minister said they could not make progress for lack of funds. The World Bank’s country director in the Comoros, Madagascar and Mauritius, Hafez Ghanem, said further funds would become available when other donors, including international organisations, had made a decision on the issue.

Foreign trade and payments

Current-account improves The current-account deficit fell significantly in 2000, following a substantial improvement in the terms of trade, the result of rising international prices for Comoros’ main exports, ylang-ylang, cloves and vanilla, over the past two years, which produced a 55% increase in the total value of exports. In contrast, imports stagnated, growing by only 1.8%, largely because of financial constraints. The services balance continued to follow the improving trend of recent years, as tourism receipts increased by 15%. As a result, the current- account deficit declined from 4.1% of GDP in 1999 to 0.4% of GDP in 2000.