PESA
PESA Regional Integration Monitor, Apr 2019

The April 2019 issue focuses on providing an overview of public debt in SADC and what needs to be done to retain debt sustainability in the future – Why do SADC countries raise public debt? What is the balance of revenue versus expenditure? What are the main sources of government revenue in SADC? What are the current average levels of public debt in SADC? Which are the most and least indebted countries? What is the regional public debt target or ceiling? How many countries comply? What options does this mean for the future of public debt sustainability in SADC? The PESA Regional Integration Monitor, Apr 2019 examines some of these questions.

 

 

 

Headline Story by Michael Andina

An Overview of Public Debt in SADC

Countries in the Southern African Development Community (SADC) and other developing countries will often use public debt as a way to gain access to extra funds that are used to induce or maintain economic growth. However, states need to be careful with how they manage their debts because recurrent budget deficits and borrowing due to insufficient revenue can potentially lead to the accumulation of an unsustainable public debt, especially if a government must use an increasing amount of its revenue to pay interest on loans or service its debt. These payments will often compete with infrastructure and capital expenditure, and crucial developmental investments will be postponed to service debts. This, in turn, can force a government to borrow more money from external sources as an immediate solution to finance their budget deficit, which if poorly managed exacerbates the problem instead of solving it, and can lead to unmanageable spiralling debts.

 

In order to determine whether a country has a sustainable amount of debt, economists will look at a country’s debt-to-Gross Domestic Profit (GDP) ratio and compare it to its economic strength. This provides an indication of how likely a country can pay off its debt[1]. Continuously rising of public debt leads to increased interest rates, lower credit rating, and increases the odds of a country defaulting on its debt[2]. In the SADC region, debt has become more expensive to service because interest rates are often very high. Therefore, a large amount of revenue is being channelled towards servicing the debt instead of investing in critical areas of the economy and this leads to poor long-term economic performance. SADC countries must use domestic and regional public debt management strategies in order to ensure that public debt does not become a fiscal burden. Nevertheless, governments should not fear public debt, because it is attractive to risk-averse investors as it usually comes with very secure guarantees by the government itself. Thus, if used correctly, a stable level of public debt has the capacity to improve the standard of living in a country[3].

 

SADC governments have recognised that macroeconomic stability is fundamental to economic growth and as such the regional bloc encourages member states to adopt policies aimed at fostering sustainable levels of debt. In 2002, SADC established guidelines for managing public debt in its Memorandum of Understanding on Macroeconomic Convergence[4]. The regional bloc has encouraged its member states to avoid large public debt-to-GDP ratios. In pursuit of this objective, SADC also encourages member states to monitor and measure this ratio as an indicator of macroeconomic convergence, especially considering the sustainability of the debt. In order to obtain these Macroeconomic Convergence targets, member states are advised to maintain a public debt-to-GDP ratio no greater than 60.0%[5].

 

Of the 16 SADC member-states five (Angola, Mauritius, Mozambique, the Seychelles, and Zambia) had public debt levels above the regional limit in 2018. Mozambique and Zimbabwe are the most indebted SADC countries with public debt valued at 110.1% and 75.2% of their GDP[6]. Another three countries (Malawi, South Africa, and Zambia) have public debt above 50.0% of their GDP, but below the regional limit. The rest of the countries have public debt levels below 50.0% of their GDP and the average debt level in the region (including the Comoros) is 49.6%. From 2011 to 2016, the average public debt in SADC countries amounted to 40.0% of GDP, but debt levels steadily increased over that period and in 2017 they constituted 49.5% of SADC countries’ GDPs (excluding the Comoros)[7].

 

But this does not necessarily mean that most of the SADC countries have sustainable public debt levels. High-income economies are considered at a high risk of debt distress if their public debt-to-GDP ratio exceeds 70.0%, while low- and middle-income countries are considered at the same level of risk if their public debt exceeds 30.0% or 55.0% of their GDP, respectively[8]. All SADC member states are low- to middle-income economies so the 60.0% limit is quite high. However, the 60.0% limit exists to avoid putting too much strain on overly indebted economies while they create realistic policy goals to help them ease their fiscal burden[9]. Nevertheless, the consensus is that the region is still at risk of continuing developing unsustainable levels of debt[10].

