Economy: An Overview of Tanzania by Mohammed Dewji of MeTL Group

Mohammed Dewji, CEO of MeTL Group, gives an overview of the economy of Tanzania and shares his thoughts on the country’s newly elected President: John Magufuli. He also presents MeTL Group, Tanzania’s largest home-grown company.

Interview with Mohammed Dewji, CEO of MeTL Group

Mohammed Dewji, CEO of MeTL Group

You have said that for some years Tanzania was something of an economic backwater, it was and still is a very peaceful and stable nation by Africa’s very volatile standards, yet one held back by the socialist legacy of Julius Nyerere. Tanzania has habitually contrasted with its northern neighbour as being perhaps too bureaucratic, too sclerotic, too state led, compared to Kenya’s more go-go dynamic and entrepreneurial culture. To what extent is that caricature now becoming outdated?

I think you are partly right that we were a socialist country but we all agreed that socialism had its positives and negatives. The positives were that it brought the country together, it created peace and harmony. It killed discrimination: colour, tribal discrimination, gender discrimination, etc. So socialism did help us to bring peace and tranquillity to our country. Economically, we didn’t do very well but then we realised that socialism wasn’t working and we decided to move towards capitalism. If you see the last ten years, we have had tremendous growth, we have been growing at over 7% ; compared to Kenya we are doing far better. If you look at the trajectory of our growth, in the next fifteen to twenty years, if we continue growing at this rate, (I think Kenya is growing at about 5.5%) then we are projected to be the biggest GDP country in Eastern Central Africa. If you look at Tanzania, it has many advantages, firstly it is peaceful but secondly it is a huge country. When you talk about the East African Community, the five or six countries, Tanzania holds 52% of the land, we are talking about a land that is almost a million squared kilometres. We are very lucky to have many ports. We have many land locked countries surrounding us and many of them depend on our ports. When you talk about natural resources, our country has everything, we have gold and cotton, we are big in agriculture and tourism, we have coal, magnesium, and we now have helium, uranium… I make a joke always that the American President has been here, the Chinese President and the Indian President have been here and even Putin would want to come to Tanzania because of the huge uranium mines we will hopefully have! We can talk about tourism: recently I took my kids to Kenya and if you compare the Maasai Mara to the Serengeti, the Maasai Mara is only 5% of the Serengeti. Tourism is now the largest foreign exchange runner in this country. The potential of this country is tremendous. I am very bullish about it. I think the young generation is becoming more capitalistic and less socialist. We still have a little bit of a hangover but I think it is fading away.

The new government has declared its intention to really ramp up the manufacturing and agro-processing sectors both to push the economy up the value chain and to provide jobs for a swelling workforce. Both are sectors that your company is heavily involved with. How vital will improved infrastructure be in accomplishing this? Do you have confidence that the new administration under President John Magufuli can actually really create the right business environment?

I have always been an impact investor, before even the phrase impact investing was out, because I always believed that yes I need to make money and a return but I would choose where I can create more jobs and get a return over where I can just have an easy ride.

I think President Magufuli has a great vision; he is trying to run the country as a business. When you look at a business, you always try to increase revenue and cut expenses. When you say increased revenue, if you look at the tax collections over the last seven or eight months, you will see they have jumped up by 15 or 20%. If you look at our budget of revenue collection, it is 22% higher than last year. He is trying to get as much money as possible. My advice to the government would be to increase the tax base because 500 top companies are paying between 60 to 70% of the total tax in this country. If you look at the whole issue of EFDs and VAT, I would presume there are about 2 million businesses but the amount of EFD machines that are out there are only 100 thousand. The potential is huge to increase the revenue. I think he is doing a tremendous job. The more money, the better power he has to be able to use it for social services such as healthcare, water and education which help the poor. The second good thing which he has done is to cut expenses. There were times when the government was a little undisciplined in terms of spending money. Now when you talk about travelling and seminars he has cut down on them because in a way what he is doing is very right: it is unfair that in a country like Tanzania where you are getting some aid and some budget support, you have your people in government flying first class, while a country that is the donor country has their ambassador flying in economy class. I think it was getting a little bit too much and I think discipline is important and I think he is doing a great job. With that of course, he is making sure that he does development work besides social services, in infrastructure. I think Tanzania has a few challenges, the first is power. Tanzania has hit 55 trillion cubic feet of gas in the south and we have contracted a pipeline of 2 billion dollars that is coming to the commercial capital of Dar es Salaam. The pipeline is built and they have started on the Kinyeresi I power plant and there will be Kinyeresi II, Kinyeresi III, IIII and V. Power has been inconsistent and slightly expensive. Now with the gas line, I think that within twelve to twenty four months, power issues in Tanzania will be history. We are very much on track. Secondly is the matter of infrastructure. I think our President can be congratulated. With the past President Kilwete, they did a tremendous job in terms of building a road network of thousands and thousands of kilometres. As I said, this country is big so it is easy for people to compare us to a smaller country and say that they are doing so much better and they have much better infrastructure, but they don’t realise that our population is so scattered and the country is so huge and that it costs far more money and takes longer to build that infrastructure. Notwithstanding that, I believe the challenge is with rail. I will give you a small example; a company like mine has over 2000 vehicles, why should I have 2000 vehicles? Actually transporting your goods on trucks is far more expensive than rail, rail is the cheapest mode in the world. Our central line that cuts through the country from the east to the west is there but it is a narrow gauge built a very long time ago so today to put up a new standard gauge rail facility would cost 7 or 8 billion dollars which is a lot of money but I think it would be good for the country. We need to go out and borrow money to build that railway because at the end of the day when you build that type of infrastructure the person that you are helping is a poor person, because when you have a country where the per capita income is so low, and every dollar matters… in the food business for example if you can cut down your transport costs by 20% that means that the end consumer is spending 20% less and that 20% becomes disposable income to spend elsewhere to better their lives. I think we have a challenge with rail and I think we have a challenge with the ports. We need to increase efficiency. I read a World Bank report that says that if we increase efficiency in our ports with more berths and we have a dry port, and if we decongest Dar es Salaam by moving our cargo through rail then our GDP would increase by 1.5%. I think if we fix these few things then Tanzania should be growing by 10% a year.

