Enhancing liquidity for the growth of the stock market

Liquidity is a fundamental enabler for the rapid and fair exchange of securities between participants in the stock market. Liquidity enables investors and issuers to meet their requirements in the stock market, be it on investments, financing, capital raising, or risk management as well as in reducing investment costs and cost of raising capital.

At the Dar es Salaam Stock Exchange there has been various efforts and actions that the exchange, regulator, and other markets participants have taken in order to grow liquidity, improve efficiency of trading and in offering better services for issuers and investors in our market. In the past few years, we have focused on enhancing our core market infrastructure such as electronification of our trading, settlement and depository systems; enhancement of our settlement cycle to international standards as well as our pro-active engagements in investor education and awareness campaigns in order to attract more issuers and investors into our market. We have also been working collaboratively with the Government to bring about various tax incentives for both issuers and investors who participate in our markets — these includes zero capital gains tax on listed shares transactions, a five percent withholding tax on dividends (instead of 10 percent for investors in non-listed shares), zero stamp duty, etc. For issuers, there is a reduction of 5 percent in corporate tax rate, there is also a tax deductibility of all Initial Public Offering (IPO) costs for the purposes of income tax determination by the tax authority.

Other efforts and actions have included pursuing the regulatory framework that have a fair combination of both merit-based and disclosure-based regulatory regime in approving public offerings and in admitting listings into the exchange. We have recently changed our regulations in order to attract more foreign investors and international issuers. We are pursuing actions that encourages more companies to list into the exchange — establishing the enterprise growth market and our plans to establish exchange traded funds and exchange traded derivatives are all some of the efforts to encourage more depth and liquidity in the market place. Despite all these efforts, one thing which is usually significant in increasing the breadth, depth and liquidity in the market is number of issuance, and especially the size of those issuances and listings. In this end, the government’s pro-market growth policies becomes imperative. As it is, private sectors conducts are usually less for public good compared to the public sector conducts and practice, where public good is the fundamental focus. In pursuance of self-interest, as the private sector normally does, sometimes they have wait for the necessary market resillience and liquidity levels that will match their self-interest valuation motives, growth and profitability desires before they may seriously pay attention to calling to conduct IPOs, list into the stock market and become transparent thereafter. Meanwhile, the government — which looks for the general public good — performs several supporting and interventions measures to ensure market growth. This is what our government, like many other governments, have been doing. And it has included pursuing tax policies, privatisation policies via IPOs and listings as well as other policies and legislative actions that encourages or requires some firms in certain sectors to list into the stock market, all in efforts to encourage the growth of the local capital market — why?

Empirical evidence from other markets indicates that development of capital markets has been driven to a great extent by offering of State Owned Entities (SOEs), with large-scale privatization programs typically being followed by substantial market capitalization and liquidity as well as strengthening of regulatory and corporate governance frameworks.
With existence of relatively sizeable IPOs and listings, secondary markets can then be enhanced mainly to provide an exit route for investors and facilitate better price discovery – the accurate valuation of instruments that ensures issuers are paying an appropriate price for their access to finance and investors are adequately compensated for the risk they take in providing it. For this, market makers and liquidity providers are crucial to this latter function, as they take advantage of their superior expertise and information in order to arbitrage away inconsistencies in valuations as well as differences in risk appetites between investors.
Investors in capital markets need immediacy exit opportunities, in order to match the maturity of available securities to their own preferred portfolios. This requires the function of market institutions, key being stockbrokers/dealers and the other aspect of intermediaries which is currently missing in our market i.e. liquidity providers/market makers who are willing to build inventories of financial instruments. While sometimes these key market intermediaries are frequently denounced as mere speculative in their dealings with investors, their function is essential. In fact, insufficient liquidity is very often cited as the primary barrier to capital markets growth and development.
Evidence demonstrate that liquidity providers are generally attracted to critical mass of investors (including security borrowers and lenders) but equally they need a set of rules governing trading that are not unduly restrictive.They also benefit from trading mechanisms, including supporting clearing and settlement systems, which do not impose prohibitive transaction costs. To minimize learning costs, liquidity providers tend to require relatively large issue sizes and frequent and/or regular issuance or, alternatively, long maturities. Finally, liquidity providers rely on the existence of financial instruments whose risk profiles incorporate mostly or exclusively market risk as opposed to plethora of different risks; alternatively, other instruments through which market risks can, at least in theory, be isolated (e.g. by hedging all other sources of risk).
When market rules and trading conditions are much more benign for liquidity providers than for other investors, a market can accumulate liquidity in good times, sometimes from overseas investors, whose presence in the market can be relatively volatile in some cases and in certain situations. Such excess liquidity during booms may be associated with the rapid loss of market liquidity that several developed markets saw during the financial crisis of 2008/9 and the sovereign debt crisis of 2010-12 in many developed countries. In fact, such phenomena could prove to be self-reinforcing as fear that liquidity may drain from the market at short notice is likely to drive investors away.
The strength of the disclosure system (disclosure rules, monitoring and enforcement and information dissemination) is positively correlated with stock market liquidity. The timely and credible disclosure of company information tends to not only promote investor confidence and encourage more active participation in the market, but also to attract additional listings, thus broadening the benefits to the domestic economy. On top of mandatory disclosures, voluntary disclosures have also been shown to increase stock market liquidity by reducing bid-ask spreads. Disclosures also have an indirect effect on emerging bonds market liquidity.
It is however important to note that overall market liquidity is not an end in itself. Investors normally demands a premium from smaller firms listed in small stock markets above and beyond what would be justified by market liquidity. Thus, there is case for policies that ensures that capital markets not only attract liquidity, but also direct it towards the most productive firms, regardless of size.
To conclude, market liquidity is fundamental and very beneficial for the growth of any stock market. Market operators, investors, regulators and others needs to constantly pursue a range of metrics to assess and enhance the level of liquidity in the market place. Some markets uses Liquidity Enhancement Schemes such as those mentioned in this article and others. In the overall — more product offerings, more investors, a meaningful regulatory regime and an efficiency market infrastructure matters a lot.

