THE UNITED REPUBLIC OF TANZANIA MINISTRY OF FINANCE TANZANIA NATIONAL DEBT SUSTAINABILITY ANALYSIS

Transcription

1 THE UNITED REPUBLIC OF TANZANIA MINISTRY OF FINANCE TANZANIA NATIONAL DEBT SUSTAINABILITY ANALYSIS September, 213

2 TABLE OF CONTENTS LIST OF TABLES, FIGURES AND CHARTS... III ACRONYMS AND ABBREVIATIONS... IV EXECUTIVE SUMMARY... V CHAPTER 1: INTRODUCTION BACKGROUND OBJECTIVE OF THE DSA MACROECONOMIC PERFORMANCE GDP GROWTH GDP OUTLOOK INFLATION INFLATION OUTLOOK EXPORTS OF GOODS AND SERVICES IMPORT OF GOODS AND SERVICES GOVERNMENT FINANCE... 6 CHAPTER 2: DEBT PORTFOLIO REVIEW OVERVIEW OF NATIONAL DEBT EXTERNAL PUBLIC DEBT PUBLIC OUTSTANDING EXTERNAL DEBT BY BORROWER AND CREDITOR CATEGORY DISBURSED OUTSTANDING DEBT BY CURRENCY COMPOSITION ACTUAL EXTERNAL DEBT SERVICES DISBURSED OUTSTANDING DEBT BY REMAINING MATURITIES DISBURSED OUTSTANDING DEBT BY INTEREST TYPE DOMESTIC DEBT PUBLIC DOMESTIC DEBT BY INSTRUMENT DOMESTIC DEBT BY HOLDER CATEGORY MATURITY STRUCTURE OF GOVERNMENT DOMESTIC DEBT ARISING FROM GOVERNMENT SECURITIES NEW FINANCING ANALYSIS DOMESTIC BORROWING EXTERNAL BORROWING SEMI-CONCESSIONAL BORROWING FROM EMERGING CREDITORS NON-CONCESSIONAL BORROWING GOVERNMENT CONTINGENT AND ACTUAL LIABILITIES GOVERNMENT CONTINGENT GOVERNMENT ACTUAL LIABILITIES LIABILITIES FROM GUARANTEES ISSUED TO PENSION FUNDS IN FAVOUR OF MDAS FOR IMPLEMENTING VARIOUS PROJECTS LIABILITIES FROM GOVERNMENT EMPLOYEES CONTRIBUTIONS TO PSPF AND LAPF LIABILITIES FROM COMPENSATION CLAIMS... 2 CHAPTER 3: UNDERLYING DSA ASSUMPTIONS MACROECONOMIC ASSUMPTIONS BASELINE ASSUMPTIONS DOMESTIC DEBT ASSUMPTIONS SCENARIO I: BASELINE (REPORTED AND OTHER DEBTS) SCENARIO II: ALTERNATIVE SCENARIO NEW FINANCING ASSUMPTIONS i

3 3.3.1 BASELINE SCENARIO: CONCESSIONAL BORROWING AND LIMITED NON-CONCESSIONAL SOVEREIGN BOND SCENARIO CHAPTER 4: ANALYSIS OF DSA RESULTS DRIVERS OF PUBLIC DEBT ACCUMULATION EXTERNAL AND FISCAL DEBT SUSTAINABILITY ANALYSIS BASELINE DEBT SUSTAINABILITY USING DISCOUNT RATE OF 5% ANALYSIS OF ALTERNATIVE SCENARIOS SUSTAINABILITY OF NATIONAL EXTERNAL DEBT SENSITIVITY OF TOTAL DEBT BURDEN INDICATORS TO MACRO-FISCAL SHOCKS ANALYSIS OF SOVEREIGN BOND SCENARIO... 3 CHAPTER 5: POLICY RECOMMENDATIONS ANNEX ii

4 LIST OF TABLES, FIGURES AND CHARTS List of Tables Table 1: Current Account Table 2.7: Remaining Years to Maturities Table 4.1: Summary of Baseline Projected Indicator Table 1a: Terms and Conditions for Borrowing from Creditors..3 Table 2a: Tanzania Sensitivity Analysis for Key Indicators by Public Debt Table 3a: Tanzania Public Sectors Debt Sustainability Framework Baseline Scenario List of Figures Figure 1.1: Actual and Projected GDP....3 Figure 1.2: Revenue and Grants Figure 2.1: National Debt and Debt to GDP Ratio...8 Figure 2.2: Trend in Public Sector Debt and Ratio to GDP....9 Figure 2.3: Composition of Public Sector Debt...9 Figure 2.4: External Public Debt (DOD)..1 Figure 2.5: External Debt Stock by Creditor Category Figure 2.6: Actual Debt Service Figure 2.7: Disbursed Outstanding Debt by Remaining Maturities...13 Figure 2.8: Disbursement of Loan and Grant Figure 4.1: Contributions to Changes in Tanzania s Public Debt...24 Figure 4.2: Composition of Public Debt DSA Under the Baseline Scenario. 25 Figure 4.3: Present Value of Debt to GDP Under Baseline and Alternative Scenario...26 Figure 4.4: Present Value of Debt to Exports Under Baseline and Alternative Scenario..26 Figure 4.5: Comparison of DSA Results under Alternative Macroeconomic Scenario...27 Figure 4.6: Debt Service to Revenue Ratio.. 28 List of Charts Chart 1.1: Performance of Selected Exports of Goods and Services.5 Chart 2.1: Disbursed Outstanding Debt by Creditor Category. 11 Chart 2.2: Disbursed Outstanding Debt by Currency..12 Chart 2.3: Interest Rate Structure Chart 2.4: Evolution of Domestic Debt Stock 15 Chart 2.5: Domestic Debt by Instrument...15 Chart 2.6: Domestic Debt by Holder Category.16 Chart 2.7: Composition of Government Contingent Liabilities. 18 Chart 2.8: Composition of Actual Liabilities 19 Chart 2.9: Percentage Share of Borrowing from Different Sources..23 iii

