Total public debt stock rises moderately

As Figure 1 below shows, Tanzania’s total public debt stock rose by 1.9% from USD 8,106.65 mn (TZS 7,859.4 bn) at end-June 2002 to USD 8,259.31 mn (TZS 8,007.4 bn) at end-September 2002. The moderate increase was principally due to the depreciation of the shilling against the dollar. Total public debt stock is comprised of external and domestic debt. Of the two debt components, external debt continued to account for over 80.0% of the total public debt stock.

External debt stock stable in usd terms

In USD terms, the external debt stock remained stable at about USD 6,900.0 mn (Figure 2).However, in shilling terms, the external debt stock increased from TZS 6,545.2 bn to TZS 6,699.2 bn due to the shilling’s depreciation by 2.5%. The performance of the external debt stock continues to illustrate how sensitive it is to exchange rate movements.

Domestic debt stock decreases

The decrease in domestic debt stock from TZS 1,314.3 bn to TZS 1,308.2 bn was entirely attributable to the TZS 14.1 bn decrease in BoT liquidity paper. Thus the 2.7% decrease in other public sector liabilities outweighed the 1.0% increase in central government securities stock arising from the new issuance of Treasury bonds to finance a plot development scheme. Liquid deposits from BoT and banks decreased by 37.1% or TZS 78.0 bn to make up for shortfalls arising from foreign inflows and the clearing of a large volume of cheques written in the FY 2001/02.

External debt service burden drops

Compared to the previous quarter, total debt service dropped by 36.9% from USD 16.6 mn to USD 10.5 mn, mainly on account of HIPC relief from the multilaterals. Debt service on this component of external debt was actually USD 4.2 mn, rather than the estimated USD 11.0 mn, as depicted in Figure 3. However, the effective nominal interest rate on external debt increased to 9.3% at end-September 2002 from 6.6% recorded in the previous quarter primarily on account of the 2.5% exchange rate depreciation.

Sustainability indicators promising

Overall, total public debt/GDP remained above 90.0%, although it reduced by 0.6%. The Present Value (PV) of public debt/GDP remained stable at the 55.0% level attained in the last quarter of FY 2001/02.

Foreign inflows fall short of expectations

Individual trends for programme and project loans fell far below the budget estimates. Project loans amounting to TZS 22.5 bn were disbursed, only one-quarter of the forecast amount, due to delays in finalizing modalities. There were no disbursements on programme loans during the quarter, as expected.

Total grants received for the period fell short of the targeted amount of TZS 156.49 bn by 69.0% on account of late disbursements by some donors. The persistent unpredictability of the level and timing of inflows continues to adversely affect the planning and execution of the Government budget, and necessitates domestic borrowing to make up the difference.

Securitization causes higher domestic borrowing

Domestic borrowing through government securities rose from TZS 73.3 bn to TZS 160.4 bn to finance the budget shortfall and securitization requirements. Principal repayments were TZS 178.4 bn, markedly higher than the estimates mainly on account of the immediate redemption of a TZS 40.0 bn external payment arrears (EPA) stock vis-à-vis the gradual rollover of 35-day Treasury bills issued for securitization purposes.

Successful launch of the 7-year T-bond

The launch of the 7-year Treasury bond was a success, being oversubscribed by TZS 5.8 bn in August and TZS 10.8 bn in September, compared to offered amounts of TZS 5.2 bn and TZS 5.0 bn, respectively. While the coupon rate was 7.75%, the bond sold at an average premium price of TZS 103.4177, equivalent to an average yield-to-maturity of 7.1188%.

Yield curve declines

With the 7-year Treasury bond in place now, the Government has a yield curve out to 7 years (Figure 5). In comparison to previous quarters, this markedly lower and longer yield curve indicates low cost funding possibilities extending all the way up to 7-years. Indeed, the cost of borrowing fell on account of an overall decline in yields on government securities across the 35-day to 7-year maturities. At end-September 2002, the real interest rate on central government securities had decreased by 33.3% to 1.8%. Since the inflation rate remained constant at 4.5%, this decline was attributed to the 9.5% fall to 6.3% of the nominal interest rate.

The Government expects to launch the 10-year Treasury bond in October 2002, thereby extending the yield curve further to 10 years.

Cabinet approves national debt strategy

The Cabinet of the United Republic of Tanzania approved the in August 2002. Along with this approval, the National Debt Strategy put emphasis on the strengthening of the National Debt Management Committee (NDMC) as the watchdog of all borrowing and guarantee granting issues, based on the Loans, Guarantees and Grants Act No. 30 of 1974, which is in the process of being amended.

Short term outlook optimistic

That the country is managing despite the foreign inflow shortfalls suggests that short run fiscal measures are succeeding. Furthermore, the domestic capital market is becoming more robust and this augurs well for financing on the domestic front. However, progress towards debt sustainability is likely to drag unless the exchange rate depreciation stabilizes and the exports strengthen. Given the emphasis shift of external debt flows from development expenditure in-kind to recurrent expenditure in-cash, then the marginal benefits of denominating this assistance in shillings is worth serious consideration, in light of maintaining a stable exchange rate.

Notes to attached tables

Tables 1-5 attached with this report contain detailed data on public domestic and external debt stocks and flows. Stocks are reported as at end-March 2002, end-June and end-September 2002 while flows are reported in 2001/02 and 2002/03. Tables 6 and 7 summarize the status of negotiations with Paris Club and Non-Paris Club creditors.