SPECIAL REPORT: Tanzanias debt stock to hit Sh2.54 trn by June 2011 Monday, 11 October 2010 10:40 By The Citizen Reporter Until 1997, the Tanzania government had no domestic debt. By 1998 when the country started to borrow domestically, the debt stock was pegged at around Sh6 trillion. It is in this year that Tanzania started to mull the option of borrowing commercially. However, the idea was put off temporarily due to what was cited as unfavourable global situations. It is from that year that the debt stock started to increase and as of last June, the total debt stood at $9.9 billion. And by last June exchange rate, this amount was equivalent to Sh13.6 trillion. This is the same as saying that as of June 2010, every Tanzanian owed the lenders roughly Sh332,000 in public debt. If you think that you might be able to settle this debt, just prepare your calculator for some additions. This fiscal year (2010/11) the government plans to borrow Sh2.12 trillion more on commercial terms. This money will be borrowed domestically and from abroad. According to an analysis done by a non governmental organisation called Uwazi, of this amount, Sh797.62 billion will not be new debt as the government will be selling new treasury securities (bills and bonds) to pay for the redemption of maturing debts. This typically keeps debts at more or less the same level. The other Sh1.3 trillion will be a new debt which, according to the minister for Finance, will pay for infrastructure development. With an additional Sh1.21 trillion net borrowing on concessionary terms (soft loans) the stock of debt is expected to grow by about Sh2.54 trillion or Sh54,300 per Tanzanian by June 2011. Commercial borrowing The government efforts to maintain the debt stock has enabled Tanzania to be regarded as a loanable country. This creates a possibility of borrowing on commercial terms. That possibility on the other hand, has opened a new window of opportunity that was unavailable for quite some time. Without massive debt relief, largely delivered between 2000 and 2007 under the Highly Indebted Poor Countries (HIPC) initiative and Multilateral Debt Relief Initiative (MDRI), international commercial loans to Tanzania would have remained a farfetched dream because Tanzania was debt stressed and therefore not a creditworthy borrower. There was a time in late 1990s when the ratio of external debt to GDP shot up to above 100 per cent and the external debt to exports ratio was well above 500 per cent. Commercial lenders simply refused to extend credit to Tanzania. Consequently soft loans and grants from bilateral donors and multilateral financial institutions became Tanzanias main source of deficit financing. But there is an argument that the HIPC initiative will not go far enough to relieve the poor countrys external debt. The former Finance minister, Mr Basil Mramba, is a witness to this. He is in record to have told Parliament few years ago that while the programme has provided some relief in its first years, TaDEBT Înzania debts continued to accumulate. This situation is still the same today as we still witness the bulging of the debt stock. The Tanzania situation is not different from many other sub-Saharan African countries that qualified for debt relief - a substantial lowering of debt initially, with rising obligations as new money is borrowed to service old debt and to finance new basic development programmes. There was some signs of improvement immediately after the debt relief started. For instance, after receiving assistance from HIPC, sponsored by the World Bank and International Monetary Fund (IMF), Tanzanias external debt fell from $3.8 billion (about Sh5.3 trillion) in mid-1999 to $2.6 billion (about Sh3.6 trillion) in the period of only two years. Grants instead of loans In her much discussed book, Dead Aid: Why aid is not working and how there is a better way for Africa, Dr Dambisa Moyo, suggests on how African countries could get themselves out of what she refers to as debt cycle. She proposes that poor countries could redeem themselves by borrowing commercially instead of relying on grants and aid. She says poor countries should take charge of own development and through commercial loans, countries will be more responsible. Of late, Tanzania has opted for borrowing. We witnessed in the last budget, the minister for Finance announced the governments intention to borrow, not only from traditional sources but also commercially. The idea to borrow commercially was earlier considered in 2007/08, but put aside due to unfavourable conditions in the international financial markets at the time. Now the idea is back with prospects of further increasing the debt stock. So, tax payers get å Due to the efforts by the government to service its debt, local and foreign, it has reached a point that the country is eligible to