THE UPDATED DEBT SUSTAINABILITY ANALYSIS

Transcription

1 THE UNITED REPUBLIC OF TANZANIA THE UPDATED DEBT SUSTAINABILITY ANALYSIS PREPARED BY TANZANIA DEBT SUSTAINABILITY TECHNICAL TEAM APRIL 2005

2 ACRONYMS AND ABBREVIATIONS ADF ADB AfDB AGOA AIDS BOT BWI CIDA DANIDA DBR DOD DRI DSA EAC FDI GDP GOT HBS HIPCs HIV IBRD IDA IMF LDCs MDF MEFMI MOF African Development Fund African Development Bank African Development Bank and Fund Africa Growth and Opportunity Act Acquired Immune Deficiency Syndrome Bank of Tanzania Breton Woods Institutions Canadian International Development Agency Danish International Development Authority Domestic Budget Revenue Disbursed Outstanding Debt Debt Relief International Debt Sustainability Analysis East African Community Foreign Direct Investment Gross Domestic Product Government of Tanzania Household Budget Survey Highly Indebted Poor Countries Human Immune Virus International Bank for Reconstruction and Development International Development Assistance International Monetary Fund Least Developed Countries Multilateral Debt Relief Fund Macroeconomic and Financial Management Institute of Eastern and Southern Africa Ministry of Finance ii

3 MTEF NGOs NORAD NPV ODA PC POPP PRSP SADC SDR SIDA TDS TZS UK UNDP UNFPA UNICEF USA USD VPO XGS Medium Term Expenditure Framework Non Governmental Organization Norway Agency for Development Net Present Value Official Development Assistance Paris Club President s Office Planning and Privatization Poverty Reduction Strategy Paper Southern Africa Development Community Special Drawing Rights Swedish International Development Agency Total Debt Service Tanzanian Shilling United Kingdom United Nations Development Programe United Nations Population Fund United Nations Children s Fund United States of America United States Dollar Vice President s Office Export of Goods and Services iii

4 ACRONYMS AND ABBREVIATIONS... ii EXECUTIVE SUMMARY... vii The National Debt... vii External Debt...viii Domestic Debt...viii ENHANCED HIGHLY INDEBTED POOR COUNTRIES (HIPC) INITIATIVE FOR TANZANIA... viii Delivery Of Debt Relief... ix Multilateral Institutions... ix The UK Initiative... ix Paris Club Bilateral Creditors...x External Debt...x Domestic Debt...x ANALYSIS OF RESULTS... xii External Debt Results... xii Domestic Debt Results... xii RECOMMENDATIONS...xiii External Debt...xiii Domestic Debt...xiii 1.0 INTRODUCTION An Overview of the Workshop An overview of Tanzania s economy TANZANIA DEBT PORTFOLIO REVIEW The National Debt External Debt External Debt Stock External Debt Arrears Profile of Disbursed Outstanding Debt (DOD) Disbursed Outstanding Debt by Creditor Category Disbursed Outstanding Debt (DOD) by Borrower Category Disbursed Outstanding Debt (DOD) by Use of Fund Maturity Structure of External Debt Average Terms of New Commitments...8 iv

5 2.2.4 New Commitments and Disbursements New Commitments Loan Disbursements External Debt Service Domestic Debt Domestic Debt Profile Domestic Debt by Instruments Government Securities by maturity Government Securities by Holder Category Domestic Debt Service ENHANCED HIGHLY INDEBTED POOR COUNTRIES (HIPC) INITIATIVE The Debt Sustainability Analysis Delivery Of Debt Relief As At December Multilateral Debt Relief Bilateral Paris Club HIPC Debt Relief Bilateral Non Paris Club HIPC Relief Debt Relief from UK s Multilateral Debt Relief Initiative: DEBT SUSTAINABILITY ANALYSIS Underlying Strategy Assumptions External Debt Scenarios Assumptions Domestic Debt Scenario Assumptions External Financing Macro-Economic Scenarios Outlook of the Macroeconomic Scenarios Assumptions ANALYSIS OF RESULTS UNDER ALTERNATIVE SCENARIOS External Debt Sustainability Analysis Sensitivity Analysis Domestic Debt Sustainability Analysis RECOMMENDATIONS External Debt Domestic Debt ATTACHMENT A: SELECTED ECONOMIC INDICATORS ATTACHMENT B: CIRR/DISCOUNT RATE ASSUMPTIONS USED ATTACHMENT E: COMPLETION POINT DSA (NPV/XGS) ATTACHMENT F: UPDATED SCENARIO COMBINATIONS (NPV/XGS) ATTACHMENT G: MACROECONOMIC SCENARIOS v

6 ATTACHMENT H: NATIONAL BUDGET ATTACHMENT I: BALANCE OF PAYMENTS ATTACHMENT J: SELECTED INDICATORS ATTACHMENT K: THE TANZANIA NATIONAL DEBT SUSTAINABILITY ANALYSIS (DSA) TEAM vi

