Country Report

Tanzania

Tanzania at a glance: 2006-07

OVERVIEW The president, Jakaya Kikwete, will consolidate his position in power during the forecast period, while pursuing the donor-recommended economic reform agenda inherited from his predecessor. The opposition has been weakened by its poor performance in the December presidential and legislative elections and is now little more than an ineffective minority in parliament. Although the new regime on the mainland has pledged to renew its focus on resolving Zanzibar’s problems, tensions on the islands will persist. Prospects for economic growth in 2006 have been affected by drought conditions and, as a result, the Economist Intelligence Unit expects real GDP to grow by just 5.8% this year. Better weather conditions should see the rate of growth increase to 6.7% in 2007. Inflation peaked in May, at a year-on-year rate of 7.7%, and, with a reduction in food shortages, is forecast to decline to average 5.9% for 2006 as a whole before falling further to average 4.8% in 2007.

Key changes from last month Political outlook • There has been no change to the political outlook. Economic policy outlook • There has been no change to the economic policy outlook. Economic forecast • Following the sharp drop in the value of the Tanzanian shilling in July and August, we have revised our forecasts for the average value of the currency to TSh1,257:US$1 for 2006 and TSh1,320:US$1 for 2007. • The latest figures from the Bank of Tanzania (BoT, the central bank) show inflation declining more rapidly than expected. As a result, we have reduced our forecasts for the average rate of inflation from 6.1% to 5.9% for 2006 and from 5.1% to 4.8% for 2007. • In line with the release of provisional data by the BoT for the current account in 2005, we have increased our estimate for the current-account deficit in 2005 from 5% of GDP to 5.2% of GDP.

September 2006

The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom

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Tanzania 1

Contents

Tanzania

3 Summary

4 Political structure

5 Economic structure 5 Annual indicators 6 Quarterly indicators

7 Outlook for 2006-07 7 Political outlook 8 Economic policy outlook 10 Economic forecast

13 The political scene

18 Economic policy

22 The domestic economy 22 Economic trends 24 Agriculture 25 Financial and other services 26 Infrastructure 28 Mining

29 Foreign trade and payments

List of tables

10 International assumptions summary 13 Forecast summary 22 Growth in gross domestic product by sector 23 Manufacturing production index 23 Inflation 24 Coffee and tea exports 25 Nile perch fillet exports to the EU 30 World Bank debt relief to African countries

List of figures

13 Gross domestic product 13 Consumer price inflation

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Tanzania 3

Tanzania September 2006 Summary

Outlook for 2006-07 Tanzania’s president, Jakaya Kikwete, is expected to consolidate his position in power over the coming months while pursuing the donor-recommended economic reform agenda inherited from his predecessor. The opposition has been weakened by its poor performance in the December presidential and legislative elections and is now little more than an ineffective minority in parliament. Although the new regime on the mainland has pledged to renew its focus on resolving Zanzibar’s problems, tensions on the islands will persist over the forecast period. Prospects for real GDP growth in 2006 have been affected by drought conditions and, as a result, the Economist Intelligence Unit expects the economy to grow by just 5.8% this year. Better weather conditions should see the rate of growth increase to 6.7% in 2007. Inflation is expected to average 5.9% in 2006 before falling to 4.8% in 2007, a more usual level for Tanzania, as a reduction in food shortages is expected. The current-account deficit is forecast to narrow slightly to 4.9% of GDP in 2006 and 3.9% of GDP in 2007 as Tanzania benefits from high international prices for gold exports and as donor inflows to the country increase.

The political scene The government has entered into discussions with the semi-autonomous islands of Zanzibar over its union with the mainland. As expected, the president has started to reorganise the ruling Chama Cha Mapinduzi, promoting more of his supporters into positions of power.

Economic policy The 2006/07 budget (July-June) has continued along the same broad themes of reducing donor dependence and economic empowerment that characterised the policy of the previous government. Similarly, the June 2006 monetary policy statement contained no surprises, targeting 4% inflation by mid-2007.

The domestic economy The government has admitted that, following strong real GDP growth in 2005 (estimated at 6.8%), growth in 2006 is expected to be constrained by the impact of the drought. The arrival in July of oil-fired generators, ahead of schedule, should help to alleviate some of the power shortages caused by the drought.

Foreign trade and payments Tanzania is set to benefit from a debt write-off of US$3.8bn, as part of the Multilateral Debt Relief Initiative (MDRI). The World Bank has announced its component of the MDRI. Debate within Tanzania has continued over the country’s membership of regional trade organisations.

Editors: Ewan Wheeler (editor); Pratibha Thaker (consulting editor) Editorial closing date: September 14th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule

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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 Zanzibar constitutions, as amended

National legislature National Assembly, comprising 295 members (232 directly elected on the mainland; five delegates from the Zanzibar parliament; the rest appointed); Zanzibar’s House of Representatives (59 members, including nine women appointees) legislates on internal matters

National elections December 2005 (legislative and presidential); next elections on the mainland due by end-2010; elections for the Zanzibar presidency and the House of Representatives were held on October 31st 2005

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

National government The president, vice-president and Council of Ministers

Main political parties 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 Jakaya Kikwete Vice-president Ali Mohamed Shein President of Zanzibar Amani Abeid Karume Prime minister Edward Lowassa

Key ministers Agriculture & food security Joseph Mungai Defence & national service Juma Kapuya East African co-operation Andrew Chenge Education & culture Margareth Sitta Energy & minerals Ibrahim Msabaha Finance Zakia Meghji Foreign affairs Asha-Rose Migiro Health & social welfare David Mwakyusa Home affairs John Chiligati Industry & trade Nazir Karamagi Infrastructure Basil Mramba Justice & constitutional affairs Mary Nagu Labour, employment & youth development Jumanne Maghembe Lands & human settlement development John Magufuli Natural resources & tourism Anothy Diallo Planning, economy & empowerment Juma Ngasongwa Public safety & security Bakari Mwapachu Union affairs Hussein Mwinyi Wa t e r Stephen Wassira

Central bank governor Daudi Ballali

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Economic structure

Annual indicators 2001a 2002a 2003 a 2004 a 2005b GDP at market prices (TSh bn) 8,274.1 9,445.9 10,692.4 11,820.7 13,142.4 GDP (US$ bn) 9.4 9.8 10.3 10.9 11.6 Real GDP growth (%) 6.2c 7.2 7.1 6.7 6.8 Consumer price inflation (av; %) 5.1 1.0 3.5 4.1 4.3a Population (m) 35.5 36.2 36.9 37.7 38.4 Exports of goods fob (US$ m) 811.7 911.6 1,156.6 1,278.1 1,553.3 Imports of goods fob (US$ m) 1,631.4 1,526.5 1,980.4 2,184.1 2,508.4 Current-account balance (US$ m) -456.6 -216.9 -393.4 -437.1 -605.9 Foreign-exchange reserves excl gold (US$ m) 1,156.6 1,528.8 2,038.4 2,295.7 2,048.8a Total external debt (US$ bn) 6.2 6.8 7.0 7.8 8.1 Debt-service ratio, paid (%) 9.7 6.5 4.7 5.3 6.1 Exchange rate (av) TSh:US$ 876.4 966.6 1,038.4 1,089.3 1,128.9a a Actual. b Economist Intelligence Unit estimates. c Official estimate.

Origins of gross domestic product 2005a % of total Components of gross domestic product 2005a % of total Agriculture, forestry & fishing 45.1 Private consumption 78.5 Services 39.1 Gross fixed capital formation 21.4 Manufacturing 8.5 Government consumption 18.7 Construction 4.3 Increase in stocks 0.2 Mining 3.0 Exports of goods & non-factor services 34.9 Imports of goods & non-factor services -53.7

Principal exports 2005a US$ m Principal imports 2005b US$ m Gold 615 Consumer goods 643 Cotton 122 Machinery 584 Coffee 82 Oil & other fuels 315 Cashew nuts 54 Industrial raw materials 280 Tea 30 Food & foodstuffs 185

Main destinations of exports 2005c % of total Main origins of imports 2005c % of total Canada 8.7 South Africa 12.3 India 8.5 China 9.6 Netherlands 5.2 India 6.2 Japan 4.5 United Arab Emirates 6.1 a Economist Intelligence Unit estimates. b Bank of Tanzania estimates. c IMF, Direction of Trade Statistics, 2005.

