Overview of Public Debt and Financing
What Is Public Debt? Public debt refers to the current outstanding obligations for which the Central Government and its branches are responsible. Simply, public debt means borrowing by the Central Government, Local Governments, and Government entities with or without Government guarantee. In broader terms it includes the borrowing by private sector under Government guarantee (publicly guaranteed debt). Public debt can either be
Why does the Government borrow? The Government spends money to finance its various activities. The activities include building of infrastructure, defence of a country's national boundaries, provision of social services such as health, education, maintenance of security, payments of salaries for its employees and many others. To meet these expenditures the Government needs to have financial resources (revenue). Essentially the Government would use its domestic revenue arising from tax and non-tax sources. However, these resources may not be enough to meet these expenditures. This means that the expenditures will be greater than revenue hence creating a gap. This gap is called a deficit. To bridge this gap the Government is compelled to borrow from either domestic sources or external sources. This is referred to as Budget Financing. Sometimes the Government may have balance of payments problems, whereby the country's exports can not pay for imports. In this case the Government may borrow to solve this problem. This is sometimes referred to as balance of payments (BOP) financing.
Why do countries worry about debt? Once a country borrows, it has to pay the borrowed (loan) amount plus interest and any associated cost. This is sometimes called debt servicing. This will therefore imply that the Government uses resources which could be used to meet it expenditures to pay the lender. The impact of debt servicing is more severe for external debt than domestic debt especially when the currency of the borrowing country is depreciating. This is because the external debt is normally paid in foreign currency. If Tanzanian Shilling value depreciates (falls) it means that we have to use more Shillings to pay the same amount of foreign currency amount, say United States Dollar. The consequences of debt servicing are weak economic and political power, poor social services and infrastructure and hence increasing poverty.
Is borrowing a bad thing? The advantages and disadvantages of borrowing by Government depends on the situation. If the Government does not borrow, when situations compel it to, that Government may fail to meet critical expenditures needed by the nationals of the country concerned. If countries borrow to finance projects which have a bearing on economic growth, that borrowing is rational. This is because the projects will generate additional income for the Government (for example through additional tax revenue) in the future which will enable it to repay the debt. Borrowing by a country to finance recurrent expenditures such as salaries and related benefits, will lead to problems because the Government in the future will have to tax the nationals more to be able to service the debt or else accumulate arrears. Tanzania experienced this situation in the 1980's and was forced to request for debt relief in the form of restructuring.
Sustainable Debt In order for borrowing to be recommendable, it should always result in a Sustainable Debt Level. In simple terms, a sustainable debt level is the level where debt does not grow faster than the economy. This means that Government will have enough revenue to pay the debt without having to accumulate arrears or ask for debt restructuring. Debt restructuring may be done through rescheduling where the terms of the loan are reviewed; cancellation where the debt is completely written off; Debt Buy Back where the borrower is allowed to buy back its debt at a discounted price and debt swap where the debt is converted into cash, equity, assets or environmental programmes. In other words, a sustainable debt level is the one which is manageable from the Government budget's perspective, meaning that the Government can, in any financial year, accommodate in its budget all the maturing obligations (Pricipal/redemption and interest) of domestic and external debt. Tanzania has been to the Paris Club seven times requesting restructuring of its debt from the member creditor countries.
How does a country know whether it has a Sustainable Debt? A country knows that it has a sustainable or unsustainable debt by carrying out a debt sustainability analysis referred to as DSA. Under the Highly Indebted Poor Countries (HIPC) initiative there are ratios which are usually called indicators used to show the position of a country's debt level in terms of sustainability. Usually the IMF and World Bank conduct the DSA in collaboration with the Official of a debtor country.
Debt management mechanism in Tanzania Debt management mechanism in Tanzania consists of
For information on monetary policy, see the Bank of Tanzania website.