Wednesday, August 17, 2011

Gold to boost FDIs to Tanzania, survey establishes

By Polycarp Machira
The Citizen Reporter
Dar es Salaam. Tanzania’s gold reserves will continue to be a magnet for investors in the medium term, placing the country among those with high prospects for attracting more foreign direct investment (FDIs) over the next five years, a new report reveals.According to Ernst & Young 2011 African Attractiveness Survey released this month, higher FDI prospects for the country emanate from the rising price of gold, which has increased by 75 per cent over the last three years.

Except for Burundi, all members of the East African Community (EAC) are in the survey’s list of 17 African economies likely to offer appealing FDI opportunities in the next five years. Apart from Kenya, Uganda and Rwanda, Ernst & Young also earmarks other promising FDI destinations in Africa  Zambia, Tunisia, South Africa, Senegal, and Nigeria. The list also includes Mozambique, Morocco, Mauritius, Ghana, Ethiopia, Egypt, DRCongo and Angola.

“Driven by the rising price of gold that has increased 75 per cent over the last three years, Tanzania’s gold reserves will continue to attract investor interest over the medium term,” the survey notes. It also says that although the risks in investing in Africa may appear high, the risks involved are manageable, and the rewards appealing.
The report notes that Tanzania’s relatively well-educated labour force, coupled with political stability and the government’s sound macroeconomic management of the economy, will add to the country’s attractiveness. However, it cautions that the relatively small domestic market, poor infrastructure network and high levels of bureaucracy are a barrier to further investment in the non-mineral sector of the economy.

Estimates of gold reserves in the country are said to be over 30 million ounces, with only a small part of it currently being mined. Meanwhile, the country’s official gold exports rose in value from $121 million in 2000 to $890 million in 2007, and $1,076.1 million in 2009.According to the Central Bank’s May monthly economic review (MER), gold exports fetched $1,626.4 million in the year ending last April, compared to $1,424.1 million during the same period in 2010. Total investments in the country’s gold mines amounted to $2.5 billion during 1997 - 2007.

Bank of Tanzania (BoT) reports show that the price of gold, which is currently over $1,600 per troy ounce, was on average fetching $1,370 and $1,391 in November and December last year, respectively. The average price of the precious metal in January this year was $1,356, and rose to $1,373, $1,424 and $1,480 in February, March and April, respectively.
“The results of our first Africa attractiveness survey highlight what over 500 business leaders had to say about Africa's growth story, the latest foreign direct investment (FDI) trends and the region’s growth potential,” Ernst & Young notes in the report.

“FDI flows have increased strongly in the past decade, investor perceptions of Africa are ever improving and the outlook is positive, with capital inflows forecast to reach $150 billion by 2015,” it adds.A United Nations Conference on Trade and Development (Unctad) report released in Dar es Salaam on Tuesday also paints a bright future for the country’s economy. It says that although there has been a decline of FDI inflows in Africa since the global economic recovery, Tanzania managed to record an 8.5 per cent FDI increase in 2010.
The World Investment Report (WIR) 2011 shows that the inflow of FDIs to Tanzania increased from $645 million in 2009 to $700 million in 2010. That makes the country second in attracting FDIs in the East African region after Uganda, whose inflows increased from $816million to $846 million during the same period.

Apart from contributing to expansion of the national economy, FDI inflows have also contributed immensely in creating jobs and helping the country to increase its foreign exchange income.
Economist Honest Ngowi of Mzumbe University argues that although FDIs are still inadequate in Tanzania, they play and have the potential to play a substantial positive role in the development of the country. Neighbouring Kenya experienced FDIs decline from $141 million to $133 million over the two years. The director of investment promotion and acting executive director of Tanzania Investment Centre (TIC), Mr Raymond Mbilinyi, associated the increase in FDIs to growing confidence of transnational corporations in the national economy.

Apart from gold, Tanzania is also endowed with other minerals like the rare Tanzanite, diamonds and the most recently discovered uranium. It is believed that already developed treasure does not exceed ten per cent of the raw minerals which the sector possesses, making mining a leading player of the national economy. However, despite being one of the fastest growing sectors, mining is yet to meaningfully contribute to the country’s development.
There is much criticism over how the proceeds from the country’s abundant minerals are being shared.
Retired judge Mark Bomani, who chaired the 2007 Presidential Mining Review Committee, noted that “the potential of mining in the country is very huge, the government only needs to put in place good policies to ensure the public benefits” from it.

According to him, despite the presence of large amounts of mineral reserves, the sector’s contribution to the national economy, and community development, is below the citizens’ expectations.Prof Samwel Wangwe, executive director, Research and Poverty Alleviation (Repoa) has noted that the government’s effort in putting in place policies that encourage more investment would soon bear fruit.
He says that FDIs always go to places with abundant natural resources--like Tanzania.  The Repoa chief has challenged the government to ensure the economy, and Tanzanians in general, benefits from FDI inflows through optimal taxation and creation of backward and forward linkages between the investments and other productive activities in the country.

According to him, Tanzania stands to lure more investors not only in the mining industry, but also in other sectors due to continued improvements in the domestic investment climate.
“With improved policies, more investors will definitely come to invest in Tanzania than any other East African country; there is just need to work on other factors that could still hinder more investments,” he said. According to the WIR, increased regional integration will be a decisive factor in attracting FDIs.
Citing the EAC, the report says such regional economic blocs are vital for their collective market sizes, but they need to work to standardise and improve laws governing businesses, remove tariff barriers, enable the free flow of skills and encourage intra- and extra-regional trade as additional incentives to investment flow.