5 ACRONYMS AND ABBREVIATIONS ADF AfDB AUA BoT ACGEN BRN NDF DoD CPIA DCF DSA DSF DARTS ECA FYDP GBS GDP HIPCs IBRD IDA IMF JAST LAPF LDCs LIC MDAs MDRI MEFMI MKUKUTA MKUZA MoF NPV NSSF PC PPG PPL PPP PSPF PV PVD PVDS SAGCOT SDR TZS USD UTT African Development Facility African Development Bank African Units of Account Bank of Tanzania Account General Big Results Now Net Domestic Financing Disbursed Outstanding Debt Country Policy and Institutional Assessment Development Cooperation Framework Debt Sustainability Analysis Debt Sustainability Framework Dar es Salaam Bus Rapid Transit Export Credit Agency Five Year Development Plan General Budget Support Gross Domestic Product Highly Indebted Poor Countries International Bank for Reconstruction and Development International Development Assistance International Monetary Fund Joint Assistance Strategy Local Government Authorities Pensions Fund Least Developed Countries Low Income Countries Ministry Department and Agencies Multilateral Debt Relief Initiative Macroeconomic and Financial Management Institute of Eastern and Southern Africa Mkakati wa Kukuza Uchumi na Kupunguza Umaskini Tanzania Mkakati wa Kukuza Uchumi Zanzibar Ministry of Finance Net Present Value National Social Security Fund Paris Club Public and Publicly-Guaranteed Pensions Properties Limited Public-Private Partnership Public Service Pensions Fund Present Value Present Value of Debt Present Value of Debt Service Southern Agricultural Corridor of Tanzania Special Drawing Right Tanzanian Shilling United States Dollar Unit Trust of Tanzania iv

6 EXECUTIVE SUMMARY The Government of Tanzania has conducted a Debt Sustainability Analysis (DSA) with the assistance of Macroeconomic and Financial Management Institute of Southern and Eastern Africa (MEFMI). The purpose of the DSA was to assess whether Tanzania s debt burden indicators, in particular the level and trajectory of the debt-to-gdp ratio, would remain at or below levels consistent with an acceptably low risk of debt distress and with preserving growth at a satisfactory level. The assessment was critical to determine the sustainable borrowing requirement consistent with the need to ensure long term growth prospects of the economy and guard against the risk that debt may become unsustainable. Macroeconomic assumptions in this analysis envisage higher GDP growth due to continuing implementation of the Five Year Development Plan, introduction of the Big Results Now Programme and economic returns expected from exploration and utilization of natural gas. Going forward, GDP growth is projected to increase to 7. percent in 213 and progress upwards to 8 percent by 218. It is projected to remain at that level until 233. Based on the macroeconomic assumptions, the debt sustainability analysis results indicate that Tanzania s debt remains sustainable. The debt burden indicators do not breach their relevant thresholds under both the baseline and alternative scenarios. As such, Tanzania s risk of debt distress remains low. It is worthy to note that analysis of domestic debt was carried out basing on current domestic debt and actual liabilities arising from issuance of guarantees to MDAs and Government employees contributions to PSPF and LAPF. By including all outstanding public debt including actualized contingent liabilities, the DSA results show a substantial increase in the public debt to GDP ratio. The impact would also be much larger in the event that further contingent liabilities continue to materialize. This underscores the need for the Government to recognize outstanding liabilities, provide funds for servicing these liabilities and managing any potential contingent liabilities arising Government guarantees to public entities. Tanzania as other developing countries is highly susceptible to shocks on macro-fiscal variables which can worsen debt dynamics. The results, however shows that Tanzania s debt portfolio remains sustainable following shocks on growth, interest rate, and exchange rate under the baseline and alternative scenarios. The alternative scenario of lower growth and high deficit projected in the 213/14 financial year to finance the pipeline project shows that Tanzania remains sustainable under the historical and baseline scenario. However, the country would become unsustainable if the projected high deficit policy (8 percent of GDP primary balance) is continued into the future. v

7 CHAPTER 1: INTRODUCTION 1.1 Background 1 Pursuant to the Government Loans, Guarantees and Grant Act 1974 as amended in 24, Regulation (38)(d) the Government of the United Republic of Tanzania is required to conduct annual Debt Sustainability Analysis (DSA) which will among other things indicate trend of various debt sustainability indicators including narration of economic situation in different scenarios for debt sustainability and recommend measures for maintaining sustainable level of debt. 2 The methodology of the DSA involved assessing the realism of the required financing by comparing it with the financing maintained by the country in the past. In addition, the assessment involved analyzing the evolution and main drivers of public debt in Tanzania including the size of the unexplained variations in the stock of public debt. Risks associated with particular types of financing (for example foreign currencydenominated, short-term, and domestically-issued debt) and potential bunching of maturities should be discussed. The assessment also involved analyzing debt sustainability concerns emanating from increasing contingent liabilities, which have the potential of exacerbating the so-called hidden deficits increases in public debt that are not explained by headline fiscal balances. 3 The annual DSA exercise is an inter-institutional activity comprising members from the Ministry of Finance (MOF), President s Office Planning Commission (POPC) and Bank of Tanzania (BOT). 1.2 Objective of the DSA 213 The general objective for the 213 DSA is to prepare analytical output for revising of the National Debt Strategy for Tanzania as well as amending the Government Loans, Guarantees and Grants Act of 1974 as amended in 24. DSA 213 Key Areas of Focus The 213 DSA analytical process comprised the following key areas of focus: (i). Produce and prepare debt data for input into the Debt Sustainability Framework Tool (historical data for the past 1 years and projection of up to 4 years); (ii). Review and update the status of Government Guarantees and contingent liabilities; 1

