Assessing Implications of Trumps Tariffs on Intra East Africa’s Regional and International Trade

By Moses Kulaba, Governance and Economic Policy Centre

Effective 5th April 2025 (with a pause of 90 days) the US President Donald Trump slapped a global tariff of 10% on all exports to the US. The US tariffs has caused a lot of turbulence and uncertainty about the future of the WTO rules based global trade as we knew it. The future of EAC -US trade is unknown and during this period loses will be counted particularly in the agriculture, textiles, apparel and handcrafts sector. However, in the midst of turbulence, the EAC has an opportunity of re-inventing its intra-regional and international trade, and perhaps emerging stronger.  This policy brief analyses the implications of the US tariffs on EAC intra-regional trade and what options the member states can take.

Background on EAC -US Trade Relations and Trade Flows

The East African Community (EAC) and Sub-Saharan Africa generally have been major trading partners with the United States for decades and so far, the fastest growing markets in the world according to the International Monetary Fund.  The US has signed multiple trade agreements allowing smooth trade flows across the two regions, with the US enjoying an overwhelming trade surplus for decades. In 2008 the U.S. signed Trade and Investment Framework Agreements (TIFA) with the EAC regional economic block in 2008.

The purpose of the TIFA was to strengthen the United States-EAC trade and investment relationship, expand and diversify bilateral trade, and improve the climate for business between U.S. and East African firms. Earlier in 2000 the US had passed the African Growth Opportunity Act (AGOA), a trade preference program that allowed selected goods from EAC duty free market entrance into the United States. AGOA had helped expand and diversify African exports to the United States, while at the same time fostering an improved business environment in many African countries through the application of eligibility requirements.  In 2015, the U.S. Congress extended AGOA through 2025. 

According to the Office of US Trade Representative data the U.S. goods exports to East African Community in 2022 were $1.1 billion, up 2.0 percent ($22 million) from 2021 and up 15 percent from 2012. U.S. goods imports from East African Community totaled $1.3 billion in 2022, up 40.4 percent ($367 million) from 2021, and up 121 percent from 2012. The U.S. trade balance with East African Community shifted from a goods trade surplus of $211 million in 2021 to a goods trade deficit of $135 million in 2022[1].Although the US suffered a goods trade deficit in 2022, it has continued to enjoy trade surpluses with individual EAC member Countries as reported by the US trade Administration.

Table of US-EAC Trade flows and Surplus for 2023-2024

Country

Total Goods Trade with US 2024 (USD)

US Exports

(2024)

US Imports

(2024)

Surplus (2024)

% Increase in Surplus compared to 2023

Kenya

1.5Bln

782.5Mln

737.3Mln

45.2Mln

110 (454.6Mln)

Tanzania

778.1Mln

573.4Mln

204.7Mln

368.7Mln

45.8 (115.8Mln)

Uganda

238.9 Mln

106.3 Mln

132.6 Mln

26.3Mln

574.3 ($31.9Mln)

Rwanda

75.0Mln

44.8Mln

30.2Mln

14.5Mln

4,060 (($14.2Mln)

Democratic Republic of Congo

576.4Mln

253.3Mln

323.1Mln

69.8M

20.9 ($18.4 Mln)

Burundi

$10.4Mln

$6.6Mln

$3.7Mln

$2.9Mln

224.3 (5.2Mln)

South Sudan

$60.1Mln

$59.3 Mln

$0.8Mln

$58.5 Mln

16.0(8.1Mln)

Somalia

$51.6Mln

$49.1 Mln

$2.5 Mln

$46.6Mln

0

Source: Office of US Trade Representative data analyzed and presented by GEPC researcher

Over the years, through its trade diplomacy, the US had cemented long lasting relations paving way for other strategic economic, political and security relations, with the EAC member states including defense. With the new tariff wall, if not changed, this long-term relationship could be bound for a new trajectory.

Knock-on Effects of Tariffs

Tariffs have knock offs whose effects can trickle down the goods and services value chain in many ways, affecting both producers, exporters and consumers down the trade supply chain.

A tariff is a duty imposed by a national government, customs territory, or supranational union on imports of goods. Besides being a source of revenue, import duties can also be a form of regulation of foreign trade and policy that burden foreign products to encourage or safeguard domestic industry[1]. At their core, tariffs are simple: they raise the domestic price of imported goods. But their effects ripple through the economy in complex ways – altering prices, wages, exchange rates and trade patterns.

Simply put, a tariff is a tax on imported products. It creates a difference between the world price and the domestic price of a product. Tariffs raise the price of imported goods relative to domestic goods (good produced at home).  For example, if a US Tarif of 10% is applied on world price of coffee of USD200, the domestic price of coffee in the US market becomes USD 220 per kilogram. The government collects the difference of USD20 dollar as tariff revenue to finance other public expenditures.

Tariffs can also affect the world price of a product, particularly when they are imposed by a large economy. The logic is that higher domestic prices reduce domestic demand, which in turn lowers world demand, and thus world prices. In our example, the world price might fall to $150 after the tariff is imposed, resulting in a domestic price of $165. In this case, part of the tariff is effectively paid by foreign producers[2].

This cost-shifting creates incentives for large economies to unilaterally impose tariffs. However, this so-called optimal tariff argument overlooks the possibility of retaliation. If country A imposes tariffs on country B, country B has an incentive to respond in kind. The end result is a trade war that leaves both sides worse off[3].

With the current US tariffs, the prices of goods entering into the US market will increase by 10%. For example, the price of coffee will increase by 10% making it more expensive for Americans to afford. Similarly, the costs for other agricultural products, textiles and handcrafts will suffer the same fate. The resultant effect of this will be a low demand for these goods in the US markets affecting EAC farmers and exporters. We can further illustrate this with a simple of the effects of the tariffs on handicrafts from the EAC. 

Because of increased tariffs and a decline in demand for the Makonde carvings, the exporter of Makonde Carvings and paintings will buy less. The Makonde carver and painter in Mtwara and Mwenge will lose business and sell less. The transporter of Makonde carvings will have little business and therefore send a few trucks to collect and deliver the carvings to Dar es Salaam. The exporter will send a few containers and therefore the port handlers and clearing firms will have no business. The Makonde artist may completely close and ultimately the transporter and port handler may lay off staff. A similar experience can be the same for the Coffee producer in Uganda and Kenya, whose knock off effect of the US tariffs will trickle down the supply chain in a similar manner.

Tariffs in the Context of WTO and GATT rules

In the World Trade Organisation (WTO) rules-based system, when countries agree to open their markets for goods or services, they “bind” their commitments. A country can change its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of trade[1].

Under the WTO (GATTs, GAT and TRIPs agreements) international trade and commerce is run based on a rule-based system and principles. These include;

  1. Most-Favoured-Nation (MFN), which requires treating other people equally. Under the WTO agreements, countries cannot normally discriminate between their trading partners. Grant someone a special favour (such as a lower customs duty rate for one of their products) and you have to do the same for all other WTO members[2]
  2. National Treatment of foreigners and locals equally where by imported and locally-produced goods should be treated equally — at least after the foreign goods have entered the market. This also applies to services, trademarks, copyrights and patents. (Article 3 of GATT, Article 17 of GATS and Article 3 of TRIPS) although there can be some variations in applications depending on an existing arrangement such as a Regional Economic block or once a product, service or item of intellectual property has entered the market can be a subject to customs duty or any other applicable duties.
  3. National treatment only applies once a product, service or item of intellectual property has entered the market. Therefore, charging customs duty on an import is not a violation of national treatment even if locally-produced products are not charged an equivalent tax.
  4. Freer trade gradually through negotiations and reducing of trade barriers such customs duties (tariffs), import bans or quotas, selective restriction on quantities, bureaucracy and exchange rate policies.
  5. Predictability of trade through binding commitments and transparency. This encourages investment, job creation and consumers can enjoy the benefits of competition
  6. Promotion of fair competition, with an allowance of a limited. number of tariffs for limited protection, allowing thriving of domestic industry and protection against entry of harmful products.
  7. Generally, encouraging development and economic reforms aimed at increasing global trade flows and particularly allowing less developed countries to equally enjoy benefits of the global trade system.
    Tariffs as Tools for Trade Policy and Geopolitical Statecraft

    Tariffs are not universally banned from trade policy. Tariffs can be a useful tool for protecting domestic industries, generating revenue, and supporting economic development, especially in developing countries. They can equally be used as a foreign policy instrument to advance economic diplomatic ties between nations.

    According to the WTO, tariffs must not be used as weapon for trade distortion, carry the risk of increased costs for businesses and consumers, potentially stifling economic growth and competitiveness. However, the recent US Trump measures reorganize the rules on International Trade. Tariffs are now used as a political tool for advancing geopolitical and national security interests, including cajoling other trading partners and WTO member states into curving in to pressure aimed at achieving domestic political gains.

    There are contending views (including from the US Council on Foreign Relations) that according to the WTO rules, the US Trump tariffs are illegal, arbitrary, based on a wrong formular, not reciprocal, distortionary[1] and must be fought either at the WTO or through reciprocal measures taken by affected Countries. Poor application of tariffs can spark a contagion effect of tariffs wars across nations.

    EAC Response options for Trade Creation and Diversion to new markets

    To date the EAC as a regional block has remained silent while its respective member states have decided to individually not to retaliate.  Uganda’s Ministry of Finance, clearly stated that it had taken a decision not to retaliate[2].  Similar statements were made by Kenya’s Ministry of Trade[3].

    Uganda’s trade volumes with the US were small and the US was a major beneficiary of this trade relationship, enjoying a goods trade surplus, while its nationals enjoyed cheap high quality agricultural exports such as coffee, tea, fruits and handcrafts from the EAC.

    The AGOA partnership agreement was bound to expire at the end of 2025 and the US and EAC were already on the road towards negotiating new trade arrangements, if AGOA was not extended. Moreover, some Countries such as Uganda, Burundi, South Sudan and Somalia were not eligible for AGOA in 2024 due to among others sanctions imposed by the US for various reasons (including conflicts, human and political rights violations) and were already searching for markets elsewhere.

    The EAC as a regional block was pushing for increased intra-regional trade. The East African Business Council, an apex body of businesses and companies, has always been concerned with low volumes of intra EAC trade as compared to other economic regions. 

    This has been widely linked to existence of tariff and non-tariff barriers, including stringent rules of origin, Stay of Applications which allows member states to charge or exempt different tariffs on some specific goods different from the Common External Tariff, differences in taxes such VAT, Income Taxes and Exercise duties. It was further concerned with the bilateral negotiations of trade deals with third parties. The East African Business Council (EABC) advocated and has been pushing the EAC to continue negotiating the EAC-EU Economic Partnership Agreements (EPA) and the EAC-UK EPA as a region to avoid creating mistrust and distortion of the EAC Common External Tariff (CET)[4]

    The new US tariffs therefore offer the EAC and Sub-Saharan Africa region with a window of an opportunity to disconnect itself from the US markets by deepening intra-regional trade, diversifying and diverting its trade to other regions such as Africa via Africa Continental Free Trade Area (AfCFTA), the EU, the Middle East and China.

    AFCTA offers flexible rules and unfettered free access to a market population of about 1.3 billion people and a combined GDP of approximately US$ 3.4 trillion[5]. The AfCFTA aims to eliminate trade barriers and boost intra-Africa trade. In particular, it is to advance trade in value-added production across all service sectors of the African Economy[6]. There are a lot of opportunities in the AfCFTA for the Private sector in the EAC as it offers a larger and diversified market for goods and services. According to President Museveni Uganda will now focus on African markets[7]

    The EU has been a major trading partner and EU trade in goods (imports and exports) with the EAC has risen steadily comparatively to 2007 volumes[8]  In 2023 the EU trade in goods and services with the EAC region amounted to EUR106Bln. The EU trade in services amounted to EUR 5.9bln. If compared to 2022 the EU trade in goods with the EAC region reached EUR 5.7bln while imports from the EAC were EUR4.9bln. Exports in services were valued at EUR3.0Bln compared to EUR2.9 bln imported from the EAC[9]. The major exports to the EU from the East African Community are mainly coffee, cut flowers, tea, tobacco, fish and vegetables. Imports from the EU into the region are dominated by machinery and mechanical appliances, equipment and parts, vehicles and pharmaceutical products[10].  Kenya and Tanzania were the leading EU trade partners.

    China is already a major trading partner with the EAC and had surpassed the EU and the US. In 2023, China was the largest source of imports for the East African Community (EAC), with imports valued at $11 billion. The EAC’s exports to China in the same year were valued at $15.8 billion. China is closely followed by the United Arab Emirates (UAE) at US$6.4 billion in 2023[11].

    From the statistics, the EAC already enjoys a trade surplus with China. Although there are concerns over unethical business conducts, including the risk of stifling industrial growth by flooding the EAC with cheap substandard goods, China remains a huge market of about 1billion people, it is the second largest economy in the world and the largest one in RCEP with a GDP of 16,325 billion USD in 2022 (World Bank, 2023).  Chinese demand for EAC products is enormous and projected to grow.

    The EAC also has an opportunity of benefiting from arbitrage practices, whereby producers from highly US tariffed countries set up business to produce, buy, sell or reroute their products via the EAC to take advantage of the tax and price differences. In this case highly taxed countries such as China and Lesotho would be interested in setting up business in EAC.  Kenya has already made a move with President Ruto’s visit to Beijing to attract Chinese businesses to set business in Nairobi.

    Recommendations

    For this to happen, the EAC and its member states will have to

    1. Diversify, Divert and Create trade. This happens when new or existing regional economic grouping (Free Trade Areas or Customs Unions) leads to creation of new trade that never existed before or leads to shifts in trade flows from efficient nonmember exporters to non-efficient member exporters among others due to preferential tariffs charged amongst member states.
    2. Invest in processing and industrial production of agricultural products and raw materials into finished products that can be sold or consumed locally and in the new markets
    3. Address existing tariffs and non-tariff barriers to trade such as VAT, Excise duties, income taxes, bureaucracy and infrastructure which have been an obstacle to intra-regional trade.
    4. Revive old economic partnerships with the EU and explore new partnerships with the EU, South America, Middle East and China
    5. Establish linkages between the farmers and manufacturer so as to create value and sustainable supply chains of quality products for the market
    6. Address political differences, instability and conflicts affecting cordial economic cooperation and free flow of goods across EAC and African borders.

     References 

    European Commission: Trade and Security available at https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/east-african-community-eac_en

    Ralph Ossa; Views of the Chief Economist, World Trade Organisation, available at: https://www.wto.org/english/blogs_e/ce_ralph_ossa_e/blog_ro_11apr25_e.htm accessed 14 April 2025

    The New Times (May 02, 2025) available at https://www.newtimes.co.rw/article/21152/news/africa/eabcs-adrian-raphael-njau-advocates-for-stronger-eac-market

    WTO; Principles of the Trading system available at: https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm#:~:text=In%20the%20WTO%2C%20when%20countries,the%20case%20in%20developing%20countries.

