Public debt sustainability refers to a country’s ability to meet all its debt obligations without resorting to exceptional funding, rescue (or debt rescheduling), or indeed falling into default. Sustainability is assessed through a Debt Sustainability Analysis (DSA)
In our last instalment, we sought to understand what Public Debt is. We noted that public debt is now an integral part of public finance management; that there is productive (or bad) debt, and productive or good debt.
We referred to the advantages and disadvantages of public borrowing; and hinted upon the sources of borrowing; whether domestic or external.
We noted that loans could be concessional, meaning that they have some “favours” such as low interest rates; a long repayment period and a grace period before you start paying. Commercial loans do not have such favours.
In this article we discuss the question of public debt sustainability, which crops up now and then in public debates. As far as politicians are concerned, those in government will defend the national debt as “sustainable”.
Those outside government will condemn national debt as unsustainable and burdening current and future generations. When positions are reversed, parties also change their stance. That is why there is need to delve more into this question of public debt sustainability.
Public debt sustainability refers to a country’s ability to meet all its debt obligations without resorting to exceptional funding, rescue (or debt rescheduling), or indeed falling into default. Sustainability is assessed through a Debt Sustainability Analysis (DSA).
This evaluates debt levels relative to the economy’s size (debt-to-GDP), revenue generation, and the composition of debt. A sustainable debt situation allows a country to manage its debt commitments, foster economic growth, and implement necessary investments. An unsustainable debt profile can lead to economic instability and higher borrowing costs.
The DSA framework is a tool jointly developed by International Monetary Fund (IMF) and the World Bank in order to enable countries to evaluate their ability to service debts without compromising economic growth and stability. This framework provides a good locus to debate public debt in a country.
In Tanzania, in compliance with Regulation 38 (d) of the Government Loans, Guarantees, and Grant Act, Cap. 134, the Government is mandated to perform an annual Debt Sustainability Analysis (DSA).
It is in this premise that the Ministry of Finance (MoF) prepares the DSA as part of fulfilling this obligation with the view to identify and mitigate risks and vulnerabilities associated with country’s debt trajectory.
The primary objective of this analysis is to assess the country's ability to fulfill its existing and upcoming debt commitments. It serves as a guiding framework for making informed borrowing decisions, ensuring a balance between gross financing needs and the capacity to repay debts both in the current and future periods.
A recent and publicly available DSA for Tanzania was prepared for 2023. It is titled: “Tanzania National Debt Sustainability Analysis of December 2023”.
Tanzania 2023 DSA examined a range of factors that impact its debt profile, such as the level and structure of debt, macroeconomic conditions, external factors, and policy frameworks.
One of the most commonly referred to indicator of public debt sustainability is the “Debt-to-GPD ratio”. This is a very important indicator, comparing a country’s total debt to its Gross Domestic Product (GDP). A high ratio often signals potential risk of failing to service the debt.
Countries with the Highest Debt-to-GDP Ratios are: (1) Sudan, 252 percent; (2), Japan, 235 percent; (3) Singapore, 175 percent; and (4), Greece, 142 percent. Tanzania, with a projected ratio of 48.20 percent in 2024 is nowhere near these countries.
The Japanese case is many times quoted as a country with a high debt-to-GDP ratio but whose debt is sustainable, mainly because the debt is largely domestic.
Secondly, revenue generation, that is, a country's ability to generate enough revenue from its economy to cover interest payments and principal repayments is vital for sustainability.
Thirdly, composition of debt matters, including its currency, maturity (long-term vs. short-term), and whether it is domestic or external.
Fourthly, a strong GDP growth helps to manage and reduce the debt-to-GDP ratio, making it easier to service existing debt.
Fifthly, high interest rates increase the cost of servicing debt, making it more difficult to maintain sustainability.
The 2023 Tanzanian DSA indicated that all external debt burden indicators continued to remain below the established thresholds in the baseline, affirming the sustainability of Tanzania’s debt in the medium and long term.
However, the country’s debt carrying capacity has faced challenges due to global shocks, such as the economic repercussions of the Russia-Ukraine war and the deceleration of exports.
Consequently, under shock scenarios, the country faces constrained capacity to service its external debt; and has taken appropriate steps to mitigate the situation.
Clearly, the debate on Public Debt sustainability needs to move from the debt amount to explore several of the factors referred to above.
It needs to be mentioned as well, that Public Debt is at the core of various investment scenarios for both households and institutions who/which invest through Treasury Bills (short term) and Treasury Bonds (long term).
This kind of borrowing is important for a stable socio-economic development of the country.
