Tanzania will now allow East Africans to freely move capital in and out of the country — a move that is expected to increase cross-border investment and deepen economic integration.

The IMF in its latest disclosure on the Tanzanian economy said that the country had informed it that it had opened its capital account to East African nationals ahead of full liberalisation, which will allow the rest of the world to bring capital in and out of Tanzania with no restrictions.

The changes are part of a wider plan to loosen state control of the economy, which will also see the country allow its currency greater exchange rate flexibility and adopt new monetary tools.

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“As a first step, the authorities have allowed for freer flows of capital among EAC residents since June, which they see facilitating trade, financial and investment flows within the region.

The next step would be to extend this with the rest of the world by end-June 2015, in line with Tanzania’s commitments under the EAC Common Market Protocol,” said the IMF.

Under the Common Market Protocol, countries are supposed to open up their economies to allow the free movement of people and capital.

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Saada Mkuya Salum, Tanzania’s Finance Minister, in a June letter authored jointly with the Bank of Tanzania (BoT) and addressed to the IMF, notes that the decision to liberalise the country’s capital account to East African Community residents will allow freer movement of capital within the region, facilitate intra-EAC trade, and lead to increased financial flows and investments.

Normally, countries impose capital controls in order to reduce their exposure to external factors and limit capital outflows.

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Allowing the Tanzania shilling greater flexibility has been previously cited by the IMF as one of the things that could help increase the country’s competitiveness: “Tanzania is becoming increasingly interconnected with the global economy and a greater focus on international competitiveness is warranted. Accordingly, the exchange rate should fully reflect market conditions,” said the IMF in May.

The BoT said it will now step in only when there is an urgent need for its intervention.

“The flexibility of the exchange rate will be further enhanced to help cushion against adverse external developments. The BoT will participate in the foreign exchange market only for liquidity management purposes and to smooth out short-term fluctuations in the exchange rate,” said BoT Governor Benno Ndulu.

Business leaders said the opening up will help make the country even more competitive.

“Tanzania is one of the leading FDI centres in East Africa. Opening the capital account will further boost the investment inflow into the country... It will now be easier to take advantage of low interest rates and one can better hedge against currency depreciation risk,” said Patrick Mwati, group finance director at Crown Paints, the NSE-listed paint manufacturer with operations in both Kenya and Tanzania.

General Motors East Africa general manager Rita Kavashe said the move will give businesses greater flexibility when sourcing for capital, adding “It’s a step in the right direction.”

Market watchers say the move will help deepen the country’s capital market and offer greater options for regional investors.

“We expect that with the opening up of the capital account, market turnover will go up and help pull up the bourse’s capitalisation,” said Joseph Uiso, manager of research, operations and trading at Tanzanian Securities Ltd.

Current limits

Currently, Tanzania does not place restrictions on East African participation in the equities market but limits ownership in government securities. Under current laws, East African citizens can only own 40 per cent of government securities, with investors from a single country allowed to own a maximum of 27 per cent.

“Depending on how the opening up of the capital account impacts on the shilling, we expect that the BoT will up the quota of government securities that East Africans can own,” said Mr Uiso.

The move is also expected to expand the array of investment options available to East Africans.

“This will enable East African investors from Kenya, Uganda, Rwanda, Burundi and Southern Sudan to diversify their investments by investing in securities listed on the Dar es Salaam Stock Exchange.

East African investors will be able to participate in the economic growth of Tanzania, particularly as the mining, energy and agricultural sectors in Tanzania pick up,” said Peter Mwangi, the Nairobi Securities Exchange chief executive.