RECENT TRENDS AND DEVELOPMENTS IN PUBLIC DEBT MANAGEMENT IN HIPC COUNTRIES COUNTRY EXPERIENCES AND CHALLENGES THE CASE OF TANZANIA.

Transcription

1 RECENT TRENDS AND DEVELOPMENTS IN PUBLIC DEBT MANAGEMENT IN HIPC COUNTRIES COUNTRY EXPERIENCES AND CHALLENGES THE CASE OF TANZANIA Helen Saria Submission for fulfillment of MEFMI Fellowship Programme

2 TABLE OF CONTENTS Abbreviations and Acronyms 3 Acknowledgements 5 Executive Summary 6 Chapter 1 Introduction 8 Chapter 2 Theoretical Background to Debt Management 10 Chapter 3 An Overview of Tanzania s Economy 13 Chapter 4 Review of Tanzania s Debt Portfolio 18 Chapter 5 Structure of Tanzania s Debt Office 30 Chapter 6 The Heavily Indebted Poor Countries (HIPC) Initiative on Debt Capacity-Building Programme (CBP) Framework 45 Chapter 7 Tanzania s HIPC CBP 2003/ Chapter 8 Recommendations 68 Tables Table 1 Tanzania: Macroeconomic Performance, Table 2 Trend of National Debt, 2000/ /06 18 Table 3 Principal and Interest Arrears, 2000/ /06 20 Table 4 Disbursed Outstanding Debt by Creditor Category (%) 20 Table 5 Disbursed Outstanding Debt by Borrower Category (%) 21 Table 6 Maturity Structure of External Debt, end June Table 7 Trend of New Commitments (US$ millions) 23 Table8 Disbursements (US$ millions) 24 Table 9 Composition of Public Domestic Debt Stock (billions TZS) 25 Table 10 Government Securities by Maturities 20 Charts Chart 1 Trend of Tanzania s External Debt Stock 19 Chart 2 Disbursed Outstanding Debt by Use of Fund, end June Chart 3 Trend of DOD by Currency Composition (%) 22 Chart 4 Actual Debt Service (US$ millions), 2000/ /06 24 Chart 5 Trend of Domestic Debt Stock, 2000/ /06 26 Chart 6 Domestic Debt Composition, end June Chart 7 Government Securities by Holder Category, end June

3 Chart 8 Government Securities by Maturities 29 Chart 9 Trend of Domestic Debt Service (Principal and Interest) 29 Chart 10 Ministry of Finance Policy Analysis Department 36 Chart 11 Ministry of Finance - External Finance Department 37 Chart 12 Ministry of Finance - Accountant General s Department 38 Chart 13 Bank of Tanzania Debt Management Department 38 Chart 14 Bank of Tanzania Debt of Monetary and Fiscal Affairs 39 Chart 15 Bank of Tanzania Domestic Accounts Department 39 Chart 16 Bank of Tanzania Department of Foreign Accounts 40 Chart 17 Bank of Tanzania Department of Domestic Markets 40 References 71 Appendices Appendix I Tanzania MEFMI Performance Standards and Indicators Appendix II Tanzania HIPC CBP Evaluation Appendix III Tanzania HIPC CBP Evaluation Appendix IV Tanzania HIPC CBP Evaluation

4 ABBREVIATIONS AND ACRONYMS ACC. GEN - Accountant General AfDB - African Development Bank and Fund AG - Attorney General BOT - Bank of Tanzania CBP - Capacity-Building Programme CS-DRMS - Commonwealth Secretariat Debt Recording Management System COMSEC - Commonwealth Secretariat GDP - Gross Domestic Product HIPC - Heavily Indebted Poor Countries Initiative on Debt IDA - International Development Association IMF - International Monetary Fund L&G ACT - Loans and Guarantees Act, 1974 MEFMI - Macroeconomic and Financial Management Institute MPEE - Ministry of Planning, Economy and Empowerment NDMC - National Debt Management Committee NPV - Net Present Value TDMC - Technical Debt Management Committee of the National Committee WAIFEM - West African Institute for Financial and Economic Management WB - World Bank PAD - Policy Analysis Department PC - Paris Club Creditors PRSP - Poverty Reduction Strategy Paper TNDC - Technical National Debt Management Committee 4

5 Acknowledgements This Paper is in partial fulfillment of the Fellows Development Programme of the Macroeconomic and Financial Management Institute (MEFMI) of East and Southern Africa. MEFMI was created in 1993xxxx. It is the fore runner to the East and Southern Africa Institute for Debt and Reserve Management (ESADRM) created in 1994 by East and Southern African countries 1 in their continued effort to address external debt and reserve management capacities in the region and in the respective countries in particular. MEFMI strives to improve sustainable human and institutional capacity in the critical areas of macroeconomics and financial management. The Fellows Development Programme is an accelerated expert formation endeavour that trains outstanding regional officials at professional level into experts who later serve as trainers and trouble-shooters in capacity building activities. This Programme aims to save the Institute and the region from unnecessarily using expensive consultants from overseas. The Fellows Development Programme which is now in its 13 th year of existence is envisaged to result in handsome dividends to the MEFMI region. It is programmed to be an investment with a high rate of return. It is designed to truly build capacity that further builds more capacity and cost effectively. I am one of the budding regional officials that hope to contribute to the Programme that aims at creating long-term and sustainable capacity within the region. I would like to express my profound gratitude to the Government of the Republic of Tanzania for allowing me to pursue this Programme. I would also like to thank my immediate supervisor at work, Mrs. Irene Bruce Kasambala the Deputy Accountant General for her consistent assistance throughout the period that I have been on the Programme and been allowed time off my official duties in order to fulfill the requirements of the Programme. To Ms. Anna Msutze, the Debt Programme Director, I would like to simply say thank you for everything that you have done. Further I would be ungrateful in not acknowledging the confidence, encouragement and trust that the officials, especially those in the Directorate of Debt Programme, at the Institute had placed in me. To Mr. Patrick C. Malambo, my Programme Mentor, thank you for pushing me on with the work. Even when it seemed so difficult you encouraged me to perseverance and rekindled the interest and the courage to fight on. You always said I will manage and today the work is done; thank you very much. Least but not the last, to my dear family, the time that I spent away while on the Programme has not come to nothing. This is the product of your patience. Your love and understanding helped me in more ways than I am able to put into words. Please accept my love for all of you. Lastly, I wish to state that the views and interpretations expressed in this manuscript are mine and do not represent the views and policies of the Government of the Republic of Tanzania, Management and staff of MEFMI or my Mentor. I take full responsibility for all omissions and errors 1 Mefmi comprises Angola, Botswana, Kenya, Lesotho, Malawi, Mozambique, Namibia, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe 5

6 Executive Summary This Paper has looked at the issue of debt management in Tanzania. In so doing it has covered the economic background in which the subject matter operates in. further it has also looked at the theory behind the subject matter and the current best practice that have been established. In its final chapters the Paper analysed the evolution of capacity building efforts in debt management Tanzania and finally closed with recommendations on the way forward. Since independence 1961, the Government of Tanzania has been preoccupied with three development problems namely, ignorance, disease and poverty. National efforts to tackle these problems were initially channeled through centrally directed, mediumterm and long-term development plans, and resulted in a significant improvement in per capita income and access to education, health and other social services until the 1970s. Thereafter, these gains could not be sustained because of various domestic and external shocks, and policy weaknesses. Despite sustained efforts since the mid-1980s, to address the country s economic and social problems, one half of all Tanzanians at the end of the eighties were considered to be basically poor, and approximately one-third live in abject poverty. This trend was reversed in the 1990s after the government had put in place corrective measures and by the mid-1990s progress had been achieved toward macroeconomic stability. In particular, inflation was reduced to a single digit level, and fiscal imbalances were in a prudent range and the government s objective was to consolidate the substantial progress that had been achieved in this area. However, these gains were not complete in light of the huge external debt stock that continued to hinder Tanzania s effort to achieve sustained economic growth and poverty reduction. Thus more efforts were put into addressing the issue of debt sustainability. This was achieved through the Heavily Indebted Poor Countries (HIPC) Initiative on debt relief. In order to sustain this relief it has been incumbent upon the authorities to deal with the issue of capacity in debt management. In a broader macroeconomic context for policy, governments should seek to ensure that both the level and rate of growth in their public debt is fundamentally sustainable, and can be serviced under a wide range of circumstances while meeting cost and risk objectives. Poorly structured debt in terms of maturity, currency, or interest rate composition and large and unfunded contingent liabilities have been important factors in inducing or propagating economic crises in many countries throughout history. Therefore sound risk management by the public sector is also essential for risk management by other sectors of the economy. Sound debt structures help governments reduce their exposure to interest rate, currency and other risks. Another requisite of debt management is the importance of sound debt management practices and the need for an efficient and sound capital market. It is said that even although government debt management policies may not have been the sole or even the main cause of debt crises, the maturity structure, and interest rate and currency composition of the government s debt portfolio, together with substantial obligations in respect of contingent liabilities have often contributed to the severity of the crisis. Even 6

7 in situations where there are sound macroeconomic policy settings, risky debt management practices increase the vulnerability of the economy to economic and financial shocks. However, irrespective of whether financial shocks originate within the domestic banking sector or from global financial contagion, prudent government management policies, along with sound macroeconomic and regulatory policies, are essential for containing the human and output costs associated with such shocks. In line with the need for prudent government management and debt sustainability Tanzania in 2003 amended its Government Loans, Grants and Guarantees Act Nos. 9 and 30 of The Act oversees the activities and operations of public debt - the contraction of both external and domestic debt by the Minister of Finance. The strengthening of the law was in support of other measures taken in May 2001 when the Government of Tanzania (GOT) and donors jointly carried out a Country Financial Accountability Assessment (CFAA). This assessment brought to the fore the fact that despite a number of significant improvements in financial accountability, issues of noncompliance, limited execution, inadequate monitoring, insufficient capacity and lack of enforcement need to be resolved and developed a total of 170 recommendations. Hence the government decided to revise the Public Financial Management Reform (PFMR) - first put in place at the Ministry of Finance in to take forward relevant CFAA and the IMF s Report on the Observance of Standards and Codes (ROSC) recommendations and take account of recent developments including the new Public Finance and Public Procurement Acts. The purpose of the revised Programme continued to be the establishment of effective and sustainable financial management arrangements to support the equitable delivery of public services with a strong strategic perspective, minimise resource leakages and strengthen accountability. Under the (PFMR) a number of activities to enhance capacity in the respective Units, Departments and Institutions were mooted. It is from the above areas of concern and corrective measures that Tanzania has now moved its debt management capacity building programme from what could be term as below par at the beginning of the 1990s to have its debt management structures among the best organized among its peers. This purpose of this Paper was to trace the evolution of debt management in Tanzania and its readiness to tackle issues of debt sustainability in the aftermath of debt relief that the country obtained from its external creditors. It is the belief of the author that this objective has been achieved and that the Paper will serve as material for further work by others in the future. 7

8 Chapter 1 Introduction 1.0 Introduction In the late 1960s, Tanzania embarked on a development strategy of substituting domestically produced goods for imports, based on the concept of socialism with selfreliance articulated in the 1967 Arusha Declaration. This import-substitution strategy had among its key economic objectives promotion heavy industry and achieving selfsufficiency in food production. Two main instruments were employed in implementing the strategy. First, a series of ambitious investment programmes, embodied in five-year plans, targeted mainly at the expansion of the capital-intensive industrial sector and infrastructure projects; and second, asset of large public enterprises that dominated most industries; had legal monopolies in the pricing, marketing, and processing of agricultural crops; and by the mid-1970s, had become the country s largest importers and exporters. By the late 1970s, Tanzania was a highly state-controlled economy, characterized by an inflexible economic system comprised of monopolistic and heavily regulated production structures. And throughout the 1970s and the 1980s, the government used trade restrictions as key tools for achieving its development priorities with disastrous consequences on the economy. Under this policy the government put in place incentives favouring exports but due to declining world prices, this sector suffered declining income while facing increasing prices for their imported raw materials. The country also experienced economic shocks that were its control, such as drought and declining terms of trade. Tin the face of unfavourable terms of trade, the government s policy shifted in favour of food crops over export crops. The overall result was that per capita output of exports fell by 50 percent during the as the share of production of agricultural output increased. Contracting international trade eroded revenue and significantly changed the structure of Tanzania s fiscal position, with the share of import duties in total budgetary revenue falling to 11 percent in fiscal year 1979/80 from 22 percent in 1969/70. The government was becoming increasingly dependent for revenues on transfers from public enterprises, whose profitability was being undermined by import shortages and rising operating costs. On the expenditure side, subsides and transfers to public enterprises accelerated sharply. The resulting fiscal imbalances created strong inflationary pressures and both an accumulation of external arrears and an increased reliance on external borrowing. By the mid-1980s, it was generally recognized that Tanzania s overly restrictive external trade policies and the consequent reduction in its exports were seriously undermining its economic performance. To address these issues, the government s 1996 Economic Recovery Programme (ERP) sought to reinvigorate the export sector by elimination cost-price distortions and introducing import liberalization measures. The relaxation of trade restrictions was supported by strong macroeconomic stabilization measures, which brought about a substantial fall in inflation, as well as steps to correct the 8

9 exchange rate misalignment, reflected in a sharp depreciation of the real effective exchange rate. The relative success and durability of economic reforms in Tanzania can be attributed to a confluence of factors, including a strong and tested sense of ownership of the reforms since early in the process, a wide consensus on necessary policy actions and measures based on consultation with civil society, and constant support from developing partners. Overall this strong economic performance would not have been possible without the strong consistent political will and commitment at the highest levels of the government. 2 As the economy is now on an even keel, it is time to turn to those areas that will assist in maintaining the momentum. One such area is debt management. One of the tenets of the Heavily Indebted Poor Countries (HIPC) Initiative on Debt is to ensure that countries that have graduated from debt relief do not go back into unsustainable debt. This Paper looks at Debt Management in Tanzania and it is composed of eight chapters. Chapter 1 is an introduction and the background to the Paper. Chapter Two is an expose on Theoretical Background to Debt Management the world over. In Chapter 3, the Paper presents an Overview of the Tanzanian Economy up to the 2005/2006 fiscal year. A review of Tanzania s Debt Portfolio is covered in Chapter 4. The following two chapters deal with the crust of the Paper Structure of the Debt Management in Tanzania and the Heavily Indebted Poor Countries (HIPC) Initiative on Debt Capacity- Building Programme (CBP) Framework. The subsequent Chapter analyzes the CBP Framework with respect to Tanzania for the period The last Chapter covers the Way Forward/Recommendations arising from the penultimate chapter. 2 This is acknowledged by the International Monetary Fund, IMF Country Report No. 06/198, June 2006 United Republic of Tanzania: Ex Post Assessment of Longer-Term Programme engagement. 9

