Official figures show that currently the government debts to the social security system amounts to some 2.15trn/-, which is 21.7 per cent of the pension funds total assets. According to Bank of Tanzania (BoT) figures, the assets amounted to nearly 10trn/- at the end of the third quarter last year.
Capital markets players say the new bonds will be a boon to the nascent sector in the country. According to the CEO of Zan Securities, Raphael Masumbuko, non-cash bonds are bonds usually issued by governments to institutions as settlement of debts it owes them.
He said the bonds are issued when a government does not have enough cash or doesn’t want to give immediate cash. He also said that the new securities will improve the liquidity of the secondary market (stock exchange) if floated by changing hands.
“The bonds are important to the recipients because they can decide to discount them in the market if they need immediate cash or they can wait until maturity,” Masumbuko told Smart Money on Sunday.
Deputy Economic and Planning Minister, Dr AshatuKijaji, said the non-cash bonds maturities will range between three and 20 years.Last week, the minister said Treasury has directed BoTto prepare a non-cash bond to pay the outstanding debt of 225bn/-that it owes the PPF Pension Fund.
According to her, the government was currently working on a plan to pay all the debts it owes the funds. She also said that it will ensure all the requisite civil servants’ contributions are remitted on time.
The government’smove will be a big shot in the funds’ financial arms since both its non-performing loans and outstanding arrears have been a constraint to the industry’s liquidity.A report on the fiscal positions of the schemes says that bad debts were 400bn/- in 2013 when the total outstanding loans amounted to 1.8trn/-.
Sectoral sources say the government’s total obligations and contingent liabilities to the system, whose honouring has been wanting for quite some time, now amount to 12trn/-. The amount has been downsized following reforms instituted in the sector under the new Harmonisation Rules adopted on July 1, 2014.
“The obligations and contingent liabilities of the government to the pension system in Tanzania, under the previous rules of the pension funds, are estimated to amount to 23.5trn/- or 48 per cent of the 2013 GDP,” reads a part of the report that examines the fiscal sustainability of pension funds.
The report adds thatif paid in full, the arrears would equally have a substantial impact on both the government finances and the public debt stock, which topped 41.2trn/- in November 2015. Apart from honouring its obligations through debt issuance, policy note by the world calls for cash transfers from Treasury’s Consolidated Account.
According to a 2014 World Bank staff analysis,the government’s obligationsto pension funds included arrears to the Public Service Pension Fund (PSPF) on pre-1999 pension benefits paid on the government’s behalf (2.1 per cent of GDP), overdue loans from pension funds to public entities (0.7 per cent of GDP), and future liabilities to the PSPF on pre-1999 pension benefits.
In a policy note to the IMF in December 2015, Deputy Economic and Planning Minister, Dr AshatuKijaji, said progress has been made in the reconciliation of arrears to pension funds. She also said that loans from three pension funds to the government have now been reconciled, while those from PSPF, LAPF and NSSF were being processed.
“The arrears to the PSPF on account of the 1999 reform amount to 2.7trn/-,” Dr Kijaji noted in the Letter of Intent, Memorandum of Economic Financial Policies, and Technical Memorandum of Understanding dated December 24, 2015. “We expect to settle them by end-March 2016, through the issuance of non-cash bonds with maturities ranging from three to 20 years,” she added.
“Loans from three pension funds to the government have now been reconciled, while work is progressing on loans from three other pension funds (namely the PSPF, LAPF and NSSF),” Dr Kijaji noted in the letter.
According to her, the government plans to take over these loans entirely and recognize them as public debt, and will issue non-cash bonds to the pension funds in compensation by end-June 2016.
Treasury also said that new loans to the government will not be extended until the share of these loans to total pension fund assets falls below the regulatory limit of 10 percent. To enable the pension funds have enough funds to meet their obligations liketimely payment of benefits to pensioners, the government says the limit will be further reduced in the future.
BoT’s latest review of the sector says that the ratio of government loans to the sector’stotal assets has been increasing owing to accumulation of interests. The rate for December 2014 was 17.6 per cent, which increased to 19.3 per cent at the end of the first quarter in 2015 and reached 21.6 per cent by mid-year.
“Future loans will be recorded explicitly as budget financing, with the corresponding expenditure properly recorded in the budget and fiscal reports,” Dr Kijaji promised the IMF, which has been raising concerns over delays to disburse remittances to the funds and honour other obligations.
Improving the financial status of the industry is one of the key features in IMF’s conditionalities to Tanzania. In February last year, the government was required to prepare and adopt a strategy to address the arrears to the pension funds in order to improve their financial sustainability.
The global financial prefect wants all arrears, including on loans, to be cleared in the current financial year. According to it, enhancing the sustainability of the pension system, including by addressing existing government arrears to the pension funds, was a critical issue.
The IMF lists staggering arrears to the funds and suppliers as one of the three major factors that have been exerting excessive fiscal pressures on the economy. Others are external financing and the perennial shortfalls in revenue collection.
The other Bretton Woods institution, the World Bank, says that the social security system in Tanzania is characterized by a relatively large number of social security funds serving a small subset of the population. It wants the sector to be streamlined, an idea shared by many sectoral experts, who see value for money in the proposal through economies of scale.
“Not a bad idea,” consultant Abdul Razaq Badru of Dar es Salaam told Smart Money.
“If we want to keep all or a few that are efficient and profitable, we will need to redefine their mandates and scopes…sometimes organized competition and complementarity work better,” he said.
Dr Antipas Massawe said their merger would consolidate their operations and sort out the inherent inefficiencies in the industry. To him, the idea was good because it would most importantly maximize their capital.
“That would enable them to invest in more business giving high returns locally and internationally and minimize the level of investment risks as well as maximize benefits to pensioners.”
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