Tuesday, 5 June 2012

Debt is not the Devil... Mismanagement of debt is.

By Alykhan V (Uhuru Blog)

As we await the arrival of the very late but much anticipated Tanzanian budget for the year 2012/13, let us focus on a recent trend that is grabbing all the headlines. The DEBT CRISIS! Tanzania's fiscal debt has been increasing at an alarming rate recently, doubling in 3 years from 2007 where it stood at $3.4 billion dollars to June 2010 the debt increased to $6.5 billion. The debt then took only 2 years to double again to June 2012 where it is expected to above $14 billion dollars! What this means is that the debt-to-GDP ratio of 50% has now been breached and although it may still be premature to panic, the ever widening budget deficit is a cause for concern.

So is debt bad all the time? Why is the central government borrowing money to finance its operations? Lets probe this matter more objectively before jumping to conclusions. Debt and borrowing is an important driver of growth and expansion not only for governments but also for corporations, small businesses and individuals. A housing loan is a good example of how borrowing may help in overcoming a shortage of capital. Someone who wants to buy a house but doesn't have millions lying around, can take a loan from a bank to purchase the house. Then, instead of paying rent to some landlord, he/she can re-pay the loan plus interest in monthly installments after which the house becomes his/hers. Corporations do the same when buying other smaller companies or investing in fixed assets. The whole point of taking on debt is to ensure that you get a return on investment that is sufficient to cover the debt plus whatever interest is charged. That is why taking on a loan to buy clothes, to pay salaries of workers or paying for a holiday is unsustainable. 

So it seems the matter is simple? The central government can take on more debt. But only if it invests the money wisely, and on projects that will boost income a few years down the line. That is why, taking on debt for infrastructure is the norm because this will ultimately boost the country's economy by attracting more investors etc. Once the government's income rises, it will be able to pay off its debt without worrying about default. Here is where Tanzania diverts from the debt model. On the graph below (click graph to zoom in), we can see that the increase in government borrowing is far greater than the increase in development expenditure (includes infrastructure spending etc) which is almost stagnant. Most of that debt increase has been used to finance recurrent expenditure and, just as a person using his credit card to buy more clothes while unsure of how he will pay for it, this is a dangerous game to play. Other payments such as interest on accumulated debt accounts for the remainder of the increase in government debt.


Source: CAG reports (2008/09-2011/12)
At this rate, financing government debt will become unsustainable and we must come up with a solution now to avoid a debt default. A debt default will come with its own host of problems such as reduced investor confidence in Tanzania and a further pull out of foreign direct investment as well as increase in inflation as the central bank tries to increase currency flows in the country. According to current estimates, public debt will be around $14 billion by June 2012, which means we will have crossed the Debt/GDP ratio of 50%. Research by Harvard economist Ken Rogoff has shown that above levels of 60% for developing economies, growth rate is slashed on average by 2%. We need a radical change in the way government raises funds for financing its operations or else we may be headed for a debt crises of our own.


2 comments:

  1. Great post bringing attention to the country's looming debt problem.

    If you don't mind my asking, from what source did you pull the data you gathered particularly the graph you post?

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  2. Thanks for your suppport! Our aim is to inform and involve all Tanzanians in discussing issues of national importance particularly the diaspora. I have been part of that group and have felt left out on numerous occasions.

    The source I used for the graph are Controller and Auditor (CAG) annual general reports. They are a good source of unbiased figures for government finances and the only such body that has access to govt finances for auditing. purposes.

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