THE DEBT CRISIS

Tanzania, like many other countries in the Third World, suffers from a heavy burden of foreign debt. The causes are complex. Some imprudent borrowing may have occurred during the seventies, when records of foreign debt and debt servicing were inadequate and uncoordinated and an overview of the nation’s obligations would not have been possible, while assumptions about economic growth were made that in the event proved much too sanguine. But the main cause was the severe economic recession of the eighties, leading over a number of years to a negative growth rate per head and an economy increasingly unable to bear the weight of debt. As a result, much bilateral debt, especially that owing to countries outside the main industrial group, and many commercial obligations have fallen into arrears, giving rise to the imposition of penalties and leading to the accumulation of new debt by capitalisation of the arrears.

DEBT TAKES 59% OF REVENUE FROM EXPORTS
By 1991 Tanzania had acquired the unenviable status of a ‘low income, debt-distressed economy’ and was no longer able unaided to work its way out of its difficulties without the prospect of further widespread and extremely damaging default on existing obligations. Tanzania’s total external debt, which at the end of 1986 amounted to about $3.9 billion, by the end of 1992 had passed the $6 billion mark. In 1991, expressed as a percentage of gross national product (GNP), the average stock of foreign debts in all countries of the world amounted to 37%, in Sub-Saharan Africa as a whole 109% and for Tanzania no less than 256%. Notwithstanding some alleviation as a result of rescheduling and other relief measures, debt service obligations still remained at 59% of revenue from the export of goods and services in 1990-91. Tanzania’s indebtedness had thus reached crisis proportions and was exercising a damaging influence on the prospects for economic recovery.

In Tanzania arrangements for the recording and handling of foreign debt have hitherto proved ineffective as a control mechanism in the absence of a single authority for the recording, monitoring and supervision of debt and debt servicing. As a result, there could be no clear picture of the extent and nature of the country’s present and prospective external obligations. This situation has now been remedied by placing the responsibility for the monitoring of all external debt and advising the Government on debt management in the hands of the External Debt Department of the Bank of Tanzania. At the same time, with the help of the Commonwealth Secretariat, new computerised procedures for the recording and analysis of debt and debt-related matters have been instituted, using CS-DRMS software.

The central problem facing Tanzania is the insupportable volume of debt and the need to bring it within reasonable limits. The importance of this goes beyond a reduction of debt servicing to the point where it constitutes a reasonable charge on export revenues. An excessive debt burden leads inexorably to default and default undermines confidence and imposes higher and unnecessary costs on commercial transactions. It also discourages foreign investment. Hitherto it has been necessary for each instalment of interest and capital on foreign debts to be the subject of a separate application for foreign exchange and some commercial creditors have been waiting many years for a posi ti ve response, even where debtors have met their obligations in local currency. It is therefore essential to reach a situation in which, once a credit deal has been approved, all subsequent debt servicing is automatic.

At the end of 1991 Tanzania, with one or two exceptions such as the East African Development Bank, the League of Arab States and the OPEC Special Fund, was up-to-date in honouring its obligations to the main multilateral financial institutions, notably the World Bank, and to the principal industrial donor countries. The country’s obligations to the multilateral bodies constitute about 35% of the total external debt, some 90% of which is on concessional terms I free of interest with fifty year periods of maturity. Nevertheless, with the progressive ending of grace periods, the servicing of concessional debts is expected to rise from $19 million in 1992 to $49 million by the year 2000. The servicing of much of the remaining 10%, which is on quasi-commercial terms, will be assisted by the World Bank’s concessional wing, the International Development Association (IDA), under the Special Programme of Assistance for Africa and by bilateral donors. IDA debt, under current rules, cannot. be waived or rescheduled.

REDUCING THE DEBT RATIO
That part of intergovernmental debt that is owing to the Principal industrial countries (about 40% of the total in 1991) has already been rescheduled four times, providing relief in respect of debt service obligations. In January 1995, it is hoped that it will prove possible to include within the scope of the new arrangements what is known as the ‘Trinidad terms’. This plan, originally put forward by the UK Government in 1990, provided for the writing off of two thirds of the stock of non-concessional inter-governmental debt. The effect of this measure, if confirmed, has been estimated to bring Tanzania’s stock of debt as a percentage of GNP down to a level marginally below the average for Sub-Saharan Africa. Further growth of the economy on present prospects should reduce the ratio to below 60% by the year 2000. Debt cancellation would also reduce the annual cost of debt servicing to the region of 20% of the earnings from the sale abroad of goods and services by 1996 and to the region of 10% by the end of the century. It is hoped that in the meantime debt to countries not included in the above arrangements can be rescheduled on similar lines.

Some of the outstanding commercial debts have been protected by export credit guarantee arrangements in the creditor countries and therefore in effect rank as official debts, subject to the arrangements described in the foregoing paragraph. Arrangements are now in train to redeem the remaining uninsured debts and outstanding suppliers’ credits by means of a buyback scheme operated under the IDA Debt Reduction Facility. The effect of the buyback scheme is to purchase debts in convertible currency at discounted rates by means of an IDA loan, thus converting the obligation into a highly concessional debt of 50 year maturity.

It is hoped that the complex of measures described in this paper will enable Tanzania within a few years to regain control of its foreign debt servicing to a reasonable charge on its external resources. Such an outcome can powerfully stimulate the economy by releasing valuable foreign exchange hitherto used for debt servicing, but more importantly, by restoring Tanzania’s reputation as a good trading partner. Essential to the changes now in train is the new centralised system of debt management, which will enable the Government, to forestall any future tendency towards over-commitment.

While the reduction of the debt stock to a manageable size and the restoration of automatic debt servicing is likely to provide a boost to the economy, the newly imposed self-discipline will also restrain over-hasty development. Almost all new development increases the demands made on the external sector of the economy, but any attempt to meet such external obligations by borrowing beyond prudent limits cannot fail to damage economic prospects. It is thus necessary for planners to calculate the foreign exchange implications of all major planning proposals, including the subsequent external requirements for maintenance purposes. Data of this kind is as essential for orderly debt management as it is for successful economic development.
J Roger Carter

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