Tanzania is to liberalise its capital account by the end of next year in a move that is expected to raise the country’s appeal among international investors.

The country says it is amending laws that cap foreign ownership of stocks and bonds in line with East African Community requirements to allow free movement of capital.

The change of heart is also seen as part of a larger plan by Tanzania to tap foreign investors for the cash for infrastructure projects.

In an interview last week, President Jakaya Kikwete told the Bloomberg news agency that his government was reviewing the laws and the process was expected to be completed by the end of next year.

Bars foreigners

Tanzania bars non-residents from buying its bonds and limits foreign ownership of companies to 60 per cent, well below the not-so-strictly-enforced threshold of 75 per cent set by neighbouring Kenya on listed companies.

Tanzania’s move is expected to spark a major shift in asset allocation in Rwanda, Uganda and Tanzania, where pension funds are overexposed to government debt and real estate investment, forcing asset managers to seek a wider selection of regionally quoted shares to boost returns.

And, just as East Africans are allowed to buy and sell shares at the Dar es Salaam Securities Exchange, Tanzanians will also be free to invest in other capital markets.

“The central bank has given me assurances that we will meet that deadline,” President Kikwete said in Dar. “By 2015, we will be fully liberalised.”

The new rules will allow foreigners to take up shareholding in several mining and telecom firms, in line with regulations that require them to list part of their stake in the local market.

Under 2010 laws, mining firms working under licence and telcos were required to list part of their shareholding in the local market. But the country has not developed laws to effect this requirement.

There are six telecoms operators — including Vodacom, run by Britain’s Vodafone, and Airtel, run by India’s Bharti.

Tanzania has been reluctant to fully open up the capital account for fear of capital flight, which could precipitate a currency and banking crisis that would hurt its economy.

The move is also expected to increase foreign participation at the bourse and help grow the bond market, which has a bond-to-GDP ratio of less than five per cent compared with 16 per cent in Kenya and about 22 per cent in South Africa.

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Highest return

Tanzania government securities offer the highest return in the EAC, with yields on the 91-day, 182-day and 365-day Treasury bills averaging 12.16 per cent, 13.22 per cent and 13.3 per cent, respectively.

Yields on Uganda’s 91-day T-bill average 10 per cent and Kenya’s 91-day, 182-day and 364-day are at 8.8 per cent, 9.8 per cent and 10.3 per cent, respectively. Rwanda’s 91-day, 182-day and 364-day T-bills have yields of 5.2 per cent, 6.2 per cent and 7.7 per cent.

Key driver

Foreign investors are a key driver of Kenya’s capital market as more than half of the trading at Nairobi Securities Exchange is driven by foreign buying and selling of shares.

The IMF partly blames the narrow investor base in Tanzania and, indeed, the EAC, for the low levels of international investor participation in local markets relative to regions such as Southern Africa.

“Low liquidity is also due to the shallow investor bases,” says the IMF in a report assessing the regional capital markets. “Local commercial banks and pension funds, dominant investors in the region, generally tend to hold securities until maturity.”

According to The East African Common Market Score Card 2014: Tracking EAC Compliance in the Movement of Capital, Services and Goods report released earlier this year, Tanzania and Burundi have the highest number of restrictions to cross-border trade and flow of foreign direct investment in the region. The scorecard was developed over 18 months.

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In Tanzania, a foreigner may deal in up to 60 per cent of shares of primary or secondary issues in the local stockmarket while Kenya, which defines a local investor as a citizen of the EAC, allows foreigners to purchase a maximum of 75 per cent of shares in a local company.