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Quarterly indicators 2004 2005 2006 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr Central government finance (TSh bn) Revenue & grants 813.72 743.75 605.86 572.66 772.01 894.08 648.60 721.65 Expenditure 656.96 1,024.50 755.92 838.18 834.42 1,283.02 781.02 974.79 Adjustment -170.96 95.64 -78.65 -16.85 -119.68 172.17 -183.85 43.86 Balance -14.21 -185.12 -228.71 -282.37 -182.09 -216.77 -316.26 -209.29 Prices Consumer prices (2000=100) 114.3 114.0 119.7 119.1 119.5 119.5 126.8 127.6 Consumer prices (% change, year on year) 4.0 4.2 4.1 4.1 4.5 4.8 5.9 7.1 Financial indicators Exchange rate TSh:US$ (av) 1,087.09 1,056.99 1,101.23 1,116.64 1,135.98 1,161.88 1,192.44 1,240.22 Exchange rate TSh:US$ (end-period) 1,060.45 1,042.96 1,104.29 1,126.30 1,136.25 1,165.51 1,223.82 1,253.08 Deposit rate (av; %) 4.09 4.28 4.89 4.63 4.81 4.47 5.66 5.72 Discount rate (end-period; %) 14.38 14.42 13.64 13.92 16.13 19.33 17.50 13.40 Lending rate (av; %) 14.40 13.91 14.82 15.39 15.04 15.22 14.70 14.81 Treasury bill rate (av; %) 8.60 9.72 8.87 8.08 11.46 14.25 14.33 10.04 M1 (end-period; TSh bn) 1,296.40 1,315.61 1,390.88 1,528.83 1,644.91 1,758.81 1,729.08 1,798.84 M1 (% change, year on year) 19.4 18.2 26.8 28.9 26.9 33.7 24.3 17.7 M2 (end-period; TSh bn) 2,796 2,848 3,125 3,266 3,536 3,935 4,109 4,299 M2 (% change, year on year) 21.7 19.2 26.1 25.5 26.5 38.2 31.5 31.6 Sectoral trends Productiona (annual totals; ‘000 tonnes) Coffee ( 54 ) ( 57 ) n/a n/a Seed cotton ( 330 ) ( 330 ) n/a n/a Sisal ( 23.5 ) ( 23.5 ) n/a n/a Foreign trade (TSh bn) Exports fob 389.76 528.70 440.17 389.32 484.70 582.40 496.10 485.28 Imports cif -751.81 -874.76 -868.63 -774.43 -1,004.76 -1,078.28 -1,063.14 -1,331.52 Trade balance -362.05 -346.06 -428.46 -385.11 -520.06 -495.88 -567.04 -846.24 Foreign reserves (US$ m) Reserves excl gold (end-period) 2,003.0 2,295.7 2,125.1 1,968.1 2,023.6 2,048.8 2,140.7 1,995.0 a Crop years, ending year shown. Provisional for 2004-05. Sources: UN Food and Agriculture Organisation; Bank of Tanzania, Economic Bulletin; IMF, International Financial Statistics.

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Outlook for 2006-07

Political outlook

Domestic politics The president, Jakaya Kikwete, has managed, to a remarkable extent, to stamp his own image on the government during his first months in office. Ministries and departments seem more dynamic, in line with the new president, and the government is far more media-savvy. In addition, in late June he cemented his influence over the ruling Chama Cha Mapinduzi (CCM), when he assumed the party’s presidency and appointed his own supporters to key positions. But even though Mr Kikwete has consolidated his political power base, there is still considerable resentment within the party over the battle which saw him emerge as its presidential candidate in mid-2005. Although this is insufficient to challenge his hold on power!and the CCM has a long history of being able to paper over its internal divisions in public!the president will face residual sniping from senior party members, and his ability to implement policy changes as quickly as he would like will be curtailed for some time. As well as the need to take a united party with him, another constraint to reform may be the extent to which Mr Kikwete and the government are truly committed to implement long overdue changes. Although the changes made so far consolidate Mr Kikwete’s political control, the president and those who have been appointed to ministerial posts and to positions within the CCM are very much party insiders. Therefore, although Mr Kikwete has seemed much more willing publicly to take a firmer line in the battle against corruption!an early theme of his presidency!the extent to which this will translate into a real change in policy, especially if investigations were to implicate high-profile party members, remains unclear. It would require a great deal of political will for him to take on a prominent figure over this issue. The president’s cautious approach is also clear from the fact that, since being elected, he has stressed that he has set himself a two-to-three-year timeframe over which he wishes his performance to be judged, and has made it clear that, despite the wave of enthusiasm accompanying his election, he will not be rushed into making changes for the sake of change. For now, the main focus will be to build on and enhance the progress made on economic reform under the previous president, Benjamin Mkapa. The president can take such a long-term view because the December elections re-emphasised the CCM’s political domination of the mainland, with all the main opposition parties having performed poorly. The Civic United Front (CUF) remains the main opposition force, with 19 seats (although 18 of these were won on the island of Pemba). The opposition’s failure to gain significant representation in the Bunge (parliament) increases the risk that political debate on important issues will be of poor quality. It remains to be seen how effective the new parliamentary speaker, Samuel Sitta, will be in encouraging healthy and intelligent debate on policies proposed by the executive. Nevertheless, early indications are encouraging; the debate on the 2006/07 budget, for example, was a marked improvement on the budget debates in recent years.

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Although Mr Kikwete has been quick to acknowledge Zanzibar’s volatile state and his fears that it could become polarised between the main island of Unguja and the smaller island of Pemba, he is not seeking a quick resolution. Instead, he has adapted the role of the vice-president to focus on the issues surrounding the union of the mainland and the islands and has appointed Hussein Mwinyi as Minister for Union affairs. The CCM has indicated that it will seek to open a new dialogue with the CUF in a bid to resolve tensions, but has emphasised that reaching a political solution is likely to take time. As an interim measure, the government has embarked on what it says will be a comprehensive review of the current union to establish how it can be reformed and clarified to be more acceptable both to islanders and to those on the mainland. The government will also seek to provide additional resources to boost economic development on the islands. Given the lack of quick progress, there remains a risk that CUF supporters may become increasingly radicalised, arguing that they were not given a fair deal in last year’s elections and that the political system in Zanzibar is weighted too heavily against them for it to be worth participating in a peaceful and democratic manner. The CUF’s leadership is considering whether to step aside, and may well do so in late 2006 or early 2007, depending on the concessions made by the government. Although the Economist Intelligence Unit expects that any further violent protests will be quickly defused, given the strong police and army presence on the islands, a low-level sporadic insurgency would be difficult for the government to contain.

International relations Tanzania will maintain good relations with its regional neighbours and with donor countries. Relations with donors will focus on technical matters, such as ensuring better accounting and co-ordination of aid flows into the country. The conduct of the elections in October and December (especially in Zanzibar) is likely to have pleased donors, as there had been serious concern over the potential for violence during polling on the islands. The smooth electoral process has boosted Tanzania’s image. At the regional level, the implementation of the customs union protocol of the East African Community (EAC)!which comprises Kenya, Tanzania and Uganda!will remain a source of political contention as trade barriers between the three countries are slowly reduced. The situation is complicated by the long-running debate over Tanzania’s membership of regional organisations. At present, Tanzania is also a member of the Southern African Development Community (SADC), having withdrawn from the Common Market for Eastern and Southern Africa (Comesa) in 2001. However, some influential voices in the private sector argue that the country would be better off in Comesa. The government seems unlikely to be rushed into a decision on the issue.

Economic policy outlook

Policy trends Tanzania has seen a substantial pick-up in real GDP growth since 2000!to an annual average of around 7% in 2002-04!against a background of low and stable inflation. The main problem for the government has been how to translate macroeconomic stability and higher, donor-supported spending on

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healthcare and education into an increase in employment and improvements to the welfare of ordinary Tanzanians. The recent budget and comments from key ministers indicate that no radical alteration in the direction of economic policy can be expected in 2006-07, but policy may become, at least in rhetoric, more nationalistic, with the concept of economic empowerment a clear theme. Rural and agricultural reforms are key components of policy and the real challenge for the government in the coming years will be to push ahead with the more difficult structural and institutional reforms required to develop infrastructure and reduce corruption while encouraging the development of the private sector. The scale of the challenge has been made clear by the low level of private-sector investment that has so far been attracted into infrastructure, and by difficulties that have arisen between the government and private companies when the administration has tried to encourage greater private- sector involvement in energy, telecommunications, water and transport. The government and the IMF have been negotiating to replace the current poverty reduction and growth facility (PRGF)!which runs to December!with a policy support instrument (PSI). A PSI would provide extensive external monitoring of the government’s reform efforts but, unlike the PRGF programme, would give no financial support. The PSI would continue to set the medium-term policy framework and maintain macroeconomic stability, while the government pushes ahead with its five-year national strategy for growth and reduction of poverty (NSGRP, which is usually referred to by its Swahili acronym, MKUKUTA), which runs to June 2010. At the heart of the MKUKUTA strategy is the goal of boosting economic growth to 8-10% per year in order to reduce poverty. Although this is potentially possible, it could be achieved only through a real commitment to boosting agricultural performance, as around 45% of GDP comes from this sector and it remains the main source of employment. Progress on agricultural reform has so far been erratic. Although the government has announced various support initiatives for the sector in recent budgets, it seems to have shied away from the more fundamental reforms required to boost agricultural growth. The other key goal is to promote the growth of the private sector, which the government will seek to support by improving infrastructure, reforming the weak legal system, and reducing corruption and bureaucracy. Progress in all these areas will be slow!although support for reform exists within the government and among senior civil servants, there are strong vested interests opposed to liberalisation, particularly in the agricultural sector. In addition, implementation of reforms will be hindered by weak capacity in the civil service.

Fiscal policy Despite a new government and a change of finance minister in early 2006, the 2006/07 (July-June) budget, which was announced in June, targets increased spending in priority areas, as did the two previous budgets. In particular, the budget seeks to boost spending on development-related projects and poverty- reduction programmes, led by agricultural development, education and healthcare. It also seeks to increase the capacity of the civil service by boosting public-sector wages. The significant rises in spending in recent years have been possible only because of large increases in donor support. An increasingly important aim over the next few years will thus be to monitor expenditure and

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ensure that it does not spiral out of control, given that spending efficiently at such high levels raises significant problems in terms of government capacity. In order to reduce its dependence on donor support, the government will try to boost domestic revenue collection by widening the tax base, improving tax administration and eliminating taxes that are a drag on business. However, grants will still account for a significant proportion of expenditure and will have a huge impact on the sustainability of fiscal policy. Furthermore, given significant improvements in 2004/05 and 2005/06, government targets for raising revenue collection to 14.7% of GDP in 2007/08 may prove optimistic. With large expenditure and revenue rises targeted, underperformance will be problematic. Overall, we forecast that the budget deficit will grow in 2006/07 to 4.6% of GDP. The government will finance much of the deficit through external and domestic borrowing. However, as included in the 2006/07 budget, the government may use its foreign-exchange reserves to part-finance the deficit.