10 2.0 Introduction Chapter 2 Theoretical Background to Debt Management Sovereign debt management is the process of establishing and executing a strategy for managing the government s debt in order to raise the required amount of funding, achieve its risk and cost objectives, and to meet other sovereign debt management goals the government may have set, such as developing and maintaining an efficient market for government securities. In a broader macroeconomic context for policy, governments should seek to ensure that both the level and rate of growth in their public debt is fundamentally sustainable, and can be serviced under a wide range of circumstances while meeting cost and risk objectives. Sovereign debt manages share fiscal and monetary policy advisors concerns that public sector indebtedness remains on a sustainable path and that a credible strategy is in place to reduce excessive levels of debt. Debt mangers should ensure that fiscal authorities are aware of the impact of government financing requirements and debt levels on borrowing costs. 3 Examples of indicators that address the issue of debt sustainability include the public sector debt service ratio, and ratios of public debt to Gross Domestic Product (GDP). Poorly structured debt in terms of maturity, currency, or interest rate composition and large and unfunded contingent liabilities have been important factors in inducing or propagating economic crises in many countries throughout history. For example, irrespective of the exchange rate regime, or whether domestic or foreign currency debt is involved, crises have often arisen because of an excessive focus by governments on possible cost savings associated with large volumes of short-term or floating rate debt. This has left government budgets seriously exposed to changing financial market conditions, including changes in the country s creditworthiness, when this debt has to be rolled over. Foreign currency debt also poses particular risks, and excessive reliance on foreign currency debt can lead to exchange rate and/or monetary pressures if investors become reluctant to refinance government s foreign currency debt. By reducing the risk that the government s own portfolio management will become a source of instability for the private sector, prudent government debt management, along with sound policies for managing contingent liabilities, can make countries less susceptible to contagion and financial risk. A government s debt portfolio is usually the largest financial portfolio in the country. It often contains complex and risky financial structures, and can generate substantial risk to the government s balance sheet and to the country s financial stability. The Financial Stability Forum s Working Group on Capital Flows Report of April 5, 2000, did 3 Excessive levels of debt that result in higher interest rates can have adverse effects on real output. See A. Alesina, M. de Broeck, A. Prati, and G. Tabellini, Default Risk on Government Debt in OECD Countries, in Economic Policy: A European Forum (October 1992), pp

11 acknowledge the vulnerability of governments to external shocks. 4 Therefore sound risk management by the public sector is also essential for risk management by other sectors of the economy. Sound debt structures help governments reduce their exposure to interest rate, currency and other risks. Another requisite of debt management is the importance of sound debt management practices and the need for an efficient and sound capital market. It is said that even although government debt management policies may not have been the sole or even the main cause of debt crises, the maturity structure, and interest rate and currency composition of the government s debt portfolio, together with substantial obligations in respect of contingent liabilities have often contributed to the severity of the crisis. Even in situations where there are sound macroeconomic policy settings, risky debt management practices increase the vulnerability of the economy to economic and financial shocks. However, irrespective of whether financial shocks originate within the domestic banking sector or from global financial contagion, prudent government management policies, along with sound macroeconomic and regulatory policies, are essential for containing the human and output costs associated with such shocks. 2.1 Debt Management in Developing Countries This Paper will dwell on the problem as it relates to developing countries economic and debt management and in particular the case of Tanzania. Developing countries find themselves more vulnerable than developed countries when it comes to shocks versus their debt portfolios. Whereas industrialized countries can be said to have adopted international best practices in debt management, developing countries have on the other hand lagged behind in this area. Further, the two worlds debt problems appear to be different in that for developed economies the problem is more on how to deal with domestic debt and large capital flows, consequences of poor balance sheet management in the private sector the problem with developing countries relate mainly with how to cope with unsustainable external debt, smaller base of domestic financial savings and less developed financial systems. The major problem facing the developing countries is how to deal with public debt. Whereas in the period the major problem was how to deal with the huge unsustainable external debt domestic debt, which was relatively insignificant and little discussed, has also now risen to alarming levels. External debt has largely been dealt with through the Highly Indebted Poor Countries (HIPC) Initiative on Debt. Domestic debt on the other hand has not. As this is regarded as an internal matter for the respective countries to deal with, creditor/donor countries are not prepared to assist. It is therefore important for debt managers in the developing countries to learn to manage their debt portfolios efficiently. There are two types of debt managers; those in 4 See Financial Stability Forum, Report of the Working Group on Capital Flows, April 5, 2000, p. 2. where the Group asserted that recent experience has highlighted the need for governments to limit the build up of liquidity exposures and other risks that make their economies especially vulnerable to external shocks 11

12 the developed countries and those in developing countries. The two find themselves operating in two different scenarios. Given their operating theatres, the two find that they cannot set themselves the same objectives. Debt managers in developed countries have a relatively straight forward objective: to cover the government s borrowing needs at the lowest cost. They need not concern themselves with objectives of government, such as price stability. In practice, in many advanced countries debt management and monetary policy are conducted by the central bank, and the goal, therefore, for debt managers is to minimize the cost of government debt without jeopardizing the aims of monetary policy. Thus, there is an argument for separating these functions institutionally: that the responsibility for debt management should be placed on an independent debt management office and the responsibility for monetary policy should rest on the central bank. Such an arrangement exists in Ireland, Sweden and New Zealand where the debt management office aims to minimize the cost of government s debt, and the central bank aims to keep inflation down to a specified target. They act independently of each other, using different instruments to achieve their ends. And their objectives can then be reconciled optimally through the operation of markets forces. Unfortunately such a system is not possible in developing economies, where financial markets are undeveloped, and instruments of both debt management and monetary control are not developed to the same extent as those in developed economies. In these circumstances, the operation of debt management is bound to be initially linked to the operation of monetary policy. Both will initially use the same instruments. Their objectives, therefore, need to be coordinated institutionally. Given that public budgets and inflation are far from stable and financial markets are undeveloped, debt management and monetary policy must also support the common objectives of stabilization and market development. According to a Compendium prepared by the Economic and Legal Advisory Services Division of the Commonwealth Secretariat specifically, debt managers in developing countries, apart from their primary objectives of selling government debt at the least cost, should: Ensure the liquidity needs of the economy are met, as debt management operations have the potential to disrupt the money markets causing short-term interest rate fluctuations; Support monetary policy by limiting the inflationary impact of deficit financing; Promote the development of money and capital markets; Not jeopardize investment by crowding-out the private sector; Encourage saving by households; and Act in harmony with external debt management. 5 The above does not encompass all the objectives of debt management but it should be pointed out that as economic scenario of countries change, objectives of debt managers should also evolve as debt management is not a once-and-for-all affair. 5 See, Effective Domestic Debt Management in Developing Countries. P.10-11, A Compendium prepared by the Economic and Legal Advisory Services Division of the Commonwealth Secretariat (1999), Debt management Series 1, London. 12

13 3.0 Introduction Chapter 3 An Overview of Tanzania s Economy For an understanding of the Tanzanian debt situation, it is advisable to have an insight of the Tanzanian economy. Thus, this chapter presents an overview of the Tanzanian economy since independence and The review is split into two; the first covering the period 1961 to 2004 and the last the period Since independence 1961, the Government of Tanzania has been preoccupied with three development problems namely, ignorance, disease and poverty. National efforts to tackle these problems were initially channeled through centrally directed, mediumterm and long-term development plans, and resulted in a significant improvement in per capita income and access to education, health and other social services until the 1970s. Thereafter, these gains could not be sustained because of various domestic and external shocks, and policy weaknesses. In the late 1960s, Tanzania embarked on a development strategy of substituting domestically produced goods for imports, based on the concept of "socialism with selfreliance" articulated in the 1967 Arusha Declaration. This import-substitution strategy had among its key economic objectives promoting heavy industry and achieving selfsufficiency in food production. Two main instruments were employed in implementing the strategy. First, a series of ambitious investment programs, embodied in five-year plans, targeted mainly at the expansion of the capital-intensive industrial sector and infrastructure projects; and, second, a set of large public enterprises that dominated most industries; had legal monopolies in the pricing, marketing, and processing of agricultural crops; and, by the mid-1970s, had become the country's largest importers and exporters. Indeed, despite sustained efforts since the mid-1980s, to address the country s economic and social problems, one half of all Tanzanians at the end of the eighties were considered to be basically poor, and approximately one-third live in abject poverty. By the mid-1990s (refer to Table 1.0 below) progress had been achieved toward macroeconomic stability. In particular, inflation was reduced to a single digit level, and fiscal imbalances were in a prudent range and the government s objective was to consolidate the substantial progress that had been achieved in this area. The macroeconomic objectives included (i) accelerating GDP growth to 6 percent from the annual average of 4 percent in 1998; (ii) sustaining efforts to maintain domestic inflation at approximately 4 percent annually (from the annual average of 12.8 percent in 1998); (iii) ensuring that the exchange rate for the Tanzanian shilling continued to be market determined; (iv) maintaining gross international reserves at the equivalent of approximately 4 months (from the annual average of 3.4 months in 1998) of imports of goods and non-factor services. 6 6 See, the United Republic of Tanzania Poverty Reduction Strategy Paper (PRSR), October 1,

14 Table 1.0 Tanzania: Macroeconomic Performance, Macroeconomic Performance Growth (in percent) inflation (in percent) 2/ Official reserves/imports 3/ Change in bank credit to be government as percent of M3 4/ Source: Tanzanian Authorities and fund staff estimates. 1/ March / Data available from 1964 onward. 3/ Data available from 1976 onward. Gross official reserves in months of imports of goods and non-factor services. 4/ Data available from 1969 onward. Source: Tanzanian Authorities and IMF staff estimates According to the March 2000 Letter of Intent by the Minister of Finance to the Managing Director of the International Monetary Fund (IMF) 7, the Government's program for the period largely achieved macroeconomic stability and put in place many of the structural reforms needed to promote higher economic growth. Such policies and reforms were essential to reduce poverty, and were to continue and were directed at reducing poverty. Tanzania's adjustment efforts regained momentum after the 1995 election. Under its economic programme of the New Government, macroeconomic stabilization was achieved. Inflation declined and since the beginning of 1999 has been consistently in the single digits for the first time in 20 years. Gross international reserves have more than doubled to reach the medium-term target of four months of imports of goods and non-factor services. This progress occurred in the face of adverse weather, which severely affected exports and kept growth below programme targets. Economic developments through the early part of 1999 were broadly in line with programme objectives. Since then, inflation has continued to fall, reaching 7.0 percent at the end of Real growth in the economy was estimated at 4.6 percent in 1999, somewhat higher than in 1998, but still below the medium-term target of at least 6 percent per annum, in part reflecting unfavorable weather. The lagged effect of the adverse weather of 1998 resulted in an increased current account deficit in 1999, but with larger aid disbursements and capital inflows gross international reserves nonetheless increased from 3.1 months of imports of goods and non-factor services at the end of 1998 to 4.1 months at the end of See Tanzania Letter of Intent, March 9, 2000 to the IMF. 14

15 Real growth was estimated to have reached 5.1 percent in 2000 and the year-on-year inflation rate was 5.5 percent at end-december 2000 mainly because of a sharp increase in the prices of petroleum products and, in the final months of the year, the high costs to industry of producing electricity from own generators to offset the cuts in the electricity supply. An improvement in the current account (before grants) and higher grants than projected contributed to a much higher increase in international reserves at US$553 million. One major manifestation of the economic difficulties that the country experienced was with regard to debt sustainability. At end-1998 Tanzania s external public debt stood at US$ 7.5 billion in nominal terms, including US$2.3 billion in arrears,(representing US$5.7 billion in net present value terms, or 485 percent of three-year average exports). At end June 1999, Tanzania s external public debt amounted to US$6.4 billion in nominal terms, including US41.2 billion in arrears. This translated to US$4.6 billion in net present value terms, or 397 percent of the three-year average of exports. Of the public debt outstanding in present value terms, about 41 percent was owed to multilateral creditors, and 38.8 percent to Paris Club creditors (including 2.4 percent to Russia). Non-Paris Club creditors accounted for 17.8 percent of the debt, and commercial creditors for the remaining 2.2 percent. Of the debt owed to multilateral creditors, on an NPV basis, 68.1 percent was owed to International Development Association (IDA) and the International Bank for Reconstruction and Development (IBRD), 12.2 percent to the African Development Fund/Bank (AfDB), and 11.7 percent to the IMF. Other multilateral creditors accounted for 7.8 percent; these included the Arab Bank for Economic Development in Africa (BADEA), the East African Development Bank (EADB), the European Union (EU), the International Fund for Agricultural Development (IFAD), the Nordic Development Fund (NDF), and the Organisation of Petroleum Exporting Countries (OPEC) Fund. The debt owed to multilaterals included arrears of US$10.3 million to BADEA. With respect to bilateral debt, 68.6 percent represented Paris Club debt, and the rest owed to other bilateral creditors. Paris Club debt, of which 93.5 percent was pre-cut off date, was owed in large part to Japan (36.9 percent), United Kingdom (10.1 percent), France (8.5 percent). Large holders of Non-Paris Club Official debt included Iran (17.6 percent), Libya (13.7 percent), Algeria (12.2 percent), and China (11.6 percent). With the advent of the HIPC Imitative on Debt, Tanzania being a HIPC did qualify for debt relief under the Initiative and in April 2000, the country attained the Decision Point using the end-1998 external public debt which amounted to US$7.5 billion in nominal terms, including US$2.3 billion in arrears. 8 Total relief from all of Tanzania's creditors was worth more than US$2 billion, which was equivalent to more than half of the net present value of total debt outstanding after the full use of traditional debt relief (Paris Club bilateral debt relief) mechanisms. The enhanced HIPC Initiative helped Tanzania to advance its poverty reduction programme and stimulate economic growth. The debt reduction operation translated into debtservice relief over time of US$3 billion, or about one-half of Tanzania's debt-service obligations during fiscal years and about one-third of Tanzania's debt- 8 See, Tanzania Decision Point HIPC Document,

