ONE of the interesting topics in the budget discussions at the moment, is the public debt issue. The original part of this debate gravitates on our aspirations as a sovereign state and the interesting part of it emanates from our future economic stability.
What is interesting though in this debate, is not original and what is original is not interesting. The reason for this is crystal clear; our public debates in economic affairs do not always define the topicality of the subject matter-thus the public debt topicality remains the stock issue in this discourse.
When reading the national budget estimates 2021/2022, the Minister for Finance clinically assured the nation that our debt is sustainable in the short, medium and long-term, basing on all internationally accepted debt sustainability indicators. The indicators referred to here are; Debt to GDP ratio which is 27.9% compared to the threshold of 70%, Current Debt Value Value to GDP ratio at 17% compared to a benchmark of 55%, Current Foreign Value to Export ratio at 113.2% compared to a limit of 240%.
Many government officials, journalists,economic and political pundits who have commented on the same, maintained since Tanzania’s debt/GDP ratio is below 70%, our debt position is still okey. From the interesting part of the debate which is the future of our economic stability, the most deposited argument so far(as always though) is that; we are borrowing to invest in the projects of great “economic benefits”. So we can borrow as much as we want given the International Monetary Fund metrics. And of course, they have a point not to neglect.
By the end of 1815 at the Napolean Wars, British government debt was £ 1 billion that was more than 200% of its GDP. During WWI, British was forced to borrow to finance war, its debt increased from £ 650 million in 1915 to £7.4 billion in 1919. That is about £40 billion or Tshs.126 trillion. Despite this huge debt , British didn’t default on loans, and the debt was all paid in 2015, 215 years later. Two issues are clear from this economic history fact to the position of the interesting part of our debate; (1) Britain borrowed for war, Tanzania is borrowing for development projects, (2) Britain didn’t default and paid it’s debt more than two decades later. So, if Britain did why not us?
Secondly, the proponents of our ballooning debt, argue on the debt/GDP ratio. They give examples from Japan to Italy to USA and countries of that caliber to prove that our debt is in good shape.
I think this kind of analysis which is quantitative in nature is kind of misleading and politically instigated. I will argue on the basis of household economics and qualitative differentials between Tanzania and other countries.
HOUSEHOLD ECONOMICS EXAMINATION
Let’s start from the very basics to examine our debt sustainability by using household economics. Imagine two homes.
One worth Tshs 10 million and a second one worth Tshs 100,000.
The owner of the first home owes creditors a total of Tshs 20 million(that’s 200% of the home value) whereas the owner of the second home owes creditors a total Tshs 50,000(50% of the home value)
By monthly income(revenue), the owner of the first home nets in Tshs 3 million whereas that of the first home is Tshs 20,000.
The creditors of the first home owner happen to be his children who don’t need any interest on the money lent, whereas the creditors of the second home owner happen to be people in the business of lending money at high interest rates.
Lastly, the first home owner has also lent a lot of money to others including to the second home owner, whereas the second home owner is not a creditor to anyone.
If these two people approached a bank for a loan, who do you think stands a better chance of getting some cash based on their credit worthiness?
Definitely the first home owner. Despite having millions in debt, the first home owner has close to risk free debt(zero percent interest), has a huge revenue base(30% of his GDP) and also a creditor to other homes. The second home owner has a fickle GDP that may dry out pretty soon, owes 50% of his GDP to money hungry creditors who demand huge interests and has no other home owner owing home anything- those when it comes to comparisons, the home owners are definitely not in the same league.
RECENT GLOBAL EXPERIENCES
One may think that the above example does not have any resemblance to real world macro economics, but there are numerous examples in which we can draw parallels, both for the first and the second home owners. Countries like Japan, Italy and US are in the league of their own, whereas countries like Venezuela, Sri Lanka and Djibouti are in another league of their own.
The two sets of countries share some commonalities- the first set has countries that has debt/GDP ratio well above 100% but have little to nothing to worry about , whereas the second set has countries already undergoing economic problem having debt/GDP ratio well below 100% but have had their properties acquired by China for defaulting on debt.
Venezuela’s hyperinflation of over 83,000% in 2018 didn’t came from vacuum. Having taken a lot of loans from China, the country was forced to sell up to 28% of her oil production to China in order to pay debts. Coupled with global oil plummeting yet the country expected nothing else other than oil( the country imports basically every other item including food) and the government printing money in order to please the poor, it had reached a point where the only solution to carrying huge sacks of money to buy a simple item like a matchbox was to redominate the currency. Venezuela’s economic crisis happened despite having a debt/GDP ratio of 26% by 2017.
According to the New York Times, every time Sri Lanka’s president, Mahinda Rajapaksa turned to his Chinese allies for loans and assistance with an ambitious port project, the answer was yes, even though feasibility studies had found no economic justification for the project. In December 2017, the government of Sri Lanka was forced to hand over the Hambantota to China on a 99-year lease a means of repaying the huge loans the country owes to China. Sri Lanka’s debt/GDP was 79.6%
Djibouti is a country that has been identified as the next Sri Lanka, having signed an argument with a Singapore based company that works in the partnership with China Merchants Port Holdings Co.or CM Port- the same state owned Corporation that gained control of Hambantota port in Sri Lanka for the construction of Doraleh Multipurpose Port. This is the port that only sits next to China’s only overseas military base but also is the main access point for American, French, Italian and Japanese bases in Djibouti and is used.
DIFFERENT TIPPING POINTS
Different countries have different tipping points when it comes to debt. We cannot compare our debt/GDP ratio to that of developed nations in measuring our debt sustainability. This is a point where the original part of our debate lies.
Our base being a household example; lets consider Tanzania and Japan in major macroeconomic metric differentials.
One, Japan is a wealthy nation. Their 200% debt/GDP ratio is our 27%. Japan is one of the biggest creditors. We cannot lend anybody.
Two, Japan’s debt is mostly in ¥¥¥(Yen) a global and liquid currency and is held by her own citizens. It can adjust interest rates at low levels so that repayment values stay low relative to the overall debt level. Its interest rates are negative- thus they borrow 100 and pay 99. More than 50% of Tanzania is in foreign curency. Slight macroeconomic puts in a fiscal hole.
Three, Japan’s foreign currency reserves at over $1.3 trillion. Tanzania’s GDP is $63 billion. With their reserves, they can buy all the goods and services produced in Tanzania for the next 30 years.
Four, when Japan’s currency depreciates, they win big time. For every Tshs 1, we add Tshs.52 billion to our debt.
For sure, debt/GDP ratio can not be our benchmark in measuring our public debt sustainability. The bottom line is, debt analysis is more a multidimensional task than a quantitative one. Let those who feel comfortable with the debt/GDP ratio at 27% look into the qualitative metrics as well.