The Future Financing of our Development

We were happy last week when we learned that the Government has decided to reinstate its initial position of (continuous) providing fiscal incentives for the Dar es Salaam Stock Exchange (DSE) listed companies’ investors. We were amazed by the degree of wisdom that informed this decision. As I argued in the last few weeks — our exchange is still nascent, it is still small, investors and listed companies are few and the level of awareness on the role of the stock market to the economic growth is still low. But the vibrant stock market is vital for any major economic development — the sheer ability of bringing people together through common financing and ownership of major sectors or enterprises within the economy is a fundamental tool in propel the economic development in a different way. This idea is economically sound, socially coherent and psychologically good — it makes the society content and secure to the idea that we are all in this together.

Furthermore, the Finance Bill of 2016 recommends for the amendment of the Electronic and Postal Communication Act (EPOCA) of 2010 (as amended in 2011) back to its original intent and spirit, which is to require companies operating in the telecommunication sector to offload part of their shares and list into the local stock market. The recommended amount of shares to be sold to the public is 25 percent. And so by doing this — significant (75 percent) majority of ownership will still be retained by the strategic investor(s).

These two legislative actions by the Government aims at creating a vibrant stock market that will be able to partly facilitate the financing of the envisaged economic transformation through industrialisation. In the process, these actions will also enable economic empowerment to many Tanzanians, it will go further into enabling more financial inclusion and financial literacy to many people in the society as well as creating more transparency and encouraging good corporate governance. So, the argument here is strong and many other countries have gone through this process — we won’t be the first, we are not reinventing the wheel.

We definitely need a vibrant capital market in line with the economic transformation and a successful industrialisation that we are currently pursuing. So these decisions by the government and the parliament sends a strong signal towards a new era, that the way out of underdevelopment lies in raising the level of a nation’s savings and capital formation capacity. A vibrant capital market will encourage more savings and investment.

Currently, our total savings as a proportion of our Gross Domestic Product (GDP) is about 20 percent per annum, while our investment rate per year is about 30 percent of GDP. What this means is that we finance the investment gap using foreign funds and capital. Many economic and geopolitical indicators tells us that we need to gradually reduce this gap — this will require us to make a cultural reorientation, from a cycle of low savings and high consumption into the situation of high savings and high investment. Eastern Asia countries have done so in their process of industrialisation — China to the extreme, 50 percent of what is produced in China is being saved and then invested. Even in other relatively poor countries such as Vietnam their savings rate is currently 33 percent. Therefore, efforts and plans and decisions to motivate our savings has to be encouraged. a vibrant stock market is one of the means to encourage savings which are mobilised and intermediated towards productive investment activities in the economy.

As we consciously increase our capacity to save and capital formation, in the short to medium term, we should target to leverage further from foreign sources of funds (grants, Foreign Direct Investment – FDIs and development finance). In 2015, FDIs flow to Tanzania was about 3 percent of the total FDIs to Africa; we proper policies and a conducive business climate we can do more in this aspects. However, once raised, foreign capital (via donor funds, concessionary and non-concessionally loans, FDIs, private equity funds, portfolio investors, etc) should consciously be utilised to gradually increase our capital formation. We need to match the mobilised foreign funds with a clear intent to monitor, manage and prudently utilise funds raised from external sources. That is to say, having managed to attract foreign funds, we should aim to use the same for financing importation of capital goods, raw materials and foreign technology that are to be used in manufacturing of goods under the industrialisation program.

Further actions to propel a vibrant capital market is for whenever there are future privatisation intent — significant considerations should be paid to the capital market. Our own history tells us that this approach, as opposed to private sales, is more impactful to the society and the government. Privatisation through the capital market and listing of these entities into the stock market creates multiplier effects whose trickle down socioeconomic impact is more impactful. However, a better sustainable and impactful privatisation strategy has been through a good blending of retail domestic investors via IPO, the state and foreign strategic/industrial investment — privatisation examples of TBL, TCC, Swissport, NMB, Twiga Cement, and Tanga Cement are good models to repeat. Therefore, a combination of government’s ownership in existing (and new industries) via financial interests/commitments, combined with large number of shares trading publicly in the stock market, plus joint ventures with strategic/industrial investors is a better privatisation program to execute. SOEs that are being privatised through a combination of: state ownership + strategic/industrial investors + IPO (& public listing) have been socially and economically more impactful than other forms of privatisation. Therefore, going forward, targeted and strategic privatisation where the state retains ownership, combined with an invite for strategic/industrial investors to own and manage identified enterprises while allowing the public ownership (via IPOs) should be encouraged.

