Government of Tanzania Conducts Debt Sustainability Analysis

The government of Tanzania conducted its annual debt sustainability analysis (DSA) to assess the potential impact of scaling-up public investment plans on the country’s debt sustainability. Government plans to undertake sizeable public investment projects articulated in the country’s Second Five Year National Development Plan, to address infrastructure gaps and enhance output growth. To finance these public investment plans, government is considering various options including borrowing from domestic and non-concessional external sources.

Given the risks associated with non-concessional borrowing, policy choices involve several distinct crucial decisions on the mix of projects to undertake and the pace at which public investment should be increased. These considerations are crucial, since government should aim to achieve development goals while maintaining macroeconomic and debt sustainability.

As part of efforts to support the government’s endeavor to achieve development goals while minimizing the risk that the country experiences debt distress, MEFMI provided technical assistance in the DSA workshop held from 2 to 13 December 2019 at the Bank of Tanzania in Arusha. A MEFMI team, comprising Mr. Tiviniton Makuve, and Mr. Yasin Mayanja (Candidate Fellow from the Ministry of Finance, Planning and Economic Development of Uganda), facilitated at the workshop.  The DSA assessed the potential impact of prospective domestic and non-concessional external borrowing on the country’s debt sustainability. The main output of the exercise was a draft report that summarises the findings of the debt sustainability analysis and key messages for consideration by the authorities.

The findings of the DSA show that Tanzania’s public debt is sustainable, and the country remains at low risk of external debt distress. All debt burden indicators are projected to stabilise at levels consistent with low rollover risk under both the baseline (which assumes a gradual public investment scaling-up) and plausible stressed scenarios. The realism tools show that the level and trajectory of debt burden indicators are underpinned by realistic projections for primary balance adjustment. These findings are premised on continued strong economic growth performance in the medium to long term, as well as the efficiency and rate of return on public investment spending. Low public investment efficiency and along with absorptive capacity constraints can significantly discount the growth benefits of public investment.

While the overall risk of debt distress is low, results show that the country is vulnerable to export shocks. This underscores the need for sustained targeted efforts to expand the export base to reduce external vulnerability. Creating fiscal space for higher infrastructure investment is also important, as it helps to contain public debt surges and the associated repayment burden. In addition, government needs to prioritize development of the domestic debt market to enhance its capacity to meet some of the public-sector investment financing requirements. A well-functioning and liquid bond market provides the government with a stable source of funding at reasonable costs and desirable maturity, as well as reducing exposure to external financial shocks.

In 2020, MEFMI will work with the Government of Tanzania to build capacity to manage domestic debt and identify priority areas that must be addressed to support development of the government securities market.