In order to fully understand whether a country is at risk of defaulting on its debts one needs to understand the relationship between the analytical conditions of debt-servicing costs as a share of total government revenue and the effective interest rates compared to real GDP growth. If either of these conditions are too high, a government will develop unsustainable level of public debt even if its debt-to-GDP level is low. When debt-servicing costs are a significant share of total government revenue, interest payments compete with other government spending, slowing economic development and eventually the government will default on its debts. This process can be accelerated if effective interest rate on these debts are higher than a country’s GDP growth rate, because this means that debt is at a risk of spiralling out of control as interest payments increase faster than the government revenue-raising potential. Therefore, the government will effectively generate less revenue, spend more on servicing its debt and economic growth will continue slowing down.

 

Once one takes these secondary factors into account, a government needs to make sure that their real GDP growth rate is greater than the effective interest rate on public debt in order to ensure it can pay its creditors.  Maintaining the balance between interest rates and economic growth is particularly difficult for commodity-exporting countries, because their economic growth is closely linked to the commodity price cycles which tend to be volatile.

In order to effectively manage public debt, governments need to set a number of prudential thresholds or limits to public debt beyond just the nominal value or debt-to-GDP ratios. Once a country has projected their debt ceilings, they can then review the areas of their economy where they need to expand the optimal combination of debt instruments to hold before drafting accurate budgets that will help their economies grow.

 

Botswana has consistently maintained a stable level of public debt through measured and responsible government spending. Botswana’s public debt is projected at 13.2% of GDP for 2018/19, which is well below the national public debt threshold of 40.0% of GDP and the SADC regional limit[11]. Botswana’s public debt is projected to remain below the domestic and regional threshold even though it is to decrease to around 13.0% of GDP from 2019/20 to 2021/22[12]. Botswana has maintained sustainable public debt by producing a national public debt management strategy that is relevant to its national context and implementing fiscal policy that is consistent with the strategy.

On the opposite end of the spectrum, Mozambique’s public debt has been increasing rapidly due to government corruption and poor fiscal policy decisions. While the country has set a modest debt threshold of 50.0% of GDP, its current debt-to-GDP ratio is projected to reach 118.7% in 2018/19 and will continue increasing to an average of 130.0% of GDP from 2019/20 to 2021/22[13]. The elevated public debt and poor fiscal policy will impact Mozambique’s economic growth in the medium term unless the government implements drastic reforms. Public debt management does not just affect public finances but it has a direct impact on whether a country is likely to grow its economy and become less reliant on debt; or face rising interest rates and debt-servicing costs which can lead to a potentially devastating decline in GDP growth.

 

Therefore, SADC member states need to make sure they have sound debt-management systems in place. Regional policies attempting to rein in member states who have built up an unsustainable level of public debt have realistic short-term goals, but more solid long-term strategies need to be created to guarantee sustainable public debt management and economic growth. In addition, governments need to complement regional policies with domestic public debt management strategies that are sensitive to their domestic context which should inform national budgeting. Commodity-based economies must be particularly careful with when and how they borrow money since shocks in the market can cause previously sustainable debts to spiral out of control. This does not mean countries should avoid taking on sovereign debt, as it provides a necessary inflow of capital into the economy. However, governments need to be held accountable to their debts and irresponsible borrowing or poor economic management needs to be curtailed to ensure that their national economies and the region grow to their fullest potential.

 

By Michael Andina

 


[1] Chudik, A., Mohaddes, K., Pesaran, M.M. and Raissi, M. 2018. ‘Rising Public Debt to GDP Can Harm Economic Growth’, Economic Letter, Vol. 13, Issue 3, pp.: 1-4. Available At: https://www.dallasfed.org/ [Last Accessed: 3 February 2019].

[2] CED 2018. What is the ‘National Debt’ and Why Does it Matter?, on the Committee for Economic Development Website, viewed on 3 February 2019, from https://www.ced.org/.

[3] Chudik, I. et al. 2018. ‘Rising Public Debt to GDP Can Harm Economic Growth’, ibid.

[4] SADC 2002. Memorandum of Understanding on Macroeconomic Convergence, Southern African Development Community: Gaborone. Accessed At: https://www.sadc.int/ [Last Accessed: 4 March 2019].

