United Republic of Tanzania: Requests for Disbursement Under the Rapid Credit Facility and Purchase Under the Rapid Financing Instrument—debt Sustainability Analysis
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UNITED REPUBLIC OF TANZANIA

Abstract

UNITED REPUBLIC OF TANZANIA

Title page

UNITED REPUBLIC OF TANZANIA

REQUESTS FOR DISBURSEMENT UNDER THE RAPID CREDIT FACILITY AND PURCHASE UNDER THE RAPID FINANCING INSTRUMENT—DEBT SUSTAINABILITY ANALYSIS

August 20, 2021

Approved By

Catherine Pattillo (AFR), Maria Gonzalez (SPR) and Marcello Estevão and Asad Alam (IDA)

Prepared by the staffs of the International Monetary Fund (IMF) and the International Development Association (IDA).1

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The Debt Sustainability Analysis (DSA) indicates that Tanzania’s risk of external debt distress has increased to moderate, mainly due to the effects of the pandemic on exports, which has weakened Tanzania’s ability to service its external debt, and to the lower debt burden thresholds that correspond to the new medium debt carrying capacity classification.2, 3 Tanzania’s macroeconomic conditions have been resilient despite the COVID-19 shock. Although uncertainty is high, and risks are tilted to the downside, the macroeconomic outlook is stable. The results of the external DSA show that, with the exception of a one-off breach in the debt service to exports ratio caused by the collapse in tourism receipts due to the pandemic, all external debt burden indicators continue to remain below the policy-determined thresholds under the baseline. However, in the short-term Tanzania has limited space to absorb shocks, and the ongoing effect of the pandemic on the tourism sector is highly uncertain.

The public DSA analysis shows that the present value of the public debt-to-GDP ratio remains contained at around 30 percent, well below the 55 percent threshold. The results of the DSA underscore the importance of accessing, to the extent possible, external financing on concessional terms. Also, to maintain fiscal and debt sustainability, the authorities should improve public investment management and proceed only with investment projects with clear socioeconomic payoffs. Finally, it will be important to continue improving the coverage and transparency of public sector debt statistics, including non-guaranteed debt.

A. Background

1. Tanzania’s public and publicly guaranteed (PPG) debt remains relatively low. At the end of FY 2019/20, the level of public debt stood at 38.8 percent of GDP, down from 41.4 percent in 2017/18.4 However, over the past decade the debt to GDP ratio increased by more than 13 percent of GDP. While domestic debt rose over the period, most of the increase was related to external debt which accounts for 73 percent of the total debt.5

2. Non-concessional borrowing has increased in recent years to finance the public infrastructure agenda. Multilateral and official bilateral creditors continue to be the major financiers, accounting for about 70 percent of the stock of external PPG debt as of end-FY2019/20. However, in recent years, commercial borrowing as a share of new disbursement has increased to about 50 percent, and in FY2020/21 it is expected to reach 68 percent, as the authorities borrowed US$1.3 billion through commercial loans to finance the Standard Gauge Railway project.

3. Domestic public debt has also increased but remains small. Domestic debt stood at 10.8 percent of GDP at end-FY2019/20, with about a fifth of that stemming from short-term instruments. Commercial banks continue to hold the largest share of government debt, followed by pension funds. If government arrears were counted as part of the domestic debt stock, the above figure would increase further by about 3 percent of GDP.6

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4. The public sector debt covers central government debt, central government-guaranteed debt, and central bank debt. Owing to data constraints, the coverage of the public sector debt is limited. With assistance from development partners, the authorities have been working on broadening the coverage of the fiscal data, including local governments and public corporations. The Ministry of Financing and Planning has a wide mandate over debt management, as any domestic debt issuance by local governments and parastatals with weak financials is subject to its approval, and all external financing requires government guarantees.7,8