State-owned enterprises and parastatals such as TANESCO, should be restructured and be encouraged to list into the stock market. Entities with similar nature and mandates within the region are efficiently run following their restructuring and listing in local exchanges; TANESCO’s equivalent in Kenya i.e. KPLC and KENGEN are all listed in the Nairobi Securities Exchange. UMEME of Uganda, is dual listed in the Uganda Stock Exchange and Nairobi Securities Exchange. The same approach may apply to our TPDC and STAMICO— companies with similar business and economic models and mandates, are listed into local exchanges i.e. ZCCM in Zambia (with mandates similar to our STAMICO) is listed in the Lusaka Stock Exchange. Following their listing, our companies may be run more efficiently relative to their current state, will be better managed, will be more accountable and will reduce using tax payers money to finance some of the inefficiencies. Other entities where the government have ownership but may be privatised, while the government still retain major ownership, are: TPB, TIB, TWB, TPA, TTCL, NIC, ATCL (after restructuring and financing by the government), etc. Other entities where the government may reduce its ownership and convince their strategic partners to also do the same are NBC, Mbeya Cement, East African Cables, etc. Privatization through listing, while the government have ownership, have several benefits: i.e. sources of revenue to the government; provide access to efficient finance to these entities; economic empowerment to citizens; provide quality jobs to many; more government revenue (by way of taxes); growth of the local capital market; encouraging transparency and good governance, etc.

What I am proposing is that development aids and concessional financing for our economic development has it limits, we do not need to be trapped in this status. We can move up the ladder and potentially grow faster if we increase our domestic level of savings and capital formation so that we can invest in our own development. Advance in technology has taught us how deposits may be mobilised in the way that the conventional banking model would have took long time to uncover. A vibrant capital market can also be a tool to facilitate mobilisation of savings in our local economy in order to finance part of our growth and development. However, for this to be achieved — it requires conscious decision to move into this direction. The recent government decision on tax exemption for DSE listed companies’ investors and the decision on EPOCA is a clear signal towards that direction. We can do more in pursuing privatisation and in better use of of foreign currency and foreign capital.

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How can the Government benefit from DSE Activities?

In my last week’s article I tried to explain why the removal of tax incentives for the DSE listed companies and investors is not a good idea. In my argument I said, removing fiscal incentives for the DSE listed securities will not be a tool to propel DSE into a vibrant stock market that can play a vital role in the financing of enterprises and government projects, as stated in the Minister’s budget speech. The removal of tax incentives will rather diminish the exchange into a small, weak, thin, illiquid, less competitive and less attractive stock market. In my opinion, this shouldn’t be the way to go — the removal of tax incentives will take us back years ago and will defeat all intents and purposes of creating a stock market that is still young and small whose multiplier and trickle down effects is supporting economic growth via more revenue to the government, jobs creation, competitive pricing of financial products, economic benchmarking, attracting foreign capital, is currently less felt. In this article I will try to suggest the alternative.

In this age and era where cities across the world competes to be regional financial hubs and attractive investment destinies — any action, by a nation, that doesn’t recognise this fact, will make that nation less competitive, or less attractive and especially if that nation doesn’t offer an alternative that is highly differentiated or gives it a competitive edge and/or comparative advantage relative to others. Global investors will always have options — for example if Kenya, or Mauritius, or Ghana or Rwanda, or many other countries in Africa and in the region, some of them are more developed than us, offers tax incentives on listed securities (shares and bonds and collective investment schemes, etc) what will then make such investors choose Tanzania which has taxes on listed securities over these other markets? what will make investors choose an investment in asset classes whose cost of investment is relatively higher? — unless it offers something else that would still make it competitive despite the high cost of investment and lesser return. In such a situation, how will we be able to attractive foreign capital or even encourage local savings and capital formation that will propel our financing of industrialisation?. Should we opt to continue relying on Foreign Direct Investments (FDIs) and, to the some extent, banks to finance our industrialisation and its supporting infrastructure? or is it time that we broaden our imagination as to how we can plan to finance our development?