7 EXECUTIVE SUMMARY Since reaching the HIPC Completion Point in 2001, Tanzania has undertaken two Debt Sustainability Analysis, one in 2002 and the other in This is part of her Debt Management policy objective to conduct an overall assessment of the debt structure on an annual basis, and to evaluate its sustainability and performance to evaluate performance under the HIPC Debt Relief Initiative. The Debt Sustainability Analysis (DSA) conducted in April to May 2005 is based on Tanzania s outstanding external and domestic debt as of end December The macroeconomic data reflect the national accounts and balance of payments statistics consistent with the projected medium-term macroeconomic framework under the three-year IMF Supported Poverty Reduction and Growth Facility (PRGF) Programme beginning in fiscal year 2004/05. The National Debt Total national debt stock, as at end December 2004 stood at USD 10.1 billion of which, USD 8.5 billion is external debt and USD 1.6 billion is domestic debt. The total national debt increased from USD 9.0 billion in December 2000 to USD 10.1 billion as at end-december The increase in domestic debt is mainly attributed to increases in borrowing through securities for liquidity management, settlement of parastatal debt, claims and budget financing, while foreign disbursements, exchange rate fluctuations and accumulation of non-paris Club and commercial payment arrears contributed to the increase in external debt. vii

8 External Debt Total public and private external debt stock as at end December 2004 stood at USD 8.5 billion. The debt stock represents an increase of about 6.1 percent, compared to USD 8.1 billion registered in Despite the debt relief so far, the debt stock has increased due to structural adjustment policies that requires external finances, mainly sourced as loans from multilateral institutions that are offering concessional loans. At the same time, disbursements, exchange rates fluctuation and accumulation of interest arrears on non Paris Club Bilateral and on commercial debt, also contributed to the increase in the debt stock. During the period 2000 and 2001, there was a substantial decrease in the total debt stock from USD 7.9 billion in 2000 to USD 6.9 billion in 2001, being a decrease of 12.7 percent. The reduction was due to debt cancellations under PC VII arrangements. Domestic Debt Total domestic debt stock, owed by the United Republic of Tanzania (URT) stood at TZS 1, billion as at the end of December 2004, representing an increase of TZS billion or percent when compared to TZS 1, billion recorded at the end of December The rise is mainly attributed to government financing, monetary policy and development of capital markets. ENHANCED HIGHLY INDEBTED POOR COUNTRIES (HIPC) INITIATIVE FOR TANZANIA DECISION POINT DSA The Debt Sustainability Analysis (DSA) conducted jointly by the Government and IMF showed that Tanzania s external public and publicly guaranteed debt position, as at end June 1999 was USD 6.38 billion. The DSA results indicated viii

9 that the NPV of external debt to export ratio before debt relief was percent, and it falls to percent when traditional Paris Club debt relief arrangement are applied, implying that even after full application of traditional debt relief mechanism 1, Tanzania s external debt position would remain unsustainable. There was therefore a need for further debt relief. When the debt is treated under Enhanced HIPC Initiative, the NPV of debt to exports ratio declined to 150 percent in 1998/1999, percent in 2001/02 and further to 82.5 percent in 2004/05. These are sustainable levels. However, the analysis also indicated that, the Debt Relief required to reduce external debt to sustainability level was USD 2,026 million in Net Present Value (NPV) approximately USD 3,000 million in nominal terms. HIPC Initiatives were designed to meet that requirement. Delivery Of Debt Relief Multilateral Institutions As at end December 2004, Tanzania received a total debt relief amounting to USD million from multilateral institutions. The UK Initiative The United Kingdom begun making payments for 10 percent of Tanzania s debt service to IDA and AfDB for loans contracted before 1 st January 2004 and after multilateral HIPC Relief. The payments cover the debt service falling due from January 1 st 2005 onwards. The cumulative payments from 2005 through 2015 by UK are expected to total USD 74 Million. 1 If the debt was rescheduled under Paris Club Naples Terms (67 percent stock cancellation) by the end of June ix

10 Paris Club Bilateral Creditors Until December 2004, Tanzania had concluded bilateral agreements with governments of Austria, Belgium, Canada, France, Germany, Italy, Norway, the Netherlands, United Kingdom, USA, Russia and Japan, leading to cancellation of debts worth USD million under Paris Club VII arrangement. Non - Paris Club Bilateral Creditors Total debt relief received from this creditors as at end December 2004, amounted to USD 72.5 million. This relief came from Bulgaria, India and China. Kuwait has offered debt relief by rescheduling debt worth USD 31.8 million. THE CURRENT DEBT SUSTAINABILITY ANALYSIS ASSUMPTIONS External Debt In analyzing external debt, two strategies have been used, the first one assumes that maximum debt relief is to be provided by all creditors as set out in Tanzania s Decision Point Document of April, It is also assumed that additional debt relief will come from UK Initiatives of 2004 to complement IDA and AfDB debt relief. The second strategy assumes that, debt relief is delivered as per current trend whereby other creditors are not delivering at all. Domestic Debt Three domestic debt strategies have been developed for analysis of domestic debt. The first one assumes the current policy on domestic debt whereby the Government is currently borrowing in order to repay maturing obligations,(rolling over policy). The second one analyses the impact of lengthening the maturity structure of the domestic debt portfolio and the introduction of bonds for market development. The last one considers pessimistic x