How crucial will it be to clean up the judiciary so that companies have more speedy and dependable recourse to law?

Before I answer the judiciary question, I want to talk a little bit about corruption. As you can see, since President Magufuli has come in, he has taken a very hard line on corruption, he is a no nonsense person. Basically, you don’t mess around, you don’t break the law and this has a good spill over effect into the judiciary. Now, everyone in civil service is disciplined so automatically when that discipline is instilled in the police, the bureaucrats, the ministries and the judiciary, it means there are no delays in judgements, there are fair judgements, etc. I think it is positive.

How much does the future growth of Tanzania depend on the new government’s cordial relations with business? To what extent do you think Magufuli has inherited perhaps some of Nyerere’s suspicion of the private sector? He has for example questioned the deals with foreign mining companies including the London-Listed Acacia Mining which also has a dual listing here and was formerly Barrick Gold Africa, arguing that companies have been allowed to declare years of losses whilst paying their dividends overseas.

Two things, firstly sometimes people twist his words and misconstrue what he says. The other day I was invited to the Confederation of Tanzanian Industries and he was the guest of honour, it was for the President´s Manufacturer of the Year award. Our group of companies got many awards there and he was very clear. He said “listen, I have no issues with wealthy people, I have no issues with the private sector” as a matter of fact he went one step further and said “if you do not grow and if you do not manufacture in my term, then I don’t foresee you doing it in any other time”. I think he knows and understands that the private sector is the engine of growth and that we need each other and we need to partner with each other. He is quite positive about it and quite open. I don’t think he has these leftist tendencies at all. He is smart, he is current and he understands that. Also as far as multinationals go we all know that there have been flows and dividends declared outside in offshore companies, changing of shareholders, people not paying capital gains tax, etc. The bottom line is that the African countries that need the revenues are losing out. A contract is a contract but sometimes you can get into a contract that is a bad contract. I don’t think you can unilaterally just cancel that contract. It is important that you sit with the mining companies and explain to them your position that for example “you have had a concession for so many years and you are showing losses, but at the end of the day, in a crude way, I can see that you are mining, for some reason you are benefiting, if you were not benefiting you would have stopped mining and I am not getting anything from it. Maybe ten years ago, my guys got into a bad deal but let’s correct, and live and let live”. At the end of the day, by them also paying taxes, they will go to social services and alleviate poverty. I think it cannot be a one way thing. Both parties should come and sit down and discuss, and if they need to renegotiate they should.

Although there has undoubtedly been significant growth in recent years, it has not been widely shared, thus part of the plan to tackle that involves quite a dramatic shift in the latest budget away from current capital spending towards roads, rural electrification and power, as well as health and education. Much of this will go straight to GDP leading some economists to predict increased growth as more people in the countryside join the formal economy and productivity improves. Do you have any fear however that these ambitious spending plans could push the country’s budget deficit to unsustainable levels? It is already quite high.

