M i n i s t r y of F i n a n c e Q UA R T E LY P U B L I C D E BT R E P O R T F O R T H E T H I R D Q UA R T E R E N D I N G M A R C H 2 0 1 1 1. 0 P U B L I C D E B T S T O C K I N S I D E T H I S I S S U E : Total Public Debt 1 Public Debt inflow/ Outflow Domestic Debt Analysis External Debt Analysis Cost and Risk indicators Key Developments in the Third Quarter 1 3 5 8 10 Tanzania s Public Debt cember 2010. Of this Stock, (Central Government and Other Public Sector Debt) as at end of March 2011, stood at TZS 14,782.0 bn (equivalent amount TZS 4,496.5 bn was domestic debt and TZS 10,285.4 bn (USD 6,830.5 mn) was external debt. The debt stock displays to USD 9,816.6 mn) an increase of (Chart 1), compared to 47.6%, equivalent to TZS TZS 13,972.3 bn 4,765.3 bn relative to the (equivalent to USD level in the preceding financial 9,516.5 mn) recorded for the quarter ending De- year. The increase of debt stock was attrib- Chart 1:Trends in Public Debt uted to newly contracted domestic and foreign loans for financing various development projects, accumulation of arrears in the external debt portfolio and the depreciation of Tanzanian Shillings against the US Dollar. T H E I N C R E A S E I N T O T A L D E B T S T O C K The increase in debt stock was attributed to newly contracted domestic and foreign loans for financing various development projects, accumulation of arrears in the external debt portfolio and the depreciation of Tanzanian Shillings (TZS) against the US Dollar. 2.0 PUBLIC DEBT INFLOW AND OUTFLOW 2.1 New Borrowing The increased debt stock during the quarter under review follows the issuance Treasury bills and TZS 271.7 bn Treasury bonds) for budget financing and rollover of matured obli- of domestic debt gation. On the other worth TZS 504.1 bn hand, the rise in debt (consisting of TZS 232.4 bn stock was also attributed to the new external loans comprising TZS 178.5 bn for Projects and TZS 17.8 bn for Programs which were contracted in the same period.
Quarterly Public Debt Report Page 2 D O M E S T I C - EXTERNAL DEBT SERVICING SHARE The amount of external debt service is small despite its majority share in total debt due to the fact that most of external debts are concessional and some of them are not serviced as a result of prevailing negotiations on relief. THE DEBT SERVICE TREND The downward movement of the debt service as a percentage of total expenditure follows the huge debt relief and newly contracted concessional loans whose principal payment are not yet to mature. 2.2 Debt Service hand, TZS 82.9 bn was for that most of external During the quarter under domestic interest payments debts are concessional review the total debt service payments was TZS 642.1 bn, out of which and TZS 547.6 bn was used to pay for matured government securities and some of them are not serviced as a result of prevailing negotia- domestic debt service on rollover terms. tions on relief. In past was TZS 630 bn (98.2%) The net debt inflow (new five years, debt service and external debt service debts less principal repayments) as a percentage of total payments was TZS 11.6 bn (1.8%). Out of is positive, imply- ing an increased size of expenditure has been falling due to debt relief the total external debt the debt stock. The in the period and newly service, TZS 5.2 bn was principal repayments and amount of external debt service is small despite its contracted loans whose principal payments are TZS 6.4 bn was interest majority share in total not yet to mature payments. On the other debt stock due to the fact (Chart 2). Chart 2:Trends in Debt Service as a Percentage of Total Expenditure 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2005/06 2006/07 2007/08 2008/09 2009/10 Interest payment Amortization Total debt service 2.3 The Budget Deficit and the Growth of the Public Debt stock The new borrowing during the quarter under review is an outcome of budget deficit after grants. As the deficits grows, one way of financing is through the contraction of new debts. The graph below shows the Budget deficit and the growth of the Public Debt Stock.
