VZCZCXRO7270
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHDR #0836/01 3380610
ZNR UUUUU ZZH
R 040610Z DEC 09
FM AMEMBASSY DAR ES SALAAM
TO RUEHC/SECSTATE WASHDC 9105
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHJB/AMEMBASSY BUJUMBURA 3021
RUEHKM/AMEMBASSY KAMPALA 3558
RUEHLGB/AMEMBASSY KIGALI 1491
RUEHNR/AMEMBASSY NAIROBI 1449
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHLMC/MCC WASHINGTON DC

UNCLAS SECTION 01 OF 03 DAR ES SALAAM 000836 
 
SIPDIS 
 
DEPARTMENT FOR AF/E JTREADWELL, INR JBERNTSEN, FEHRENREICH, AF/EPS 
 
STATE PASS USAID, USTR, USTDA 
COMMERCE FOR ROBERT TELCHIN 
TREASURY FOR REBECCA KLEIN, DAN PETERS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAID PGOV TZ
SUBJECT: BANK OF TANZANIA GOVERNOR REVIEWS TANZANIA'S ECONOMY WITH 
DEPUTY TREASURY SECRETARY WOLIN 
 
DAR ES SAL 00000836  001.2 OF 003 
 
 
¶1. Summary: Bank of Tanzania (BOT) Governor Benno Ndulu reviewed for 
visiting Deputy Treasury Secretary Neal Wolin the state of the 
Tanzanian economy and the Government of Tanzania's (GOT) responses 
to the global financial crisis in a November 2 meeting at the BOT. 
Ndulu described the GOT's rescue plan as focused on safety nets, 
including food security, and support for the most affected sectors 
to prevent spillover to the banks, which had mainly been spared the 
crisis.  Ndulu noted the GOT was seeking private sector involvement 
in infrastructure and agriculture, and was addressing obstacles to a 
more welcoming business environment.  He said Tanzania was moving 
towards lifting capital controls.  Deputy Secretary Wolin lauded the 
GOT's response to the crisis, offered technical assistance in 
several areas, and encouraged Tanzania to make its anti-money 
laundering legislation national in scope.  End Summary. 
 
¶2. Ndulu began by reviewing Tanzania's economic situation prior to 
the financial crisis.  During the first eight years of the decade, 
Tanzania saw 7.1 percent growth, 5-7 percent inflation, revenue 
growth increasing 20 percent annually, from 11 to 16 percent of GDP, 
and expanded spending supported by foreign assistance.  The global 
crisis had reduced projections for 2009 growth from 7.9 percent to 
5-5.5 percent, but Ndulu recounted good signs of resumed growth 
including better than expected tourist arrivals from July to 
September (tourism is Tanzania's main foreign exchange earner). 
Inflation, after peaking at around 14 percent early in 2009, had 
dropped to 12 percent, with the increase driven primarily by food 
prices, which comprise 56 percent of Tanzania's Consumer Price 
Index. 
 
¶3. In the financial system, Ndulu said Tanzania's banks were "mainly 
unscathed" by the crisis, a conclusion shared by a joint mission 
from the IMF/WB, which recently updated Tanzania's Financial Sector 
Assessment Program ("FSAP").  While the proportion of nonperforming 
loans has increased slightly from 6.2 to 7.7 percent, the banks are 
generally very solid with a high liquidity ratio of 37.8 percent. 
This reflects a more conservative approach to providing loans, and 
as of August 2009, annual credit growth was 26 percent, down from 
the 40 percent average over the past three years.  Even the most 
visible damage of the crisis is fairly limited - three small banks 
might require recapitalization, but even if further shocks hit the 
system, recapitalization would cost less than 1 percent of GDP. 
Because of concerns about a buildup of nonperforming loans resulting 
from reduced demand for exports, the GOT's rescue plan focused on 
assisting exporters, especially for commodities like cotton and 
coffee where prices had collapsed, rather than waiting for banks to 
get into trouble. 
 
¶4. Ndulu said the BOT had advised President Kikwete on the 
development and implementation of the rescue plan, which ran to Tsh 
1.7 trillion (USD 1.3 billion).  The first element involved 
providing safety nets, through support for jobs in export sectors 
and food security.  On food security, he commented that a good crop 
in southern Tanzania would have been sufficient to cover shortfalls 
in the north, but exports to Kenya drove up Tanzanian food prices 
and contributed to inflation.  He said that Tanzania should position 
itself as a regional food producer.  The GOT also protected key 
social programs, especially in health.  Second, the GOT looked to 
protect key investments for growth, in particular infrastructure. 
Actions included filling the revenue gap, in part through increased 
domestic financing (1.2 percent last year and 1.6 percent this 
year), and filling the foreign exchange gap with almost USD 340m 
from IMF's Exogenous Shock Facility, USD 240m from the IMF's 
allocation of Special Drawing Rights, and front-loading of World 
Bank disbursements for budget support and an emergency food loan. 
Ndulu acknowledged that front-loading in 2009 had been very useful 
but that, as a result, the GOT would receive less assistance from 
the WB and AfDB in 2010.  The GOT also compensated exporters and 
market agents for losses as a result of the crisis, thus preventing 
spillover to the banks, initiated a guarantee facility that allowed 
banks to extend loan repayments, and provided emergency food 
assistance to food deficit areas.  In addition, the GOT instituted a 
fertilizer subsidy voucher program and extended support for leasing 
agricultural machinery. 
 