[5] SADC 2012. Public Debt, on the Southern African Development Community Website, viewed on 3 February 2019, from https://www.sadc.int/.

[6] IMF 2018a. World Economic Outlook Database, October 2018, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 4 March 2019].

[7] IMF 2018a. World Economic Outlook Database, October 2018, ibid.

[8] IMF 2018b. Joint World Bank-IMF Debt Sustainability Frame Work for Low-Income Countries, International Monetary Fund: Washington, D.C. Accessed At: https://www.imf.org/ [Last Accessed: 4 March 2019].

[9] SADC 2012. Public Debt, ibid.

[10] SADC 2012. Public Debt, ibid.; PESA 2018. Political Economy Review: Looming SADC Public Debt Crises, on the Political Economy Southern Africa Website, viewed on 23 March 2019, from https://politicaleconomy.org.za/.

[11] BMFED 2018. 2019 Budget Strategy Paper, Batswana Ministry of Finance and Economic Development: Gaborone. Available At: http://www.bb.org.bw/ [Last Accessed: 21 February 2019].

[12] IMF 2018a. World Economic Outlook Database, October 2018, ibid.

[13] IMF 2018c. Mozambique 2017 Article IV Consultation, International Monetary Fund: Washington, D.C. Accessed At: https://www.imf.org/ [Last Accessed: 4 March 2019].

 

Industry Spotlight by Serge Hadisi

Industry Spotlight: Public Debt Instruments

Governments rely on domestic resource mobilisation through taxes, excise and customs duties, royalties and other primary sources of government revenues to finance their national budgets[1]. However, domestic resource mobilisation is jeopardised by weak revenue management institutions and slow economic growth which result in less government revenues[2]. This affects the government’s ability to stimulate domestic demand and support economic growth during recessions or sustained periods of slow growth. Hence, governments borrow from domestic and foreign sources to finance their budget deficits or revenue shortfalls for operational and public investment towards socioeconomic development[3]. Public debt needs to be effectively managed to stimulate economic growth and ensure that the government is able to repay its debts. Poor public debt and fiscal managements leads to rising public debt-servicing costs and debt distress. Therefore, public debt sustainability is determined by the terms of financing as well as how government spend their financing.

 

The pressure on governments to demonstrate tangible economic development progress pushes governments to embark on public infrastructure projects which can raise spending and public debt sharply[4]. For example, Angola’s government decided to revitalise the national textile industry using Japanese loans valued at USD 1.1 billion with 35.0% of this allocated to rebuild the Satec textile factory in Dondo in 2015[5]. As a result, total government spending increased from an average of 37.0% between 2011 and 2014, and 27.0% of GDP in 2015. Angola’s public debt rose from an average of 32.3% of GDP from 2011 to 2014, to 75.3% of GDP in 2016[6]. Sometimes, governments receive poor value-for-money on its investments which has the same negative impact. In Zambia, the Lusaka-Ndola Dual Carriageway road project cost USD 1.2 billion, which is approximately USD 3.8 million per km for the 320 km of road between the two cities[7]. Consequently, government spending increased from an average of 22.3% between 2011 and 2014, and 28.1% of GDP in 2015. Zambia’s public debt increased from an average of 27.4% from 2011 to 2014, to 63.1% of GDP in 2017[8].

 

Government spend their revenues on three categories of expenditures which includes current expenditures (e.g., paying employees and interest on public debt); fiscal transfers and subsidies (e.g., providing social welfare or other grants); and capital expenditure (e.g., acquiring fixed or financial assets)[9].  Increasing capital expenditure on economic infrastructure and industrial development is considered a desirable strategy because it to supports economic growth and increases government revenue which reduces reliance on debt. Despite the necessity for social transfers and social infrastructure investment in order to reduce poverty and transform society, it is very important for governments to consider whether a specific project will provide sufficient economic returns in order to ensure fiscal sustainable or service public debt[10]. This means that government must match their finance with the needs that the funding will serve.