16 service obligations thereafter. Tanzania was to receive the bulk of the assistance under the enhanced HIPC Initiative when it satisfied a number of conditions, including adoption and implementation of a participatory poverty reduction strategy paper. 9 In line with the requirements of the HIPC Initiative on Debt the Government prepared a Poverty Reduction Strategy Paper (PRSP), which focused on specifying poverty reduction objectives and identified measures to improve the living standards of the poor. Essential to that effort were policies and reforms necessary to safeguard macroeconomic stability and promote growth, basic objectives that also formed the core of the National Development Vision The PRSP developed in conjunction with the Tanzania Assistance Strategy (TAS) was a government initiative that was developed in collaboration with the donor community and civil society. Tanzania reached the under the Enhanced the HIPC Completion Point in November 2001and received most of the expected debt relief. External debt as a share of exports at end-june 2001 was reduced to 105 percent in Net Present Value (NPV) terms, bringing it to the point of debt sustainability. Other debt indicators were also satisfactory. Updated debt indicators (before relief under the Multilateral Debt Relief Initiative (MDRI) indicated that the NPV of debt-to-exports ratios was projected to fall further, stabilizing at about 92 percent, instead of 115 percent projected at completion point. All other indicators remained well below the indicative threshold levels. 10 Tanzania s debt outlook improved further following its qualification for debt relief under the MDRI. In particular, the NPV of debt as a share of exports was expected to decline further to about 46 percent in Recognizing the need for improving debt management, Tanzania adopted a National Debt Strategy (NDS) in 2002, under which the government amended the Loans, Grants, and Guarantees Act of 1974 to make contracting and guaranteeing of new foreign debt by the government (including its parastatals) subject to approval from the Minister for Finance. In addition, the NDS included capacity-building initiatives and strengthened debt management through the establishment of a National Debt Management Committee (NDMC) The economy continued to perform strongly in response to sustained economic reforms undertaken by the Government. Meanwhile, drought towards the end of 2005 and high oil prices in the world market were the main source of setbacks to economic performance in The decrease in domestic food supply coupled with persistent increase in petroleum prices, caused an upswing in inflation in the last quarter of 2005 that continued into 2006, reaching a peak of 7.7 percent by May The rate however, slowed down to an average of 5.6 percent in August and September due to improved food supply. The growth rate of real GDP accelerated from 4.8 percent in 2000 to 6.8 percent in 2005, the highest in the past two decades. These developments were associated with the macroeconomic and structural reforms undertaken by the government, which increased 9 See, IMF Press Release 00/26 of April 2000 which detailed the amounts of debt relief as well as conditions attached to the attainment of full enhanced HIPC Imitative Debt Relief. 10 See IMF Country Report No. 06/198, June 2006 United Republic of Tanzania: Ex Post Assessment of Longer- Term Programme engagement. 16

17 efficiency and productivity in the economy. There were substantial improvements in the external sector as reflected in the increase of official reserves from around 4.9 months of imports of goods and services at the end of 2000 to around 6.5 months at the end of The strong expansion of economic activities coupled with oil price hike and increased importation of food in the first half of 2006, saw the value imports increasing steeply, lowering the level of international reserves measured in terms of months of imports to 4.6 at the end of June Domestic revenue collection increased significantly during the past five years from 11.8 percent of GDP in 2001/02 to 13.9 percent in 2005/06. The budget deficit ratio to GDP (excluding grants) rose from 4.8 percent in 2001/02 to 12.1 percent in 2005/06 reflecting increased expenditure related to postponement of general election in 2005 and payment of ex-east Africa Community workers which was made possible by an increase in budget support inflows and reallocation made within Ministries, Departments and Agencies (MDAs). Despite the increase in grants, the deficit after grants widened to 6.1 percent in 2005/06 from 1.1 percent in 2001/02. Domestic revenue-to-gdp ratio rose from 13.3 percent in 2004/05 to 13.9 percent in 2005/06, improvement in collections was most noticeable in the import and income tax components. Tanzania reached the under the Enhanced the HIPC Completion Point in November 2001and received most of the expected debt relief. External debt as a share of exports at end-june 2001 was reduced to 105 percent in Net Present Value (NPV) terms, bringing it to the point of debt sustainability. Other debt indicators were also satisfactory. Updated debt indicators (before relief under the Multilateral Debt Relief Initiative (MDRI) indicated that the NPV of debt-to-exports ratios was projected to fall further, stabilizing at about 92 percent, instead of 115 percent projected at completion point. All other indicators remained well below the indicative threshold levels See IMF Country Report No. 06/198, June 2006 United Republic of Tanzania: Ex Post Assessment of Longer- Term Programme engagement. 17

18 Chapter 4 Review of Tanzanian Debt Portfolio 4.0 Introduction It is necessary to include a chapter on the debt position of Tanzania as this Paper is about debt management in the country. Hence, below the Paper discusses the two categories of the country s debt; domestic and external debt. 4.1 The National Debt Total national debt stock, as at end June 2006 stood at US$11,095.6 million being equivalent to TZS13,903.9 billion. Of this, US$8,954.3 million (TZS11,220.6 billion) was external and US$ 2,141.3 million (TZS2,683.3 billion) was domestic. The total national debt increased by US$ 2,488.1 million or 28.9 percent from US$8,607.5 million registered in June 2001 (Table 2). The gradual increase in debt is mainly attributed by increase in borrowing through securities for liquidity management, settlement of parastatal debt claims and budget financing on part of domestic component. On the other hand, recording of disbursements, exchange rate movements and accumulation of interest arrears for external debt where no debt relief has been agreed contributed to the increase in external debt. If the current status is maintained, the total debt stock is projected to increase at annual average of 5.3 percent. Meanwhile, the total debt stock to GDP ratio reached the peak of percent in the year ending June 2004 from percent registered in June From June 2004 Debt to GDP ratio declined to 80.1 percent in the year ending June Trend of National Debt 2000/ /06 (US$ billion) Table 2 Data Category 2000/ / / / / /06 Total National Debt External Debt Stock Domestic Debt Stock Source: National Debt Database (ACGEN) 4.2 External Debt Total public and private external debt stock as at end June 2006 stood at US$8,954 million of which US$7,679 million was the principal amount disbursed and outstanding 12 Domestic debt refers to Government, Government Guarantees and the Bank of Tanzania liabilities to the domestic financial system and the public 18

19 (DOD) and US$ 1,275 million was interest arrears on un-serviced debt 13. The debt stock represents an increase of 19.7 percent, from US$7,482 million in June There was a drop in debt stock in 2001/02 due to debt relief from Paris Club (PC) Bilateral creditors under Cologne Stock Terms under PC VII 14 (see Chart1). Trend of Tanzania s External Debt Stock (US$ Millions) Trend of External Debt Stock Chart Million USD / / / / / /06 Years DOD Interest Debt Stock The debt stock continued to increase thereafter due to new disbursements on committed and new loans, mostly by multilateral institutions that are offering concessional loans. Exchange rate fluctuations and accumulation of interest arrears on non Paris Club Bilateral and Commercial debt for which debt relief negotiations have not been concluded also contributed to the increase in debt stock External Debt Arrears Total arrears as at June 2006 amounted to US$2,404.5 million out of which US$1,129.5 million is principal arrears and US$1,275.0 million is interest arrears. Total arrears increased by US$ million or percent from US$1,753.1 million in the year 2000/01 on account of non payment especially of Non Paris Creditors and Brazil and Japan which have not fully concluded the PC VII bilateral agreements, (Refer to Table 3). 13 Pending conclusion of debt relief agreements 14 External debt amounting to US$ million was cancelled. 19

20 Table 3 Principal and Interest Arrears from 2000/ /06 (US$ billions) 2000/ / / / / /06 Interest Principa l Total Source: National Debt Database (ACGEN) Most of the arrears relate to non Paris Club Bilateral and commercial debt creditors. Debts due to these creditors are not serviced because negotiations for debt relief terms like those offered by Paris Club creditors are still ongoing. On the other hand, inadequate flow of information on commercial creditors contributed to those arrears Disbursed Outstanding Debt by Creditor Category At the end of June 2006, the profile of external DOD by creditor category shows that 70 percent and 20 percent of the debt is owed to multilateral and bilateral creditors respectively. Debt owed to commercial and export creditors stood at a combined total of 10 percent. Analysis shows that the share of bilateral debt is declining due to debt cancellations under the Enhanced HIPC Debt Relief Initiative. However, the share of multilateral debt is increasing because of Government policy of borrowing exclusively on concessional terms, which are available mostly from these institutions. Disbursed Outstanding Debt by Creditor Category (%) Table 4 Data Category 2000/ / / / / / Multilateral Bilateral Commercial/Export Credits Source: National Debt Database (ACGEN) 20

21 4.2.3 Disbursed Outstanding Debt (DOD) by Borrower Category Analysis of DOD by borrower category shows that as at end June 2006, the Central Government is the largest borrower with 86.9 percent of the DOD, followed by Public Corporations with 5.8 percent of the total and lastly the private sector with 7.3 percent of the total debt (Table 5). The increasing share of Central Government borrowing is attributable to increased borrowing to finance its budget. The share of public corporations has reduced due to the privatization programme. Disbursed Outstanding Debt by Borrower Category (%) Table 5 Data Category 2000/ / / / / /06 Central Government Public Corporations Private Source: National Debt Database (ACGEN) Disbursed Outstanding Debt (DOD) by Sector Analysis of debt by sector indicates that at the end of June 2006, 19.2 percent of the DOD was disbursed in the form of Balance of Payments Support. The agricultural sector accounted for 14.0 percent of the total, while 14.7 percent was channeled to the energy and mining sector. The rest of the DOD was channeled to other sectors of the economy as shown in Chart 2. Chart 2 Disbursed Outstanding Debt by Use of Fund as at end June 2006 Maritime Transport 1.0% Educ. & Training 5.2% Finance, Insurance 1.4% Tourism & Hotel 1.1% Telecom. 3.0% Rail Transport 1.3% Health and Social Wel 5.0% Source: National Debt Database (ACGEN) Others 18.8% BoP 19.2% Energy & Mining 14.7% Agriculture 14.4% Ground and Air Trans. Industrial Dev. 9.6% 5.3% 21

22 4.2.5 Currency Composition of the Disbursed Outstanding Debt External debt in terms of currency composition weighs in favour of the Special Drawing Right (SDR). The share of SDR has increased from 39.3 percent at end June 2001 to 53.4 percent in June The dominance of SDR in the currency composition of Tanzania s external debt arise from the fact that the Government has been borrowing more from multilateral institutions lending in SDR such as IDA, IMF and IFAD, because they offer highly concessional loans. The US Dollar is the second largest currency, accounting for 32.6 percent in 2000/01 and dropped to 25.1 percent in year The Japanese Yen is the third largest currency, accounting for about 12.8 percent in 2000/01 and dropped to 12.1 percent in June The British Pound (GBP) also dropped from 2.2 percent to 1.2 percent while Euro currency increased from 2.0 percent in June 2001 to 3.6 percent in June Other currencies accounted for 11.1 percent in June 2001, and fell to 4.8 percent in June 2006 (Chart 3). A decline to Bilateral debt is explained by increased aid in form of grants that loans and few concessional loans are obtained from such window. Trend of DOD by Currency Composition (%). Chart SDR USD JPY GBP EURO Others Percentage / / / / / /06 Years Source: National Debt Database (ACGEN) Maturity Structure of External Debt External loans with maturity periods of 10 years and above, mostly from multilateral creditors, accounted for 95.5 percent of the total DOD. Loans with a maturity of between 5 10 years accounted for 3.0 percent, while loans with maturities between 1 5 years account for 1.5 per cent of the DOD. The maturity structure reveals that the Government is the largest borrower and borrows concessional loans with longer maturities (Table 6). 22

23 Table 6 Maturity Structure of External Debt as at End - June 2006 Year Amount (Million USD) % Of Total DOD Total Above Source: National Debt Database (ACGEN) New Commitments, Disbursements and Debt Service A. New Commitments New loans committed and recorded for the year ending June 2001 amounted to US$536.7 million. The commitments decreased to US$530.4 million in 2001/02 and further to US$298.6 million in the year 2002/03 before increasing to US$356.4 million and US$632.3 million in the years 2003/04 and 2004/05 respectively. New commitments (Table 7) declined to US$469.4 million at the end of June Heavy investments by the private sector on the mining sector contributed to the higher commitments recorded in the years 2000/01 and 2004/05. Table 7 Trend of New Commitments (US$ millions) 2000/ / / / / /06 Central Government Public Corporation Sub Total (Public) Private Sector Grand Total Source: National Debt Database (ACGEN) B. Loan Disbursements Loan disbursements (see Table 8) recorded during the year-end of June 2006 amounted to US$525 million. The government received 95 percent of the total amount while the rest (5 percent) was received by the private sector. This amount is higher by 42 percent when compared to US$371.2 million received during the year ending June Disbursements in favour of private sector reached the peak of US$171 million in the year ending June 2001 reflecting heavy investment in the mining sector and has since then been much lower. 23

24 Table 8 Disbursements (US$ millions) 2000/ / / / / /06 Total Disbursements Government Public Corporation Private Source: National Debt Database (ACGEN) C. External Debt Service Total Debt Service (TDS) recorded during the year ending June 2006 amounted to US$97 million. Government debt service has been fluctuating between US$121 million to 91 from the year 2001 to June However, the debt service declined further in the year 2005/06 following addition debt relief obtained from the IMF under the MDRI Initiative. Debt Service by the private sector increased during the year 2001 to 2004 reflecting the large amounts contracted and disbursed by the private sector during the year 2000/01 (Chart 4). Actual Debt Service: 2000/ /06 (US$ millions) Chart 4 Amount mn USD / / / / / /06 Years Central Government Public Corporations Private Sector 4.3 DOMESTIC DEBT Domestic debt is composed of marketable, non-marketable securities and various claims on Government by both the private sector and public institutions. Marketable securities comprise of 35, 91, 182 and 364 day Treasury bills as well as 2, 5, 7 and 10- year bonds. Non- marketable securities include Government stocks, re-capitalization bonds, and special bonds issued to private and public institutional investors at negotiable terms. Since 1997 the Government has been implementing the rollover policy for tradable government securities. The 35 days and 91 days Treasury bills are issued for monetary policy purposes, while 182 and 364 day Treasury bills are issued 24

25 for both financing and liquidity management purposes. The 2, 5, 7, and 10 years bonds are also issued for financing purposes Domestic Debt Profile Total domestic debt stock, owed by the United Republic of Tanzania (URT) stood at TZS 2,527.4 billion as at end June 2006, representing an increase of TZS billion or 29.6 percent when compared to TZS billion recorded at end June The increase is mainly attributed to newly issued government special bonds and additional instruments issued for liquidity management purposes. Chart 5 and Table 9 show the position of domestic stock for the past six financial years. TABLE 9 COMPOSITION OF PUBLIC DOMESTIC DEBT STOCK (IN BILLIONS TZS) S/NO DESCRIPTIONS 2000/ / / / / /06 Government 1 Securities Treasury bills Financing Papers BOT Liquidity Papers Sub total Stocks & Bonds Government stocks Government Bonds Sub total Other Government 2 Debts Sale Agreement Tax Certificate Duty Draw Back NSSF Mabibo Compensation Claims Parastatal Debt taken over by Government Un-remitted statutory contributions Total Debt (1+2) Source: National Debt Database (ACGEN) 25

