What new public debt benchmarks could mean for TZ

Dar es Salaam. A study commissioned by the International Monetary Fund (IMF) has proposed changes in ways of determining the sustainability of public debts, arguing that the traditional debt-to-the Gross Domestic Product (GDP) ratio isn’t enough to determine countries’ access to credit markets.

While, if adopted, the new proposals could widen countries’ access to credit from the international financial markets, it could also lead to a bigger debt burden by poor countries that are already struggling with repayments, analysts say.

Interviews with local experts early this week indicated that the findings of the report were in fact a continuation of an ongoing debate in the academia on the inadequacy of using only debt levels to determine countries’ access or re-entry into international financial markets.

The IMF working paper entitled Lost and Found: Market Access and Public Debt Dynamics published recently states that the level of the debt-to-GDP ratio, “whose use is justified on a theoretical and empirical ground, should not be the only fiscal metric to assess the complex relationship between public debt and debt defaults as well as market access.”

The level of public debt, measured as a share of the GDP, is the main yardstick for determining its sustainability. It has then been used to predict debt defaults and to determine credit access by countries. A debt threshold or limit, in terms of percentage of GDP, has been set for each country to avoid default.

The debt to GDP threshold set for Tanzania through the IMF/World Bank Debt Sustainability Framework (DSF) is 56 per cent. By end of June 2016 Tanzania’s debt to GDP ratio reached 34.2 per cent well below the 56 per cent threshold. The public debt stock as of June 2016 was $20.7 billion (Sh45.6 trillion), according to the Tanzania National Debt Sustainability Analysis (DSA) published in November 2016 by the ministry of Finance and Planning. By December 2016, the public debt had declined slightly to about $18.4 billion (Sh40.8 trillion), according to calculations by The Citizen based on data from the Monthly Economic Review report published in January 2017 by the Bank of Tanzania.

In the 2016/17 fiscal year, the debt to GDP ratio is expected to decline slightly to 32.5 per cent, according to the DSA.

The IMF commissioned study, conducted by Antonio Bassanetti and others, calls for a wide use of instruments known technically as debt dynamics in addition to the debt-to-GDP ratio, when determining things such as debt distress, market access and, even, debt sustainability. Public debt dynamics are factors such changes in factors such as interest rates, inflation, economic growth and budget surplus and deficits that may affect the ability to repay the debt.

“Debt dynamics does matter and – together with the level of public debt—it matters in a major way in affecting both the probability of loss of market access and of regaining it,” the report, whose findings do not represent the policy stance of the IMF, says.

The findings of the report are good news specifically for those advances economies whose public debt ratios have reached unprecedented levels following the 2008/09 global economic and financial crisis, the report adds.

But for Tanzania, the findings would serve both as a wake-up call and a relief, according to experts, who spoke to The Citizen.

Tanzania could gain more access to sovereign financial market access that would otherwise be limited by the debt level limits (debt-to-GDP ratio). But the report’s findings could also demand for a re-assessment of whether the country’s debt is sustainable despite its lower debt-to-GDP ratio. Speaking to The Citizen in separate interviews, Dr Joseph Massawe, the former director of Economic Research and Policy of the Bank of Tanzania and, Prof Ibrahim Lipumba, a former presidential adviser, said the findings should prompt Tanzania to look at whether the current debt level is sustainable enough.

They said the current debt-to-GDP ratios for Tanzania and other poor income countries are low due to debt relief provide to them in the early 2000s under the Highly Indebted Poor Countries (HIPC) and the Multilateral Debt Relief Initiative (MDRI) arrangements.

“Looking at the debt level only is not enough. We should be able to know how fast the debt is increasing or decreasing. A study could be able to determine that,” Dr Massawe, who has since retired from the BoT, said.

“My take is that the current debt-to-GDP ratio of Tanzania’s debt may not reflect the whole truth because the ratios went significantly down after debt relief. What worries me is the rate of the increase of the debt, especially between 2010 and 2015,” Prof Lipumba, an opposition politician and former adviser to President Ali Hassan Mwinyi, said.

On his part Dr Massawe said the reduced debt-to-GDP ratios following the HIPC and MDRI debt relief encouraged Tanzania and many other countries to borrow heavily to finance infrastructure projects, which was a good thing, but as the fact that the projects do not directly and immediately result in foreign currency generation has led to some increased debt distress and has affected the capacity of the countries to repay loans.

“We borrow in foreign currency to finance infrastructure projects, but since during the implementation of the projects no foreign currency is generated and since we have to repay the loans in foreign currency, we then start struggling to repay the debt,” Dr Massawe said.

Prof Lipumba said in addition to debt dynamics the composition of creditors should be checked as Tanzania was now borrowing more and more from commercial sources, which were more expensive.

“The strengthening of the US dollar and the weakening of the shilling are also important factors to watch because they lead to an increase in debt levels, making it even more difficult to repay,” Prof Lipumba said.

Debate on public debt

The findings come at a time, when there has been an on-and-off debate about whether the Tanzanian debt is sustainable or not. While some academicians and opposition politicians have expressed concerns about the speed of the increase of the debt stock which does not match a similar increase in domestic revenue, the government has been quick to say that the debt was sustainable because it was well below the debt limits (thresholds).

Cautious optimism

The DSA, on the other hand, reflects experts and opposition politicians’ concern. Though its tone is more of cautiously optimistic as far as the sustainability of the public debt is concerned it warns of likelihood of future debt crises for Tanzania.

In its conclusion the report says that though Tanzania’s risk of external debt distress has remained low inadequate revenue collection as determined by the revenue to GDP ratio which is low compared to regional averages should be the source of concern.

By June 2016, for example, the public external debt stood at $14.0 billion (Sh31.1 trillion) equivalent to 31.4 per cent of GDP, while revenue was $6.3 billion (Sh14.0 trillion), according to calculations by The Citizen based on data from the BoT’s MER for July 2016 (equivalent to 14.4 per cent of GDP).

“The interest rate sensitivity analysis results [also] reveal that debt burden indicators would significantly breach the threshold in the event of borrowing extremely high interest loans. This suggests that to maintain sustainability, the country should minimise contracting extremely high interest loans and at the same time attain relatively high growth rates compared to historical averages,” reads part of the DSA.

It adds; “The projected pace of debt accumulation is also an issue of concern and underscores the need for government to maintain sound macroeconomic policies and ensure effective implementation of projects earmarked for financing from the proceeds of new loan disbursements , particularly, the commercial loans. The DSA also suggests a need to exercise caution when borrowing externally to avoid bunching of maturities that may result in sizeable peaks in debt service payments.”