United Republic of Tanzania: Seventh Review under the Policy Support Instrument—Debt Sustainability Analysis
Author: International Monetary Fund. African Dept.
Publication Date:
16 Jan 2018
eISBN:
9781484337981
Language:
English
Keywords:
ISCR; CR; debt; deficit; GDP; real GDP; monetary policy stance; PPG debt; sustainability framework; creating flow; debt indicator; debt service-to-revenue ratio; Public and publicly-guaranteed external debt; Depreciation; debt stock; debt vulnerability
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Seventh Review Under the Policy Support Instrument-Press Release; Staff Report

Abstract

Seventh Review Under the Policy Support Instrument-Press Release; Staff Report

Background and Macroeconomic Assumptions

1. Tanzania’s public and publicly guaranteed (PPG) debt to GDP ratio has been increasing in recent years. Total PPG debt increased by more than 15 percentage points of GDP since 2006/07 to 36.2 percent of the GDP at end-2015/16.2 Most of the increase (some 13 points) was accounted for by external debt.

2. While most of Tanzania’s PPG external debt is concessional, borrowing on non-concessional terms has increased in recent years. Official bilateral and multilateral creditors continue to be the major financiers, accounting for more than two thirds of external PPG debt as of end-2015/16. That said, the share of commercial financing has increased to about 30 percent at end-2015/16 from just over 4 percent at end-2010/11. More recently, and to finance high priority infrastructure projects, the authorities raised US$500 million through a commercial loan from Credit Suisse over the period June-August 2017.

3. Domestic public debt has increased gradually, but remains relatively small. Domestic debt stood at 9 percent of GDP at end-2015/16, with only about a third stemming from short-term instruments. Commercial banks continue to hold the largest share of government domestic debt. However, adding several outstanding government liabilities and other contingent liabilities currently not accounted for in the domestic debt stock increases it to 14.4 percent of GDP (as reflected in the 2016/17 figures, the first projection year under the current DSA update).3

4. The medium- and long-term macroeconomic projections remain broadly unchanged from the previous DSA (Box 1) with the exception of a substantial decrease in the projected current account deficit.

Text Figure 1.
Text Figure 1.

Tanzania Public Debt, 2005/06 – 2015/16

(in percent of GDP)

Citation: IMF Staff Country Reports 2018, 011; 10.5089/9781484337981.002.A002

Source: Ministry of Finance and Planning, Bank of Tanzania, and IMF staff estimates.

External DSA

5. Tanzania’s external debt is assessed to be remain “low” in this DSA update. The present value of the PPG external debt-to-GDP ratio peaks at 19.1 percent in FY20/21, in line with the previous DSA. All debt burden indicators under the baseline scenario and under various bound tests remain below their respective policy-dependent thresholds. However, some ratios breach the respective thresholds under the historical scenario, mainly due to a larger historical current account deficit, which has recently fallen substantially and is projected to remain relatively low throughout the projection period (Figure 1).

Figure 1.
Figure 1.

Tanzania: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2017–2037 1/

Citation: IMF Staff Country Reports 2018, 011; 10.5089/9781484337981.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2027. In figure b. it corresponds to a One-time depreciation shock; in c. to a Terms shock; in d. to a One-time depreciation shock; in e. to a Exports shock and in figure f. to a One-time depreciation shock

Baseline Macroeconomic Assumptions

Real GDP growth: Although GDP growth is projected to have decelerated slightly in 2016/17 and 2017/18, it is projected to remain strong in the next few years (around 6½-7 percent), reflecting a scaling up of public investment, mainly in transportation and energy infrastructure. Over the medium term, growth is assumed to revert to its historical average of about 6.5 percent.

uA02fig01

Foreign Financing Assumptions

(in percent of GDP)

Citation: IMF Staff Country Reports 2018, 011; 10.5089/9781484337981.002.A002

Inflation (CPI): CPI inflation is projected at about 5 percent, in line with the authorities’ inflation target.

Current account balance: The external current account deficit fell to 2.7 percent of GDP in 2016/17 from 10.7 percent in 2013/14, due to a decline in oil imports partly aided by a shift from imported oil to domestically-produced gas for electricity generation and a contractionary fiscal stance. Considering this, the projected long-term current account deficit has been assumed to narrow by 2½ percentage points of GDP to 5½ percent of the GDP, compared to the previous DSA.

