31 July 2012

Tanzania: Need to Integrate Gas Policy in Poverty Reduction Plans

Photo: Flickr/heipmann
The Tanzanian government plans to build a pipeline to carry natural gas to Dar es Salaam.

AS the country prepares for a vibrant gas regime, economists have advised that government should prepare to connect its gas policies and master plan to poverty reduction initiatives.

In a joint response to 'Business Standard', they explained that in a scenario whereby gas resources are productively utilised, the major winners are households involved in the service sector especially the public sector. But they added that to equally benefit should be other sectors where individuals who are involved in the exportable agricultural or manufactured commodities are thriving.

"The impact of gas resources depends on whether it is used to improve productivity of the economy and remove supply constraints. "Tanzania's natural gas deposits are expected to last for 100 years and it is anticipated that when the country starts producing seriously for export, the currency will appreciate against other major trading currencies," notes energy economist Dr Lenny Kasoga at University of Dar es Salaam.

In an interview with 'Business Standard', the Director General of Tanzania Petroleum Development Corporation(TPDC), Mr Yona Kilagane, said that in order to connect the gas policy to other government policies aimed at fighting poverty, they have submitted the draft to Research and Poverty Alleviation (REPOA) to align it with government policies which aim at fighting poverty.

Dr Kasoga said he believes that appreciation of the real exchange rate would have a negative impact on the rural households producing cash crops for export. He further argued that at the national level, poverty would be reduced most when the gas is mainly spent on infrastructure development.

"But if spent on unproductive activities, poverty at the national level would even be higher than if the country did not have a vibrant gas regime," he said. "In particular, we find a real exchange rate appreciation that, in turn, leads to a significant reduction in exports especially in the traditional exports. However, if oil resources are used on productive activities, we note that it could be reversed," they said.

He said they should not neglect other sectors like agriculture and also focus directly on industrial development would result into industrialisation failure because of the high wages and uncompetitive exchange rate. They suggest that monetary authorities should depreciate the exchange rate through build-up of foreign reserves (that is in a market determined foreign exchange environment).

This would support a wide range of export commodities (agriculture and manufactured goods) and reduce dependence on export of gas, failure to do so is likely to result into the wiping out of other export commodities. "The gas sector has an important role to play in our fight against poverty," he said.

The economists argue that gas discoveries, through the policy, should benefit marginalised people living in remote areas and youth participation. Parallel to the preparation of the policy and a law, he said, officials from his ministry and the TPDC, in collaboration with lead consultant from Trinidad and Tobago, were in the final stages of completing a draft strategic plan and use of natural gas.

Today the country sits on about 40 trillion cubic feet (tcf) of proven natural gas reserves, equivalent to approximately US$150 billion at current prices, or 6 times Tanzania's current GDP. According to the World Bank's Jacques Morisse, these proved and potential reserves can be a game changer for Tanzania.

Yet, he said, extracting and producing is not a simple affair. Massive up-front investments (larger than the country's current GDP of US$22 billion) and new technologies are necessary, while benefits will typically spread over 25 to 30 years. Short of cash and expertise, he said, the country will have to partner with global companies. Potential candidates (British Gas, Statoil) are already knocking on the door.

"Roughly, the host country can expect to get around 40 per cent of total revenues depending on the tax regime and the production sharing agreement (PSA). This means for Tanzania around 7 per cent of its projected GDP or about a third of its current fiscal revenues if all above reserves can be exploited. These fiscal resources, while considerable, will not be sufficient to transform Tanzania," he said.

He said that if Tanzania wants to avoid the famous curse associated with natural resources, the lesson from experience is straightforward -- transparency. All negotiated contracts with producing companies, the selection of projects, and payments must be monitored and audited by an independent body and ultimately disseminated to the public at large.

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