borrow more. But should it do so? Critics are asking if the opportunity for commercial borrowing be embraced. And what are the chances of Tanzania plunging back into another unsustainable debt situation? Analysis done by Uwazi indicate that current statistics do not indicate Tanzania plunging into an unsustainable debt situation shortly in the future. Both, debt-GDP and debt-export earnings ratios are at sound levels. However, Uwazi warns in its brief titled Should Tanzania Borrow Commercially? that the Government must not lose sight of the fact that each shilling it borrows is a liability Tanzanians will have to bear through more taxes. Worse still, what burdens more Tanzania is not the principal debts themselves, but the interest. For instance Sh3.7 trillion debt stock as of 2010, only Sh1.5 trillion is principal debt and the bulk of the rest is interest. Experience show that interest has been growing as the country borrows more and fails to service past debts and the new ones. There was a time in late 1990s when the ratio of external debt to GDP shot up to above 100 per cent and the external debt to exports ratio was well above 500 per cent. Commercial lenders simply refused to extend credit to Tanzania. Consequently soft loans and grants from bilateral donors and multilateral financial institutions became Tanzanias main source of deficit financing. This situation of having interest outstripping the principal debt is the result of several initiatives which saw Tanzania qualify for more debts. And the country did not ask itself twice after being granted opportunity to borrow. It borrowed and borrowed and the result is what we see today. Uwazi stresses that debt sustainability indicators must be kept healthy by sustaining strong growth of exports as well as GDP. In addition, investments made on borrowed money ought to achieve value for money spent and benefit its people equitably. If they fail to meet this criterion at planning stage and in the course of implementation, Tanzania is likely to plunge in debt distress again in the future. History has an important lesson to teach here, warns Mr Rakesh Rajani, head of Twaweza, a subsidiary of Uwazi. A good part of the debt accumulated in the pre-debt relief era was not effectively used, and the benefits to society were skewed to certain groups or localities. The significant infrastructure shortfalls facing Tanzania despite a huge debt it accumulated in those years indicates this actuality. Nevertheless, the debt had to be serviced, except of course where lenders were willing to write it off, something which does not occur frequently. Not paying is expensive There is a recent example to show just how costly it is when a country fails to service a debt. In the 1980s Tanzania borrowed Sh49 billion from Brazil to finance construction of Morogoro-Dodoma highway. The debt was never serviced. By 2010, it had accumulated to $240 million (about Sh336 billion under the current exchange rates). This is far more than what the country borrowed. Fortunately for Tanzania the road was built and it is there. But the country was lucky also as after long negotiations, the Brazilian authorities recently agreed to waive it. In its analysis, Uwazi points out that if the Sh2.12 trillion that the government will borrow on commercial terms in 2010/11 is not serviced, it could in a decade also balloon to an amount too painful to service. For instance, Uwazi says, if the loan is charged a 5 per cent interest rate per year, payable monthly and is not serviced, in 10 years this amount will have increased by 65 per cent and will have more than doubled in 15 years. This proves that non paying ones debt is expensive. The longer maturing obligations are not serviced the higher the interest accumulated become. The debt owed to Brazil just demonstrates how bad this can be. Such a risk is also more pronounced in the case of foreign borrowing on commercial terms, which normally does not have grace periods and charges relatively higher interest rates. Another concern, according to Uwazi, is whether Tanzania will be able to manage its debt service obligations. At present, not all existing debt is serviced, and more commercial borrowing could cause additional strain. As of June 2010, the country had debt service arrears comprising principal and unpaid interest worth $2,760.8 million (or Sh3.8 trillion). Unpaid interest accounts for the bulk of the arrears. According to Bank of Tanzania, selling new securities to redeem maturing debt is straightforward when dealing with domestic debt. This is logic since the transactions are based on the same currency. But Uwazi notes that this cannot be applied for external debts because such a debt must be paid in foreign currencies and is prone to exchange rate risk. Uwazi proposes that new commercial debt must be serviced steadfastly.