Incentives proposed for removal were enacted in order to attract investment in listed securities, in line with our privatisation and creating a vibrant private sector whose enterprises financing can be facilitated by the capital market which will then be the engine of economic development — an idea of a “small government”. It is important to underscore the wider benefits that have been realised in the economy by having these incentives; some of these benefits are: (i) tax revenue by the government, because most of listed companies are in large tax payers category; (ii) encourage transparency and good governance within our society; (iii) creates quality employments to skilled and semi-skilled labour; (iv) catalyst for cultural change by enticing more savings and capital formation; (v) local citizens’ economic empowerments, financial inclusion and financial literacy; and many other qualitative benefits.

The success of the Five Year Development Plans (FYDP-II) with theme: “Industrialisation for Economic Transformations and Human Development” hinges, among others, on the existence of a vibrant financial markets, capital markets being a significant part to it. In reviewing the just ended FYDP-I, it has been remarked that one of the shortcomings of its implementation was a weak DSE, that could not intermediate and/or mobilise enough long term financial resources required to supplement financial resources provided by the banking sector and FDIs.

Having said that — what are the proposed actions by the government that would make DSE more beneficial to the government?

Most of us do appreciate that our stock market is relatively young and small, therefore requires some nurturing, but we also understand that the stock market has not been treated as the primary national engine of economic development by the Government or the donors; i.e. instead of driving most privatisations through the exchange and creating a tax efficient structure for companies listed on the exchange and investors in listed securities, different policies are sometimes being chosen.

The consequences of these other policy choices are an economically weak exchange, with a vastly inadequate supply of securities in the market place. This is a big lost opportunity for financial inclusion, literacy and economic development. To avoid repeating similar incidences, during the implementation of the FYDP-II, it is advisable that the remaining privatisations or entities that will be returned to the government — following the recent recall, are conducted across the capital market, existing tax structures are retained, to use tax as a strategic tool for capital market and economic development.
Government should remove structural barriers in order to encourage the listing and private sector investment. If the stock market is not supported by a champion within Government who will facilitate a drive to significantly increase in the supply of securities to the market, the exchange will not become economically significant. The goal of Government should focus on radically increase the supply of securities to the DSE and retain or change the tax/legal structure to incentivise enterprises and vehicles for long term projects to use the stock market as part of their source of financing.
Policy makers should understand that exchanges’ relevance in the economy is not driven by tax revenue generation per se, but rather on the exchange’s economic multiplier effect to the overall economy. A vibrant stock market has the power to create economic multiplier over and above the pure tax revenue from its investors or listed companies.
Privatisation via stock market is a strong for government to create a vibrant stock market — how? when the government does a private sale of its entity, the only beneficiaries are the buyer, the seller, the advisors and the employees assuming the entity continues to operate locally. By contrast when a company is privatised via the capital market there is a broader range of stakeholders who are impacted, which create an economic multiplier and also contribute to lower the cost of capital within the economy — this is key for enterprises growth which then motivates further investments, increased consumption, creation of jobs, more tax revenue to the government, etc. Additionally, the public entity is subject to the transparency and scrutiny of the the regulator, the market, the investing community and the public. This means it employs higher corporate governance and transparency standards. Research shows public companies out-perform their private company rivals in terms of revenue, profits and employment. Strong corporate governance of a public company also helps sustainability of the company and its employees, suppliers, customers, bankers, the government, etc.
The other missed opportunity by the Government that would otherwise create a vibrant capital market which will then benefit the government via multiplier and trickle down effect has been the lack or slow implementation of Electronic and Postal Communications Act (EPOCA) and Mining Act, both of 2010. Part of these legislations requires companies operating in the telecoms sector and companies with special mining licences to to offer part of their shares to the public and subsequently list with the stock exchange. The spirit of these laws which was to facilitate the existence of a vibrant local stock market and create more economic empowerment among many, has somehow been diverted. The telecoms regulation that was issued last year didn’t go to the extent of implementation this spirit. I understand there are proposed amendments incorporated in the Finance Act, 2016. Implementation of these amendments will be a game changer in our capital markets and the role of the stock market to the government and the economy.

