Mining in Tanzania
Team Leader: Marko Gombac
Analysts: Nathan Leili, Jeyasri Pakeerathan, Cynthia Yi, Trevor Zaple
The United Republic of Tanzania is located in east-African, bordered by eight countries and the Indian ocean. Gaining independence from the United Kingdom in 1961, the current geographic form of the country was established in 1964. The country went through a period of increasingly socialist policies through the 1970s and 1980s, which saw much of the nation’s industry and financial sector nationalized. Following the amendment of the constitution in 1992, a multiparty system was introduced and liberalization began taking place. Home to 55 million people and one of the top ten African countries in terms of nominal GDP, Tanzania shares the same potential for a bright future as many other nations on the continent, but has its own set of unique and traditional problems that currently serve as roadblocks to long term economic success.
Current Political Situation
Tanzania is a unitary republic with a multiparty electoral system. Due to the infancy of the democratic system, the institutionally weak parties and political structure lack strong ideological support. This has resulted in poor development of a robust civil society. The current ruling party, Chama cha Mapinduzi (the Revolutionary party), has set out a path of liberalization and pro-market initiatives in an effort to distance itself from its socialist past. The current president, John Magulfi, is both the head of state and government, and has successfully boosted the economy and embarked on an anti-corruption campaign. Though corruption is still a major factor in the bureaucracy of the state, other political indicators common amongst other developing countries, like a politically intrusive military, are a lesser factor in Tanzania.
One potent domestic risk affecting political stability in Tanzania is the threat of terrorism from the Somali-based Al-Shaabab Islamic militant group. Though the group is mainly active in Kenya and Ethiopia, attacks on embassies and sporadic small scale incidents are frequent. A larger threat lies in the long lasting war in the neighboring Democratic Republic of Congo (DRC) as well as destabilizing political situations in other countries in the region. This is a good indicator for the ease of doing business in Tanzania, but as is the case with many countries in Africa, the nation’s current stability hinges on regional politics.
Tanzania currently has troops deployed in peace keeping operations in the DRC, Liberia, and South Sudan. This fact has both positive and negative externalities. On one hand, it elevates Tanzania’s profile in the region as a stable and model country, concerned with the well being of its neighbors. This elevates their stature and power in regional bodies like the East African Economic Community and the African Union, a vital resources for a growing economy in Africa. On the other hand, it involves Tanzania intimately in the affairs of its neighbors, which could result in domestic backlash and unrest if any of these operations fail or falter. Similarly, this involvement has made Tanzania a beacon for refugee flows. Though it is not a disadvantage to be seen as a safe haven (since you can absorb skilled elements of the refugee population), it can overload the fledgling infrastructure and economic capacity, leading to domestic strife. A solution to the settlement and resettlement of these refugees is vital to ensure Tanzania’s continuing stability.
Economic Size-Up
The HDI index for Tanzania is 0.531, placing them 151st in the world overall. 28.2% of the population counts as below the poverty line in terms of national standards; however, it is estimated that 68% of the population lives below the $1.25 per day global poverty line. The overall economic situation is one of poverty, albeit a slowly alleviating form of poverty. Despite strong growth and development goal accomplishments, the specter of rural hunger persists and the Global Hunger Index ranks the situation of malnutrition as “alarming.”
Industries driving GDP growth are construction, services, and basic manufacturing; however, 25% of the economy is agriculture-based, which accounts for 85% of national exports and employs 65% of the population. This sector is hampered by “inadequate infrastructure investment; limited access to farm inputs, extension services, and credit; limited technology…and heavy dependence on rain-fed agriculture and natural resources.” An important consideration for foreign investors is that, “All land in Tanzania is owned by the government, which can lease land for up to 99 years.”
Mining Industry Overview
Gold not only dominates the mining sector, it also tops Tanzania’s export list by a wide margin, representing 21% of all exports. As the worlds 4th largest gold producer, Tanzania’s economy is exposed to fluctuations in the price of the gold, and to a lesser degree copper. However, increased political instability in the developed world over the last few years have seen an increased demand in gold as a secure investment source. Increasing dependency on gold as a secure asset in the portfolios of investors in developed countries increases the desire for entry into the Tanzanian market by North American and European mining companies. With large and unwieldy infrastructure projects at the top of the list, it is no wonder that the largest foreign investors are wealthy nation states like UK, India, and China.
A further implication of the country’s heavy dependence on mining is the willingness of the government to intervene and correct what it sees as market imperfections, as well as intervening and preventing free market operations to deal with domestic corruption issues. For example, over the past year the Tanzanian government moved to temporarily ban gold and copper exports due to taxation violations by domestic and foreign participants. This impacted large mining operations of heavy-weights Barrick Gold and AngloGold Ashanti who have large mines in North Mara and Geita respectively. Though these experienced companies won’t be displaced by limited term restrictions, any move by the government to increase bureaucratic encroachment can cause more risk averse actors to leave.
The situation in Tanzania can be considered as a case study that many resource rich developing nations face. Over-reliance on one resource, developing but still weak political institutions, and a host of diverse domestic and foreign destabilizing factors like corruption and local conflicts make Tanzania a perfect proxy for showcasing the benefits of political risk analysis for evaluating investment decisions.
