Tanzanian Leader’s War for Taxes Puts Economy in Firing Line

DAR ES SALAAM (Capital Markets in Africa) – Tanzanian President John Magufuli’s deepening dispute with  companies he accuses of being tax cheats is rattling investors and dimming the   allure of one of Africa’s fastest-growing economies.

Since taking office in late 2015, Magufuli has been on a drive to increase  revenue from natural resources to help fund his industrialization plans. His   administration has passed laws enabling it to renegotiate contracts and ordered   foreign mining firms to sell stakes on the local stock exchange to increase   transparency. The authorities have hit Acacia Mining Plc with a $190 billion tax   bill, curbed its exports and detained a senior employee, and seized gems and   questioned staff from Petra Diamonds Ltd., alleging it hadn’t paid its dues.

“In his bid to do some good things like trying to reduce the level of corruption, President Magufuli has often taken steps that have actually gone outside of the formal rules,” Nic Cheeseman, professor of democracy at the University of Birmingham in the U.K., said by phone. “Even people I think who have sympathy for his ends are starting to say that the means of achieving them might do more harm than good. It is a very worrying situation.”

Acacia, whose tax bill and related penalties equate to 180 times its revenue last year, and Petra have denied wrongdoing. Acacia has shuttered some operations in Tanzania until its dispute is resolved. With Magufuli showing no signs of backing down, the closures may have an effect on tax income, deter other investment and stifle an economy that the International Monetary Fund expects to expand an average of 6.7 percent a year until 2021.

‘Economic War’
Magufuli, who was nicknamed the bulldozer because of the zeal he showed in his previous post of works minister, campaigned for the presidency on an anti-corruption ticket. His approach was welcomed by Tanzanians weary of years of graft in the public sector. He says Tanzania is in the midst of an “economic war” and if foreign investors want to leave, locals will take over their mines.

“They should not threaten us,” he said in a televised address on Sept. 7. “They are the ones that should be scared.”

Financial markets have taken fright, with the Tanzanian All Share Index slumping 10.1 percent since the Acacia dispute erupted on March 3 and the company’s shares nosediving 62 percent in London, where it’s based. Petra’s shares fell in London on Monday after its annual earnings missed analysts’ estimates, bringing their decline to 6.9 percent since it announced the temporary closure of its Tanzanian operations on Sept. 11. It said Monday it has now resumed production at its Williamson mine.

Prospects ‘Impeded’
“Exports could be hit,” said Mark Bohlund, Africa economist with Bloomberg Intelligence in London. “A failure to entice foreign direct investment with a favourable regulatory framework and consistent government policy will impede Tanzania’s longer-term growth prospects.”

Mining accounted for about 5 percent of Tanzania’s $47-billion economy last year, a contribution the government intends to double by 2025. While efforts to derive more benefit from the country’s mineral riches should be welcomed, the government’s approach is flawed, according to Racheal Chagonja, a coordinator at HakiRasilimali, an association of civil-society groups that focuses on Tanzanian resource extraction.

“Are we asking what happens if an Acacia or a Petra leaves?” she said. “The way we are carrying on threatens the sustainability of Tanzania. We need investors and they need us.”

Zitto Kabwe, who sat on a panel established by former President Jakaya Kikwete in 2007 to review the mining industry, anticipates disinvestment and warns the government’s approach could set the country back decades.

 ‘Bullying, Unprofessional’
“It is too bullying, unprofessional,” said Kabwe, who’s an opposition lawmaker. “There are genuine claims about Tanzanians not benefiting from the mining sector, but we need the investments. What the government is doing is turning away investors.”

Finance Minister Philip Mpango has called for the nationalization of the diamonds that were seized from Petra this month and alleged to be undervalued.

“Tanzanians are being robbed in broad daylight,” he said in an address on state television. “We cannot continue in this way.” Calls to Mpango’s assistant didn’t connect when Bloomberg sought comment from the minister.

Alex Cobham, chief executive officer of the London-based Tax Justice Network, said many Africans countries’ natural resources had been systematically looted and greater transparency was needed, including country-by-country reporting by multinationals for each project, to ensure nations secured fair deals.

“What’s happening in Tanzania is the natural result of a process that has been going on for decades,” Cobham said by phone. “It’s unfortunate the steps taken by the Tanzanian government have been seen to be unlawful and a deterrent to investor confidence, but their actions are understandable given how badly some of the companies have behaved.”

Acacia is 64 percent owned by Barrick Gold Corp. Security guards at the company’s North Mara mine, near Tanzania’s border with Kenya, were in 2010 accused of shooting and killing people scavenging for gold-laced rocks to sell for cash. Barrick said at the time it frequently faced groups of intruders, often armed, who illegally trespassed on the mine and some thefts and vandalism were linked to organized crime.

Tanzania’s recent actions may not be fully justified, Cobham said. “I think most people would say they have crossed the line in a number of ways.”

Source: Bloomberg Business News