Why TZ needs a sovereign debt restructuring framework

LAST month Dr Philip Mpango, the minister for Finance and Economic Affairs, presented the government’s proposed 2018/19 annual plans and budget ceiling; however, the plans do not include any mitigation strategies on how Tanzania could preempt the eventuality of sovereign debt default or financial distress which may arise from the vagaries of world commodity markets, world capital markets and world currency markets.

In its Global Economic Prospects report released in January 2018, the World Bank notes that government debt indicators continued to weaken in sub-Saharan Africa in 2017. The bank also warned that, in the absence of modern budget management, the region could face increased fiscal risk stemming from rapid public debt buildup and suffer economic instability.

In Tanzania, this buildup of public debt is shown in the Monetary Policy Statement: The MidYear Review 2017/18 report issued in February 2018 by the Bank of Tanzania (BoT). According to this report, Tanzania’s stock of public debt as at December 2017 was $21,012.2 million (excluding short-term overdraft of Sh600.79 billion) compared to $19,957.6 million at the end of June 2017, reflecting an increase of $1,054.6 million in just six months.

The composition of the public debt portfolio by currency shows that 68.2 percent of Tanzania’s public debt was denominated in foreign currency. This creates additional constraints on monetary policy and exchange rate management. The foreign-currency denominated debt could have gone up if the government had listed the $700 million Eurobond in December 2014.

In addition, the external debt stock in Tanzania has been growing over the last three fiscal years: $15,410.2 million at end of 2014/15; $16,397.7 million at end of 2015/16; and $18,491.5 million at end of 2016/17. This is according to the BoT’s Annual Reports for 2015/16 and 2016/17. In its MidYear Review report for 2017/18, the BoT noted that by end of December 2017 external debt stood at $19,180.2 million—making a 4 percent increase in six months from June 2017 to December 2017.

Disbursed outstanding debt (DOD) on external debt increased in December 2017 to $17.629.4 million from $15.977.4 million in December 2016, according to data from the BoT’s Monthly Economic Report for January 2018. One of the downsides of such external debt portfolio is low fiscal strength driven by high state spending on big ticket infrastructure and investment projects and mounting debt-servicing costs as noted by global credit rating agency Moody’s.

Out of Tanzania’s outstanding external debt stock, 47.5 percent is owed to multilateral creditors, 9.4 percent to bilateral creditors and 11.2 percent to export credit agencies. The International Bank for Reconstruction and Development (IBRD), the International Development Agency (IDA) and the Africa Development Fund (ADF) are the largest providers of multilateral credit to Tanzania.

Bilateral credit as official development assistance (ODA) loans are dominated by Xi Jinping’s China and Shinzo Abe’s Japan, but is not covered by any effective form of debt restructuring mechanism like in the case of multilateral credit which is restructured through the Paris Club, the HIPC Initiative, the MDRI and such other initiatives.

Moreover, as Tanzania turns to bilateral lenders and private capital markets for its borrowing needs, the importance of these initiatives in the eventuality of debt distress will diminish.

Legal dispensation over sovereign debt

Under section 5 of the Public Finance Act, Cap 348 of the Laws of Tanzania, the power to control and monitor the finances of Tanzania, to coordinate international and inter-governmental financial (and fiscal) relations, and to supervise and guide all financial affairs of Tanzania is vested in the Minister for Finance.

By that power and given that the importance of the restructuring mechanisms of the Paris Club, HIPC Initiative and MDRI is waning, the Tanzania is turning more and more towards bilateral lenders and private capital markets for its borrowing needs Minister for Finance in collaboration with the BoT Governor and the Attorney General needs to make effort to craft a strong and forward-looking framework for restructuring sovereign debt.

Recent developments in resource-rich countries of Ghana, Mozambique, Nigeria and Zambia underscore the reality of the enormous threats of debt distress; therefore, the need for such a framework in Tanzania is justified to forestall the possibility of the country yielding to awkward, prolonged and costly sovereign debt restructuring.

Undoubtedly, Tanzania’s need for credit to finance its infrastructure deficit is huge—which is why the country should maintain sustainable sovereign debt levels to avoid unnecessarily constraining its ability to finance development and infrastructure projects. Bilateral credit from China and Japan and other countries and funds raised from the issuance of sovereign bonds through international capital markets bring new political, financial and economic risks. Without a sovereign debt restructuring framework that provides effective legal and policy tools for assessing the debt sustainability of Tanzania and the case for carrying out a proactive and timely restructuring when needed, it is likely that recourse will be had to startle, alarmist and reactionary actions and responses to debt distress resolution.

In this connection, there is yet again a need for the Minister of Finance in cooperation with the BoT Governor and the Attorney General to constitute a local team of experienced economists, accountants, lawyers, academics and government officials to advise on the necessary framework for appropriately dealing with sovereign default events, including any unpleasant situations that may arise during the tenure of sovereign debt.

For Tanzania, the natural choice is probably combining global level innovations such as the proposed Sovereign Debt Adjustment Facility under the aegis of the IMF— which do not have full statutory authority all over the world—with the more popular implementation of contractual approaches of making debt relief contingent on the country meeting specific policy targets in the eventuality of concessional ODA loan defaults.

Paul Kibuuka is the managing partner of Isidora & Company Advocates

, a corporate, commercial and financial law firm.