8 (iii). (iv). (v). (vi). (vii). (viii). (ix). Review sources of domestic financing and new external borrowing including External Non concessional borrowing to meet government financing needs; Review alternative macroeconomic scenarios, including 2-year budget, balance of payments and GDP projections; Analyze the macroeconomic scenarios, and their effects on debt sustainability including the prospective Gas Economy; Update National Debts Strategy as well as formulation of National Debt Policy; Produce DSA report and recommendations for new borrowing to be presented to senior policymakers and parliament; Prepare DSA report for internal use and share the same with IMF during IMF/World Bank and other Development Partners; and Incorporate DSA output in the Draft National Debt Strategy (NDS). 1.3 Macroeconomic Performance GDP Growth 4 The trend of growth indicates that for the past 1 years, (23 212) there has been mixed growth in real GDP with an average 7.%. The outturn of GDP growth for 212 was 6.9%, compared to 6.4% in 211. The strong performance was reflected in communication (2.6 percent), financial intermediation (13.2 percent), manufacturing (8.2 percent), and construction (7.8 percent). The strong performance was attributed to: improved transport and communication infrastructures, industrial production and agricultural sectors. 5 The growth of Electricity and Gas sub activity picked up to 6. percent in 212 compared to 1.5 percent in 211 largely due to increase in electricity generation, particularly from thermal and gas sources. Electricity and gas sub economic activity account for about 2% to total GDP. The national grid is the mainstay of power transmission in the country but it still has limited coverage. Only about 21% of the household have access to electricity and the demand for electricity is high, outpacing Tanzania s capacity to generate power. 2

9 1.3.2 GDP Outlook 6 Economic performance in 213 will continue to be on upward trend owing to improved and stabilized power supply and implementation of economic policies under the FYDP1. Other strategies/policies to be implemented to support the growth in the medium term include Agriculture Sector Development Plan, Big Results Now, MKUKUTA II, Southern Agricultural Corridor of Tanzania (SAGCOT), Special Economic Zones; and infrastructure development (Dar es Salaam Rapid Transport System, roads, railways, and ports). Based on those assumptions, GDP growth is projected to increase to 7. percent in 213 and progress upwards to 8 percent by 218. It is projected to remain at that level until 233. Figure 1.1: Actual and Projected GDP (22/3-232/33) Source: Ministry of Finance 1.4 Inflation 7 Annual average inflation for 212 was 16.% compared to 12.7% in 211 mainly associated with higher oil prices in the world market and food prices. Food is the main contributor to the movement of CPI, accounting for 47.8 percent of the total CPI basket in Tanzania, followed by transport (9.5 percent) and energy (9.2 percent.) Entailing that food prices, fuel prices and energy have very significant in influencing inflation trend. Inflation took a downward trend from January 212 due to measures taken by the 3

10 Government. Headline inflation which used to be double digit slowed down continuously from a peak of 19.8% in December 211 to single digit of 7.6 % in June 213, (against the target of 9.5% for the period) and further down to 6.7% August Inflation Outlook 8 Several factors point in the direction of easing inflationary pressures in the near future. Reduction in the production costs due to stability in power supply; Improved food supply/production in neighboring countries; Prudent fiscal and monetary policies; Continued stability of the shilling against US Dollar; Global consumer price inflation is projected to decline according to IMF World Economic Outlook Report of July 213; and Continued stability in the world market oil prices; (WEO July 213). 9 Based on these factors, the headline inflation is projected to converge to mediumterm goal of 6. percent by June Exports of Goods and Services 1 The year ending June 213, has experienced good performance in exports of traditional cash crops, manufactured goods as well as receipts from travel and transportation services. This development led to an increase in exports of goods and services by 3.1 percent while imports declined by.6 percent. As a result, the current account deficit narrowed by 3.4 percent to USD 4,12.5 million compared to a deficit of USD 4,267.2 million recorded during the year ending June The value of exports of goods and services was USD 8,35.4 million during the year ending June 213, up by USD 25.3 million when compared to the amount recorded during the year ending June 212. The increase came from exports of traditional goods; manufactured goods travel receipts and transportation receipts. 4

11 , , ,493. 1, , , , , ,288.2 Chart 1.1: Performance of Selected Exports of Goods and Services 29/1 21/11 211/12 212/13 Gold Travel Manufactured Goods Traditional Exports Source: Bank of Tanzania and Tanzania Revenue Authority 12 The value of traditional exports maintained an upward trend since 21 and increased by 4.5 percent to USD million in the year ending June 213, compared with USD million recorded in the preceding year. This increase was largely driven by export volumes of coffee and cotton g unit export prices recorded a decline for most of the crops. The increased volumes are attributed to good weather in growing areas coupled with good price developments in the preceding years. 13 On the contrary, the value of non-traditional exports amounted to USD 3,855.4 million, a decline of 4.9 percent compared with the USD 4,52. million recorded a year earlier. The decline was notable in the value of gold, which fell by USD 42.7 million to USD 1,885.5 million. The service receipts increased by 15.3 percent to USD 2,928.8 million compared with the amount recorded in the preceding year, mainly driven by travel and transportation that accounted for over 8 percent of total service receipts. Travel receipts increased by 12.1 percent to USD 1,751.5 million, owing to an increase in tourist arrivals by 26 percent to 1,148,37 from 99,258 tourists recorded in the preceding year. 1.6 Import of Goods and Services 14 In the year ending June 213, the value of import of goods and services decreased to USD 12,871.7 million compared with USD 12,952.3 million recorded in the corresponding period last year. Much of the decrease was observed in imports of machinery, fertilizers, industrial raw materials and consumer goods. On the other hand, 5