B. Macroeconomic and Policy Assumptions

5. The macroeconomic outlook is stable, but hinges on the extent of changes to COVID-19 policies as well as the broader policy and reform agenda. The impact of the COVID-19 pandemic on Tanzania’s economy continues to be subject to considerable uncertainties, with significant downside risks on the horizon. The third wave of the virus and/or new coronavirus variants might prolong the COVID-19 pandemic and worsen the impact on Tanzania’s external demand and domestic activity. Resumption of travel restrictions by source markets, or a delayed vaccine roll-out could undermine the slow recovery in tourism and add to external pressures. Conditional on satisfactorily implementation of the authorities’ National Tanzania COVID-19 Socioeconomic Response Plan (see main text), growth is expected to recover to 4 percent in 2021 and further pick up over the medium-term. The medium- and long-term macroeconomic outlook assumes a moderate and steady implementation of the authorities’ reform agenda. Scarring from the COVID-19 pandemic is expected to have a persistent negative impact on Tanzania. In particular, the tourism sector is not anticipated to fully recover over the medium-term.

  • Real GDP growth: GDP growth is projected at 4½–5½ percent in the medium- and long-term. The authorities project higher medium-term growth in the order of 7 percent, but in staff’s view such a robust level of potential growth is not warranted. Despite the impetus from the new administration of President Hassan, the past reform implementation track record, the poor business climate over the last few years that will take time to recover from, and the lasting effects of the pandemic suggest a slightly more moderate rate of growth.

  • Inflation (CPI): CPI inflation is projected at about 3½ percent over the medium-term, in line with the authorities’ inflation target, and with current trends that seemed to have anchored inflation expectations at around 3½.

  • Fiscal balance: The overall fiscal deficit is projected to increase temporarily to 3.9 percent of GDP to accommodate about 1 percent of GDP in COVID-related spending in FY2021/22. The deficit will linger close to 3 percent of GDP over the medium-term reflecting the authorities’ ambitious infrastructure plans to close development gaps in energy and transportation.9 As revenues recover over time from their hit during the pandemic, the long-term fiscal deficit is projected to remain below the 3 percent of GDP ceiling required by the convergence criterion of the East African Community.

  • Gross financing needs: Gross financing needs are projected to peak in FY2021/22 at about 7.2 percent of GDP and remain at 6¾ percent of GDP over the medium term. External non-concessional borrowing (ENCB) is projected to remain above 40 percent of annual foreign financing over the next five years, while access to grants is assumed to taper. Compared with the previous DSA, the current one includes higher projected disbursements from the World Bank of about US$500 million per year over the medium-term.

  • Current account balance: In FY2020/21 tourism receipts declined by 55 percent (or almost 2 percent of GDP) as travel froze across the world, but the balance of payments proved resilient as higher gold exports, and lower oil imports helped offset the decline in tourism. The current account deficit is estimated to widen to 4.½ percent of GDP in FY2021/22 as imports of medical equipment, medicines and vaccines pick-up steam to fight the pandemic.10 As exports of tourism services slowly improve over the medium-term, the current account deficit is expected to narrow to about 3 percent of GDP. However, over the next five years exports are projected to be on average about 1½ percent of GDP lower than in the last DSA (Text Table 1), which is reflected in a deterioration of key debt burden indicators (see below). FDI inflows are expected to remain subdued over the medium-term at about 1½ percent of GDP.

  • Debt Service Suspension Initiative (DSSI): Tanzania benefited from the DSSI in FY2020/21 to the tune of US$102 million from the Exim Bank of China (US$99.5 million) and the French Development Agency (US$2.6 million).11 Consequently, the DSA includes a corresponding reduction in debt service payments in 2021, and reflects the higher debt service over the period 2022–27 to repay the rescheduled debt.

Text Table 1.

Selected Macroeconomic Indicators, Current vs Previous DSA1

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Sources: Tanzanian authorities; and IMF staff estimates and projections

The previous DSA was conducted in the context of the 2019 Article IV Consultation (The Country Report was not published).

For the current projections it covers the period 2027–2041, and for the previous DSA the period 2026–2040.

6. The first realism tool suggests some small changes in the decomposition of debt-creating flows (Figure 3). The decomposition of debt-creating flows indicates that the projected contribution of the current account deficit and FDI flows will have a higher impact on external debt dynamics. Similarly, lower growth and the impact of an increase in nominal interest rates will contribute to higher debt accumulation compared to historical drivers. For the total public debt, higher primary deficits, and a lower growth rate than in the past, will be key drivers of debt-creating flows.

