East Africa is showing continued good economic performance, but the World Bank forecast a drop in growth rates of about one-third for 2009, with GDP growth in Tanzania forecast to fall to 4.5% and in Uganda to 4%.Sao Hill benefits from a strong construction sector.The local banks were mostly funded by deposits and have not been significantly affected by the international banking crises, even if lending has become tighter during 2009.Due to the lack of a long-term loan market, the construction industry is mostly equity financed and has been less hit by the credit crises than expected.The tourism business, a major export earner, has seen a significant downturn, as have selected commodity markets like cotton and cashew.Investments in the mining sector, a main driver of economic growth in Tanzania, but also Uganda and Mozambique during the last ten years, have come to a halt.

In 2008, GDP growth was 7.1% (7.3%) in Tanzania, 7.3% (7.9%) in Mozambique, 1.7% (7.0%) in Kenya and 6.9% (8.6%) in Uganda, which is marginally down on 2007 for most countries.The exception is Kenya, which was hurt by the election riots at the start of 2008, and this also had implications for Uganda.It should be noted that the 2007 figures were revised upwards by on average 0.5 percentage points compared to those published in our last report.Since 2000, GDP growth has averaged 8% in Mozambique and 6-7% in Tanzania, 6% in Uganda and 4% in Kenya, making them among the most successful African economies, and East Africa the fastest growing region of Africa.

Mozambique has been one of the world’s most rapidly growing economies over the past decade, with much of the impetus coming from reconstruction efforts and extensive foreign investment in projects based on natural resources.Key sectors contributing much to the performance of the economy include industry, the service sector, agriculture and fishing.

Prudent macroeconomic policies and the growth in the mining sector, as well as the construction and telecom industries, account the most for the success in GDP growth in Tanzania. The electricity (mostly hydro power) supply situation has been better during the last two years due to good rainfall.However, drought in the key food producing regions during 2008 is now creating uncertainty about food supplies. The economic growth in urban areas of East Africa is significantly higher than the overall growth. Mafinga, the town located close to Sao Hill, is believed to have experienced 10-15% pa economic growth during the last few years.

The Ugandan economy has continued to grow rapidly in recent years. Telecommunications has been the fastest growing sector as a result of the growth in mobile phone subscribers, while the agriculture and horticulture sectors have also done well.The horticulture sector is now experiencing a downturn.

Good FDI and ODA

Total foreign direct investments (FDI) attracted to East Africa was USD 889mn in 2006. Tanzania attracted the largest share, USD 377mn in that year, mostly driven by the mining sector.Uganda is the second largest destination for FDI followed by Mozambique attracting USD 307mn and USD 154mn respectively.Kenya attracted USD 51mn.

Official development assistance (ODA) has been increasingly flowing into the East Africa region.In absolute terms, ODA into the region has increased by 50% over the last decade from an average of USD 750mn in 1996 to an average of USD 1,483mn in 2006. In 2006, the East Africa region where the company operates attracted ODA amounting to USD 5,930mn compared to USD 3,035mn attracted ten years earlier.In 2006, Mozambique received the highest percentage of ODA (as a ratio of GDP) at 24%, followed by Uganda and Tanzania, which received 17% and 14%, respectively.Kenya received 4% during the same year.

Falling exchange rates

After some appreciation in 2007, all East African currencies depreciated against most international currencies in 2008.However, the weak Norwegian krone lead to translation gains for Green Resources’ financial accounts. The Tanzanian shilling has steadily depreciated over the last decade, typically at a rate of 5-10% pa against the US dollar, but experienced relative stability since 2005.The Ugandan shilling experienced periods of appreciation as well as depreciation between 2001 and 2005, but since 2006 the currency has been appreciating against the US dollar.The Mozambique metical was stable for five years following 2001, but depreciated by 20% by the end of 2006.But, since 2006 the metical has maintained strong appreciation against the US dollar. The Kenyan shilling has appreciated steadily since 2001, but has depreciated during the last two years.

Inflation under control?

Inflation moved down to single digits at the end of the 1990s and bottomed out at 4-6% in Tanzania and Uganda from 2004-07.Since then, inflation has edged upwards in both countries. Inflation increased sharply in 2008 following a mixture of more expansionary fiscal policies, higher food prices and imported inflation, in particular from oil, but also due to the depreciating currencies.Inflation peaked at 26% in Kenya, 12% in Uganda, 10% in Tanzania and 8% in Mozambique.

Interest rates

Annual interest rates have shown a general downward trend in East Africa for a long period.Money market rates fell to 8% in Tanzania in 2008, down from 13% in 2007, but remained high at 16% in Uganda. Tanzanian interest rates have moved back up in 2009 and continue at a high level in Uganda.