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Municipal Bonds, Viable Financing Alternative for our Cities

It was in the month of April 2014, my colleague and I at the DSE requested an opportunity to speak with members of the Tanga City Council — having explained to the city’s executive few weeks back about how the concept of municipal bonds can be one of the solutions to their financing need for the expansion of the infrastructure around their newly built bus terminal just in the outskirt of the Tanga. Up to that point, we had also spoken to mayors and district executives of Kinondoni, Ilala and Arusha. We, therefore embraced the opportunity to speak with the members of the council when it emerged. We hadn’t gotten such an opportunity in other municipalities, despite our requests. Unfortunately, this story is cut short by the fact that we couldn’t go as far, despite this opportunity and my team’s drafting of the Information Memorandum framework that could have guided their further consultations. Why efforts such as these are necessary? and why are still pursuing them? I will explain:

Municipal bonds are debt instruments issued by municipalities.They enable local governments to raise money to fund public projects, paying bondholders interests for the debt. In the U.S where such bonds were first issued, during the urban boom of 1850s — their outstanding bonds issuance by states, cities ad other sub-national entities exceed US$ 3 trillion, by 2015. In Sub-Saharan Africa, only South Africa cities of Cape town, Johannesburg, Ekurhuleni and Tshwane have issued bonds, so as Douala in Cameron; Dakar in Senegal as well as a few cities in some states in Nigeria. It is therefore apparent that, in Africa — municipals and sub-national bonds market is still infant. Most countries municipals and sub-national entities are not allowed to borrow.

As I proceed with this, I think it is important we take note on the fact it is not only the municipal bonds market that isn’t developed or isn’t in existence in most cities, states and countries, but so are other types of bonds, i.e. government bonds (issued by central governments and backed by national governments); Agency bonds (normally issued by stated-owned-entities, government agents or government sponsored entities); corporate bonds (issued by public and private companies); sovereign bonds (issued in foreign currencies and guaranteed by national governments targeting foreign investors); diaspora bonds (issued by governments and directed to citizens originating from the country but live somewhere else); nor are Islamic bonds (issued by government or islamic banks and institutions targeting people of islamic faith) — these are all well underdevelopment in most African countries, despite financial resources mobilisation challenges and the need for financing.

Inspire of the above, the truth is that Governments in Africa are overwhelmed by the rapid growth of cities, however, strategic planning has been insufficient as it is for the provision for basic services to residents, and the situation isn’t getting any better by the day. Since 1990s, (earlier than that for us) widespread decentralisation and devolution has substantially shifted responsibilities for dealing with urbanisation to local authorities; yet municipal governments across Africa receive just aa small share of the national income to discharge their duties and responsibilities. Responsible and proactive city authorities are examining how to improve their revenue generation and diversify their sources of finance. Municipal bonds may be a financing option for some capital cities, depending on the legal and regulatory environment, viability of proposed investment projects, investors appetite and the creditworthy of the borrower.

