United Republic of tanzania: Joint World Bank/IMF Debt Sustainability Analysis
Author: International Monetary Fund
Publication Date:
18 Jul 2012
eISBN:
9781475505801
Language:
English
Keywords:
ISCR; CR; deficit; SCF arrangement; debt; authority; financing; debt indicator; IMF debt sustainability analysis; debt-GDP path; creating flow; service-to-revenue ratio; Debt sustainability analysis; Government debt management; Global; debt data
Download PDF (475.3 KB)

Tanzania’s economy experienced adverse supply shocks in 2011. The Fourth Review under the policy support instrument (PSI) discusses that tighter fiscal and monetary policies are addressing the inflationary impact of the drought/energy shock. Performance under the PSI-supported program has been generally satisfactory. All December 2011 and March 2012 quantitative assessment criteria and indicative targets were met, other than the March 2012 floor on net international reserves, which was missed on account of delays in contracting programmed external borrowing.

Abstract

Tanzania’s economy experienced adverse supply shocks in 2011. The Fourth Review under the policy support instrument (PSI) discusses that tighter fiscal and monetary policies are addressing the inflationary impact of the drought/energy shock. Performance under the PSI-supported program has been generally satisfactory. All December 2011 and March 2012 quantitative assessment criteria and indicative targets were met, other than the March 2012 floor on net international reserves, which was missed on account of delays in contracting programmed external borrowing.

I. Background

1. Tanzania’s macroeconomic performance over the last decade has been strong. Growth averaged 7 percent per year during 2002–2011 which, together with increased revenue collection, donor funding, and HIPC debt relief, provided room for an expansion in public spending. Higher global food and fuel prices and a regional drought in 2011 caused a drop in hydroelectric generation and increased fuel prices, leading to a peak in headline inflation of almost 20 percent and a widening current account deficit of about 15 percent of GDP in 2012. Core inflation (excluding food and energy) has stabilized at 9 percent, up from about 4 percent a year earlier. Despite these supply shocks, real GDP growth in 2011 was 6.4 percent, supported by strong construction and services expansion.

2. Tanzania has benefited from extensive debt relief. HIPC and MDRI debt relief reduced Tanzania’s debt burden sharply to 20.6 percent of GDP at end-June 2007. External debt has steadily crept upwards since then, amounting to 34.7 percent of GDP by end-June 2011.2,3 In present value (PV) terms, the public and publicly guaranteed sector (PPG) external debt stood at about 26.7 percent of GDP at end-June 2011, or 88.1 percent of exports, while public external debt service was around 1 percent of exports. The current DSA only refers to central government debt, except for a US$135 million guarantee extended to the power utility, TANESCO, but contingent risk from debt by other state-owned enterprises and pension funds could be sizable.4 The authorities intend to broaden their coverage to include contingent liabilities, including stepping up their compilation of data on debt guarantees. Public domestic debt stood at 10.6 percent of GDP at end-June 2011, up by 1.5 percent of GDP from the previous year.

3. The authorities’ medium-term policy is focused on stepping up public investment. The poverty reduction strategy for 2011–2015 (MKUKUTA II) and the five-year development plan for 2012–2016 support growth, including through increased infrastructure spending, especially in transportation, power generation, and irrigation. Inadequate infrastructure is considered a key constraint to capacity building, the business environment, productivity and subsequently higher growth in the country and in the region. The authorities have been using the space provided under the PSI program for non-concessional external borrowing for development and infrastructure spending.

II. Baseline Assumptions

4. Changes in baseline assumptions are minimal from the previous DSA (Box 1). The medium-term growth path (of about 7.5 percent annually) is virtually unchanged. Similarly, inflation (GDP deflator) is projected at the Bank of Tanzania’s medium-term objective of 5 percent. The noninterest current account deficit is expected to increase in 2012 and 2013 before improving steadily to about 7.9 percent of GDP in the long term, due to the supply response to the buildup in infrastructure.

Comparison with the Previous DSA

Changes in assumptions with respect to the previous DSA are mostly limited to updating prices and interest rates to reflect prevailing market conditions and incorporating the terms of external nonconcessional borrowing and revisions in the debt stock as provided by the authorities as they proceed with upgrading their data base and debt monitoring capacity.

  • Growth: Growth is projected to remain at 7.5 percent over the medium and long term.

  • Exports and imports: Export growth is kept somewhat higher than import growth to reflect higher infrastructure spending and export-led growth.

