The Tanzanian mining sector has been hardest hit by regulatory changes in the country, with investors in other sectors also adopting a more cautious stance, which will present headwinds to growth in the long term, says research firm BMI Research.

A recent dispute between the Tanzanian government and LSE-listed mining company Petra Diamonds, involving government’s seizure of diamonds worth nearly $15-million from Petra, highlights the challenging operating environment and “reinforces our long-standing view that elevated operational risks are likely to temper investment and growth in the country over a multiyear time horizon”, says the firm.

On August 31, the Tanzanian government confiscated the diamonds from the Williamson diamond mine, which is majority-owned by Petra Diamonds. In explaining its reasoning, government cited suspicions that the company was undervaluing its exports to lower its tax bill, a charge that Petra denies.

BMI explains that this latest move by the Tanzanian government follows the enactment of a number of less than favourable policies on the mining sector as well as the issuing of a $190-billion fine against LSE-listed Acacia Mining, the biggest gold miner in the country, owing to a dispute that arose as a result of an export ban imposed on unprocessed metals in March.

“We have already revised gross domestic product (GDP) growth from 6.3% in 2017 and 6.5% in 2018 to 5.3% and 5.7% respectively on the back of the more challenging business environment, and we could revise it down again should we see further measures.”

The firm explains that, since his November 2015 inauguration, Tanzanian President John Magufuli has enacted several protectionist measures – including a crackdown on tax incentives for foreign companies, a ban on the export of unprocessed metals and legislation forcing mining firms with special licences to list 30% of their shares on the Dar Es Salaam stock exchange.

“With many of the policies receiving broad domestic support, we see little scope for an abrupt change in tactics in the near future. Magufuli won office by presenting himself as a strident anticorruption and antigovernment waste advocate, playing up his reputation as a ‘bulldozer’, stemming from his time as Interior Minister, to highlight his efficiency in pushing forward policies,” BMI points out.

The firm states that recent measures have been embraced by Magufuli, in part, because they reinforce this persona and feed into the current popular resentment toward international mining firms.

“Indeed, a recent survey conducted in June indicated that seven out of ten – 71% – citizens approve of the performance of the president. While our core view is that government will come to an agreement with the major mining companies to remove the ore export ban by the end of the year, we cannot rule out the risk that the ban remains in place for a more prolonged timeframe should negotiations hit an impasse.

“Moreover, even if an agreement is reached on that one piece of legislation, we still think government will prefer a more protectionist policy mix going forward.”

This increasingly challenging business environment will likely weigh on growth in the years ahead. The research firm forecasts average real GDP growth of 6% over the next decade, which, while above the regional average, is lower than the 6.3% average seen over the last decade.

“The continued embrace of resource nationalism will hit the mining sector especially hard, feeding through to continued headwinds for growth. We have already seen the March export ban result in a halt in production at Acacia Mining’s mine in Bulyanhulu,” BMI notes.

BMI’s mining team has, therefore, revised its gold production forecasts from 1.5-million ounces down to 1.4-million ounces. Over the longer term, the continued stringent measures against the sector are expected to undermine government’s goal of rapidly expanding the mining sector to grow its GDP contribution from less than 4% to 10% by 2025.

“Indeed, while we believe the recent regulatory shifts are part of a strategy by the Tanzanian government to support local businesses, our mining team has noted that the domestic-based industry does not have the capacity to fill the gaps left if foreign firms begin to significantly reduce operations.”

Meanwhile, BMI highlights that firms outside the mining sector are likely to be negatively impacted on by the recent government measures. The mining sector has suffered most by government’s embrace of more protectionist policies, but other industries, including hydrocarbons and telecommunications, have also been subject to changing regulations.

Signals by government that it effectively intends to double down on its current policies – such as the seizure of Petra’s diamonds – are expected to increasingly reinforce investor caution.

Tanzania’s business environment has long lagged behind that of many of its East African neighbours, with the country scoring lowest in both BMI’s Operational Risk Index and Trade and Investment Sub-Index. “A continued embrace of more protectionist policies will only exacerbate the country’s woes.”