P a g e 3 60.00% Chart 3:Trends in Budget Deficits and Public Debt BUDGET DEFICIT AND GROWTH OF DEBT STOCK The growth of deficits and debt may still be feasible as long as it finances development related projects to the degree of increasing the productive capacity of the economy in terms of higher GDP growth, more revenue collection and advanced ability to service back the debt. 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% -10.00% 2005/6 2006/7 2007/8 2008/9 2009/10 THE SPEED AND COMPOSITION OF D O M E S T I C D E B T ACCUMULATION The domestic debt has been rising but at a slower pace than external debt, resulting to its diminishing share in total public debt. On the other hand, the domestic debt increase tilts to the issuance of long term instruments in the spirit of government debt strategies. -20.00% Overall balance before grants Overall balance after grants Public debt as a percentage of GDP 3. 0 D O M E S T I C D E B T 3.1 Domestic Debt domestic debt stock increased ending March 2011. Domestic Debt Stock (including BoT liquidity by 2.5% percent equivalent to TZS 111.1 The increase was due to issuance of bonds paper) as of end of bn from TZS 4,385.4 bn for financing various March, 2011 stood at TZS 4,496.5 bn out of which Central Governm recorded at the end of December, 2010. On year to year basis, the total development projects. Despite the increase, the share of domestic e n t S ec urities domestic debt increased debt in total public amounted to TZS by 15.3% from TZS debt on yearly basis fell 3,387.4 bn while Other Public Sector Debt was TZS 1,109.1 bn. The 3,898.7 bn in the quarter ending March 2010 to TZS 4,496.5 bn in the quarter from 38.9% to 30.4% by the end of March 2011.
P a g e 4 THE CROWDING OUT EFFECT To contain the crowding out effect from government borrowing, the ceiling of 1 percent of GDP has been set (in accordance with PSI benchmarks) as a maximum possible amount to be borrowed domestically. The crowding out effect is highly probable in the face of shallow and illiquid financial markets, a real reflection of financial sector in Tanzania 3.2 Cost and Risk Characteristics of Domestic Debt Portfolio 3.2.1 Domestic Debt Stock by Instrument Category The profile of domestic debt by instrument indicates that as at end of March, 2011 treasury bonds ranked the highest, accounting for 58.3 percent of the total debt followed by treasury bills (including BOT liquidity paper) which accounted for 35.8 percent while other debts and government stocks accounted for 5.9 percent. The greater share of Treasury bonds tallies the National Debt Strategy of borrowing from long term instruments for financing development projects. 3.2.2 Domestic Debt by Holder Category The analysis of Government securities (excluding BoT liquidity paper) by holder category shows t h a t C o m m e r c i a l Banks/Non Bank Financial institutions are the leading creditors, holding 47 percent of the total, followed by Bank of Tanzania 30 percent, the institutional investors (pensions funds and insurance companies) 22 percent, and Individu- Chart 4: Domestic Debt by Holder Category als and other entities 1 percent (chart 4). The relatively low investment risk in government securities and expansion of the banking sector explains the dominance of commercial banks in securities market. To contain the crowding out effect of government borrowing, the ceiling of 1 percent of GDP has been set (in accordance with PSI (Policy Support Instrument) benchmarks) as a maximum possible amount to be borrowed domestically.
P a g e 5 COSTS AND RISKS OF DOMESTIC DEBT The nature of domestic debt does not pose a credible threat owing to highly fixed interest rate, the absence of exchange rate risk and the greater share of the long term instruments. 3.2.3 Interest Rate Structure of Public Domestic Debt The proportion of domestic debt with fixed interest rate accounted for 95 percent of the total and the remaining portion was variable rate debt. This depicts low risks from interest rate fluctuations. 3.2.4 The Average Time to Maturity (ATM) The Average Time to Maturity (ATM) for the domestic debt is 5.15 years due to the greater share of Treasury Bonds in the domestic debt portfolio relative to the Treasury Bills whose maturity is less than one year. As more than 50 percent of the existing domestic debt portfolio is anticipated to mature in period of 5 to over 10 years while the share of domestic debt in total debt portfolio remains comparatively lower, refinancing risk is still very low average wise. T H E S I Z E O F EXTERNAL DEBT Holds a bigger share in the total debt portfolio On quarterly basis, external debt stock in USD rose by 4.6 percent as a result of new contracted loans and accumulation of arrears. In terms of TZS external debt stock increased by 7.2 p e r c e n t d u e t o depreciation of TZS against USD. 4. 0 E X T E R N A L D E B T S T O C K 4.1 External Debt Stock external debt stock in USD 4.2 Disbursed Debt by Use The total National External Debt Stock as of end of March, 2011 stood at USD 8,687.9 mn, of which USD 6,830.5 mn is public debt and USD 1857.4 mn is private sector debt. Total Public External Debt, stood at USD 6,830.5 mn comprising of Disbursed Outstanding Debt (DOD) of USD 6,108.5 mn (89.4 %) and Interest Arrears of USD 721.9 mn (10.6%). Total public terms increased by 4.6% to USD 6,830.5mn (TZS 10,285.4 bn) from USD 6,529.6.mn (TZS 9,586.9 bn) recorded at the end of the preceding quarter. The increase was attributed to new disbursement from ADB, World Bank and Republic of Korea, accumulation of interest arrears and exchange rate fluctuation (depreciation of domestic currency) over the period under review. of Funds During the quarter ending March 2011, the sectoral break down of disbursed public external debt consisted of Budget Support (USD 1,910.3 mn), Infrustructure (USD 1984.4 mn), Agriculture (USD 736.6 mn), Energy and Mining (USD 447.8 mn), Industry (USD 75.5 mn), Education (USD 355.3mn), Insurance (USD 37.3 mn), Tourism (USD 25.2mn) and Others (USD 536 mn) (chart 5).