First and foremost, for sure we were a little undisciplined, whatever money we were collecting at the end of the day was being spent in recurrent expenditure and now there is discipline. First of all, we have a bigger pot of money than we used to have; secondly our recurrent expenditure has been cut down and tightly budgeted. Obviously you have to do the math: there is more money flow. You then punch corruption because otherwise there would be holes that money could flow out of. The automatic answer is that this money is going to go into infrastructure. At the end of the day it is going to help this country and the GDP and the people. The government has to be very intelligent. I always say, like in business, I cannot just go out and borrow 50 million dollars to buy a private jet, because I need to know how much money I will get out of it and how much money I will pay back. If you look at our debt to GDP ratios I think it is quite under control. I think the last time I checked it was about 57 or 58% so we still have room in terms of borrowing more money. I think we should as long as we have strong infrastructure projects and we know we will be able to get our money back.

I agree with you that the growth has been there but when you have 6 or 7% growth, it doesn’t come down to the majority so that is why my ambition is for the country to be growing at 10 or 12%. That is when the bottom of the pyramid will feel that money and improvement in their lives.

Do you perceive that there is any risk attached to the government’s bid to raise revenue and to clamp down much more proactively on tax evasion in terms of this perhaps scaring off the private sector investment or even provoking capital flight? Might the temptation be from the government’s perspective to come down too heavily on the private sector, looking at is as a kind of golden goose? We have seen what has happened in tourism recently with VAT.

Whoever is evading taxes is unfair, it is not right, it is unethical, and so if those guys are being clamped down on, I think that is fair game. That is why I am saying that the government should be a little cautious, that they should not only target the big companies but rather expand the tax base. At the end of the day, if a business feels that they are being highly taxed, and they are not getting the return on their capital, then you know this is a global village, capital has no boundaries, if someone thinks they can earn a better return somewhere else, with a lesser risk of course there is going to be capital flight. This is where the government has to be intelligent. They have to see how elastic that particular industry is and how much money they are making and what other options they have.

Before I come to tourism, there was an issue with the VAT on auxiliary services for transit goods; everybody said that was why the ships were not coming to the port and so on and so forth. Yesterday I flew in and I saw that the Tanzania Revenue Authority had done a very good analysis, because everybody was saying that we were losing out to Mombasa port and so on, but we toured these countries and some of the countries mentioned were Rwanda, Burundi and DRC, and they came up with an advertisement that made comparisons and just because Dar es Salaam is of close proximity to these countries, our transport costs are fair less than Mombasa and if you were to add it all up with our VAT, we are still cheaper. So at the end of the day when people have to make their judgement when they look at their costing, they will see that our port is still more competitive. So the government has stood its ground. As far as VAT on tourism is concerned, tourism in Tanzania and tourism in Kenya is very different. Kenyan tourism is competitive tourism; it is more for people who are not spending a lot of money. You go to Tanzanian tourism and it is for ultra-rich people because it is expensive. We don’t have as many beds; we have an amazing tourism in Tanzania. The question of whether that rich man can afford to pay that 18% VAT or not is a secondary issue for me. I wouldn’t know. Of course the government through its technocrats must have done research. Where I do disagree a little bit with the Ministry is that you can’t do things abruptly, you need to sit down and engage with the stakeholders and tell them what you want to do because what has happened is that there have been some repercussions because travel agents had sold out tours and suddenly they had to pay 18% and they can’t go back to the consumers to ask for that etc. I am not saying I am for or against VAT although I think that the government have done their research, and I think there is not going to be a negative effect in the industry, what I would advise is for better engagement so there is no shock.

Under Magufuli, Tanzania has also shown more interest in the East African Community as an emerging tariff free area. With its long coast line and its proximity to numerous landlocked countries, how important a transhipment centre could Tanzania become in terms of using its influence as a transport conduit for an integrating East African trade block?

I think the East African Community has worked very well. We have had many challenges. We started off with Tanzania, Kenya and Uganda, then Rwanda and Burundi joined in and now South Sudan is part of it.

The newest country in the world.

Yes, the newest country and now they are in big trouble again. Initially the whole thought process of goods moving freely was very worrying for Tanzania because if you look at our education system we are very weak and we were socialists whilst Kenyans were capitalists and they had a strong education system. They were far more aggressive than we were so we were always worried that they were going to come in and eat us up. Then we finally agreed to have common external tariffs and that we can trade zero zero but Kenya gives us a five year advantage so Tanzanian goods go in zero, Kenyan goods come in 20,15,10,5 and zero or so and over time it becomes zero. Finally we reached zero and now it is all zero and everything is perfectly fine. What is not working is that countries suddenly come up with their own rules and regulations, that a certain particular product they want to tax, for example Uganda has a list of 180 products while Tanzania and Kenya have to pay a certain tax but Uganda gets an exemption or vice versa. That creates an imbalance. I think the vision of the community has to be zero trade in between the countries and external tariffs have to be harmonised. We have some challenges. Of course there is also political integration single currency. In the past Kenya and Uganda and Rwanda ganged up on us and they created something called the COW, the Coalition of the Willing, as they felt that Tanzania and Burundi were dragging their feet. They wanted integration in labour and land but these are very sensitive subjects because for labour we have unemployment issues and the last thing you want is for Kenyans to come and take your jobs.