¶5. Ndulu explained that prudent macroeconomic policies over the last 
decade had given the GOT the policy space to initiate its robust 
response.  For instance, Ndulu mentioned that Tanzania's latest Debt 
Sustainability Analysis showed that government has significant 
 
DAR ES SAL 00000836  002.2 OF 003 
 
 
"headroom" to expand borrowing.  Additional borrowing of 1 percent 
of GDP per annum for 5 years would enable Tanzania to borrow up to 
USD 1.5 billion while maintaining acceptable debt sustainability. 
 
¶6. Deputy Secretary Wolin commended Ndulu for the GOT's range of 
responses which were usefully protecting banks and maintaining 
assistance to the poor and those most affected by the crisis.  On 
sovereign debt, he suggested that capital markets appear to be 
improving, with lower spreads on bonds for most emerging and 
developing countries.  He offered U.S. technical assistance for 
Tanzania in the process of its bond offering.   More broadly, Deputy 
Secretary Wolin said that U.S. businesses look for the right climate 
on issues such as licensing, taxation and infrastructure. 
 
¶7. In response to Deputy Secretary Wolin's question about Tanzania's 
capital controls, Ndulu replied that there are few controls and no 
inward investment restrictions or limits on profit repatriation.  He 
then qualified that statement by acknowledging that Tanzania 
maintains a limitation on foreign purchase of treasury bills, but is 
moving towards further liberalization.  He justified the restriction 
on short-term government obligations by saying that it is necessary 
to decrease volatility.  He said that the GOT may open its markets 
but limit volatility by stipulating that investors must hold 
securities for at least six months.  He added that the East African 
Community (EAC) had an agreed timetable (through 2015) for removing 
restrictions on Tanzanian citizens' outward investments, which would 
in effect be global because the other EAC members had no controls. 
He acknowledged that the current regime of capital controls is 
imperfect, with foreign investors finding ways to purchase Tanzanian 
securities.  He suggested Tanzania could benefit from technical 
assistance on dealing with volatility in capital flows. Deputy 
Secretary Wolin indicated the U.S. would consider such a request and 
perhaps provide such assistance as part of Treasury's ongoing 
assistance to the BOT. 
 
¶8. Ndulu turned to the issue of involving the private sector in 
infrastructure and agriculture, saying that the GOT now had an 
approved framework for public-private partnerships.  He acknowledged 
that ease of doing business was critical to the success of the 
framework and noted that President Kikwete had personally convened a 
technical group on ease of doing business.  The private sector had 
already identified key ease-of-business issues, including land and 
its disposal, infrastructure, and the transaction costs related to 
registering a business. 
 
¶9. Deputy Bank Governor Enos Bukuku embarked on an extended 
criticism of the Millennium Challenge Compact (MCC) for moving 
slowly and in a bureaucratic fashion and for having eliminated or 
scaled down several projects, including the Mafia island airport. 
He asked for U.S. assistance to encourage private sector investment 
in the rail sector, especially the Central Line, and in development 
of regional data centers to take advantage of the recently arrived 
SEACOM fiber-optic cable.  He said the SEACOM connection to Africa 
had huge potential to improve the Tanzanian communications sector, 
but that Tanzania still needs software to take advantage of it.  He 
noted that Tanzania is working with Microsoft to obtain the 
necessary software.  He also asked for help with the judiciary, 
which needs a digital management system to reduce delays as well as 
additional training.  Deputy Secretary Wolin thanked Bukuku for his 
comments and noted that Tanzania's MCC compact is the largest in the 
world, and while the U.S. understands that there are additional 
projects the Tanzanians would like to pursue, we believe they should 
first focus on making the current compact as successful as possible. 
 He also commented that there are areas in which the Tanzanians 
could move with greater alacrity in moving their projects forward. 
 
¶10. Ndulu made a pitch for information technology assistance to the 
BOT, saying it needs modernization, integration into the Tanzanian 
Interbank Settlement System to do daily settlements, and a national 
switch.  He also requested support in involving the private sector 
in organizational solutions in agriculture, such as outgrower 
schemes in which small growers use the credit of large farmers and 
have guaranteed processing.  These would enable farmers to raise the 
standards and quality of their products and make mechanization more 
feasible.   Ndulu said that this expansion of the value chain had 
worked in the sugar sector and was being expanded to sisal and tea. 
 
¶11. Deputy Secretary Wolin concluded by complimenting Ndulu on 
 
DAR ES SAL 00000836  003.2 OF 003 
 
 
Tanzania's good progress on anti-money laundering (AML), while 
noting that follow-through on Zanzibar was necessary for effective 
AML on a national scale.  He emphasized that a strong regime would 
be important for capital market and banking integration.  Moreover, 
Deputy Secretary Wolin said Tanzania should take seriously the 
recent review by the East and Southern African Anti-Money Laundering 
Group, which should run its course without government involvement. 
 
¶12. Deputy Secretary Wolin has cleared this cable. 
 
LENHARDT