    [1] https://www.cfr.org/blog/five-things-know-about-trumps-tariffs

    [2] Mr Ramadhan Ggobi , Permanent Secretary for Treasury made these remarks while addressing a press conference at the Ministry of Finance

    [3] Mr Lee Kinyanjui, PS for Trade, Kenya in an Interview with  Citizen TV available on Citizen digital via https://www.citizen.digital/news/what-it-means-for-kenya-after-us-imposes-10-export-tariff-trade-cs-kinyanjui-n360379

    [4] https://www.newtimes.co.rw/article/21152/news/africa/eabcs-adrian-raphael-njau-advocates-for-stronger-eac-market

    [5] https://au-afcfta.org/about/

    [6] ibid

    [7] https://eastleighvoice.co.ke/african%20markets/140091/museveni-says-uganda-to-focus-on-african-markets-amid-us-tariff-hike

    [8] https://www.europarl.europa.eu/RegData/etudes/BRIE/2024/766228/EPRS_BRI(2024)766228_EN.pdf

    [9] ibid

    [10] https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries-and-regions/east-african-community-eac_en

    [11] https://www.eac.int/trade/79-sector/trade#:~:text=China%20is%20the%20dominant%20source,US%246.4%20billion%20in%202023.

[1] ibid

[2] https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm#:~:text=In%20the%20WTO%2C%20when%20countries,the%20case%20in%20developing%20countries.

 

Webinar Series: Assessing Implications of Trumps Tariffs on Intra East Africa’s Regional and International Trade

The rules of world trade are being redefined. We are delighted to invite you to plug and join in as we explore and discuss this interesting topic on regional economic cooperation, trade and investment. 

The East African Community (EAC) and Sub-Saharan Africa generally have been major trading partners with the United States for decades and so far, the fastest growing markets in the world according to the International Monetary Fund.   Since 2001, the US has signed multiple trade agreements (including AGOA in 2001 and TIFA in 2008) allowing smooth trade flows across the two regions, with the US enjoying an overwhelming trade surplus for decades. Under AGOA EAC selected products had duty free access to US markets. US trade relations with EAC member states were booming.  For instance, in 2024 the US trade surplus with Rwanda increased more than 4000% compared to 2023.

Effective 5th April 2025 the US President Donald Trump slapped a global baseline tariff of 10% on all exports to the US. The US tariffs have caused a lot of turbulence and uncertainty about the future of the WTO rules based global trade as we know it. The future of EAC -US trade is unknown and during this period loses will be counted particularly in the agriculture, textiles, apparel and artifacts sector. However, in the midst of this turbulence, the EAC may have an opportunity of re-inventing its intra-regional and international trade, and perhaps emerging stronger by looking elsewhere. 

This webinar will enable stakeholders and the public understand the issues at play and the potentially new World Trade Order that we could moving towards. Expert speakers at this webinar will analyze the implications of the US tariffs on EAC intra-regional and international trade and what options the EAC block and member states can take.

The Governance and Economic Policy Centre (GEPC) is a regional governance and development policy organization, based in Tanzania, interested among others in promoting economic and fiscal governance, with a national and regional focus on East and Africa Great Lakes Region.

The webinar is organized as part of GEPC’s project on promoting regional economic cooperation, trade and investment implemented in collaboration with the Africa Economic Diplomatic Study Circle (AEDSC), a loose network of practicing professionals, students of economic diplomacy, international relations and development based on the African continent, working to promote Africa’s position in the global space.

Our distinguished speakers will be;

Ms McDowell Juko, Chairperson East Africa Business Network (EABN): Elsa Juko-McDowell, a native of Uganda, is a remarkable individual with a deep passion for people and business. Her journey began in 2015 when she joined the East Africa Chamber of Commerce (EACC), an 18-year organization devoted to fostering trade and investments between the United States and East Africa, currently known as the East Africa Business Network. owns multiple businesses, including real estate development, investments, and consulting ventures. Additionally, Elsa serves as a North Texas District Export Council member.  Can be reached via: info@eabn.co or chairman@eabn.co

Mr. Adrian Njau, Ag. Executive Director, East African Business Council: Adrian Njau is the Executive Director of the East African Business  Council (EABN), the apex advocacy body of private sector associations and corporates from the 7 East African Community (EAC) Partner States (Kenya, Democratic Republic of the Congo, Tanzania, Rwanda, Burundi, Uganda and South Sudan). Adrian holds a Master’s Degree in International Trade and a Bachelor’s Degree in Economics, both obtained from the University of Dar es Salaam. His academic background is complemented by professional certifications and specialized training in trade, investment, policy and regional integration from Switzerland, Singapore, and Sweden, among others. With over two decades of experience, Adrian has been instrumental in research and policy at the Chamber. Can be reached via: Email: info@eabc-online.com

Mr Robert Ssuna, International Trade and Tax Expert, Researcher and Consultant, Governance and Economic Policy Centre:  Robert is an Independent Consultant on Tax Trade and Investment. He is Chartered Economic Policy Analyst (CEPA), a Fellow of the Global Academy of Finance and Management with over 15 years of experience in economic policy analysis focusing on tax, trade, and investment at national, regional, and global levels. He is also a member of the Base Erosion Profit Shifting (BEPS) Monitoring Group. Prior to this, he served as a Supervisor Research Statistics and Policy Analysis in the Research and Planning Division of the Uganda Revenue Authority. Can be reached via: ssuunaster@gmail.com

Hon: Dr Abullah H Makame, Member of East Africa Legislative Assembly (EALA):  Dr Makame, is a distinguished member of the East African Legislative Assembly (EALA) based in Arusha, Tanzania, where he is a commissioner and a former Chairperson of the Standing Committee in Agriculture, Environment, Tourism and Natural Resources. Dr Makame has served in various senior capacities in both the Government of United Republic of Tanzania and Zanzibar; academically, his docorate is from Birmingham UK and MSc from Strathclyde – Scotland, he holds a Professional Certificate in International Trade from Adelaide and has published both locally and internationally. Dr Makame serves in various boards across the EAC region. Can be reached via email: abdullah.makame@gmail.com

Mr Moses Kulaba, Executive Director & Convenor, Governance and Economic Policy Centre: Mr Moses is a political economist, tax and economic diplomat with more than 20 years of active service in international public, private and civil society sector.  Prior to joining GEPC he served as the East Africa Regional Manager for the Natural Resources Governance Institute, where he worked with various stakeholders including governments to advance fiscal policies and governance of the extractive sector. Has served on the international board of the EITI and in consultancy roles for UN, DFID and the EU. Can be reached via : moses@gepc.or.tz or mkulaba2000@gmail.com

Webinar Date: Tuesday, 6th May, 2025

Time: 10:30AM-12:30 PM (Nairobi Time)/ 9:30AM (CAT)/ 7:30AM (GMT)

Online Participation via Google meet video link: https://meet.google.com/odd-ysgh-dtf

Understanding of Thermal power, opportunities and limitations for power generation in East Africa.

 

In this brief we focus on geothermal as source of energy, shading some perspectives on what it is, the potential and why it may be an attractive source of energy but also point out the downside factors that may limit its exploitation in East Africa.

By  Moses Kulaba, Governance and Economic Policy Centre

Globally, there is an increasing focus on mitigating climate change by gradually transiting to clean energy sources. With its location along the equator and various volcanic plates, Africa is considered as a sleeping giant of renewable energy sources. Despite this abundancy, Africa lags behind in energy access and investment in renewables generally. If deliberate efforts are not taken, Africa will remain perpetually in Energy poverty. The disparity in East Africa is even worse, with countries facing significant energy shortages and a very small investments in Geothermal power.

According to scientists, geothermal energy is largely heat flowing from the core of the earth’s crust to the top surface, which is trapped and transformed into energy.

The Earth is generally a block of solid rock and molten surfaces. At about 3000km deep into the earth there is a transition from solid rock to an inner molten core comprising of liquid iron, nickel and a mixture of other substances.  The amount of heat within 10,000 meters of the earth’s surface contains 50,000 times more energy than all the oil and natural gas resources in the world.

At this depth, the temperatures raise up to around 5700 Kelvins, which is almost the same on the sun.  These temperatures ordinary do not reach to the surface of the earth because the solid rock between the earth’s surface and its molten core are heat conductors. 

However, the molten rock can escape to the earth surface through an eruption and the heat can reach the earth surface through fissures or cracks. This is trapped and harnessed to generate power as illustrated below:

Where does the heat come from?

Geothermal comes from the Greek word, where ‘Geo’ refers to Earth, and ‘Therme’ refers to Heat. The heat comes from beneath the earth’s crust. Generally, it is found distantly far below the earth’s burning molten rock ‘Magma’ and stored in the rocks and vapour in the earth’s centre. The heat comes from two major sources.

  1. Residual heat, which is heat left over largely when the earth formed during the gravitation aggregation phase when the solar system formed. Small bodied such as asteroids which existed before and collided to form the earth and cooled still exits and emit the heat from their bodies
  2. Decay process of radioactive elements in the earth’s mantle. It is estimated that since the earth formed over 4.5billion years ago, there are significant radio active materials, largely radium, radioactive potassium and others in tiny quantities but the decay of these generated enough materials to keep the earth warm

Geothermal energy resource at the surface is therefore the rate of heat flowing through the earth’s surface at any given location.

The rate of this heat flow is to surface is highly variable and depends on the local geological settings and on the types of rocks directly beneath the surface at any given location.

The heat generated from the earth’s surface is measured in the same way as we measure solar energy (Watts per Meter Square). The hottest points on the earth’s surface are ironically the deep ocean basins where magma is always welling up and creating an undersea chain of volcanic mountains.

These actually create new crusts in the ocean basins.  Continents are relatively cool although there are hot spots on the margins such as in the North America where there are occasional heat flows with rates ranging between 20 milliwatts per square meter to 50,000 milliwatts per hour.

Key Features of Geothermal Power

The key feature of geothermal power is (electricity generation) is the rate at which temperatures increases with depth, which is the Local Geothermal gradient. i.e How far deep you have to reach the rocks that is hot enough to create steam.

An average gradient in the crust is about 25 degrees centigrade per km. i.e if you dig by 1 km deep the temperature at that point will be 25 degrees Celsius and constantly at that rate as you go deep and deeper.

The local gradient and thermal conductivity of the rocks the surface determine the local heat. In the mountain areas where the rocks are relatively recently formed the temperatures are hotter and well suited for geothermal.

Geothermal gradients are important because they determine how deep one has to dig to reach to a rock hot enough to produce steam by exposing water to the hot surface. Even in areas with low gradients, geothermal systems can be used for residential and commercial heating and cooling.

Geothermal power basics

To date geothermal power is still a very small tinny part of the overall electricity generating capacity of the world. The total geothermal capacity was approximately around 15 GW by 2018 and was projected to increase to 18 GW by 2021, compared to 600GW of solar and 400 GW of hydro. Asia had the largest installed capacity of around 4.8GW closely followed by the United States with around 3.5GW.

Types of Geothermal systems

There are largely two types of geothermal systems.  The Hydrothermal systems (Hot wet rock) and the Enhanced Geothermal Systems (EGS).

The Hydrothermal systems account for nearly all installed and commercial systems. These are systems where natural ground water or injected water is heated at a depth. It is either its natural depth or deep boreholes and circulated through an exchange system to create steam to drive a conventional steam turbine. Hydrothermal systems must have enough natural permeability of rocks to support enough water circulation without high pressure pumping or fracturing of the rocks.

The Enhanced Geothermal System (EGS) is also referred to as the dry rock system, whereby water is circulated through a hot dry rock so the rock itself is hot but doesn’t naturally have water present because it is largely impermeable.

EGS are considered quite revolutionary in the geothermal energy sector as they can be easily installed in multiple places around the world through available engineering methods. Practically, everywhere around the world it is possible to drill and reach enough depth to generate an Engineered Geothermal System.

Why it is attractive

Geothermal has the lowest carbon foot print of any energy system types and the cheapest in dollar terms per megawatt hour produced and therefore quite competitive compared to other sources. Moreover, it can operate at high capacities of around 70% capacity compared to 20% to 30% for solar and wind respectively. Geothermal systems can also easily support other associated economic activities such as tourism in the hot water springs and spurs.

East Africa’s Geothermal potential

Kenya

In East Africa  so far Kenya has the largest geothermal energy systems network located within the Rift Valley with an estimated potential of between 7,000 MW to 10,000 MW spread over 14 prospective sites.  Kenya generates at least 47% of its energy geothermal with a substantive portion of this being generated from the expansive Olkaria station in Naivasha, generating up to 800MW of Kenya’s geothermal power.

Figure 2: Olkaria Geothermal Project in Kenya, Courtesy Photo of Shutterstock

According to Kenya power, so far, the Country sources up to 91% of its energy from renewables with 47% geothermal, 30% hydro, 12% wind and 2% solar. Kenya hopes to transition fully to renewables by 2030, with KenGen saying the country has the potential to increase its capacity to as much as 10,000MW of geothermal energy.

A report by the Geothermal Energy Association noted Kenya as “one of the fasted growing geothermal markets in the world.” The country is fortunate to have great geothermal energy potential, offering a cost-effective alternative to expensive fossil fuel power. In 2017, installed geothermal capacity in Kenya stood around 660 megawatts (MW); the government has established a target of 5,000 MW by 2030[1].

With more than 14 high temperature potential sites occurring along the Rift Valley, Kenya has an estimated potential of more than 10,000 MWe. Other locations include Chyulu, Homa Hills in Nyanza, Mwananyamala at the Coast and Nyambene Ridges which have equally good potential for additional geothermal generation.

As a result, it is predicted that “Kenya will lead the world with substantial additions to their geothermal infrastructure over the next decade and become a center of geothermal technology on the African continent.”

Geothermal has numerous advantages over other sources of power. It is not affected by drought and climatic variability, has the highest availability (capacity factor) at over 95 %, is green energy with no adverse effects on the environment, and is indigenous and readily available in Kenya, unlike most thermal energy that relies on imported fuel. This makes geothermal a very suitable source for baseload electricity generation in the country[2], putting Kenya in clean energy terms, a step ahead of the others in the region.

Tanzania

Tanzania is endowed with a huge geothermal potential which has not yet been used, and has only been explored to a limited extend. According to Tanzania Geothermal Development Company Limited (TGDC), a 100% subsidiary company of Tanzania Electric Supply Company Limited (TANESCO), in 2013 Tanzania had a geothermal power potential of 650 Mw. However given its location along the East African Great rift valley system, it is likely that these figures are conservative and geothermal potential could be higher with some estimates putting it up to the range of 5000 MW.

Most of the identified geothermal resources occur in three regions: in SW Tanzania in the Rungwe volcanic field, where the project site Songwe-Ngozi, is located, in northern Tanzania at the southern end of the eastern branch of the East African Rift system and in eastern Tanzania (e.g. Rufiji Basin) along the Proterozoic mobile belt around the Tanzanian Craton.

The Deputy Prime Minister and Minister for Energy, Dr Dotto Biteko said Tanzania would start drilling by April 2024. This was to be a major first step in establishing the resource potential before starting energy production.

However, to date, very limited information is available on the progress of these projects and the actual dates when geothermal power could flow into Tanzania’s energy system are uncertain.

Geothermal power is a reliable, low-cost, environmentally friendly, alternative energy supply and an indigenous, renewable energy source, suitable for electricity generation. With an increasing demand for power amidst outages and uncertain future of the LNG gas to power projects, investment and development of geothermal, could be a major boost to Tanzania’s power needs.