 

Domestic borrowing is considered more favourable than external borrowing because it is less vulnerable to market volatility and does not expose public debt to currency risk like international bond markets[11]. However, domestic borrowing is less favourable due to relatively higher real interest costs and shorter maturity compared to external borrowing[12]. For example, Eurobond maturities tend to have a long-period of payment than for debt issued in the domestic markets[13].In addition, difficulty to maintain sufficient foreign exchange reserves to balance international payments leads to greater risk of rollover or debt defaults[14].

 

Short-term and medium-term debts are regarded with lower interest portion, but with a higher debt-service cost which can pose as a significant cash-flow risk to government. However, short- and medium-term debts are often subject to the risks of rollover due to cash flow constraints. The higher rollover risk is mitigated by a relatively higher interest rates, which raises the debt servicing costs considerably for short- and medium-term debt instruments[15]. Long-term debt usually attracts a relatively lower interest rate due to lower risk of roll-over which reduces the debt-service cost. However, long-term debt is associated with higher interest portions because the lower interest rate is paid over a much longer tenure or maturity period. Hence long-term debt provides prolonged and relatively cheaper debt-servicing costs which provides more liquidity and reduces cash flow risk[16]. The interest rate and tenure of the financial instrument is the most important considerations that governments make before acquiring debt. In addition, government need to choose the type of financial instruments to meet its financing needs from a range of debts instruments such as Treasury bills, bonds and loans from other foreign and locally-owned financial institutions[17]. The decision on which instrument is often tied with domestic debt managements policies prescribing the optimal amount of debt that the government should hold in the various instruments and the proportions of domestic and foreign-denominated debts.

 

Treasury bills (T-bills) and government bonds are usually issued by the national government or relevant stock market. These financial instruments are used to meet government financing needs and for the purpose of monetary policy[18]. T-bills offers short-term maturities less than 1 year and lower returns to investors, while bonds offer long-term (5-, 10-, 20- or even 30-years maturities and higher returns to the investors. T-bills present less risk from potential financial losses for government, whereas bonds are subject to volatility with high interest rate risk for government, and the risk of the government defaulting on bond payments for investors[19]. The advantage of using T-Bills and government bonds is that the government determines the borrowing conditions and how to direct the funds to specific investment project. However, this is linked to higher interest costs and political risks such as government being “captured” by a particular group of private investors or financing interests[20]. Foreign denominated bonds like Eurobonds are similar, except they are not issued by the sovereign and they still face currency risk which makes them less desirable than government bonds.

 

The final borrowing option for governments is bilateral, foreign and domestic, loans and project finance. Loans and project financing as debt instrument give the lenders strong bargaining power to determine the borrowing conditions and where to direct the funds – either into government coffers or directly to service providers. Often, loans and project finance are linked to the economic performance of the recipient countries[21]. Project finance can also be issued through a mixture of local and foreign currency to blend the risk, avoid dependency on foreign funds, and reduce currency risk[22]. Financial Institutions such as International Monetary Fund, World Bank, Paris Club or Organisation for Economic Cooperation and Development offer concessional loans and development finance to governments. Concessional funding is more attractive because it comes with lower or no interest and the lenders often can decide to write off the debts[23]. Concessional funding is always provided at lower interest rates than commercial finance and sometimes it comes with added support to bridge technical or other gaps throughout the life cycle of the project. Grants are the most preferred form of concessional funding because they are provided for politically-visible purposes like social infrastructure, without the obligation to repay, and can sometimes be directed for current expenditure or budget support directly to government coffers[24].

 

To sum up, at large extend SADC countries needs enormous resources to undertake socioeconomic development programmes to enhance the living conditions of citizens. However, government fall short to mobilise enough resources to finance and meet their developmental goals. That is why governments make decision whether to use domestic and foreign financing instruments which is imperatively linked to maturity period, interest rate and flexibility of terms of payments. As mentioned above, it is very important to consider the advantages and disadvantages, and other conditions (such as taking into account money borrowed in local currency or foreign currency, and exchange rate) associate by using the different financing instruments, while its raises the issue of the capability of repayment of the governments and whether borrowed money by the government is directed into investment that create productive and value added activities capable to sustain public debt and contribute to support economic development. Hence, these instruments need to be used very cautiously to avoid unsustainable public debt management and worsening the fiscal deficit.

 

By Serge Hadisi

 


[1] IMF 2001. Government Finance Statistics Manual, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 2 February 2019].