Figure 1.
Figure 1.

Tanzania: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2021–31

Citation: IMF Staff Country Reports 2021, 213; 10.5089/9781513598352.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 2.
Figure 2.

Tanzania: Indicators of Public Debt Under Alternative Scenarios, 2021–2031

Citation: IMF Staff Country Reports 2021, 213; 10.5089/9781513598352.002.A002

Sources: Country authorities; and staff estimates and projections.1/ The most extreme stress test is the test that yields the highest ratio in or before 2031. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals. When a stress test with a one-off breach happens to be the most exterme shock even after disregarding the one-off breach, only that stress test (with a one-off breach) would be presented.
Figure 3.
Figure 3.

Tanzania: Drivers of Debt Dynamics – Baseline Scenario

Citation: IMF Staff Country Reports 2021, 213; 10.5089/9781513598352.002.A002

1/ Difference between anticipated and actual contributions on debt ratios.2/ Distribution across LICs for which LIC DSAs were produced.3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation.

7. The other realism tools indicate that the projections are reasonable (Figure 4). The projected scaling-up of public investment is expected to yield a growth dividend in line with historical factors. This will be supported by the authorities’ intentions to improve the business environment and public investment management. The authorities also expect to enact reforms to support financial intermediation and the development of domestic markets, which, in turn, will allow for additional levels of domestic financing.

Figure 4.
Figure 4.

Tanzania: Realism Tools

Citation: IMF Staff Country Reports 2021, 213; 10.5089/9781513598352.002.A002

8. The country’s debt-carrying capacity applied in this DSA is categorized as medium. The calculated Composite Indicator (CI) Index is 2.92 based on the April 2021 WEO and the 2019 World Bank’s CPIA, corresponding to a medium debt carrying capacity. The CI is lower than the 3.07 in the 2019 Article IV DSA, which corresponded to a strong debt carrying capacity. The corresponding indicative thresholds are: 40 percent for the net present value (NPV) of external debt-to-GDP ratio; 180 percent for the NPV of debt-to-exports ratio; 15 percent for the debt service-to-exports ratio; and 18 percent for the debt service-to-revenue ratio. The benchmark of the PV of total public debt for medium debt-carrying capacity is 55 percent.

Text Table 2.

Calculation of the CI Index

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Source: IMF staff calculations, based on the April 2021 WEO and 2019 CPIA.

C. External DSA

9. Based on the baseline projections and borrowing assumptions, Tanzania’s risk of external debt distress is assessed as moderate. The present value of the PPG external debt-to-GDP ratio is projected to peak at about 19 percent in 2022 and remain below the corresponding threshold. The debt service-to-export ratio has a one-off marginal breach of the 15 percent threshold in 2022 under the baseline (Figure 1), and would have also breached it in 2021 if it wasn’t for the debt rescheduling of US$102 million in FY2020/21 under the DSSI. Due to the different scenario breaches (see below), the DSA rating for the external risk of debt distress is assessed as moderate. The change compared to the low risk rating in the last DSA is mainly due to the collapse of tourism exports during the COVID-19 pandemic, and the lower debt burden thresholds that correspond to the new medium debt carrying capacity classification

10. Furthermore, a number of debt indicators are sensitive to shocks (Figure 1). A decline in exports is the most extreme scenario among bound tests for half of the ratios, confirming the sensitivity of the Tanzanian economy to a narrowing of its exports base, as the one experienced with the COVID-19 shock. This is especially conspicuous for the debt service to exports ratio, which is projected to remain elevated, and in breach of the threshold, under this shock. A one-time 30 percent depreciation shock is the biggest impact on the debt service-to-revenue ratio and results in a one-off breach. The shocks underscore the importance of enhancing revenue mobilization and seeking concessional loans where possible. Furthermore, the historical scenario breaches two thresholds, highlighting the risks of past behavior.