Uganda

The main geothermal areas are Katwe-Kikorongo (Katwe), Buranga, Kibiro and Panyimur located in Kasese, Bundibugyo, Hoima and Pakwach districts respectively. According to available data Uganda geothermal resources are estimated at about 1,500 MW[3].  Currently, the government has ambition to develop up to 100 MW in geothermal power generation capacity in the country, as reported by Afrik21[4].

Uganda’s geothermal potential lies primarily within the western part of the country, with the most prominent prospects found in the Panyimur and Kibiro regions. Geological studies indicate that the East African Rift System, which traverses through Uganda, provides favorable conditions for geothermal reservoirs. The estimated geothermal capacity in the country is substantial, and tapping into these resources could significantly contribute to the nation’s energy mix.

The main geothermal resources of Uganda are centered around Lake Albert and Lake Edward in the districts of Kasese, Hoima, Bundibugyo and Nebbi. This area lies along the Western Branch of the East African Rift System (EARS)[5]

But despite the considered geothermal potential, challenges remain in the development and utilisation of the resources. Uganda’s geological complexity poses challenges for geothermal drilling operations. However, advancements in drilling technologies, such as slim-hole drilling and directional drilling, have the potential to overcome these obstacles. Investing in research and development specific to Ugandan conditions is considered a major factor that will improve drilling efficiency and reduce costs[6].

Obstacles to peaking of Geothermal in East Africa

Despite being the cleanest and most efficient energy source, scaling up geothermal generation in East Africa faces significant obstacles.

  1. The resources are site specific. Globally, hydrothermal systems with wet hot rocks are rare in the world and can only be found in very special locations. Similarly in East Africa these resources are located largely along the Great Rift Valley belt such as Western Uganda, Along the Rift Valley in Kenya and Tanzania
  1. Relatively long lead time of between 5-7 years from conception to production of electricity. Heavy investment in transmission and other support infrastructure due to long distances to existing load centers.
  1. High upfront investment costs. In East Africa, the initial investment costs in geothermal is still expensive compared to other forms such as hydro. According to published data indicate that installation costs range between 2.5 to 6.5 million US$ per MWe. Kenya average installation cost is about 3.6 million US$ per MWe[7]. Geothermal exploration demands money upfront – one well costs about 500 million USD[8]. With a few private investors so far, the governments have to borrow expensive loans to build geothermal power plants.
  1. High resource exploration and development risks. In East Africa there is limited updated knowledge of the geology and geodata about the resource potential. Most of the data was collected in the 1970s and 80s and has been upgraded slowly. For example, McNitt (1982) estimated resource potential for Kenya at 1,700 MW, whereas the latest estimates have revised the potential to 7,000-10,000 MW and similarly in Tanzania the latest resource estimate is about 5000 MW, up from 650 MW in 1982.
  1. Inadequate geothermal expertise. Unlike other power options, it requires highly skilled technicians. In a developing country such as in East Africa, geothermal training programs are hard to come by and local experts are limited.
  1. Land use conflicts. Geothermal power stations require substantive large chunks of free land to develop. In this process there can be potential risks for land conflicts between the government or investors and local residents.
  1. Risks for natural disasters. EGS systems have to deal with induced seismicity, or fracturing of rocks to high depth of about 10km or deeper, which risks induced earth quakes due to injected fluids through fracturing. This technology despite being revolutionary in nature is yet to become readily and cheaply available in East Africa.

Key policy recommendations

  1. Conduct and update the existing geodata on the resource potential and feasibility. Experts confirm the only way forward for scaling up geothermal might be for the “government to carry out feasibility studies and exploration to attract private sector development. Once areas with geothermal energy capacity are well mapped out, (…) it will be easier to attract investment in this sphere.”
  1. Scale up investment in existing geothermal projects. Given its huge initial investment costs, the government can reduce this burden by developing projects through Private Partnerships (PPPs) structured investments. Moreover, the government must continue to support and fund geothermal resource assessment and development so as to manage the geothermal exploration risk and attract investors.
  1. Reduce administrative barriers and corruption in the energy sector, by among others, adequate financing of dedicated Geothermal departments, streamlining licensing and allocation of geothermal blocks with incentives and sanctions in order to accelerate geothermal development.
  1. Promote research, development and capacity building for geothermal development by providing fiscal and other incentives. Investment in training can reduce on the current specialized skills gap required for Geothermal development and operations.
  1. Increase marketing of East Africa’s Geothermal potential and its value as a clean energy source. This can be further ramped up by the government packaging and offering multiple incentives through attractive pricing to promote and encourage direct uses of geothermal resources such as utilization of heat, water, gases and minerals. In other words, investment in Geothermal is not only an investment in the energy sector but also in associated productive ecosystem around it, including tourism. A good example is the Olkaria hot spur in Naivasha.
  1. Promote early geothermal generation through implementation of efficient modular geothermal technologies. This is essential in cutting back on the long lead time from conception to production by more than half.
  1. Enforce proper compliance to mitigate possible occurrence of disasters such as man induced earth quakes from fracturing for geothermal power with the regulatory requirement to utilize the best available technologies that optimize the resource and conserve the reservoir.

[1] https://ndcpartnership.org/knowledge-portal/good-practice-database/geothermal-energy-powering-kenyas-future-menengai-geothermal-field-development#:~:text=The%20country%20is%20fortunate%20to,of%205%2C000%20MW%20by%202030.

[2] https://renewableenergy.go.ke/technologies/geothermal-energy/

[3] https://www.thinkgeoenergy.com/uganda-targets-geothermal-development-of-up-to-100-mw-by-2025/

[4] https://www.thinkgeoenergy.com/uganda-targets-geothermal-development-of-up-to-100-mw-by-2025/

[5] https://www.carbon-counts.com/uganda-geothermal-resources

[6] https://www.linkedin.com/pulse/geothermal-energy-engineering-uganda-harnessing-earths-enyutu-elia/

[7] https://rafhladan.is/bitstream/handle/10802/6070/UNU-GTP-SC-17-1201.pdf?sequence=1#:~:text=The%20installation%20cost%20is%20also,3.6%20million%20US%24%20per%20MWe.

[8] https://www.euronews.com/business/2022/11/14/cheap-and-eco-friendly-the-huge-potential-of-geothermal-power

Tanzania’s Mining Investment Climate: Reforms that government should take to attract and retain new mining investors

According to the Ministry of Minerals, government stands ready to facilitate investor meetings and explore potential business ventures in Tanzania. However, investors operating under the current mining regime in Tanzania still face challenges which require a thorough regime review and fix, for the challenges to go.

Author:  Governance and Economic Policy Centre

Tanzania is endowed with a variety of mineral resources and has been successful in attracting large mining investments. However, over the past few years, this investment curve stagnated and has zigzaged out, as potential new investors stayed away in fear of a potentially unpredictable regulatory mining regime.  In order to attract and retain new large-scale projects, investors suggest, that pertinent reforms must be made.

This brief traces Tanzania’s mining history and from an investor perspective, shows how the country started losing the momentum and its share as a leading mining destination. It proposes some actions and reforms that could be made to reclaim its glory while at the same time achieving a win-win regime for sustainable mining and development.

Tanzania’s mining in a historical context

Mining and minerals trading has a long history in Tanzania, dating back to 18th century when Arab traders plied the Tanzanian coastal towns bringing spices from the Arabian gulf in exchange for gold, copper, iron and other minerals.  Records show that the German colonialists discovered gold in Geita and Sekenke (Singida) where the first gold mine was established in 1909.

In 1940 a Canadian Geologist Dr. John Williamson discovered the Mwadui Kimberlite pipe and established a diamond mine there.  After his death in 1958 his heirs sold the mine to De Beers (50%) and the British colonial government (50%).

In 1971 the government of Tanzania nationalised all mines.  The State Mining Corporation (STAMICO) took ownership of the Diamond mine and run it between 1974 to 1993 when years of ill maintenance took their toll to cause an urgent need of recapitalisation and equipment overhaul.  This need came at a time when the country was going through a tough economic situation that it was not possible to accommodate the need.  A decision was made to invite De Beers to the rescue. They agreed to recapitalise the company and in return acquired a 75% stake in the mine in 1994.  In 2009 DE Beers sold their 75% stake to Petra Diamonds.

Following economic troubles of the seventies, raising fuel prices, geopolitical tensions between ‘east and west’, the 1978/79 war between Tanzania and Uganda, low commodity prices for the country’s backbone agriculture produce (cotton, coffee & sisal) exports, the Tanzanian economy continued to deteriorate to the extent that the country was left with no other option but to embrace free market economic policies advocated by the Bretton Woods Institutions. 

With advice and guidance from the World Bank and IMF, Tanzania liberalised its mining sector and invited foreign investors.  This was during the 3rd phase government of H.E. Benjamin William Mkapa (RIP). The shift to free market economy and liberalised mining industry required new policies, laws and regulations.

New Mining Reforms and knock off effects

A Mineral Policy was formulated in 1997.  The policy gave way for private sector to take the lead in mineral exploration, development, mining, beneficiation and marketing.  Instead of being an active participant, the government would become the facilitator, the regulator and the administrator. This policy was complimented by the Mining Act 1998.

The Mineral Policy 1997 and accompanying Mining Act 1998 together with personal efforts by the late President Benjamin William Mkapa resulted in foreign mining investors in their multitudes flocking the country.  In a span of about eleven years (1998 – 2009) six large scale gold mines were opened.  These are:

  • Golden Pride Mine in 1998, owned by Resolute Mining Limited of Australia
  • Geita Gold Mine in 2000, owned by Anglogold Ashanti of South Africa
  • Bulyanhulu Gold Mine in 2001, owned by Barrick Gold of Canada
  • North Mara Gold Mine in 2002, owned by Sutton Resources of Canada and later the mine was acquired by Barrick Gold of Canada
  • Tulawaka Gold Mine in 2005, owned by Pangea Minerals – a wholly owned subsidiary of Barrick Gold of Canada
  • Buzwagi Gold Mine in 2009, owned by Barrick Gold

Despite the many benefits that the new mines brought, including improved balance of trade realised by increased gold exports, increased government revenue collection through import & employment taxes, the multiplier effect that was created by new business opportunities to local suppliers and contractors, there was still a public outcry that the country was not getting enough.

It deemed necessary to form various committees and task them with reviewing the country’s policy, law, regulations and public views on the mining industry and compare the findings to the practice in other African countries.  The aim was to improve the playing field to achieve a win-win situation.  Four committees were formed for the cause at different times between 2002 and 2009:

  • General (Rtd) Robert Mboma Committee in 2002
  • Kipokola Committee in 2004
  • Lau Masha Committee in 2008
  • Judge Mark Bomani (RIP) Committee in 2009

Observations and opinions collected from the various committees led to the formation of a new Mineral Policy in 2009 and enactment of the (new) Mining Act 2010.

Vision of the Mineral Policy 2009 was to attain an effective mineral sector that contributes significantly to the acceleration of socio-economic development of the country, through sustainable development and utilization of mineral resources by the year 2025.  This included attaining a GDP contribution of 10%.  Note that the GDP contribution of the mining sector was 2.7% in 2010 (BOT Annual Report June 2011). Focus of the Mineral Policy 2009 was to integrate mining with other sectors of the economy.

It’s interesting to note that:

  • After establishment of the Mining Act 2010 and its accompanying regulations, only one ‘medium scale’ gold mine was constructed – the New Luika Mine in 2012.
  • Thereafter, there have been a limited number of medium scale mines (smaller in size and production capacity than New Luika) which have been constructed, but not a single large scale mine has been built ever since.

Following the change of government in 2015, the Mining Act 2010 was further overhauled in 2017 and led to the current version of the act – Mining Act CAP 123 R.E. 2019.  This overhaul was complemented by two new acts:

  • The Natural Wealth and Resources (Permanent Sovereignty) Act, 2017
  • The Natural Wealth and Resources Contracts (Review and Renegotiation of Unconscionable Terms) Act, 2017

The Mining Act CAP 123 R.E. 2019 introduced new clauses which imposed more control of natural resources by the government.  It banned export of mineral concentrates and put more emphasis on local refining of extracted minerals.  It revoked retention licenses and introduced new clauses to govern local content and corporate social responsibility.  The intent was to see more participation of Tanzanians in management of the foreign owned mining companies and in the value chain of the mined minerals.  Instead of exporting raw minerals the companies were required to beneficiate locally before export. The Government was also enabled by the law to acquire at least 15% un-dilutable free carried interest in Mining Licenses and Special Mining Licenses.

Key takes from the new law on ‘permanent sovereignty’ were introduction of clauses which mandated for:

  • Arbitration of commercial disputes in local courts and using Tanzanian law
  • Review by Parliament of agreements entered on natural resources
  • Local beneficiation of mined minerals
  • Retention of earnings in local banks

The ‘review and renegotiation of unconscionable terms’ act gave mandate for the Parliament to review any agreement on natural resources previously entered by the government, to be reviewed and renegotiated if the terms entered appeared to be unconscionable.

In a 2017 commentary, titled: Tanzania Overhauls Mining Laws, Fines Investor US$190 Billion: Is Your Investment Protected?  the JonesDay, a leading commercial law firm wrote; ‘The new laws heighten the government’s role and power in investment contracts, increase the costs of foreign investment, and substantially reduce investment protections, including international arbitration. Investors should take immediate action to mitigate the risks associated with the Tanzanian government’s actions pertaining to the mining industry[1]. Despite current government reassurances, to date these fears have continued to revibrate among risk averse investors, who remain uncertain of Tanzania’s future investment climate. For these laws have never been repealed.

Factors driving mining investment decisions

To put matters in context, one crucial criterion that attracts mining investors to a country is rich geology that has a scientific potential to host high grade orebodies. Tanzania is among the African countries blessed with such geology.  But to attract mining investors rich geology cannot stand on its own.  Rich geology must be complemented by:

  1. A conducive business environment
  2. A stable fiscal/mining regime
  3. Security of tenure
  4. Political stability and peace in the country
  5. Skilled artisans
  6. Good infrastructure – roads, rails, power, etc.

Over the years until in the recent past the country managed to do well in the list above on items 4 to 6.  Items 1 to 3, however, have been a challenge.

 Wins and missed opportunity

When the first large scale mine was established in 1998 at Lusu ward, Nzega district, Tanzania had a challenging road, rail and power infrastructure.  Some important mining skills were lacking.  But the country was politically stable, mining companies owning Special Mining Licenses had their fiscal issues stabilised by the Mining Development Agreements (MDA) signed with the government, there was security of tenure and a good business environment.  Over time, good progress continued to be made in some areas, but there was deterioration of circumstances in other areas as noted by  investors. 

Frequent and unilateral changes to laws and regulations led to breach of mine development agreements (MDAs).  Some concessions given to investors through the signed Mine Development Agreements were not honoured by the Tanzania Revenue Authority because they were not gazetted, and despite requests from concerned investors the Ministry of Finance avoided gazetting the MDA’s.

Significant improvement and upgrade made to road and power infrastructure; and skills development was defeated by unnecessary red tape brought about by introduction of a multiplicity of regulators who appeared to be more focused in raising revenue through hefty fines rather than providing oversite and regulating the sector.

Security of tenure was put at risk by uncontrolled gold rushes and haphazard trespassing by unlicensed artisanal miners. Investors who had invested millions of US Dollars in green field exploration witnessed invasion of their tenements by unlicensed artisanal miners with no serious intervention by authorities to rescue the situation, allowing the invasions to be politically concluded at the demise of the investor.

