YESTERDAY Zanzibar President Dr Hussein Ali Mwinyi was quoted as saying that Zanzibar’s national debt is sustainable and that the isles is creditworthy, thanks to an arrangement that is in place to service the debt.
Dr Mwinyi took the right step to assure the public of creditworthiness of the country, as the government moves to allocate 10 million US dollars, equivalent to 300bn/-, per month to service the debt.
According to him, Zanzibar’s current national debt stands at 1.2tri/- that is sustainable and manageable and it retains the capacity to borrow further because it has put in place a repayment system which can enable the debt to be cleared within two years.
Creditworthiness, simply put, is how ‘worthy’ or deserving one is of credit. If a lender is confident that the borrower will honour her debt obligation in a timely fashion, the borrower is deemed creditworthy.
If a borrower were to evaluate their creditworthiness on her own, it would result in a conflict of interest. Therefore, sophisticated financial intermediaries perform assessments on individuals, corporates and sovereign governments to determine the associated risk and probability of repayment.
As well put by Dr Mwinyi, the government borrows for development projects, it has a special account for that. Financial institutions use credit ratings to quantify and decide whether an applicant is eligible for credit.
Credit ratings are also used to fix the interest rates and credit limits for existing borrowers. We commend President Mwinyi for telling the public the real situation in regards to Zanzibar’s debt, so baseless claims by the opposition should be rubbished.
These ratings are important because they affect a country’s ability to borrow money, which can impact its ability to fund programmes like healthcare and infrastructure.
There are a variety of basic elements which provide a solid and broad understanding of what the ratings are, how they are devised, why they are devised and how they are used.
A sovereign credit rating is a measurement of a government’s ability to repay its debts. Just like personal credit scores, a high credit rating indicates that a government with low credit risk and a low rating indicates a government that might struggle to repay its debts. Kudos Zanzibar for being creditworthiness.