11 situation in which the economy is not doing well, with high inflation rate, declining revenue collection and low market absorption. External Financing The current DSA assumes that the new inflows for budget financing will be bridged by both loans and grants at varying degrees and proportions. On the side of grants, the figures will be those generated under macro projections. As regards to Loan financing, the two scenarios are considered; 1. The current level and proportions of loans and grants will be maintained in the year 2005 and gradually start to decline in successive years. Loans will be those with Grant Element of 50% and above. 2. In another case, the financing will be such that inflows will constitute less new grants accompanied by new borrowing from less concessional sources of finance with Grant Element of 35% or less. Macroeconomic Projections The macro economic projections are based on three fundamental assumptions, one the projections are broadly kept in line with programme agreed with IMF. The second assumption considers that, the economy will be characterized by favourable domestic environment for production and investment, as well as a favourable external environment as evidenced by accelerated real growth, rising revenue and higher government expenditures, especially on infrastructure and continued support of development partners. The third assumption assumes that, the economy is characterized by less favourable domestic and trade environment; sluggish infrastructure improvement effort; and scaled back support by development partners, together with less buoyant domestic revenues xi

12 ANALYSIS OF RESULTS External Debt Results Under the HIPC Initiative Tanzania qualified for debt relief under export window whereby NPV/XGS should not exceed 150 percent. If maximum debt relief is received as envisaged in the Enhanced HIPC Initiative, Tanzania will attain the sustainability threshold by 2006 when the ratio of Net Present Value of Debt to Exports (NPV/XGS) falls to percent. The ratio declines further, to percent by 2010 and to 74.5 percent in In a more realistic situation where it is no longer assumed that all non Paris Club creditors will provide full HIPC debt relief, Tanzania will reach sustainability threshold by 2007 when the NPV/XGS ratio moves down to percent. The NPV/XGS ratio under this scenario shows a declining trend from percent in the year 2005 to 82.4 percent in the year This scenario shows that, nondelivery of HIPC relief from the expected non Paris Club bilateral and commercial creditors, will lead to a delay of one year for Tanzania s debt to be sustainable. Domestic Debt Results Unlike external debt, there is no international consensus over what should be the appropriate threshold or benchmarks that can be used to test the sustainability of domestic debt. However, according to MEFMI/DRI, domestic debt is considered unsustainable if the ratio of present value of domestic debt to budget revenue (solvency) exceeds 127 percent or the ratio of total domestic debt service to budget revenue (liquidity) exceeds 66 percent. (a) Solvency Ratio: Analysis of solvency indicates that, Tanzania domestic debt is sustainable. xii

13 (b) Liquidity Ratio. Under baseline scenario the TDS/DBR ratio is projected at 56.1 percent in the year 2005, showing that Tanzania is just sustainable. In the long run analysis the ratio declines to 13.7 percent in year 2010 and 8.9 percent in year The lower ratios trend is also observed in both optimistic and pessimistic scenarios. The ratio in the pessimistic scenario is lower at 49.0 percent compared to 50.1 percent in the optimistic scenario due to the fact that the pessimistic scenario assumes accumulation of arrears. RECOMMENDATIONS External Debt The HIPC Initiative has significant achievements to Tanzania. The debts have been reduced to levels whereby now the country is able to service maturing debts. It is important that the country adheres to prudent debt management and ensures it does not over borrow and return to the debt trap. Priority should be given to loans with softer and very concessional terms offered by Multilateral and Bilateral creditors. Domestic Debt It is important to note that while domestic debt stock represents less than 20% of total public debt (external & domestic debt) its debt service payment is twice higher than external debt service. This calls for the need of close monitoring of the accumulation of the domestic debt and its cost in order to come out with less expensive debts. xiii

14 1.0 INTRODUCTION 1.1 An Overview of the Workshop This Report is the outcome of the Post HIPC Debt Sustainability Analysis Workshop for Tanzania held at the White sands Hotel Dar es Salaam from 25 th April to 4 th May, The Report builds on the DSA of November 2003 as revised in April Since reaching the HIPC Completion Point in 2001, Tanzania has undertaken two Debt Sustainability Analysis, one in 2002 and the other in This is part of its policy objective in Debt Management of making an overall assessment of the debt situation on an annual basis and to evaluate performance under the HIPC Debt Relief Initiative. The Workshop was organized with facilitation from Mrs. Alice Konga of the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) and supervision of Mr. Michel Vougeis an expert in Debt Strategy Analysis from Debt Relief International (DRI). It drew participants from the Ministry of Finance in Policy Analysis and Debt, External Finance, Treasury Registrar, Stock Verification and Accountant General Department. Others were from Debt Management Department, Monetary and Financial Affairs Department, Trade Finance and Investment Policies and Domestic Markets Department of the Bank of Tanzania and officials from the President s Office Planning and Privatisation. This paper presents an updated Debt Sustainability Analysis (DSA) based on Tanzania s outstanding external and domestic debt as of end December The macroeconomic data reflect the national accounts and balance of payments statistics updated by the Financial Programming Team and consistent with the projected medium-term macroeconomic framework under the three-year arrangement IMF Supported Poverty Reduction and Growth Facility (PRGF) beginning in fiscal year 2004/05. 1