26 Chart 5 Trends of Domestic Debt Stock 2000/ / Debt stock intzs Bn / / / / / /06 Financial year Treasury bills Government stock Government Bonds Other Government Debts Domestic Debt Composition by Instrument Analysis of domestic debt by instruments shows that, Treasury Bills constitute the largest proportion with 53 percent of the total debt followed by Government bonds with 37 percent. Government stocks accounts for 7 percent while other Government debts constitute 3 percent of the total debt. When compared to the 2004/05, the position for 2005/06 shows that treasury bills have increased substantially by 33.4 percent from TZS billion to TZS billion. Government bonds increased by 28.6 percent from TZS billion in 2004/05 to TZS billion in 2005/06. Government stocks increased by 34.6 percent while other government debts decreased by 26 percent from TZS billion in 2004/05 to TZS 78.7 billion recorded in 2005/06. Other debts position as at 30 th June 2006 does not include government guarantees, which is a potential debt, as well as unverified claims on central and local governments. The substantial increase noted in Treasury Bills was due to implementation of monetary policy, new financing needs and redemption of government stocks. The increase in government Bonds was due to new issues for settlement of parastatals debt, financing of debt swap arrangement and compensation claims. Other domestic debts have decreased significantly from TZS billion in June 2005 to TZS 78.7 billion in June The decrease was due to payments of various claims out of government budget. 26

27 Chart 6 Domestic Debt Composition as at end June 2006 Other Government Debts 3% Government Bonds 37% Government stock 7% Treasury bills 53% Government Securities by Holder Category Government securities, including Treasury Bills, Treasury Bonds and Stocks accounts for 97 percent of the total domestic debt stock. Analysis of Government Securities by Holder Category shows that Commercial Banks are leading creditors with 42.9 percent, followed by Pension Funds with 26.5 percent. The Bank of Tanzania is third largest creditor to government with 19.1 percent, while public enterprises are fourth with 6.1 percent, followed by Insurance Funds, Non-Bank Financial Institutions and Private Sector with 3.0 percent, 2.1 percent and 0.3 percent respectively. 27

28 Chart 7 Government Securities By Holder Category As At End June 2006 Insurance Funds 3.0% State/public owned Organizations 6.1% Bank of Tanzania 19.1% Pension Funds 26.5% Private Sectors 0.3% Non Bank Financial Institutions 2.1% Commercial Banks 42.9% Government Securities by Maturity Maturity profile of Government Securities shows that the share of instruments maturing in less than 3 years has increased to 68 percent of total outstanding Government Securities as at 30 th June The increase is mainly attributed to investor s preference for short term maturity instruments such as Treasury Bills and 2 year Treasury Bonds. Instruments with maturities within 3 to 5 years constitute 19.9 percent Instruments with maturities within 5 year to 10 year comprising of stocks and long-term bonds constitute 8.0 percent of the total outstanding debt, while debt instruments with maturities of more than 10 years recorded 4 percent of the total outstanding Government Securities as shown on Table 10 below. Government Securities by Maturities MATURITIES End June 2005/06 <=3 Years 68.01% Over 3 Yrs but <= 5 yrs 19.94% Over 5 Yrs but <= 10 yrs 8.04% Over 10 Years 4.01% TOTAL % Source: National Debt Database (ACGEN) Table 10 28

29 Chart 8: Government Securities by Maturities 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% <=3 Years Over 3 Yrs but <= 5 yrs Over 5 Yrs but <= 10 yrs Over 10 Years Domestic Debt Service A total of TZS billion comprised of principal plus interest was due for payment for the year 2005/06. Out of the total debt service TZS933.5 billion or 87.2 percent represented principal amount that was rolled over while interest amounting to of TZS136.6 billion or 12.8 percent was paid out of the Government budget. Trends of Domestic Debt Service (Principal and Interest) Chart TZS in Billions / / / / / /06 Financial Year Treasury bills Treasury Bonds Stocks Special Bonds 29

30 Chapter 5 Structure of the Tanzania Debt Office 5.0 Introduction This Chapter looks at debt management in Tanzania. Issues covered include the legal and institutional frameworks. 5.1 Legal Institutional Framework The Government Loans, Grants and Guarantees Act Nos. 9 and 30 of 1974 and Amalgamated with the Government Loans, Guarantees and Grants (Amendment) Act, 2003 provides for the overall management of public debt in the Republic of Tanzania. It oversees the activities and operations of public debt. The Act provides for the contraction of both external and domestic debt by the Minister of Finance. Part II Article 3 of the Act states, among others, that: Subject to the provisions of this Act the Minister may, for and on behalf of the Government, from time to time, raise from outside Tanzania, upon such terms and conditions as to interest, repayment or otherwise as may be negotiated by the Minister, loans of such sums as in the opinion of the Minister are necessary to defray expenditure which may lawfully be defrayed; Provided that the authority conferred upon the Minister by this section shall be so exercised that in no financial year shall- a) the aggregate of the service cost becoming due and payable in respect of all outstanding foreign loans during that financial year and the four succeeding financial years exceed fifteen per centum of the average annual foreign exchange earnings computed on the basis of the annual foreign exchange earnings of the preceding three financial years; b) the aggregate of the service cost becoming due and payable in respect of all outstanding loans (both foreign loans raised under this section and local loans raised under Part III) during that financial year and the four succeeding financial years exceed thirty per centum of the average annual recurrent revenue computed on the basis of the three proceeding financial years. Part III Article 6 provides for the Minister of Finance to, among others, contract local loans: Subject to the provisions of this Part the Minister may, for and on behalf of the Government, from time to time raise, in the manner provided for in this Part, loans from within Tanzania of such sums as in the opinion of the Minister are necessary to defray expenditures which may be lawfully defrayed: Provided that the authority conferred upon the Minister by this section shall be so exercised that in no financial year the aggregate of the service cost becoming due and payable in respect of all outstanding loans (local loans as well as foreign 30

31 loans) during that financial year and the four succeeding financial years shall exceed thirty per centum of the average annual recurrent revenue computed on the basis of the three preceding financial years. Part IV Article 13 provides for the Minister of Finance to on behalf of the a Local Government Authority or Parastatal Body, among others, guarantee loans: Where on the advice of the National Committee, the Minister is satisfied that it is in the public interest that the repayment of any principal money and the payment of the interest and other charges on any loan raised either within or outside Tanzania by a local government authority or parastatal body requires a Government guarantee, the Minister, shall proceed to issue such a guarantee for and on behalf of the Government. (1) The guarantee to be issued under section 13 shall be issued under the following terms and conditions that a) the proceeds of a loan being guaranteed shall be utilized in furtherance of the priority areas as set out in the regulations made under this Act; b) the extent of the guarantee of the guarantee covered shall be no more that seventy per cent (70%) of the amount borrowed: Provided that, under exceptional circumstances, the Minister may, upon the recommendations of the National Committee waive this requirement; c) the parastatal organisation or body corporate for whose benefit such a guarantee is given, demonstrates to the satisfaction of the Minister, that it has provided adequate securities to cover the loan in the event of a default by such parastatal organisation or body corporate. And Part V Article 15 provides for the Minister of Finance to on behalf of the Government, among others, receive a Grant: (1) The Minister shall have the authority to receive for any and on behalf of the Government any grant made to the Government by any foreign Government or other person. Provided that, the provisions of this sub-section shall not apply where a grant is received by the Revolutionary Government of Zanzibar. (2) The provisions of section 5 shall apply mutatis mutandis 15 in relation to any sum of money received by the Government by way of grant. The Act further provides for limits in terms of the local loans and guarantee to be borrowed and issued, in a given period respectively. Further, the Act is supported by the Public Finance Act, 2001of Parliament. Specifically, Article 24 of the Act deals with matters relating to contracting of debt by the Republic and any other entity. Article 24 as reproduced below states; where for the purposes of any development project which has been approved by the National Assembly by resolution or otherwise a contract for the supply of goods or services is entered into on behalf of the United Republic which provides 15 the necessary changes having been made 31

32 that any payment other than a payment charged to the Consolidated Fund by virtue of the provision of this or any other Act is to be made on or after the first day of July nod, following, the Minister shall as soon as possible after the making of such contract give notice to the National Assembly and every such notice shall specify- (i) The names of the contracting Parties; (ii) The nature, of the goods or services to be supplied; (iii) The total amount payable by the United republic in respect of such goods or services and the date or dates on which payment is to be made; (iv) The development project to which such contract is referable. From the above it is clear that debt management in the Republic of Tanzania is well covered in terms of the legal framework. 5.2 Institutional Framework The following are the institutional arrangements in descending order under which debt management in Tanzania is conducted; The Parliament The Cabinet The Minister of Finance The National Debt Management Committee The Policy Analysis Department The Accountant General s (Acc Gen) Office The Treasury Registrar The External Finance (Office) The Bank of Tanzania (BOT) The Office of the Attorney General provides legal guidance, i.e., legal opinion on debt documents The Parliament This is the highest authority in Tanzania that oversees the contracting and repayment of external and domestic debt through the Appropriation Bill. Any decision to contract debt by Executive is referred to Parliament for approval. These decisions are normally imbedded in the national budget for the respective financial year to which monies so raised or expended are debated by Parliament. Part II Section 3 of the Act sets the limits of how much can be raised and or paid abroad. Other relevant Parts of the Act stipulate the amounts authorized by Parliament The Cabinet This is the highest authority in Debt Management matters, responsible for approving annual debt strategy and reviewing quarterly debt reports. 32

33 5.2.3 The Minister of Finance The Minister of Finance exercises his sole right to issue and manage government debt and guarantees, submits annual debt strategy (including public debt statement and gross funding plan), and quarterly debt reports for cabinet approval and review respectively The National Debt Management Committee Part VI of the Loans, Guarantees and Grants Act of 1974, among others, provides for the establishment and functions of the Appendix xx, xx, and xx. There is hereby established a National Debt Management Committee which shall be an advisory body to the Minister on all matters relating to debt management. The functions of the Committee shall be To advise the Minister on matters relating to external and domestic borrowing, issuing of government guarantees and acceptance of grants on behalf of Government; To monitor the implementation of the Annual Debt Strategy and borrowing plan approved by the Government for the ensuing quarter; To prepare quarterly debt and budget execution reports; To advise on the formulation of an Annual Debt Strategy and borrowing plan; To monitor, co-ordinate and direct the activities of all government departments and institutions involved in the management of debt, grants and guarantees; and To advise on the measures to be taken against any person for noncompliance of the provisions in the Act. The National Debt Management Committee (NDMC) comprises of; a) Permanent Secretary Treasury who shall be the Chairperson; b) Permanent Secretary Ministry of Finance; c) Permanent Secretary Minister of Finance Zanzibar; d) Permanent Secretary President s Office Planning and Privatisation; e) Attorney General; f) Permanent Secretary Prime Minister s Office; g) Permanent Secretary Ministry of Foreign Affairs and International Co-operation; h) Governor Central Bank of Tanzania; i) Accountant General Ministry of Finance, Tanzania Mainland; and j) Accountant General Ministry of Finance, Zanzibar. Further, the Act also provides for the establishment of a Technical Committee to be known as the Technical National Debt Management Committee (TNDMC) of the National Committee whose Chairman shall be the Commissioner of the Policy Analysis in the Minister of Finance. Under Section 17 of the Act the Technical National Debt Management Committee (TNDMC) is tasked with provision of technical advice to the NDMC. 33

34 5.2.5 The Policy Analysis Department (PAD) The Policy Analysis Department (PAD) is the centralized public debt policy unit which performs the role of centralized debt policy unit to the Government and acts as Secretariat to the NDMC combining inputs from the various units involved in debt management at the Ministry of Finance and Bank of Tanzania, and from POPP, PSRC, and TR. It also prepares quarterly analytical debt report for the NDMC deliberation and onward submission of the same to the Minister and Cabinet. In addition, the department further monitors debt sustainability outlook and adherence to Ministerial guidelines on debt structure (e.g. external-domestic debt balance); submits annual and quarterly budget funding analytical debt report to NDMC through the debt section and provides macro-fiscal inputs into the debt strategy formulation process The PAD- Debt of the Ministry of Finance responsible for; Analyzing, and formulating policies and strategies on debt issues Debt reporting Provide technical analysis on debt instruments, portfolio, risk, debt sustainability and setting benchmarks The Accountant General s (Acc Gen) Office The Accountant General responsible for; Overseeing domestic securities auctions, Managing foreign loans agreements, Effecting debt service payments, Recording, validating, and accounting, Maintaining the debt data base Custodian of al Loans, Grants and Guarantees Agreements and Reporting of debt The Treasury Registrar Treasury Registrar at the Ministry of Finance responsible for; the monitoring performance of the liabilities of Government Agencies, parastatals, Regulatory bodies and other Government Institutions together with the Parastatal Sector Reform Commission, keeps record of all parastatal-related liabilities, prepares annual parastatal debt statements for NDMC review and subsequent integration into the public debt statement The External Finance (Office) The External Finance Department of the Ministry of Planning, Economy and Empowerment (MPEE) is responsible for the scrutiny of project proposals to ensure that they are in line with National Development Plans and monitoring implementation of projects at the national level. Further, the Office is responsible for sourcing of financing for projects. 34

35 5.2.9 The Bank of Tanzania (BOT) Section 5(1) and 60(1) and (2) of the Bank of Tanzania Act, 2006 states, among other responsibilities, that the Bank of Tanzania is; responsible for advising the Government on monetary policy issues, responsible for the formulation and implementation of monetary policy, an agent of the Government for servicing public debt, including the issuance or payment of interest on and the redemption of bonds and other securities of the Government, and responsible for advising the Government on issues which affect fiscal policy and the national growth of the economy in general. The responsibility of debt management is enshrined in Section 32 (2) (b) & (c) of the same Act. Further, the Act provides that the BOT may pay, remit, collect or accept for deposit or custody funds in Tanzania or abroad on behalf of the Government. According to Sections 5(1) and 60(1) & (2) of the BOT Act 2006 the Bank of Tanzania is responsible to advise the Government on monetary policy issues including formulation, and implementation of the monetary policy and to advise the Government on issues which affect fiscal policy and the national economy. Section 32(2)(b) & (c) of the Act further provides for the Bank of Tanzania to act as an agent of the Government in servicing the public debt, including the issuance or payment of interest on and the redemption of bonds and other securities of the Government. Further the Bank may pay, remit, collect or accept for deposit or custody funds in Tanzania or abroad on behalf of the Government. In addition, for the purpose of providing temporary accommodation to the Government, Section 34 (1)(b) of the Act provides for the Bank to purchase, hold and sell Treasury Bills issued by the Government which mature not later than twelve months from the date of issue. 5.3 Institutional Administrative Arrangements The institutional arrangements in the process of debt management in Tanzania are shown in the respective Charts below. 35

36 Job Title Commissioner Policy Analysis Dept (PAD) Asst. Commissioner PAD/Debt Policy Analysts/Debt Chart 10 The Ministry Of Finance - Policy Analysis Department Reports to Subordinates Technical Administrative (directly) (directly) responsibiliti responsibilities Deputy PS Asst. Commissioner, Debt (ACP/D) Asst. Commissioner PAD/Debt Assistant Commissioner Debt (ACP/D) CPAD N.A es Chairs DMC meetings Head of the Debt Section Formulation of debt policy and strategy, assess impact of debt on economic growth, equity, stability and national independence, ensure timely and accurate availability of debt data, Analysis, report writing, Coordinate debt related functions Policy Analysts N.A. 36