How can the Government benefit from DSE Activities?

In my last week’s article I tried to explain why the removal of tax incentives for the DSE listed companies and investors is not a good idea. In my argument I said, removing fiscal incentives for the DSE listed securities will not be a tool to propel DSE into a vibrant stock market that can play a vital role in the financing of enterprises and government projects, as stated in the Minister’s budget speech. The removal of tax incentives will rather diminish the exchange into a small, weak, thin, illiquid, less competitive and less attractive stock market. In my opinion, this shouldn’t be the way to go — the removal of tax incentives will take us back year ago and will defeat all intents and purposes of creating a stock market, which is still young and small whose multiplier and trickle down effect in economic growth, more revenue to the government, jobs creation, competitive pricing of financial products, economic benchmarking, attracting foreign capital, is currently less felt. In this article I will try to suggest the alternative.

In this age and era where cities across the world competes to be regional financial hubs and attractive investment destinies — any action, by a nation, that doesn’t recognise this fact, will make that nation less competitive, or less attractive and especially if the nation doesn’t offer an alternative that is highly differentiated or gives it a competitive and /or comparative advantage relative to others. Global investors will always have options — for example if Kenya, or Mauritius, or Ghana or Rwanda, or many other countries in Africa and in the region, some of them more developed than us, offers tax incentives on listed securities (shares and bonds and collective investment schemes, etc) what will then make such investors choose Tanzania which has taxes on listed securities over these other markets? what will make investors choose an investments in an asset class whose cost of investment is higher? — unless it offers something else that would still make it competitive despite the high cost of investment and therefore lesser return. In such a situation, how will we be able to attractive foreign capital or even encourage local savings and capital formation that will propel our financing of industrialisation?. Should we opt to continue relying on Foreign Direct Investments (FDIs) and, to the some extent, banks to finance our industrialisation and its supporting infrastructure? or is it time that we broaden our imagination as to how we can plan to finance our development?

Incentives proposed for removal were enacted in order to attract investment in listed securities in line with privatisation and creating a vibrant private sector whose enterprises financing can be facilitated by the capital market which will then be the engine of our economic development — an idea of a “small government”. It is important to underscore the wider benefits that have been realised in the economy by having these incentives; some of these benefits are: (i) tax revenue by the government, because most of listed companies are in large tax payers category; (ii) encourage transparency and good governance within our society; (iii) creates quality employments to skilled and semi-skilled labour; (iv) catalyst for cultural change by enticing more savings and capital formation; (v) local citizens’ economic empowerments, financial inclusion and financial literacy; and many other qualitative benefits.

The success of the currently government Five Year Development Plans (FYDP-II) with theme: “Industrialisation for Economic Transformations and Human Development” hinges, among others, on the existence of a vibrant financial markets, capital markets being a significant part to it. In reviewing the just ended FYDP-I, it has been remarked that one of the shortcomings of its implementation was a weak DSE, that could not intermediate and/or mobilise enough long term financial resources required to supplement financial resources from the banking sector and FDIs.

Having said that — what are the proposed actions by the government that would make DSE benefit for the government?

Most of us do appreciate that our stock market is relatively young and small, therefore requires some nurturing, but we also understand that the stock market has not been treated as the primary national engine of economic development by the Government or the donors; i.e. instead of driving most privatisations through the exchange and creating a tax efficient structure for companies listed on the exchange and investors in listed securities, different policies are sometimes being chosen.