15 1.2 An overview of Tanzania s economy Tanzania s macroeconomic indicators have improved significantly in the past five years. The growth rate of real GDP accelerated from 4.8 percent in 2000 to 6.7 percent in 2004, the highest in the past two decades. Inflation has been consistently declining from 5.5 percent in 2000 to 4.0 percent by end December These developments have been associated with the macroeconomic reforms spearheaded by the government, which have increased efficiency and productivity in the economy. There has also been substantial improvement 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 7.0 months at the end of Domestic revenue collection also increased significantly during the past five years from about TZS 858 billion in 2000 to TZS 1,459.3 billion in December The budget deficit ratio to GDP (excluding grants) rose from 5.1 percent in 2000 to 11.1 percent in 2004, reflecting an even more pronounced expenditure effort. With the increase in grants, the deficit including grants rose only half as much, from 2.2 percent to 5.2 per cent. It is worth noting that, despite the impressive performance in revenue collection, the revenue to GDP ratio remains low at 13.1 percent in

16 2.0 TANZANIA DEBT PORTFOLIO REVIEW 2.1 The National Debt Total national debt stock, as at end December 2004 stood at USD10.1 billion of which, USD 8.5 billion is external and USD 1.6 billion is Domestic. The total national debt (external and domestic) increased from USD 9.0 billion in December 2000 to USD 10.1 billion as at end-december 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 other hand, disbursements, exchange rate fluctuations and accumulation of arrears contributed the increase in external debt. Table 1: Trend of National Debt Billion USD Growth of National Debt Total National Debt External Debt Stock Domestic Debt Stock External Debt External Debt Stock Total public and private external debt stock as at end December 2004 stood at USD 8.5 billion of which USD7.08 billion is DOD and USD 1.46 billion is interest arrears. The debt stock represents an increase of about 6.1 percent, from USD 8.1 billion registered in 1999 when compared with the debt stock of USD 8.5 billion registered at end-december 2004 (Chart 1). Despite the debt relief so far, the debt stock has increased due to structural adjustment policies that required bulk of external finances, which is sourced from external sources. Most of these finances were borrowing from the multilateral institutions that are offering concessional loans. On the other hand disbursements, exchange rates fluctuation 3

17 an accumulation of interest arrears on non Paris Club Bilateral and commercial debt also contributed to the increase in debt stock. Chart 1: Trend of Tanzania s External Debt Stock (Billions of USD) Disbursed Outanding Debt Interest During the period 2000 and 2001, there was a substantial decrease in the total debt stock from USD 7.9 billion in 2000 to USD 6.9 billion in 2001, being a decrease of 12.7 percent. The reduction was mainly due to debt cancellations under PC VII arrangements External Debt Arrears Total arrears as at end 2004 amounted to USD 2,629.6 million out of which USD 1,168.1 million are principal arrears and USD 1,461.5 million are interest arrears. Total arrears increased from USD 1,905.2 million in 1999 to USD 2,629.6 million in 2004, being an increase of about 38.0 percent Analysis of arrears by creditor category indicates that bilateral creditors are holding arrears amounting to USD 1,698.4 million in 2004 followed by commercial creditors with an amount of USD million. Export creditors holding USD million and lastly other multilaterals such as EADB, IFC, etc are holding USD 30 million. 4

18 Arrears by borrower category shows that the Central Government is the major holder with arrears amounting to USD 1,727.3 million followed by private sector with USD million and lastly the Public Corporation with an amount of USD million Profile of Disbursed Outstanding Debt (DOD) Disbursed Outstanding Debt by Creditor Category At the end of 2004, the profile of DOD by creditor category shows that 67.6 and 22.8 percent of the debt is owed to multilateral and bilateral creditors respectively, while debt owed to commercial and export creditors was 9.6 percent. Further analysis shows that the share of bilateral debt is declining due to debt cancellations under the Enhanced HIPC Debt Relief Initiative. However, the share multilateral debt is increasing because of Government policy of borrowing concessional loans, which are offered by these institutions. Table 2: Disbursed Outstanding Debt by Creditor Category (%) Bilateral Multilateral Commercial/Export Credit TOTAL Disbursed Outstanding Debt (DOD) by Borrower Category Analysis of DOD by borrower category shows that as at end December 2004, the Central Government is the largest borrower, with 85.1 percent of the DOD, followed by Public Corporations with 7.9 percent of the total and lastly the Private Sector with 7.0 percent of the total debt (Table 3). 5

19 Table 3: Disbursed Outstanding Debt by Borrower Category % Central Government Public Corporations Private TOTAL Disbursed Outstanding Debt (DOD) by Use of Fund Analysis of debt by use of funds indicates that at the end of 2004, 19.8 percent of the DOD was disbursed in the form of Balance of Payments Support, compared to 27.3 percent during The agricultural sector accounted for 16.0 percent, while 14.4 percent was channeled to Energy and Mining Sector. The rest of the DOD was channeled to other sectors of the economy as shown in table 3. Table 3: Disbursed Outstanding Debt by Use of Fund (% of DOD) Sector Balance of Payment Support Energy & Mining Agriculture General Ground and Air Transport Industrial Development Health and Social Welfare Telecommunication Finance, Insurance, etc Education & Training Maritime Transport Tourism & Hotel Industry Rail Transport Others