37 Chart 11 Job Title Commissioner External Finance (CEF) Asst. CEF/Multilateral The Ministry Of Finance - External Finance Department Reports to Subordinates (directly) (directly) Deputy PS CEF Assistant Commissioner s Multilateral desk officers Asst. CEF/Bilateral CEF Bilateral desk officers Aid Coordination Unit Asst. CEF/Regional Administration Desk Offers CEF CEF Heads of Sections Aid coordination unit desk officer Regional Cooperation Desk Officer N.A. Technical responsibiliti es Resource mobilization in line with TAS document Recourse mobilization, Multilateral Institutions Resource mobilization Bilateral Institutions Data collection and analysis Resource mobilization, Coordination of Regional Programmes Execute their respective schedules of work including signing of applications for withdrawal of funds Administrativ e responsibiliti es Sub-vote resource holder Member of Ministerial Management Team Head of Section Head of Section Head of Unit Head of Section Administer day to day activities 37

38 Chart 12 Job Title Accountant General (ACGEN) The Ministry of Finance - Accountant General s Department Reports to Subordinates (directly) (directly) PST Assistant Accountant General Technical responsibiliti es Execute payments of the Government including debt Assist in the above Participate in Asst. ACGEN (Public Debt) ACGEN Chief Accountant Chief Accountant Asst ACGEN Public Debt (debt) Officers TDMC Public Debt Officers AACGEN N.A Debt recording, debt service payment coordination and disbursements and report writing Administrativ e responsibiliti es Head of Department Head of Section Supervisor of the section N.A Chart 13 Job Title Deputy Director - Debt Economists/debt Managers Bank of Tanzania - Debt Management Department Reports to Subordinate Technical (directly) s (directly) responsibilities Director of Economic Policy (DEP) Heads of section Heads of section NA 38 Advise DEP on debt issues Member of TDMC Data recording, reconciliation, validation and verification, analysis and report writing, verification of demand notes and participate in DSA Administrativ e responsibiliti es Head of Debt Management Department NA

39 Chart 14 Bank of Tanzania - Department Of Monetary And Fiscal Affairs Job Title Reports to (directly) Subordinates (directly) Technical responsibilities Administrative responsibilities Deputy Director Director Heads of Preparation of Head of the M& Fiscal. Economic Section annual department Affairs Policy monetary targets Econ/ M& Fiscal Affairs Heads Section of NA Handle analytical Issues, report production. NA Chart 15 Job Title Deputy Director Domestic Accounts Bank of Tanzania - Domestic Accounts Department Reports to Subordinates Technical Administrative (directly) (directly) responsibilities responsibilities Director of Heads of Effecting Head of the Finance Section payments for department maturing government securities Accounting of T/bills and Bonds sales Bank Officers Heads of Section NA Assist the head of sections on technical issues like recording holders of Government security, payments on maturity and report writing NA 39

40 Chart 16 Job Title Deputy Director Foreign Accounts Bank Of Tanzania - Department Of Foreign Accounts Reports to Subordinates Technical Administrative (directly) (directly) responsibilities responsibilities Director of Heads of Authorizing Head of the Finance Section Transfer of department funds in respect of external debt service. Recording and Monitoring of foreign inflows Bank Officers Heads of Section NA Assist the head of sections and on technical issues NA Chart 17 Bank of Tanzania - Department Of Domestic Markets Job Title Deputy Director Domestic Markets Reports to (directly) Director of Financial Markets Subordinates (directly) Heads of Section Technical responsibilities Design and implement policies for developing secondary markets Administrative responsibilities Head of the department Oversee auction process for securities Bank Officers Heads of Section NA Assist the head of sections on related technical issues like recording in GSS, conduct auctions, report preparation and analysis of auction trends NA 40

41 Flow of Tasks/Work In debt management, work can be divided into three distinct stages namely; the Front, Middle and Back Offices. A. The Front Office This includes: The External Finance Department of the Ministry of Finance which is responsible for mobilizing domestic and external financing resources The Central Bank involved in conducting domestic securities auctions B. The Middle Office This Section involves: The PAD- Debt of the Ministry of Finance responsible for analysing, and formulating policies and strategies on debt issues, debt reports and provision of technical analysis on debt instruments, portfolio, risk, debt sustainability and setting benchmarks. Treasury Registrar at the Ministry of Finance responsible for monitoring the performance of assets and liabilities of government agencies, parastatals, regulatory bodies and other Government Institutions External Sector Department of the Ministry of Planning, Economy and Empowerment (MPEE) responsible for the scrutiny of project proposals to ensure that they are in line with National Development Plans and monitoring implementation of projects at the national level. C. The Back Office This includes: The Accountant General responsible for overseeing domestic securities auctions, managing of foreign loan agreements, effecting debt service payments, recording, validating, accounting, maintaining the debt data base and reporting of debt. The Central Bank responsible for debt service payments, maintaining accounts, maintaining debt data base and debt reporting. Budget Department at the Ministry of Finance responsible for making budgetary provisions and release of funds for debt service. 5.5 Accounting Systems The Public Debt and General Services (PDGS) Section operating under the Accountant General s Office carries out the day-to-day operations of the debt office. It is responsible for the raising of financial transaction vouchers, i.e. receipts and payments. 41

42 Operational Objectives of The PDGS include the following; 1. to maintain a steady GDP growth; 2. to promote best practices and stakeholder participation in public financial management; 3. to enhance efficiency and accountability in resource mobilizations, allocation and utilization; 4. to improve control and management of government assets and liabilities; 5. to improve procurement procedures of goods, works and services for government; 6. to develop human resource capacity and promote MIS for improved public services delivery; 7. to create a conducive working environment for efficient and effective delivery of supporting services; 8. to improve the delivery of retirement benefits to government employees. The PDGS uses the Government Accounting System based at the Central Payment Office using an Integrated Financial Management System (IFMS) computer system in capturing transactions. In addition, a separate system has been adopted outside the normal IFMS called the Commonwealth Secretariat for Debt Recording and Management System (CS-DRMS) in order to keep records of individual loans transactions. 5.6 Financing The Public Debt and General Services Section controls its own Budgetary Vote through the Exchequer Issue System. 5.7 Recording Generally, all records are required to be maintained by the Back Office but the Middle and Front Offices maintain records for their own operations, analysis and monitoring purposes. In Tanzania, different units in both, the Ministry of Finance and the Bank of Tanzania assume the Back Office functions. These are Accountant General s Office, Treasury Registrar s Office and the Directorate of Legal Service in the Ministry of Finance and the Debt Management Department of the Bank of Tanzania. The Public Finance Act 2002 stipulates that all agreements in respect of loans raised by the government should be kept with the Accountant General s Office for custody. The Accountant General s Department keeps all loan agreements for external debt. Guarantees and on-lending agreements are kept with the Directorate of Legal service of the Ministry of Finance. Auction results for Treasury Bills and Bonds are kept with the Department of Domestic Accounts and Domestic markets of the Bank of Tanzania but copies are sent to the office of the Accountant General and Policy Analysis of the Ministry of Finance. Records for Special Stocks, which were issued before the starting of GSS, are also kept on registers in these two departments. Information on Un-Securitised Debts, which form contingent liabilities such as terminal benefits, un-remitted pension dues for privatized parastatals are kept with the Treasury Registrar s Office of the Ministry 42

43 of Finance. Information on Local suppliers and utility arrears are kept with the Accountant General s Office. The Treasury Registrar s Ordinance No. 35 of 1959 has given the Treasury Registrar powers to act as the Manager of all parastatals on behalf of the Government. Information on the privatized parastatals is kept by the Treasury Registrar s Office. However, the keeping of the on-lending loans and guarantee records with the Directorate of the Legal Service of the Ministry of Finance is an internal arrangement Users of Records Government mainly uses the information kept above. Within the government the information is used by various institutions but mainly by the Accountant General, Bank of Tanzania, Treasury Registrar, the Policy Analysis Department, Directorate of Legal Services of the Ministry of Finance, the Office of Attorney General and the Office of the Controller and Auditor General Process Involved in Information Usage Once a foreign loan is signed the original loan agreement is taken to the Accountant General who would produce a copy for the Bank of Tanzania for recording purpose. Guarantee and On-Lending Agreements once signed are sent to the Directorate of Legal Service for custody and copies sent to the Treasury Registrar s Office for records. When parastatals are earmarked for privatization the obligations, which the government is to shoulder, are sent to Treasury Registrar s Office for records. When the Domestic Markets Department of the Bank of Tanzania conducts auction for Treasury Bills and Bonds the copies of Auction results are sent to the Accountant General s Office and the Debt Department of Bank of Tanzania for records, and to the Policy Analysis of the Ministry of Finance for analysis and monitoring purpose. The Domestic Markets and Domestic Accounts, both of the Bank of Tanzania also maintain records of the Auction results for reference. 5.8 The Role of the Bank of Tanzania in Debt Management Operations According to Sections 5(1) and 60(1) & (2) of the BOT Act 2006 the Bank of Tanzania is responsible to advise the Government on monetary policy issues including formulation, and implementation of the monetary policy and to advise the Government on issues which affect fiscal policy and the national economy. Section 32(2)(b) & (c) of the Act further provides for the Bank of Tanzania to act as an agent of the Government in servicing the public debt, including the issuance or payment of interest on and the redemption of bonds and other securities of the Government. Further the Bank may pay, remit, collect or accept for deposit or custody funds in Tanzania or abroad on behalf of the Government. 43

44 In addition, for the purpose of providing temporary accommodation to the Government, Section 34 (1)(b) of the Act provides for the Bank to purchase, hold and sell Treasury Bills issued by the Government which mature not later than twelve months from the date of issue. 44

45 6.0 Introduction Chapter 6 Heavily Indebted Poor Countries Capacity-Building Programme Framework 16 Under the Original and Enhanced Heavily Indebted Poor Countries (HIPC) Debt Relief Initiatives (HIPC I and II), each HIPC had to engage in tripartite analysis with the Bretton Woods Institutions on the sustainability of its external debt, whether or not it was ultimately eligible for HIPC relief; and, if it was eligible, to conduct such analysis regularly throughout the period of the Initiative. In addition, in order to qualify for relief, each HIPC also needed to demonstrate that it had a coherent strategy aiming to achieve long-term sustainability of its debt, in order to achieve a genuine exit from debt problems. Under the enhanced HIPC Initiative, this debt sustainability must also contribute more directly to the reduction of poverty in the HIPCs. In that context, (since July 1997) the Governments of Austria, Denmark, Sweden, Switzerland and (since June 1998) the United Kingdom through the Debt Relief International (DRI), have been funding the HIPC Debt Strategy and Analysis Capacity- Building Programme (henceforth CBP). The aim of the Programme is to allow HIPC governments to develop the full independent capacity to design, own and lead their national debt strategies; and to demonstrate to the international community and their civil society their commitment to a high level of debt management during and beyond the HIPC Initiative in two respects. It adapts its methodology to the needs of HIPC countries and goes beyond the narrow conception of debt sustainability in the Enhanced HIPC Initiative; and it continues assistance to countries after the HIPC Initiative, in order to ensure that their future borrowing policies allow them to maintain long-term debt sustainability. The HIPC CBP has developed a methodology for implementing partner organizations and HIPC countries to assess debt management capacity. Initially, this methodology was designed mainly to allow evaluation of debt strategy status. In later updates, the methodology was revised to assist in making a comprehensive assessment of national debt management capacity. The revised methodology drew extensively on earlier assessment methodologies used by the MEFMI, West African Institute for Financial and Economic Management (WAIFEM) and the Bretton Woods Institutions, as well as the CBPs earlier methodology. In this methodology, there are 14 areas of assessment in order to give a comprehensive picture of debt management in a given country. All areas are judged net of external technical assistance. 16 HIPC Debt Strategy & Analysis Capacity Building Programme, Debt Management Capacity Assessment Guide Document by DRI, July

46 The 14 areas are: Legal and Institutional Framework Human Resources Management, Supervision and Working Environment New Financing Policy Disbursement Recording Servicing Renegotiation Macroeconomic Projections Poverty Reduction Programming and Forecasting Portfolio and Risk Analysis Debt Strategy Analysis Political Priority and Leadership Transparency, Valuation and Control In each area of assessment, five criteria are established, for each of which a country can receive a between 1 and 5 points depending on whether the debt management in this area is judged to be very poor, poor, adequate, good or excellent (I.e. reaching ideal international standards). Tanzania was first tested under this framework in 2002, 2003, and 2005, and most recently in In 1998, MEFMI did carry out an assessment of capacity in debt management in Tanzania under its Performance and Standards Indicators Assessment Framework. The Assessment for the years 1998, 2003 and 2005 under the HIPC CBP are discussed in the subsequent Chapter. 46

47 Chapter 7 Tanzania HIPC CBP 2003/ Introduction As pointed out in the chapter above, Tanzania was subjected to the HIPC CBP analysis four times with the most recent being in Tanzania was first tested under this framework in 2002, 2003, 2005 (but reported in April 2006) and most recently in November 2006). In 1998, MEFMI did carry out an assessment of capacity in debt management in Tanzania. A summary of that work is presented in Appendix I. In depth analysis of the respective assessment for this Paper has been limited to the 2003, 2005 and 2006 work only to show the progress made between the three periods. This selection has been done because the work for 1998 was conducted under a different methodology hence it has been felt that it would not augur well to compare results under different assessment guidelines. 7.1 MEFMI Assessment of Capacity in Debt Management 1998 The MEFMI in its 1998 assessment did come up with a number of recommendations for capacity building in debt and aid (grants) management. At the time of the assessment Tanzania was struggling with an external debt stock of over US$7.0 billion. At the time domestic debt was not so much on the discussion menu. The assessment did however cover the need for capacity building in domestic debt as well as general management of external financial assistance. Tanzania embarked on a debt management capacity building programme in 1996 in line with one of EASIDARM s objective of strengthening capacity in Member States in debt and reserves management. As recognized by the assessment report, Tanzania had by the third quarter of 1999 achieved tremendous progress in core functional areas of debt management. The area of main concern was that grants management. The main strength of the 1998 MEFMI Assessment is that it went beyond identification of problem areas but provided for Recommendations that included Costing of the activities that required attention and were time bound covering the period and these are presented in Appendix I. 7.2 Analysis of HIPC CBP 2003 During the 2003 HIPC CBP Assessment (Appendix II) it was found that on the level of Legal and Institutional arrangement, Tanzania did not have clear guidelines or where they existed they were not followed and hence there was need to enact laws and regulation in this respect. At Human Resource level it was found out that while staff was in place, the numbers were not adequate and most of it was ill-qualified, ill-trained and lowly paid. At supervisory level the personnel was not being assisted by procedures manuals and did not hold regular consultative meetings. 47

