Eye of the Needle - The Africa debt Report - Tanzania

Tanzania receives loans instead of debt relief

Eye of the Needle

The Africa debt report (a country by county analysis) Tanzania

http://www.jubilee2000uk.org  

Political Background

Tanzania gained independence in 1961, with the island Zanzibar jointly forming the United Republic of Tanzania in 1963. Julius Nyerere was the first president and in the Arusha Declaration of 1967 he embarked on a socialist agenda of development. However the country changed course in 1986 when the Mwinyi government adopted an IMF/World Bank economic reform programme. Despite serious deterioration in the economy in 1995-6, the government of President Mkapa reconfirmed its commitment to an IMF reform agenda. His government came to power in November 1995, and the ruling Chama Cha Mapinduzi party won a new mandate in the elections in October 2000, although there was violence in Zanzibar. Former President Nyerere remained a powerful campaigner for debt relief for Tanzania right up to his death in 1999.

Economy and Social indicators

Tanzania's population of 32 million has a per capita income of $220. The economy is heavily dependent on agriculture (coffee, tea, tobacco, cashew nuts, maize), which accounts for half of economic output and 85% of exports. Tanzania is ranked 156 out of 174 countries on the Human Development Index. Life expectancy in 1998 was 47 years.

Debt analysis

Tanzania's total debt in 1998 was $7.6 billion. This was split evenly between that owed to bilateral and multilateral creditors, with a small amount owed to private lenders. Tanzania's debt to exports ratio is 484% and therefore three times higher than the level defined by the World Bank and IMF as sustainable in the medium term. The actual debt service rose by 48% in 1998, the largest increase for more than ten years. Indebtedness ratios do not look favourable. The government spent 2% of economic output on debt service in 1998, the equivalent of almost twice the amount spent on health.

In early April 2000 Tanzania reached three milestones in the debt relief process. The approval of its Interim PRSP, the commencement of a new three year PRGF arrangement totalling $175 million and its decision point in the Enhanced HIPC initiative. As pledged in the decision point document Tanzania is set to receive total nominal relief of $3 billion. However, measured in net present value terms this amounts to $2.03 billion, and because HIPC is mainly cancelling debt not serviced anyway and foreign aid available for paying debt will reduce, Tanzania is likely to find debt a greater burden on government resources after HIPC than before. Consequently, there will be almost no benefit to ordinary Tanzanians from HIPC debt relief. Tanzania's completion point under the enhanced HIPC Initiative is projected by the IMF and World Bank for 2001.

Tanzania's debt, US $ million

Tanzania receives loans instead of debt relief

www.jubilee2000uk.org  

Just over a year ago the late Julius Nyerere, much loved and respected former President of Tanzania, said the following: "When I am asked why the debts of the Highly Indebted Poor Countries should be cancelled; my answer is simple: these countries are very poor: their debts are immense and unpayable; and their heroic attempts to pay inflicts intolerable pain on people who are already too poor." ^[1]

Tanzania recently reached the half-way stage or decision point in the current Heavily Indebted Poor Countries (HIPC) Initiative. US Treasury Secretary Larry Summers visited Tanzania in mid- June and after meeting President Benjamin Mkapa he was upbeat about Tanzania's progress both in poverty reduction and its benefit from HIPC: "The HIPC program is on the right track at least for Tanzania," he said. On the face of it, with the headline figure of $3 billion of debt relief, it would be easy to believe him.

The reality is different however, and shows that the comments of Julius Nyerere are much more relevant than those of Larry Summers. Measured in net present value terms the debt will be reduced by only 36 per cent, and what is worse annual debt service payments are likely to fall by only 7 per cent. The reason for this tiny fall is because in Tanzania's case the HIPC initiative is largely cancelling debt that was not being serviced in any case. Rather than boosting government funds for poverty reduction, the initiative is just tidying up the books of creditors and recognising the fact that much of the debt can never be paid back. There is almost no benefit to ordinary Tanzanians.

Tanzania: US$ millions, unless stated

Source: World Bank

The real outlook for Tanzania may be even bleaker than the World Bank estimates above. The Tanzanian Finance Minister Daniel Yona warned against over-expectations following the country's entry into the initiative. In a pre-budget speech at the end of May he said that 27.4 per cent of the government's recurrent revenue, projected at about $1.05 billion in the 2000/2001 fiscal year, would be spent on servicing the external debt. This would mean payments of $290 million in the current financial year, more than it was paying before entering HIPC. Completion point in the HIPC initiative will still be at least one year away, during which time the government will need to have shown it has an effective Poverty Reduction Strategy Paper in place.

It is easy to see future problems ahead as well. As a new study from Christian Aid has shown, despite the fact that many World Bank loans in the agricultural sector have been ineffective and added to the debt burden, the World Bank is considering a new programme that could entail lending almost US$1 billion to Tanzania. A new Country Assistance Strategy (CAS) is being considered, and as long as Tanzania stays on track with its IMF-supported adjustment programme, the World Bank intends to lend the government at least US$790 million over the next three years. There is also a proposal to increase lending in the third year of the CAS by US$200 million if the government performs exceptionally well in its adjustment programme, increasing lending over the period to some US$990 million.

Jubilee 2000 argues this shows that the World Bank cannot `kick the habit' of loan pushing, piling new debts on top of old unpayable ones. If the World Bank is serious about debt sustainability for Tanzania, its assistance should be in the form of grants and it should show a readiness to cancel much more debt.

Footnotes