20 Disbursed Outstanding Debt (DOD) by Currency Composition External debt in terms of currency composition weighs in favour of the Special Drawing Right (SDR). The share of SDR has increased from 37.4 percent in 1999 to 51.9 percent in The dominance of SDR in the currency composition of Tanzania s external debt reveals that the Government has been borrowing more from multilateral institutions lending in SDR such as IDA, IMF and IFAD that offers highly concessional loans. The US Dollar is the second largest currency, accounting for 29.6 percent in 1999 and dropped to 25.6 percent in year The Japanese Yen is the third largest currency, accounting for about 13.2 percent. Other currencies accounted for 18.2 percent in 1999, and fell to 9.3 percent in 2004 (Chart 2). Chart 2: Trend of DOD by Currency Composition (%) Pe rc en ta ge SDR USD JPK Others Years Maturity Structure of External Debt Loans with Maturity of 15 years and above, mostly from multilateral and bilateral creditors accounted for 83.6 percent of the total DOD. Loans with maturity between years accounted for 11.4 percent, while loans with maturities between 5-10 years account for 2.5 per cent of the DOD while loans with maturities between 1 5 years accounted for 2.6 7

21 percent of DOD. The maturity structure reveals that the Government is the largest borrower because it borrows concessional loans with longer maturities (Table 4). Table 4: Maturity Structure of External Debt as at End - December 2004 Year Amount (Million USD) % Of Total DOD and above 5, Average Terms of New Commitments Analysis of average terms of new commitments shows that interest rates dropped from 1.4 percent in 1999 to 0.7 percent in the year The grant element increased from 60.7 percent in the year 1999 to 81.8 percent in the year 2004 (Refer Table 5 below). Table 5: Average Terms of New Commitments Interest (%) Maturity (Years) Grace Period (Years) Grant Element (%) New Commitments and Disbursements New Commitments New loans committed and recorded for the year 2004 amounted to USD million. The Government contracted 72.4 percent of the total loans while the rest were contracted by the private sector. 8

22 It can be noted in Table 6 that from 1999 to 2004, the average public borrowings stood at USD Million, while in the Completion Point Document, the average borrowing was projected at USD Million. This indicates that in average Tanzania borrowings are below Completion Point Document because of grants the country is receiving. Table 6: Comparison between New Commitments and Projections in the CP Document Million USD Average Actual New Borrowings Central Government Public Corporation Sub Total (Public) Private Sector Grand Total Projections as per CP Documents Loan Disbursements Disbursements recorded during the year 2004 amounted to USD million. The government received 85.0 percent of the total amount while the rest was received by the private sector. This amount is lower by 59.5 percent when compared to USD received during Table 7: Disbursements Million USD Total Disbursements Government Public Corporation Private

23 2.2.5 External Debt Service Total debt service declined from USD million at end-december 1999, to USD million at end-december 2002, as a result of Enhanced HIPC Debt Relief, and accumulation of arrears to Non-Paris Club bilateral and commercial creditors. However, debt service reached the level of USD million in 2003 before dropping to USD million in Out of the total debt service for the year 2004, USD million was made to multilateral creditors, while USD 4.1 million and USD 19.5 million were payments to bilateral and commercial creditors respectively (Tables 8). Table 8: Actual Debt Service: Million USD Creditor category Multilateral Bilateral Commercial/Export Credit Total Domestic Debt Domestic debt is composed of securities (marketable and non-marketable) debts that arose as a result of implementation of parastatals divestiture policy and various claims on Government by both the private sector and public institutions. Marketable securities comprise of 35, 91, 182 and 364 days Treasury bills as well as 2, 5, 7 and 10-year bonds. Non- marketable securities include Government stocks, re-capitalization bonds, and special bonds. The Government since 1997 has been implementing the rollover policy for Government securities. The 35 days and 91 days Treasury bills are issued for monetary policy purposes, while most of the 182 and 364 days Treasury bills are issued as financing papers. The 2, 5, 7, and 10 years bonds are issued also for financing purposes. 10

24 2.3.1 Domestic Debt Profile Total domestic debt stock, owed by the United Republic of Tanzania (URT) stood at TZS 1, billion as at the end of December 2004, representing an increase of TZS billion or percent when compared to TZS 1, billion recorded at the end of December The rise is mainly attributed to government financing, monetary policy and development of capital markets. Table 9: Composition of Public Domestic Debt (In billion TZS) Dec Dec Dec Dec Dec % of Total Absolute % debt Dec change Change Securities , , Treasury Bills BOT Liquidity Papers Sub Total Government Stocks Government Bonds Promissory Note Sub Total Other Govt. Debts , Sale Agreement Tax Certificate Duty Draw Back NSSF-Mabibo Parastatal debt Govt. Guarantees CompensationClaims Direct Claims Privatization Recapitalization Total Debt , , ,

25 Domestic Debt by Instruments Analysis of domestic debt by instruments shows that, Securities (Treasury bills and BOT liquidity papers) constitutes the largest proportion with percent of the total debt followed by Government bonds with 36.0 percent, other government debts are third with percent and lastly, Government stocks with 7.47 percent. When compared to December 2003, the position for December 2004 shows that Securities have increased substantially by 25.0 percent from TZS billion to billion. Government bonds increased by 3.61 percent from TZS billion in year 2003 to TZS billion in year Government stocks decreased by 0.09 percent while other government debts increased by percent from TZS 16.5 billion to TZS billion. The substantial increase noted in Securities was due to implementation of monetary policy 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 increased tremendously from billion in December 2003 to billion in December The increase was due to inclusion of non - previously recorded debts (Government guarantees, compensation claims, privatization, direct claims, parastatal debt and re-capitalization). It is worthy noting that other domestic debts are indicative numbers, the confirmation of the same is subject to auditing and verification. 12