[2] Lopes da Veiga, J., Ferreira-Lopes, A., and Sequeira, T. 2014. Public Debt, Economic Growth, and Inflation in African Economies, Munich University: Munich. Available At: https://mpra.ub.uni-muenchen.de/ [Last Accessed: 21 December 2018]; IMF 2001. Government Finance Statistics Manual, ibid.

[3] Were, A. 2018. Debt Trap? Chinese Loans and Africa’s Development Options, South African Institute of International Affairs: Johannesburg. Available At: https://saiia.org.za/ [Last Accessed: 21 December 2018]; Wentworth, L., Markowitz, C, Ngidi, Z., Makwati, T., and Grobbelaar, N. 2018. SADC Regional Development Fund: Operationalisation Imminent?, Global Economic Governance: Pretoria. Available At: http://www.gegafrica.org/ [Last Accessed: 21 December 2018]; IMF 2001. Government Finance Statistics Manual, ibid.

[4] Lopes da Veiga, J. et al. 2014. Public Debt, Economic Growth, and Inflation in African Economies, ibid.

[5] AHK 2017. Angola, Southern African – German Chamber of Commerce and Industry: Johannesburg. Available At: http://suedafrika.ahk.de/ [Last Accessed: 11 January 2019].

[6] IMF 2018. World Economic Outlook Database, October, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 26 March 2019].

[7] Cheelo, C.2018. Financing the Economic Stabilisation and Growth Programme (Zambia Plus) in the Shadow of the IMF, Zambia Institute for Policy Analysis and Research: Lusaka. Available At: https://www.africaportal.org/ [Last Accessed: 11 January 2019].

[8] IMF 2018. World Economic Outlook Database, October, ibid.

[9] IMF 2018. World Economic Outlook Database, October, ibid.

[10] Wentworth, L. et al. 2018. SADC Regional Development Fund: Operationalisation Imminent?, ibid.

[11] Were, A. 2018. Debt Trap? Chinese Loans and Africa’s Development Options, ibid.

[12] IMF 2015. Public Debt Vulnerabilities in Low-Income Countries: The Evolving Landscape, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/  [Last Accessed: 6 February 2019].

[13] IMF 2015. Public Debt Vulnerabilities in Low-Income Countries: The Evolving Landscape, ibid.

[14] IMF 2015. Public Debt Vulnerabilities in Low-Income Countries: The Evolving Landscape, ibid.

[15]  Djeutane, G. K. 2014. An Overview of Domestic Debt in SADC: A Synthesis of Trends, Structure and Development Impacts, on the Africa Portal Website, viewed on 21 December 2018, from https://www.africaportal.org/.

[16] UNCTAD 2017. Debt Vulnerabilities in Developing Countries: A New Debt Trap?,  United Nations Conference on Trade and Development: Geneva. Available At: https://unctad.org/ [Last Accessed: 6 February 2019].

[17] Ibrahim, H. 2015. Effect of External Public Debt on Economic Growth: An Empirical Analysis of East African Countries, University of Nairobi: Nairobi. Available At: http://erepository.uonbi.ac.ke/ [Last Accessed: 8 February 2019].

[18] Yigermal, M. E. 2017. ‘History of Treasury Bills Market in Ethiopia: T-bills Yield and other Interest Rates’, Historical Research Letter, Vol. 39, pp.: 32-44. Available At: https://www.iiste.org/ [Last Accessed: 09 February 2019]; Oji, C. K. 2015. Bonds: A Viable Alternative for Financing Africa’s Development, South African Institute of International Affairs: Johannesburg. Available At: https://www.saiia.org.za/ [Last Accessed: 09 February 2019]; Nyawata, O. 2012. Treasury Bills and/or Central Bank Bills for Absorbing Surplus Liquidity: The Main Considerations, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 26 February 2019]; Andritzky, J. R. 2012. Government Bonds and Their Investors: What are the Facts and Do they Matter?,  International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/  [Last Accessed: 26 February 2019].

[19] Sogoni, Z. 2014. Is Public Debt Boosting Economic Growth in SADC?, University of Cape Town: Cape Town. Available At: https://open.uct.ac.za/ [Last Accessed: 21 December 2019]; Yigermal, M. E. 2017. ‘History of Treasury Bills Market in Ethiopia: T-bills Yield and other Interest Rates’, ibid; Oji, C. K. 2015. Bonds: A Viable Alternative for Financing Africa’s Development, ibid.