That is exactly what is putting the EU under such strain.

Exactly. We were being cautious and then we were worried about giving away our land. Everything else was getting integrated I think, and I think that it is very important for Tanzania, being the biggest country in size and being very strategic as a gateway for Eastern Central Africa. The East African Community is very important for Tanzania.

Promisingly Tanzania has about 55 trillion cubic feet of proven reserves of natural gas; this is enough for it to become a really significant exporter. How challenging will it be for the country to conclude the transparent and robust deals which will be necessary with foreign companies including people like Exxon Mobile, Royal Dutch Shell and others? How do you think Tanzania will be best placed to try to avoid the resource curse that has plagued so many other African states?

I think there has been a very transparent process in exploration and all those big companies have finally found a lot of gas offshore. The last round of tenders were out for further exploration and of course gas and oil prices were down at that time so there was very little interest. Now they have found these reserves they need to bring them onshore. I think Tanzania is expecting a 30 billion dollar investment in terms of two LNG trains to convert this gas into LNG and to be an exporter. Obviously, each company does not have enough gas for it to make it feasible to put up their own LNG train so they are coming together and doing it as one company and one unit which is great for us. Hopefully I believe by 2022 or 2023 we will have this LNG train ready and we will start exporting. Once we start exporting it will be good because we will have more foreign exchange, because sometimes there is a little bit of strain and a negative balance of payment so year on year we devalue about 7 to 8 or 9% which we budget in unlike other countries, who are highly dependent on oil like Angola and Nigeria who have taken a big hit. If you look at last year, major African countries took a big hit in their currencies and the dollar was getting stronger, that is why foreign exchange is good for the country. I think the whole process is very transparent and investors should not be worried in terms of coming and putting their money in this country because it is very safe, politically stable, we have never had any wars, we don’t have tribal issues, we speak one language so it is a perfect destination for FDI.

Lastly, as part of the efforts to support President Magufuli´s industrialisation plans, you have personally pledged to create 100,000 new jobs within the next four years. This is quite a vote of confidence. We take it then that you have huge faith in the potential of Tanzania and its people.

Yes of course, because if you look at the growth of the country and our growth, we were a mere trading house that was just trading soft commodities and today we are still the largest trading house and when I say trading I mean imports and exports so I import everything, soft commodities, sugar, rice, fertilisers, etc. Everything from tomato paste to bubble-gum, to tractors to motorcycles, air conditioners… over 100 products. We export cocoa, coffee, sesame seeds, yellow gram, cotton, anything and everything that you find in this country. Then we progressed into manufacturing. So when socialism fell off, people started putting in structures and I think it was the third phase government that started saying that we needed more value addition and job creation. Today we have over 31 industries, we had the largest edible oil refinery in Africa at one point, manufacturing cooking fat and margarine, we have grain milling, wheat milling, maize milling, rice milling, plastics, PET, water, juices, carbonated drinks… We have managed to corner the Unilevers and the Procter & Gambles of this world in our country. We manufacture bicycles and we do textiles, we do spinning, weaving processing, dying, printing… we are now going into knitting and garmenting. We produce over one hundred million metres of cloth from Tanzanian cotton; that is one hundred thousand kilometres of cloth, which is two times the circumference of the world! There is a lot of manufacturing here. Then we integrated into agriculture, which everybody thought was going to be a challenge. We produce 40% of sisal, we grow cashews, not only do we grow cashews and export raw cashews but our manufacturing arm processes cashews into cashew kernels which we export 99% of to the US. We are also into tea. The key for MeTL has been the distribution. We have over 100 outlets country wide, we have ICT infrastructure, warehousing, etc., to be able to reach the hinterland of this country. When a farmer wants to sell us anything we give him money and with that money he wants to buy fast moving consumer goods, which in turn goes into petroleum, insurance, mobile telephoning and infrastructure projects. The growth has been the reflection of the growth of the country. We have a President now that says he wants to support the manufacturing sector. Why not? Today sugar is in a deficit, it’s a quarter of a million dollar investment, you have agriculture and with that you can create jobs. I am very bullish and very positive and that is why we have a vision that this is one of the sectors that we want to invest in and where we are going to bring in value but I have always been an impact investor, before even the phrase impact investing was out, because I always believed that yes I need to make money and a return but I would choose where I can create more jobs and get a return over where I can just have an easy ride. Sometimes I even compromise on my return a little bit for creating jobs. That is my commitment to the President and I hope I will be able to succeed.

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