Massive construction programmes for roads and pavements, roads rehabilitation and parking, street and traffic lights, shopping malls, downtown markets, bus terminals, waste management facilities, flood management, sewage pipes, environment management as well as other social programmes such as school milk programmes, free uniforms and computers, etc. all these can be financed efficiently via issuance of municipal bonds by municipals and cities.

As indicated above, I understand that under the current legal/regulatory framework in our country, there is limited scope to increase resources by way of revenue collections because this role if highly concentrated to the central government, also there are several overlaps between the central and local governments. However, it is also fair to argue that those closest to the people i.e. local government — must have pro-poor development programmes that can be financed using internally determined financing channels such as municipal bonds. Therefore, reforms that will enable cities and municipals to borrow efficiently in the process of reducing their financing dependency on the central government, should be encouraged.

Much as there exists limited alternatives for raising finances to finance local governments development projects, but the attraction of bonds issuance may be clear, it will enable cities to borrow large amounts in lump-sum at a relatively cheaper rate than commercial borrowings. Once done, this will be a strong signal of determination by cities not to overly rely on concessional financing and confidence in their abilities to manage large revenue-generating investments. But, this requires close personal leadership by a champion within the city governance structure, such as a mayors as well as the political and administrative discipline that goes with such initiatives.

Further to legal/regulatory environment, currently, one of the major challenges for cities and municipalities is the capability to establish creditworthy environment based on good governance, cash flow, debt profile and credit history to allay investors concern about repayment of the loans — complimenting to this, only few cities can show an adequate record of strategic planning, debt management, and competent administration. However, despite all these — there is a need to start from somewhere, it is not difficult, cities such as Dar es Salaam, Arusha, Mwanza, Mbeya, Tanga, Moshi, and Iringa can develop the capability to demonstrate that they are capable of developing a credible development strategy and competent debt management systems. This may require involvement of expertise outside their immediate administrative resources; with consultations and engagements with all key stakeholders such as council members, mayors, civil societies, business representatives, and capital markets experts, we can bolster the expertise and enhance their strategic planning.

Of course, bonds issuance planning and process is crucial for success and for quality decision making — therefore the involvement of capital markets authorities, the DSE, international financial institutions such as the World Bank, central government, development institutions (such as USAID for possible guarantees), rating agents (for benchmarking), etc are all relevant.

In conclusion, rapid urbanization may be a key driver of economic growth in our economies. As it is, societies will continue urbanising, especially as options for people to live in villages become limited by the day; therefore the need for proper planning so as to avoid unplanned slums devoid of basic provisions, spiralling youth unemployment, and escalating environmental hazards and degradation. The overwhelming majority of residents of most cities and their informal economic activities, on which most prosperous future depends i.e. need of financing; however, lack of planning and execution of planning due to shortfall in urban financing.

A 2015 study estimated Africa’s “municipal investment gap” at US$ 30 billion per annum, therefore diversification and enhancing sources of funding is crucial; our cities can not continue to rely on inadequate grants and handouts from central government and limited donor-funded concessionary loans, local governments needs access to capital markets and private sector in order to finance or infrastructure and other social development programmes.

In all, the need for progressive, active, innovative approach from local government leaders is paramount. The DSE’s engagements with municipalities of Arusha, Tanga, Kinondoni and Ilala has not materialised into an issuance of the municipal bonds so far, but retreating from these engagements is not an option.

Why do we need Investment banking in our Industrialisation Plans

Last week I had an opportunity to attend in an investors’ event, this was a meeting that was well organised and coordinated by a local firm where a high-level delegation of industrial and strategic investors from outside the country with the intent to participate in our industrialisation plan, as investors in some of the flagship projects as identified in our Five Year Development Plan (FYDP-II) were in the exploration mission. I then participated in the C-Suite business development panel discussion whose objective was, among others to engage with leading government and business decision-makers in Tanzania so as to enable this group of investors get first hand, relevant and reliable information and also help them gain the exposure to business development opportunities and evolving investment climate in Tanzania’s markets. I thought this was an encouraging move by this firm.