11. Tanzania has limited space to absorb shocks due to the effect of the pandemic on tourism exports (Figure 5). The debt-service to export ratio suggests that over the medium-term Tanzania has limited space to absorb shocks, but over the long-term Tanzania will regain some space to absorb shocks, and that towards the end of the projection period it would have substantial space. There are two countervailing factors that qualify this assessment; on the one hand Tanzania has and is projected to maintain healthy levels of reserves above 5 months of imports, but on the other hand the ongoing effect of the pandemic on the tourism sector is highly uncertain and could continue to worsen the capacity of the country to earn foreign exchange, which then serves to pay down debt.12 Given the relatively large fiscal needs (about 1 percent of GDP) to fight the pandemic, the government will need to carefully balance their COVID-19 response with their broader development agenda to preserve debt sustainability.

Figure 5.
Figure 5.

Tanzania: Qualification of the Moderate Category, 2021–2031 1/

Citation: IMF Staff Country Reports 2021, 213; 10.5089/9781513598352.002.A002

Sources: Country authorities; and staff estimates and projections.1/ For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent. For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.
Figure 6.
Figure 6.

Tanzania: Market-Financing Risk Indicators

Citation: IMF Staff Country Reports 2021, 213; 10.5089/9781513598352.002.A002

Sources: Country authorities; and staff estimates and projections.

D. Public DSA

12. The risk of overall public debt distress is assessed as moderate, in line with the moderate risk of external debt distress rating. Under the baseline scenario, the PV of public debt remains below the indicative threshold under the baseline and most extreme stress scenario and is expected to increase modestly in the medium-term and peak at 30.5 percent of GDP in 2022. After that, the ratio is projected to decline gradually and continue to remain below both the threshold associated with heightened public debt vulnerabilities and the EAC convergence criterion of 50 percent (Figure 2).

13. Bound tests indicate the importance of public investment management. A one-time materialization of contingent liabilities is the most extreme scenario among bound tests for all the ratios, highlighting again the importance of improving public investment management processes and the proper prioritization of investment projects, as well as proper public financial management processes. It will also be important to improve the coverage and transparency of public sector debt statistics, including non-guaranteed debt, to minimize the risk of unexpected debt surprises.

E. Conclusions

14. The DSA indicates that the external and the overall risk of debt distress for Tanzania are moderate. The pandemic’s devastating effect on tourism inflows brought to light Tanzania’s vulnerability to export shocks that threaten its capacity to service external debt. However, the healthy level of reserves of 5 months of imports serves as a significant buffer against these types of shocks. Other than a marginal breach in the debt service-to-export ratio, all other external debt burden indicators remain below the policy-dependent thresholds under the baseline scenario, but are breached under different shocks and stress tests, highlighting the increase in risk of debt distress since the last DSA. In particular, a narrow export base and one-time depreciation pose risks. The results highlight the importance of raising domestic revenue, improving public investment management, and leveraging concessional financing sources when available, while carefully selecting projects to be financed by commercial loans.

15. Authorities’ views. The authorities agreed on the economic outlook and risks and indicated economic growth will be supported by their ambitious public investment program. On the overall assessment, the authorities agreed with the characterization of Tanzania’s risks of debt distress and noted their intention to maintain prudent debt management policies and to undertake debt sustainability analysis every year. They plan to continue prioritizing borrowing on concessional terms, including seeking financing from export credit agencies, while carefully venturing to non-concessional sources for projects of significant importance to the economy. To anchor fiscal consolidation in the long-term, the authorities reiterated their commitment to the EAC guidelines. The authorities also indicated that they are currently preparing a report on contingent liabilities that will help broaden the perimeter of debt covered, which is expected to be completed by end-2021.

Table 1.

Tanzania: External Debt Sustainability Framework, Baseline Scenario, 2020–2041

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections. 1/ Includes both public and private sector external debt. 2/ Derived as [r – g – ρ(1+g) + Ɛα(1+r)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, ρ = growth rate of GDP deflator in U.S. dollar terms, Ɛ=nominal appreciation of the local currency, and α = share of local currency-denominated external debt in total external debt. 3/ 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. 4/ Current-year interest payments divided by previous period debt stock. 5/ Defined as grants, concessional loans, and debt relief. 6/ 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). 7/ Assumes that PV of private sector debt is equivalent to its face value. 8/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 2.

