The ‘good, the bad and the ugly’ of govt. borrowing on real estate

Thursday January 13 2022
Estate pic
By J.M. Lusugga Kironde

Government borrowing, which results in a national or public debt, is an area of intense discussion in many countries, including Tanzania. We have seen in recent days how the question of reference to government borrowing has led to fundamental changes in the governance structure of this country. Is government borrowing bad? What are the impacts of government borrowing on real estate, a major form of investment for the nation and for individuals?

Government borrowing is when a government runs a budget deficit, meaning that its revenue falls short of its expenditure. Happy is the Finance minister who has a balanced budget. However, this is a rare occurrence these days. Many countries run a budget deficit - and, therefore, borrow. Many times, the budget deficit and the resulting borrowing become areas of major debate by economists and politicians. Even international finance institutions such as the World Bank and the IMF worry about a rising national debt in a country. Indeed governments have been voted out of power on account of excessive national debt. The national debt is the cumulative amount of annual borrowing that occurs when government spending is greater than revenue.

Whether government borrowing is good or bad depends on the circumstances. If the Government does not borrow, when situations compel it to, that Government may fail to meet critical expenditures needed by the nationals of the country concerned.

If countries borrow to finance projects which have a bearing on economic growth (such financing capital infrastructure), that borrowing is rational. This is because the projects will jerk up national development and generate income for the Government (for example through additional tax revenue) in the future which will enable it to repay the debt. Debt is considered to be good if the money is spent on development projects.

However, borrowing to finance recurrent expenditures - such as salaries and other personal emoluments - will lead to problems because the Government in the future will have to tax the people more to be able to service the debt - or, else: accumulate arrears. It is also inflationary. National debt to finance recurring expenditure is considered to be bad debt.

Many countries in the developing world have huge infrastructural deficits. The benefits from the existence of these infrastructure are required now and yet the capacity to finance these is largely wanting. Thus, the need for governments to borrow.


Government borrowing involves issues such as what, when and from whom to borrow, how to use borrowed money and whether the national debt is sustainable or not. A common measure is to relate the percentage of national debt to the Gross Domestic Product (GDP).

The National Debt in relation to GDP in Tanzania (with relevant years in brackets) was: 39.8 percent (2016); 40.73 percent (2017); 40.54 percent (2018); 30.04 percent (2019); and 39.15 percent (2020). Many observers argue that this debt is sustainable.

Our focus in this article is on real estate, the growth and flourishing of which is highly dependent on good infrastructures such as roads, drain and railway networks, adequate water and electricity generation and distribution, and proper land use planning. Much of the real estate in the cities of developing countries, such as Tanzania, is in unplanned and unserviced areas, meaning that the potential for this real estate is not realised. The land value in these areas remains locked up.

If therefore, the government borrows to acquire and plan land and provide it with essential infrastructure, or to provide such essentials as low cost housing, such borrowing could be regarded as being good. Serviced land can generate revenue through property taxes, land rent, premiums, development taxes and other land-based finance sources, to offset the public debt.

A number of real estate related projects are being implemented using borrowed money in Tanzania. These include the World Bank financed Dar es Salaam Metropolitan Development Project (DMDP), whose development objective is to improve urban services and institutional capacity in the Dar es Salaam metropolitan area, and to facilitate potential emergency response. Its four components include construction and improvements of priority roads and drains; upgrading of low income communities) and the provision of community related amenities, including parks, markets, and bus stands; development of municipal governance arrangements and systems; and improving the integration of transport and land use planning.

The impact of this is already evident in various neighbourhoods as properties are improved to reflect the higher land values emanating from improved infrastructure.

Real estate can, therefore, clearly benefit from good borrowing.