During a panel discussion, the panelist requested my response to a question that intended to gain an insight as to what do I think are the key cornerstone that will jumpstart (in a big way) and sustain the industrialisation plan as detailed in the FYDP-II. In my quick response, I indicated that — we need some elements of industrial technologies (some of which might be imported, probably via foreign strategic/industrial investors), we need enough energy to power industries, we need relevant-efficient local skills/competences. I said I think we have political willingness and good leadership, I also said we need good monetary and fiscal policies accompanied by relevant financial institutions, I finally said we need a more focused industrialisation strategy that have taken into consideration the desires of both the state and private sector. In elaborating my point particularly on the sources of finances to finance our industrialisation, I said we need monetary and fiscal policies that tries to balances trade offs between the need of private sector and the state as well. I said I thought we need more diverse financial structures and infrastructure that will include sector-based financial institutions as well as investment and more development banks.

I provided further details by saying we, as a nation in collaboration with others who shares and understands our ambitions should think of the possibility of establishing specialist banks/financial institutions i.e., industrial development bank (targeting the manufacturing component of industrialisation) and infrastructure development bank, as is the case with Tanzania Agricultural Development Bank (TADB) that provides wholesale lending for agricultural projects. I said that these specialist banks/institutions should be tailored to support industry-led projects and enterprises and that ownership and governance of such financial institutions should be strategic so as to enable accountability and efficiency. I suggested that these institutions should be public-private owned with clear mandates, among others, to provide long-term credits/capital at subsidized financing costs for projects identified in the FYDP II; that in their structure and set-up, the government should provide seed capital, while private sector (local and foreign investors) should participate 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 issues and/or bonds issuances.

Soon as the panel discussion ended, one of the local executives present at this meeting posted at his twitter account a twit that was based on my suggestions. Some of his followers wanted to know more about my idea of an investment banking in our local context especially being mindful of the fact that we had an investment bank that has in recent years changed into a development bank. Therefore, in the next few paragraph I will try to explain the concept of investment banking and its relevant, especially at this time and age of our economy.

Our current financial market structure is basically that which is almost totally tilted into commercial banking which makes a total assets base of about US$ 10 billion; our stock exchange’s total market capitalisation is about US$ 10 billion, and our total bonds size is about US$ 2.5 billion. We almost lack private capital and venture capital funds. We have one development bank and we have relatively minimal investment banking activities which are currently provided by a few commercial banks. So — what do investment banks do, why are they relevant? Investment banks are institutions that typically provide various financial-related and other financial/investment services to individuals, corporations, and governments. These services are such as corporate finance and transaction advisory and sometimes acting as client’s agents in the issuance of securities (shares and bonds) for capital raising. Investment banks may also provide ancillary services such as market making in trading of shares, bonds and derivative instruments. And, one of the major functions of investment banks is their participation as underwriters in securities issuances, in a way guarantees the success of capital raising for issuers of financial instruments.

The balance sheet of an investment bank is somewhat different to that of a commercial bank. Investment banks do not (generally) hold retail deposits — unless they are part of a universal bank, like the current case in our market. Investment banks’ liabilities come in the form of promises to pay on securities such as bonds or short term wholesale money market instruments — in some cases they use money placed in the company by shareholders; and instead of holding deposits with central banks, investment banks tend to place cash at the commercial banks or buy money market instruments, if they have temporary surplus cash. Based on these, it is clear that investment banks are different from commercial banks.

Why are investment banks relevant to an economy like ours, especially now? — companies and state entities, in their evolution in line with economic growth of a country, they reach a point when they need to raise significant amount of capital; during this point, companies and SOEs face an array of alternative types of finances and ways of raising that finance. from syndicated loans to issuance of bonds to selling of new shares, etc. In such cases, the role of investment banks, their skills, knowledge, contacts and reputations helps in bringing the needed potential investors. They assist in pricing financial instruments, they assist in selling the securities, they may underwrite new securities issued — guaranteeing its successful uptake.

One of the signs of a vibrant and growing economy is the amount, size and activities of enterprises changing hands between investors. In the process of enterprises growth, there comes a time when some investors would wish to exit from the business and liquidate their investment as they seek other investment and financing opportunities; while at the same time others may wish to make and entry into such businesses — in these cases, investments banks advises companies contemplating in such transactions i.e. in mergers, takeovers, acquisitions and other corporate restructuring activities. The non-existence of investment banks, their negotiation skills, deal structuring, relationship management, etc makes existing and flow of such transactions limited, which feeds into minimal growth-oriented business financing activities. Thus, whether it is risk management, syndicated lending activities, privatisation of state-owned-entities, the role of investment banking is significant.