  • Development spending: Development spending increases from 7.9 percent of GDP in 2011 to an average of 9.8 percent during 2012-2014, which then declines to around 8 percent due to an assumed decline in external non-concessional borrowing, before going back to 9.5 percent in the long run.

  • External nonconcessional borrowing: Contracting and guaranteeing of external non-concessional debt during the PSI program period through 2013 is projected at US$1.77 billion, up from an earlier assumption of US$1.5 billion; this figure includes US$135 million of government guarantee for the power utility TANESCO. The estimated terms of this borrowing are incorporated. As in the previous DSA, non-concessional borrowing is assumed to average 1 percent of GDP a year after the PSI program period. The assumed average interest rate remains at 8 percent, in line with prevailing market conditions.

  • Foreign concessional loans and grants: External grants decline to about 3 percent of GDP by 2015 and thereafter, lower than in the previous DSA. Foreign concessional loans also decline in percent of GDP to reflect a gradual reduction in aid dependency.

  • Fiscal deficit: The projected fiscal deficit for 2012 is slightly higher compared to the previous DSA. However, the overall fiscal deficit declines to 3 percent of GDP by 2017 and then further toward 2.5 percent of GDP. This is consistent with a decline in the primary deficit to below its debt-stabilizing level of 2-2½ percent of GDP (Table 3). The fiscal consolidation is expected to be achieved through efficiency gains from strengthened tax administration, tax reforms, including the introduction of a new VAT law, and prioritization of expenditure. The alternative scenario whereby the primary deficit is fixed throughout the entire projection period shows substantial deterioration in all debt indicators.

Table 1:

External Debt Sustainability Framework, Baseline Scenario, 2009–2032 1/

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

About 3 percent of the residual in 2012 and a large part in later years is explained by capital transfers.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Table 2a.

Tanzania: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2012–2032

(In percent)

article image
article image
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 3.

Table 3: Tanzania: Public Sector Debt Sustainability Framework, Baseline Scenario, 2009–2032

(In percent of GDP, unless otherwise indicated)

article image
Sources: Country authorities; and staff estimates and projections.

Covers central government debt, except for a US$135 million guarantee extended to the power utility TANESCO.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

5. Borrowing assumptions are slightly revised. Domestic and external non-concessional borrowing is expected to be used to finance infrastructure investment. This includes contracted non-concessional external financing of US$1.77 billion over the PSI program period (with disbursements of US$55.3 million in 2011, US$642.7 million in 2012, and US$978.1 million expected in 2013) and 1 percent of GDP for the remainder of the projection period. Domestic financing is projected at about 1 percent of GDP for 2012–2015 and not exceeding 1 percent of GDP thereafter. The real interest rates on new domestic borrowing are assumed to increase gradually toward 3.5 percent (with automatic rollover), while external nonconcessional borrowing is assumed to have an average nominal interest rate of 8 percent, with a 1-year grace period and 10-years’ maturity.

6. Government revenues are assumed to increase as a percent of GDP while external grants and concessional loans will decline. Domestic revenues (excluding grants) grow from 17.4 percent of GDP in 2012 to about 22.1 percent of GDP by 2032, consistent with IMF staff estimates of Tanzania’s tax potential. On the other hand, external grants decline from 6.0 percent of GDP in 2012 to 3 percent of GDP by 2015 and thereafter. External concessional loans (both program and project loans) would increase from 3.2 percent of GDP in 2012 to 4.6 percent of GDP in 2013 due to expected concessional project loans from China to build a new gas pipeline to bring lower cost natural gas from shallow water offshore reserves to the Dar es Salaam area. External concessional loans are then expected to start declining, reaching 2 percent of GDP by 2017, consistent with a gradual reduction in Tanzania’s aid dependency. Annual development spending is assumed to stabilize at 9.5 percent of GDP for the long term. Annual maintenance costs equal to 5 percent of the total value of the accumulated additional infrastructure spending are added to government recurrent spending throughout the period.