Monetary policy As a result of the high level of external support, which has meant that the domestically financed fiscal deficit has been low in recent years, the Bank of Tanzania (BoT, the central bank) has been able to bring inflation down to one of the lowest rates in Sub-Saharan Africa outside the CFA Franc Zone without having had to tighten monetary policy excessively. The BoT is also seeking to boost credit growth to the private sector by raising interest rates. This policy was further outlined in the BoT’s June 2006 monetary policy statement, which seeks to control the growth of broad money supply (defined as M2) to help to restrict annual inflation to around 4% until June 2007. Assuming that the impact of the current drought has run its course by late 2006 and that fiscal targets are met, the government should broadly meet this goal, despite continued inflationary pressure from high global oil prices. Secondary goals included targeting an annual growth rate of credit to the private sector of 37% by end-June. It appears that the government missed this target, albeit narrowly. However, credit growth will remain constrained by the huge structural constraints to lending faced by most commercial banks. The BoT will aim to keep foreign-exchange reserves at the equivalent of over six months of imports of goods and services!which should be relatively straightforward, given the high level of donor inflows!even if the government does consider drawing down reserves to finance the deficit. The BoT has no formal exchange- rate target, but seeks to maintain a competitive exchange-rate policy. This has proved problematic in recent years, given high donor inflows, which have limited the extent of depreciation, despite the large current-account deficit.

Economic forecast

International assumptions International assumptions summary (% unless otherwise indicated) 2004 2005 2006 2007 GDP growth World 5.5 4.9 5.3 4.7 OECD 3.1 2.6 3.0 2.2 EU25 2.4 1.7 2.6 2.1

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International assumptions summary (% unless otherwise indicated) 2004 2005 2006 2007 Exchange rates ¥:US$ 108.1 110.1 114.1 100.3 US$:€ 1.244 1.245 1.255 1.365 SDR:US$ 0.675 0.677 0.678 0.641 Financial indicators € 3-month interbank rate 2.13 2.15 3.06 3.86 US$ 3-month Libor 1.62 3.56 5.28 5.33 Commodity prices Oil (Brent; US$/b) 38.5 54.7 71.1 70.0 Gold (US$/troy oz) 409.5 445.0 639.5 700.0 Food, feedstuffs & beverages (% change in US$ terms) 8.5 -0.5 8.9 -4.5 Industrial raw materials (% change in US$ terms) 21.0 10.3 43.6 -3.2 Note. Regional GDP growth rates weighted using purchasing power parity exchange rates. Although the global economy is growing rapidly, tighter policies in the developed economies are likely to cause world GDP growth (on a purchasing power parity basis) to slow from 5.3% in 2006 to 4.7% in 2007. Continued uncertainty on global markets and the weakness of the US dollar will keep the price of gold!Tanza nia ’s ma in expor t!high in 2006, at an average of US$639.5/troy oz. Continued buoyant demand will push up gold prices further in 2007, to an average of US$700/troy oz. Increased global cotton production pushed prices down in 2005, but lower global stocks will allow prices to recover in 2006-07. Coffee prices will trend downwards over the forecast period as global oversupply outweighs the speculative pressures that boosted prices in 2005. Continued high global demand and a lack of spare production capacity will push international oil prices higher, to average US$71.1/barrel in 2006. Increased production and reduced demand should ensure that oil prices fall fractionally in 2007, although they will remain high, at an average of US$70/b.

Economic growth Drought, largely in the north of the country, in late 2005 and early 2006 looks set to undermine Tanzania’s growth this year. As well as the negative impact on agriculture, water levels at the dams that provide the country’s hydroelectric power are very low and hence, since the start of the year, most major cities have suffered from prolonged power cuts, which will impact on overall economic activity even if the power crisis eases in the second half of the year after the long rains and the provision of additional emergency generators. As a result, we forecast that real GDP growth will fall back in 2006, to 5.8%, from an estimated 6.8% in 2005. However, this is still a high rate by African standards and reflects growth in construction, which is expected to remain fairly constant owing to donor-funded infrastructure development, notably in roadbuilding. Assuming normal rainfall, and recoveries in the agricultural and manufacturing sectors, real GDP growth should rebound to 6.7% in 2007. We also expect further strong growth in construction and tourism, and the mining sector should pick up as new projects come on stream in late 2007.

Inflation The BoT did not meet its target of year-on-year inflation of 4% in the year to end-June 2006, despite a sharp fall in the inflation rate in June to only 6.8%.

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Before then, inflation had risen sharply in 2006, with the year-on-year rate reaching 7.7% by May, the highest since June 1999. The rise was driven by the increase in food price inflation, which rose to 12.3% in May, owing to the drought. The drought and high world oil prices have also led to sharp increases in prices for fuel, power, water and transport, which have raised the inflation rate. Although the BoT has indicated that it expects further steep falls in the inflation rate in the second half of 2006, we believe that the decline will be slower than forecast by the central bank, owing to the ongoing effects of high oil prices and public-sector wage increases, as well as continuing electricity shortages. As a result, we expect annual inflation to average 5.9% in 2006!its highest level for a number of years. For 2007, assuming a return to more normal weather conditions!which would reduce food prices!coupled with slightly weaker international oil prices and efforts to consolidate the fiscal deficit, we forecast that average inflation will fall to 4.8%, lower than in 2006 but still above the central bank’s target of 4%.

Exchange rates For much of the first half of 2006 the Tanzanian shilling fell sharply against the US dollar, reaching TSh1,255:US$1 by the end of May. This reflected the demand for fuel and food products, with the drought having caused food and electricity shortages, at a time when foreign-exchange inflows are traditionally at their lowest. The shilling stabilised briefly in June, ending the month at TSh1,253:US$1, owing to increased demand for the currency from the telecommunications sector, and was supported by central bank intervention. However, the firming of the shilling was short-lived and dollar demand was boosted by the continued high level of oil imports, buoyed by the arrival of oil- fired generators, and by rising imports of capital goods. The shilling fell rapidly in July and August, ending the latter month at TSh1,325:US$1. Despite the recent fall in the value of the shilling, we believe that it will strengthen in the remainder of 2006 and may even appreciate fractionally against a weak dollar, with foreign-currency receipts from the harvest and export of traditional cash crops coinciding with the height of the tourist season and with a pick-up in donor inflows. We forecast that the shilling will average TSh1,257:US$1 for the year. In 2007, given the weakness of the US dollar, slowing inflation, increased donor grants and a recovery in the agricultural sector, we expect the shilling to fall only modestly to average TSh1,320:US$1 for the year.

External sector Provisional BoT data indicate that the current-account deficit widened in 2005. This was caused by a widening of the trade deficit and was reinforced by a fall in the value of current transfers as donors held off committing funds until the 2005 elections had been successfully completed. Income debits rose sharply, reflecting high gold prices. We estimate that the 2005 deficit was US$606m, or 5.2% of GDP. Although the impact of the drought is likely to push up food and fuel imports in 2006, and imports of capital goods will continue to rise as the government and donors invest in infrastructure development, this should be broadly offset by rising export earnings, led by gold, global prices for which are at very high levels. On the invisible trade account, profit repatriation by international mining companies will continue to increase, but this will be partly offset by lower debt-service payments. Although an expected recovery in donor inflows does not appear to have materialised in the first quarter of 2006, we

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still believe that, for the year as a whole, donor inflows will exceed the 2005 level and hence push up the current transfers surplus. As a result of these trends, the current-account deficit is forecast to narrow to 4.9% of GDP in 2006. Trends across the current account will be broadly unchanged in 2007. With real GDP forecast to grow strongly in 2007, by 6.7%, we forecast that, as a proportion of GDP, the current-account deficit will decrease marginally, to 3.9%.

Forecast summary (% unless otherwise indicated) 2004 a 2005 b 2006c 2007c Real GDP growth 6.7 6.8 5.8 6.7 Gross agricultural production growth 5.8 5.2 4.2 5.5 Consumer price inflation (av) 4.1 4.3 a 5.9 4.8 Consumer price inflation (year-end) 4.2 4.3 a 5.2 4.2 Lending interest rate 13.9 15.1 a 14.9 13.3 Government balance (% of GDP) -3.1 -4.1 -4.1 -4.6 Exports of goods fob (US$ m) 1,278.1 1,553.3 1,800.2 1,962.7 Imports of goods fob (US$ m) -2,184.1 -2,508.4 -2,777.0 -2,796.3 Current-account balance (US$ m) -437.1 -605.9 -564.5 -479.8 Current-account balance (% of GDP) -4.0 -5.2 -4.9 -3.9 External debt (year-end; US$ bn) 7.8 8.1 4.6 4.9 Exchange rate TSh:US$ (av) 1,089.3 1,128.9 a 1,257.3 1,320.4 Exchange rate TSh:¥100 (av) 1,007.5 1,025.6 a 1,102.2 1,317.1 Exchange rate TSh:€ (year-end) 1,412.0 1,374.8 a 1,709.6 1,781.6 Exchange rate TSh:SDR (year-end) 1,619.7 1,665.8 a 1,981.9 2,053.2 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

Gross domestic product Consumer price inflation (% change, year on year) (av; %)

Tanzania (a) Sub-Saharan Africa Tanzania (a) Sub-Saharan Africa 8.0 10.0 7.0 9.0 8.0 6.0 7.0 5.0 6.0 4.0 5.0 3.0 4.0 3.0 2.0 2.0 1.0 1.0 0.0 0.0 02 03 04 05 06 02 03 04 05 06 07 07 2001 2001 (a) Mainland only.

