Thursday, November 11, 2010

Tanzania Announces Plans for Large Infrastructure Development

Wikipedia: Eurobonds
Investopedia: Eurobonds
All Africa: Tanzania: Poor Infrastructure Dogs Development
Bloomberg: Tanzania May Sell $500 Million of Eurobonds in 2011 – 2012, Central Bank Says
All Africa: Tanzania: Business Confidence High Despite Impending Polls

Last June, the Finance Minster announced that Tanzania would try to borrow around $1.4 billion from lenders in order to finance massive infrastructure projects, such as building roads, expanding ports, and increasing the nation’s power generation. Eurobonds are one avenue for the country to raise these funds. Last week, the Bank of Tanzania announced this week that it was planning on selling around $500 million of Eurobonds within the next two years.

Eurobonds are bonds for an international market. The issuing country issues the bond in a foreign currency, rather than its own local currency. The bond issuer will pay the bond holder interest on the bond over time. An attractive feature of the Eurobond is that the holder does not have to pay a withholding tax on the interest. Eurobonds also draw investors because of their small par value (face value) and high liquidity (investors can easily buy and resell the bonds without affecting their price).

The bonds will help provide Tanzania with the funds to undertake massive infrastructure-building projects. Constructing roads will be one such infrastructure project. Tanzania’s road system is a network of 85,000 kilometers of roadway, but only around 5,000 kilometers are paved. This new infrastructure is important for Tanzania, because poor infrastructure has caused many problems for the county, such as inhibiting both trade and anti-poverty efforts.

Tanzania is currently one of the least developed countries in the country. The national economy relies heavily on agriculture that is not industrialized. Although there are other sectors, such as tourism, mining, construction, and manufacturing, the agriculture sector employs almost 80% of the country’s workforce. If the nation can develop better infrastructure, it will be an important step for the nation’s development and help ease the Tanzanian economy’s reliance on agriculture.

Discussion Questions:
1. What are some of the advantages and disadvantages Eurobonds have over other revenue-raising tools?
2. In what ways, other than helping trade and anti-poverty efforts, might new infrastructure affect Tanzania?

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