MY notes follow the public discussion on Sunday 2nd of January, 2022, over a Zoom video teleconferencing that was all about Tanzania’s Borrowing Sustainability, which brought together a good number of scholars to air their views about this current burning issue.
Amongst them were Prof. Florence Luoga; Prof. Palamagamba Kabudi, Prof. Haji Semboja; and others based in the Diaspora. The show was moderated by Dr. Hezron Makundi.
I watched the show to the end. It followed a claim by the Speaker of National Assembly Job Ndugai that Tanzania’s public debt is unsustainable, the position that attracted mixed reactions.
During this discussion, it was like an agreed approach that they would be in support of the view that Tanzania’s debt is sustainable. I don’t intend to cast aspersions on the intellectual rigour of the panelists, my job here is to serve our economic management debates from political correctness at best and populist politics at worst.
The reaction to this scientific subject didn’t start with the famous Zoom discussion yesterday; in a quick rejoinder Peter Serukamba( former member of Parliament for Kigoma South) shared his position in favour of the government’s borrowing binge. Unfortunately, Serukamba’s response was a statement displaying utter lack of respect for Speaker and bordering on arrogance and sheer bankruptcy of analytical rigour.
Soon thereafter, Prof Florence Luoga ( BOT governor) in an interview with Clouds TV defended the sustainability argument on the ballooning public debt- although Prof. Luoga’s interview was based on generalities and is noticeably devoid of detailed, empirical or researched evidence worth quoting or mentioning.
The Zoom discussion about Accountability in Debt-Financed Strategic Projects and People’s Development was largely of the views which are laced here and there with half truths, generalities, superfluous political undertones, some times with diversions from the main issue of discussion. With the exception of Prof. Haji Semboja whose analysis vindicated why Tanzania should seriously worry about her debt, many of the the panelists were engulfed with LUXURY BELIEFS.
The luxury beliefs are ideas and opinions that confer status in the upper class which inflicting costs on the lower class. In modern political economy, luxury beliefs are the latest status symbol for the well to people in society. One of these beliefs in our Tanzania is that public debt is sustainable.
So, what is it about this luxury belief that our technocrats keep using?
I give intense facts on a number of issues surrounding the subject of debt sustainability in line with accountability on project financing in strategic areas of the economy in Tanzania. In so doing, I tackle some of the half-truths, myths, digressions, irrelevancies in the panelists’ arguments.
For starters, country incurs two types of debt, which are, the internal debt and the external debt owed by all of us to some of us ; it is the sum of(unpaid) past and current government domestic borrowing.
The domestic borrowing is affected through issuance of treasury bills, government bonds, treasury notes and other financial papers issued by Government. Government Revenue(RG) consists of net returns on government investment, direct and indirect net tax collections, revenue from fines, rates and other non-tax sources and grants or net transfers from the rest of the world.
This revenue is always collected continuously through out the year, and the amount collected varies from month to month; hence in a given month, the revenue collected may fall short of, equal to, of exceed government expenditure(EG) during that month.
So, even if the government balances its budget over the year(EG= RG), it has to borrow to meet the various revenue shortfalls during certain parts of the year. The internal debt occurs if government does not have adequate revenue to repay its debts during a year, or if the government decides to live beyond its means. According to Prof. Mukwanason A. Hyuha, in his Monetary Economics textbook; “the debt is essentially a mortgage on future generations” which will have to pay off.
But, the subject matter is on external debt, which is owed by us to the rest of the world; it is government plus private borrowing from the rest of the world.
This implies that, the external debt is a country ‘s sum of the stock of past and current unpaid public and private loans and advances. On the other hand, the internal debt has a significant impact on a country’s efforts to attain internal balance, the external debt basically affects on the very nature of the external balance of the country in particular. In monetary economics-speak, the debt is a stock, not a flow. Therefore, the argument that the it is hard to pivot the actual debt since it is a figure always in movement is a big fat lie. Any debt stock can be ascertained any time the current account books of a country.
Where does the debt Problem Arise?