P a g e 6 THE USE OF EXTER- NAL LOANS. Chart 5: Disbursed Debt by Use of Funds The Infrastructure sector gets a relatively larger funding from external loans because the policy of external borrowing is financing development expenditure which has a positive impact on the economy and can easily service back the debt The Infrastructure sector gets a comparatively larger funding from external loans because the policy of external borrowing is financing development expenditure which has a positive impact on the economy and can easily service back the debt. 4.3 Cost and Risk Characteristics of External Debt Portfolio 4.3.1 External Debt by Creditor Category Concessional multilateral loans have been the major source of external financing. As a result, the majority of external debt (70 per cent) came from multilateral sources followed by bilateral debt which accounted for 24 per cent, whereas commercial and export cred- its constituted 6 per cent as at end of March, 2011 (chart 6). The loans from the International Development Association (IDA) and the African Development Bank Group (AfDB), which are highly concessional, dominated the external debt portfolio while other multilateral sources consisting of the European Investment Bank (EIB), International Fund for Agriculture Development (IFAD), Nordic Development Fund (NDF), OPEC fund and Arab Bank for Economic Development in Africa (BADEA). The major bilateral creditors were Japan and Brazil.
P a g e 7 Chart 6: External Debt by Creditor Category Commercial/ other 6% Bilaterals 24% COSTS AND RISKS OF T H E E X T E R N A L DEBT STOCK Most of the external debt is concessional obtained f r o m M u l t i l a t e r a l institutions such as IDA and AfDB owing to long grace periods, long maturities and highly fixed interest rate. However, most of it is held in USD and EURO, exposing the debt stock to exchange rate risk due to historical trend of TZS depreciation against the major foreign currencies. bution below, the exchange rate risk of the external debt will highly be dependent upon USD 4.3.2 Currency Composition of External Debt The USD continued to be the leading currency of Tanzanian s external debt which indicates that the Government has been borrowing more from IDA which commonly uses SDR (in which USD has a significant share). As shown in Chart 7 below the external debt held in USD accounts for 39 percent of the total external debt, followed by EURO which holds 26 percent of the total external debt (Chart 7). Given the distriand EURO currencies movement relative to Tanzanian shillings. Chart 7: Currency Composition of External Debt RMB (China: yuan) 3% EUR (EU: euro) 26% GBP (UK: sterling) 7% Others 13% Multilaterals 70% USD (U.S.: dollar) 39% JPY (Japan: yen) 12%
P a g e 8 MAJOR SOURCES OF COSTS AND RISKS The redemption profile is not smooth, igniting huge refinancing risk for some years particularly 2019, 2012 and 2011 5.0 COST AND RISK INDICATORS OF THE TOTAL DEBT PORTIFOLIO The proportion of external terms of longer grace pemestic debts whose ma- debt was the largest riod, longer maturities, turities are pushed up by constituting 69.6 per and highly fixed interest the presence of long maturities cent of total public debt rate. The Average Time to of the non- as at end of March, Maturity (ATM) of the total marketable instruments. 2011, which partly reflects the government s debt strategy of limiting net domestic debt issuance. The share of concessional debt was 61 debt portfolio is 15.7 years owing to the fact that, the ATM of external debt portfolio which holds the majority of the total debt is 19.97 years as For the next ten years the redemption profile will not be smooth and the largest repayment profile will be observed in 2019 as a result of increased share of per cent of the total compared to the ATM of maturing external debt debt. The largest share of external debt, and domestic debt portfolio of 5.15 years. As noted before, and the maturity of 10 years special bonds (Chart particularly concessional the longer maturities 8). The nature of the re- borrowing, in the of external debt portfolio payment profile calls for debt portfolio lowers emanates from the dominance efforts to smooth and the overall cost and risk of the total debt in of concessional fi- nancing contrary to do- manage refinancing risk. Chart 8: Redemption Profile of the Total Debt Stock The large share of foreign currency denominated debt exposes the country to exchange rate risk 1000 900 800 700 600 500 400 300 200 100 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Domestic debt External Debt Total Redemption Profile