7. Further strengthening of Tanzania’s debt management capacity and operations is needed, and the authorities are taking steps in this direction. The authorities have developed a medium-term debt management strategy based on quantitative analysis of costs and risks of alternative strategies. To further consolidate debt management, the authorities intend to establish a new Debt Management Office in the Ministry of Finance, which is expected to consolidate Tanzania’s fragmented debt management functions, improve capacity, debt monitoring, and compile data on government debt guarantees on a quarterly basis. Given Tanzania’s rising debt, it is important to be able to monitor debt accurately, promote effective inter-agency coordination on debt management and debt sustainability issues, and improve consistency and accuracy in compiling and reporting debt data. In addition, investment projects need to be subject to a sound evaluation and prioritization process, including assessing economic returns from infrastructure investments from external non-concessional borrowing, to ensure high returns and growth benefits from additional borrowing.

III. External and Fiscal Debt Sustainability Analysis

8. The risk of external debt distress remains low under the baseline scenario. Debt indicators are slightly higher than in the last DSA exercise, but do not jeopardize long-run sustainability (Figure 1). Debt service indicators increase gradually throughout the projection period, but stay below risk thresholds. The PV of public external debt-to-GDP ratio would increase from 28.2 percent of GDP in 2012 to 31.8 percent by 2013, before falling to 15.6 percent by the end of the projection period. The PV of debt-to-exports is expected to peak at 98.7 percent of GDP in 2013, before declining to 38.4 percent in 2032. The debt service-to-export and debt service-to-revenues ratios would reach 5.5 and 10.3 percent by 2022, respectively, before falling to 4.6 and 8.4 percent, respectively, by 2032. The rising debt service-to-revenue ratio for both external and total public debt despite a rising revenue-to-GDP ratio and a declining debt-GDP path reflects the shorter maturity and grace period of external nonconcessional borrowing, which has risen significantly in recent years with a bunching of disbursements in 2013.

Figure 1.
Figure 1.

Tanzania: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2012–2032 1

Citation: IMF Staff Country Reports 2012, 185; 10.5089/9781475505801.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2022. In figure b. it corresponds to a Terms shock; in c. to a Terms shock; in d. to a Terms shock; in e. to a shock and in figure f. to a One-time depreciation shock

9. Alternative scenario and shock analysis indicate that Tanzania’s debt dynamics remains sensitive to the terms of external borrowing. Tanzania’s public external debt would remain below the relevant risk thresholds under the standard bound tests and extreme shocks.5 The alternative scenario based on less favorable financing terms shows the largest deterioration for most indicators (e.g. the PV of debt-to-GDP ratio increases from 28 percent in 2012 to 39 percent in 2016, before declining to 32 percent in 2032). The high investment, low growth alternative scenario shows a rapid increase in PV of debt-to-GDP, exports, and revenue, in the medium term—close to the levels of the most extreme shock scenarios—before falling close to the baseline scenarios in the long run.

10. The path of total public debt, which includes external debt and domestic debt, is also projected to be sustainable. The PV of public debt-to-GDP ratio increases from 38.2 percent in 2012 to 41.3 percent by 2013, before declining to 25.0 percent by the end of the projection period. Similarly the PV of public debt-to revenue ratio peaks at 186.8 percent in 2015 before declining to 99.4 in 2032. Debt service-to-revenue increases from 5.9 percent in 2012 to 12.0 in 2022, before falling to10.2 by end of the projection period (Figure 2).

Figure 2.
Figure 2.

Tanzania: Indicators of Public Debt under Alternative Scenarios, 2012–20321

Citation: IMF Staff Country Reports 2012, 185; 10.5089/9781475505801.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in 2022.2/ Revenues are defined inclusive of grants.

11. Public debt sustainability is particularly sensitive to the fiscal position (Figure 2). Under an alternative scenario, for which the primary deficit is fixed at recent levels throughout the projection period, all debt indicators deteriorate substantially. Under this scenario, the PV of debt-to-GDP ratio would keep rising throughout the projection period, from 38 percent to 65 percent (A2 in Table 4). Although some reduction in the primary deficit is projected to have been achieved in 2012 (after increases in earlier years on account of expansionary fiscal policies during the global recession), further strengthening of the primary balance will be critical to prevent an unsustainable debt buildup. Revenue reform will be imperative to generate sufficient revenues in a non-distortionary manner. Balancing higher demands on the budget against financing constraints will also call for significant increases in spending efficiency. Reducing the deficit, while funding additional expenditures in areas where they are critically needed, such as health and education, will likely require ambitious tax policy and PFM measures, areas where IMF and World Bank technical assistance has recently been provided.

Table 4.

Tanzania: Sensitivity Analysis for Key Indicators of Public Debt, 2012–2032

article image
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.