The consequences of these other policy choices are an economically weak exchange, with a vastly inadequate supply of securities in the market place. This is a big lost opportunity for financial inclusion, literacy and economic development. To avoid repeating similar incidences, during the implementation of the FYDP-II, it is advisable that the remaining privatisations or entities that will be returned to the government — following the recent recall, are conducted across the capital market, existing tax structures are retained, to use tax as a strategic tool for capital market and economic development.
Government should remove structural barriers in order to encourage the listing and private sector investment. If the stock market is not supported by a champion within Government who will facilitate a drive to significantly increase in the supply of securities to the market, the exchange will not become economically significant. The goal of Government should focus on radically increase the supply of securities to the DSE and retain or change the tax/legal structure to incentivise enterprises and vehicles for long term projects to use the stock market as part of their source of financing.
The policy makers should understand that exchanges’ relevance is not on tax revenue generation per se, but rather on the exchanges’s economic multiplier effect into the economy. An vibrant stock market has the power to create economic multiplier over and above the pure capital raising for an issuer for a particular investor — i.e. when a Government does a private sale of its entity, the only beneficiaries are the buyer, the seller, the advisors and the employees assuming the entity continues to operate locally.
By contrast when a company is privatised via the capital market there is a broader range of stakeholders who are impacted, which create an economic multiplier and also contribute to lower the cost of capital in the economy. Additionally, the public entity is subject to the transparency and scrutiny of the the regulator, the market, the investing community and the public. This means it employs higher corporate governance and transparency standards. Research shows public companies out-perform their private company rivals in terms of revenue, profits and employment. Strong corporate governance of a public company also helps sustainability of the company and its employees, suppliers, customers, bankers, the government, etc.
The other missed opportunity by the Government that would otherwise create a vibrant capital capital which will then benefit the government via multiplier and trickle down effect has been the lack or slow implementation of Electronic and Postal Communications Act (EPOCA) and Mining Act, both of 2010. Part of these legislations requires companies operating in the telecoms sector and companies with special mining licences to to offer part of their shares to the public and subsequently list with the stock exchange. The spirit of these laws, was to facilitate the existence of a vibrant local stock market and create more economic empowerment among many, has somehow been diverted. The telecoms regulation that was issued last year didn’t go to the extent of implementation this spirit. I understand there are proposed amendments incorporate in the Finance Act, 2016. Implementation of these amendments will be a game changer in our capital markets and the role of the stock market to the government and the economy.

Removal of Tax Exemption on DSE Listed Shares — an End to the nascent Capital Market?

Sometimes, at some level of a country’s development there has to be a careful balancing between a “small government” versus the need for private enterprise — where the private sector becomes the engine for economic growth and development. When the economy is relatively small and its markets and industries are still nascent there may be an argument for the increased role of the government to nurture and propel growth and prosperity — under such scenario, the government needs more revenue, but there has to be a good striking balance between the two.

In the past few weeks — I have been writing about possible financing strategies for our Five Years Development Plan (FYDP)-II; a vibrant capital market being a significant part to it. Then comes the 2016/17 budget speech, which, on one hand it appreciates the need to nurture the creation of a vibrant capital market that will be capable to finance the proposed FYDP-II; while on the other hand, the budget proposed specific measures that go against the spirit of enhancing the growth and vibrancy of the capital market. Rather, the proposed measures seems like will reduce the capital market into a small, thin and illiquidity with minimal possibilities of take off. I will explain:

In his budget speech the Honourable Minister for Finance and Planning says: “….The Government will continue to improve investment environment in the country in order to attract private sector to invest in our industries and other sectors. To facilitate this, the Government will improve services relate to accessibility of loans to private sector; enhance the capital market; strengthening coordination of public private partnership – PPP; improve doing business environment through various incentive packages and removal of red tape measures.” Based on this one will anticipate that there will be specific recommendation for “enhancing the capital market”. What comes next? The Minister continues: “I propose to amend the Income Tax Act, CAP 332 as follows: … (ii) To remove exemption on non-investment assets (shares), hence increase the tax base as the same item which enjoy a reduced rate of 5 percent on dividend. This will be done by deleting paragraph (d) under section 3 in the definition of “investment asset” on shares or securities listed in the Dar es Salaam Stock Exchange that are owned by a resident person or a non resident person who either alone or with other associate controls less than 25 percent of the controlling shares of the issuer Company”.