P a g e 9 T H E R O L E O F EXCHANGE RATE TO THE GROWTH OF THE TOTAL DEBT STOCK The exchange rate movement of the major currencies against the Tanzanian Shilling (TZS) tends to parade a unison movement. And therefore, the depicted depreciation trend of TZS against USD may not be desirable as may help fatten the debt size even in absence of new debts. However, the existing lio is denominated in foreign the historical trend of TZS portfolio entails significant currency and the re- depreciation against major exposure to exchange demption profile for external foreign currencies as demonstrated rate fluctuations because 69.96 per cent of the total debt portfoing debt keeps on ris- overtime. This represents potential risk given below. Chart 9: Exchange rate (annual average) (TZS/USD) 1600 1400 1200 1000 800 600 400 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Exchange rate (annual average) (TZS/USD)
P a g e 10 6. 0 K E Y D E V E L O P M E N T S I N T H E T H I R D Q U A R T E R E N D I N G M A R C H 2 O 1 1 6. 1 M E D I U M D E B T M A N A G E M E N T S T R A T E G Y In January 2011, the Government carried out its Medium Debt Management Strategy (MTDS). Fundamentally, MTDS guides the governmentt borrowing decision in the medium term by analyzing costs and risks of alternative debt strategies. From this work out, the debt strategy that maximizes the use of concessional loans in the external debt portfolio was found optimal (in terms of costs and risks) in the virtue of limiting the domestic borrowing to 1 percent of GDP. Given the fact that, the concessional window is limited relative to government needs for development spending, the strategy was found to be unfeasible. And thus, the strategy that favours more the use of syndicated loans in the external debt portfolio was found viable in the medium term. 6. 2 T D M C A N D N D M C M E E T I N G In the quarter ending March 2011, five Technical Debt Management Committee (TDMC) meetings were held to discuss a number of guarantees and new borrowings. Only a single National Debt Management Committee. (NDMC) meeting took place to evaluate the aforesaid proposals. On the other hand, the negotiations with HSBC bank to access its commercial/non-concessional loan continued smoothly throughout the quarter. The expected loan worth USD 190 million is earmarked for the construction of electricity power plants capable of generating 160 Megawatts.
P a g e 11 N/A (Not applicable) refers to all Post Cut off Debt as per Agreed Minute TABLE 1: STATUS OF RELIEF NEGOTIATIONS WITH NON-PARIS CLUB CREDI- TORS AS AT END MARCH 2011 CREDITOR COUNTRY Current Status 1 Angola Negotiations Pending 2 Algeria Concluded 3 Bulgaria Concluded 4 China Concluded 5 Slovak and Czeck Concluded 6 Egypt Pending 7 Hungary Concluded 8 India Concluded 9 Iran Negotiations underway 10 Iraq Negotiations Pending 11 Korea DPR N/A 12 Kuwait Concluded 13 Libya Concluded 14 Romania Negotiations Pending 15 Saudi Arabia N/A 16 United Arab Emirates Negotiations Pending 17 Zambia Negotiations underway 18 Zimbabwe N/A
P a g e 12 TABLE 2: STATUS OF PARIS CLUB VII AS AT END MARCH 2011 S/N Creditor Country Response /Status 1 Austria June 2002. Can- Agreement concluded on 24 th celled Euro 29.9 mn. 2 Japan 3 Belgium 4 Netherlands 5 France Agreement concluded on 3 rd Feb 2004 and JPY 12.0 mn were cancelled Bilateral agreement with the Belgium Government on state-to-state loans concluded on 22 nd November 2002. Cancelled Euro 21.25mn. Agreement with Ducloire concluded on 29 th November 2002. Cancelled Euro 11.0 mn. Bilateral agreement with NCM concluded on 17 th March 2003. Cancelled 100% of debt. Bilateral agreement with COFACE and Banque de France concluded in March 2003. Cancelled 100% of pre cut-off debt. 6 Russia Bilateral agreement July 2003. concluded PC VII on 18 th 7 Germany 8 Canada Bilateral Agreement concluded on 28 th April 2003. Will cancel Euro 52.2mn. Bilateral agreement concluded on 16 th October 2002. Cancelled Canadian Dollar 83.6 mn. 9 United Kingdom 10 Norway Cancelled USD 129.0 mn. Bilateral agreement concluded on 5 th December 2002. Cancelled Norwegian Kronor 55.0 mn. 11 Italy Bilateral agreement concluded on 18 th 2002. Cancelled USD 132.0 mn October 12 USA Bilateral agreement concluded on 4 July 2002. Cancelled 21.0 USD mn. 13 Brazil Waiting for final version of bilateral agreement