The political scene

Tentative start to a dialogue Since his initial speech to the Bunge (the Tanzanian parliament) on the need to

with Zanzibar resolve the long-standing political problems in Zanzibar (February 2006, The political scene), the president, Jakaya Kikwete, has said little in public about how he proposes to achieve this. However, tentative signs of the basis for a new dialogue are emerging. Rather than using the party structures to conduct the talks!as under the former president, Benjamin Mkapa, who used the offices of

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the general secretaries in the ruling Chama Cha Mapinduzi (CCM) and the opposition Civic United Front (CUF)!Mr Kikwete seems to be keen, at least initially, to promote discussions between the office of Zanzibar’s chief minister, a post currently held by the CCM’s Shamsi Vuai Nahodha, and that of the mainland prime minister, Edward Lowassa. The two have already held a number of meetings, and have apparently been examining the anomalies in the current union between the mainland and the semi-autonomous islands. The aim of these meetings seems to be to identify key areas of concern for the two sides. These are to be forwarded to the vice-president’s office, which will try to create a roadmap to ensure that the union is legally sound and acceptable to both sides. This process will involve other ministries and government bodies. Already the Ministry of Natural Resources and Tourism, the Tanzania Revenue Authority (TRA), the Ministry of Finance and the Bank of Tanzania (BoT, the central bank) have been involved, and other ministries are likely to participate as the dialogue progresses. That there are problems with the union agreement is clear; it was drawn up hastily in 1964 in a bid to end the violent revolution on the islands and is far from coherent or comprehensive (there is even some doubt as to whether a copy of the original signed document exists). A number of ad hoc articles have been added to the agreement, further confusing matters. However, it is unclear what the talks will achieve politically or economically. In the run-up to the 2005 election in Zanzibar, both the CCM and the CUF stepped up their nationalistic rhetoric, a tactic that enjoys widespread popular support (May 2005, The political scene). Agreement about the nature of the union!and clarification of controversial issues such as, for example, the treatment of revenue from oil found in Zanzibari waters!would probably be welcomed by most inhabitants of the islands, especially those who support the CCM. But it is not clear what the CUF, which is not included in the talks, will gain from them, especially as they are extremely unlikely to cover the CUF’s far more pressing political concern: the fact that, in their eyes, the 2005 election on the islands was comprehensively flawed. Moreover, the talks will also fail to address other CUF demands, such as its calls for an independent investigation into the election, state compensation for those affected by the violence and the setting up of a genuinely independent Zanzibari electoral commission.

Government commitment to Despite this, the Economist Intelligence Unit expects that the government will reform of the union is unclear push ahead with the dialogue and will steadily increase the number of people involved. This will at least allow it to claim that it is addressing the problems in Zanzibar!especially to foreign governments, such as that of the US, which have been critical of the elections!without really doing anything. The government appears to believe that, having ensured that the vote itself passed relatively peacefully, the current security force presence on the islands will be sufficient to ensure that there are no further post-election outbreaks of violence, even if resentment over the election outcome continues to fester, notably among the underemployed youths of Stonetown. However, the government could bring the CUF into the dialogue, which would give greater legitimacy to the talks. The CUF is aware of this possibility, and this may lie behind some of the recent agitation about Zanzibari nationalism, such as the call by Zanzibar’s politicians

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to have a greater voice in East African affairs. In a parliamentary debate in early August, CUF politicians demanded that Zanzibar be given at least associate membership of the East African Community (EAC), and complained that they were excluded from talks about the formation of the East African Customs Union last year. At present, Zanzibari politicians can have influence on such issues only through Tanzanian appointments and membership of Tanzanian committees. However, the CUF has called for Zanzibar to be treated in a similar manner to Greenland, which, although a province of Denmark (which is an EU member), is not affected by legislative decisions made in Brussels. This argument would be strengthened if the EAC does eventually move towards a more unified political federation by 2012, as is currently planned.

The CUF will be patient The CUF has repeatedly said that, despite little progress in resolving the

fo r a whil e Zanzibar issue since the elections, it still has confidence that Mr Kikwete will take action. The CUF hopes that, once more firmly established as the CCM party leader, Mr Kikwete will be in a stronger position to take on those members of the party in Zanzibar who refuse to engage in dialogue. This obstructive stance became evident following the elections, when the prime minister, Mr Lowassa, instructed the Tanzanian Human Rights Commission to investigate complaints of human rights abuses by the police and army during the polls. No progress was made on the issue as the CCM government on the islands refused to co-operate. The nature of some CCM politicians on the islands is further illustrated by the actions of the speaker of the House of Representatives, Pandu Kificho. During the debate on the islands’ budget, he refused to allow CUF members to deliver their speeches without giving him a chance to read them first. This clearly unconstitutional practice prompted a CUF walk-out. Some CCM members seemed to approve of the move, arguing that it would ensure that parliamentarians’ speeches would not be excessively emotive. The situation seems to have calmed down since the budget, but the CUF has written to the Commonwealth Parliamentary Association to let it know of the situation in Zanzibar, although the impact of this will be minimal. However, the CUF leadership is keeping its options open and will reconsider its position if no progress is made in the next few months. One option is for the leadership to resign en masse. This would force the party membership to vote on whether they wish to carry on down the road to dialogue, or whether they want a more radical leadership, which would increase political tensions. Meanwhile, the CUF has relented over the formation of the shadow cabinet in the mainland Bunge, by allowing in members of other opposition parties (although, given their limited parliamentary representation, the smaller parties’ participation in numerical terms is minimal). The most high-profile change is the appointment of Wilbroad Slaa as deputy leader of the opposition. Mr Slaa is a member of Chama Cha Demokrasia na Maendeleo (Chadema), the second- largest opposition party, with 11 appointed seats. Also, the new parliamentary speaker, Samuel Sitta, is seen as far more progressive and open to debate than his predecessor, Pius Msekwa. These moves can only strengthen democracy.

New leadership for the CCM As expected, on June 25th Mr Kikwete continued what seems to have become a widely accepted tradition, when he was elected, unopposed, as the national

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chairman of the CCM at the seventh national congress of the party in Dodoma (by 1,812 votes in favour and one vote against). He replaced the former president, Mr Mkapa, in a transition process that seems to have become firmly established during the multiparty democracy era, ever since the founding president, Julius Nyerere, cut short his tenure as party president in 1990, handing over to Ali Hassan Mwinyi, the newly elected national president, so that he could hold the two posts simultaneously. This policy was also adopted by Mr Mkapa when he became president. Meanwhile, other important changes have taken place in the CCM leadership. One of these was the appointment of Rostam Aziz as party treasurer. An Arusha businessman, he was a major financial backer of Mr Kikwete’s election campaign and is also the member of parliament (MP) for Ihunga. His closeness to the president was such that he had been touted as a potential finance minister, although in the end he was not given the position. As the party’s finances have become increasingly strained in recent years, Mr Aziz will have a crucial role in putting them on a firmer footing.

Rejuvenating the CCM will not The key appointment was that of the Dar es Salaam regional commissioner,

be easy Yussuf Makamba, as CCM secretary-general, replacing Phillip Mangula, who had held the post since 1997. Mr Makamba also became an MP (nominated by the president). It seems to have been widely accepted that a change in personnel was needed, even by the outgoing secretary-general, who felt that ten years in the job and the recent leadership battle had sapped his energy. What is clear from Mr Mangula’s tenure is that the CCM has become very effective at winning elections, as shown by the strong votes secured first by Mr Mkapa and now by Mr Kikwete, together with the ongoing marginalisation of the opposition. However, while the ruling party may need some new impetus, it is unclear how effective Mr Makamba will be as secretary-general. He has clearly been rewarded for his strong support of Mr Kikwete during the election campaign and the fact that Dar es Salaam did not, as expected, vote strongly for the opposition. As Dar es Salaam regional commissioner, he was arguably no more or less effective than any other civil servant, although in his defence it could be argued that resolving issues such as housing and infrastructure in an African city such as Dar es Salaam is hardly a straightforward task. Likewise, reforming a party as bureaucratic and monolithic as the CCM will not be simple, although its new website shows that the goal is to try to spruce up the party’s image as quickly as possible. Another step in this direction was the appointment of 46 new district commissioners. The leadership is expected to launch a new newspaper to ensure that the views of the president, and those whom he has appointed to run the CCM, receive greater coverage. Whether this will replace, or compete against the current party newspaper, Uhuru, is not clear, but Mr Kikwete is reportedly unhappy that the paper is effectively run by his political adversaries within the CCM.

The media comes under the Mr Kikwete’s problems with Uhuru are not all that surprising. Successive

spotlight again Tanzanian governments have had run-ins with the media. On the one hand, this reflects the fact that the country’s newspapers, notably the Swahili tabloids, often oversensationalise issues to boost sales in a highly competitive market.