26 Chart 3: Decomposition of Domestic Debt Composition as at 31st December Other Gvt.Debt 11% Securities 45% Government Bonds 36% Government Stocks 8% Government Securities by maturity Maturity profile of government securities shows that, the share of securities maturing in less than 3 years ranked the first. The instruments with maturities above 3 years but not exceeding 5 years ranked the second. Maturities of over 5 years but less than 10 years constituting of stocks and long-term bonds ranked the third. While those with maturities of more than 10 years ranked fourth. Table 14 below summarizes maturities profile. Table 10: Government Securities by Maturities MATURITIES 2004 <=3 Years 45.72% Over 3 Yrs but <= 5 yrs 22.24% Over 5 Yrs but <= 10 yrs 17.38% Over 10 Years 14.65% TOTAL % 13

27 Chart 4: Government Securities by Maturities 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% <=3 Years Over 3 Yrs but <= 5 yrs Over 5 Yrs but <= 10 yrs Over 10 Years Government Securities by Holder Category Analysis of Government Securities by Holder Category show that Commercial Banks are leading creditors, followed by Pension Funds. Bank of Tanzania is third while Insurance Funds are fourth. Non-Bank Financial Institutions and Private Sector share the last position. (Chart 5). Chart 5: Public Domestic Debt by Holder Category (Government Securities) Insurance Funds 2.6% Private Sectors 2.1% Bank of Tanzania 21.4% Pension funds 35.5% Non Bank Fin.Insts 1.9% Commercial Banks 36.5% 14

28 2.3.2 Domestic Debt Service Total amount of TZS 281, million being principal plus interest was due for payment as at 31 st December Out of it TZS 230, million or percent represented principal amount that was rolled over while interest to the tune of TZS 51, million was paid out of the Government revenue. Table 11: Domestic Debt service as at December 2004 (Million TZS) TREASURY BILLS TREASURY BONDS SPECIAL BONDS STOCKS OTHERS TOTAL PRINCIPAL Budget , Rolled over 178, , , Sub-Total 178, , , , INTEREST Govt. Budget 9, , , , Sub-Total 9, , , , TOTAL Budget 9, , , , , , Rolled over 178, , , , Grand-Total 187, , , , , , TOTAL IN % Further analysis of debt service payments show that at the end of December 2004, percent of the amount was spent on Treasury bills, percent on Treasury bonds, 5.03 percent on Special bonds, 4.16 percent on others and remaining utilized 3.17 percent on stocks. 15

29 3.0 ENHANCED HIGHLY INDEBTED POOR COUNTRIES (HIPC) INITIATIVE 3.1 The Debt Sustainability Analysis The Debt Sustainability Analysis (DSA) conducted jointly by the Government and IMF showed that Tanzania s external public and publicly guaranteed debt position, as at end June 1999 was USD 6.38 billion. The DSA results indicated that the NPV of external debt to export ratio before debt relief was percent. The same would have fallen to percent implying that even after full application of traditional debt relief mechanism 2, Tanzania s external debt position would remain unsustainable, hence the need for further debt relief. Accordingly, if the debt were treated under Enhanced HIPC Initiative, the NPV of debt to exports ratio would have declined to 150 percent in 1998/1999, percent in 2001/02 and further to 82.5 percent in 2004/05 (Table 12). Table 12: Net Present Value of External debt to Export of Goods and Services (NPV/XGS). 1998/ / / / / / /05 1 Before Debt Relief After Traditional Relief Mechanism After enhanced HIPC Initiative Source: Tanzania Decision Point Document As a result of the Debt Sustainability Analysis, the Boards of World Bank and IMF approved the Decision Point (i.e. the time when the country is declared eligible for debt relief) for Tanzania on April 4, 2000 under Enhanced HIPC Initiative. Debt Relief required to reduce external debt to export ratio was calculated as USD 2,026 million in Net Present Value (NPV) approximately USD 3,000 million in nominal terms. 2 If the debt was rescheduled under Paris Club Naples Terms by the end of June The NPV of debt for 1999/2000 and 2000/01 shows the impact of all interim relief and relief to be delivered after the Completion Point 16

30 The DSA done at Completion Point (i.e. the time at when the relief is delivered) by the Government in collaboration with the IMF indicated that Tanzania s external public and publicly guaranteed debt position at June 30 th 2001 was USD 5,717.0 million. According to DSA results, the NPV of debt-to-export ratio for end-june 2001 was 137 percent well below 172 percent projected at Decision Point. The debt indicators showed that debt relief provided under the Enhanced HIPC Initiative would have reduced Tanzania s public and publicly guaranteed external debt to sustainable levels. The NPV of debt-to-export would have remained well below the Enhanced HIPC Initiative sustainability target of 150 percent throughout the projection horizon. The fall in the ratio was due to revised information on the debt stock, macroeconomic and debt projections, and changes in discount rates and exchange rates. The ratio could further declined to 105 percent after taking into account pledges of additional assistance from Paris Club bilateral creditors beyond the Enhanced HIPC Initiative. Table 13 Completion Point DSA; The Net Present Value of External debt to Export of Goods and Services (NPV/XGS) Year 2000/ / / / / / / / / / /1 1 After Enhanced HIPC Beyond HIPC Assistanc e Delivery Of Debt Relief As At December Multilateral Debt Relief As at end December 2004, Tanzania received a total of USD million as HIPC debt relief from multilateral institutions. Out of this, USD million came from International Development Association (IDA), USD 65.6 million from International Monetary Fund (IMF), USD 37.2 million from African Development Bank (ADB), USD 8.3 million from European Investment Bank (EIB), USD 8.0 million from the International fund for Agricultural development (IFAD), USD 5.5 million from Norwegian Trust Fund (NORTF) and USD