12 the value of oil imports rose by 9.4 percent to USD 3,922.8 million in the year under review compared to the value recorded in the year ending June 212. Service payments also increased by 2.2 percent to USD 2,389.8 million in the year ending June 213, compared to an increase of 17.8 percent in the preceding year consistent with a slowdown in the rate of expansion of imports of goods and services. Table 1: Current Account Items 28/9 29/1 21/11 211/12 212/13p % Change Goods Account (net) -2, , , ,52.6-5, Exports , , Imports , , Services Account (net) Receipts , , Payments , , Goods and services (net) , , Exports of goods and services ,55.1 8, Imports of goods and services , , Income Account (net) Receipts Payments Current Transfers (net) Inflows , o/w General Government Outflows Current Account Balance -2, , , , , Source: Bank of Tanzania and Tanzania Revenue Authority 1.7 Government Finance 15 Strong performance has been recorded in domestic revenue collection largely attributed to improvements in tax administration. However, revenue collection in the past three years has fallen short of estimates and far below the required Government expenditure financing. But in general terms, domestic revenue has been increasing at lower pace compared to an increase of the Government expenditure and consequently widening of the resource gap (fiscal deficit). 6

13 Figure 1.2: Revenue and Grants Source: Ministry of Finance and Tanzania Revenue Authority 16 The generic measures of closing the gap have been grants, domestic borrowing and external concessional and non-concessional borrowing. Each source has its repercussion in terms of accessibility and conditionalities as follows: Grants and concessional loans are not predictable; Domestic borrowing is tied with a cap of 1% of GDP taking into account the absorption capacity of domestic capital market and crowding out private investment; and External non-concessional borrowing has high borrowing costs and short maturities. 7

14 23/4 24/5 25/6 26/7 27/8 28/9 29/1 21/11 211/12 212/ Overview of National Debt CHAPTER 2: DEBT PORTFOLIO REVIEW 17 Tanzania s debt stock, at the end of June 213 reached USD 17,69.5 million, an increase of 25.1 percent and 4.6 percent from the amount recorded at the end of corresponding period in 212 and 211. The increase was mainly on account of new disbursements, accumulation of arrears for the few Paris and non Paris Club creditors and new issuance of domestic debt instruments. The ratio of national debt to GDP, in nominal terms, was 57. percent which comprises of public and private sector debt to GDP of 47.1 percent and 9.9 percent, respectively (Chart 2.1). However, in Present Value (PV) terms debt to GDP ratio is 24.8 percent below the DSA threshold of 5 percent and PV of debt to export ratio is 93.8 below the DSA threshold of 2. In addition, debt service to exports ratio is 3.3 percent below the DSA threshold of 25 percent reflecting the ability of the Government to service debt. 18 Out of national debt stock, external debt amounted to USD 13,281.4 million while domestic debt was USD 4,49.1 million (TZS 7,66.4 billion) representing 75. percent and 25. percent of national debt stock respectively. Figure 2.1: National Debt and Debt-to-GDP Ratio External Debt Stock Domestic Debt Debt-to-GDP Source: Ministry of Finance and Bank of Tanzania 19 The analysis of borrower category indicates that the larger portion of debt amounting to USD 14,624.9 million as at June 213 falls under public sector compared to USD 11,343.9 million at the end of June 212. Notwithstanding the increase of public 8

15 23/4 24/5 25/6 26/7 27/8 28/9 29/1 21/11 211/12 212/ /4 24/5 25/6 26/7 27/8 28/9 29/1 21/11 211/12 212/13 sector debt, the ratio of public debt-to-gdp has remained stable due to relatively high economic growth and lower borrowing costs (real interest rate) from concessional sources (Chart 2.2). Figure 2.2: Trend in Public Sector Debt and Ratio to GDP Public External Debt Domestic Debt Public Debt/GDP The profile of public debt by source shows that external debt was USD 1,215.9 million equivalent to 32.9 percent of GDP. The composition between external and domestic debt, expressed in USD, remained stable despite the relatively high growth in domestic debt due to depreciation of local currency which has led to a decline in the proportion of domestic debt in US dollar terms (Chart 2.3). Figure2.3: Composition Public Sector Debt External Debt Domestic Debt 9

16 2.2 External Public Debt 21 The stock of External Public Debt at the end of June 213 stood at USD 9,761.1 million equivalent to 31 percent of GDP. Out of the external debt, Disbursed Outstanding Debt (DOD) was USD 8,993.6 million (91.5 percent) while interest arrears totaled to USD million (8.5 percent) of the debt stock. As at end of June 213, the disbursed outstanding external debt (DOD) increased by 68 percent as compared to USD 5,363. million at the end of June 24 and USD 7,14.8 million at the end of June 212. The trend shows that external debt has emanated from public sector borrowing. Figure 2.4: External Public Debt (DOD) Source: Ministry of Finance, ACGEN Public Outstanding External Debt by Borrower and Creditor Category The profile of disbursed outstanding debt by borrower category indicates that as at 3th June 213, the Central Government debt accounted for 85 percent while private sector debt 15 percent of the total external DOD. The profile of disbursed outstanding debt by creditor category shows that as at the end of June, 213 multilateral creditors lead by USD 5,848.8 million (65 percent of the total DOD), followed by commercial/export credit USD 2,16.8 million (24 percent of the total DOD) and bilateral creditors USD 1,2.1 million (11 percent of the total DOD. Commercial debt increased by USD 1,378.4 million (189 percent) from June 212 to June 213 due to Government borrowing from commercial sources. Multilateral debt increased by USD million (13 percent) while bilateral decreased by USD 8.2 million (.8 percent). 1

17 Chart 2.1: Disbursed Outstanding Debt by Creditor Category Comme rcial 24% Private 15% Bilatera l 11% Multilat eral 65% Central Govern ment 85% Figure 2.5: External Debt Stock by Creditor Category Source: Ministry of Finance Disbursed Outstanding Debt by Currency Composition As at 3 th June 213, the currency composition of outstanding external debt indicates that Special Drawing Right (SDR) is a dominant currency accounting for 52 percent of the total external debt, followed by USD at 23 percent, African Units of Account (AUA) at 11 percent, Chinese Yuan (CYN) at 5 percent, EURO at 4 percent Japanese Yen (JPY) at 3 percent and other currencies at 2 percent. The dominance of SDR in total external debt 11