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On the other, it reflects the fact that, although Tanzania is a multiparty democracy, most senior members of the CCM have never been entirely comfortable with the concept of a free press. Interestingly, the latest run-in with the media is not with the local press, but centres around an international documentary, originally released in 2005, but recently given a wider release on DVD. The film!entitled Darwin’s Nightmare!made controversial claims that the fish export industry in Tanzania’s largest town, Mwanza, which is on the shores of Lake Victoria, contributes to arms-trafficking, poverty, HIV/AIDS, prostitution and homelessness. In a televised address from Mwanza on July 31st, a visibly angry Mr Kikwete argued that the film had failed to provide specific evidence linking fish exports to the arms trade. He added: “One of the biggest lies in the film is that the planes that are coming to pick fish from Mwanza bring weapons that are used to destabilise the Great Lakes region.” The row has been deepened by claims that the government has threatened to deport some of the journalists who were interviewed in the film. In particular, an investigative journalist for the Citizen newspaper, Richard Mgamba, has apparently been harassed by the authorities and threatened with deportation to Kenya, even though he is a Tanzanian citizen. He fled Mwanza, owing to fears that a demonstration against the film!organised by the local authorities and held in early August!would spiral out of control. Heightening the sense of crisis, in early July the land and settlements minister, John Magufuli, launched a legal case against the Rai newspaper over an article that questioned how funds for the construction of the donor-sponsored Usagara-Chato road had been spent, why the road had not been completed, and whether its route had been diverted to pass through his constituency.

Press cards for journalists Meanwhile, the minister for information, culture and sports, Muhammed Sief Khatib, told the Bunge, when presenting his ministry’s budget estimates for 2006/07, that the government planned to put in place a mechanism under which only those with the requisite academic and professional qualifications will be accredited in Tanzania as journalists. In the subsequent debate, it was clear that the move had stemmed at least partly from the controversy over the Lake Victoria documentary, with the government apparently also concerned about various press stories it considers to be out of line with Tanzanian culture, as well as unethical. Unsurprisingly, following the announcement, there has been considerable speculation in the media that the issue of press cards could infringe on the freedom of the press, as they can effectively be used as a method of barring individuals from being registered as journalists. Despite the problems with the press, the director-general of the Tanzanian Communications Regulation Authority (TCRA), John Nkoma, recently held a public ceremony in Dar es Salaam to award new broadcasting licences to television and radio stations. He assured the stations’ owners that the use of analogue technology in the broadcasting sector will continue until 2015. The new licences were granted to 22 television stations and 38 radio stations under the converged licensing framework, which was introduced last year. The TCRA will continue consultations with relevant parties in the sector on the best way forward to ensure a smooth and efficient digital switch-over.

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Security a concern for the With crime a growing concern in Dar es Salaam during the last year, leading

tourism sector players in the tourism sector held a meeting with the police force in the city in early August. Some tour operators argue that the industry has still not recovered from the 2001 terrorist attacks against hotels and an airliner in Mombasa, Kenya. However, the issue of crime was of more immediate concern. It was clear from the meeting that the incidence of crime varies substantially: it is a growing problem in Zanzibar and coastal areas, but far less important in the southern tourism circuit based around the Selous game reserve. The police commissioner, Paul Chigonja, said at the meeting that the force is setting up a special unit to deal with tourist protection, which was awaiting approval by the Ministry of Public Safety and Security.

Economic policy

The 2006/07 budget contains The new minister of finance, Zakia Meghji, presented her budget for the

few su rprises 2006/07 fiscal year (July-June) on June 15th. Given the detailed and relatively transparent method of budgeting under the medium-term expenditure framework (June 2006, Economic policy), the projections for revenue and expenditure contained few surprises. Neither did the macroeconomic assumptions on which the budget was based: a steady pick-up in real GDP growth, after the setback in 2006, to over 7% in 2007 and nearly 8% in 2008; and a slow decline in inflation to 4% in 2007 after the temporary drought- induced spike in 2006; against a background of steady money-supply growth and maintaining foreign-exchange reserves above six months of import costs. The budget did, however, contain a very strong theme in that the government is keen to boost revenue and reduce dependence on donors. In order to achieve this, Mrs Meghji has set the goal of raising the ratio of domestic revenue to GDP from around 14% at present to around 15% by 2008/09. Although this seems a relatively modest goal, it will be difficult to achieve. Tanzania’s tax levels are high, but the real problem is that the number of taxpayers is quite limited. The key method through which the goal will be achieved is by continuing the policy of broadening the tax base by bringing more individuals and firms into the tax net. This means that activities carried out in the informal sector must be moved into the formal sector, or that more jobs will need to be created in the formal sector. This will prove difficult without a significant improvement in the business environment (November 2005, Economic policy). Moving from the informal to the formal sector

One of the main ways in which the government hopes to move more firms and individuals into the formal sector is through the Property and Business Formulisation Programme (PBFP, known as Mkurabita in Swahili), which the government is in the process of getting off the ground. The aims of the policy are as follows: • to simplify registration procedures to encourage people to formally register their properties and businesses; and • to encourage registration by highlighting the potential benefits (for example, with formal title deeds, property can be used as collateral to raise loans and to expand business).

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In a recent survey conducted as part of the preparation of the policy, it was highlighted that issuing permits to pharmacies, restaurants or tour agencies could be done only in Dar es Salaam and costs TSh400,000-600,000 (US$320-480). It was estimated that 89% of property and 98% of businesses in Tanzania are not officially registered and that the worth of these businesses is US$2.9bn.

Two main measures to boost In view of this major constraint to raising revenue, Mrs Meghji has proposed

revenue two additional measures which will have a more immediate impact. The first was to increase the excise duty on mobile-phone airtime from 5% to 7%. This led to complaints from the industry, which argued that it would slow take-up of mobile phones and that the move is discriminatory as landline usage is not similarly charged. The government is unlikely to back down, especially as excise duties in Tanzania are much lower than in Uganda (12%) or Kenya (10%), although these countries have lower rates of value-added tax (VAT). The second, and probably the more controversial measure, was the abolition of VAT on fuel (both petrol and heavy fuel oil). To offset the impact of this, Mrs Meghji raised other taxes, notably excise duty on fuel and road tolls. The aim of the apparently contradictory measures was that there should be a modest overall reduction in the price of petrol at the pump. The government has also cut the duty on kerosene, a measure it hopes will be welcomed by low-income households. The move is also designed to stop the adulteration of kerosene supplies with diesel (a common practice in Tanzania) and to encourage households to use kerosene instead of burning wood and charcoal.

Abolishing VAT on fuel may The government does not seem to have fully taken account of the fact that

raise business costs although VAT is recoverable for businesses, and so is not a cost to them, excise duty is not recoverable and hence the new measures will increase their costs. Moreover, the change has been implemented at a time when the cost of petrol has been rising rapidly, owing to high world oil prices, and when many businesses have been incurring extra costs by running generators as a result of power rationing. According to provisional estimates by the Tanzanian Association of Oil Marketing Companies, this latter aspect alone could push up costs for businesses by 15%, which ultimately will either have to be passed on to consumers or absorbed within the firms’ profit margins. Some analysts have pointed out that the ability to reclaim VAT on fuel was an important incentive to encourage firms to register, and to become part of the formal sector, but as it has now been removed, the measures seem to undermine the government’s aim of boosting the number of formally registered companies. Although the government had hoped that the changes would lead to a modest reduction in the pump price for petrol, it has continued to increase as a result of rising world oil prices. With the inflation rate also rising, partly because of increased fuel prices, the new government’s initial reaction seems to have been to accuse the private sector of operating a fuel-importing cartel in contravention of existing regulations. This argument has emerged periodically since the right to import petroleum products was opened to the private sector in 1999 and may reflect a wider concern!that, despite its apparent commitment to reform, senior members of the ruling Chama Cha Mapinduzi (CCM) remain sceptical about the private sector.

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The TPDC is to resume Unusually, the government responded to the rising fuel prices by relaxing

importing fuel after six years policy. The energy and minerals minister, Ibrahim Msabaha, announced that the Tanzania Petroleum Development Corporation (TPDC) would be allowed to resume importing petroleum products (it was banned from doing so in 2000). The government probably hopes that allowing the TPDC to import petroleum products will boost competition in the sector and ensure the maintenance of adequate supplies. To achieve this, it is proposed that the TDPC will manage a strategic fuel reserve from which supplies can be released if there are delays in imports by the private sector. However, for the TPDC to be competitive, it must be able to buy fuel in sufficient quantity to obtain a competitive price. Moreover, it has not been particularly effective in storing and distributing fuel in the past, and it seems unlikely that it will have improved significantly in this respect. But although the decision may fail to improve competition, it may reduce some of the artificial price discrepancies which currently exist.

Sharp jump in civil service On the expenditure side, perhaps the most important announcement in the

salaries budget was the decision to raise civil service salaries. According to the finance minister, the total civil service wage bill will rise from TSh682bn (US$590m) in the 2005/06 financial year to TSh1trn in 2006/07, an increase of 46.6%. Even taking into account the costs of paying for new posts, this is a large rise and will substantially increase the take-home salaries of existing civil servants. The government has said that the increase is in line with its election manifesto, which argued that, in order to improve the efficiency of the civil service, the government must offer pay levels which encourage those employed to turn up to work and not to accept bribes to supplement their salaries. In terms of new posts, the main areas in which recruitment is occurring remain the priority sectors, especially education and healthcare. The government also aims to boost the number of accountants and internal auditors in the civil service to try to improve control over expenditure. Addressing the Bunge (parliament) in early June, the interim Comptroller and Auditor General, Frank Mhilu, admitted that staff shortages meant that his department was unable properly to keep track of expenditure, or to really clamp down on corruption, even though it was aware of corrupt practices within the civil service.