The report notes that the block is a compelling and accessible marketplace. Kenya is singled out in the WIR as the most developed economy in region.  The Kenyan market has a relatively well-educated and rapidly growing labour force, and it is mostly often used as a hub by multinationals looking to develop East African markets.

“However, its relative lack of natural resources may make it increasingly hard for it to compete with its neighbours, and it’s still a small domestic market; immature infrastructure and high levels of bureaucracy are barriers to investment that need to be addressed.” reads the report in part.

On Uganda,  WIR notes that the country’s vast mineral resources and the recent discovery of oil are likely to attract significant amounts of investment over the medium term. The country’s relatively well-educated labour force, low levels of bureaucracy and diversified economy are also likely to attract funds into the labour-intensive service sector.
Offsetting these positive factors in Uganda are the country’s poor infrastructure network and small domestic market. In addition, following the recent disputed presidential election, Uganda’s political risk factors need to be taken into account, notes WIR.

“Relative to its African counterparts, Rwanda’s resource endowment is poor; the country has no significant natural resource, and its labour force is small and poorly educated. But offsetting these negatives is Rwanda’s institutional environment. The Government has actively tackled corruption in recent years, and the business environment is extremely friendly. Significant investment has been made to improve infrastructure,” WIR noted. It also further shows that Africa currently attracts less than five percent of global FDI projects, which, however, does not reflect the increasing attractiveness of the continent and growth story.

Although Africa’s proportion of global FDI has grown to some extent over the last decade, it does not accurately reflect a region that has one of the fastest economic growth rates and highest returns on investment in the world, says the Ernst & Young report.
It further shows that capital investment from emerging market investors grew particularly strongly, with high concentration in the extractive and manufacturing sectors.While investors from developed markets are relatively more cautious about Africa, the study says they still represent the largest proportional investment, and are investing in a diverse range of sectors beyond resources.

A key difference appears to be that emerging market investors regard Africa as critical to sustaining their own growth, whereas developed market investors see it as a potential future market that still needs to develop.  Commenting on the African FDI scenario, Leslie Rance, general manager of British American Tobacco’s East Africa markets noted: “The question is not whether you should be doing business in Africa but rather how”

Mr Christo Wiese, chairman of Shoprite/Pepkor believes that there is a perception gap in relation to Africa. According to him, people don’t appreciate the sheer scale of the region, which has nearly double the number of cities with populations of over a million more people than the US.

He argues that African landmass could incorporate the whole of the US, China, India, and still have room for Argentina. Importantly, he observed that Africa currently holds 60 per cent of the world’s total uncultivated arable land, and has two of the world’s largest rivers.“I don’t think we are getting our fair slice of the investment cake. I think this is driven by this perception gap,” he said, adding that there is still too little understanding in Africa of what we need to do to make it easier for the money out there to come in.

The general recommendation of the interviewed executives by Ernst & Young is for African countries that are relatively successful in attracting FDI to identify their prospective investors and their own selling points, and remain proactive in marketing themselves.

The African growth story and the critical role of FDI in continent’s development

By Ernst & Young
It's time for Africa. While Africa’s challenges are well documented, there is an increasing recognition that the continent is on an upward trajectory; economically, politically and socially.
The African growth story is underpinned by a longer-term process of economic and regulatory reform that has occurred across much of the continent since the end of the Cold War; a period during which inflation has been brought under control, foreign debt and budget deficits reduced, state-owned enterprises privatized, regulatory and legal systems strengthened, and many African economies opened up to international trade and investment.

Widespread reform has resulted in an ever improving business environment, and this, together with other factors, such as the commodities boom and increasing infrastructure investment, has contributed to a doubling of economic output over the past decade.

During this period, a number of African economies have recorded impressive growth rates.
For example, six African economies were among the 10 fastest growing economies in the world in the period 2001-10, according to The Economist. African economies proved resilient through the global financial crisis, with the sub-Saharan region, for example, rebounding very strongly from a slight dip in 2009 to grow, according to the International
Monetary Fund (IMF) forecasts, by five per cent in 2010, 5.5 per cent in 2011 and six per cent in 2012.

A major road in Kigoma Region. FDI is also a critical source of longer-term capital for reinvestment in infrastructure development. photo I File
In addition to fundamental economic and regulatory reforms, there have also been significant advancements in human development and governance indicators, with the MoIbrahim Index of African Governance, for example, showing steady progress. African society is also becoming wealthier with greater spending power.A growing middle class, together with technological and communications advancements, is also giving rise to an increasingly active civil society that is demanding a participatory voice and accountability from its politicians.

Population growth is resulting in a flood of new entrants into the labour market, increasing social pressures but also founding the base for a new consumer market.Even more crucially, while Africa’s rich endowment in natural resources has played an important role in its economic development, many economies are diversifying away from an overdependence on extractive industries.

We believe that foreign direct investment (FDI) can play a critical role in helping to accelerate and sustain growth and development across the continent. Besides being a critical source of longer-term capital for reinvestment in infrastructure and other developmental initiatives, FDI also provides a positive ripple effect in terms of job creation, development of local suppliers, economic diversification as well as skills, technology and knowledge transfe

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