What the Minister introduces, in the case of removing exemptions is: (i) start charging capital gains tax on DSE listed securities; (ii) introduce a 10% withholding tax on DSE listed shares compared to the existing 5%; and (iii) introduce withholding tax on interest income from DSE listed bonds — both government bonds and corporate bonds whose maturity tenor is 3-years and above. For the purpose of this article i will focus on capital gains tax.

The Kenyan Minister of Finance, during his 2014/15 budget speech introduced capital gains tax on NSE’s listed securities, but it couldn’t work, immediately after the speech — investors refused to engage with the Kenyan capital market, the Nairobi Securities Exchange (NSE) lost investors’ worth by almost 40 percent within a space of few months from the effective date of implementation of the proposed tax which was January 2015, market activities and liquidity significantly slowed down (market slumped by more than 70% within the first month of the tax being introduced on January 2015) and investors exited the Kenyan market, opting for other portfolio investment destinations such as the DSE, as well as stock exchanges in Nigeria, Egypt, Mauritius, South Africa, and Morocco.

Additionally, the implementation and administration of this tax by the stockbrokers (who were to be the collecting agents of the tax) became a practical nightmare, and brokers protested it — as a result on September 11, 2015 the President of Kenya signed into law the Finance Bill (2015) abolishing the capital gains tax which was proposed at 5 per cent on all securities traded in the NSE, the law came into effect from January 2016.

The abolished capital gains tax restored back investors confidence, boosted trading in the exchange and positioned their country once again into being an attractive investment destination. Since then, the NSE retained its glory.

Now, let me reflect on the difference in size between the NSE and the DSE: NSE has been in existence since 1954; DSE started operations in 1998. NSE has 64 domestic listed companies; DSE has 17 domestic listed companies. DSE market capitalisation is about Tsh. 8.3 trillion; NSE market capital is equivalent to Tsh. 46 trillion. DSE market turnover (liquidity) is an average of Tshs. 750 billion per annum; NSE market turnover averages equivalent to Tsh. 3,500 billion per annum. DSE has 3 listed corporate bonds worth Tsh. 57 billion; NSE has 30 listed corporate bonds worth equivalent to Tsh. 1,640 billion. DSE listed government bonds are worth about Tsh. 5 trillion; NSE listed government bonds worth is equivalent to Tsh. 22 trillion. DSE has about 450,000 investors with CDS account; NSE has about 2,300,000 investors with CDS accounts.

These statistics clearly indicates that the NSE is far ahead to DSE. And I also think it is proper for Kenyan to have observed the wisdom of continuing to attract companies to raise capital through the NSE and encouraging both local and foreign investors to use the NSE for the savings and investment activities via fiscal incentives. Let me quote what the NSE CEO had to say upon President Kenyatta’s signing of the bill that abolished capital gains tax, he said: “this tax really affected our market in terms of interest from foreign investors. It has been disincentive. It sent a lot of jitters through the market.”

I joined the Dar es Salaam Stock Exchange in May 2013 — since then we have collectively managed to improve the market liquidity from the historical (for the past 15 years) market turnover averages of Tsh. 50 billion per annum, we are now at Tsh. 750 billion per annum and yes there has been an increase in prices of DSE listed securities, some counter have recorded capital gains of more than 5 times in a space of these past 3-years — which are relatively significant, I guess that’s why the government has now considered to charge taxes on these turnover. However as I indicated above, in terms of turn over — our market is still less than one-forth (or 25%) of the Kenyan market; but the Kenyan market decided that it is not wise or worth it for them to start charging such taxes on their Tsh. 3,500 billion market turnover. In their decision to scrap a tax that the same government introduced few months before, I guess was guided by factors such as the negative multiplier effect that will be created by a non-vibrant market versus the targeted revenue that the government may collect.

