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Tanzanian Public Debt Sustainability

Tanzanian Public Debt Sustainability

The Ministry of Finance in Tanzania defines public debt as the outstanding obligations for which the central government, local government or government entities are responsible for[1]. Tanzania’s total public debt was valued at 38.6% of GDP in 2018/19 compared the average of 38.3% of GDP from 2015/16 to 2017/18[2]. The current debt to GDP ratio is well below the Southern Africa Development Community (SADC) macroeconomic convergence of 60.0% of GDP[3].  Consequently, Tanzania does not have a public debt problem despite its total public debt having increased over this period. In the forward-looking medium term from 2019/20 to 2021/22, public debt is projected to increase to an average of 39.8% of GDP[4]. Tanzania’s public debt is still manageable given as it is far below the SADC macroeconomic convergence and GDP growth is projected to increase to an average 6.7% from 2019 to 2021 and during the same period the effective interest rate on public debt is projected to average 1.9%.

Tanzania’s public debt profile also remains in line with the government’s medium-term debt management strategy of maintaining domestic debt below 40.0% and total public debt below 56.0% debt to GDP ratio[5]. Domestic public debt is projected to constitute 9.9% of GDP in 2018/19 and public debt is well below the national threshold[6]. In the forward-looking medium-term from 2019/20 to 2021/22, domestic public debt is projected to constitute an average 11.6% of GDP and the total public debt will remain well below the current threshold[7]. As a result, Tanzania has sustainable public debt which is also below its domestic targets.

 

Tanzanian Public Debt Sustainability
Tanzanian Public Debt Sustainability

 

The foregone analysis of total public debt provides a general perspective on the macro sustainability of Tanzania’s public debt. However, a deeper analysis of other sustainability indicators is needed to clearly understand the underlying sustainability of Tanzania’s public debt. Tanzania’s debt-servicing costs averaged 7.1% of total government revenue for the period from 2015/16 to 2017/18, which is expected to have increase to 11.7% in 2018/19[8]. This means that the cost of servicing Tanzania’s public debt has increased which undermines debt sustainability. In the forward-looking medium-term from 2019/20 to 2021/22, the public debt-servicing costs are projected to continue increasing to an average of 12.5% of total government revenue[9]. Therefore, public debt-servicing costs are expected to continue increasing in relative terms which should provide little room for the government of Tanzania to increase its capital expenditure or accumulate fiscal buffers. Unfortunately, the government of Tanzania has not been able to take advantage of strong GDP growth performance to improve its public debt sustainability in terms of the rising public debt-servicing costs.

In 2018, the effective interest rate on public debt decreased slightly to 1.6% from an average of 1.7% from 2015 to 2017[10]. Meanwhile, GDP growth decreased slightly to 6.2% in 2018, from an annual average of 6.7% from 2015 to 2017. This means that Tanzania is generating sufficient economic value to cover the public debt obligations. In other terms, Tanzania has been able to secure sufficient concessional or low-interest public debt which enables medium- and long-term public debt sustainability. Real GDP growth is projected to be persistent at an annual average of 6.7% from 2019 to 2021 whilst the effective interest rate is projected to average 1.9% over the same period[11]. The lower effective interest rates compared to real GDP growth rate means the Tanzania has sustainable public debt as the economy grows leading to broadening of the government’s revenue base enabling government to service its public debt or clear arrears. The robust GDP growth will enhance the country’s capacity to sustain borrowing to finance priority development needs and infrastructure projects.

Tanzania’s external public debt stood at 28.7% of GDP in 2018/19 from an average of 29.3% of GDP from 2015/16 to 2017/18. Projections indicate that external debt will slightly decrease to an average of 28.1% of GDP from 2019/2020 to 2021/22. Tanzanian external debt is manageable buoyed by an average of USD 6.5 billion from 2019/20 and 2021/22 as well as a real GDP growth of an average 6.7% between 2019 and 2021. Another indicator to support the manageable external debt is the low interest rate of an average within the same period.

In sum, debt sustainability analysis in Tanzania indicates that the risk of debt distress remains low attributed to the structure of the debt, which is largely concessional, and Tanzania’s GDP growth forecasts and ambitious revenue collection targets[12]. Tanzania‘s total public debt remains below the SADC threshold of 60.0% of GDP and its domestic thresholds. Tanzania has no public debt problem and should maintain sustainable debt levels due to strong GDP growth performance and relatively effective interest on public debt. This growth is crucial since a growing economy is vital for debt servicing. Tanzania also has a strong international reserves position and efficient use of concessional and non-concessional sources should be augmented by mobilising domestic revenue which will help maintain public debt. The country’s external debt portfolio is susceptible to export and exchange shocks.  Therefore, the government of Tanzania has to sustain macroeconomic policies in both medium and long term to mitigate these shocks.

The government should also ensure effective implementation of infrastructure projects in order to enhance and sustain projected GDP growth. Sustained economic growth will ensure that the country is able to generate additional revenue and to enhance government capacity to meet its debt servicing obligations. Finally, government has to make sure that new debts are done in a way that will not compromise GDP growth.

 


[1] TMoF 2019. Finance Debt Policy, on the Tanzania Ministry of Finance Website, viewed on 30 May 2019, from http://www.mof.go.tz/.

[2] IMF 2018a. Tanzania Financial System Stability Assessment Report, International Monetary Fund: Washington, D.C. Available At: https://imf.org/ [Last Accessed: 30 May 2019].

[3] SADC 2019. Macro-economic Convergence, on the SADC Website, viewed on 15 May 2019, from https://www.sadc.int/.

[4] IMF 2018a. Tanzania Financial System Stability Assessment; Staff report, Ibid.

[5] TMoF 2017a. Medium Term Debt Strategy: 2017, Tanzania Ministry of Finance: Dodoma. Available At: http://www.mof.go.tz/ [Last Accessed: 30 May 2019].

[6] TMoF 2017a. Medium Term Debt Strategy: 2017, ibid.

[7] TMoF 2017a. Medium Term Debt Strategy: 2017, ibid.

[8] IMF 2018a. Tanzania Financial System Stability Assessment Report, ibid.

[9] IMF 2018a. Tanzania Financial System Stability Assessment; Staff report, ibid.

[10] IMF 2018b. Tanzania Seventh Review Under the Policy Support Instrument, International Monetary Fund: Washington, D.C. Available At: https://www.imf.org/ [Last Accessed: 30 May 2019].

[11] IMF 2018b. Tanzania: Seventh Review Under the Policy Support Instrument, ibid.

[12] TMoF 2017b. Debt Sustainability Report 2017, Tanzania Ministry of Finance: Dodoma. Available At: http://www.mof.go.tz/ [Last Accessed: 30 May 2019].

 

 


Emmison Muleya

Former Regional Analyst

Emmison Muleya

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