In summary, the current mining industry in Tanzania has been a mixed grill of successes and failures. Despite the many ups and downs over the years, several ‘wins’ have been witnessed by the sector following revision of the Mining Act CAP 123 R.E. 2019 and enactment of the laws on sovereignty in natural resources and renegotiation of unconscionable terms on agreements entered by the government on natural resources:

  • Renegotiation of the Mining Development Agreement entered between the Government of Tanzania and Barrick Gold Corporation which led to Acquisition of a 15% un-dilutable free carried stake by the Government in Barrick Gold mining projects in Tanzania (Bulyanhulu & North Mara Gold Mines) and signing of a Framework Agreement between the Government and the company.
  • Acquisition of a 15% un-dilutable free carried stake by the Government of Tanzania in the Kabanga Nickel project (Tembo Nickel Corporation).
  • Acquisition by the Tanzanian Government of a 15% un-dilutable free carried stake in the Ecograph Epanko graphite project
  • Acquisition by the Tanzanian government of a 15% un-dilutable free carried stake in the Peak Resources Ngualla REE project (through Mamba Minerals)
  • Acquisition of a 15% un-dilutable free carried stake by the Government in the Strandline Resources Heavy Minerals Sands project through Nyati Resources
  • Acquisition by the government of a 15% un-dilutable free carried stake in the Evolution Energy Chilalo Graphite project through Kudu Graphite Limited
  • Acquisition of a 20% un-dilutable free carried government stake in the Perseus Mining Nyanzaga Gold Project through Sota Mining Ltd.
  • Increased royalty collections following increase of the royalty on gold to 6% from the previous 4%
  • Increased gold revenue collections through the introduction of 1% inspection fee on gold exports
  • Construction of 3 gold refineries in Mwanza, Geita and Dodoma which have not only facilitated purchase of refined gold by the Bank of Tanzania but have also created employment opportunities to Tanzanians.
  • Enforcement of local content regulations which have in turn facilitated the participation of Tanzanians in the mines supply chain.
  • Enforcement of new local content regulations have made it possible for several Tanzanians to take over senior management positions in foreign mining companies investing in Tanzania
  • Enforcement of new CSR regulations have enabled CSR projects to be managed in a fair and transparent manner, ensuring value for money of the projects.
  • Introduction of the online Mining Cadastre system has revolutionised the licensing process by modernising it. The ‘first come first served’ approach in license application is working fine and fairly.  So long as they have all the required supporting documents in soft / electronic form, applicants are now able to lodge license applications from wherever they are in the world. They just need to be connected to the internet.
  • Significant improvements in power generation and transmission capacity have enabled connection of major mines to the national electricity grid. It was heartwarming to witness connection of the Geita Gold Mine (Anglogold Ashanti) to the national power grid.  This event shall not only save the company millions of US Dollars in energy cost, but it will also increase Tanesco’s revenue.  The Geita mine used to consume about 8 million litres of diesel every month to generate electricity using a rented thermal plant.

But, have the country now achieved a win-win situation? How is this goal going to be realised?

In the business world the investors would always want to maximise their profits and governments would always want to maximise their tax and fees collections to support socioeconomic development.  An attractive and well researched mining regime that involved stakeholder participation in its making is the only one that will manage to at least strike a delicate balance between the profits anticipated by the investors and the taxes and fees anticipated by the Government.

Obstacles that Tanzania Mining investors face

Courtesy Photo: Tanzania Minerals Minister, Anthony Mavunde speaks to stakeholders in Dar es Salaam

According to the Ministry of Minerals, government stands ready to facilitate investor meetings and explore potential business ventures in Tanzania. This unwavering commitment to attracting foreign investment underscores the nation’s dedication to unlocking the full potential of its mining sector. Tanzania Mining industry is highly important since it accounts for a significant share of the country’s export revenues. The Government plans to have this sector contribute 10% of GDP by 2025.

However, investors operating under the current mining regime in Tanzania still face challenges which require a thorough regime review and fix, for the challenges to go.

  • Several advanced mining projects including the ones in Graphite, REE, Heavy Mineral Sands and Gold have continued to struggle in raising project finance due to some clauses in different laws governing the mining sector in relation to the ownership of won minerals as well as banking of mineral sales proceeds
  • Extended negotiations on the making of framework agreements have been one area that frustrates many investors whose projects have reached that stage in their development
  • If left the way they are, some local content procurement tendering procedures have the potential to cause costly delays during the construction phase of the advanced projects
  • If left as currently reads, some wording on Section 56 of the Income Tax Act CAP 332 R.E. 2006 will end up ‘taxing’ capital of exploration companies when shareholding changes. Triggering imposition of Section 56 will cause a 30% capital gain tax on a junior exploration company when part of whose shares are acquired by another company for the intent of capitalising the junior company.  It should be noted here that exploration companies are not operating mines and instead of making money they normally burn money trying to find a mineable mineral deposit.  Trying to tax a non-trading company is weird and unheard in the mining industry.  The only way we can generate new mines to replace closed ones is by promoting exploration – not discouraging, investors say
  • The Income Tax Act CAP 332 R.E. 2006 disallows deduction of Royalty costs when calculating taxable income of a mining entity. This is a concern because no company is allowed to export minerals unless it has paid Royalty, meaning that royalty is part and parcel of the costs incurred to generate revenue of the company and should therefore be an allowable deduction

The above listed are only a few issues of concern to mining investors and something that the Government needs to have another look about or even conduct a study to see their quantitative impact in discouraging mining investment in Tanzania and what will be the impact (pro or cons) if some of the clauses will be amended to reflect investor’s proposals.

Proposed remedial actions and reforms that government should take

 There is a raft of measures that government can take. These include;

  1. Asses the current investment climate with a view to determine whether the 2017 mining reforms achieved any significant dividend to the mining sector
  2. Re-examine the current laws, particularly those passed in 2016 and 2017 to see if there are any remaining clauses that may be of concern to the mining investors. Some changes were made , however government should evaluate and see if there are any areas that need further review, without losing the core purpose of securing maximum value for Tanzania.
  3. Re-evaluate Tanzania’s mineral geology and mining potential in the current context and future mining investments trends, with a view of keeping aligned and on course to attract and retain new large-scale investors
  4. The final approach would be to form yet another task force made of representatives who are experts in the field of mining business and mining taxation, from the government and the mining private sector, to mutually consult and come up with a proposal that would attain a level play field balancing the profit anticipation of the investors and the tax and fees anticipation of the Government.

Minerals will always be a finite resource. Value can only be derived from them when they are extracted from underground and used to the benefit of the country.

The opportunity is still there to exploit minerals in Tanzania for the fair benefit of both the Government of Tanzania (on behalf of its people) and the investors. With tweaks to some of the current mining laws, bolstered with stability and government confidence building measures, the Tanzania can recapture and retain its glory as the prime mining investment destination in Africa.

While contemplating on the next move, the government should also make a thorough assessment of mark-timing mining projects – public (like the Liganga iron ore and Mchuchuma coal) and private ones (like the Kabanga Nickel, Mkuju River Uranium and Nyanzaga Gold), to see how such projects can be fast tracked and brought to production stage. With the speed at which technology is developing in the world, Tanzania faces the big risk of having some of its mineral deposit being stranded.  The coal deposits at Mchuchuma are faced with the highest risk with the current push for the world to go green and stop the use of fossil fuels.

With determination and the right people and policies at the forefront, the government can profitably and timely exploit the country’s minerals for the social economic development of its people.

[1] https://www.jonesday.com/en/insights/2017/08/tanzania-overhauls-mining-laws-fines-investor-us190-billion-is-your-investment-protected

Unlocking Non-Tariff Barriers (NTBs) in Regional Agricultural Trade in East Africa: An Analysis of Sanitary and Phytosanitary (SPS) Regime for Horticultural Products in Tanzania and Its Effects on International Trade.

Generally, Non-Trade Measures (NTMs) are good for safe and ethical international trade; however, when poorly regulated and applied irregularly, they transform into Non-Tariff Barrier (NTBs) and can be harmful to trade. Our short analytical study shows that Tanzania is both a perpetrator and victim of irregular SPS measures and could be losing billions in international trade and revenue foregone from its horticultural sector

By Jacob Mokiwa, Researcher , Governance and Economic Policy Centre

(Featured  top image, Courtesy of UNDP-Tanzania, Kizimba Project, Itete Ifakara Youth) 

Sanitary and Phytosanitary measures (SPS) are standards and regulations put in place as Non-Tariff Measures (NTMs) to ensure the safety and quality of food, as well as to protect humans, animals, and plants from risks associated with diseases, pests, and contaminants based on science. SPS decisions are supposed to be science based. These measures are integrated into Tanzania’s regulatory framework, including through legislation, policies, and adherence to international agreements like the WTO SPS Agreement and the International Plant Protection Convention (IPPC) IPPC.

Also, the normative framework governing East African Community (EAC) SPS measures include but are not limited to Article 108 (c) of the EAC Treaty; Article 38 (1C) of the Customs Union Protocol, EAC SPS Protocol, SPS Information Sharing Platform, etc.).

This short policy brief analyzes Tanzania’s Sanitary and Phytosanitary (SPS) regime for horticultural products, assessing their impact on international trade and concludes with recommendations for enhancing SPS policy measures to ensure safety, compliance and a facilitative smooth international trade in Tanzania horticultural products. It emanates from our economic governance work on regional economic cooperation, trade and investment, with multiple aims of creating awareness about SPS as a major regulatory tool in regional and international trade that small traders and aspiring international horticulture exporters must know.

State of Horticultural Products

Faraha Salim sells vegetables in the market in Lushoto thanks to a small loan from a community savings and lending group-VICOBA.

Tanzania is a largely an agricultural producing and exporting country with its horticulture sector becoming a rapidly expanding sector with a huge potential to contribute to Tanzania’s economy through employment, trade and export foreign income earning. The country has large chunks of arable land, water bodies and favorable climate for horticulture in many regions across the country.

Tanzania’s horticultural sector encompasses various products, including fruits, vegetables, flowers, and spices.

In recent years, Tanzania has registered impressive export performance of different horticultural products, and this presents an advantageous opportunity to the smallholder farmers to increase their production. Despite this huge potential, the horticultural sector still suffers multiple challenges, including financing, regulation and export standardization. 

The local market infrastructure  conditions are still poor. The cold storage chain for horticultural products from the gardens to the market is limited. Horticulture products are transported in hot trucks, sold in open markets damaging quality  and export standards. The net effect is that Tanzania’s export share of the regional and global horticultural trade has been growing but remains low, compared to its neighbors such as Kenya. According to Ministry of Agriculture statistics, the horticulture sector has become the second largest growth driver of the entire agricultural sector, after food crops contributing about 25% of the sector but has remained stagnant in  growth at 11% annually.

According to the Tanzania Horticultural Association (TAHA) and the BoT Monthly Economic Review (MER), for the year ending in December 2023, the value of horticultural crops’ exports grew to $417.7 million (Sh1.044 trillion) as compared to $290.1 million (Sh725.25 billion) recorded in 2022. This shows that exports grew by $127.6 million (Sh319 billion), which is equivalent to 43.9 percent. The growth in exports comes after a decline from $384.9 million (962.25 billion) reported in 2021 to $290.1 million (Sh725.25 billion) in 2022. The decline accounted for a total of $94 million (Sh237 billion), which is equal to 24.4 percent[1].

This data if extrapolated for the last five years indicates that the Horticultural sector can be a major game changer in Tanzania’s international trade exports, serving as a major source employment to the bludgeoning unemployed youthful population of foreign revenue through increased investment in horticulture and export trade.  Moreover, the sector can leap frog Tanzania to a regional competitor, outpacing its neighbors and rivals in the horticultural sector.

However, the limited awareness, selective and uncoordinated application of SPS standards by both export and importing partners in intra-regional and international trade has gradually turned them from being Non-Tariff Measures (NTM) to become Non-Tariff Barriers (NTBs) to trade in Horticultural products amongst others.

According to Land O Lakes Trade of Agriculture Safely & Efficiency (TRASE) report, the East African Community (EAC) represents one of the fastest growing regional economic communities in the world. And yet, trade of agricultural products from and within this region has been hindered by Sanitary and Phytosanitary (SPS) issues 

SPS Measures Regime in Tanzania

Tanzania’s SPS regime consists of several legal frameworks articulated and differentiated under the three SPS functions of animal health, food safety and plant health. This involves the Plant Health Act, 2020 with the mandate of issuing phytosanitary certificates, among other functions, Standards Act No. 2 of 2009 with the mandate of regulating and developing mandatory standards and responsible for inspection and certification). 

The regulatory institutions include the Ministry of Agriculture and Livestock, Ministry of Trade and Industry, Tanzania Pesticides and Plant Health Authority (TPPHA) established under the Act No. 04 of 2020 with a mandate to comply with the requirements of International Plant Protection Convection (IPPC) on sanitary and phytosanitary measures[2].  The other regulatory institution is the Tanzania Bureau of Standards (TBS) established under Act No. 3 of 1975 as the National Standards Institute and subsequently renamed Tanzania Bureau of Standards under Act No. 1 of 1977. On 20th March 2009, the Standards Act No. 3 of 1975 was repealed and replaced by the Standards Act No. 2 of 2009.

The Bureau was established as part of the efforts by the government to strengthen the supporting institutional infrastructure for the industry and commerce sectors of the economy. Specifically, TBS is mandated to undertake measures for quality control of products of all descriptions and to promote standardization in industry and commerce[3]. So far, the regime has been quite robust, enabling Tanzania to enforce its SPS measures, however faces multiple challenges that would benefit from improvement.

Challenges

The agricultural sector already faces multiple challenges but the SPS regime in Tanzania adds another layer of complexity, potentially hindering Tanzania’s ability to invest in the horticultural sector, produce, export and compete effectively in the global market. For instance, some stringent SPS requirements cannot be met by small farmers in Tanzania due to the limited resources required for modern agriculture and consequently hinder the export of horticultural products, as meeting the standards can be costly.

Additionally, inconsistent enforcement of SPS regulations across different institutions and regions within Tanzania creates confusion and delays in trade processes and hence affects the competitiveness of Tanzanian products in international markets.

Furthermore, procedural framework for SPS regulation has shortcomings in the institutional framework and that, as a result, application of the existing legislations is impaired. There is limited capacity for speedy and quality testing and certification facilities. This lead to bottlenecks in the export process, delaying shipments and increasing costs for exporters.

Other challenges are; limited funding to attract and retain high quality talent, lack of transparency in certification, duplication of regulatory functions, poor coordination among the various SPS control agencies, lack of mutual confidence between enforcement agencies in different countries and non-existence of arrangements and mutual recognition agreements signed to facilitate trade.