I am not certain as to whether rumours were on the air that the removal of tax incentives on the DSE listed securities was coming, because for the past 3-years, this quarter (April todate) is the worst recorded performing quarter in terms of liquidity and capital gains which informs market capitalisation. DSE quarterly trading turnover has been an average of Tsh. 200 billion for the past 3-years; however, April to date DSE turnover is less Tsh. 50 billion and we are only two weeks towards end of quarter. That says something.

Let me conclude by saying one of the major reasons for the establishment of the capital market in the country was to create an efficient financial system that will facilitate investment and financing of the businesses and government projects. To motivate the creation of a vibrant capital markets the government has been providing fiscal incentives to catalyze and encourage the use of the capital markets in mobilizing financial resources for onward investment in identified economic ventures of both public and private nature. As it is, our market is still relatively very small to consider revised the spirit of existence of these incentives. Listed companies can not be treated the same as non-listed, because, among other factors listed companies decided to share their prosperity with other many people in the society, they have opted to be transparent and comply to good governance principles, they easies tax administration work for our tax authority, they provide economic empowerment and wealth creation to many people in the society, they facilitate creation of employment — not only to their companies but for people working in the capital markets industry, etc.

I love this country as most of us do, I support austerity measures currently undertaken by the government. I want our government to increase its tax base for more revenue collection so that it can finance our infrastructure because its key to our envisaged industrialisation, economic transformation and human development. However, I also know that the local private sector can highly engage in building industries and related infrastructure projects if there are mechanisms that will enable them to raise long term capital. A vibrant and liquidity stock market is the tool to provide such sources of capital. The removal of fiscal incentives will not create a vibrant capital market. Let us re-consider our decision. I know the government has already planned and budgeted for this, but with proper consultations we can introduce a transaction based levy that will also be practically implementable for the easy of tax administration.

Other Ideas for Financing our Industrialisation

This is the third article in a series of my opinion and ideas on how I see we need to make a difference this time around as we engage in a major policy proposal and implementation. As I indicated in the previous articles, I believe that a successful and sustainable industrialisation policy and any major economic transformative plan should be preceded and/or accompanied by the financial sector transformation of similar nature. A revolution of the financial sector, especially the development of financial institutions, within the economy, is paramount. Therefore, the need to enhance the nation’s capacity to mobilise financial resources, encourage savings and enhance the process of capital formation is key for any transformative economic development.

The last two articles explained the relevance to which Foreign Direct Investments (FDIs) and the Stock Markets hold in the industrialisation and economic transformation process. Before I proceed any further, I would like to put a caveat — in that as I try to propose some of the financing strategy that may close align to our economic objectives, I also understand that these are not the only way forward, and I consider country’s such as Ethiopia, which is making major progress in the aspect of industrialisation, especially the manufacturing part of industrialisation, does not have a stock market, its banking sector is not yet liberalised, and Ethiopia do not have the specialised or sectoral financial institutions to finance their industries or its supporting infrastructure as I propose — they are mainly financing their industrialisation through FDIs. However, I also understand that there are many other economies, especially in the Eastern Asia, Latin America and Gulf states that have pursued some of these ideas and have made key head ways in economic and social prosperity of their societies via industrialisation. For us, what we can define our interests, our position and our objectives, let us then opt and pursue those solutions that works better within the context of our society.

Today I will explain how our banking sector may propel us into reaching the intended industrialisation and economic transformation objectives.

Our economy has over 60 banks and non-banking financial institutions whose balance sheet size closer to Tsh. 27 trillion, this is about 25 percent of our current Gross Domestic Product (GDP). However, our banking sector is highly tilted towards commercial banking whose business model is to mobilise savings/deposits and intermediate them for onward lending, mostly as working capital finance to businesses and enterprises. In many cases these institutions will also use their balance to lend onto the government through either subscribing in treasuries (treasury bills and treasury bonds). Our banks also engages in off-balance sheet activities — all meant to finance or facilitate financing of businesses and development projects.