In the case of stock market related activities, along side their great skills in assisting companies with primary market issuance of bonds and shares, investment banks would normally have superior capability in secondary market dealings being for equities, bonds, money market instruments, derivatives, currencies, etc. In this space, investment banks may play the role of brokers — acting on behalf of investing clients to try and secure the best buy or sale deal in a market place. Or, they may be market makers — quoting two-sided prices for securities, the price which they are willing, using their balance sheet, to buy securities and a price at which they are willing to sale the same securities. Market making is a very important aspect for the creation of liquidity in a stock market and eventually for the growth of a stock market. One may therefore argue that one of the reasons as to why our bonds and equity market haven’t achieved the growth in line with the need for investment financing within our economy is the general lack of investment banking activities.

It is on these basis, and others, that I said in that investors’ meeting — we need sector specific and specialised financial institutions, such as investment banks to finance our industrialisation.

Why Regulations should support Entrepreneurship and Innovation in the Financial Sector

Throughout history, there has been a constant battle to maintain high levels of integrity and competence in the financial sector. However, the financial markets industry had recognised this to be the truth long time ago — that it is in its own best interest that it fiercely engage in this battle so as to establish the minimum set of behaviour and standards for its institutions, its intermediaries as well as the users of these financial services. That is why, institutions such as the Dar es Salaam Stock Exchange, being a self-Regulatory Organisation, have various sets of rules that regulates the conduct of its members in their various stages of engaging with the stock market. Having rules and regulations to regulate the conduct of its members is necessary for the stock market mainly because, if users of financial services (i.e. investors in listed companies) develop a fear that malpractice is prevalent in the stock market, they will not allow their funds to flow through the stock market system and the stock market, even if it were for only this reason, will shrink. If the conducts of the issues related to the stock market were to be left into the gentlemen’s agreement, assuming that all participants have good intents and that they will behave ethically, then we would have created a room where crooks and incompetents would have loved to join and become industry’s intermediaries where they could free-ride on the industry’s reputation. Thus the need for regulations, rules and minimum standard of conduct becomes a necessity.
For example, it is a common phenomena for directors, managers and officers working with companies that in one way or the other deals with the matters of stock markets, to have an information set that is often superior to the information possessed by investor’s or by stock markets intermediaries client’s. This asymmetry of information, can lead to exploitation, or in some cases even financial failure; in order to avoid or minimise such incidences, rules and regulations are being put in place so as to ensure investors or users of financial services are as equally treated and are not disadvantaged.

The other key reason why rules and regulations are important is that in financial markets institutions, the failure of one company or one intermediary may lead to the failure of others, the situation of systematic failure may lead to instability in the whole system. In our recent memory, for this kind of phenomena is the failure of Lehman Brothers in 2008. The failure of Lehman Brothers led to contagion effect, with very serious consequences not only for the United States financial system, but for the overall global economic health where businesses failed to meet their obligations, banks and businesses collapsed, investors wealth were eroded, insurances and pensions were lost, etc.

One more key reason for having rules and regulations is that, many markets and players in the market, if left to their own devices, would tend to move towards a structure where one or a few players exerts undue power to the market, affecting its pricing mechanism in favour of a few over many. If not well managed, this undue influence, creates the desire for beneficiaries to control price of a product. In the case of a stock market, this will be the situation where an individual, or a few individuals or an institution manipulates the price mechanism in the stock market by controlling liquidity and the price of a listed stock towards a direction of the choice of the influencer.

So, regulations have a significant benefits for the proper conduct of any financial markets activities. However, having indicated how beneficial and relevance regulations are, I want to also say that it is important so any society to ensure there is a good trade off between benefits of regulations and its negative effect on the innovation, enterprising, business creation and economic growth. Without a good balance and trade off between regulations and innovations; regulations may be particularly detrimental to industry and economic prosperity to the extent that it may deter innovation and entrepreneurship. Therefore, it is proper to take a view that before promulgating new regulations, regulators must carefully consider their consequences and justify regulations in light of the likely negative impact on product/services development, innovation and economic development.