31 million from Nordic Development Fund (NODF). EADB has offered debt relief by canceling debt worth USD 1.3 million. Table 14: Multilateral Debt Relief June 1999 December 2004 Million USD TOTAL IDA AfDB IMF IFAD NORTF NODF EIB EADB TOTAL Bilateral Paris Club HIPC Debt Relief Until December 2004, Tanzania had concluded bilateral agreements with governments of Austria, Belgium, Canada, France, Germany, Italy, Norway, the Netherlands, United Kingdom, USA, Russia and Japan, leading to cancellation of debts worth USD million under Paris Club VII arrangement (Table 15). Efforts are under way to have the remaining bilateral agreements signed with Brazil and other Japanese agencies namely EID/MITI and Japanese Food Agency. 18

32 Table 15: Status of PC VII Implementation Creditor Amount Cancelled (In USD) Remarks Austria 31,288,564.7 Beyond HIPC Belgium 74,294,335.1 Up to 90% Cancellation Canada 31,085,847.0 Up to 90% Cancellation* France 89,948,544.8 Beyond HIPC Germany 60,850,832.1 Beyond HIPC Italy 132,000,000.0 Beyond HIPC Norway 11,055,493.1 Beyond HIPC The Netherlands 99,105,877.4 Beyond HIPC United Kingdom 129,220,781.5 Beyond HIPC United States 21,330,000.0 Beyond HIPC Russia 69,569,474.0 Up to 90% Cancellation Japan 108,900,452.4 Partial Relief Total 858,650,202.0 * Canada has announced that it will cancel her remaining debt, however, the agreement to that effect has not been executed Bilateral Non Paris Club HIPC Relief Total debt relief received from this category as at end December 2004, amounted to USD 72.5 million. Bulgaria, India and Kuwait are the only countries that have offered debt relief in line with the HIPC framework. Bulgaria has offered debt relief by canceling debts amounting to USD 15.1 million. India has offered debt relief by canceling all her intergovernmental loans amounting to USD 19.7 million. Kuwait has offered debt relief by rescheduling debts amounting to USD 31.8 million. China has offered debt relief outside the HIPC framework by canceling debts worth USD 37.7 million (Table 16). Dialogue has been initiated with Abu Dhabi Fund, Libya, Hungary, Algeria and Iran but no firm commitment has been made so far. 19

33 Table 16: Debt Relief from Non Paris Club Bilateral Creditors Million USD Creditor Amount of Relief Remarks Bulgaria 15.1 Cancellation India 19.7 Cancellation Kuwait 31.8 Rescheduling China 37.7 Cancellation Debt Relief from UK s Multilateral Debt Relief Initiative: The United Kingdom begun making payments for 10 percent of Tanzania s debt service to IDA and AfDB for loans contracted before 1 st January 2004 and after multilateral HIPC Relief. The payments cover the debt service falling due from January 1 st 2005 onwards. The cumulative payments from 2005 through 2015 by UK are expected to total USD 74 Million. 20

34 DEBT SUSTAINABILITY ANALYSIS 4.1 Underlying Strategy Assumptions External Debt Scenarios Assumptions (i)`scenario One: Maximum HIPC (E 1 ). This strategy assumes that maximum debt relief is to be provided by all creditors as set out in Tanzania s Completion Point Document of November 8, It is also assumed that additional debt relief will come from UK Initiatives of 2004 to complement IDA and AfDB debt relief. The main categories of debts and the debt relief operations applied to each category are shown below. Table 17: Categories of Debt Relief Debt Category Treatment Paris Club Implementing PC VII Agreement Non Paris Club Bilateral Applying Comparable Treatment to PC on pre-cut off date debt Pay post-cut off date debt Commercial Buyback the eligible debt at IDA terms Pay (Others) Multilateral HIPC Relief (promised) UK Initiative Detailed Assumptions for Maximum HIPC Paris Club All concessional (ODA) pre-cut-off date loans are treated on Cologne Stock Terms (90 percent cancellation) plus additional cancellation for all creditors. Equally all Non- 21

35 concessional (Non-ODA) pre-cut-off date loans are treated on comparable terms to concessional (ODA) pre-cut-off date loans. All creditors are assumed to cancel 100 percent of post cut off date (ODA) loans. However, it is assumed that some creditors will cancel 100 percent of post-cut-off Non- ODA loans. Non-Paris Club Bilateral All creditors are assumed to offer Paris Club comparable terms on all pre-cut off date concessional (ODA) loans. These creditors are also assumed to offer Cologne Stock 90 percent plus 6 percent on Non-concessional (Non ODA) loans, which are pre-cut off date loans. Tanzania is assumed to pay all post cut off date loans as they fall due. Commercial Tanzania is assumed to buyback (eligible debt) at IDA terms ie. 12 cts on a dollar of principal amount. Other commercial debts are assumed to be paid when they fall due. Multilateral Multilateral creditors are assumed to offer HIPC relief with maximum front-loading as set out on Completion Point Document, for example IDA agreed to offer debt service reduction for a period of 20 years. It is also assumed that UK will pay 10 percent of HIPC s debt service payments to IDA and AfDB on all debts incurred before January 1, (ii) Scenario Two: Realistic HIPC (E 2 ) In this strategy it is considered that all creditors as per latest position offer the HIPC relief realistically. 22