In the context of industrialisation, where financing is mostly via risky capital targeting projects and enterprises that have a long term view — our commercial banks should be encouraged to make the necessary preparations so that in due time they can get heavily involved and align themselves with the country’s economic transformation goals. This can be achieved through building banks their capacity to finance long term projects and enterprises under the industrialisation and infrastructure development programs. Our commercial banks should be able to extend their credit tenor to long term. To sustainably achieve this objectives, these banks should be encourages (through policies, legislative actions or by other such tools) to match their long term lending with similar long term financing sources that can be obtained from the capital markets via issuance of corporate bonds or similar financial instruments.

At the stock market, we currently have only three outstanding corporate bonds, two being issued by commercial banks and one by a regional development bank. There is currently an ongoing public offering for another corporate bond, that (if successful) will also list into the exchange in few weeks. Admittedly there are about five commercial banks (Barclays, Standard Chartered, Bank M, Exim Bank, and now NMB) that have ever issued corporate bonds and listed into our stock market. Much as it makes a lot of commercial and business sense for commercial banks to tap-in public money (via IPOs and bond issuances) to maximise their ability to finance long term projects and enterprises, for us this hasn’t been so much the case. In other countries (e.g. Sri Lanka) banks, by the business model (taping in public money by way of savings and deposits mobilisation for onward lending to the same public by way of loans or overdrafts), are compelled to invite the public to be shareholders of these banks via partly accessing public money, through a issuance of shares, bonds and other commercial papers and list into the stock market. Such long term raised capital are then matched with long term investments and credits. Within our context of need for economic transformation, economic empowerment to our people, etc — we may consider actioning some of these options, only that we may not need to embrace them wholesomely, we may need to localise them.

Further to enhancing our commercial banks’ capability to lend long, we may also consider the need to create the conducive regulatory framework that will motivate some of these commercial banks to also participate in the investment banking space. The investment side of banking will enable our banks to provide transaction and corporate financing advisory services as well as arranging larger syndication credits — which will so be needed in our envisaged state of economy under the industrialisation drive.

We should also start thinking of possibilities for establishing more sectoral specialist banks/financial institutions, such as industrial development bank (targeting the manufacturing component of industrialisation) and also probably the infrastructure development bank (targeting infrastructure related project finance) — like it is the case with the Tanzania Agricultural Development Bank (TADB) that provides wholesale lending for agricultural projects or TIB Development Bank for broad-based development projects; so it should be for manufacturing and infrastructure. These specialist banks/institutions should be tailored to support industry-led projects and enterprises and the supporting capital infrastructure. In our Five Year Development Plan (FYDP) II, there is a mention of the establishing an industrial banks — I guess what would be key is how will it be structured and how will the ownership and its governance play out.

In my opinion, the ownership and governance (as well as operationalisation and management) of such financial institutions should be strategic so as to enable their accountability and efficiency. They should be public-private owned with clear mandates, among others, to provide long term credits/capital at subsidised financing costs for projects identified in the FYDP II. The government may provide seed capital, while private sector (local and foreign) should be allowed to participate in the ownership of the bank via a combination of private placement and IPOs. With IPOs and listing, these institutions will be able to efficiently raise future capital by way of rights shares issuances and/or bonds issuances.

The government has an intent to capitalise TIB Development Bank (albeit gradually) to the tune of up to TZS 1 trillion in the period of five years from 1 July 2016 — in order to build its capacity to finance some of the projects and programs as identified in the FYDP II. In my option, while mindful of the fact that the government is constrained, the proposed TZS 1 trillion is relatively in the lower end, especially if one judges it within the context of the overall financing requirements in the FYDP II, currently set at the tune of TZS 107 trillion. Therefore, in addition to the government’s equity financing, TIB should consider accessing other sources of funds i.e. public funds from the local capital markets, or even the usual International Development Financial Institutions. Listing into the stock market will allow TIB to continuously access public money whenever substantial funds are required, via rights issuances, issuing of corporate, infrastructure, industrial, or revenue bonds at competitive and efficient cost of funding that set by market forces. Furthermore, this will increase TIB’s (or other established specialist financial institutions) institutional capability to lead or arrange syndications with both local and international financial institutions.