How domestic borrowing is reshaping Tanzania’s economy
By Anna Tibaijuka
In the previous article, I argued that Tanzania’s debt debate cannot be understood simply by looking at debt-to-GDP ratios alone.
While the country’s public debt remains technically within international sustainability thresholds, the more troubling issue is the growing share of government revenue now devoted to debt servicing.
Yet behind the debate over external borrowing lies another quieter but equally important development: the rapid rise of domestic debt and its growing influence on the structure of Tanzania’s economy.
Public discussion on debt often focuses on foreign lenders, international financial institutions and external obligations denominated in dollars or other foreign currencies.
However, government borrowing within the domestic economy has expanded rapidly in recent years through Treasury bills and Treasury bonds purchased mainly by commercial banks, pension funds, insurance companies and other financial institutions.
Today, Tanzania’s domestic debt is estimated at well over Sh38 trillion and continues to grow steadily. Treasury bonds now account for the overwhelming majority of domestic government borrowing.
This trend may appear less alarming than external debt because the government is borrowing largely from Tanzanian institutions using local currency rather than relying entirely on foreign creditors.
At first sight, domestic borrowing appears safer and even more patriotic. Governments mobilise local savings for national development, reduce exposure to exchange-rate risks and avoid excessive dependence on foreign lenders.
In moderation, domestic borrowing is indeed an important and legitimate financing tool.
The danger arises when domestic borrowing grows so rapidly that it begins reshaping the entire economy.
The most important issue is what economists call “crowding out”. Every economy has limited financial resources available for lending and investment. When government increasingly borrows from banks and financial institutions, those institutions often prefer purchasing government securities rather than lending to private businesses, manufacturers, farmers or entrepreneurs.
From the perspective of banks, this behaviour is understandable. Government securities are generally considered safe, profitable and predictable. Lending to small businesses, agricultural producers or industrial start-ups carries higher risks and administrative costs.
As government borrowing expands, financial institutions therefore allocate more capital toward Treasury bonds and less toward productive private-sector activity.
The consequences for economic transformation can become serious over time.
Industrialisation depends on credit. Farmers require financing for irrigation, mechanisation and storage facilities. Manufacturers require capital for machinery, expansion and technological upgrading.
Young entrepreneurs require affordable loans to establish businesses and create employment. When increasing amounts of domestic capital are absorbed by government borrowing, productive sectors may struggle to access affordable financing.
In effect, government begins competing directly with the private sector for scarce domestic savings.
This issue is particularly important for Tanzania because long-term industrial transformation cannot occur without a dynamic private sector.
Economic growth driven mainly by public expenditure and debt-financed infrastructure eventually requires productive private investment capable of generating exports, employment, tax revenues and innovation.
Another important dimension concerns pension funds. Large pension institutions now hold substantial amounts of government securities because Treasury bonds provide relatively stable returns.
On the surface, this appears reasonable and is common internationally. Pension funds everywhere invest part of their portfolios in sovereign debt.
However, excessive dependence on pension financing creates its own risks.
Pension funds manage the lifetime savings of workers and retirees. If governments become increasingly dependent on pension institutions as continuous sources of financing, concerns may eventually arise about concentration of risk and long-term sustainability. Future pension obligations ultimately depend on the strength of the broader economy itself.
Domestic borrowing also affects interest rates across the economy. As government demand for financing rises, Treasury yields may increase in order to attract investors.
Higher government borrowing costs can then push up commercial lending rates for businesses and households. Private investment slows, production costs rise and economic dynamism weakens.
This is why domestic debt deserves much greater public attention than it currently receives.
Unlike external debt, domestic borrowing often appears politically less controversial because repayment occurs internally. Yet excessive domestic borrowing can quietly weaken the productive foundations of the economy itself.
An economy where banks increasingly finance government consumption rather than productive enterprise may remain fiscally stable in the short term while gradually undermining future growth potential.
The question is not whether domestic borrowing should exist. All modern economies use domestic debt markets. The real issue is whether borrowing supports productive transformation or merely sustains expanding fiscal obligations.
This distinction becomes especially important when debt servicing itself continues to rise. If growing portions of government revenue are increasingly devoted to repayment obligations while private-sector expansion slows, governments may eventually face the difficult choice between higher taxation, reduced social spending or even more borrowing.
Tanzania still possesses enormous economic potential. The country has strategic geographic advantages, abundant natural resources, a growing population and significant opportunities for industrial and agricultural expansion. Domestic borrowing can contribute positively to this transformation if carefully managed and directed toward productive investment.
But borrowing alone does not create prosperity. Sustainable development ultimately depends on whether debt strengthens the productive capacity of the economy or gradually weakens it through excessive fiscal dependence and reduced private-sector dynamism.
Domestic borrowing can therefore either support national transformation or quietly constrain it.
The outcome depends on discipline, transparency, investment quality and long-term economic planning.
Next week I will analyse a more sustainable borrowing strategy grounded in productivity, accountability, industrial growth and intergenerational responsibility.
Prof Anna Kajumulo Tibaijuka is a former Tanzanian Cabinet minister and former United Nations Under-Secretary-General and Executive Director of UN-HABITAT