36 Paris Club In realistic HIPC all creditors have offered relief beyond HIPC Cologne Stock Terms (90 percent cancellation) except Belgium, Canada and Russia. Japan has offered partial relief below Cologne Stock terms because some of Japanese agencies have not yet offered any debt relief. Brazil has not offered any debt relief. Non-Paris Club Bilateral For non Paris Club Bilateral Creditors, only Bulgaria, India and Kuwait have offered debt relief in line with the HIPC framework. Kuwait has offered debt relief by rescheduling her eligible debts at concessional terms. China has offered debt relief outside the HIPC framework by canceling some of her debts, which represents percent of her debt at Completion Point. Multilateral Tanzania is receiving HIPC debt relief from International Development Association, African development Bank (ADB), IMF, European Investment Bank (EIB) and Nordic Development Fund (NODF). However, under this scenario, EADB has offered debt relief by offering its share of HIPC delivery. UK Initiatives The UK Government has proposed to pay 10 percent of HIPC debt service payments to IDA and AfDB on all debt incurred before 1 January The debt service relief will be on payments due, after HIPC relief but as of 1 January Commercial On case-by-case basis certain commercial debts are being paid. The Government accumulates arrears on other commercial debts. 23

37 4.1.2 Domestic Debt Scenario Assumptions. Three domestic debt scenarios have been developed on the basis of types of instruments, purpose of debt, and creditor category. The overall objective of these scenarios is to develop a sustainable domestic debt strategy for Tanzania. (i) Scenario I: Baseline This scenario implements the current policy on domestic debt of the government. The Government is currently borrowing in order to repay maturing obligations. This scenario implements the current strategy of rolling over marketable instrument at market price. This involves: Roll over all Treasury bills on maturity. Roll over all tradable bonds on maturity. Refinance debt service through the re-capitalization Bonds and other special bonds through 2, 5, or 10-year bonds. Refinance debt service with Government stocks of 2, 5, 7 and 10-year bonds. Pay the privatization debts as budgeted. Pay the re-capitalization shares to Tanzania Standard Newspaper in 2005 as committed. Pay and/or securitize through 2-year bonds all claims on government. The Government guaranteed debts are maintained in arrears. The Government maintains its policy of not borrowing internally for gap filling. (ii) Scenario II: Optimistic The objective of this scenario is to analyze the impact of lengthening the maturity structure of the domestic debt portfolio and introduction of bonds for market development. This scenario supports the government policy of rollover. Therefore, in this scenario it is assumed that: 24

38 Domestic debt borrowing will be kept in abeyance while the existing debt will be refinanced through issuance of long-term bonds in order to lengthen the yield curve and promote market development. The Treasury bills will be rolled over at lower yields on assumption that the economic growth will improve and therefore the inflation rate will go down. The government will pay the interest cost on financing papers while the Bank of Tanzania will pay interest cost on liquidity papers. Bonds are issued through the auction system. In order to promote market development, 80% of these bonds will be rolled over while 20% of maturing bonds will be restructured into 5, 10 and 15-year bonds. These bonds will be restructured as follows: 20% of the 2, 5, 7, 10 and 15 year bonds will be restructured into 5, 7, 10 an 15 year bonds respectively. Re-capitalization and special bonds will be rescheduled into 15 and 20-year bonds in order to spread and lengthen the maturity profile. Considering that 94% of the government stocks are held by BOT, the two parties namely, the Government and the Bank of Tanzania will negotiate and reschedule the debt into 15 and 20 year bonds at an agreed interest rate. The government will pay privatization debts in order to avoid court proceedings that might end up into costly court awards. In order to enhance the capital base or net worth of the Tanzania Standard Newspaper the government will have to buy the additional re-capitalization shares. Some of the government claims such as Compensation, Duty Drawback Scheme, Tax Reserve Certificates and NSSF Mabibo Hostel will be paid according to agreements. 25

39 The indirect and direct claims like utility bills will be securitised over a period of 4 years into 10 year and 15 year bonds at prevailing market rates. The Government will pay the guaranteed debts in order to maintain credibility. (iii) Scenario III: Pessimistic This scenario was developed under the assumption that, the economy is not doing well, with high inflation rate, declining revenue collection and low market absorption capacity. With this in mind, the following assumptions have been made:- Rollover of treasury bills at a higher cost in line with high inflation rate. All tradable bonds will be rolled over at higher interest rates. Re-capitalization Bonds will be re-financed using the 2 and 5-year bonds at higher interest rate since it is assumed that market preference will move towards the short end of the yield curve and thus long term bonds will not be attractive. The external to domestic debt Swap bonds will be re-financed using the 2 and 5- year bonds. Government Stocks held by the Bank of Tanzania will be rescheduled into 5 and 10 years bonds at negotiable rate. Privatization Debts will be held until the economic situation improves. Re-capitalization shares will be delayed until the financial status stabilizes. No action will be taken regarding Compensation claims, Duty Drawback Scheme, Tax Reserve Certificate, Guarantees, and Parastatal indirect debts since there are no resources. 26