Heavy debt servicing new govt’s Achilles’ heels

The central bank attributes the recent escalation of this debt portfolio to mainly exchange rate pressures that saw the shilling weakening significantly against major currencies most of last year.

In a March 2016 report on the stability of the financial sector, the Bank of Tanzania (BoT) says debt servicing in a period of one year will amount to 1.6 per cent of GDP or US$773.5 million.

At the current mean official exchange rate, that amounts to about 1.68trn/- or slightly over 140bn/- a month. According to the current budget estimates, the Treasury plans to spend 8trn/- on national debt servicing in the current financial year.

“Public debt portfolio is exposed to exchange rate risk due to dominance of external debt. The proportion of public external debt remains high at about three quarters of the total public debt with debt servicing in the next 12 months standing at about 1.6 per cent of GDP or US$773.5 million,” BoT notes in the recently released Financial Stability Report.

“This exposes fiscal operations to exchange rate risk,” it adds.

BoT figures show that when the new regime assumed power in November last year, total national debt was US$19.17 billion (about 41.34trn/-). Out of this, external debt amounted to US$15.26 billion (32.9trn/-), which increased to US$16.19 billion (35.26trn/-) at the end of March 2016.

Tabling the 2016/17 government budget in June, Finance and Planning minister Philip Mpango said the national debt stock amounted to US$20.94 billion at the end of March. Compared to the US$19.69 billion recorded in June, 2015, Dr Mpango said this was equivalent to an increase of 6.34 per cent.

At the exchange rates during the two months, the public debt was 45.6trn/- and 39.7 trillion respectively. Dr Mpango told Parliament that out of this amount, public debt was US$17.93 billion and private external debt was US$3.01 billion.

“In addition, the public debt increased by 6.01 per cent compared to US$16.92 billion in June, 2015. This increase was mainly caused by government borrowing to finance development projects,” he said.

The government has been also borrowing heavily due to unrealistic revenue targets especially during the previous regime and dwindling of donor funding which has made foreign aid increasingly unpredictable. Borrowing from external commercial sources has also been expensive largely due to strengthening of the dollar and high interest rates.

BoT says that relative decline of concessional external debt financing increases government’s exposure to external shocks. According to its report, the share of concessional debt was 67.5 per cent of total external debt as at end of March 2016, compared to 69.0 per cent a year earlier.

“The recent relative decline in concessional financing and the possibility of Tanzania moving to middle income group may necessitate the government to opt for more non-concessional borrowing. This may gradually change the debt maturity profile, exposing the country to global interest and exchange rate volatility,” the report reads.

The report also has it that the large share of domestic public debt bears fixed interest rates, thus lowering its vulnerability to interest rate risk. However, it adds that during the year ending March 2016, the average debt maturity shortened to 3.8 years from 4.5 years in the corresponding period in 2015, thus posing rolling-over risk.

Domestic debt, which was US$3.91 billion (about 8.43trn/-) in November 2015, increased to US$4.34 billion (about 9.45trn/-) at the end of the first quarter of this year. In April, 2016, it surged to US$4.45 billion (about 9.7trn/-) compared to the US$4.19 billion it was during the same month in 2015.

UCTAD has said in a new report titled Economic Development in Africa that the country’s domestic debt was still sustainable thus cannot compromise economic growth. It also says that there is greater scope for the debt to expand without crowding out bank lending to the private sector and inducing inflationary pressures on the economy.

This view is shared by the government and major international financial institutions.

“Despite the observed increase in national debt stock, the debt is still sustainable. This is supported by the Debt Sustainability Assessment conducted in September, 2015 which revealed that the national debt is sustainable in the medium and long term,” Dr Mpango said in his budget speech.

He said that in ensuring effective management of national debt, the government was finalising the preparation of National Debt Management Policy and would review the Government Loans, Guarantee and Grants Act CAP 134 in order to conform to the proposed blueprint. For sound management of the debt, the policy will be followed by the issuance of guidelines to develop and increase domestic financial market efficiency.

In its latest review of the national economy, the IMF says that while central government debt has increased to about 38 per cent of GDP, debt vulnerabilities remain limited. It attributes the increase to both fiscal deficits and the impact of the recent depreciation of the shilling on dollar denominated debt.

“External borrowing on non-concessional terms has increased rapidly in recent years, partly to making up for dwindling aid,” the Bretton Woods institution adds, noting that utilising public-private partnerships (PPPs) for large infrastructure projects would significantly reduce government borrowing.