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Monday, June 18, 2012

National debt: We must watch out

Finance Minister Dr William Mgimwa
Experts in economy have warned that though the government has assertively stated that the public debt is sustainable the figures are a reminder that ‘we must watch out.’
On Thursday, Finance Minister Dr William Mgimwa told the House while unveiling the new budget that by March 2012 the national debt stock comprising of external and domestic debt reached Sh 20,276.6 billion( Sh 20.276 trillion) compared with Sh 17,578.9 billion (Sh 17.578 trillion ) at end of March, 2011 equivalent to 15.4 percent increase.
Contributing to the subject, Economic and Social Research Foundation Executive Director Dr Bohela Lunogelo said : “no worry-- but its something to watch out, especially if the trading partners in Europe keep on deteriorating.”
The expert in economy, however, hinted that fortunately, judging from international trade trends, exports and imports of Tanzanian traders have now turned and have started looking to the East, implying that goods are increasingly being exported to and imported from Asian countries.
“ As you can see from our shops--we import mostly from Asians (China, and India. We should pray for stable growth of the Brazil, India, China and South Africa (BRICS),” he said.
He added: “Just think simply: the debt is equivalent to one and half of the annual government budget.
It’s like you as an individual having borrowed from the bank the equivalent of your one and half years’ salary. How dangerous is that? It depends on the period you have agreed to repay that debt.”
According to Dr Lunogelo, for most loans, especially external loans, the repayment period is more than 20 years.
“It’s paid slowly. Yes, slowly, but it can still be dangerous if the annual repayment takes all your salary and you remain with nothing. That is what they call sustainability. Meaning the repayment plan must allow you with some money to continue living,” he remarks.
He, however, allays public fears by underlining that such a country’s debt level allows funds to be retained, after servicing the loans, upon paying interest dues. The retained money is chiefly for importation of goods and services and also for allowing the government to pay salaries and maintain the built infrastructure, etc (for domestic debt). “That is why the Minister says that analysis shows the debt is sustainable,” he elaborated.
Dr Lunogelo states that another measure for sustainability of debt is the ratio of the debt burden to GDP.
He says the standard threshold or danger ratio to avoid is that a country's debt should not go beyond 50 per cent of the country’s Gross Domestic Product ( GDP) as the global average is 45 per cent.
“I read the whole budget speech and it has been mentioned somewhere that Tanzania’s Gross Domestic Product ( GDP) is 48,398 billion ( Sh 48.398 trillion) while the public debt is Sh20,277 billion (Sh20.277 trillion). These figures indicate that the debt ratio to GDP is 42 per cent,” Dr Lunogelo observes.
He says mid last year the country’s debt ratio was about 24 per cent of the GDP, which was quite below the danger zone.
According to the expert, other countries’ debt- GDP ratio has reached between 60 and 70 per cent yet they are going on well.
Giving examples Dr Lunogelo said, for instance Kenya’s debt ratio was standing at 55 per cent while in the US it has now reached 80 per cent. Japan’s debt ratio now stands at 100 per cent while in Russia it is below 15 per cent.
“One of the dangers of government borrowing using whichever instrument is what they call "crowding out" on the ability of the private sector to borrow because commercial banks get more interested in government because its a more secure borrower compared to an individual,” he cautions.
”This explains why when President Mkapa worked to reduce government borrowing though domestic treasury bonds. Few banks bothered to lend to individuals,” he adds.
Dr Lunogelo is of the view that the public should be more worried on the use of the money borrowed, whether from outside or within.
The public should insist on investing the loans in building the capacity of the economy to generate wealth and services that can catalyze economic growth.
He says the main focus of the government at the moment is to invest in productive infrastructure such as transportation and energy. He says borrowing to invest in human skills development is part of the agenda for long term growth plans.
“The budget should therefore be interrogated with that lens: how effective our planned expenditure shall help the economy to consolidate conditions for an eventual take off,” he concludes.
Prof Ibrahim Lipumba, a renowned Tanzanian economist says the 2012/2013 budget will be difficult to implement as the government has continued with its dependency on donors and fails to collect tax in crucial sectors including minerals and other natural resources.
The Government is expecting to receive Sh3,156.7 billion as grants and concessional loans. Out of this amount, Sh842 billion is general budget support, Sh2,314.2 billion is project grants and loans including basket funds. The government also intends to borrow shillings 1,632 billion from the domestic market in order to curve the deficit of this year’s budget.
Speaking to this reporter, top economist and chairman of the Civic United Front (CUF) Prof. Ibrahim Lipumba said the budget is more theoretical because the achievement of its vision depends on donors.
“It is difficult to achieve the vision and other development projects because the money is not in government hands. It depends on donors who may or may not give us the money, so we can’t say the poor will get relief as the government fails to create new areas for collecting taxes to boost revenue,” said Prof. Lipumba.
He disclosed that the government is sticking to routine budget strategies of increasing taxes on drinks and forgetting about natural resources including minerals, that would enable it to gain a lot of money.
In this fiscal year the government budget is Sh15.1 trillion that will curve both recurrent and development expenditures compared to Sh13.5trillion in the previous fiscal year. However Prof. Lipumba challenged that the increased amount won’t accelerate development as the government has increased expenditure through creating new regions and districts.
He said despite that the budget increased to Sh1.6 trillion costs of administration remain high because the budget allocated about Sh70.7 billion for recurrent and development expenditure for newly established regions, districts and councils.
Finance Minister Dr William Mgimwa said in his budget presentation on Thursday that last year the country faced challenges of inflation caused by increased prices of fuel in the world market and tackled the problem by restraining fuel pump operators from raising prices haphazardly.
However Prof. Lipumba criticized the government arguing that last year a fuel barrel was sold at $120 and now it is sold at $100 but still there is no reduction in fuel prices.
“Generally the government is not serious in curbing inflation because if the factor was the increasing fuel price in the world market, even when the price has declined in world markets inflation is just as high or rising in the country,” said Prof. Lipumba.
He admitted that the budget has ended the discrimination between government officials who enjoyed tax exemption on importing cars and they will now be charged the taxes as private sector employees.
“The other good thing is that the government has increased the threshold to be charged the pay as you earn (PAYE) from Sh135,000 to Sh70,000 and this at least gives some relief to low income earners.
The government needs to improve infrastructure and enable people in rural areas to use gas cookers by selling the gas at affordable prices in line with the average income in poor urban households.

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