Economic empowerment The controversy over fuel prices dominated the post-budget discussions,

starts to move centre-stage largely to the exclusion of the other major theme of the budget, the economic empowerment of Tanzanians. This has been on the agenda for some time, but was specifically addressed in the CCM’s election manifesto and appears to have assumed greater importance under the new president, Jakaya Kikwete. Although the overall vision of what economic empowerment should seek to achieve in Tanzania is not as coherent as South Africa’s Black Economic Empowerment Policy, for example, it has several clear themes, as follows. • The government is keen to reduce its dependence on donor funding, in the long term at least. • There is a need to ensure that local entrepreneurs and businesses have access to capital to finance their activities. This includes encouraging the commercial banking sector to boost lending, mainly to small and medium-sized enterprises (SMEs). It also involves government financial institutions and

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projects, notably the Development Finance Guarantee Fund, and the ongoing plan to turn the Tanzania Investment Bank into a national development bank. • The government also has direct policies on the issue, including the National Economic Empowerment Policy. In November 2005 it set up the National Empowerment Council. With an executive secretary appointed in April 2006 and a funding allocation provided in the 2006/07 budget, the organisation is now in a position to start work on the greater co-ordination of empowerment policies. This will involve preferential government provisions for local firms competing for government contracts; provision of training and education in entrepreneurship; and ensuring that the overall empowerment policy is well publicised and widely understood.

New monetary policy While Mrs Meghji was presenting her first budget, the governor of the Bank of

statement presented Tanzania (BoT, the central bank), Daudi Ballali, presented what was probably his last monetary policy statement. Mr Ballali is already well past retirement age, but his mandate as BoT governor was renewed by the former president, Benjamin Mkapa, in 2003. Mr Ballali has been an important force in setting up the policy structure that has seen a sharp improvement in macroeconomic stability over the last five years. However, with a new president and economic team, coupled with political sniping about the escalating cost of building the BoT’s new headquarters in Dar es Salaam, rumours that he will step aside have steadily increased. His most likely successor would be the deputy governor, Juma Reli, who was appointed in March 2005. However, if the president wanted a more radical change, the head of the CRDB bank, Charles Kimei, who has previously worked at the BoT, could be given the job. The monetary policy statement, like the budget, provided no real surprises. Its main targets for the fiscal year (to end-June 2007) are: • to limit annual growth in reserve money (M0) to 24% (from 26.6% in 2005/06); • to limit the growth rates of broad money (M2) to 23.4% and extended broad money (M3) to 24.2% (against a combined growth rate of 27% in 2005/06); • to achieve 37% growth in commercial bank credit to the private sector (up from 33% in 2005/06); and • to maintain an adequate level of foreign reserves, to cover at least six months of imports of goods and services (unchanged from 2005/06). The main aim of these measures is to reduce the annual inflation rate to 4% by end-June 2007. The BoT failed to meet its 4% inflation target in 2005/06, although it would argue that this was because of factors beyond the control of monetary policy, namely the drought and the larger than forecast fiscal deficit.

An end to the privatisation The government has said that it hopes to finalise privatisation of the remaining

programme 36 strategic state-owned firms by the end of 2007. If the process is completed on schedule, the effective transition from an economy with a very large state- owned sector to one in which the private sector plays a far more important role will have taken about a decade to complete. The Parastatal Sector Reform

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Commission (PSRC), the government body charged with the privatisation of state-owned companies, was established 13 years ago. When the privatisation programme is completed, the aim is to largely disband the PSRC, leaving just a small unit which will be responsible for the monitoring and evaluation of the enterprises sold. In 2004 the government extended the PRSC’s term until December 2007 in order to complete privatisation of the remaining enterprises. However, it remains unclear whether the process can be completed on time. The main problem is that the companies yet to be privatised are arguably the most complex, testing the government’s commitment to the process. This is illustrated by the ongoing saga over the privatisation of Air Tanzania and by the government’s recent repurchase of Tanzania Telecommunications Company (August 2005, The domestic economy). There also appear to be problems with the concessioning of the Tanzanian Railway Corporation and the National Insurance Corporation (NIC). Although the NIC is up for sale, it has attracted bids far below the price expected by the PSRC and there is confusion over whether the sale includes the NIC’s properties or just its insurance portfolio.

The domestic economy

Economic trends

Growth was robust in 2005 According to data presented by Juma Ngasongwa, the minister of planning, economy and empowerment, in the Economic Survey which accompanied the budget, real GDP growth remained very robust in 2005 at 6.8%, almost unchanged from the 6.7% recorded in 2004. Growth remained strong in the agricultural sector, at 5.2%, but this was slightly down on the 5.8% recorded in 2004. However, this was easily offset by faster growth in other sectors, led by mining, which, with growth of 15.7%, continued to be the most buoyant sector of the economy. Growth also remained strong in manufacturing (9%); the trade, hotels and restaurants sector (8.2%); transport and communications (6.4%); construction (11.9%); and financial and business services (5.3%).

Growth in gross domestic product by sector (% change, year on year; 1992 prices) 2001 2002 2003 2004 2005a Agriculture 5.5 5.0 4.0 5.8 5.2 Mining & quarrying 16.6 15 18.0 15.4 15.7 Manufacturing 5.0 8.0 8.6 8.6 9.0 Electricity & water 3.0 3.1 4.9 4.5 5.1 Construction 8.7 11.0 11.0 10.8 11.9 Wholesale & retail trade, hotels & restaurants 6.7 7.0 6.5 7.8 8.2 Transport & communications 6.3 6.4 5.0 6.0 6.4 Financial & business services 3.3 4.8 4.4 4.4 5.3 Public administration & other services 3.5 4.1 4.1 4.3 5.1 Total GDP 5.8 6.2 5.7 6.7 6.8 a Official estimates. Source: Bank of Tanzania.

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Growth will slow in 2006 Given the impact of the drought, the government forecasts a sharp fall in real GDP growth in 2006, to 5.9%. Whether this rate of growth is achieved will depend heavily on the extent to which the agricultural and manufacturing sectors recover. The manufacturing sector, which accounts for about 8% of GDP, remains particularly vulnerable. Businesses are faced with two options to cope with the power rationing that at present leaves them without electricity for around 12 hours every other day. They can use generators, which most already own as the power company, Tanesco, has never been a reliable source of electricity. However, with rising fuel prices and budget changes which have removed value-added tax (VAT) and replaced it with excise duty!which, unlike VAT, cannot be reclaimed (see Economic policy)!this will be costly. Some companies estimate that the power rationing has increased production costs by 50%. Alternatively, they can introduce night shifts, as some manufacturers have done. This will also cut into profit margins, as in many cases workers must be paid time and a half for working these shifts. The impact of the electricity supply problems is highlighted in recent data on manufacturing production from the National Bureau of Statistics, which show that output fell by 19% in the first quarter of 2006 compared to the last quarter of 2005. However, it is probably still too early to assess the full extent of the impact. The index tends to be considerably down in the first quarter, reflecting the fact that many factories close over the festive holiday period and do not get production fully up and running again until February. The position will become clearer when data for the second quarter are available. In general, the upward trend in manufacturing production has continued in recent years, with the index averaging 224 in 2005, an 11.9% increase over the previous year.

Manufacturing production index (1985=100) Annual 1 Qtr 2 Qtr 3 Qtr 4 Qtr average % change 2003 165 159 204 213 185.5 13.2 2004 168 168 235 230 200.2 7.9 2005 193 195 245 263 224.0 11.9 2006 213 n/a - - - -

Source: National Bureau of Statistics.

Inflation starts to trend Despite the impact of the drought on manufacturing production and the

downwards ongoing increases in fuel prices, the start of the rainy season appears already to have had an impact on food prices. Having risen steadily in the first five months of the year to peak at 7.7% in May, the year-on-year inflation rate fell to 6.8% in June and to only 5.4% in July.

Inflation (% change, year on year) 2005 2006 (av) Jan Feb Mar Apr May Jun Jul Overall CPI index 4.3 5.4 5.8 6.5 6.9 7.7 6.8 5.4 Food price inflation 5.9 9.1 9.4 10.7 11.2 12.3 9.6 7.0

Source: National Bureau of Statistics.

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Food prices were the key factor behind the fall, with the yearly rate of food price rises declining from 12.3% in May to 9.6% in June and 7% in July. The fall in the index in July also stemmed from a sharp slowdown in the increase in fuel, power and water prices, although transport costs continued to rise steadily.

Agriculture

Boost to coffee and tea According to the director-general of the Tanzania Coffee Board, Leslie Omari,

production the modest increase in world coffee prices has triggered a rise in the country’s coffee production in recent years. This is certainly a factor, although production has also been boosted by producers’ efforts to market brands specifically identified with Tanzania, as shown by the growth in coffee exports to the US under the Kilicafe brand (November 2005, The domestic economy: Agriculture). Provision of key brands for Tanzanian commodities will be enhanced by the recent decision by Café Direct Fairtrade to invest in a new tea factory in Kilolo, in the Iringa district. The factory will buy tea from local co-operatives as well as investing in local infrastructure. It should help to boost Tanzania’s tea production, which recently has been 20,000-25,000 tonnes/year. However, owing to the drought, tea and coffee output look set to decline in 2006. Estimates by the Bank of Tanzania (BoT, the central bank) for the first half of 2006 put tea production down by 25% and coffee production down by 36% on the same period of 2005.