[20] Djeutane, G. K. 2014. An Overview of Domestic Debt in SADC: A Synthesis of Trends, Structure and Development Impacts, ibid.

[21] Djeutane, G. K. 2014. An Overview of Domestic Debt in SADC: A Synthesis of Trends, Structure and Development Impacts, ibid.

[22] Griffith-Jones, S. and Fuzzo de Lima, A. T. 2004. Alternative Loan Guarantee Mechanisms and Project Finance for Infrastructure in Developing Countries, University of Sussex: Brighton. Available At: http://citeseerx.ist.psu.edu/ [Last Accessed: 9 February 2019].

[23] Clements, B., Gupta, S., Pivovarsky, A., and Tiongson, E. R. 2004. Foreign Aid: Grants versus Loans,  International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 10 February 2019]; Wentworth, L. et al. 2018. SADC Regional Development Fund: Operationalisation Imminent?, ibid.

[24] Clements, B. et al. 2004. Foreign Aid: Grants versus Loans, ibid.; Wentworth, L. et al. 2018. SADC Regional Development Fund: Operationalisation Imminent?, ibid.

 

Policy Spotlight by Xolisile Ntuli and Tsepiso Ranto

Policy Spotlight: Public Debt Management Strategies

Public debt management is the practise of developing different strategies to measure and effectively manage national debt accrued by government and state-owned entities[1]. The process is meant also to provide policy or legal tools to monitor, evaluate and regulate the actions of politicians and government officials to ensure effective management of the government’s liabilities and financing obligations. The provision of public and up-to-date public debt management strategies informs lenders about government plans to ensure debt sustainability and reassures lenders, which also facilitates government’s borrowing from both internal and external sources. It is for this reason why SADC countries signed a Finance and Investment Protocol (FIP) in 2006 to tackle economic challenges such as inflation, public debt, budget deficits and current account balances through macroeconomic convergence[2].

 

Annex 2 of the SADC FIP requires member states to manage public finances transparently, it also provides a set of criteria for monitoring and evaluating SADC member states’ performance in relation to macroeconomic convergence[3]. However, the current state of public debt and the economic crisis in some countries poses significant challenges for macroeconomic convergence targets. This is because many SADC countries are faced with high inflation rates, widening budget deficits and rising public debt levels[4]. The macroeconomic convergence target requires member states to maintain public debt valued at less than 60.0% of GDP[5].  The targets include a budget deficit less than 5.0% of GDP and an inflation target below 9.0%[6]. In addition to the macroeconomic convergence targets, member countries use different strategies to manage public debt.

 

In Zambia the public debt ceiling is set in nominal terms. The limit for domestic bonds is set at ZMK 40.0 billion and ZMK 30.0 billion for treasury bills[7].  However, the Zambian government does not set a target for external public debt[8]. The public debt ceiling is also not set in traditional terms as a share of GDP. Zambia has not performed well in terms of public debt management which is in part caused by the current insufficient public debt management strategy.

In 2018, Zambian public debt increased to 60.0% of GDP from an average of 59.2% of GDP from 2015 to 2017[9]. An increase in Zambia’s public debt is attributed mainly to volatility in the ZMK-USD exchange rate and excessive government spending since 2012 that resulted in increased foreign borrowing[10].  Therefore, Zambia’s external public debt increased by 28.0% to ZMK 102.5 billion (approx. USD 9.8 billion) in 2018 compared to ZMK 80.1 billion the year before[11]. Despite having performed well according to its domestic targets, Zambian public debt exceeds the SADC debt limit and debt-servicing costs are becoming a fiscal strain. As a result, in 2018 public debt-servicing costs are projected to have increased to 22.3% of government revenue at ZMK 10.9 billion (approx. USD 1.0 billion)[12]. Debt-servicing costs have increased significantly from 15.3% of government revenue in 2015 to 21.9% in 2017[13].

