A few selected issues in the national debt discourse

National debt is the money owed by a country to domestic and foreign lenders. Governments do borrow because of inadequacy of revenues from own sources - including tax and non-tax revenues - to finance public goods and services.

Generally, therefore, a national debt is a necessary evil emanating from inability to generate own revenues that are adequate to foot public expenditure bills of governments. National debt has been a subject of discussion in Tanzania in several contexts and correctly so especially in last week of December 2021 and first week of January 2022. This piece highlights selected issues in understanding national debt.

Internal and external debts

National debt can be internal or external. Internal debt is due to borrowing from domestic money market. It is an opportunity to domestic money lenders. It is good because it is denominated in local currencies thereby solving foreign exchange volatility challenges when However, it can lead to squeezing out the private sector that borrows from the same domestic market.

Why debt

As is the case for firms, households and individuals, governments incur debts because of deficits between revenues from their own sources on one hand and expenditure on the other. It is all about having to spending beyond one’s income at a given point in time. This is not necessarily bad. Whether bad or good, it is contextual. Generally, countries do borrow because of inadequate Domestic Resources Mobilization (DRM) which is a function of several factors.

Expenditure posts

National debt discourses should revolve around the axis of the expenditure posts the debt is put into. Generally, good debt is one used on development rather than recurrent expenditure. The former is expenditure on investments that unlock productive capacity of the country. These are typically expenditure on hard and soft infrastructure including but not limited to roads, ports, airport, railways and expenditure. Others are expenditure on social services such as water, health, social security, peace and security.

Recurrent expenditure comprises of day to day running of the government such as wages, salaries, allowances and others along that line. National debt used to fund recurrent expenditure is generally bad debt.

Commercial versus concessional

Commercial debts have more strict terms than concessional ones. The terms can include larger interest rates, shorter repayment time and at times no grace period. On its side, concessional loans have better terms for the borrower. These include having grace period, lower interest rate or no interest at all and longer repayment time. A country may be obliged to borrow commercial as a necessary evil when its house is not clean enough to borrow concessional.

Size and growth rate

National debt discourses should dwell on the absolute and relative size of the debt and its rate of growth over time. A huge and ballooning national debt can be a cause of concern from debt distress and sustainability points of view. The lower the size and growth rate the better, other factors remaining constant.

Currency denomination

A foreign currency denominated debt may increase even without borrowing more. This is due to foreign exchange volatility and appreciation in particular. This is because when foreign-denominated debt has to be serviced by revenues collected in local currencies, the size may look bigger in local currencies not because we have borrowed more but because the local currency has depreciated.

The sustainability criterion

Debt sustainability is very important. It is measured by various metrics. The metrics include gross domestic product whose threshold is 55 percent; for total public debt the threshold is 70 percent; for external debt the threshold of 240 percent and external debt-servicing budget threshold in relation to export earnings is 23 percent. Therefore, debt sustainability at any point in time should be determined by these criteria. Good debt should be sustainable from short- to long-term.

Local contents

National debt used to finance public goods and services such as unlocking infrastructure projects would make more sense if used to fund local contents. These are the local factor inputs used to construct and therefore deliver infrastructure projects among other public expenditure.

These inputs should be taken very broadly and strategically to include human and physical resources. The more local contents for example by letting local firms deliver infrastructure projects using borrowed money will lead to more trickle-down effect in the country. This has potential to deliver quick wins and low-hanging fruits.