48 Below is presented a more detailed analysis of that evaluation. 1. Political Priority and Leadership Gaps and Causes Act just enacted hence low profile of debt management in government discussions. Lack of regulation implementation of capacity building recommendations. No ownership of national debt strategy. Recommended Solutions There is need to further adherence to the Act. Government should own the national debt strategy to enhance implementation. 2. High Quality Legal And Institutional Framework For Debt Strategy Gaps and Causes No laws or regulations are in place for publication or provision of public information on debt management. No clear institutional or departmental responsibilities. Lack of key ratios for contracting debt. Recommendation Enact laws on debt contraction and responsibilities. Enact regulations for publications on debt and information flows. Establish keys ratios for debt contraction. 3. Availability Of Trained Personnel Capable Of Formulating And Executing Debt Strategies Gaps and Causes Inadequately trained personnel. Lack of adequate staff motivation and compensation schemes in place. Staff assessment and development plans not in place. Recommendations Employ only qualified staff. Introduce and implement staff training programmes. Introduce and implement staff retention schemes. 4. External Debt Strategy Analysis Gaps and Causes Inadequately trained staff. DSA does not include private sector debt. Domestic debt is included. 48

49 Recommendations There is urgent need to train staff in DSA techniques. Include domestic and private sector. 5. External Debt Disbursement Gaps and Causes Delays in information flow. Failure to fulfill conditions precedent for disbursements and creditor delays. Recommendations Improve information flow among receiving agencies. Strive to fulfill conditions precedent timely and process applications immediately and correctly. 6. External Debt Recording Gaps and Causes Lack of network between the MOF and BOT. Inadequate training in System Report customization. Inadequate information inflow. Short term debt not recorded in the System due to no Module to capture short term debt in CS-DRMS. Recommendations Improve information flow among respective units and institutions. Introduce training for staff. Install network version of CS-DRMS External Debt Renegotiation Gaps and Causes Noted delays in finalizing PC agreements. Negotiators do not use information in the international arena for negotiations. Problems with Non-PC Creditors. Lack of adequate negotiation skills. Negotiation teams exclude knowledgeable personnel. Recommendations Train staff in negotiation skills. Include all relevant personnel in negotiations. Negotiators should apply best practices in negotiations. 49

50 8. External Debt Servicing Gaps and Causes Late receipt of demand notices from creditors. Un-updated data base Recommendations Regular reconciliation of the data base. 9. New Financing Gaps and Causes No new financing policy in place. No monthly meetings by relevant units. No procedures on new financing and matching of high-quality projects in place. No effective political and technical coordination. Little qualitative evaluations beyond the PRSP requirements. International best practices are not used in evaluating new financing. Recommendations Put in a new financing policy. Institute monthly meetings. Establish qualitative evaluations mechanisms. Maximise usage of international best practices in assessing sources of new finance. 10. Portfolio and Risk analysis Gaps and causes No training groups in place. No long term MTEF to check the quality of poverty reduction spending. No ability to forecast poverty reduction trends and attainment of goals. Recommendations Introduce long term MTEF. 11. Capacity Building Plans Individual Level Gaps and causes Lack of staff assessment and development plans. Recommendations Introduce regular staff assessment which will should measurable benchmarks. 50

51 12. Transparency, Evaluation and Control Gaps and Causes No annual conferences with civil society. There is no strategy to interact with political structures. Lack of regular self evaluations. Recommendations Introduce evaluation procedures which will act as control mechanism. Had strategy implementation discussions with the political structures. Introduce regular evaluations. In the 2003 assessment it is very clear that Tanzania was well behind its efforts for capacity building in terms of legal, institutions, human and material resources. The assessment shows that the country had along way to improve its debt management areas. 7.3 Analysis of CBP 2005 In November 2005, the MEFMI and the DRI conducted a routine DSA workshop to update the last DSA and to train more Tanzanian Officials how to conduct a DSA. Tanzania had just achieved debt relief under the enhanced HIPC Initiative and it was necessary to assess progress of the country s debt ratios after the Multilateral Debt Relief (MDRI). Results of this workshop showed that while a lot has been achieved from the 1998 benchmark, there still is need to enhance capacity in the country. Using the 2005 HIPC CBP (Appendix III) below are some of the identified constraints and possible solutions. 1. Updating Debt Management Strategies At Least Once A Year Gaps and Causes Limited ability to use the computerized strategy tool the Debt-Pro - due to low frequency of the software usage and turnover of trained staff. Narrow analysis being carried out on domestic debt strategy. Low understanding of the National Debt Strategy. Recommended Solutions Training of more debt staff in the use of software used in debt analysis -Debt Pro and the new CS-DRMS In implementing national debt strategy, enhance cooperation and coordination between units involved in debt management. Adhere to the formalized action plan with time frame work and milestones to ensure smooth follow up of the NDS. Set time frame to be in line with ministry strategic plans. 51

52 2. High Quality Legal And Institutional Framework For Debt Strategy Gaps and Causes No clear institutional and departmental responsibilities resulting in duplication of work. Coordination among agencies not formalized leading to time lags in information flow. Crisis Lending to state companies through guarantees has led to high levels of contingent debt. Recommendation Facilitate formalization of responsibilities among stakeholder. The Minister of Finance should adhere to constitutional limits on overall financial management. Educate stakeholders on the revised and updated laws and regulations through in house training, seminar and workshop up to political levels. Circulate legislation parameters for debt contraction and guarantee issuance to stakeholders and institute penalties on defaulters to ensure adherence in observed 3. Availability of Trained Personnel Capable Of Formulating and Executing Debt Strategies Gaps and Causes Under staffing and lack of specialization making it difficult to have comprehensive capacity building plan. Recommendations Working through the Public Service Commission, establish plans for staff recruiting, retention and training programmes. Prepare comprehensive staff capacity building requirement in collaboration with all debt management stakeholders, MEFMI inclusive. 4. External Debt Recording Gaps and Causes: Inadequate ability to run new software CSDRMS by most new users due to new features. Incomplete and un-updated database with some types of debt recorded on spreadsheets making it difficult to follow up debt service repayment schedules and preparation of analytical reports. Lack of some information resulting in incomplete data validation. Improper accuracy consistency of information provided by responsible institutions. Recommendations Provide more training on new CS-DRMS to all users. All transactions need to be recorded in the unified database. 52

53 5. External Debt Renegotiation Gaps and Causes Absence of effective political and technical coordinating bodies of debt technocrats. Lack of tactics in taking leading role in respect of renegotiation and drafting of loan agreements. Limited knowledge in debt portfolio analysis and review of contents of agreements. Non use of national and international information and documentation to support negotiation team especially for Non Paris Club in order to obtain better terms. Recommendations Including debt experts in all political trips which are likely to culminate into loan agreements being signed. Train a cadre of staff in more rigorous negotiation skill. This group should include experts in financial analysis, debt analysis and international financial legal instruments and should be maintained together for a long time. 6. External Debt Servicing Gaps and Causes Unreliable debt service forecasting and budget provision in line with debt strategy resulting in untimely and inaccurate debt service payments. Unnecessary accumulation of arrears due policy decisions or otherwise. Some creditors not sending demand notices in time or at all. Recommendations Maximum use of the CSDRMS debt service projection module to reduce inaccuracies. Constant upgrading once debt service has been effected so that arrears are not automatically generated by the system. Creditors should be requested to send demand notices at least a month in advance to provide time for cash flow planning and timely settlement. 7. New Financing Gaps and Causes A. Recording Existing tool does not record contingent debt and on-lent loans. 53

54 Some information is captured in spread sheet and remain unrecorded in the system. Delay in capturing some of new debt instruments and transactions leading to failure to capture information for some loan agreements. B. New Financing Policy New financing policy not fully developed. Lack of deep feasibility study on some project leading to failure in matching financing and quality and relevance of projects. Missing of comprehensive risk analysis to account for impact of new financing in the overall portfolio makes it difficult in having prospective new financing policy guidelines. C. Disbursements Delay in documentation on disbursement circulation between Front and Back Offices and Project Implementation Units. Recommendations A. Recording and Disbursements A most comprehensive version is required to ensure it records all types of financing. Training on new financing is highly recommended. Regular and smooth sharing of information particularly on new instrument and loan agreements. Embark on risk analysis for new financing and impact in the new portfolio training module of CSDRMS 2000+, although some insight is currently provided. B. New financing policy New financing policy should be put in place. Institutional arrangement which involve in depth analysis by MPEE, to ensure proper procedure implemented before decision on new borrowing. Strengthen inter-institutional information flow to ensure smooth circulation of disbursement information among agencies including direct-to-project technical assistance and assets. 8. Domestic Debt Gaps and causes I. Recording Most domestic debt instruments are not recorded in CS-DRMS Most CS-DRMS users, especially new ones, lack adequate experience or have no experience at all. 54

55 Some off tender transaction are sometimes forgotten to be reported making reporting not accurate to all stakeholders especially on debt servicing and trend analysis. II. Domestic Debt Strategy Most political cadres do not have knowledge on domestic debt. Limited participation by market players in depth securities. While government need appropriate amount at best terms monetary policy does at times detect otherwise. III. Domestic Debt Issuance and Servicing Sometimes there is over or under subscription that encourages Off- Tender intervention resulting in diverse terms of interest rate and maturity profiles. Huge chunk of unverified transaction i.e domestic debt arrears from privatized and non performing parastatals debt taken over by government. Sometimes information on Off-Tender auctions and Special Bonds that are issued outside normal weekly auctions is not captured by all agencies. Recommendations I. Recording Put in place a programme to transfer all domestic instruments from spreadsheet into CS-DRMS Conduct regular training for both new and other domestic debt staffs. Conduct regular validation of domestic debt database for comprehensiveness, accuracy and timeliness. Develop systems of obtaining comprehensive information on all instruments sold on Tender and Off-Tender Auctions. II. Domestic Debt Strategy Conduct an Awareness Seminar to sensitize members of parliament on debt management issues. Sensitize more participants from the economy through media programmes. Enhance coordination between the different agencies involved in debt management - the monetary and debt committee to develop a domestic debt policy in line with fiscal and monetary policies. Develop more skills on domestic debt strategy are recommended to combat both financing and monetary pressures. III. Domestic Debt Issuance and Servicing Public to be educated on money market transactions as the market is still developing. Strengthen communication between all agencies to ensure necessary information is circulated regularly. 55

56 Enhance coordination between the different agencies involved in debt management in order to develop a domestic debt policy in line with fiscal and monetary policies. Domestic debt service payments should be projected accurately and payments effected in a timely manner to avoid arrears. 9. Portfolio and Risk analysis Gaps and causes Inadequate skills in Portfolio and Risk Analysis including restructuring of loans and anticipating and preventing risks. Recommendations Conduct continuous training of personnel in the areas of risk analysis of loan by loan, portfolio analysis and prevention methodologies. 10. Capacity Building Plans Individual Level Gaps and causes Understaffing relative to tasks available and large staff turnover. Lack of specialization and few experienced staff. Lack of adequate policy that awards staff appropriately. Lack of incentives and meager salaries. Recommendations Implement a rigorous capacity building programme so as to equip skills with relevant skilss. 11. Recruitment of enough staff and put in place an ambitious retention scheme. 12. Review salaries and the scheme of pension benefits at retirement. 11. Capacity Building Plans Unit Level Gaps and causes There is communication break-down among debt units due to inadequate information flow. High labour mobility and low skills. Duplication of responsibilities among units. Shortage of offices (work rooms). Recommendations Strengthen communication among units in order to improve the process of information flows among members of units. Connect (network) all units in order to enhance data accessibility to all agencies. Conduct a work assessment needs programme in order to assess capacity at unit/agency level. 56

57 Implement a comprehensive staff recruitment programme that will also address issues of skills and staff retention. 12. Capacity Building At Government Level Gaps and causes Civil society is not privy to debt strategy discussions. Less interest shown by political structure. Recommendations More representation of civil society. More sensitization to political and other similar structures. On average by the 2005 HIPC CBP, Tanzania had shown remarkable progress in her efforts to build capacity in the area of debt management and macroeconomic analysis. 7.3 Analysis of CBP 2006 In November 2006, the MEFMI and the DRI conducted a workshop to assess the amount of resources that Tanzania was eligible to under the Debt Sustainability Framework (DSF) and to train Tanzanian Officials how to calculate debt relief available under the DSF. This facility was for countries that had achieved debt relief under the enhanced HIPC Initiative but in order for them to attain the MDGs still required the financial assistance of multilateral financial institutions, namely, the IMF, the World Bank Group and the African Development Bank Group in the case of African countries. Results of this workshop showed that while a lot has been achieved from the 1998 benchmark, there still is need to enhance capacity in the country. Using the 2006 HIPC CBP (Appendix IV) below are some of the identified constraints and possible solutions. 1. Does Tanzania Maintain Debt At Sustainability Levels According To Own Established/Agreed Criteria? Gaps and Causes Some creditors have either provided less relief or have not delivered debt relief at all. Recommended solution Negotiate full debt relief as provided under the HIPC Initiative and request for further debt relief 2. Does Tanzania Have Debt Management Strategies That Are Updated At Least Once A Year? Gaps and Causes Inadequate manpower and training due to under budgeting and long process of recruitment approvals. 57

58 Low capacity in risk management assessment, long term macroeconomic and poverty reduction forecast. National debt strategy is highly comprehensive but requires more time to implement before updating Recommended solution Enhance staff recruitment, retention and training programmes. Conduct training in risk management analysis. Enforce regular updating of the NDS. Conduct train of negotiation techniques and skills across all staff streams. 3. High Quality Legal and Institutional Frameworks for Debt Strategy Gaps and Causes No gap identified. Legal and Institutional Framework is in place. 4. Availability of Trained Personnel Capable Of Formulating and Executing Debt Strategies Gaps and Causes No gap identified. Tanzania has developed a good number of staff to handle formulation and execution of debt strategies. What is required is to maintain these staff in one office. 5. Presence of High Quality Capacity Building Plans That Are Implemented and Annually Updated Gaps and Causes Staff capacity building plans are not comprehensive resulting in under staffing and lack of specialization in some work areas. Lack of adequate funding and retention measures Failure implementation for lack of resources Recommended solution Develop enhanced staff recruitment, retention and training programmes. Comprehensive staff capacity building requirements to be prepared in collaboration with debt management stakeholders, i.e. MEFMI, DRI and the COMSEC. Enhance budget allocation towards debt management programmes. Domestic/Country training to be encouraged for more indigenous participation. 58

59 6. External Debt Gaps and Causes I. Recording Users of CS-DRMS are not linked to the national unified debt database. Not all the new features of the System are utilized. Newly employed staff not fully trained on use of the System. A few transactions are still being recorded in separate spreadsheet i.e. Domestic debt roll-over while Short term debt is not recorded at all. Lack of data validation and non-provision of information among the responsible institutions. Delays experienced in receiving updated data from source. II. Renegotiation Uncoordinated negotiation meetings. Borrowing for crisis management due to inadequate forecasting. Inadequate preparations and lack of negotiation skill. III. Servicing Inaccurate data base due to lack of regular validation. In some instances creditor s statements differ with our records. Delay in receiving demand notices from creditors. Accumulation of arrears with Non-PC Creditors which have not offered PC comparable terms. Recommended Solutions I. Recording BOT and MPEE need to be linked to ACGEN'S debt database which is currently under validation and reconciliation. More training on the new CS-DRMS especially to new users. All transactions need to be recorded in a single system i.e. CS- DRMS with a monthly update. The CS-DRMS 2000 should be updated enough to record all kind of debt data. Validation of data and smooth sharing of information is required Need to reconcile with creditors on debt position as well as among debt units. II. Renegotiation Planning for annual negotiations in advance is required. Have in place a contingent crisis management plan. Training in preparation of strategies in advance and improve on prior consultation among Debt Management Officers (DMOs). 59