Coffee and tea exports 2001 2002 2003 2004 2005a Coffee Value (US$ m) 57.1 35.2 50.0 49.8 74.3 Volume ('000 tonnes) 48.4 36.4 46.0 38.6 46.1 Tea Value (US$ m) 29.0 29.6 24.7 30.1 25.6 Volume ('000 tonnes) 23.0 24.3 20.8 24.3 21.8 a Provisional. Source: Bank of Tanzania.

New forestry management The management and exploitation of Tanzania’s forestry resources has long

policy been an issue, with widespread concern that the country is being deforested too rapidly by illegal logging. Following the president’s announcement in March of an immediate ban on the cutting of trees and harvesting of timber (June 2006, Economic policy), the government released new guidelines on forestry management in early August. Under the guidelines, district committees are to be set up, chaired by district commissioners. These will approve all licences to harvest logs or wood and produce charcoal. They are also to compile quarterly reports to improve the quality of and access to statistics on logging and deforestation. Monitoring of the cutting and clearing in forest areas will be supervised by district forest officers and village governments. Permits will be needed for the transportation of logs out of districts and regions. Although in theory the guidelines are a positive development, their complex structure is a source of concern, as is corruption within the system. The other main aspects of the forestry strategy are to encourage greater use of non-wood energy

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resources and to boost the replanting of trees. According to government data, 66,182,502 seedlings were planted in 2005, up from 65,558,138 in 2004.

Fishing in Lake Victoria faces While the controversy over the film Darwin’s Nightmare (see The political

challenges scene) raged in Tanzania, the UN Food and Agriculture Organisation’s fishery section, Globefish, produced its annual report on the EU market for Nile perch. It argued that the industry faces a crisis in managing falling stocks. This reflects the high levels of fishing and the ongoing fall in water levels in Lake Victoria (which is clearly observable, but the cause of which remains contentious). Moreover, the fall in Nile perch stocks is occurring against a background of greater global competition. The report warns that the fall in stocks, coupled with rising world fuel prices, is pushing up export costs at a time when other freshwater species, such as pangasius and tilapia, are increasingly competing against Nile perch. Tanzania’s Nile perch exports to the EU fell in 2005. Exports of the species to the EU from the East African Community (EAC), which comprises the three countries bordering the lake (Kenya, Uganda and Tanzania), fell from 56,089 tonnes in 2004 to 52,849 tonnes in 2005.

Nile perch fillet exports to the EU (volume in tonnes; value in € '000) 2001 2002 2003 2004 2005 Volume of exports from EAC 40,586 39,303 45,113 56,089 52,849 Volume of exports from Tanzania 23,063 23,119 26,965 30,813 23,880 Value of exports from EAC 175,163 194,289 169,884 192,434 210,128 Value of exports from Tanzania 99,170 114,235 99,701 99,510 89,723

Source: Globefish.

One of the report’s recommendations is that the industry should make greater use of the fish caught, such as by commercially exploiting the non-filleted part of the fish. Possible options include using the extracts to obtain Omega 3!a sought-after food supplement in some EU markets!or to add more value to the fillets. On a more positive note, the report noted that the decline in Nile perch, an alien species to Lake Victoria and an aggressive predator, was having a beneficial impact in that it was allowing a limited revival in local species such as catfish, mudfish and lungfish.

Financial and other services

A new incentive to list on One new incentive announced in the budget was a reduced tax rate for

the DSE companies listing on the Dar es Salaam Stock Exchange (DSE). Companies that list at least 35% of their capital base on the market will qualify for a 25% corporate tax rate for three years, as opposed to the standard 30%. The next listing on the DSE is to be that of the Tanzania Portland Cement Company (TPCC), which will be listed in late September following the government’s decision to sell off its shareholding in the company. The offer for shares opened in June and closed in July. It has also been announced that the oldest listed equity on the market, Tanzanian Oxygen, will declare its first dividend in 2007, which will be paid in 2008. Having listed in 1998, the company has stumbled from crisis to crisis. However, in 2004 it made a small profit, which was

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re-invested in the company. If its turnaround continues as planned, total profit should continue to grow in the coming years. Finally, following a successful cross-listing on the Ugandan Securities Exchange, Kenyan conglomerate Jubilee Holdings has announced that it also plans to list on the DSE and will continue to expand into Ugandan and Tanzanian markets.

Infrastructure

Slow steps to resolve the One fillip to those dependent on Tanesco for power was the announcement in

power crisis mid-July that temporary generators!two purchased and two hired!had arrived in the country ahead of the September date originally agreed. The generators have a total capacity of 100 mw and should help to stabilise the power situation. In late August the government announced that it had signed an agreement with the Kiwira Coal Power Company to eventually supply the national grid with 200 mw of power (June 2006, The domestic economy: Infrastructure). As expected, the project will be in three phases, with the first phase for 50 mw of power expected to start in July 2007. The second phase of a further 100 mw would start in November 2007, with the third phase of 50 mw starting in 2008. As well as building the plants, connections to the national grid will have to be upgraded. One interesting feature of the agreement is the establishment of an escrow account. The money in this is designated for use only if Tanesco fails to make the payments it is supposed to make to Kiwira. Tanesco’s financial position and the issue of tariffs remain a major problem facing investors in the country’s energy sector.

New link to the Southern It has also been announced that studies of the planned electricity link-up

African grid between Zambia, Tanzania and Kenya have been completed, and that all that is now required is project funding (June 2006, The domestic ec0nomy: Infrastructure). If this can be agreed, the project could start as early as the first half of 2007. It would provide an additional 400 mw of power and is estimated to cost US$650m, of which US$300m would be to strengthen the existing infrastructure. The project will be in three phases, as follows: • the first phase would link the Zambian and Tanzanian grids; • the second would link the Mbeya entry point into Tanzania with Singida in the north; and • the last phase would link the grid into Kenya via Arusha. With the proposed developments to the Southern African electricity grid in the coming decade, the project could provide a very important source of electricity for Tanzania and Kenya. However, the funding of the project could be complicated, as the three countries have different tariff structures. It may be some time, therefore, before the project really moves forward.

Lufthansa to help turn around The government is slowly moving towards resolving the problems at Air

Air Tanzania Tanzania (AT). After discussions between the Tanzanian and South African governments, a deal has been agreed under which South African Airways (SAA) will eventually sell its 49% stake in AT, ending the five-year relationship

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between the two companies, and try to recover some of the investment it has made during that time. Meanwhile, the government has contracted Lufthansa Consulting to examine the options facing AT. Lufthansa is to draw up a plan for the restructuring of the airline, in particular how to improve its cargo operations. It will then be involved in the restructuring exercise and the withdrawal of SAA. Lufthansa Consulting is one of a number of companies set up by major international airlines to provide this sort of consulting service, and it has been relatively successful in turning around Air Madagascar. However, the AT deal has been controversial, with some members of parliament warning of the dangers of continuing to support the airline and of being caught in a situation where the level of funding is sufficient to keep it operating, but insufficient to provide the investment needed to turn it around.

Precision Air buys new planes This move seems to have ended, at least temporarily, efforts by Precision Air to replace SAA as the private-sector investor in AT, which it had been aggressively pushing earlier this year (June 2006, The domestic economy: Infrastructure). Precision Air has announced that it will buy six new aircraft over the next four years, which will double the size of its fleet, with the planes to be delivered in 2008-10. Although the airline remains optimistic about the growth of Tanzania’s air transport market, it has expressed concerns over the difficulty of obtaining qualified local pilots and other skilled workers, which means that, even as a Tanzanian company, it remains heavily dependent on expatriate labour.

Railway privatisation drags on The concessioning of the railways continues to drag on, with negotiations between the government and the Rites consortium apparently taking much longer than initially envisaged (June 2006, The domestic economy: Infrastructure). The original plan was to hand over the operations of the railways in late August or early September, but this is now likely only towards the end of 2006 at the earliest. The infrastructure minister, Basil Mramba, has said that workers should not worry about the delays as the cost of their retrenchment was fully accounted for in the 2006/07 budget. He also said that he could not confirm when train services between Dar es Salaam and Dodoma would resume, but that they would remain suspended for the time being, given the shortages of wagons and engines, and the poor state of the line.

External telephone call costs The US$200m East African Submarine Cable System (EASSy)!a fibre-optic should ultimately fall cable from South Africa to Sudan via a number of waypoints, including Dar es Salaam!is set to go ahead after a three-year gestation period. Stakeholders, including representatives from 15 governments, telecommunications companies, donor agencies and the New Partnership for Africa’s Development (Nepad) secretariat, reached agreement at a meeting in Nairobi, Kenya, in early July on the outstanding issues of ownership and financing. They agreed a 25-year construction and management contract based on an open-access ownership structure using a hybrid special-purpose vehicle to raise the funds and manage the project. The open-access model will allow new entrants to use the infrastructure without paying high entry charges. With a task force in place to push the project forward, work on the 9,900-km cable is due to start in September, pending final detailed negotiations with the

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US firm Alcatel, which was awarded the construction contract. Services are due to start by September 2008 and should bring down international telecoms charges by 50% or more, providing a major boost to the economy and removing a key deterrent to investment. Some funding will come from participating countries and operators but the bulk, perhaps 85% (US$170m), will come from eight development finance institutions, including the World Bank (and the International Finance Corporation), the European Investment Bank, the African Development Bank, and the French, German and South African development banks. Several other donor agencies are providing technical assistance.