Impact on regional and International Trade

 The effectiveness of Tanzania’s SPS regime significantly influences its international trade in horticultural products and therefore, there is a need to balance regulatory practices for health protection with trade facilitation. However, if not addressed, the regime may, and for purposes of enforcement of SPS controls, create trade constraints such as;

  • Market Access Restrictions: Non-compliance with SPS measures restricts access to lucrative international markets that is with stringent regulations, the production costs for horticultural producers may increase and making Tanzanian products less competitive compared to those from other countries. Kenya, Tanzania’s immediate horticultural competitor has been successful in meeting the standards at lower costs and thereby dominating the regional and international market of horticultural products.
  • Loss of Revenue: Inability to meet SPS standard leads to rejected shipments, financial losses, and diminished competitiveness in global markets, affecting the revenue generated from horticultural exports and thus undermines economic growth potential in the horticultural sector.
  • Diminished Reputation: Persistent challenges in meeting SPS standards tarnish Tanzania’s reputation as a reliable supplier of safe and high-quality horticultural products, thereby reducing consumer confidence and market demand.
  • Market Diversification: Strict regulatory requirements may incentivize Tanzanian exporters to explore new markets where compliance costs are lower or where there is greater alignment between domestic and international standards.
  • Quality Perception: Adherence to rigorous quality and safety standards can enhance the perception of Tanzanian horticultural products in international markets, positioning them as premium offerings valued for their quality and reliability. This could open up opportunities for niche markets and premium pricing strategies.

Policy Recommendations

Addressing challenges in Tanzania’s SPS regime for horticultural products is crucial for unlocking the sector’s full export potential, facilitating more investment and fostering sustainable economic growth. By implementing the recommendations outlined in this brief below, Tanzania can overcome SPS-related barriers to international trade and position itself in the global horticultural market as a reliable supplier of high-quality horticultural products and maximize the benefits of international trade for the citizens and economy. The following recommendations are proposed:

  1. Improve coordination among regulatory agencies and investing in digital platforms for documentation and compliance verification to simplify and accelerate SPS certification procedures for horticultural products and this will cut costs, reduce trade barriers and enhance market access.
  2. Strengthen enforcement mechanisms by putting in place an enabling legal framework to create effective and expeditious administrative mechanisms and provide clear administrative redress mechanisms for handling trade complaints and disputes. Also, the framework should provide for coordination of the various SPS control agencies to avoid overlaps and duplication. The current regime lays a solid foundation for further improvement.
  1. Improve infrastructure by allocating resources for upgrading SPS-related infrastructure including laboratories, inspection facilities and cold chain logistics that will enable producers and exporters to meet international standards and capitalize on emerging market opportunities. Tanzania has a deficit of cold storage capacity and its location along the equator exposes horticultural products to heat waves and vulnerability rapid quality deterioration and waste.
  1. Recruit and retain high quality staff with the of international testing and certification requirements. This must also be followed by addressing administrative limitations and sealing off opportunities for corruption.
  1. Prioritize capacity building, awareness and improve dissemination of information on SPS particularly for producers, small-scale traders, exporters and raising initiatives for regulatory agencies, on legislation and regulations, processes, procedures, standards, best practices, and technological advancements to enhance competitiveness in global markets.
  1. Foster partnership between public and private sector stakeholders to develop and implement SPS-related programs, training, research & development, technology adoption and technical assistance so as to address common challenges and promote innovation in the horticultural value chain. This must be backed by scaled up SPS technical assistance, going beyond the implementing institutions but also extended to horticultural farmers.
  1. Advocate for harmonization of SPS standards with international norms and regional trade agreements to streamline trade procedures and facilitate market access for Tanzanian horticultural products. Horticulture farmers and exporters still complain of disharmony in application and enforcement between Tanzania and its trading partners such as the Tanzania-South Africa Avocado case in 2021[4].
  1. Establish and empower the National SPS Committee to address and resolve technical SPS issues faced by traders and increase transparency on SPS requirements. Moreover, the committee should also be the main source of information on new SPS regulations, including measures introduced by trading partners.
  1. Constantly review to ascertain the extent to which Tanzania’s SPS regime is aligned to the EAC SPS protocol and its application is consistent and facilitative of international trade. There are cases of selective application and enforcement even among EAC member states.

References

Ministry of Agriculture. (2022). “National Horticulture Development Strategy.” Retrieved from Online:    https://www.kilimo.go.tz/uploads/books/Mkakati_wa_Kuendeleza_Horticulture.pdf

Tanzania Bureau of Standards (TBS). (2022). “Sanitary and Phytosanitary Measures for Horticultural Products: Regulations and Compliance Guidelines.” Retrieved from Online: https://www.tbs.go.tz/uploads/files/LIST%20OF%20COMPULSORY%20TANZANIA%20STANDARD%20AS%20OF%20JULY%20%202022.pdf

Trade of Agriculture Safely and Efficiently in East Africa (TRASE) (2021). “Assessment of SPS Legal/Regulatory Frameworks in the EAC Partner States”. Retrieved from Online: https://storcpdkenticomedia.blob.core.windows.net/media/idd/media/lolorg/publications/assessment-of-sps-legal-systems-in-eac-partner-states-4th-june-2021.pdf

Trade of Agriculture Safely and Efficiently in East Africa (TRASE) (2021). “Assessment of SPS Systems in the EAC Partner States”. Retrieved from Online:  https://storcpdkenticomedia.blob.core.windows.net/media/idd/media/lolorg/publications/assessment-of-sps-systems-in-eac-partner-states-18th-march-2021-print-file-4th-june-2021.pdf

TradeMark East Africa: (2021). Standards, Quality Infrastructure, and SPS Programme: Project Brief: Retrieved from Online: https://www.trademarkafrica.com/project/standards-quality-infrastructure-and-sps-programme/

Food and Agriculture Organization of the United Nations (FAO). (2021). “Good Practices for Strengthening National Plant Protection Organizations.” Retrieved from Online: https://www.fao.org/3/i6677e/i6677e.pdf

 [1] https://www.thecitizen.co.tz/tanzania/magazines/what-44-percent-rise-in-horticulture-exports-means-to-tanzania-4510004

[2] https://www.tphpa.go.tz/

[3] https://www.tbs.go.tz/pages/historical-background

[4] https://www.theeastafrican.co.ke/tea/business/tanzanian-avocado-exports-poised-to-grace-sa-tables-3506248

Political Risk and Investment in EA: An Expose of violent tax protests and political risk on Trade and Investment in East Africa

In our previous brief on Tax and Fiscal governance in East Africa, we observed that with dwindling foreign aid, it appears the governments in East Africa have resorted to squeezing everywhere to raise some dime.  We cautioned that Taxation may be good however, when the extremes are beyond reasonableness, governments are bound to break their break the back of the economies they aspire to build[1]. The recent and ongoing tax protests that have rocked the East African regions, with violence and vandalism spiraling out of control in Kenya, clearly underscore this point. A failed tax administration and an irate society.

By Moses Kulaba, Governance and Economic Policy Centre

@taxjustice @politicalrisk

Freedom of expression, the right to picket and demonstrate and resist punitive taxation has been established over the years.  The doctrine of no taxation without proper representation was long established by the Romans, Greeks and Americans during the famous Boston Tea Party 1773) and American war of independence, The French Revolution and the English, paving way into the famous Magna Carta.

This was further advanced by Adam Smith in his legendary Canons of Taxation asserting that generally, a good tax system must be underlined by proportionality and ability to pay[2] and political scientist Harold D Laswell’s tax law of who pays, what and when, and each individual or group should “pay their fair share. These principles that tax liability should be based on the taxpayer’s ability to pay is accepted in most countries as one of the bases of a socially just tax system and generally citizens are duty bound to reject a system that is regarded as unfair and disproportionally beyond their means[3].

However, when peaceful protests and demonstrations strategically drift towards violence, vandalism and murder like the ones we saw in Kenya, then these effectively transform into high level political risks to trade and investment.

According to multiple sources a political risk is a type of risk faced by investors, corporations, and governments that political decisions, events, or conditions will significantly affect the profitability of a business actor or the expected value of a given economic action. In simple terms, a political risk is the possibility that your business could suffer because of instability or political changes in a country: conflicts and unrest, changes in regime or government, changes in international policies or relations between countries, as well as changes that occur in a country’s policies, business laws or investment regulations[4]. Examples of political risks include; unilateral state decisions, war, terrorism, and civil unrest

By their nature, these risks are expensive to be insured against and constitute a major determinant factor for business in deciding where to invest or do business. Highly political risk countries experience sharp declines in investment and may attract low new trade and investments flows.

According to Trade and Investment experts such as Pierre Lamourelle, Deputy Global Head of Specialty Credit within Allianz Trade for Multinationals, the interconnected nature of the global economy makes it very possible that a political risk in one country may affect many businesses across the globe.

“What has changed in the 25 years since I started in this business is that we are living in a more connected world today,” says Pierre. On the upside, that means business is easier to conduct on a global scale. Almost everybody now has the ability to reach out to emerging countries or to conclude a contract and secure a sale in a foreign country.

On the downside, this means that when something goes wrong in one part of the world, you can feel the impact halfway around the globe – directly, if you are dealing with the country in question, or indirectly because of your diverse supply chain. Remember when the 20,000-ton container ship “Ever Given” got stuck in the Suez Canal in March 2021, shutting down international trade for a week?

In today’s increasingly interconnected world, “just-in-time” supply chains, global internet connection, and smartphones give SMEs the ability to conduct business in a global arena. This means the possibility for great opportunities, but also that every business is just steps away from political risk.

Persistent violent tax protests can make it difficult and unpredictable for the government to raise enough tax revenue to finance its obligations, including servicing of sovereign commitments such as paying off its debts and makes the economic environment very unpredictable. This can lead  global economic and financial institutions to flag or down grade the Country’s economic status as risky , making difficult and more expensive for the country and companies to raise external capital for investment.

Moreover, the violent protests occurred or are happening at a critical period of the year when East African Countries such as Kenya record the highest number of tourist arrivals into the Country for the summer holiday. Before the protests, national parks, hotels and beaches in Kenya’s tourist hot spots had already recorded high tourist bookings and were expecting a bumper harvest this season as the global economies and travelers rebound from the COVID 19 lock down.  Reports from multiple travel agents and hoteliers already indicate that most tourists have either cancelled or postponed their decisions to travel to Kenya and East Africa generally. Indeed, some already in the Country were gripped with fear of uncertainty and have left.

The burning image of an old plane at Uhuru Park did not send a good image either as most people around the world, unfamiliar with Kenya, thought Jomo Kenyatta International Airport was attacked and planes on the tarmac set on fire.  A recorded video clip that trended on social media of passengers crammed up at JKIA with a voice note indicating that many were fleeing the country added salt to the pinch suggesting Kenya was not safe anymore!

Similarly, travel advisories have been issued to foreigners in country and intending to travel to Kenya, to do that if it is essential and be vigilant of their security as safety during this violent period cannot be guaranteed. With all these at play, Kenya may remain a blacklisted destination among some foreign tourists for some period to come, denying the country the much-needed foreign revenue and jobs in its service sector. At least a number of high conferences that were planned for Nairobi were cancelled.

The net effects of the demonstrations therefore go beyond having the bill rejected but have long-term economic effects on Kenya’s economy. The violent Gen-Z’s may have to reconsider their approach to avoid a full economic meltdown.

Of course, there are legitimate concerns that some current established large business and investments were already not providing benefits to the young people. Multiple reports have shown that some businesses were tax dodgers while others belong to the politically connected who used their political connections to shove deals and amassing wealth on the backbone of the majority Kenyans. Moreover, given the current loopholes in the governance systems, new trade and investment opportunities would not support or create many new economic opportunities either.

However, when these arguments are advanced, it is also imperative to look at the broader picture of the net effect that violent protests can have on Kenya’s economy and future that the Gen-Z seeks to address. Kenya’s economy is extensively connected and dependent on the global economy with most global business having chosen Nairobi as a regional financial hub.  Violent demonstrations and disruption of such a magnitude can have significant long-term impacts.

With a government under siege and  constrained with a debt tinkering on the margins of default and  unrelenting rancorous youth roaming and burning the streets of Nairobi armed with negative social media, Kenya’s economy could slide into a free fall and recession, whose impacts on everyone could be far reaching.

Taxation and a strong tax system may contribute to improved governance through 3 maximum channels. Taxation establishes a fiscal social contract between citizens and the taxing state. Tax payers have a legitimate cause to expect something in return for paying taxes and are more likely to hold their governments to account. Governments have a stronger incentive to promote economic growth when they are dependent on fair taxes.

In this regard, we suggest the following;

  1. Resistance demonstrations and protests for tax rights must be expressed with limitations and restraint from both sides- The state and citizens alike
  1. Government must be rational when imposing taxes. Tax policies must be clear and predictable.  Clearly, imposing taxes on bread and blanket exemption of choppers is a sign missed priorities.
  1. Government communication apparatus must be robust enough to explain to the citizens the justifications for taxation and the political class must lead by example demonstrating frugality in public expenditure.
  1. There must be distinction between private, public and national critical infrastructure, whose destruction may or can affect Kenya’s national security interest and state existence. Lest we forget, Kenya has been a victim of terrorism and still faces extensive threats from both internal and external elements, whose interests to harm Kenya has never wavered. Attacks on its critical infrastructure exposes the Country and Kenyans further to major threats.
  1. Re-engineering of Kenya’s governance and economy to address the contemporary needs for the Gen-Z. Times have changed and the Gen-Z who now constitute an overwhelming majority will effectively from 2027 be forever a major determinant of East Africa’s political future. Women will no longer be a game changer in electoral politics and outcomes but the Gen-Z will be.
  1. There is need for both political and social sobriety. East Africa needs good leadership and peace!

[1] Tax and Fiscal Governance: Is VAT milking the broken tax cow dry? An analysis of tax trends and impacts on EAC small traders, with a case of the recent traders’ demonstrations and boycotts in Uganda:

[2] Adam Smith, in his book, The Wealth of Nations, 1776

[3] Schronharl, K,  etal; Histories of Tax Evasion , Avoidance and Resistance; https://library.oapen.org/bitstream/id/346cfc5f-6001-40e3-8a3b-fe46405df8c2/9781000823882.pdf

[4] https://www.allianz-trade.com/en_US/insights/what-is-political-risk.html#:~:text=Political%20risk%20is%20the%20possibility,country’s%20policies%2C%20business%20laws%20or

Digital Currencies and Future Monetary Policy in EA: How Governments can address the downside of cryptocurrency to advance financial inclusion in East Africa

In discussing the merits and de-merits of cryptocurrency reminds us of the simple high school definition of money. Money is what money does. In other words, anything that is widely acceptable as medium of exchange can become money. Most cryptoprenuers in East Africa just want regulation.

By Moses Kulaba, Governance and Economic Policy Centre

@mkulaba2000 @cryptocurrency @monetary blog @teamMonetary

In our first policy brief we explored and untangled the socio-economic and macro-economic risks associated with Crypto currencies. We concluded that the skepticisms and scrutiny of crypto currency is well deserved but noted that the underlying technology behind it could be used to drive future monetary policy and financial inclusion. In this second part of our digital economic governance and monetary policy analytical series, we explore how governments can or may navigate around these latent risks to formalize and make cryptocurrencies safe and vehicle towards inclusive digital and financial economies. We suggest that regulation is required instead of total bans which are difficult to enforce and could be denying governments potential dividends.

Evolution of Money, currency and monetary policy in East Africa

In discussing the merits and de-merits of cryptocurrency reminds us of the simple high school definition of money. Money is what money does. In other words, anything that is widely acceptable as medium of exchange can become money. In monetary history, the definition and nature of money has always evolved based on the trust and what it can do.  The emergency of crypto currencies in the 21st century perhaps unleashes yet another moment in history when money and monetary policy will be redefined for the future.