As per Prof. Mukwanason’s book; debt servicing and debt repayments are serious problems in poor countries, Tanzania included.
Where the debtor(borrower) finds herself in difficulties to pay the debt- that is, paying back the amount borrowed plus interest and other charges as agreed between the lender and the borrower. In this situation, there might be challenges of servicing the debt and problems of repayment of the entire debt at the end of the agreed period. In fact, repayment is usually in periodic installments as per the date of contract, the problem of debt servicing arises when the borrower is unable to comply with the set schedule(agreed by two sides) of repayment. That is, installments are not affected on time or at the agreed date, or the borrower is unable to raise the amount in question of the installment due then.
Tanzania Vs the rest of the World
The discussants delved into the question whether Tanzania should worry concerning her growing public debt. To answer this question, one must be concerned with Tanzania’s ability to raise substantial funds or foreign exchange to repay the debt-and not on Africa’s or the rest of the world’s ability to repay her public debt.
On account of unwillingness to repay the debt or what public finance experts call “assuming away debt repudiation” and the external shocks that affect negatively the productivity of borrowing funds, ability to repay a debt, plus the servicing, depends on how the borrowed money are/ were used or invested.
This simply means, the productivity of the money borrowed is the important variable to insist if the debt quagmire is to be avoided. This is true regardless of whether you are focusing on a personal or a nation’s total or internal or external debt. To put this in perspective, let’s consider the illustration.
Let D= amount of borrowed money, R= total interest to be paid on the debt, C= other charges ( commitment fees, disbursement charges, bank charges and others) on the debt, and I=total (net) income realised by investing the D in productive ventures and earned a net income of I from the investments. The debt problem occurs if and only if I<(D+R+C). If I=(D+R+C), then there is no problem.
Nonetheless, the ideal situation is when I>(D+R+C); the bigger the difference between I and ( D+ R+C) the better for the debtor.
Of importance, is that even if borrowing is at zero interest rates(i.e., R=O), as long D consists of loans rather than grants and C is not zero, the debt may not be sustainable- that is, income (I) may still persistently fall short of ( D + C). Thus, it is not true, as Prof. Kabudi would like to believe that if borrowing is at zero or highly concessionary interest rates, the debt will be sustainable. Low interest rate can only indicate that the debt burden will be lessened by reducing the R in the above formula.
In my view, Prof. Haji Semboja, Dr. Hildebrand Shayo and John Mashaka did a good job in discussing this issue of Tanzania’s debt sustainability, even if I do bot necessarily agree with some of their comments. Moreover, when addressing this issue, the necessity to compare Tanzania’s borrowing scale, frequency or rate with those of Africa or other countries, as Prof. Luoga, Prof. Kabudi and others argue. In a scenario where other nation’s debts were/are unsustainable, or as unsustainable, or would Tanzania be comfortable even if her debt were vividly unsustainable? Thus, the need for comparison is of choice, not compulsory. That said, therefore, there is no function to make superfluous comparisons, even if “Tanzania is not an island”.
Had the question posed by Speaker Ndugai been; “Is Tanzania’s performance in line with the debate of debt sustainability or borrowing better, equal or worse than that of Uganda, Zambia or Rwanda, or those of other countries?”, then the comparisons would have been mandatory and spot on. By addressing the comparative question, the panelists are, in strict sense, responding to a weighty question in economic policy debate.
Tanzania’s economy has been growing below its potential. Empirical and theoretical evidence suggests. For an economy like Tanzania to be growing at the optimum 15 percent to absorb its borrowing binge in the macro-economic fundamentals. In regard to this issue, Michael Spence, a Nobel Prize Economist in his book titled; “The Next Convergence; The Future of Economic Growth in a Multispeed World” published in 2011 puts it clear that, to address the question of optimum growth in debt sustainability analysis, one has to examine, inter alia, the productivity, absorption, management and coordination of borrowed money or foreign assistance in general.