I have recently read an Article posted in the Harvard Business Review by Efosa Ojomo titled: “6 Signs You’re Living in an Entrepreneurial Society”. In the article, Ojomo mentions six major signs and the one that caught my attention mostly, is the one saying that if you are in a society where innovation precedes regulations, not the other way round, then you know you are living in an innovative and entrepreneurial society. Oromo argues that in entrepreneurial societies, innovation always precedes regulation. In the United Staes, for instance, scientist and engineers in Silcon Valley, Boston and New York, he argues, are always one step ahead of regulators, in developing innovations that helps societies to solve some of its most critical problems. The regulators eventually catch up, but not before the innovators have developed viable solutions for us to improve our lives. Ojomo says, if regulations in your society precede innovation from entrepreneurs, this is likely to curb the entrepreneurial spirit of innovators and therefore limits the growth and development that the society, in often cases, needs.

I have always admired our central bank (the Bank of Tanzania) as far as this matter is concerned, as the regulator of our banking industry, I have observed, in several cases where their flexibility to let innovations and entrepreneurship precede regulations have helped the banking industry achieve whatever the success we have so far achieved. I observed this is financial derivative products such as during the introduction of Foreign Currency Forward Contracts, Interest Rates Swaps Contracts, etc; similar cases can be said in the mobile phone technology banking services related activities; and other cases, etc. I hope that regulators in other industries and sectors can learn from this experience and adopt.

In my professional life I have met several young Tanzanian innovators and entrepreneurs, especially in the Information and Communication Technology (ICT) professional who are in the verge of creating technological breakthroughs that can unlock some of the existing potentials in developing and growing some of our industries, including the one I am currently serving, but in several cases these young, ambitious and energetic young professionals are being hindered by the our practice of letting regulations precede innovation and entrepreneurship. Same applies in cases where there are needs to introduce new products and services in the market place. As being said above, the market is always one step ahead of regulators, important as regulations and regulators are, we therefore — like many others — should learn to let innovators and entrepreneurs help us solve our most critical problems, noting that, as per Ojomo’s words the entrepreneurial society is a prosperous society, where more and more people are able to choose what they do, and when they do it. Innovation and entrepreneurship are the necessary ingredients for any economy or market flourish. I appreciate that this is topical matter, requiring a serious debate like it is other economies and societies — but is a good debate for us to engage in.

International Financial City Centre — Why it is not a bad idea?

The financial sector plays an important role in any economic development; and better developed financial systems are associated with the faster economic growth. Our financial sector — despite the progress made in the past three decades of its liberalisation — is still relatively small, nascent and lacks the vibrant, product mixture and structures that will enable it to play a critical role in achieving the growth rate, of double digit figure many economists recommend the country needs, for the next three-decades at a minimum, for us as country, to push ourselves into a middle income country bracket.
A deeper look into the Five Year Development Plan (FYDP) 2016/17-2021/22, one will note that in order to succeed in executing the Plan — by whoever (private, public, ora combination), the national industrialisation and economic transformation strategies must be underpinned by an effective transformations in financial sector and probably introduce additional financial institutions (such as the International Financial City Centre) to undertake a range of activities in the process of facilitating capital formation that will embed the efforts to industrialise the country. I therefore argued that we, as a nation, should consider on creating a set of institutional factors and institutions that will encourage and make the process of savings and capital formation more bigger, border and aggressively ambitious.

As it is, there is an urgent need to consider whatever necessary for these things to successfully happen because as it stands, in all aspects of our resources mobilisations and savings, the ratio of our domestic savings relative to our Gross Domestic Product (GDP) is far too low, even by the sub-Saharan Africa standard. This says that in any way we need to enhance the national capacity to mobilize our domestic and external financial resources because whatever way one may put it, the way out of underdevelopment lies in raising the level of a nation’s savings and capital formation which can then finance our ambitious development needs.

Currently, the total country’s savings as a proportion of our GDP is about 20 per cent while our investment rate per year is about 30 per cent of GDP. As a country, we finance this investment financing gap using foreign sources of capital (in the form of aid, grants, FDIs, portfolio investments, diaspora remittences, etc). As we consider the benefit of reducing this gap, it may be rights that we architect the means and ways that will somehow elevates us into a gradual reduction of this gap: and this requires us to make both some cultural reorientation, i.e. from a cycle of low savings and high consumption to the one that embraces high savings and high investment — as I propose this, I am deeply conscious to the fact that we are a poor nation with majority of our people enjoying low levels of disposable income, but I am convinced that we can do something about this. East Asian countries pursued this approach in their process of industrialization – China to the extreme, where about 50 per cent of what is produced is being saved and then invested. Even in other relatively poor countries such as Vietnam, their savings ratio to income is 33 per cent.

