Should Tanzania Borrow Commercially?

At the time of tabling the 2010/11 budget in June 2010, Tanzania's finance Minister announced  Government's plan to borrow commercially for infrastructure financing. This stands out as a bold attempt to break away from the aid dependency syndrome. At the same time it raises questions.

Analysis by Uwazi shows that, at present for every 1 shilling it collects as tax revenue Tanzania spends 1.9 shillings. The difference between the two is borrowed money and foreign budgetary grants.

If Tanzania’s existing debt was apportioned equally to every living Tanzanian, each Tanzanian owes lenders 332,000 shillings in public debt. Of this, 264,354 shillings (80%) is owed to foreign lenders. With the borrowing planned in 2010/11, each Tanzanian will add 54,300 shillings to their debt obligation.

History, in particular the fact that Tanzania had to beg for debt forgiveness, has a lot to teach Tanzania about the dangers of borrowing. When a government borrows, future tax payers will bear the cost of repaying. So it is important to make sure that what is borrowed benefits the population and is invested productively. This holds especially for commercial loans which unlike soft loans from the donors charge higher interest rates, rarely give grace periods, and have relatively shorter maturity/repayment periods.

The analysis by Uwazi urges government to avoid the mistakes of the past by negotiating debt terms carefully and utilizing the money effectively. The researchers also point out that not servicing existing debt is expensive. An example of how expensive it is not to service debt is the debt Tanzania owed Brazil which was recently waived. In 1980s Tanzania borrowed Tsh 49 billion from Brazil to finance a road project connecting Morogoro and Dodoma. The debt was never serviced. By 2010, it had accumulated to USD 240 million, and Tanzania could not repay it.

The researchers finally point out that Tanzania will also require to continue keeping her macroeconomic basics right: a strong growth of gross domestic product and exports will be required for it to maintain debt obligations within the levels it can comfortably service.

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