The government’s strategy of financing
its budget deficit by borrowing from the private sector has had its
share of criticism, especially since it caused economic growth
contraction.
The Bank of Tanzania (BoT) statistics
show that since 2005 the government’s domestic debt increased by over
200 per cent from 1.5tr/- in August 2005 to 4.6tr/- at the end of
August, this year.
Hence commercial banks tend to lend the
government because the area is risk-free. That in return means funds
directed to the private businesses are driven away to choke the private
sector growth, as it ends up with insufficient capital for increasing
output and expansion. The increase, according to BoT, was mainly on
account of issuance of new Treasury bonds that outweighed maturing
obligations.
“The increase was a result of issuance
of new Treasury bonds compared to maturing obligations,” BoT said in its
September’s Monthly Economic Review. BoT data shows the government
borrowing at the end of August stands at 7.95 billion US dollars, while
on the other hand the private sector lending was 1.92 billion US
dollars.
This, because the government borrows such large amounts of
capital, its activities can increase interest rates to discourage
individuals and businesses from borrowing money, which reduces their
spending and investment activities.
A University of Dar es Salaam Senior
Lecturer (Economics), Dr Jehovanness Aikael, said government increase in
borrowing from banks reduces the funds supposed to be lent to private
sector.
“The trend is not healthy especially if we believe that private
sector is the engine of growth,” Dr Aikael told the ‘Daily News’ adding,
“the sector needs capital (through lending) to facilitate output
growth.”
The economist said should the private
sector lending decrease while credit to government increases, this means
“there is a crowding out of investment, a phenomenon that contracted
GDP growth.”
In economics, crowding out is a phenomenon occurring when
expansionary fiscal policy causes interest rates to rise, thereby
reducing investment spending.
BoT said in the review, “overall lending
rate recorded an increase of 15 basis points to 15.83per cent in August
(2012), while short-term lending rate, up to one year, increased by 9
basis points to 14.55 per cent”.
“That means increase in government
spending crowds out investment spending,” a critic said.
However,
economics literatures show that monetary authorities can accommodate a
fiscal expansion by increasing the money supply, thus dampening any rise
in interest rates. Annual growth of extended broad money supply (M3)
decelerated to 9.0 per cent in August from 12.8 per cent in July and
21.4 per cent recorded in the corresponding period of 2011.
“This development was driven by the
slowdown in the growth rate of Net Foreign Assets (NFA) and Net Domestic
Assets (NDA) of the banking system,” the central bank says in the
review.
However, the country has yet to neither reach nor accommodate
“monetizing the deficit” where the central bank prints money to buy
bonds issued by the government to pay for its expansionary deficit.
The
debt increment worries economists as most loaned money is directed to
recurrent expenditure - salaries and wages and allowances - more than
invested in development budget.
They said borrowing is not a bad hing
but what matters most is how the monies are used, because every shilling
contracted as a loan today should be spent wisely to bring the desired
development goals.
Mzumbe University’s Dar es Salaam Business School
Senior Economist, Dr Honest Ngowi, told the ‘Daily News’ whether the
debt was serviced or not, it puts the country in a tight situation as it
reduced the ability to provide other public services.
“The money set aside to service the debt
today could be disbursed to higher learning institutions to calm the
students’ demonstrations,” Dr Ngowi said over a telephone interview.
As
at the end of August, external debt stock stood at 10.42 billion US
dollars compared to 10.35 billion US dollars recorded at the end of
July. Going by BoT figures, out of the external debt stock, 85.6 per
cent was disbursed outstanding debt and the remaining was interest
arrears.
The nearest problem, the economist is
seeing, is for national debt stock to balloon out of proportion to
exceed the country’s GDP: “This will be like living well above your
income.”
On annual basis, domestic debt stock increased by 15.5 per cent
or 711bn/- to 4.57tr/- as at the end of August from 3.86tr/- recorded
in the corresponding period last year. On month-to-month basis, at the
end of August, this year the total stock of domestic debt increased to
4.57tr/- from 4.50tr/- registered at the end of July.
Source: The Daily News, http://dailynews.co.tz, reported by Abduel Elinaza in Dar es Salaam
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