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China’s economic engagement in Tanzania acquiring strategic depth

2016-11-29 12:59:16

By Paul Kibuuka

"Long-standing value in key sectors of the Tanzanian economy still obvious to Chinese investors, entrepreneurs with great financial muscle", Paul Kibuuka, Managing Partner, Isidora & Company Advocates

Dar es Salaam. China's appetite for overseas mineral and energy assets, especially in resource-rich Tanzania and other African countries, is widely recounted, given the east Asian country’s need to further boost its rapid growth path and support its population of 1.4 billion people.

Although some ancient historical accounts point to evidence of early trade dealings between China and Tanzania during the time of the Ming dynasty when China’s greatest adventurer, the 15th century admiral, Zheng He, reached the coast of Tanganyika (as it was then known) and the coastal archipelago of Zanzibar, political and diplomatic relations grew mostly during the 1961-89 socialist era, and then transitioned to the IMF-World Bank models of the past 27 years, characterized by economic reforms, political vagaries and globalization.

Evidently, with the $7.6bn (Sh16tr) concessional loan to Tanzania just approved this July by China Exim Bank, Beijing’s major official lender, for building a major standard gauge railway line, the Sino-Tanzania relationship is acquiring truly strategic depth.

To appreciate this we need note that an unprecedented China-Africa business forum comprising 300 delegates was hosted in Dar es Salaam in 2008.

And over the next five years, Chinese Minister of Commerce Chen Deming and President Xi Jinping arrived on high-profile visits to Tanzania, respectively in 2010 and 2013, further confirming Beijing’s intention to deepen its relationship with the east African country.More recently, when the Chinese ambassador to Tanzania, Dr. Lu Youqing, wrote in the local press, he reaffirmed Beijing’s support to encourage its entrepreneurs to trade with or invest in Tanzania.

The flourishing relationship makes perfect sense in that China is the world’s second biggest economy aligning itself with one of Africa’s 6 fastest developing economies – according to a 2010 McKinsey report, “Lions on the move: The progress and potential of African economies”.

Whereas Tanzania needs the Chinese market for its minerals and manufactured goods as well as support for its development (through infrastructure expansion, aid, investment and trade), China’s main strategic interests in Tanzania embrace market access for Chinese exports and access to natural resources, especially coal, iron-ore, and natural gas.

In any relationship, issues and challenges subsist. Chinese investments are drawing scrutiny and a number of public perception issues have to be tackled, although China has stepped up efforts to provide more aid and nurture long-term viability of its relationship with Tanzania.

Simultaneously, Tanzania’s new fifth-phase government under President Dr. John Magufuli is trying to address corruption, deficiencies in law enforcement, and infrastructure barriers and bottlenecks with the aim of winning the confidence of new investors.

Data from Beijing’s Ministry of Commerce (Mofcom) shows that Chinese foreign direct investment (FDI) inflows soared to $2.1bn in 2013 from $700m in 2011.

Taken together with recent deals inked between the two countries, China could, thus, be the largest foreign investor in Tanzania.

Mineral resources, hydro-carbons, real estate and infrastructure (roads, railways, ports, wind power and gas pipelines) have traditionally attracted by far the most Chinese FDI inflows.

Big investment deals such as the $10bn port of Bagamoyo, the $7.6bn standard gauge railway, and the $1.2bn natural gas pipeline loans to Tanzania from China’s state-owned Exim Bank have made bigger headlines globally.

There is a view held by some analysts that Chinese entities’ entry into Tanzania’s infrastructure sector is helping cut the cost of investment and may contribute to the country’s industrialization.

However, in the short-run, this is without much significance as Chinese investments in the Tanzanian manufacturing sector are being hampered by China’s economic turmoil.

Other big investment deals by Chinese entities in Tanzania include ZTE’s $300m loan in financing telecom projects; CRJE’s $136m construction and funding pact for the Nyerere Bridge; China Poly Group Corporation’s $700m residential and commercial property deal with the National Housing Corporation (NHC); and China Sichuan Hongda Co.’s $3bn deal with the National Development Corporation (NDC) for coal and iron-ore mining in Tanzania.

It is worth noting that with a major show of interest in Tanzania’s mineral deposits by Chinese firms between 2005 and 2011, 2015 was anticipated to be a turning point for the Tanzanian mining and mineral sector.

Several developments occurring midway through the year, for instance, the slowdown in China’s growth, nevertheless, impacted international demand and production dashing that hope.

While data on how far Tanzania’s mining and mineral sector was hit by the developments in China is hard to come by, news reports quoting China’s Customs administration say that between January and June 2015, African imports to China – Asia’s largest economy – dropped by 43%. Iron ore fell by 40% from $67.39 per dry metric ton in January 2015 to $40.60 in December 2015, according to a recent Absa Capital briefing.

Despite the drop off in economic activity, the future outlook for Chinese FDI inflows into Tanzania’s minerals, hydro-carbons, real estate and infrastructure, and manufacturing sectors is positive.

The sheer size of China’s economy means that China will continually seek market opportunities for its exports; and investment opportunities to utilize its capital by, say, sourcing minerals in Tanzania.

This China need – and the need by Tanzania for Chinese expertise and FDI inflows – will sustain Chinese investors’ involvement in Tanzania for years to come.

Chinese entities must, however, take seriously the social responsibilities of the rural and urban Tanzanian communities in which they operate and sincerely offer to train vastly skilled Tanzanian managers and executives; and in turn, recruit them for China operations in Tanzania.

By working in this manner to build Tanzania’s future infrastructure and economic base, many will agree that China and Tanzania will cultivate an even deeper significance for their relationship.

Paul Kibuuka is the Managing Partner of Isidora & Company Advocates. Email: paul.kibuuka@isidoralaw.co.tz Twitter: @isidoralaw

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