Government balances and domestic borrowing: The fiscal deficit is assumed to widen over the medium-term relative to the 1½ percent of GDP deficit recorded in 2016/17. The initial expansion, reflecting the scale up of public investment to finance infrastructure projects envisaged under the FYDP II, is expected to be followed by a gradual consolidation. The fiscal deficit is projected to fall below 3 percent of GDP by 2022/23, in line with the regional convergence criteria of the East African Monetary Union. Net domestic borrowing is expected to be maintained at around 1 percent of GDP during most of the projection period.

Selected Macroeconomic Indicators, Current vs. Previous DSA

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Sources: Tanzanian authorities and IMF staff estimates and projections.

External financing flows: Reflecting the recent increase in commercial borrowing, the ratio of the ENCB (external non-concessional borrowing) to total annual foreign financing is expected to increase to around 50 percent of in the long term. Although it has dipped recently, owing to worsening investment sentiments, FDI is projected to recover gradually to its historical average of 4 percent of the GDP. As in the previous DSA, access to grants is assumed to taper.

6. Still, several debt indicators remain sensitive to various shocks. A one-time depreciation shock is the most extreme scenario among bound tests for most of the ratios, confirming the sensitivity of the Tanzanian economy to shocks stemming from exchange rate volatility. This is especially so for the debt service to revenue indicator; while more costly terms of external finance underscore a degree of vulnerability in the debt to exports measure. While there has been a structural change to a more resilient economy, breaches of the thresholds for the debt-to-exports and debt service-to-revenue ratios under the historical scenario underscore the importance of expanding the export base, boosting public revenue sources and adhering to fiscal consolidation over the medium to longer terms.

Public DSA

7. Total public debt and debt service ratios suggest a low level of vulnerability. Under the baseline scenario, the present value of total public debt as a share of GDP is expected to increase modestly in the next few years (to a peak of 43.6 percent of GDP in 2019/20) and to decline gradually over time, therefore remaining below the benchmark of 56 percent of GDP associated with heightened public debt vulnerabilities for medium performers, and the EAMU convergence criterion of 50 percent (Figure 2).

Figure 2.
Figure 2.

Tanzania: Indicators of Public Debt under Alternative Scenarios, 2017–2037 1/

Citation: IMF Staff Country Reports 2018, 011; 10.5089/9781484337981.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio on or before 2027.2/ Revenues are defined inclusive of grants.

8. Bound tests indicate a low level of vulnerability for the projected paths for total public debt indicators. Under the historical scenario, all three ratios (PV of debt-to-GDP, PV of debt-to-revenue, and debt service-to revenue ratio) would keep growing gradually and reach the highest among alternative scenarios and bound tests at the end of the projection period, highlighting again the importance of implementing the envisaged fiscal consolidation over the medium to long terms.

Conclusion

9. The DSA update indicates that Tanzania continues to face a low risk of external debt distress. External debt burden indicators remain below the policy-dependent thresholds under the baseline scenario and stress tests. The latter suggests that a potential exchange rate depreciation and a currently narrow export base pose risks to debt vulnerabilities. The results also highlight the importance of maintaining the authorities’ strong track record of macroeconomic management—sound fiscal and monetary policies leading to robust growth, relatively low current account, balances, and a strong international reserves’ position. To that effect, raising public domestic revenue should be pursued in a business-friendly manner to maintain the economic growth momentum. The scaling-up of development spending to address Tanzania’s infrastructure gap needs to be accompanied by improvements in spending efficiency through improved public investment management and enhanced debt management capacity. It is vital to leverage concessional and semi-concessional sources of financing when available and carefully select projects to be financed by commercial loans.

Table 1.

Tanzania: External Debt Sustainability Framework, Baseline Scenario, 2014–2037 1/

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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.

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 2.

Tanzania: Public Sector Debt Sustainability Framework, Baseline Scenario, 2014–2037

(in percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections.

[Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.]

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.

Table 3.

Tanzania: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt 2017–2037

(in percent)

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Table 4.

Tanzania: Sensitivity Analysis for Key Indicators of Public Debt 2017–2037

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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.

1

This Debt Sustainability Analysis (DSA) updates the previous joint IMF/IDA DSA prepared in June 2016 in the context of the 2016 Article IV consultation and Fourth PSI review (IMF Country Report No. 16/253). The three-year average score of the World Bank’s Country Policy and Institutional Assessment (CPIA) for 2014–16 is 3.71, thus this DSA applies policy-dependent thresholds corresponding to medium policy performers.

2

While the DSA tables below have a standardized presentation in calendar year terms, the data for Tanzania are represented in fiscal year terms, i.e., 2016 corresponds to 2015/16 figures.

3

This mainly include arrears to pension funds and loans to government entities, budget expenditure arrears, TANESCO’s arrears to its suppliers, and other actual or contingent liabilities.

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