18 exposes the Government to exchange rate risk as the actual repayment is made in USD for SDR dominated debt and in USD, EURO or YEN for AUA dominated debt. Chart 2.2: Disbursed Outstanding Debt by Currency Other 2% CNY 5% EUR 4% JPY 3% USD 23% AUA 11% SDR 52% Source: Ministry of Finance Actual External Debt Services Public external debt service for the year ending June, 213 amounted to USD million, equivalent to 1 percent of export of goods and services, out of which, USD 55.5 million was principal repayments and USD 64.5 million was interest payment. When compared with the actual debt service paid for the year ending June 212. This amount indicates an increase of 23 percent, when compared to amount paid in the corresponding year ending June 212. The increase is attributed to the Government borrowing from commercial sources in which the grace period offered is shorter at 2 years to 3 years and variable interest rate of 4 percent to 6 percent compared grace period of 1 years and fixed interest rate of.75 percent offered by multilateral creditors (IDA and ADF). Actual debt service by creditor categories indicates that debt paid to commercial creditors increased by 116 percent while that paid to bilateral creditors increased only by 6 percent and decreased by 12 percent respectively during the year ending June 213. Figure 2.5 below shows the trend of the actual debt services paid from June 24 to June

19 Figure 2.6: Actual Debt Service Source: Ministry of Finance Disbursed Outstanding Debt by Remaining Maturities Analysis of the disbursed Outstanding Debt by remaining maturity shows that large portion of debt outstanding as at June 3, 213 will mature after ten years. This is due to the fact that larger proportion of external debt is dominated by multilateral creditors (IDA and ADF) with grace period of 1 years and maturity of 4 to 5 years. Figure 2.7: Disbursed Outstanding Debt by Remaining Maturities Source: Ministry of Finance 13

20 2.2.5 Disbursed Outstanding Debt by Interest type As at the end of June 213, 66 percent of the Tanzania outstanding debt was in fixed interest rate debt with weighted average yield of.69 percent while the remaining 34 percent was floating interest rate with weighted average yield of 2.8 percent. When compared with disbursed outstanding debt recorded in June 211, share of floating rate has continued to increase to 3 percent while fixed rate was 7 percent. It is expected that portion of existing debt portfolio with floating rate will continue to grow due to the non-concessional borrowing. Chart 2.3: Interest Rate Structure 2.3 Domestic Debt 22 Public Domestic debt comprises marketable securities, non-marketable securities, and other debts. Marketable securities consist of Treasury bills (35, 91, 182, 364-days) and Treasury bonds (2, 5, 7 and 1-years), whereas non-marketable securities comprise special bonds and stocks. Unsecuritized debt comprises liabilities arising from guarantees issued to Ministries, Departments and Agencies, and guarantee issued to public corporations, suppliers arrears and liabilities arising from contractual and non contractual government obligations. 23 Total public domestic debt stock as at end of June 213 stood at TZS 9,345.7 billion compared to TZS 6,588.4 billion and TZS 4,937.8 billion recorded at the end of June 211 and June 212 respectively. Lower Government revenues coupled with high infrastructure expenditure and inclusion of unsecuritized debt (guarantees to MDAs) explain the rapid growth of the domestic debt stock. However, the ratio of total public domestic debt to GDP (at market prices) has consistently been lower than 2 percent for 14

21 the past 1 years. Out of total public domestic debt stock, Government securities amounted to TZS 7,56.9 billion and TZS 2,288.8 billion were unsecuritized debts. Chart2.4: Evolution of Domestic Debt Stock Source: Ministry of Finance and Bank of Tanzania Public Domestic Debt by Instrument 24 Analysis of domestic debt (marketable and non marketable debts) by instrument as at end of June 213 indicates that long term debt including bonds and stock and unsecuritized debt accounted for 72 percent of the total debt stock. This analysis coincides with domestic debt strategies which emphasizes on minimizing rollover risks associated with issuance of short term debt by lengthening maturity profile of Government securities through issuance of long term debt. Chart 2.5: Domestic Debt by Instrument Source: Ministry of Finance and Bank of Tanzania 15

22 2.3.2 Domestic Debt by Holder Category 25 The Tanzania s domestic debt market is still underdeveloped and it is dominated by few participants led by commercial banks holding 48 percent of securitized debt. The relatively low risk in Government securities as compared to lending to the private sector explains the dominance of commercial banks in the securities market. This has also been exacerbated by the fast expansion of the banking sector. Bank of Tanzania ranked the second by holding 28 percent of all securitized debt followed by pension funds with 16 percent (Chart 2.11). Chart 2.6: Domestic Debt by Holder Category Source: Ministry of Finance and Bank of Tanzania Maturity Structure of Government Domestic Debt Arising from Government Securities 26 The analysis of the maturity structure of domestic debt indicates that, instruments maturing in less than 1 year account for 35 percent of the outstanding amount while 38.4 percent will mature within 1 to 5 years. The analysis also indicates that 24.4 percent of the outstanding amount will mature within 5 to 1 years, and 2.2 percent after 1 years. Table 2.7: Remaining years to Maturities Remaining Years to Maturities Amount in TZS Billions Percentage to >1 to >3 to >5 to Over