Tanzania’s external public and publicly guaranteed debt is, as Prof. Luoga says, sustainable and at low risk of debt distress. To the contrary, during the seventh and last review of the Policy Support Instrument(PSI) in 2018, the International Monetary Fund(IMF) Board of Directors had the following observations.
‘Directors emphasized the importance of strengthening fiscal policy implementation. They cheered the importance of the increase in revenue collection, however, they noted on the large projects under implementation which necessarily cause crowding out of the private sector. They urged authorities to set outstanding external arrears to buffer the economy from external shocks.
As country get into more debts, it is economically advised to consider two main principles- the the expected productivity of borrowed money, and the ability of the economy’s absorption capacity vis-a-vis the implicit debt. These principles are organized from the country’s management and coordination of its public debt, plus the external debt. Top of that, the matters of poor execution of debt-financed projects, untimely disbursement of money, corruption around borrowed funds and the interconnected leakages, must be reckoned with. In a situation of mismanagement and poor coordination; empirical studies have shown that foreign aid or the debt, always, inter alia, lead to the following occurrences.
- Capital flight and unwarranted reverse flows via overpricing of exports.
As per Shah( 2010), whilst countries in Africa receives $162 billion in resources such as aid, loans and foreign investment, a whopping $203 billion is taken out, mostly by multinational corporations, debt payments, tax dodging, and the costs imposed by climate change caused by the rest of the world. In total, the rest of the world receives more than $41b a year from African countries. This is more than enough money to provide decent healthcare to all people in Africa. This is a story of African poverty at the core. Given this situation and the logic or philosophy, in reality, Africa is the foreign aid donor, while the rest of the world is actually the recipients of Africa’s aid. This is food for thought!( Anup Shah, 2010).
2.Aid funds being stolen by corrupt cartels in view of the high levels of corruption in many of the poor countries including Tanzania.
- Productivity rates that are less than optimal and suboptimal absorption rates.
- Discouraging domestic production in favour of imports, thereby constraining foreign exchange generation.
- Low or minimal content of debt-financed projects plus high unit costs of the projects. Many skilled and unskilled workers in projects managed by Chinese and some raw materials are sourced from donor countries, and the unit cost( of, say, road construction) is very high in Africa than any other continent.
6.Overt and covert political strings and unfavourable conditionalities may be attached to the aid.
- Importation of unnecessary commodities, such as cosmetics, hair- dos using scarce foreign exchange.
8.Borrowed funds being expended mostly on consumption, rather than investment goods.
- Foreign money being used to add to reserves, rather than invested in productive ventures.
- Aid may lead to adverse impacts on domestic cultures and value systems.
I expected the talk show guests/experts to critically analyse the above issues as most of them apply in Tanzania. Little from them was depicted. The real question of mass prosperity in line with the public debt is PRODUCTIVITY on the borrowed money in Tanzania. There is overwhelming evidence that productivity of aid is suboptimal and the issues of absorption are serious. The less than optimal aid absorption and productivity rates as result of, among other factors, mismanagement of loans, time lags and insufficient release of counterpart funds from the government, donors, unreliable planning and coordination, and related political and administrative leakages in the space of constraints imposed by corruption. I agree when some panelists say that, many other poor countries in Africa, have the same problems. But, the governance question is, so what? Should Tanzanians be comfortable in such utterances?
Therefore, if we are to gauge the public debt on the optimal growth, let’s find the potential optimal growth of our economy. Unfortunately, technocrats on the panel didn’t offer any discussion on this matter. Much of what they offered in this regard were the “offside” remarks. The last time I checked, offside goals are always rejected.
On the Debt/GDP) ratio
I have written many times on this aspect. I have always argued that this is a quantitative measure of debt sustainability clinically fronted by International creditors. What worries me, is that even top notch economists seem not to understand the LOGIC behind the economics curriculum they learn in western economics schools regarding this matter.
It is critical to note that the debt to GDP ratio of 50 percent is just an average, just like a pass mark figure of, say, 50 percent at the University where I teach.The 50 percent doesn’t mean every student studies for 50 percent; some study to get more than 90 percent and others for less.
