Amid reports that the State has been borrowing heavily in recent years to finance its operations, the International Monetary Fund (IMF) yesterday warned the government on the dangers of this tendency.
The IMF cautioned that the current trend of receiving short-term expensive loans was posing a threat to the nation’s debt sustainability.
By the end of 1997, the national debt as a percentage of Gross Domestic Product (GDP) was almost 70 per cent, but debt cancellation brought that ratio down to about 21 per cent.
But during the past few years, the national debt – which is also referred to as public debt –
has grown alarmingly as the government embarked on borrowing to finance both current and re-current expenditures.
While some experts put the current ratio at a conservative rate of around 40 per cent of GDP, others say it is already above 50 per cent.
However, the Bank of Tanzania (BoT) says the current debt level, which is 33 per cent of the GDP, is sustainable and the country is still creditworthy.
According to the latest BoT Monthly Economic Review, the value of external debt stands at $13.5 billion (Sh34.6 trillion), while the domestic debt is worth Sh6.08 trillion—giving a grand total of Sh40.6 trillion.
But in his presentation on the country’s economic outlook yesterday, the IMF Resident Representative, Mr Thomas Baunsgaard, urged the government to have a balance between more revenues it collects and loans it takes to avoid debt traps.
“It is not wrong to continue borrowing, but there is a need to strike a balance between borrowing and internal generation of revenue in order to avoid debt problems. The government should abandon short-term and expensive loans and stick on long-term and concessional loans which are not expensive” says Mr Bainsgaard.
The IMF representative also says that in terms of economic growth, the country was doing well as the rate has been sustained at seven per cent, but the only flaw is inability to attain inclusive growth in that the rate of poverty reduction, especially in upcountry regions was small. “The rate of poverty reduction is still low because agriculture is growing at the rate of 4 per cent, while the majority of the people are employed in this sector. The poverty reduction in urban areas is higher than rural areas,” he says.
For his part, the Repoa director of research growth and economic development, Dr Donald Mmari, said that the IMF presentation had provided some lessons to the country on pertinent issues namely, namely: the need for raising economic empowerment for the poor, strengthening the institutions of governance, transforming small and medium enterprises (SMEs) and integrating smallholder farmers into large-scale production.
Dr Mmari also said that financial inclusion should be enhanced because the country’s level of financial inclusion is lower than that of Kenya and Uganda.
According to IMF presentation organised by the development research organisation for poverty alleviation, the government’s level of budget deficit which is 6 per cent of Gross Domestic Product (GDP) should be sustained as further expansion would be dangerous to the national economy.
The IMF recommends the need for the government to have clear priorities of development projects for borrowing purpose, the need to strengthen financial discipline, to increase private sector strength and transforming agricultural sector through empowerment of smallholder farmers.
Speaking to The Citizen at the public service exhibition to mark 50 years of the Union on Thursday, a senior economist with the BoT, Mr Charles Sama, said that since the threshold for debt accumulation is 50 per cent ratio of public debt to GDP standing at about Sh50 trillion, the country was still capable of borrowing more funds for development projects.
“All countries in the world borrow to sustain economic growth and increase competitive strength. The caution on the purpose of borrowing should always prevail, because if the borrowed funds do not impact positively on economic growth, it is useless,” he says, adding:
“As far as the country is concerned, we are on the right track, that is why we continue to look for credit.”
He cited the case of ongoing negotiations for sovereign bond or the so-called Eurobond which is based on analysis of rating and risk.
Mr Sama further said that people must bear in mind that national debt also comprises debt from the private sector apart from the government derived from local and foreign sources.