Celtel raises funds to expand Meanwhile, Celtel, one of the country’s leading mobile-phone companies,

network announced in late June that it had secured a huge (by Tanzanian standards) US$70m loan from a consortium of eight foreign and local banks (of the total, US$17.5m will be disbursed, with the balance paid in shillings). The local press reported it as the largest private-sector loan taken out in Tanzania (which although potentially plausible, is difficult, if not impossible, to prove). The loan is to be paid back by December 15th 2010 and should allow Celtel to rapidly roll out its mobile network to all parts of the country in coming years.

Port privatisation on hold The government announced in early August that it had suspended its plans to privatise the general cargo terminal at the Dar es Salaam port. The original plan was to privatise the port on a 20-year lease, along with those in Tanga and Mtwara, having invited tenders in April. The general port consists of seven berths of various sizes, plus other facilities including cargo sheds and a grain silo. The government’s intentions remain unclear, but the general view is that it would like to invest in the facilities to improve their attractiveness to concessionaires, although whether this is a sensible strategy remains doubtful. The agreement with International Container Terminal Services, which currently has the concession to run the container terminal, is unaffected by the decision.

Mining

A new major gold mine The Canadian firm Barrick Gold Corporation has announced that it will push ahead with the construction of another major gold mine in the country. It plans to invest US$350m to develop the mine, which is near Kahama town and will be called Buzwagi. The aim is to start pouring from the mine at the end of 2007, although this is an ambitious timetable. The announcement follows discussions since June between the government and gold mining companies about a renegotiation of their contracts. This has long been a controversial issue in Tanzania, owing to perceptions that the contracts are too favourable to the mining firms (June 2006, The domestic economy: Mining). The government set up a special task force to co-ordinate its position so that it could make a series of proposals to the companies. Following its recommendations, a government negotiating team was formed, which is still conducting talks with the firms. The outcome of these has still not been made public, but the talks have progressed to a point which seems to satisfy both sides and has meant that Barrick Gold is keen to push ahead with the new investment, although it still needs final government approval.

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Clashes continue with Barrick Gold has become involved in a minor controversy over clashes

artisanal miners between its security guards and small-scale miners. The latest incident, in June, involved the shooting of a young man by a company security guard. According to a campaign group, the Lawyers’ Environmental Action Team (LEAT), this brings the number of deaths since July 2005 to six. Mining firms have a history of disputes with villagers and artisanal miners, which stems from conflict over the need to move villagers off mine sites and the fact that artisanal miners, who used to mine the areas, feel aggrieved that they can no longer do so and have not received compensation. In a bid to reduce such conflicts, the government has announced that it will re-survey all mining areas, which it hopes will provide a far clearer demarcation of the boundaries for primary licence holders.

No sign of the Mboma The fact that relations between the large mining firms and small-scale informal Commission report miners remain difficult may well explain why the government is still sitting on the Mboma Commission report, nearly four years after the commission was set up to look at the tanzanite mining industry in the country, which has also been plagued by the type of incidents that are an issue for Barrick Gold. Since the 2005 elections, officials within the ministry have indicated that the report could be published soon, but no date has been given. The most recent announcement by the ministry’s spokesman, Peter Kafuma, noted that, given the ministry’s wide agenda and the difficult negotiations under way with the gold mining companies, the publication of the report was not a priority.

Ophir to step up oil The Tanzanian Petroleum Development Corporation (TPDC) has announced

prospecting that South African firm Ophir Energy has been granted additional exploration rights for its Mafia Island block. The firm plans to invest US$10m-20m in further seismic surveys, which would allow it to start drilling in 2008. The announcement further demonstrates Ophir’s interest in Tanzania, following its production-sharing agreement with the TPDC on Block 1 on the maritime border with Mozambique (February 2006, The domestic economy: oil and gas).

Foreign trade and payments

The 2005 current-account Current-account figures in the monetary policy statement from the Bank of

deficit was significant Tanzania (BoT, the central bank), put the deficit in 2005 slightly above the provisional estimates in previous BoT publications. The BoT now estimates the current-account deficit at US$605.8m, up from its earlier estimate of US$558m (June 2006, Foreign trade and payments). This compares with a deficit of only US$246.5m in 2004. The 2005 figures are still provisional and could be revised further. The main difference in the new data is that, although exports are higher, the income deficit is much wider. As well as the sharp rise in the current- account deficit, another worrying aspect of the BoT data is that inflows of foreign direct investment (FDI) fell in 2005 to only US$325m, from US$469.9m in 2004 and US$526.8m in 2003. The decline stems partly from a slowdown in the privatisation process, but it also probably indicates that new investment into the mining sector has slowed, although this should pick up a bit in 2006 with the investment by De Beers in the Williamson diamond mine and Barrick Gold’s recently announced plans to push ahead with the Buzwagi mine.

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World Bank debt relief is As expected, on July 1st 2006 the World Bank announced the scale of its debt

announced write-offs under the first stage of the Multilateral Debt Relief Initiative (MDRI) announced at the G8 summit in July 2005. The announcement follows those by the IMF and the African Development Bank (AfDB) earlier in the year (February 2006 and June 2006, Foreign trade and payments). The write-off by the World Bank is clearly the most important, given the scale of its lending to Tanzania (and Sub-Saharan Africa in general). For example, the IMF’s 100% debt relief amounted to only US$2.5bn for the 13 African countries that benefited, US$336m in the case of Tanzania. However, for the 15 African countries that will benefit from the World Bank’s debt write-off, the total stock to be cancelled is US$32.7bn!including the relief already granted under the heavily indebted poor countries (HIPC) initiative but not fully disbursed! of which Tanzania will benefit by almost US$4bn. Using the latest data available from the World Bank’s Global Development Finance, this represents 51% of the country’s outstanding debt stock as at end-2004.

World Bank debt relief to African countries (US$ m, as at July 1st 2006) Total debt World Bank stock at Total IDA debt relief as Country end-2004 debt reliefa HIPC relief MDRI relief % of stock Benin 1,916 814 124 690 42.5 Burkina Faso 1,967 1,154 420 734 58.7 Cameroon 8,557 1,133 266 867 13.2 Ethiopia 6,574 3,616 1,278 2,337 55.0 Ghana 7,035 4,429 1,446 2,983 63.0 Madagascar 3,642 2,213 444 1,768 60.8 Mali 3,316 1,553 292 1,262 46.8 Mauritania 2,297 721 173 548 31.4 Mozambique 4,615 2,361 1,055 1,306 51.2 Niger 1,950 1,156 409 748 59.3 Rwanda 1,656 1,056 709 347 63.8 Senegal 3,938 2,018 164 1,854 51.2 Tanzania 7,799 3,961 1,157 2,804 50.8 Uganda 4,822 3,764 984 2,780 78.1 Zambia 6,257 2,760 885 1,875 44.1 Total 66,341 32,709 9,806 22,903 51.3b a Most lending to Sub-Saharan Africa by the World Bank is through its soft loans arm, the International Development Association (IDA). b Average. Sources: World Bank, MDRI Fact Sheet and Global Development Finance 2006.

Funding is still a major issue Although the recent write-offs are welcome, they will not radically improve Tanzania’s debt profile, over which serious concerns remain. The most pressing of these is that, while the write-offs have eased the country’s ability to repay its existing debt, the government still estimates that it will require substantial sums of new finance to meet the goals outlined in its MKUKUTA strategy to increase growth and reduce poverty and also the UN’s Millennium Development Goals. As the government notes in the MKUKUTA document, the financing gap is large!even under relatively optimistic assumptions!and is unlikely to be fully met by projected resource inflows. The government still relies heavily on the assumption that donors will honour their promises, made at Monterrey and at

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other meetings, to raise levels of resource disbursement, especially in the later years of the strategy. The Economist Intelligence Unit believes that this is unlikely to be the case and that, even if aid flows do increase, Tanzania will have to continue to borrow heavily in the coming years, which will push its debt stock back up, although it will remain substantially below its end-2005 level of US$8bn. Although some of the funding will continue to be supplied by the World Bank and more traditional partners, it will be interesting to see how much of it comes from less traditional sources. Already some African states which have benefited from debt write-offs have obtained sovereign debt ratings, under a programme sponsored by the UN Development Programme (UNDP) and the US State Department, and this could allow governments eventually to raise funds from the private sector, for example through a sovereign bond issue. In addition, commercial banks are looking at lending to African countries, and new lenders, such as China and the Gulf states, may help to finance projects.

The SADC/Comesa dilemma At the annual heads of state summit meeting of the Southern African

continues Development Community (SADC) in Lesotho in mid-August, leaders of the trade bloc reaffirmed their commitment to creating a free-trade area by 2008 and a customs union by 2010 (although many economists think that even this is a very optimistic timetable), as well as signing a trade and investment protocol document. This latter point will prove potentially problematic for Tanzania; as noted by its foreign minister, Asha-Rose Migiro, under World Trade Organisation regulations, a country should not belong to two customs unions. As well as the SADC, Tanzania is also a member of the East African Community (EAC), which has put in place a legislative assembly, a customs union and a regional court of justice and is currently fast-tracking a federation. The situation is further complicated by the fact that there are influential voices within Tanzania who would like the country to leave the SADC and rejoin the Common Market for Eastern and Southern Africa (Comesa), which it left in 2001. In particular, the private sector, led by the Tanzania Chamber of Commerce, Industry and Agriculture and the Tanzania Private Sector Foundation, argues that the country would be better off in Comesa (November 2005, Foreign trade and payments). The government, meanwhile, seems unlikely to be rushed into making a decision. At present, dual membership of EAC and SADC does not entail any conflict of interest, especially as the decision has major political dimensions which could upset important trade partners and political allies.

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