23 2.4 New Financing Analysis 27 Mobilization of external resources is guided by principles of the successor strategy of the Joint Assistance Strategy (JAST) which is Development Cooperation Framework (DCF) to implement Five Year Development Plan, National Strategy for Growth and Reduction of Poverty MKUKUTA II and MKUZA II, the Five Year Development Plan as well as MKUZA II IP. 28 The Government recognizes the significance of external resources in particular newly introduced aid modality known as aid for trade in supporting development programmes despite the challenges caused by lack of its predictability Domestic Borrowing 29 The Government also borrows from domestic source to finance infrastructure projects. Besides this, the Government under Policy Support Instrument arrangement can borrow domestically up to 1% of GDP without adversely affecting economy by crowding out private sector s investment External Borrowing Grants from Donors, Concessional Loans from Multilateral and Bilateral Institutions and Development Partners 3 Other identified source of financing is grants and concessional loans from development partners. This source also has its own challenges due to the fact that pledged amount are not enough and predictable because most of traditional donors are facing economic difficulties in their countries. Therefore, disbursement of pledges is declining. In recent past, the window for concessional finance has been limited and less predictable. 17

24 Figure 2.8: Disbursement of Loan and grant in TZS from Source: Ministry of Finance Semi-concessional Borrowing from Emerging Creditors 31 The Government is expecting to borrow from emerging economies such as China and India to finance development projects. This kind of borrowing has been one of key sources of funding in Tanzania Non-concessional Borrowing 32 The Government is planning to borrow from non-concessional sources to finance strategic projects. The main identified sources of non-concessional borrowing include issuing sovereign bond from International market, borrowing in form of syndicated loans and export credit loans. 2.5 Government Contingent and Actual Liabilities Government Contingent 33 The magnitude of the contingent liabilities (Government exposure) as at June, 213 stood at TZS trillion. Out of this, TZS 2.82 trillion are unpaid Government Employees Contributions from PSPF, TZS billion from Parastatal Organizations and TZS billion from Credit Guarantee Schemes. 18

25 Chart 2.7: Composition of Government Contingent Liabilities Government Actual Liabilities 34 Government actual liabilities include liabilities arising from Guarantees issued to pension funds in favour of MDAs for implementing various projects; liabilities arising from Government employees contributions to PSPF and LAPF; and liabilities from compensation claims. As of end June, 213 size of the total Government actual liabilities is TZS trillion. Chart 2.8: Composition of Actual Liabilities Liabilities from Guarantees issued to Pension Funds in favour of MDAs for Implementing Various Projects 35 Overtime, Government has experienced remarkable increased demand for issuance of guarantees in favour of the MDAs which enabled those institutions to obtain credit facilities mainly from pension funds to implement projects which were not funded within budget framework. The major pension funds are Public Service Pensions Fund (PSPF), Parastatal Pensions Fund (PPF), National Social Security Fund (NSSF), Pensions 19

26 Properties Limited (PPL), National Health Insurance Fund (NHIF) and the Local Government Authorities Pensions Fund (LAPF) Liabilities from Government Employees Contributions to PSPF and LAPF 36 The outstanding Government s contributions to PSPF and LAPF in respect of the pension benefit paid to the Central and Local Government s employees is another source of explicitly liability to the Government. The actuarial valuation conducted in 21 revealed that the outstanding liability to the Government as claims of the unpaid Government employees contributions to the PSPF was TZS 4.4 trillion. Out of this, TZS 1.22 trillion was verified as actual liability and TZS 6. billion was paid by the Government while TZS 2.82 trillion is unverified amount. 37 On the other hand, the actuarial valuation which was conducted in 26 revealed that the outstanding liability to the Government as claims of the unpaid Government employees contributions to the LAPF was TZS billion. Out of this, TZS billion was paid by the Government while the outstanding balance is TZS Liabilities from Compensation Claims 38 Liabilities arising from Compensation Claims emanate mainly from court orders. In the past, some Parastatal organizations could not honour their debt obligations forcing the creditors and claimants to pursue repayments through the courts. As of 3th June, 213 liabilities resulting from these claims amount to TZS. 79,832,13,

27 CHAPTER 3: UNDERLYING DSA ASSUMPTIONS 39 To analyze sustainability of the national debt, a set of assumptions were generated for macroeconomic performance, new external and domestic financing. Two scenarios baseline and alternative were developed to analyze debt sustainability. 3.1 Macroeconomic Assumptions Baseline Assumptions 4 The GDP projection was based on the following assumptions: (i). Historical trend of real GDP which has been growing at an annual average of above 7. percent in the last decade (ii). The world economic outlook has recovered (iii). Favorable weather condition (iv). Improved power supply and gas economy (v). The assumption of successful implementation of economic policies/strategies. Among strategies/policies to be implemented in the medium term include Five Year Development Plan, Big Results Now, Southern Agricultural Corridor of Tanzania, MKUKUTA II, and infrastructure development (DARTS, roads, railway, energy, and ports). b) Inflation is expected to remain single digit in the medium term owing to the prudent fiscal and monetary policies as well as favourable weather conditions and improved transport services. c) Increasing efficiency in revenue administration and further widening of the tax base have been assumed, which gradually improves revenue collection from 17.4 percent in 212/13 to an average of 2. percent in the medium term. Subsequently stabilizes at an average of 21. percent for the rest of the projection period. d) Expenditure as a percentage of GDP decreases from 26.1 percent in 212/13 to an average of 25.8 percent in the medium term thereafter increases slightly to an average of 27. percent. This is in line with the anticipated proceeds. In addition, the composition of Government outlays is expected to evolve in favor of capital expenditure. e) The ratio of fiscal deficit-to-gdp ratio is projected to drop from an average of 5. percent in the medium term to an average of 3. percent beyond 214/15. f) Exports of goods and services are projected to increase throughout the forecasted period to an average of 27 percent of GDP for the period of 213/14 to 232/33. 21

