Tanzania opens up capital account to ease trade

Nairobi: Tanzania has opened up its capital account to enable its citizens to invest in East African markets as the bloc enters the Common Market protocol this week. This significant policy move, which was part of the member states’ obligation under the EAC Common Market Protocol to allow free movement of capital, is expected to benefit Tanzania and boost capital flows within the region. It will allow Tanzania retail investors, insurance companies and pension funds to fully take part in the ongoing $188 million KCB rights issue.

Soon, investors in other member states will also be able to buy into Barrick Gold’s initial public share offering.

Bank of Tanzanian economic policy director Joseph Massawe told The EastAfrican that the procedures are ready and will be used under the EAC protocol only. “We’ll set the timeline to remove all obstacles in the next two years,” Dr Massawe said.

By allowing free movement of capital, Tanzania will join a popular trend that could in the next few years transform EAC stock exchanges. It will also spark a major shift in asset allocation in Rwanda, Uganda and Tanzania, where pension funds are overweight in government debt and real estate investment, forcing asset managers to embrace a wider selection of regionally quoted shares to boost returns.

This trend will accelerate as EAC heads to a Monetary Union by 2015, which will remove currency risk in regional capital flows and trade.

The Dar es Salaam Stock Exchange chief executive officer, Gabriel Kitua, said lifting of the capital account restriction would increase equity demands from Kenya, Uganda and Rwanda. “It will increase Tanzanians’ investing exposure to the member states’ bourses, hence amplify participation,” said Mr Kitua.

Tanzanians grumbled three years ago when they were blocked from investing in the high profile Safaricom IPO, a decision that allowed Ugandan and Rwandan pension funds and investors to diversify their investments and seek exposure to Kenya’s booming and highly profitable telecoms market. Today, the National Social Security Funds of Uganda and Rwanda are the fourth and eighth largest investors in Safaricom.

For some time now, the country was hesitant to fully open up the capital account fearing capital flight, which would precipitate a currency and a banking crisis that would hurt its economy.

Under the new procedures, Tanzanians will be free to invest in any country.

A capital account tracks the movement of funds for investments and loans into and out of a country. It is a component of the balance of payments accounting. Currently, the capital account is not fully liberalised.

Finance and Economic Affairs Minister Mustafa Mkulo told the International Monetary Fund in May that a tentative plan for timing and sequencing of capital account liberalisation was included in the EAC Common 

Market Protocol, which was signed by the Heads of State on November 20, 2009. "The removal of restrictions shall be progressive in accordance with the schedule on Free Movement of Capital specified as an annex to the Common Market Protocol,” Mr Mkulo said.

Among the restrictions that the government intends to eliminate by 2012 are those on the issuance of foreign 

debt by the state, and outward direct investments by residents.

The Common Market protocol requires countries within the EAC that have not liberalised their capital markets to do so by 2012 and by 2015 for global capital movements.

Tanzania and Burundi were yet to do so. Capital controls can include prohibitions against some or all cash movements outside a country. While usually aimed at the financial sector, controls can affect ordinary citizens. For example, in the 1960s, British families were restricted from taking more than £50 with them out of the country for foreign holidays.

Lifting of capital account barriers will help the DSE undertake IPOs of any size, as it will now target the EAC bloc.

The central bank has said that Tanzanians have no reason to fear capital flight as this has not happened in neighbouring countries that are already liberalised — like Kenya and Uganda.

“While this has been BoT’s major fear, Uganda, whose foreign account is 100 per cent open, have so far been spared from capital flight,” the analysts noted.

Among the restrictions that the Government intends to eliminate by 2012 include the issuance of foreign debt by the state, and outward direct investments by residents. The Common Market protocol requires countries, within the EAC region, which have not liberalised their capital markets to do so by 2012 and by 2015 for global capital movements. Tanzania and Burundi were yet to do so