Tanzania will open its capital markets to east African investors next month as part of reforms aimed at fully relaxing government controls in the economy by 2015, a senior central bank official said on Tuesday. Joseph Massawe, director of economic research and policy at the Bank of Tanzania, said the opening of Tanzania's tightly controlled capital account would result in significant capital flows into the country.
"We plan to liberalise the capital account by removing restrictions to free flow of capital within east Africa by December this year," he told Reuters in an interview. "By 2015, we expect to remove almost all restrictions on the capital account for investors even from beyond east Africa. We are now making amendments to our financial regulations to ease those restrictions."
Massawe said the move was part of Tanzania's commitment under the East African Community (EAC) trade bloc, which plans to introduce a common market with free movement of capital. Currently, only Tanzanian investors are allowed to invest in Treasury bills and bonds and trade shares on the Dar es Salaam Stock Exchange.
"The liberalisation of the capital account will open the door to foreigners and bring big capital into Tanzania," Massawe said. "Tanzanians will also be given an opportunity to invest outside the country. The five EAC partner states want to develop their capital markets through regional integration. Uganda, Kenya and Rwanda have fully opened up their capital markets, while Tanzania and Burundi are yet to do so.
Massawe said Tanzania would take cautious steps to ease its tight grip on capital account transactions to minimise risks. "Short-term capital is very volatile, therefore it is very important to proceed carefully to avoid any negative consequences in opening up the capital account," he said.
Tanzania issues Treasury bills every fortnight, with tenors ranging from 35 days to one year. Its bond yield curve extends to 15 years. The country's total outstanding domestic debt was 6,100 billion shillings ($3.8 billion) at the end of August 2013, according to the Bank of Tanzania, with government bonds representing 70 percent of the debt stock. Commercial banks and other investors in east Africa are likely to be attracted by the higher yields in Tanzania relative to its neighbours, analysts said.
At an auction last week, the yield on Tanzania's one-year paper was 14.97 percent. Yields for similar instruments in Kenya and Uganda are around 11 percent and 14 percent respectively. However, low liquidity could be a deterrent for investors beyond east Africa.
"There's quite a lot of interest in Tanzania from investors who typically have exposure to east Africa or to Africa, but the critical issue is going to be liquidity," said Phumelele Mbiyo, Standard Bank's head of macroeconomic research for east Africa. "There's very little trading that takes place in the secondary market largely because investors don't have any need to trade actively." The government securities market is currently dominated by pension funds and commercial banks who tend to hold securities until maturity.
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