28 Likewise, imports of goods and services projected at an average of 38 percent of GDP for the period of 213/14 to 232/33. g) While exports will increase in tandem with improvements in manufacturing sector on an account of stability of power supply, the ratio of imports as percentage of GDP is expected to slow down in line with the discovery of natural gas and slow down projection in the World Economic Outlook commodity prices (WEO, July, 213). h) Foreign Direct Investment is projected at an average of 6.5 percent to GDP in line with the discovery of natural gas in the economy. i) Keeping grants as a ratio to GDP constant in an effort to reduce donor dependency j) Maintain domestic borrowing (NDF) at 1% of GDP in the medium term and slow it down in the long run to be in line with the projected fiscal deficit and strategies for developing domestic market. k) Expenditure in the medium term will increase gradually consistent with the availability of resources including proceeds from gas, but is projected to remain constant. 3.2 Domestic Debt Assumptions Scenario I: Baseline (Reported and Other Debts) i. Net domestic financing is limited to 1 percent of GDP ii. All debt instruments will be rolled over on maturity. iii. Short term instruments will continue to be used for liquidity management. iv. Long term instruments will continue to be used for financing and market development purposes. v. Maturing special bonds and stocks will be financed by the issuance of 7 and 1 year bonds. vi. Interest payment will be met from the government revenue. vii. Other debts will be paid according to the repayment schedule. viii. Supplier s credit will be paid in four years Scenario II: Alternative Scenario i. All Contingent liabilities were included as part of the new domestic debt. ii. All assumptions under baseline scenario were maintained. iii. Principal and interest payments of contingent liabilities were projected to be paid in three years using Government revenue. 22

29 3.3 New Financing Assumptions The concessional and semi concessional borrowing will decline over time. Gradually increase of commercial borrowing due to decreasing of concessional loans. Chart3.1: Percentage Share of Borrowing from Different Sources Baseline Scenario: Concessional Borrowing and Limited Non-concessional 41 The rationale of highly concessional borrowing in new financing is to utilize concession borrowing from both DAC and non DAC donors. The projection of external new financing (grant and loans) under this scenario is based on the historical trends and accommodation of non-concessional ceiling available under PSI Sovereign Bond Scenario 42 This scenario assumes that all non-concessional borrowing in year 214/15 will be done through issuance of sovereign bond from international capital markets. Summary of the lending terms from various creditors is provided in Annex 1. 23

30 CHAPTER 4: ANALYSIS OF DSA RESULTS 4.1 Drivers of Public Debt Accumulation 43 Analysis of the drivers of public debt shows that the residual or the stock-flow adjustments have contributed significantly to the rise in Tanzania s public debt over the years. The stock-flow residuals averaged 9.3 percent of GDP between year 24 and 213. The decomposition of annual change in gross public debt shows the following contributing factors: i. Debt relief from HIPC and MDRI between 24-27; ii. iii. iv. In 213 contingent liabilities accounted for 2.7 percent of the changes in the gross public debt to GDP which is quite substantial reflecting the adjustments for realization of implicit and explicit contingent liabilities; The primary fiscal deficit also made a sizable contribution to the increase in the public debt ratio; and The interest-growth differential was however, considerably negative reflecting the presence of concessional loans in Tanzania s public debt stock which helped to slowdown the rate of public debt accumulation. Figure 4.1: Contributions to Changes in Tanzania s Public Debt 4.2 External and Fiscal Debt Sustainability Analysis 44 Based on the 213 DSA results, Tanzania s debt indicators are expected to remain below thresholds. The projected new borrowing from both domestic and external sources to finance infrastructure investments in line with Five Year Development Plan 211/12-215/16 will increase debt sustainability indicators in the Medium without jeopardizing 24

31 long-term debt sustainability. Using prevailing discount rate of 3 percent in both scenarios, all debt indicators remained below their respective policy-dependent threshold levels throughout the projection period as shown in Table In the baseline scenario, some of external debt indicators are projected to rise in the medium term and thereafter will decline consistently throughout the projection period. PV of Debt-to GDP Ratio is projected to increase from 24.83% in 213 to 25.19% in 217 and decline to 12.4 in 233. PV of Debt-to-Exports ratio is projected to decline from 93.8% in 213 to 92.77% in 217 and decline further to 43.7%in 233. PV of Debtto-Revenue Ratio is also projected to decline from 121.2% in 213 to 117.4% in 217 and further to 54.36% in 233. On the other hand, Debt Service-to-Exports Ratio is projected to increase in the medium term from 3.34% in 213 to 5.89% in 217 and decline to 2.75% in 233 while Debt Service-to-Revenue ratio is also projected to increase from 4.32% in 213 to 7.44% in 217 and decline to 3.43% in 233. The increase in debt service ratios is explained by borrowing from non-concessional sources which have short grace and repayment period. 46 The results of the public DSA confirm that Tanzania debt dynamics are sustainable under baseline scenario despite of recent high borrowing from both domestic and external sources, including from non-concessional terms. Under the baseline scenario, PV of Public Debt-to-GDP Ratio is projected to decline from 35.58% in 213 to 35.1% in 217 and decline further to 2.21 in 233. PV of Public Debt-to-Revenue Ratio is projected to rise in the medium term from % in 213 to % in 217 and thereafter decline to 84.18% in 233. Debt Service-to-Revenue Ratio is also projected to increase in the medium term from 1.45% in 213 to 16.2% in 217 and decline to 7.44% in 233. Declining trend of public ratios suggest that Tanzania s risk of debt distress remains low even when taking into account Government borrowing from both domestic and external sources, including from non-concessional terms. Table 4.1: Summary of Baseline Projected Indicators for DSA 213 INDICATORS OF THE EXTERNAL DEBT Threshold PV of debt-to GDP ratio PV of debt-to-exports ratio PV of debt-to-revenue ratio Debt service-to-exports ratio Debt service-to-revenue ratio INDICATORS OF TOTAL PUBLIC DEBT PV of Debt-to-GDP Ratio PV of Debt-to-Revenue Ratio Debt Service-to-Revenue Ratio