Just some few decades ago, the cowrie shell was the recognized legal tender and medium of exchange and trade along the East African coast. Europeans, Arabs and Portuguese used cowries as currency to control the valuable African trade routes and markets, along the coastline and its interior

Between 13th to the 20th century, Europeans, Arab traders and their African collaborators used Cowrie shells to buy services and precious goods such as salt, ivory, iron and gold and human beings as slaves. There are no records to show that minting machines existed and it is likely that these cowrie shells were perhaps picked along the coastline of the Indian oceans as these merchants landed to transact their business.  Clearly, the cowrie shells were not regulated by any central bank or backed up with any valuable item such as gold, as we know today yet they continued to be a means of exchange and facilitated commerce in East Africa for more than 1000 years!

Potential dividends from blockchain and crypto currencies

There are many downsides to cryptocurrencies and the experience has so far not been good always but behind any technological innovation there could be some opportunity.

According to technology experts some of the rapidly evolving technology behind crypto, however, may ultimately hold greater promise. A new kind of multilateral platform driven by blockchain and crypto could improve cross-border payments, leveraging technological innovations for public policy objectives.  

According to Forbes, the advantages of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure. Investors just need a computer or a smartphone with an internet connection to use cryptocurrency. There’s no identification verification, credit check, or background to open a cryptocurrency wallet. It is way faster and easier compared to old financial institutions. It also allows individuals to effortlessly make internet transactions or send funds to someone.[1]

With these advances, new payment technologies including tokenization, encryption, and programmability could define the future of monetary policy and public financial transactions.

Moreover, the private sector keeps innovating and customizing financial services. The public sector too just needs to match this pace by leveraging this available technology to upgrade its payment infrastructure and ensure interoperability, safety, and efficiency in digital finance.  

Just a few years ago, the mobile money transfer and payment system-MPESA was none existent.  When it was introduced by Safaricom, there was skepticism on the use of MPESA as money transfer and payment platform in Kenya and in East Africa yet over the last 20 years the MPESA mobile payment system has become the biggest financial technological innovation of the 21st century.

Today, MPESA is the largest mobile money platform, transacting billions of shillings per day and reaching millions of people across the continent.  The system has been expanded to other service sectors such as health, education and food.  They key takeaway from this technological breakthrough is that financial evolution is a continuous process and the concept of money will evolve for many years to come.

Is the imperative for crypto and a new monetary policy inevitable?

According to Amb Prof Ndemo Bitange[2], a renowned economist and Kenya’s Ambassador to Belgium & EU, contrary to the beliefs of sceptics, the penetration of crypto, development and adoption of Central Bank Digital Currencies (CBDCs) is an inevitable shift already underway.

This transformation is driven by changing business models and the increasing preference for alternative modes of payment over traditional cash. Reports from the Bank for International Settlements (BIS) affirm this trend and shed light on the ongoing efforts to shape the future of monetary policy and finance.

A CBDC is a digital or virtual form of a country fiat currency (such as USD, EUR and TZS) issued and regulated by a central bank. Their value is based on the government’s ability to maintain its value by controlling supply and demand, are used as a medium of exchange in transactions, and are considered legal tender within their respective countries.

Therefore, when issued, CBDC becomes a legal tender, analogous to physical notes and coins. Based on the literature, CBDC is thought to offer a range of benefits to the economy.

Central banks from various countries, including Canada, the European Union, Japan, Switzerland, England, Sweden, the Board of Governors of the Federal Reserve, and the Bank for International Settlements, play a crucial role in developing the foundational principles and core feature of CBDCs.

These institutions have conducted extensive research and produced valuable reports on key aspects of CBDC implementation. They acknowledge that the evolution of money is inevitable given the increasing digitalization of economies, rapidly changing user needs and the transformative impact of innovation on financial services.

Furthermore, the use of cash for transactions is declining in many jurisdictions, while non-bank private sector entities are introducing new forms of digital money, such as stablecoins. These developments highlight the need for central banks to adapt and explore how they can fulfil their public policy objectives in a rapidly changing financial landscape.

Prof Ndemo cautions however cautions that while preparations for CBDCs are underway in the global north, discussions and plans for adopting digital currencies in the south are still frozen. This disparity could lead to capacity issues and challenges for countries in the south as they try to catch up with the rest of the world during CBDC adoption.

Trends towards crypto regulation and future monetary policy in EAC

Regulation and regularization of cryptocurrencies in East Africa has been a basket of mixed goods, ranging from caution, total bans to a move towards regulation and potential new monetary policy covering digital currencies.

Tanzania currently does not have specific regulations or legislation governing digital currencies. The use of cryptocurrencies is still relatively banned, and the only accepted legal tender is the Tanzanian Shillings.

However, in January 2023, the Bank of Tanzania adopted a phased, cautious and risk-based approach to adoption of CBDCs, [3] setting in motion a potential road towards a new monetary policy terrain in the country.

This followed among others recognition despite the restrictions, mining and transacting in crypto currencies was popular widely used amongst many youths in Tanzania. The Bank of Tanzania had been researching and exploring potentiality of issuance of its CBDC. At this research stage, the Bank of Tanzania had formed a multidisciplinary technical team to examine practical aspects of CBDC and building capacity to the team in various ways.

The key considerations during this research stage involved choosing a suitable approach to CBDC adoption based on Tanzania context. This included type of CBDC to be issued (wholesale, retail or both), models for issuance and management (direct, indirect, or hybrid), form of CBDC (token-based or account-based), instrument design (remunerated or non-remunerated) and degree of anonymity or traceability.

 A particular attention was paid on risks and controls associated with issuance, distribution, counterfeit and usage of currencies. The outcome of the research at this point revealed that more than 100 countries in the world are at different stages of the CBDC adoption journey with 88 at research, 20 proof of concept, 13 pilot and 3 at launch. Analysis of these findings indicate that majority of central bankers across the world had taken a cautionary approach in the CBDC implementation roadmap, in order to avoid any potential risks that can disrupt financial stability of their economies.

Further, it was observed that, 6 countries had cancelled their CBDC adoption mainly due to structural and technological challenges in the implementation phase. The structural challenges included dominance of cash in making transactions and existence of inefficient payment systems, high implementation cost and risk of disrupting existing ecosystem.

Accordingly, to the government, the Bank of Tanzania would continue to monitor, research and collaborate with stakeholders, including other central banks, in the efforts to arrive at a suitable and appropriate use and technology for issuance of Tanzanian shillings in digital form.

Tanzania’s announcement was a pioneering move in a region whose governments have remained both non-committal but largely hostile in equal measures towards digital currencies.

In Kenya, cryptocurrency is technically legal, with no specific laws or regulations prohibiting its use or possession. However, it is not recognized as legal tender or an asset. The Central Bank of Kenya has issued warnings without specified penalties and has expressly forbidden financial institutions and payment service providers from doing business with Web3 businesses that ‘trade cryptocurrencies.’ Existing regulations are not well-communicated, and a clear legal framework is lacking.

Despite the warnings, transacting in crypto thrives and there is appetite amongst young people and online investors. Media reports suggest that overall, there are an estimated 2.7 million to 4 million cryptocurrency owners in Kenya, representing approximately 5% to 9% of the country’s populations.

On Umoja Lab’s BRAF (Blockchain Regulatory Assessment Framework), Kenya is rated a 40.63 out of 100, indicating that it is a “Developing Regulatory Environment” that is becoming clearer on where blockchain technology and cryptocurrency should go with regards to the need for regulation and expected compliance measures for crypto companies.

In 2023, the government found difficulties in prosecuting the directors of an online cryptocurrency company called One Coin. OneCoin company was accused of transacting illegally millions of Kenya shillings and duping Kenyans with a pay of Ksh7000 in exchange for their eye iris scan and biodata.

The company promised participants, among others, opportunities for making a fortune thereafter in crypto assets, a promise that never was. According to the Central Bank of Kenya, Onecoin was never registered to operate in Kenya yet it registered thousands and transacted millions without detection. 

Its co-founder, Karl Sebastian Green Wood also known as the ‘Cryptoqueen,” was arrested and sentenced to 20 years in prison for his orchestration of the massive OneCoin fraud scheme in the US and globally. Her co-founder Ruja Imatova disappeared since 2017 and it is not clear whether she is dead or alive. The Kenyan Onecoin case is not fully settled yet, bringing to light the importance of proper regulation.

Kenya Case law as cited by Justice M.W Mungai under the case of Wiseman Talent Ventures vs. Capital Markets Authority of Kenya (2019) has placed regulation of crypto currencies by the Capital Markets Authority under the ambits of  Section 2 & 11 of Capital Markets Act

Uganda does not recognize crypto-currency as a legal tender and in October 2019 the Minister of Finance, Planning and Economic Development issued a public statement to that effect.

However, in recent years there has been increasing calls from stakeholders for the country to regulate digital currencies. According to a USAID funded research by the Collaboration on International ICT Policy for East and Southern Africa (CIPESA), as technology continues to reposition itself around societal needs, at a fast pace, more countries around the globe are embracing and creating avenues for the use of cryptocurrencies within their local environments. Uganda should not be caught at the tail end of this drive and neither should it wait out the process of strategically positioning itself in the electronic commerce domain[4].

While back in 2011, Cyber-related legislation was passed to cater for the emerging digital landscape in Uganda. This failed to cater for crypto-currencies, despite recognizing a huge volume of online financial transactions.

CSO demand for clarity on the government position on use of cryptocurrencies; and suggests that Uganda should work with regional and international partners on establishment of an international treaty, as well as international collaborative measures in addressing cryptocurrencies.

In Rwanda, the government has banned banks from facilitating crypto transactions, however many locals are hopeful that Rwanda’s crypto scene will blossom on the back of a digitalizing economy.

Despite the bans, many young Rwandese are still cracking the webs to mine the crypto dimes and the appeal for regulation instead of criminalization and total ban is equally on.

Generally, we are yet to see some shifts towards regulation or regularization of cryptocurrencies in the other East Africa countries such the DRC and Somalia. Both policy and regulation are still blurred, exposing many to the risks but equally government missing out on the potential dividends that come with crypto and block chain-based technologies. It is for this reasons that a new monetary policy and regulation is required across the EAC.

Key policy recommendations to address cryptocurrency risks and future monetary policy

# Governments through Ministries of Finance and Central Banks must map existing crypto platforms and extent of penetration.  Kenya and Tanzania are so far reported as having the largest number of crypto entrepreneurs and transaction volumes in East Africa. These statistics are however not official. Like in Uganda and Rwanda, governments are yet to determine the detailed extent of penetration and impact in the form of self-employed jobs.

# Governments must assess the potential economic contributions to the economy in the form of financial inclusion, employment and facilitation of investment. Nigeria was the first to launch the e-naira but so far, no concrete assessment has been done to establish its success and why it failed. Government let studies on the potential economic benefits from crypto are non-publicly existent.

# Set up clear regulation (Policy and legislative)-To avoid ambiguities, fraud, money laundering for criminal enterprise, tax evasion and disruption of the formal financial systems. In our (Governance and Economic Policy Centre) interviews with crypto entrepreneurs, genuine traders who transact legitimate business exist, and just want to be regulated not banned.  The IMF and other institutions can offer support to EAC governments on building secure platforms while governments build their capacities to regulate and monitor transactions.

# Institutionalization of CBDC trading and clearing houses for crypto currencies. Tanzania may have taken a positive stride; however, this has to be followed with other supportive infrastructure such as a policy ambit and platforms for trading and exchange. A concomitant supportive monetary policy can go a long way in addressing some of the challenges and lacunas currently faced by both government and digital currency entrepreneurs.

# Explore, scaleup and leverage the opportunities that blockchain and crypto technology can offer in other sectors such as health, education and governance. In Kenya, it was reported that blockchain technology was used to secure the 2022 general elections voting and election results systems.

As global reports show, the penetration of cryptocurrency continues to take shape and without regulation the risks and exposure to the criminal abuse could increase. It is imperative that the public and private sectors work together to ensure that users can transact safely, and that criminals can’t abuse these new assets. So far the regulatory framework exists that can be used as a basis towards a new monetary policy and proper regulation and regularization.

With surging unemployment rates and a bulging tech-savy and connected youth population, online financial trading in digital currencies could increase financial inclusion, cause a digital economic revolution and penetration in the EAC countries, producing dividends in the form of jobs, employment and incomes. That is why future monetary policy must be aligned to the current and future technology and currency trends.

 

[1] https://www.forbes.com/advisor/in/investing/cryptocurrency/advantages-of-cryptocurrency/

[2]  Amb Prof Ndemo Bitange; Exploring the future of banking with CBDCs,  a blog post on his personal Linkedin page, July 15, 2023

 

[3] https://www.bot.go.tz/Adverts/PressRelease/en/2023011413181519.pdf

[4] https://cipesa.org/wp-content/files/briefs/Crypto_Currency_Regulation_and_Implications_on_CSOs_in_Uganda_Policy_Brief.pdf

Disruptive digital economies and Monetary Policy: Re-Exploring Blockchain , Crypto Currency and monetary policy in East Africa-Are governments running late?

 The pressure to digitalize our economies and adopt a new generation of monetary policies may be legitimate but the risks are also real. How can governments navigate this delicate balance between digital economy penetration, financial inclusion and monetary policy? Can governments in East Africa continue riding behind the tide?

By Moses Kulaba, Governance and Economic Policy Centre

@digitaleconomies @cryptocurrencies @financial inclusion @mkulaba2000

Globally, there is a debate and desire for the adoption of blockchain technology and cryptocurrency as medium for financial transactions yet in East Africa, government uptake and regulation are moving at a snail’s pace. In this first of a two-part series of our short analytical economic policy and governance policy briefings, we re-explore and unpack the future of blockchain and crypto currency penetration and the risk considerations shaping debate and monetary policy terrain in East Africa. We will later discuss how the EAC governments can leverage monetary policy and regulation to harness the dividends of blockchain and cryptocurrencies to advance financial inclusion in the region.

Generally, there is limited understanding of blockchain and crypto currency technology. The debate on the risks that these new digital currencies portend to the public and national economies is ongoing. So far there is no consensus amongst citizens, economic policy makers and central banks on which directions governments must take. The common view is that adopting block chain and crypto as a form of legal currencies should be approached with utmost care and heavy regulation. It is argued that the risks are high if crypto is adopted as legal tender as some African Central Banks have attempted to do. Moreover, if crypto assets are held or accepted by the government as means of payment, it could put monetary policy and public finances at risk.

Despite, these reservations trading in crypto currencies has continued alongside the formal currencies and could become a major part of our global financial system in the future.

All over East Africa, digital currency platforms exist, despite the bans and young digital entrepreneurs have signed up, traded and transacted in crypto with some success, while others have equally horrendous stories to tell of failure, and counting losses.  According to global reports, so far Kenya, Ghana, Nigeria and South Africa are leading with Tanzania following closely along.

The driving factors crypto adoption and penetration among young people is widespread unemployment and joblessness pushing mostly young people and new unemployed graduates to look for a living online. For speculative investors the driver is that digital currencies have provided a seemingly a good alternative store of speculative value than local African legal tenders, as they experience inflationary and forex exchange pressures. Between 2020 and 2021 transactions increased by 567 percent to $15.8 trillion between before declining in 2022 after the largest crypto exchange FTX crush in 2022.