 

In Mauritius, the domestic public debt ceiling is 50.0% of GDP. Mauritius does not perform well in relation to its domestic target despite maintaining a dynamic public debt target. Public debt increased slightly to 63.9% of GDP in 2018 compared to the annual average of 62.1% of GDP from 2012 to 2017[14].   However, Mauritius has performed better than Zambia for debt servicing.

Mauritius’ public debt servicing costs are projected to have constituted 11.4% of government revenue at MUR 13.4 billion (approx. USD 381 million) in 2018, which is a slight increase from the average of 11.3% of total government revenue from 2015 to 2017[15]. Although Mauritius has not performed well in relation to its domestic target, it is performing within the SADC macroeconomic convergence target. Mauritius is also in the process of reigning in public debt, despite it currently being valued above the domestic debt ceiling. Public debt should diminish over time because debt-servicing costs are mainly paid towards the principal debt and GDP growth performance has been positive in Mauritius.

 

Lastly, Tanzania takes a dynamic integrated approach to public debt management. This approach ensures that the country remains at low risk of external debt distress. Total public debt is projected to have increased to 37.3% of GDP in 2018, and maintained the constant average percentage (37.3%) of GDP from 2015 to 2017[16].   However, public debt-servicing costs have increased from an average of 22.6% of government revenue from 2015/16 to 2017/18, to 30.8% of in 2018/19 financial year[17]. The most notable thing is that, only 2.1% of total external debt-servicing was paid towards Tanzania’s principal public debt during 2018/19.

The nominal targets for public debt management are mainly commended for assuring debt sustainability in the region.  However, many countries compromise implementation of development projects due to limited financing.  In addition, the traditional strategy of setting public debt at a certain percentage of GDP is important for controlling mounting public debt. Furthermore, making use of the debt-to-GDP ratio as it stands as a debt management strategy, might not be ideal as it permits countries to treat the 60.0% as the ultimate threshold, and does not adequately accommodate both developing and emerging economics, such as the SADC as a regional organisation. It does however, provide a benchmark that assists counties maintain the debt-to GDP ratio below the threshold to ensure that they maintain debt sustainability.

 

Despite its importance, this strategy is often taken lightly and does not inform budget allocations in many SADC countries e.g. Mauritius and Zambia. Tanzania is an example of how countries in the SADC can successfully maintain a low risk on external debt, and remain below the 60.0% threshold. By ensuring that the focus on public investment is prioritised by developing policies that have a strong macroeconomic management system by actively monitoring systemic risks, initiating a transition of the monetary framework towards an interest rate-based operating system and raising the resilience of the banking system though the of Financial System Stability Assessment[18]. While supported by comprehensive monetary and fiscal policies[19]. Furthermore, by attending to key gaps that pose a threat to the economic growth of the country. Such as major infrastructure development in the case of Tanzania, the standard gauge railway, the revamping of Air Tanzania and port expansion in Dar es Salaam, has increased the country’s debt in 2017, but will in the long run serve to boost the economy. Moving forward, SADC governments’ need to develop more defined public debt management strategies with various integrated and measurable targets that inform budgeting in order to ensure public debt sustainability.

 

By Xolisile Ntuli and Tsepiso Rantso

 


[1] Wheeler, G. 2004. Sound Practice in Government Debt Management, World Bank: Washington D. C. Available At: https://openknowledge.worldbank.org/ [Last Accessed: 3 February 2019].

[2] SADC 2012. Macro-Economic Convergence, on the Southern Africa Development Community Website, viewed on 17 February 2019, from https://www.sadc.int.

[3] SADC 2016. Protocol on Finance and Investment, Southern African Development Community: Gaborone. Available At: https://www.sadc.int/ [Last Accessed: 12 February 2019].

[4] PESA 2018. Political Economy Review: Looming SADC Public Debt Crisis, on the Political Economy Southern Africa Website, viewed on 4 April 2019, from https://politicaleconomy.org.za/.

[5] SADC 2012. Macro-Economic Convergence, ibid.

[6] SADC 2012. Macro-Economic Convergence, ibid.

[7] ZMoF 2017. Medium Term Debt Strategy (2017-2019), Zambian Ministry of Finance: Lusaka. Available At: http://www.mof.gov.zm/ [Last Accessed: 3 February 2019].

[8] ZMoF 2017. Medium Term Debt Strategy (2017-2019), ibid.