Tanzania: Public Sector Debt Sustainability Framework, Baseline Scenario, 2020–2041

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and staff estimates and projections. 1/ Coverage of debt: The central government, central bank, government-guaranteed debt . Definition of external debt is Residency-based. 2/ The underlying PV of external debt-to-GDP ratio under the public DSA differs from the external DSA with the size of differences depending on exchange rates projections. 3/ Debt service is defined as the sum of interest and amortization of medium and long-term, and short-term debt. 4/ 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 and other debt creating/reducing flows. 5/ Defined as a primary deficit minus a change in the public debt-to-GDP ratio ((-): a primary surplus), which would stabilizes the debt ratio only in the year in question. 6/ Historical averages are generally derived over the past 10 years, subject to data availability, whereas projections averages are over the first year of projection and the next 10 years.
Table 3.

Tanzania: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2021–2031

(In percent)

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the threshold.

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

Includes official and private transfers and FDI.

Table 4.

Tanzania: Sensitivity Analysis for Key Indicators of Public Debt, 2021–2031

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Sources: Country authorities; and staff estimates and projections.

A bold value indicates a breach of the benchmark.

Variables include real GDP growth, GDP deflator and primary deficit in percent of GDP.

Includes official and private transfers and FDI.

1

Prepared by the IMF and the World Bank. This DSA follows the Guidance Note of the Join Bank-Fund Debt Sustainability Framework for Low Income Countries, February 2018.

2

This Debt Sustainability Analysis (DSA) replaces the previous joint IMF/IDA DSA prepared in March 2019 in the context of the last Article IV Consultation (The Country Report was not published).

3

Under the revised Debt Sustainability Framework for Low-Income Countries, Tanzania’s Composite Indicator is 2.92 based on the April 2021 WEO and the 2019 World Bank’s CPIA, corresponding to a medium debt carrying capacity.

4

All the figures and tables in the DSA follow the fiscal year (July-June). In the figures and tables, for example the year 2021 corresponds to FY2020/21.

5

The government fully settled external arrears to Wallis Trading in July 2021 and with Belgium in October 2019, while discussions to settle arrears with Libya are ongoing.

6

It was estimated that at end-2017/18, government arrears to pension funds and TANESCO’s arrears to its suppliers, amounted to about 3.1 percent of GDP.

7

The contingent liability stress test is calibrated to 3.6 percent of GDP. The shock is estimated to include the arrears to pension funds and TANESCO’s arrears to suppliers (see footnote 6), and 0.5 percent of GDP that local governments and public non-financial corporations had in outstanding loans from banks at end-March 2021. The central government’s strong control over public sector debt limits the risk of other uncaptured contingent liabilities.

8

Tanzania’s PPP capital stock is relatively small and represents a very small risk, hence it is not considered as part of the stress test.

9

Development spending is projected to peak at 7.4 percent of GDP in 2022/23 and then slowly decline to about 6.5 percent of GDP over the long run.

10

The reluctance of the previous government to acknowledge and confront the extent of the pandemic has left the current administration with a weak foundation to tackle the health crisis. The new administration of President Hassan plans to rapidly implement an aggressive plan to contain the spread of the virus, which requires a significant increase in imports for the health sector.

11

The Tanzanian government has also received debt relief from South Korea, Japan, Belgium and Austria, but the total amount to be rescheduled will be determined after concluding bilateral agreements. The Tanzanian authorities have not yet requested to participate in the second DSSI extension.

12

The new SDR allocation will increase reserves to about 5.6 month of imports, providing more space for Tanzania to absorb possible shocks.

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United Republic of Tanzania: Requests for Disbursement Under the Rapid Credit Facility and Purchase Under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for the United Republic of Tanzania
Author:
International Monetary Fund. African Dept.
  • Figure 1.

    Tanzania: Indicators of Public and Publicly Guaranteed External Debt Under Alternatives Scenarios, 2021–31

  • Figure 2.

    Tanzania: Indicators of Public Debt Under Alternative Scenarios, 2021–2031

  • Figure 3.

    Tanzania: Drivers of Debt Dynamics – Baseline Scenario

  • Figure 4.

    Tanzania: Realism Tools

  • Figure 5.

    Tanzania: Qualification of the Moderate Category, 2021–2031 1/

  • Figure 6.

    Tanzania: Market-Financing Risk Indicators