Despite the loses, the appetite to transact in crypto still continues. According to the online financial reporting resource, Statista, the Cryptocurrencies market in Tanzania is projected to grow by 10.36% (2024-2028) resulting in a market volume of €4.97m by 2028. With this trend, there are suggestions for governments to regularize and formalize crypto currencies as part of a new generation of monetary policy promoting digital economies, and advancing financial inclusion rather than banning their total use all together.

What is blockchain technology and cryptocurrency.

As a way of kicking off and unpacking this further, we will re-explore what is blockchain technology and crypto currency. Blockchain technology is an advanced database mechanism that allows transparent but secure information sharing within a business network. A blockchain database stores data in blocks that are linked together in a chain. Blockchain is a method of recording information that makes it impossible or difficult for the system to be changed, hacked, or manipulated and therefore provide the infrastructure on which crypto currencies are transacted.

The oxford online dictionary defines crypto as a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority. The Reserve Bank of Australia has defined cryptocurrencies as digital tokens. They are a type of digital currency that allows people to make payments directly to each other through an online system.

Cryptocurrencies have no legislated or intrinsic value; they are simply worth what people are willing to pay for them in the market. This is in contrast to national currencies, which get part of their value from being legislated as legal tender.

Cryptocurrency (or “crypto”) is therefore a digital currency that can be used to buy goods and services or traded for a profit. There are four major types of cryptocurrencies and these are; Payment cryptocurrency, Utility tokens, stablecoins and Central Bank Digital Currencies (CBDC). Bitcoin and Ether are the most widely used cryptocurrency.

How Cryptocurrency transactions operate.

Cryptocurrency transactions occur through electronic messages that are sent to the entire network with instructions about the transaction. The instructions include information such as the electronic addresses of the parties involved, the quantity of currency to be traded, and a time stamp. The transactions are run across multiple systems of computers using a blockchain technology, where data is stored in blocks linked together and securely shared across interlinked business networks for connected ‘miners’ to transact and trade.

How large is crypto in Africa and East Africa?

According to China Analysis reports, by 2022 Africa was one of the fastest-growing crypto markets in the world, with crypto transactions peaking at $20 billion per month in mid-2021. Kenya, Nigeria, Ghana and South Africa had the highest number of users in the region, with other countries following closely.  So far, some people have used crypto assets for commercial payments. It is not clear yet whether this number has increased since 2022 after the large crypto currency crush. However, it is evident that new platforms and mediums of exchange have emerged including the Tether USDT accepted by China and other major buyers.

The Tether (USDT) also known as a “Stablecoin” is a cryptocurrency designed to provide a stable price point at all times. The USDT cryptocurrency was created by Tether Limited to function as the internet’s Digital Dollar, with each token worth $1.00 USD and backed by $1.00 USD in physical reserves.  According to crypto traders, despite the controversy, Tether has become more popular because it is pegged to the dollar and fluctuating in value with the U.S. dollar and backed by Tether’s dollar reserves.

Who owns crypto in East Africa?

In 2021 market or financial research institutions estimated that the number of crypto owners in East Africa currently was almost 12 million.  A Singaporean cryptocurrency research firm, Tripple-A, estimated that 11.7 million East Africans owned cryptocurrencies. Out of these 6.1 million were in Kenya, 2.3 million in Tanzania and two million in the Democratic Republic of Congo.

The numbers are potentially higher given that many crypto owners and users are unreported or documented. The clampdown on crypto currency owners and traders in some countries pushed many under and away from advertising and transacting publicly. Bitcoin accepting points of sale closed shop and transactions became discrete.

Potential for new monetary policy in EA?

In 2017 the East African Community members were against digital currencies even as their appeal grew across the world. Kenya, Tanzania and Uganda governments said trading in cryptocurrencies like Bitcoin was illegal, for reasons ranging from whether they are commodities or money to being pyramid schemes that could plunge investors into losses. The Kenyan and Ugandan governments issued warnings.

The Bank of Tanzania said dealing in cryptocurrencies was tricky because they are not regulated and it was not clear who controls the market.  However, the Tanzanian government appears to have softened its stance when in 2023 announced a phased approach towards adoption of a Central Bank Digital Currency (CBDC).

A CBDC is a digital or virtual form of a country fiat currency (such as USD, EUR and TZS) issued and regulated by a central bank. Their value is based on the government’s ability to maintain its value by controlling supply and demand, are used as a medium of exchange in transactions, and are considered legal tender within their respective countries.

Therefore, when issued, CBDC becomes a legal tender, analogous to physical notes and coins. Based on the literature, CBDC is thought to offer a range of benefits to the economy and its adoption has been slowly garnering interest in many countries around the world.

What are monetary policy and socio-economic risks of crypto currencies?
  1. Lack of transparency and proper regulation and a high-risk potential for disruption of the financial system.

The International Monetary Fund (IMF) warns that crypto currencies expose users to cyber-risks such as hacking and loss of their assets. Governments are exposed to lack of transparency around issuance and distribution of crypto assets and this can be disruptive to managing monetary policy.

  1. Susceptible to fraud, and tax evasion as captured in the Nextflix true story documentary-Bitconed.

Cryptocurrencies can be conduits for fraud, tax evasion and illicit financial conduct. Because of their volatility their value is difficult to predict and store. In 2022 it was estimated that at least 12 million people in East Africa lost billions of dollars in the cryptocurrency market crush and a contagious series of ‘Bitcoin get rich’ schemes whose value disappeared overnight. The susceptibility to fraud and sudden fall from temporary economic opulence that may arise from crypto currencies has been well captured by Netflix in a true story documentary-Bitcoined.

  1. Potentially used for money laundering and terrorism financing:

Crypto currencies can be vehicles for money laundering and criminal financing. A report by American cryptocurrency market research firm, Chaina analysis says laundering of stolen funds through cryptocurrencies and scamming of users were the highest crimes in 2021 and 2022, accounting for over half of the illicit transactions. Moreover, a Reuters investigation report claimed that the world’s largest crypto exchange by volume was used by drug lords, hackers and fraudsters to move illicit cash.  According to Reuters, cryptocurrency-based crimes hit a record high in 2021, with illicit transactions rising 79.4 percent to $14 billion, from $7.8 billion in 2020.

Other crypto crimes that increased included financing of terrorism, ransomware, money laundering of child abuse material funds, cybercriminal administration and fraud shops. The US cryptocurrency exchange, Binance, was flagged out as one of the platforms used by criminals to lauder at least Sh274.4 billion ($2.35 billion) across the world in five years.  Binance has since denied the claims but the negative image of cryptocurrencies and some associated crypto exchange companies as conduits for crime still hangs on.

  1. Crypto contributes to climate change environmental damage:

Cryptocurrency activities have been associated with contributing to emissions affecting climate change and have come under criticism from climate change and environmental activists. As indicated cryptocurrency transactions and mining occurs across multiple computer systems running on blockchain technology constantly over time, using energy and emitting heat.

The environmental effects of bitcoin are significant. Bitcoin mining, the process by which bitcoins are created and transactions are finalized, is energy-consuming and results in carbon emissions as about half of the electricity used is generated through fossil fuels.

According to environmental reports by the University of New Mexico, an average of every $1 of bitcoin mined between 2015 and 2021 resulted in $0.35 of climate change damages.  Further studies show that the cryptocurrency industry, swiftly outpaced many of the traditional top-emitting sectors and significantly contributing to climate change.

The Cambridge Bitcoin Electricity Consumption Index, which tracks the real time impact of Bitcoin, in their short history shows that, Bitcoin mining alone had emitted nearly 200 million tons of carbon dioxide equivalent (CO2e). From an environmental perspective therefore scaling up wider use of blockchain technology and crypto is a danger to the environment and climate change, the report concluded.

Despite the risks and potential down side, a United Nations University (UNU) report suggests that the negative view could change as blockchain technology and cryptocurrencies percolate across from developed economies into Africa. The monetary policy and regulative landscape is evolving and governments must be aware and leverage the benefits of technology[1].

According to a commentary by the Brookings institute, indeed, many cryptocurrency fortunes have already evaporated with the recent plunge in prices.  But whatever their ultimate fate, the ingenious technological innovations underpinning them will transform the nature of money and finance.

Are East African governments running late? In the next issue we discuss how EAC can address the downside of the crypto economy, leveraging its monetary policy to harness its dividends.

[1] https://unu.edu/press-release/un-study-reveals-hidden-environmental-impacts-bitcoin-carbon-not-only-harmful-product

Tax and Fiscal Governance: Is VAT milking the broken tax cow dry? An analysis of tax trends and impacts on EAC small traders and citizens, with a case of the recent traders’ boycotts in Uganda

With dwindling foreign aid, it appears the governments in East Africa have resorted to squeezing everywhere to raise some dime. Taxation may be good however, when the extremes are beyond reasonableness, countries are bound to break the back of the economies they aspire to build. Could the recent demonstrations in Kampala show a mismatch of tax policy and that the tax cow may be now broken or is it a case of misunderstanding of the tax system and the dividends of taxation?

By Robert Ssuuna, Researcher, Trainer, and Consultant,

Governance and Economic Policy Centre

@ Tax policy @ Tax justice @africataxproffessionals @fiscalgovernance

KAMPALA, UGANDA – APRIL 17TH 2018.
People go about their everyday business in Kikuubo, one of Kampala’s busiest trading areas.

Recently media in Uganda has been inundated by the stand-off between the Government and traders in the Central Business District of Kampala’s Capital Uganda locally known as Kikuubo with traders choosing to close shops in protest. The protest which later spread to other cities like Jinja, Mityana, and Masaka was triggered by the implementation of the Electronic Fiscal Receipt and Invoicing System (EFRIS) by the Uganda Revenue Authority.

According to the Taxman, the solution is intended to address concerns related to Value Added Tax (VAT) fraud.  VAT is known as an indirect tax charged by businesses at each stage of the production and distribution chain up to the retail stage of goods and services. VAT was introduced in 1996 replacing the sales tax and has since proved a reliable source of revenue contributing 30% of Total Tax Revenues on average and 4.4% of GDP[1]. To understand how well the VAT regime is managed in the country we use two main metrics, these are;-

  • VAT productivity which is the VAT revenue yield to GDP divided by the nominal VAT tax rate. VAT productivity measures how much each percentage point of the standard VAT rate collects in terms of GDP as given by the following ratio.
  • VAT Productivity= VAT Revenue/ GDP (Standard VAT rate)
  • VAT C-Efficiency which measures the VAT revenue performance and overall efficiency of the VAT system in an economy. The efficiency ratio is given by VAT revenue yield to the approximated proxy (Final Consumption) divided by the VAT tax rat It follows that, if VAT compliance was perfect, actual revenue over potential revenue, would be one. C-efficiency ratio is given as:- 
  • VAT-C Efficiency = Actual VAT revenue/(Final Consumption)(Standard VAT Rate)

Where actual VAT Revenue implies Total VAT collections less VAT refunds.

Using the above indicators,  we establish that in 2023 Uganda registered VAT productivity of   22%  while the VAT C-efficiency ratio  stood at 21% way below the African averages of 27.6% and 37.8% respectively (ATO, 2023)

Lower VAT productivity and C-Efficiency ratios imply a higher difference between real and declared revenues and consequently few economic agents meet their VAT obligations.

From the simple results indicated above, one might argue that the Government is justified to institute both policy and administrative mechanisms to address the low VAT productivity and VAT C- efficiency. One such intervention is the introduction of the EFRIS.

The system manages business transactions, tracks stock movements, automatically applies VAT-inclusive taxes (which directly affect informal traders’ profits), issues precise and traceable invoices, and promptly reports sales data to the revenue authority in real time. Through automated cross-checks the URA can more effectively match buyer and seller invoices, thereby preventing taxpayers from claiming input VAT credits without corresponding reports from sellers. Theoretically, this system tackles tax evasion in two main ways: Firstly, by creating a more accurate digital trail, it enhances URA’s monitoring capabilities and raises the likelihood of detecting evasion. Secondly, by offering clearer transaction records and facilitating pre-filled tax returns, it encourages voluntary compliance by simplifying the tax filing process. So one wonders why traders and the Government fail to agree on such a solution given the associated benefits.

From the informal trader’s perspective,  EFRIS exposes them to the risk of “premature formalization,” where their tax compliance costs, including penalties for non-compliance, escalate faster than any benefits gained from their efforts to sustain themselves. Traders believe that any measure that decreases the amount of money they have to spend freely is essentially a tax.

The challenges posed by the EFRIS system stem from concerns about reduced incomes caused by lower sales due to increased prices resulting from VAT on purchases made by informal sector operators, particularly Kikubo Traders, from formal sector operators. Additionally, there’s a decrease in income from their imports. These worries are intensified by URA’s strict enforcement tactics and the looming possibility of facing full taxation scrutiny from tax authorities. Critical issues associated with EFRIS are:-

First, is the general lack of awareness among the trading community on what EFRIS is,  its objectives, benefits, and associated challenges despite URA’s investment in taxpayer education since 2021 when the solution was rolled out.  It is no surprise that some traders regard this as another tax. Some of the traders also clearly seem not aware of how the VAT mechanism operates especially the Input versus output approach.

The second factor is the mode of implementation and per-requisites for the EFRIS. Traders are worried about the costs associated with  EFRIS. These include among others, hiring accountants or at least personnel with electronic numerical literacy, purchase of software, internet, purchase of the EFRIS gadgets, etc. Although all these are allowable expenses under the Income Tax Act, in the medium term they eat into traders’ working capital. To curtail these, the EFRIS regulations prescribe penalties for non-issuance of receipts generated by EFRIS and nonuse of EFRIS gadgets. The penalties are from UGX 6,000,000 and  UGX 8,000,000 respectively ( USD1700&USD 2200).

Third, is the VAT threshold. Currently, EFRIS is a requirement for only VAT-registered taxpayers with annual gross sales of UGX 150,000,000 (USD 42000).  The initial registration threshold was set at shs.20 million, and then increased to shs.50 million in November 1996, following a strike by traders. The threshold was further increased to shs.150 million in 2015, and it was argued, that including small businesses in the tax net by setting a very low VAT registration threshold can drain the limited resources available to the tax authority for administration, and yet the revenue potential is insignificant because of the low turnover and low-value addition. This is because VAT tends to impose high compliance costs on small informal traders who generally do not have sufficient resources to keep proper records of their transactions and comply with accounting rules.

With the depreciation of the UGX against the dollar since 2015, traders argue that the VAT registration threshold should be increased at least to UGX 1Bn to reflect current economic trends. Traders are also concerned that non-VAT qualifying suppliers are being denied by large supermarkets and departmental stores if they do not prove adherence to EFRIS requirements. This locks small-scale traders out of the supply chain affecting their earnings.

Finally, we note that traders are using the demonstration on EFRIS to buttress other perennial issues affecting their operations and contributing to taxpayer apathy. These include unclear application of import duties and valuation for used clothing (a blend of advalorem and specific duties), protracted VAT refund processes, general poor public service delivery, and glaring corruption scandals by politically exposed persons.