[9] IMF 2018a. World Economic Outlook, October 2018, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/  [Last Accessed: 12 February 2019].

[10] LT 2018. In Search of Zambia’s Hidden Public Debt, on the Lusaka Times Website, viewed on 26 March 2019, from https://www.lusakatimes.com.

[11] IMF 2017a. Zambia 2017 Article IV Consultation, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/~/media/Files/Publications/CR/2017/cr17327.ashx [Last Accessed: 5 April 2019]; BoZ 2019. Monetary and Financial Statistics: Statistics Fortnightly Time Series, Bank of Zambia: Lusaka. Available At: http://www.boz.zm/  [Last Accessed: 5 April 2019].

[12] IMF 2017a. Zambia 2017 Article IV Consultation, ibid.; BoZ 2019. Monetary and Financial Statistics: Statistics Fortnightly Time Series, ibid.

[13] IMF 2017a. Zambia 2017 Article IV Consultation, ibid.

[14] IMF 2018a. World Economic Outlook, October 2018, ibid.

[15] MMoF 2015. Summary of Expenditure by Votes, Mauritian Ministry of Finance: Port Louis. Available At: http://mof.govmu.org/ [Last Accessed: 5 April 2019]; MMoF 2016. Summary of Expenditure by Votes, Mauritian Ministry of Finance: Port Louis. Available At: http://mof.govmu.org/ [Last Accessed: 5 April 2019]; MMoF 2016. Appendix A: Revenue, Mauritian Ministry of Finance: Port Louis. Available At: http://mof.govmu.org/ [Last Accessed: 5 April 2019]; MMoF 2017. Summary of Revenue Projections, Mauritian Ministry of Finance: Port Louis. Available At: http://mof.govmu.org/ [Last Accessed: 5 April 2019].

[16] IMF 2018a. World Economic Outlook, October 2018, ibid.

[17] TMoFP 2019. 2019 Budget Speech, Tanzanian Ministry of Finance and Planning: Dodoma. Available At: http://www.mof.go.tz [Last Accessed: 27 March 2019].

[18] IMF 2018b. United Republic of Tanzania: Financial System Stability Assessment, International Monetary Fund: Washington, D. C. Available At: https://www.imf.org/ [Last Accessed: 15 February 2019].

[19] IMF 2018c. IMF Executive Board Concluded the United Republic of Tanzania’s 2018 Financial System Stability Assessment, on the International Monetary Fund Website, viewed on 17 February 2019, from https://www.imf.org.

 

Michael Andina

Role: Regional Analyst
Contact: michael@politicaleconomy.org.za
Michael is an Economist with experience in research, renewable energy sector, and financial and economic analysis...

Serge Hadisi

Role: Research Associate
Contact: serge@politicaleconomy.org.za
Serge is an Economist with extensive research and publications on sustainable economic development focusing on social development in sub-Saharan Africa...

Xolisile Tsitsi Ntuli

Role: Regional Analyst
Contact: xolisile@politicaleconomy.org.za
Xolisile is a Researcher specialising in African human security...

Tsepiso Augustinus Rantso

Role: Research Associate
Contact: tsepiso@politicaleconomy.org.za
Tsepiso is a Development Practitioner specialising in cross-sectional research, agricultural and rural development...

Ross Oliver Douglas

Role: Editing and Research Specialist
Contact: ross@politicaleconomy.org.za
Ross is a Writer, Editor and Historian specialising in rural development in South African history...

Thabo Thandokuhle Sacolo

Role: Editing and Research Specialist
Contact: thabo@politicaleconomy.org.za
Thabo is an Economist specialising in applied economics, environmental economics and agricultural economist...

Charl Swart

Role: Editing and Research Specialist
Contact: charl@politicaleconomy.org.za
Charl is a Political Scientist specialising in constitutional democracy...

Add comment

Michael Andina

Serge Hadisi

Xolisile Tsitsi Ntuli

Tsepiso Augustinus Rantso

Ross Oliver Douglas

Thabo Thandokuhle Sacolo

Charl Swart

Follow PESA Online

Follow PESA Online

Follow us on some of your favourite social media.

Contact Us

Please complete the General Enquiry form and submit it to us for a response. Please use the subject “Media” for all media-related requests.