Relatedly, the Debt/GDP ratio of 50 per cent is a safety measure for some countries and not for others. Germany and other developed nations- and may be Mauritius and Namibia- feel comfortable at 80 percent and above, while many Low Income Developing countries(LIDCs) safety zones must be far below the 50 percent ratio. So, Tanzania’s ratio being at 39 percent( IMF figures) does not necessarily mean that Uganda is not prone to debt disaster. Any serious macroeconomics policy thinker needs more and better empirical evidence! The Debt/GDP ratio being below 50 percent is, in most cases a necessary but not a sufficient condition for debt sustainability analysis.
Further, government techocrats and politicians on the panel seem to believe that a zero or highly concessionary interest rate on borrowed money means debt sustainability. This is not factual; at best, it is a manufactured truth to suit political correctness agenda.
As argued earlier, a zero or highly concessionary borrowing rate only signals that the burden will be less than if the rate was higher( example of commercial rates). From the earlier demonstration, debt sustainability essentially depends on the productivity and absorption of the borrowed money. In the demonstration, sustainability is a function of whether or not I>(D+R+C); the higher the difference between the I and the (D+R+C), the better.
Some panelists argued on the basis of Rate of Return in assessing infrastructure Vs industry and superstructure. They posited the fact that if the cost of Tanzania borrowing was prohibitive and, therefore, the debt would be sustainable. Their basis is that of highly concessionary rates and long maturity periods. What they didn’t discuss is the sign of the difference between the I and the ( D+R+C), they naively, conclude that when the stems from highly concessionary rates with long maturity period, then our foreign debt must be sustainable. To them, its only the size of the R that is important.
How does debt affect growth prospects?
The debt burden in Tanzania poses constraints on her Critical Path Analysis(CPA) to growth particularly on derailing the extent to which it can participate in international trade. The burden of principal and interest payment do snatches the resources and possible expenditure on other productive investments in the country. This is even more critical when incomes in which debts are to be serviced are scarce- for the nations suffering most from the externalities of the debt are the poorest. From this position, the following macroeconomic problems emanate.
(A).the macroeconomics adjusting to a consistent constant reduction in spendable resources.
(B).the macroeconomics of searching extra budget resources to sustainably service the debt.
(C).the macroeconomics of constant earning of foreign exchange.
To reduce the burden sustainably and expanding the debt servicing ability of the economy, the necessity to increase exports and the reduction of the global interest rates is key, however, the later doesn’t depend on the poor countries like Tanzania.
From the empirical evidence therein, the debt burden is an uncomfortable noose around Tanzania’s neck- a noose that is getting tighter and tighter as time goes on. Given relevant economic metrics, the International Monetary Fund(IMF) for the past seven(7) years have consistently and accurately insisted on safeguarding debt sustainability and that should be a priority. They called for continued for domestic revenue mobilization and sound project implementation mainly on the envisaged growth dividend from infrastructure investment. More importantly, they advised the treasury to target the projected debt trajectory to provide a buffer relative to the Charter of Fiscal Responsibilty’s debt ceiling in case of adverse shocks. It’s public knowledge that Speaker Ndugai does not write these reports. Does he?
In my opinion, with evidence based, objective, intellectual analysis, it is crystal clear that Tanzanians worry on the growing public debt is justified.
Those who came out to blast Speaker Ndugai were generally coherent, well sequenced, spiced with political undertones, full of diversions and irrelevances, but lacked objective, intellectual analysis and focus with respect to the economic question he asked.
I hate Speaker Ndugai’s bad politics but his point on the public debt sustainability is of immense value. I will join those swimming in “luxury beliefs” to distract the public from what is so dear to them in economic policy matrix.
After all, the attempts to manipulate the economy with political euphoria will punish us more than Speaker Ndugai.
Dr. Bravious Kahyoza Lecturers in Economics at Kampala International University; is a research fellow at Fort Hall School of Government~ Nairobi; is a researcher at Maarifa Institute; and is a policy analyst at Malembo Farm~ Dar es aalam.