At the minimum, we should target a savings/GDP ratio of at least 25 per cent per annum in the next 5 years. At the current GDP of about Tsh. 100 trillion and at the anticipated compounded GDP growth rate of 7 per cent, this will translate into a movement from an annual savings quantum of Tsh. 20 trillion (20 per cent of GDP) to about Tsh. 35 or (25 per cent of GDP) trillion per annum by 2021, with a GDP projection of Tsh 140 trillion, in current value of the shilling.

And so, as we consciously increase our capacity to save and improve our capacity for capital formation, in the short to medium term, we should target to leverage further from foreign sources of funds (grants, FDIs and development finance). In 2015, FDI flow to Tanzania was about 3 per cent of the total FDIs to Africa. Our target should be between 5 and 7 percent. This will mean attracting between US$ 3 billion to US$ 5 billion per annum for the next five years. This possibility if viable given our FYDP — if adjusted in some areas so that it have few focus areas and flagship projects; and if we also pursue policies, laws and strategies that will make our doing business environment more friendly and competitive.

Upon managing to make Tanzania an attractive investment destination (through proper policies, enhanced infrastructure, relatively good labor skills, being more keen to ensuring there is proper implementation of rule of law, etc.), we should be able to increase FDIs flow into our economy from the current Tsh. 2.5 trillion per annum to about Tsh. 11 trillion per annum by 2021 — that is almost Tsh. 35 trillion cumulatively over a period of next five years. We should also strive to ensure that once raised, foreign capital (via donor funds, concessionary and non-concessionary loans, FDIs, private equity funds, portfolio investors, etc.) should consciously be utilized to gradually increase our capital formation. We need to match the mobilized foreign funds with a clear intent to monitor, manage and prudently utilize 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 industrialization program. There should be no squandering of foreign capital or use for importation of unnecessary consumption items.

Now, as it sounds these are things that requires good coordination for their successful implementation, as it is with the FYDP itself, probably a coordination unit is not a bad idea after all. So, from the financing perspective, we should think of creating an International Financial Centre Authority which will undertake a range of coordination of these activities so as to develop an efficient regional (and probably global) competitive financial services sector to serve the interest of both our domestic needs and international investors. Furthermore, the Center will also create employment, raise finance for flagship industrial and infrastructure projects and tap into new investments coming not only in the East African region but in Africa.
As proposed above, developed financial institutions and financial markets are centers through which we can drive our economic development, in poverty alleviation, in improving the standard of living and in ensuring our economic stability — to the point that we can. Establishment of such a centre will stimulate development of related industries as demand increases for better transport and ICT infrastructure, hospitality and tourism, better education and health services, modern habitation and entertainment industries, etc.
Positive stimulus to employment and infrastructure in the Centre will also have spillover on the rest of the economy as the benefits cascades to other segments of the economy. Tanzania should compete to become a favourable financial services leader in the region and it has the competitive advantage with all the ingredient of an international financial centre. We have recently earned a reputation as a country that leads in the aspect of financial inclusion in the region.
Our geographical location also serves us better — we provide maritime entry and exit to at least five countries, this combined with the proximity to a market of 150 million people — are some of the key reasons why this proposition makes sense. With the exception of sometimes unnecessary bureaucratic behaviours, our legal and regulatory framework should be another argument for the beauty of this Centre idea — our legal system is based on the British Common law jurisdiction, which is well acceptable in the development of financial centres as internationally accepted best practice.
Generally, the country enjoys relative political and macroeconomic stability which is another factor that is key to investors confidence and generally business sustainability. Our country has a great potential to position ourselves a regional hub in attracting not only Foreign Direct Investments (FDIs) but also portfolio investments.
While I understand the argument that the competition will be great because there exists other such centers and financial city authorities in the region i.e. Sandton Financial City, South Africa; Nairobi International Financial Centre Authority, Kenya; Casablanca Finance City Authority, Morocco; etc. But we should be able to face the competition, after all other in other places, countries have more than one such centres i.e. : Jinan Center Financial City, Shangong – China; Shenyang International Finance Center, Shenyang-China; other centres are such Colombo International Financial City, Sri-Lanka; IFCI Finance City, Bangalore – India; etc. So, not a bad idea to consider, after all.