60 Establish a documentation center that will ensure that all concerned access documents required for negotiations in a timely and efficient manner. III. Servicing There is need for frequent and consistent reconciliations. Creditors should be reminded to submit demand notices on time. Non-PC Creditors should be urged to comply with PC comparable treatment. 7. New Financing Gaps and Causes I. Recording The available version of the System has no facility to record Contingent Liability debt and On-Lending Loans. New financing is a new component in the System. Advanced analytical capacity lacking. Few transactions are still recorded in separate spreadsheet Some debt data from debt units or department not captured in time or remain un-recorded in the System. Some gaps in grants disbursements information. Delay in capturing some of new debt instruments and grants - out of Off-Tender transactions and new borrowing for un-provision of Loan agreements. II. New Financing Policy Partial implementation of policy commitment at sector level. Lack of deep feasibility study of some projects and list of priority projects. Lack of comprehensive risk analysis and external borrowing strategy not annually up to dated. Though Documentation reasonably comprehensive but not wellorganized/user-friendly. Policy on level of concessionality limits and non priority projects not adhered to. III. Disbursement Delays on information transmission between Front and Back Offices or agencies and sometime the agencies do not communicate back to the Treasury on the funds disbursed direct to the project. 60

61 Recommended Solutions I. Recording There is need for the System providers to incorporate recording of all instruments with full classification. Training on new financing component analytical tools is required. All transactions need to be recorded in a single system i.e. CS- DRMS with monthly updates. Regular and smooth sharing of information particularly on new instruments and loan agreements. II. III. New Financing Policy Technical advice to be respected during negotiations and capacity at sector level needs to be strengthened. Institutional arrangements which involve in-depth analysis by sector and Ministry of Planning be implemented before decision of new borrowing. A public investment program be instituted. Training on risk analysis for new financing and its impact on the overall portfolio and preparation of financing strategy. Ensure comprehensive and well-organised documentation procedures. Adherence to priority list and concessionarity policy. Disbursement Strengthen inter institutional information flow. 8. Domestic Debt Gaps and Causes I. Recording CSDRMS doesn t accommodate some of the instruments. ACGEN s Office is not connected with General System Security (GSS) still using hard copies from BOT. Some of the domestic debt data not recorded in CS-DRMS this also applies to the GSS. Data recording is done manually and some of the reports in CSDRMS are not customized for domestic debt reporting purposes. Sometimes Off-Tender transactions are not recorded on time. II. Domestic Debt Strategy Most of the stakeholders lack skills and awareness in debt management issues. Lack of co-ordination among various units. Procedures are in place but not adhered to. Lack of analytical capabilities. 61

62 Lack of exposure to new technological development e.g. derivative markets, Asset and Liability Management, etc. Lack of proper interpretation of the monetary policy formulation and interpretation. III. Domestic Debt Issuance and Servicing Institutional structures and procedures are there but are not followed. Sometime there is over/under subscription depending on market conditions. Sometimes Off-Tender auctions and special bonds issued outside normal weekly auctions are not received by all agencies for analysis. Conflicting objectives between fiscal and monetary policy. Recommended Solutions I. Recording Enhancement of the GSS and CS-DRMS to accommodate more instruments, install GSS at ACGEN's Office. Regular training is required on the System. Recording of historical debt data for Treasury Bills in CS DRMS. Prepare guidelines on proper recording of domestic debt instruments in the two systems (GSS and CS-DRMS). II. Domestic Debt Strategy Sensitization seminars to be conducted in phases: Phase 1- Technical: Phase 2 Politicians. Enforcement of the laid down procedures and regulations. Enhance domestic market analytical skills and conduct public awareness seminars. Conduct Sensitization seminars to key staff on monetary policy implementation. III. Domestic Debt Issuance and Servicing Institutional structures and procedures should be adhered to. Design/Formulate intervention policy. Reconciliation and verification exercise to be carried out and payment or re-structure shorter term instruments into bonds. Strengthen communication to ensure that information is received by all agencies. Monetary and Debt Committees to work more closely to strike a balance between fiscal and monetary policies. 9. Technical Areas Gaps and Causes I. Macroeconomic Projections 62

63 Insufficient awareness of macroeconomic policy and issues among some politicians. Some data inconsistencies across institutions and macroeconomic accounts Insufficient trained and experienced staff. Compilation of statement of Government operation still on 1986 GFSM and not comprehensive, MFSM 2000 not fully adopted. Sensitivity analysis not comprehensive, data inconsistencies negatively affect accuracy and quality of outcome. II. Poverty Reduction Programming and Forecasting Most Politicians have little interest with data. Not incorporated in the current National Debt Strategy. The spending is incorporated in the budget making it difficult to identify the exactly amount spent on poverty. The simulation of poverty variable not linked to the current National Debt Strategy Forecasting is deterred for lack of adequate data in place. III. Portfolio and Risk Analysis Low capacity on risk analysis in terms of models and skills. Overdue outdated Portfolio Review. Recommended Solutions I. Macroeconomic Projections Sensitization needed to increase awareness. Data dissemination and revision plan. There is a need to train and expose staff in the modeling tools. II. Poverty Reduction Programming and Forecasting Staff requires advanced education in interpreting poverty data and translating it into planning in their areas of responsibilities. Need to be included in the new debt strategy document. Build a data-base on poverty reduction expenditure on a periodical basis for analysis. Benchmarks to be established in order to be able to determine the level of progress in fighting poverty. Build data series to facilitate projections/forecasting. III. Portfolio and Risk Analysis People be trained in the area of risk analysis. Need to print an updated portfolio. 10. Capacity Building Plans Gaps and Causes 63

64 I. Individual Level Few and less experienced staff. Staff turn-over problem and no enough motivation especially in the MOF. Lack of incentives on staff retention. II. Unit Level Insufficient office space, modern equipment especially in the MOF. No adequate communication among units in some areas. High labour mobility and low skills. III. Agency Level Duplication in some areas of responsibilities. Inaccessibility to some information. Shortage of Staff in some offices. IV. Government Level Civil Society is not represented at discussions concerning debt issues. Less interest shown by political structures. Recommended Solutions I. Individual Level Recruitment of enough staff and putting into place an attractive retention scheme. Ensure staff is appropriately placed, trained and rewarded to encourage morale. II. Unit Level Expand office space, install modern computer packages. Strengthen communication and where possible and necessary establish networks connecting all agencies in order to access the required data. Recruitment of qualified staff which should be properly equipped with proper training, material resources and incentives to stay on. III. Agency Level Clearly spelt out responsibilities among all agencies. Improve the process of information flows among members of units. Recruitment of qualified staff which should be properly equipped with proper training, material resources and incentives to stay on. IV. Government Level More representation of civil society Increase political awareness and interest in debt issues. 64

65 Analysis of the 2006 HIPC CBP shows that Tanzania had exhibited tremendous progress in her efforts to build capacity in the area of debt management, new financing and macroeconomic analysis. It had addressed issues of legal and institutional nature and was on the right path on solidifying its gains in the macroeconomic arena to other developmental areas. 7.4 Corrective Measures in Place Arising from the various CBP analysis and other Reports 17, the government has instituted certain corrective measures in addressing the defects in debt management. In May 2001, the Government of Tanzania (GOT) and donors jointly carried out a Country Financial Accountability Assessment (CFAA). Despite a number of significant improvements in financial accountability, the CFAA concluded that issues of noncompliance, limited execution, inadequate monitoring, insufficient capacity and lack of enforcement need to be resolved and developed a total of 170 recommendations. Additionally, in March 2002 the IMF issued its Report on the Observance of Standards and Codes (ROSC) - (Fiscal Transparency), which also made a number of recommendations on financial management in Tanzania. The GOT in 2001 decided to revise the Public Financial Management Reform (PFMR) - first put in place at the Ministry of Finance in to take forward relevant CFAA and ROSC recommendations and take account of recent developments including the new Public Finance and Public Procurement acts. The Department for International Development (DFID) agreed to assist GOT in taking this process forward. The purpose of the revised Programme continues to be the establishment of effective and sustainable financial management arrangements to; i. Support the equitable delivery of public services with a strong strategic perspective; ii. Minimise resource leakages; and iii. Strengthen accountability. Under the Public Financial Management Reform (PFMR) Programme number of activities to enhance capacity in the respective Units, Departments and Institutions were mooted. Below is a matrix showing the various activities relating to debt management and the respective time scale See, MEFMI and World Bank (2001), Public Debt Management and Domestic Debt Market Development, Case Study. Washington, D.C. 18 See PFMR Document: Draft Operational Manual For The Public Financial Management Reform Programme. 65

66 Public Financial Management Reform Programme (PFMRP) Phased Plan Consolidation Phase & Phase I Year Ending 30th June Output 2: Debt Management Strategy and appropriate institutional framework and capacity in place Activities a) Incorporate Cabinet comments on debt management strategy. b) Review and revise relevant legislation relating to debt. c) Implement strategy and associated procedures. d) Improve capacity within MoF to manage public debt and improve the accuracy of data. e) Undertake audit of contingent parastatal debt. Phase II i) Review and revise legislation in respect of debt management (including amendments to, for example, the Executive Agency Act), revenue and internally generated funds and the operational autonomy of the NAO and it was envisaged that during implementation, additional regulatory, institutional and capacity constraints would be identified. ii) review and revise roles and responsibilities of the MOF, organisation structures and the division of responsibilities between Ministries, Departments and Agencies (MDAs) - such as responsibility for payroll and procurement-; and iii) carry out capacity building for all key MOF departments taking into account skills and other resources needed if the MOF was to fulfill its role and responsibilities. It was also acknowledged that in the past programmes have been mooted but delays or no action had resulted in noble ideas not bearing fruit. And in order to guard against a repeat of previous occurrences individual activities were carefully structured to address possible constraints. One prominent capacity constraint related to human resources recruitment, development and retention. In the area of Human Resources the reforms recognized that in order to take the Reform Process forward there following areas had to be addressed: i) Staff recruitment; ii) Staff retention; and iii) Staff development Staff Recruitment The Government noted the need to recruit staff on a meritocratic basis. The reform took cognisence of the fact while this was being implemented as policy by the Civil Service Department (CSD) and all vacant and new posts were advertised and this had manifested in the quality of staff recruited. 66

67 There still was a need to promote staff on the basis of ability and this is slowly being achieved. The institution of performance appraisals for staff, which is an objective of the Public Service Reform Programme, will assist government in making objective decisions with regard to promotions Staff Retention Staff retention is also an issue that is being addressed by the Civil Service Department. Public service remuneration packages remain uncompetitive when compared with the private sector and in these circumstances recruitment and retention of the best staff is not always an option that is available to government. This situation has been recognised by the Government and the donor community who have allowed interim payment of local cost compensation to government staff as an incentive to attract and retain them in their posts. The government has recognised that this arrangement is not sustainable in the long term and the Civil Service Department has proposed the Selective Accelerated Salary Enhancement (SASE) scheme to overcome the problem. Within the scheme, key staff who are recipients of local cost compensation payments will receive from government, salaries increasing annually over a five year period so that at the end of the five years their salary from government will be equal to their current packages including the uplifts paid by donor organisations. At the same time the donor payments will be reduced at a rate commensurate with the annual salary increase so that after the period of five years there will be convergence. This strategy is being implemented within the framework of the Government Medium Term Pay Policy and depends on the government s ability to increase salaries by a sufficient percentage annually. It is accepted that this remains a risk. The enhancement scheme supposed to end June 2007 after the pay reform committee finishes work to come up with a remuneration package comparable to the private sector Staff Development The Government has further plans to develop a shared network link between the Treasury Main Building, BOT (all relevant departments) and the ACGEN, so that debt related tasks and data, especially from the CS-DRMS system, can be shared on real time basis. This will be supplemented by building functional capacity in the concerned departments to use and operate the CS-DRMS for analysis purposes. The Ministry will arrange for the provision of in-house training to the staff in the Ministry of Finance, especially in the ACGEN, PAD and External Finance Departments with the latter expected to form the nucleus of centralized debt management in the medium-term. Since the BOT has a number of experienced debt management staff, including some trained as MEFMI Fellows, and fully conversant with the operations of the CS-DRMS system, with loan interpretation and data validation procedures, debt portfolio analysis techniques, and software such as Debt Pro it is envisaged that these officers will form the core of training/ knowledge transfer. Further the MOF has developed a comprehensive domestic debt database in CSDRMS that has been reconciled with the position at the BOT except for non-tradable debts. The review of the database is now available on a regular basis for analytical purposes. 67

68 Chapter 8 Recommendations 8.0 Introduction The IMF has observed that the strong growth of the Tanzanian economy has not translated into rapid poverty reduction and is not mirrored in the expansion of private investment. It is pointed out that while debt relief under the enhanced HIPC Initiative was critical to restoring debt sustainability and substantial structural reforms have been undertaken, certain persistent deficiencies constrain Tanzania s growth prospects. It is in recognition of the above that this paper ends with a Section on the way forward in strengthening structural reforms, in this case- debt management. The volume of debt in Tanzania while now sustainable still poses some challenges to the country s debt managers. Debt data, particularly domestic debt and Government Guarantees, is not up to date due to the fact that certain loans and guarantees have not yet been captured by the Ministry of Finance and/or the Bank of Tanzania. Further the lack of adequate liaison between the Treasury, the Central Bank on the one hand and the Private Sector on the other regarding the collection of private debt data and the difficulties inherent in the adherence to strict conditionalities regarding loan repayment schedules due to budgetary limitations are also another major factor. However, of prime concern are the lack of quantification and the true status of the country s domestic debt. This creates problems of planning particularly at national budget stage. 8.1 Recommendations/Way Forward The Minister of Finance should not contravene Section 3&7 of the Government Loans, Grants and Guarantees Act no.30 of 1974 as revised in 2004 which limits his/her power to raise both foreign and local loans. Whereas this was prevalent in the past, it is recommended that parliament should ensure that this does not arise in the future as this could be a source of debt unsustainability. The BOT should never effect payments to external creditors without prior approval of the Treasury as happens from time to time. In some cases debt service payments are made in the name of the Deputy Director Foreign Accounts or the Deputy Director Domestic Accounts for payments made to foreign and domestic creditors respectively and not in the names of the respective beneficiaries. This should stop as clouds information as to who the actual beneficiaries are. In some instances the bank buys special Treasury bonds and stocks with maturities of more than one hundred and eighty days, including interest free bonds/stocks depending on the circumstances for which the bonds or stocks are issued by the government, which in essence contravenes the Act.