In Tanzania and Uganda, corporate and marginal personal tax is 30%, but the rate for stock exchange listed companies is 25% in Tanzania.Losses can be brought forward indefinitely.In Mozambique, corporate tax rates are 32% and the top rate for income tax is 30%.In the northern parts of Mozambique, where Green Resources’ operations are located, there is a preferential 22% corporate tax rate, and a number of tax incentives exist.In most countries, including Tanzania, there is 10% withholding tax on dividends and interest payments and 15% withholding tax on foreign consulting services.In Tanzania, there is no income tax below TzS 80,000 per month.The tax rates are 18.5%, 20% and 25% depending on income, up to TzS 540,000 per month when the top marginal tax rate of 30% kicks in.

In Tanzania, employers and employees each contribute the equivalent of 10% of their gross salary to the National Social Security Fund and the employer contributes 6% of salaries as a skills and development levy paid to the Vocational Educational Training Authority.In Uganda, the combined pension and social tax is 15%. The returns on the pension funds are low.

In Tanzania, the VAT rate was reduced from 20% to 18% from the 2009/10 fiscal year starting 1 July, at the same time as the base for collecting the VAT was broadened. This is directly beneficial for Sao Hill, as many of its competitors are still not registered to pay VAT.In Uganda, VAT is 18%. There was also a reduction in the Tanzanian cess, a local government tax on agricultural revenues, from a maximum 5% to 3% from 1 July 2010.

There have been no major political changes in the countries where Green Resources operates during the last year.Over the next two years, there will be national elections in Mozambique (2009), Tanzania (2010) and Uganda (2011).

Mozambique: a young democracy

The last presidential and general elections were held in 2004, in which FRELIMO’s candidate Armando Guebuza won with 64% of the vote, with RENAMO receiving 32%.FRELIMO won 160 seats in Parliament while a coalition of RENAMO and several small parties won the remaining 90 seats.Guebuza is seeking re•election at the election in October 2009.RENAMO, the main opposition, seems to have lost ground, while a new opposition group has been formed around the mayor of Beira, the second largest city.After 17 years of civil war after independence in 1975, a peace agreement was signed in 1992, with the first multi-party elections in 1994 and the first multi-party presidential election in 1999.

Tanzania: Africa’s most stable country

The last election was held in December 2005 with Jakaya Kikwete elected as new president with 80% of the votes. CCM won 206 of 275 seats in Parliament and Tanzania has the weakest opposition in East Africa. The next election will take place at the end of 2010. Tanzania saw government turmoil in 2008, with a new prime minister, but the situation has since stabilised. Tanzania has possibly been the most peaceful African country since independence in 1961, with CCM governing the country uninterruptedly. The first multi-party election was held in 1995, with elections every five years. Tanzania’s president typically sits for ten years, and it is expected that Kikwete will seek re-election in 2010.

Uganda: multi-party system

In Uganda, the National Resistance Movement (NRM) and President Museveni have governed the country since 1986, under a ‘no-party’ system.A referendum held in July 2005 opened for multi-party elections in 2006. Museweni obtained 59% of the votes, ahead of FDC’s Besigyne who got 37% of the votes.In the Parliamentary election, NRM won 191 out of 215 seats.The next election is in 2011.

Sudan: election delayed

The Comprehensive Peace Agreement (CPA) signed in January 2005 stated that Southern Sudan was a semi-autonomous republic with its own president Salva Kiir, and its own government, the Government of Southern Sudan (GoSS, located in Juba).Salva Kiir is also the first vice president of Sudan, located in Khartoum. The CPA established a Government of Unity (GoU) based in Khartoum.The main parties of the agreement were the National Congress Party (NCP), to which the President of Sudan, el Bashirbelongs, and the Southern People’s Liberation Movement (SPLM), where Salva Kiir is a member.

The planned election for president and Parliament for Sudan was postponed earlier this year from July 2009 to April 2010.If and how this will affect the agreed referendum on independence for Southern Sudan in 2011, as written in the CPA, is unclear.

Southern Sudan consists of ten states.There are mainly three areas in Southern Sudan where security remains uncertain: Abyei in West Kordofan State (oil area), Upper Nile State (to the north) and Jonglei State (bordering Ethiopia).The Abyei Border Commission, which has a mandate to draw the border between North and South Sudan based on old colonial maps, is expected to present its findings in 2009.Both parties have expressed their intention of respecting the outcome.Central Equatoria State including Juba, the capital and Tindilo, where Green Resources operates, has become more stable and peaceful.