Strategic FYDP III execution keeps public debt in check

THE government has made notable progress in managing public debt
Finance Minister Dr Mwigulu Nchemba

DODOMA: THE government has made notable progress in managing public debt, effectively maintaining it at levels that present a low risk of debt distress.

This achievement is largely attributed to the strategic implementation of the Third National Five-Year Development Plan (FYDP III) for 2021/22 – 2025/26, which has directed borrowing towards high-return projects and emphasised prudent fiscal management.

Strategic borrowing and fiscal measures Under FYDP III, the government has channeled loans primarily into flagship projects such as infrastructure (roads, railways, airports) and social services (education and health).

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This strategic allocation aims to maximise social and economic returns on investment.

Additionally, the plan has reinforced fiscal discipline through improved public expenditure measures and enhanced domestic revenue mobilisation.

The Debt Sustainability Analysis (DSA) indicates that Tanzania’s debt risk remains low, with all relevant debt ratios staying below distress thresholds.

This favourable assessment is partly due to the recent reclassification of Tanzania from a medium to a strong policy performer, which has elevated the country’s debt carrying capacity.

Economic implications and expert perspectives

Imani Muhingo, Head of Research & Financial Analytics at Alpha Capital, underscores that sustainable debt levels are crucial for maintaining investor confidence.

Such confidence is essential for economic stability and allows governments to respond effectively to crises and invest in long-term growth projects without risking default.

“Investors are more likely to buy government bonds if they believe the country can manage its debt without de faulting,” he noted.

Muhingo notes that sustainable debt enables investment in vital sectors like infrastructure, education and healthcare, which are critical for sustained economic growth.

The African Development Bank’s 2024 Country Focus Report confirms that Tanzania’s public debt remains sustainable, though the risk of external debt distress has increased from low to moderate due to the Covid-19 pandemic’s impact on exports.

The report attributes Tanzania’s debt sustainability to prudent macroeconomic policies and a favourable public debt profile, which support resilient GDP growth and the ability to absorb semi-concessional loans.

“Tanzania’s prudent macroeconomic policies have supported resilient GDP growth, a favourable public debt profile and greater capacity to absorb semi-concessional loans to fi nance development,” the report states.

While Tanzania’s risk of external debt distress increased from low to moderate in 2021 due to the effects of the Co vid-19 pandemic on exports, the country’s public debt has remained sustainable.

Advisory & Capital Markets Manager at Vertex International Securities Limited, Ahmed Nganya, emphasises that sustainable debt allows governments to finance essential projects without compromising financial health.

“These projects are crucial for long-term economic growth and improving living standards,” he said.

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Nganya also points out that such debt can attract both domestic and foreign investments, signalling stability and responsibility to investors.

Furthermore, he noted that with sustainable debt, the government can allocate resources to social programs that reduce poverty, improve education and provide healthcare.

Recent developments and future outlook

The International Monetary Fund (IMF) report highlights that the public debt-to-GDP ratio is well-contained at approximately 31 per cent, below the 55 per cent benchmark for Tanzania.

This indicates effective debt management and a need to access external financing on concessional terms to maintain fiscal and debt sustainability The DSA results signal the importance of accessing, to the extent possible, external financing on concessional terms.

To maintain current fiscal and debt sustainability, in line with the International Monetary Fund (IMF) extended credit facility (ECF) objectives, the authorities should improve revenue mobilisation and public investment management, including by selecting only investment projects with clear socioeconomic payoffs.

The DSA indicates that Tanzania’s risk of external debt distress remains moderate and that the lingering effects of the spillovers from the war between Russia and Ukraine have marginally weakened Tanzania’s ability to service its external debt.

The economic recovery from the impact of the pan demic is undercut by the deteriorating global economic environment and shortfalls in rainfall.

Risks remain tilted to the downside, while Tanzania has some space to absorb shocks.

All external debt burden indicators continue to stay below the policy-determined thresholds under the baseline scenario.

Tabling the 2024/25 budget, Finance Minister Dr Mwigulu Nchemba said DSA conducted in December 2023 revealed that debt is 41 sustain able in the short, medium and long term.

The analysis indicators show that in 2023/24, the pres ent value of government debt to GDP ratios is 35.6 per cent compared to the threshold of 55 per cent; the present value of external debt to GDP ratios is 19.0 per cent compared to the threshold of 40 per cent and the present value of external debt to exports is 113.2 per cent compared to the threshold of 180 per cent.

Dr Nchemba said the increase of public debt is attributed to the need for financing development projects which are beneficial to the nation.

The projects executed here are namely construction of roads, modern railways, airports, electricity, education and health infrastructure.

He also said the depreciation of the Tanzanian Shilling against the US Dollar is one of the reasons for the increase in external debt.

He highlighted that the increase in domestic debt was caused by the issuance of special bonds worth 2.17tri/- in 2021/22 to service the Public Service Social Security Fund (PSSSF) debt relating to contributions of employees who were in service before 1999.

“In that context, it is important to understand the rea sons for debt increase before judging or spreading fear,” he said.

He said the government continues to take deliberate measures to ensure that the loans contracted are used for the intended purposes and benefit our nation.

“These measures align with our efforts to repay debts on time, placing us in a 42-sound financial position and maintaining our international credibility,” he noted.

The latest Bank of Tanzania (BoT) monthly economic review for June shows that the stock of external debt decreased by 3.6 per cent to 30.2 billion US dollars (over 75tri/-) at the end of June this year, compared to the previous month mainly due to the private sector ex ternal debt validation exercise conducted in the database following the survey.

The external loans disbursed in June amounted to 358.9 million US dollars (about 900bn/-), primarily directed to the central government.

During the month, the external debt service totaled 200.3 million US dollars (over 500bn/-), of which 120.8 million US dollars (equivalent to 302 bn/-) was for principal re payments, with the remaining amount covering interest payments.

“The external debt owed to the central government continued to account for the largest share of the external debt stock, at 81.4 per cent,” stated the BoT report.

On the other hand, domestic debt stock increased by 446.7bn/- to 31.93tri/- in June this year, driven by the issuance of long-term government securities and increased utilisation of the overdraft facility.

Overall, Tanzania’s approach to debt management through strategic borrowing and fiscal prudence has successfully kept debt levels man ageable.

While external debt dis tress risk has moderated, ongoing vigilance and effective debt management are essential to sustain this positive trend and support the country’s development goals.