69 In some instances the issuance of special Government Bonds and the subsequent debiting of the Government Bonds account by the BOT does not involve neither a grant of credit by the CAG nor authority from the Treasury. This should stop as it undermines the authority of government in particular, the office of the Accountant General. And it tends to raise unnecessary audit queries. The Treasury depends on the Bank of Tanzania to provide it with various reports which are used as inputs in the process of preparing borrowing plans, debt outstanding, debt repayment decisions and information relating to Government position. Whereas this not peculiar to Tanzania, it is recommended that the two institutions data should be the same. One should be the master set while the other should be a copy. And in this case Authorities should consider making the Ministry set as the Master Set. The Bond Management Committee should be more active as at present this Committee s meetings are erratic. External borrowing especially borrowings from multilateral financial agencies have tended not to be subjected to the approval of the National Debt Management Committee. In most cases project negotiations are carried out before Parliamentary approval on the need to borrow and how much, from whom and under what terms is obtained. This should stop especially now that the country is considered debt sustainable. It is not certain whether the National Debt Management Committee holds its meetings as required or whether all the required procedures are followed when borrowing decisions are made including the issuance of special government bonds due to non availability of the minutes of the National Debt Management Committee meetings. Data validation should a frequent activity hence the need to set up a timetable that will specify the frequency with which validation ought to take place. At present, the three Back Offices ACGEN, BOT Domestic Markets and BOT Debt validate their databases on an ad-hoc basis. Further, guidelines for data validation should be developed and made available to all relevant staff in the back offices to help them conduct the exercise with greater precision. Capacity in domestic debt management is limited within the MOF, especially regarding financial market issues and government securities operations. A programme should be put in place to train staff and recruit additional staff. In order to retain staff a remuneration policy based what the employment market is offering should be developed and implemented. Implementation of national debt strategy that has been set for July 2007 should be vigorous followed up been as tentative for launching fully reconciled database for external debt is developed at ACGEN. 69

70 Conclusion This paper has looked at the issue of debt management in Tanzania. In this exercise it was necessary to understand the background to this issue, thus, the Paper has covered the economic background and the debt portfolio before zeroing in on the subject matter capacity in debt management. This was necessary so as to afford a global picture of the environment in which debt management in Tanzania operates in. This Paper should be considered to be the beginning of the work in analysing the debt management situation in Tanzania and is thus not exhaustive of issues to be tackled and that it has contributed to the literature on the subject matter. It is therefore hoped that a lot of background has been given and the contents will be beneficial to future work on the subject matter. 70

71 References 1. Commonwealth Secretariat (1999), CDRMS Version 7.2 Installation Manual. London. 2. Commonwealth Secretariat (1999), Effective Domestic Debt Management in Developing Countries, Debt Management Series No.1, London. 3. Commonweal Secretariat (2002), CDRMS Release Notes. London. Government of the United Republic of Tanzania (1995), Draft Operational Manual for the Public Financial Management Reform Programme. Dar es Salaam. IMF Staff (2003), Guidelines for Public Debt Management, Washington, D.C. MEFMI (2000), Study on Sustainability of Domestic Debt. MEFMI and World Bank (2001), Public Debt Management and Domestic Debt Market Development, Case Study. Washington, D.C. Tanzania (1995), Bank of Tanzania Act Tanzania (1999), National Debt Strategy, Part I, External Debt, March Tanzania (2002), National Debt Strategy, Domestic and Total Debt, August Tanzania (2003), Government Loans, Guarantee and Grants Act No 30 of 1974, Amendment Act No. 7 of UNITAR (1999), Legal Aspects of Debt Restructuring to 1, Geneva, No. 1. UNITAR (1999), Building Blocks of Effective Government Debt Management, Document No.8. Geneva. UNITAR (2002), Institutional Framework for Public Sector Borrowing, Document No.17. Geneva. 71

72 Appendix I MEFMI CAPACITY BUILDING PLAN IN DEBT AND AID MANAGEMENT DRAFT GOVERNMENT OF TANZANIA CAPACITY BUILDING PLAN IN DEBT AND AID MANAGEMENT 1999 TO 2001 October

73 TABLE OF CONTENTS 1.0 INTRODUCTION CAPACITY BUILDING ACHIEVEMENT PROSPECTIVE IN DEBT MANAGEMENT BROAD INDENTIFICATION CAPACITY BUILDING NEEDS AND CATEGORISATION OF PRIORITY SECTORS ANNEX I Results of Performance Standards/Indicators Assessment Grant Aid Private Sector External Debt Public Domestic Debt Public External Debt ANNEX II Priority Capacity Building Needs and Implementation Plan with Costings...21 Grant Aid Private Sector External Public Domestic Debt Public External Debt

74 ABBREVIATIONS/ACRONYMS USED ACC. GEN - Accountant General AG - Attorney General ADM - Administration BOT - Bank of Tanzania CSD - Civil Service Department CS-DRMS - Commonwealth Secretariat Debt Recording Management System COMSEC - Commonwealth Secretariat EF - External Finance Ext Sec - External Sector FOA - Foreign Affairs L &G ACT - Loans Guarantees Act 1974 MEFMI - Macroeconomic and Financial Management Institute MOF - Ministry of Finance MFAIC - Ministry of Foreign Affairs & International Co-operations PAD - Policy Analysis Department PC - Planning Commission TB - Treasury Bill 74

75 1.0 INTRODUCTION MEFMI facilitated an in-country workshop in capacity building in Tanzania from 14th to 16 th October 1998 and another follow up from 23rd 27th August The workshops provided an opportunity to assess the performance standards of Tanzania in debt and aid management considering the many capacity development efforts that have taken place in both the Ministry of Finance and the Bank of Tanzania. This document contains the capacity building areas for an effective debt management after a performance assessment in the functional areas of debt and aid management. The implementation of period of this plan is between 1999 and the year An attempt has been made to itemise and cost some activities. Some of the costs could be absorbed in the national budget of the institutions concerned since they reflect day-today activities for an effective organisation performance. However some costs will need donor assistance within the stipulated time frame. Tanzania is a heavily indebted poor country with its present debt stock standing at US$7bn in Much of the debt is owed to the multilateral creditors accounting for nearly 47 %. Much of the Tanzanian debt burden worsened in the 1980 s when it started accumulating arrears. Tanzania has been able however to receive debt relief under almost all debt relief initiatives. It is currently grouped under the HIPC initiative although the decision point has not arrived at yet. In view of most of these debt relief initiatives, the Government of Tanzania has made considerable efforts to build its capacity in debt management. 75

76 2.0 CAPACITY BUILDING ACHIEVEMENT IN DEBT MANAGEMENT TODATE ( ) The broad objective of the debt management programme capacity building is to strengthen the capacity of Tanzania to manage debt (both external and domestic) and grants. Tanzania has made considerable achievements in debt management since the inception of ESAIDARM/MEFMI. The achievement has actually accelerated during the period from 1996 to 1998 across all the core functional areas of debt management as a result of Tanzania s implementation of debt relief requirements which necessitated strengthening capacity in debt management. However in some of the functional areas there remain a few actions which could lead to desirable attainment level. In quite a few areas a total start is required especially in the area of grants. In terms of the categories of debt, there is significant achievement for the public external debt. Unlike in the past, when significant information generation responsibility was placed on the Bank of Tanzania, the Ministry of Finance through the Accountant General s Office are now able to keep up to-date information on public debt (both external and domestic). The later categories however are of insignificant size. Nonetheless the authorities in Tanzania are convinced that they ought to build capacity in managing all categories of debt since with time, the situation might change. The summary of the achievements within the functional areas broadly is given below: EXECUTIVE LEVEL Awareness creation seminar for Chief Secretary, Permanent Secretaries and Chief Executives of parastatals. Formation and adoption of Debt Management Committee and the Debt Technical Committee. Initiation of the review of the Loans and Guarantees Act MANAGEMENT AND SUPERVISION LEVEL Publishing Debt Portfolio Review for external debt. Preparation and presentation of Debt Strategy document to Government. Upgrading of CS-DRMS to latest version. Establishing a debt strategy analysis working group. Training of officers in various debt management programmes. OPERATIONAL LEVEL Recording of all external loans in the CS-DRMS on a loan by loan basis. Recording domestic debt in CS-DRMS. Validating and updating regularly external and domestic debt data. Review of debt portfolio annually. Preparation of a procedures manual for external debt recording in CS-DRMS. Skills development at various levels as follows; All staff in the Public Debt Unit, Accountant General s Office, Bank of Tanzania, Debt Department trained in CS-DRMS recording and analysis. All officers in Bank of Tanzania, Debt Department and a number of officers in the Ministry of Finance, have been trained in preparation of a debt portfolio review. 76

77 Twenty-five officers trained in debt strategy analysis at country level in additional to a number of them who have attended at regional level. One officer trained as a MEFMI Fellow in recording and analysis has been accredited while two are on training in recording and analysis and debt sustainability analysis, respectively. Sixteen officers trained in conducting an analysis of internal capacity for implementation of an effective debt management. Officers trained in debt management have also attended courses on macroeconomic and financial management. 3.0 PROSPECTIVE IN DEBT MANAGEMENT Following the in-country workshop held in Tanzania in October, 1998 and a follow-up in August 1999 which was attended by officers representing Ministries of Finance, Planning Commission, the Accountant General s office and the Bank of Tanzania, officers conducted an analysis of internal capacity for implementation of an effective debt management. The workshop carried out, among other areas, an assessment of performance in the functional areas of debt and aid management, using the performance standards/indicators developed by MEFMI. The results of the assessment, which are contained in ANNEX I, show that Tanzania has achieved a great deal of capacity in the management of public external debt. In terms of institutional strength a lot has been done in the Bank of Tanzania and within the recent past, institutional strengthening has been observed in the Ministry of Finance especially the Accountant General s Office. A few areas however require attention at institutional level especially the need to streamline co-ordination among the units handling debt matters in Ministry of Finance. The performance assessment showed that a lot of work needs to be done in the areas of grants and the private sector debt. Summarising the resulting gaps from the performance assessment, priority capacity building needs in the various categories of debt including grants and their costings were generated. These show the direction for further improvements and the required activities to derive outputs for desirable debt and aid management in Tanzania. With regard to the costings, some of the activities may easily be absorbed by the government s regular budget since they are not stand alone activities but activities that probably officers ought to be doing but are not. Other activities may however require additional resources from donors. In addition some of the activities could concurrently be carried out since they cut across the categories resulting in cost saving. The implication for this is that implementation of the capacity build plans is feasible. The details of the priority /critical needs for implementation and the costing are indicated in ANNEXE II. 4.0 BROAD IDENTIFICATION OF CAPACITY BUILDING NEEDS DEFINITION Capacity building is an investment in human capital, institutions, systems and procedures to improve the performance of an organization. 77

78 PROCESS 1. Identification of type of debt to be managed 2. Identification of needs/gaps through needs assessment 3. Establishing national performance standards 4. Identification of causes of performance gaps 5. Development of a capacity building plan to address the identified gaps TYPE OF DEBT (PRIORITISED) 1. Domestic public debt 2. Public external debt 3. Grants 4. Private sector external debt 1.0 DOMESTIC PUBLIC DEBT Problems Weak and inefficient domestic debt policy. Violation of the provision of LG& G ACT Limited human resource dealing with domestic debt. Limited skills in debt management in BOT, MOF, and PC. Lack of co-ordination within the sections dealing with domestic debt in the ACGEN s department. No smooth flow of information within BOT and between BOT and MOF. CS-DRMS program does not have the ability to record re-discounted T-bills and cannot provide reports by maturity. Low analytical skills. Dissimilar data between the Bank of Tanzania and the Ministry of Finance. Time lag in getting actual disbursements (in some TBs and Bonds auctions) mainly due to inefficient national network payment system. Underdeveloped securities markets. Capacity Building Needs Assistance in developing a domestic debt policy/strategy. Training in recording various domestic debt instruments. Skill development in domestic debt management. Assistance in developing capital/markets. Domestic debt data validation. Improved co-ordination within the relevant units in Ministry of Finance and between the Ministry of Finance and the Bank of Tanzania. 2.0 PUBLIC/PUBLICLY GUARANTEED EXTERNAL DEBT Problems Identified Lack of debt awareness by senior policy makers. Outdated debt policies and strategy. 78

79 Lack of co-ordination among the various institutions involved in debt, including coordination within the units in the Ministry of Finance hampering information flow. Ineffectiveness of debt committees. Lack of systems administrator/programmer on CS-DRMS especially in the Ministry of Finance. Ineffective disbursement monitoring procedures. Limited incentives to personnel working in debt units in the government. Lack of job descriptions to staff after the restructuring of the Ministry of Finance. Skill development in debt management to staff in the Public Debt Unit in Accountant General s Office. Capacity Building Needs Sensitisation and awareness seminars for senior policy makers especially Parliamentarians. Improve co-ordination among institutions on debt matters as well as within the Ministry of Finance. Updating and review of debt policy and strategy. Reactivate the debt management committees. Training of systems administrator in CS-DRMS especially for a programmer in Ministry of Finance to be trained in Unix, Informix and CS-DRMS. Tailor made skill development programmes. Provide incentives to employees especially those in the Debt Unit with the Ministry of Finance. 3.0 AID/GRANTS Problems Identified Weak co-ordination mechanism between the Planning Commission and the Ministry of Finance and across line ministries. Lack of aid policy to identify areas of priority needs. Laxity in decision making on matters concerning grants resulting in diversity of decision making process. Lack of information flow between key players. Inadequate computer networking. Lack of capacity in monitoring utilisation of grants. Shortage of staff with specialised skills. Tight donor conditions. Weak procedures for utilizing grant aid. Capacity Building Needs Instituting proper networking of institutions/units in aid/grants co-ordination with clear roles. Assistance in institutionalising aid policy. Sensitisation on grants/aid matters to policy makers. Training in negotiating techniques/skills. 79

80 Develop modalities for sharing database among key players. Further training in computer skills. Establish systematic mechanism for monitoring utilization of grant funds. Setting up appropriate conditions/procedures/policies on aid/grants. Broaden mandate of Debt Management Committee to include aid and grants. Recruitment of appropriate staff for the Planning Commission. 4.0 PRIVATE SECTOR EXTERNAL DEBT Problems Lack of awareness. Lack of information on private sector medium and long term and short term external debt to facilitate recording. Lack of procedures in collecting/recording and monitoring private sector external debt. Commercial banks do not have sections/divisions that exclusively deal with private external debt. Commercial banks do not know their roles in private sector debt. Inadequate technical skills especially at managerial staff level. Inadequate/incomplete data. Capacity Building Needs Debt awareness to chief executives. Review mechanism for capturing private sector external debt data. Set a conceptual framework and methodology for collecting statistics on private sector external debt. Commercial banks should be sensitised on the importance of monitoring private sector external debt. Skill development at both managerial and technical level. 80

81