It must however be noted that the issue of VAT has been a concern of small traders across the East African Member states. The recent Ugandan demonstrations perhaps are a manifestation of the weaknesses and challenges of Tax policy and administration across the region.VAT is generally considered a regressive tax and one whose implementation has always been a source of concern and perhaps should be evaluated. 

VAT protest trends across East Africa

A man protesting Kenya’s Finance Bill 2023 is tackled by security outside Kenya’s Parliamentary Buildings in Nairobi, June 13th 2023. Courtesy Photo-Bizina

The litany of small traders’ strikes started last year (May 2023)  in Tanzania when the traders in Kariakoo, Tanzania’s, and perhaps East, Central, and Southern Africa’s largest commercial hub locked up their shops in protest over what was considered as taxation. Among the multiple taxes and levies protested was VAT. The traders wanted this reduced to 16% among others.   This later picked momentum with strikes and protests in Kenya, when the government proposed in its 2023 Finance Bill to increase the VAT, particularly on fuel products from an earlier 8% to 16%. To date, the Kenyan business community is not happy with this increase and has been complaining that a higher VAT increases the costs of living to the citizens,  doing business in Kenya and is detrimental to Kenya’s industrialization agenda.

In its 2024 Finance Bill,  the Kenyan government has proposed to introduce VAT on bread, which is largely viewed as a staple breakfast food for Kenyans.  If the proposal sails through parliament, bread, which is currently on a list of items that are zero-rated for VAT purposes— including flour, milk, and sanitary products— will attract the 16 percent tax that will see the commodity increase by at least Sh10 for 400-gram loaf. The government argues that levying bread with VAT is necessary because its zero rating was misplaced since it benefits the middle class who shop in supermarkets rather than the targeted low-income households.

Kenyans are generally not happy with this and if it is passed there could be another round of protests from different sections of what is already considered an ‘over-taxed’ Kenyan taxpayer.

Therefore the following measures should be taken to ensure that the Governments continue to milk the cow without breaking it,

  1. Invest in Taxpayer education and awareness should be a continuous process
  2. Improve accountability for the use of taxpayer money by improving the quality of public services and apprehending the corrupt to encourage voluntary compliance.
  3. Improve tax administrative efficiencies by continuously equipping URA staff with skills and ensuring that the staff numbers are adequate to manage the tax register.
  4. When introducing new systems such as EFRIS, tax administration should invest in reasonably wider consultation and ensure the participation of all those likely to be affected by the system from the design stage.
  5. Invest in agricultural commercialization, productivity, and industrialization to ensure that the majority of the agricultural sector actors are within the money economy to broaden the tax base.
  6. The government must develop a proper Tax policy to guide taxation and predictability of tax administration

 

Forthcoming Expert Webinar on Taxation and Tax Policy in East Africa

To discuss  and dissect this further we have organised an expert webinar on this subject will be coming up on the 30th May, 2024.  Please register to attend via the links below:

Title: Tax and Fiscal Governance: Is VAT milking the broken tax cow dry? An analysis of tax trends and impacts on small traders and citizens in EAC

Date: 30th May, 2024

Time: 11:00 AM to 12:30 PM EAT/ 10AMCAT
 
Meeting ID: 857 8760 2335
Passcode: 897276

[1] Author computation based on Revenue Statistics from the URA

Solar and Energy Transition: Good policy intentions but less progress: Assessing Tanzania and EAC’s Utility scale solar energy potential and policy gaps to fix

Governments are struggling with little success to attract and retain utility scale solar projects and many have died in their nascent stages. Yet utility scale solar projects could be a significant contributor to resolving the regions power shortages and increased energy access by sizeable proportions. So, what is holding back utility scale solar projects and how can governments maneuver to attract and retain more investors. 

By Moses Kulaba, Governance and Economic Policy Centre

@energypolicy @cleanenergy @solarafrica @energytransition

Multiple studies have concluded that the Eastern Africa region has the highest technical potential for solar power technologies, with estimates of 175 PWh and 220 PWh annually for Concentrated Solar Power (CSP) and Photovoltaics (PV) respectively. African countries with the highest CSP and PV potentials are Algeria, Egypt, Namibia, South Africa, Sudan, and Tanzania.  The annual technical solar power potential in Tanzania is estimated to be 31,482 TWh for CSP technology and 38,804 TWh for PV technology. Despite this potential, Tanzania and EAC lags behind its peers such as South Africa, Algeria and Egypt. Besides the technical aspects as earlier discussed, the policy terrain in East Africa has been largely zig zag and therefore not coherent enough to support investment.

In this second part of our analytical series on solar as a clean energy source, we attempt to shade some light on the policy terrain in Tanzania and East Africa generally and how this is contributing towards holding back large-scale investment and utility scale solar penetration.

Policy and investment terrain

Generally, the policy and investment landscape in East Africa has been evolving at a snail pace. Both Tanzania, Kenya and Uganda have renewable energy policies in place however these are not backed up by adequate promotion, implementation and funding. The regulatory terrain has also been discordant.  For the region to benefit, the policy and investment trajectory will have to align and move faster, catching up with the global trends and the drive to clean energy.

Tanzania’s policy terrain.

The government passed a National Energy Policy (NEP) in 2015 with a commitment to increase the share of renewables in its energy mix. The NEP 2015 seeks to facilitate improvement of investment environment to promote and support private sector participation. The policy further commits to scaling up utilization of renewable energy source by among others introducing a.. feed-in-tariffs for renewable energy technologies and structure power purchase agreements for renewable energy.  

It further commits to facilitate integration of renewable energy technologies in buildings and industrial designs and establish frameworks for renewable energy integration into the national and isolated grids; an Promote sustainable biofuel production and usage.

However, actualization of this has been slow. To date contribution of renewables to Tanzania’s energy mix remains low at 1.2 %. By 2021 Tanzania’s electricity generation came mostly from natural gas (48%), followed by hydro (31%), petrol (18%) with solar and biofuels contributing a mere 1% each. The National energy consumption balance is still dominated with biomas (charcoal and firewood) use at around 85%.

Tanzania government admits that that solar utilization is constrained by high initial costs, poor after sales services, insufficient awareness on its potential and economic benefits offered by solar technologies plus inappropriate credit financing mechanisms.

Previous policies, particularly the 2003 was successful in the establishment and operationalization of Energy and Water utilities regulatory authorities, the Rural Energy Agency (REA) and the Rural Energy Fund, However, it fell short of making advancements on the renewable energy, particularly by not creating a designated and operational Renewable Energy Fund. By design it is implied that funding of the renewable sector would come directly from the consolidated Energy Fund. However, with conflicting priorities and government’s focus on increasing energy access to hydro and gas fired electricity, much of the available funding was channeled towards rural electrification.

In 2012 Tanzania was one of the pilot countries selected to prepare the Scaling Up Renewable Energy Program (SREP). The chief objective of this plan was to transform the energy sector of Tanzania from one that is more dependent on fossil fuels to one that is more diversified with a greater share of renewable sources contributing to the energy mix through catalyzing the large–scale development of renewable energy.

The SREP–Tanzania Investment Plan was prepared by the Government of Tanzania, through a National Task Force led by the Ministry of Energy and Minerals (MEM) with support from the Multilateral Development Banks (MDBs). However much of this plan is yet to fully takeoff and its translation into actual deliverables yet to materialise

Cognizant of the significant gaps that exist, in 2023 the Minister of energy at time, Hon January Makamba revealed that the government was developing a new Renewable Energy Policy to further enhance investments in renewable energy. This policy would capitalize on the substantial financial resources, capital markets, and advancements in new technologies dedicated to renewable energy globally. He also announced ongoing efforts to identify areas with renewable energy resources and prioritize native investments in wind and solar projects. The government would provide support in this regard and establish guidelines for project implementation.

In 2023 Tanzania entered into an agreement to construct the Country’s first-ever solar photovoltaic power station to feed into the national electricity grid. According to the Ministry of Energy, the project is part of a larger initiative of installing 150 MW of solar energy in the Kishapu district of the Shinyanga region. The first phase of the project to be constructed by Sinohydro Corporation from China was estimated at TZS 109 billion and was scheduled for completion before end of 2024.

According to the Minister, the implementation of the solar project reflected the government’s commitment to establishing a diverse mix of electricity sources in the national grid, incorporating water, gas, wind, and solar power. This approach aims to ensure a continuous supply of electricity, even in the event of a failure in one source.

There are also several large-scale solar power projects under development, including the 30 MW Singida project and the 50 MW Nyumba ya Mungu project. In addition to government efforts, there are also private companies and organizations working to develop renewable energy projects in Tanzania.

Similarly, Zanzibar, the semi-autonomous Island of Tanzania, also signed in 2023 an agreement with a Mauritius-based Generation Capital Ltd and Tanzania’s Taifa Energy to build its first large-scale 30MW solar PV power plant, as it seeks to become energy independent. The plant will cost $140 million. The Power Purchase Agreement (PPA) between the state-owned Zanzibar Electricity Corporation (Zeco) and the two companies to develop the 180 megawatts plant will be implemented in phases, according to Zanzibar’s Ministry of Energy and Minerals.

Kenya’s solar terrain

Garissa Solar Farm

So far, Kenya is leading in large solar projects.  There are at least 10 large solar farms in Kenya. The Garisa solar farm, is the largest in East and Central Africa, with 55 MW generation capacity. The solar farm sits on85 hectares (210 acres) and consists of 206,272 265Wp solar panels and 1,172 42kW inverters owned and operated by Rural Electrification and Renewable Energy Corporation. Others already operational or proposed include; Malindi Solar (52MW), Alten Kasses (52 MW), Kopere Solar Project (50MW), Eldosol Solar Project (48MW), Radiant (50MW), Rumuruti (40 MW), Nakuru Solar project (40MW), Witu (40MW) and Makindu (40MW).

Kenya has buttressed its renewable energy credentials with a new Energy Transition and Investment Plan (ETIP) launched in 2023. The ETIP spells out Kenya’s road map to delivering a 100% clean energy driven economy by 2050. The country is however yet to figure out how it will fund this ambitious plan. Over the past recent years Kenya has been facing significant budgetary constraints affecting funding of its major national development plans. Even when the government has committed to achieving 100% clean energy by 2030, it bets heavily on funding from external donors. With the recent trend in aid inflows and if they remain unchanged in the short and medium term, it will be a tall order Kenya to meet this target.

Uganda’s solar uptake

Uganda has been slowly catching up with its peers. Uganda’s policy commits to make modern renewable energy a substantial part of the national energy consumption. To increase the use of modern renewable energy, from the current 4% to 61% of the total energy consumption by the year 2017[i].

The policy terrain has been zigzagging and investment in renewables is still low but the government has blended its focus on hydropower generation with small investments in solar projects as back up for its hydropower. There was a big growth in 2021, reaching 92 MW, followed by a significant increase of around 6.9 MW, reaching a total of 98.9 MW Uganda’s installed solar energy capacity in 2022.

Some of the projects contributing to this growth include Kabulasoke Solar PV Park is a 20MW solar PV power project, located in Central, Uganda, Bufulubi solar project in Tororo and Access solar plants in Soroti.  New pipeline projects include the Amea West Nile Solar PV Park, a ground-mounted solar project, whose construction was expected to commence from 2024 and subsequently enter into commercial operation in 2025. The power generated from the project will be sold to Uganda Electricity Transmission under a power purchase agreement. 

This however falls short of achieving the targets as stipulated in Uganda’s Renewable Energy policy. Uganda’s renewable energy policy commits to establish and maintain a responsive legislative, appropriate financing and fiscal policy framework for investments in renewable energy technologies. It mentions forms of financing such as strengthening the Credit Support Facility and Smart Subsidies which are intended to scale up investments in renewable energy and rural electrification.

Moreover, a special financial mechanism, a credit support facility known as the Uganda Energy Capitalisation Trust, was instituted to help realise the policy but this expired in 2012 and had never been renewed[ii]. Uganda lags in meeting its policy targets as only 10 solar projects had been completed by 2022[iii].

What is the current market and investment size?

According to global energy reports, there is a substantive market size of solar photovoltaic (PV) in East Africa and Africa generally. The Middle East & Africa solar photovoltaic (PV) market size was valued at USD 5.00 billion in 2022. The market was projected to grow from USD 6.93 billion in 2023 to USD 37.71 billion by 2030, exhibiting a cumulative Average growth rate (CAGR) of 27.4% during the forecast period.

Despite its immense solar power potential, East Africa and Africa generally continues to lag behind other continents when it comes to building up utility scale grid and off-grid solar capacity, in part due to a stagnant policy regime, overlapping institutional roles, limited research, technical capacity and lack of appropriate financing facilities for investment.  Some proposed projects have failed to take off.  As a consequence, the total investment share of utility scale projects into East Africa remains comparable low.  

So, what can EAC governments do to make utility scale solar markets attractive?

Recommendations

# Governments must make policy switches from paper to aggressive attracting of investment into the solar PV East African markets. The policies may exist but the implementation gap is too big. Policy interventions and a national course-correction is urgently needed to effectively overcome structural barriers and create local value in the emerging solar market many of which is still left behind in this progress.

# Decentralization of energy generation away from vertically integrated power monopolies such as TANESCO and Kenya power could be a game changer.  De regulation and introduction of net metering by independent Solar PV power producers to directly generate and sell to customers could improve profitability of solar projects and attract new investments.

# Financing institutions must scale up project financing of renewable energy projects.  Solar projects are still expensive and funding is difficult to come by. Kenya’s Garisa solar project required an investment of KSh13. 7 billion ($135.7 million) and was funded by the Exim Bank of China. Other projects have required substantive investment with funds generated from private developers and energy venture capitalists. The existing financial institutions are yet to master tailing project financing to utility scale solar projects.

# Addressing land rights and underlying injustices. Large solar farms require large tracts of land and these can be a source of land grabbing, land deprivation and injustice, generating conflicts and endless litigation between potential investors and the communities. The renewable policies and investments have to sit well with land rights, guaranteeing free prior informed consent, fair compensation and equity,

# Socio-economic: Identifying and prioritizing suitable areas for building large-scale solar power plants is a complex problem. In contrast with the simplistic view, identifying appropriate geographical areas for solar power installation is not only linked with the amount of received solar radiation, but there are many other technical, economic, environmental, and social factors that should be considered like: alternative land uses, topographical characteristics of the land, conserving protected areas, potential environmental impacts, water availability, potential urban expansion, proximity to demand centers, roads proximity, and potential for grid connectivity.

# Solar technology firms must address intermittence and storage of renewable energy. Solar power is generally reliant on the availability of sunshine. Depending on the weather and hours of the day and night. Unfortunately, the technology has not advanced far enough and made cheaply available to East for storage of solar power. For solar power users the days are hot and the nights are cold.

# Government leaders must have a unified political will to support renewables as part of the master energy mix and regional energy power pool. So far there is a divided political opinion on what solar power can do in helping the governments to meet their national energy demands. While Kenya is a front runner, other countries are still focused on hydro and gas. The future of distributed solar therefore depends largely on good political will driving favorable polices and changing mindset to embrace solar power as a new source of energy. This could be reflected in new generation policy drivers such as requirement for solar considerations in building designs and integrated power systems.

[i] Renewable Policy for Uganda; https://s3-eu-west-1.amazonaws.com/s3.sourceafrica.net/documents/118159/Uganda-Renewable-Energy-Policy.pdf

 

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