Finance Minister Mustafa Mkulo poses with the budget briefcase. Picture: Leonard Magomba By Abduel Elinaza May 31 2010 The East African Tanzania's Ministry of Finance is in talks with local commercial banks to borrow up to $250 million to cover a deficit left by a recent withdrawal of support by donors. The Treasury has initiated the talks with the eight commercial banks, excluding Bank of Tanzania, in a measure aimed at plugging a $3 billion budget deficit without roiling its bank interest, inflation and currency markets. Sources who have been part of the negotiations told The East African that the Tanzanian government, stung by donor criticism of the Kikwete government's inability to fight entrenched corruption among the ruling class, is currently facing hard choices - either increase its domestic borrowing through Treasury bills and bonds or raise money from international capital markets through a Eurobond. The National Bank of Commerce, a subsidiary of ABSA Group of South Africa, CRDB Bank Plc and Stanbic Bank Tanzania, a subsidiary of Standard Bank of South Africa, are among the banks who have been approached. Minister for Finance and Economic Affairs Mustafa Mkulo told The EastAfrican that the negotiations with the eight commercial banks were ongoing but have not reached any conclusion. Mr Mkulo said it was premature to disclose the names of the other five banks as talks were at a nascent stage. He defended the borrowing as normal practice for the government that did not require informing the financial custodian and regulator, the country's central bank. "After all in the next fiscal year, the bulk of development funds will be borrowed - what matters most is the interest rate charged by the banks," he said. Given the size of the loan, it is expected that the Bank of Tanzania would have concerns that it would slow down lending to the private sector as banks prefer lending to the government, increasing interest rates in the economy. This would then slow down consumption by consumers and businesses as debt becomes more expensive. A senior lecturer at the Mzumbe University Dar es Salaam Business School, Dr Prosper Ngowi, said that the move will have a crowding-out effect on the private sector, adding, "Commercial bank borrowing increases the debt burden and it's the next generation of taxpayers who will bear the brunt of paying back the debt." Hight costs Borrowing in international markets is not very attractive at the moment either, because investors who have been stung by the debt crisis facing Greece, Portugal and Spain are wary of sovereign debt from a poor country. The interest rates demanded by investors in sovereign debt from frontier economies such as Ghana has been rising. The cost of insuring these debts has also been rising dramatically. Tanzania's plans for issuing a Eurobond were scuttled by the global financial crisis. As Mr Mkulo prepares to present the new budget on June 10, he faces a tough task balancing the need to instill financial discipline to support Tanzania's economic growth and the tough political realities that his boss President Jakaya Kikwete faces an election he is widely expected to win in October. It is not clear how the Treasury by borrowing directly from commercial banks can avoid triggering a rise in local interest rates, but the strategy makes political sense in an election year because commercial banks will not make tough demands. With the Tanzanian economy still smarting from a slowdown, President Kikwete, whose political profile on the international stage has been rising, faces major political challenges on the ground with voters who continue to feel the pinch of rising food prices and unemployment. In the face of the global financial crisis, he responded with a major stimulus package, which he now wants to expand to increase demand and create jobs. The centrepiece of his political reforms has been massive investments in modernising agriculture, education and physical infrastructure. This has been paid through debts, now running to 5.5 per cent of the size of the $15 billion economy. Though the deficit has increased as tax collections slow down, the current financing crunch stems mainly from Tanzania's inability to deal with its success in attracting donors and delivering on its pledges to them. For instance, as this newspaper reports on page 9 of this edition, the country is now rushing to spend $700 million of unused cheap loans it was awarded in September 2008 by the Millenium Challenge Corporation, an agency of the US Department of State, that it was awarded to spend on energy, water and transport. If this money is not spent by 2013, it will lose out on getting a second loan. The country has not used the funds as fast as expected because of the cumbersome procurement guidelines demanded by the US government, which wants to ensure that contracts are not awarded to dubious firms with political connections as is prevalent in Africa. Treasury said it could not leave the deficit unattended as it may slow down the country's infrastructure development, especially in the road construction sector. Bank of Tanzania Director for Economic Policy, Dr Joseph Massawe said the central bank has not reached its limit on issuing Treasury bonds and that there are a number of issues to be taken into consideration before arriving at a conclusion on borrowung from commercial banks. The IMF and World Bank have warned that Tanzania's economy is not out of the woods yet after the global financial crisis, and current spending spree could derail GDP growth, estimated to be 6.2 per cent in 2011. In recent years, the government has increased borrowing to bridge the revenue collection gap exacerbated by the global financial crisis. In March 2010, revenue collections and grants amounted to $340 million and $21 million respectively, while total expenditure amounted to $475.3 million, implying a deficit of $113.5 million. On cumulative basis, revenue collections in the first nine months of 2009/10 were below budget estimates, with all categories falling short of targets. The total domestic revenue collection excluding Local Government Authorities' own sources was 91.3 per cent of budget projection during the period. The government had to borrow money from various sources following reduction of development partners' contribution to General Budget Support (GBS) of $220 million for various reasons, including delay in implementation of some reforms. The African Development Bank (AfDB) announced a GBS commitment of $534 million for the next financial year, while putting the government on notice to implement "at the required pace, certain required reforms or else lose the funding." Recommendations made by the IMF Tanzania should look for alternative financing to plug the anticipated deficit in the 2010/2011 budget. David Robinson, resident representative of the International Monetary Fund in Tanzania, said that there are a range of possibilities, including public private partnerships, syndicated loans, or Eurobonds, that however need to be handled carefully and in the context of a strategy that comprehensively weighs the risks and returns. Mr Robinson said that if there is a need for a fiscal stimulus package in the forthcoming financial year, it should not be to the level of the outgoing financial year 2009/2010. "For the next fiscal year, fiscal and monetary policy must be carefully balanced to support the economic recovery, while at the same time gradually scaling back the fiscal stimulus injected in response to the global crisis," he said. In the outgoing financial year, the government committed $1.7 billion to stimulate the economy through the injection of funds into key sectors. The IMF supplied the government with $336 million in installments to help fight the adverse effects of the global crisis. According to Mr Robinson, for the country to have a successful 2010/2011, the government needs to make improvements in revenue collection and minimise recurrent expenditure. In May, the donors slashed funding pledges for Tanzania's 2010/2011 budget by nearly a quarter of a billion dollars to $534 million due to concerns about the slow pace of reforms in the country.