32 4.3 Baseline Debt Sustainability Using Discount Rate of 5 Percent 47 After Tanzania DSA Team finalized DSA exercise, International Monetary Fund (IMF) through Press Release No. 13/48 of October 18, 213 approved Unification of Discount Rates to be used in External Debt Analysis for Low-Income Countries. The new unified discount rate is set at 5 percent. According to the IMF, the main reason for the new discount rate is due to the long period of low interest rates in the advanced economies which caused the discount rate used in DSAs to become a weak measure for discounting cash flows over the longer term. Estimates of the burden of debt service had been inflated, leading to an unjustifiable narrowing of the assessed borrowing space available to countries under the Debt Sustainability Framework for Low-Income Countries (LIC DSF). The complex system of discount rates used for computing the grant element of individual loans also gave rise to anomalies, while frequent updating of these rates created operational difficulties. With new unified discount rate difficulties experienced in recent past are expected to be resolved. 48 For the easy comparison of results of Tanzania DSA conducted by the Tanzania DSA Team and results of DSA conducted by other institutions such as IMF and the World Bank, separate baseline scenario was analysed using discount rate of 5 percent. The results show that ratios of DSA indicators improved further compared to the results of baseline scenario using prevailing discount rate of 3 percent as indicated in Table 4.2. Table 4.2: Summary of Baseline Projected Indicators for DSA 213 Using Discount Rate of 5 Percent INDICATORS OF THE EXTERNAL DEBT Threshold PV of debt-to GDP ratio PV of debt-to-exports ratio PV of debt-to-revenue ratio Debt service-to-exports ratio Debt service-to-revenue ratio INDICATORS OF TOTAL PUBLIC DEBT PV of Debt-to-GDP Ratio PV of Debt-to-Revenue Ratio Debt Service-to-Revenue Ratio

33 4.4 Analysis of Alternative scenarios 49 The analysis of total public debt was undertaken based on the current domestic debt (partial liabilities) and total liabilities1. The results show that public debt would remain sustainable under both scenarios. However, the country s public debt would increase somewhat if the contingent liabilities are taken into consideration. The impact would also be much larger in the event that further contingent liabilities continue to materialize. This underscores the need for Government to recognize its outstanding contingent liabilities in the budget for future payments. By including all outstanding public debt including actual contingent liabilities, the DSA results show a substantial increase in the public debt to GDP ratio. This, notwithstanding, the country public debt remains sustainable under both scenarios. Figure 4.2: Comparison of Public Debt DSA Results under Baseline Scenario 4.5 Sustainability of National External Debt 5 Based on the macroeconomic assumptions of envisaged higher growth from natural gas and higher borrowing for the gas pipeline project, the debt sustainability analysis results indicate that Tanzania s debt remains sustainable in the short, medium and long term. All debt burden indicators are below relevant thresholds under both the baseline and alternative scenarios. Therefore, Tanzania s risk of debt distress remains low. 1 Total liabilities include both current domestic debt and actual liabilities arising from issuance of guarantees to MDAs and Government employees contributions to PSPF and LAPF while partial liabilities include current domestic debt only. 27

34 Figure 4.3 below shows sustainability of national external debt using the present value of debt to GDP ratio under both the baseline and alternative scenarios. Figure 4.3: Present Value of Debt to GDP under Baseline and Alternative Scenario 6 b.pv of debt-to GDP ratio The results are the same using the debt to exports ratio as a sustainability indicator as shown Figure 4.4 below. Figure 4.4: Present Value of Debt to Exports under Baseline and Alternative scenario 25 c.pv of debt-to-exports ratio The above analysis notwithstanding, the outlook for debt sustainability greatly depends on the realization of the envisaged sustained solid growth rates, particularly from the natural gas prospects. Summary of projected indicators for external debt and total public debt are shown in Table

35 4.6 Sensitivity of Total Debt Burden Indicators to Macro-Fiscal Shocks 53 Tanzania as a commodity dependent country is highly susceptible to shocks on macro-fiscal variables which can worsen debt dynamics. The results however, show that the debt would remain sustainable following shocks on growth, interest rate, and exchange rate under the baseline scenario. 54 The alternative scenario of lower growth and high deficit projected in the 213/14 financial year, mainly to finance the gas pipeline project, also shows that the country would remain sustainable under the historical and baseline scenario. However, the country would become unsustainable if the projected high deficit policy (8% of GDP primary balance), is continued into the projected period. The stress tests results of unchanged primary balance indicate that the path of public debt would breach the applicable thresholds in the absence of sustained fiscal discipline. Figure 4.5: Comparison of DSA Results under Alternative Macroeconomic Scenario 55 The debt service under this scenario would reach 3 percent of revenue by 233. Although the projected deficit may be regarded as a temporary phenomenon, the results underscore the need for Authorities to ensure sustained fiscal discipline against the need for huge financing requirements for infrastructural development in the medium to long term. Figure 4.6: Debt Service to Revenue Ratio 29

36 56 Debt Sustainability Analysis (DSA) results show that Tanzania s debt distress rating remains low under the baseline scenario. The baseline projections and the standard stress tests show limited risk to public debt given that none of the indicators breach the thresholds. 4.7 Analysis of Sovereign Bond Scenario 57 This scenario was designed to show the effects of issuing USD 7 million Sovereign bond in the international capital markets in 214/15 while all assumptions under baseline scenario are maintained. The amount issued corresponds to the nonconcessional amount in the baseline new financing assumptions. The result to this scenario reveals that; due to Tanzania s highly sustainable ratios, the issuance of sovereign bond does not make liquidity indicators breach sustainable thresholds at any point during the period. However, a huge amount of funds required at the maturity to service the bond. This situation is shown by a hump in ten years down the line in the external debt service to exports and to government revenues graphs although sustainability is not affected. Figure 4.7: Impact of Issuance Sovereign Bond 3