Debt: Why Tanzania is better off than its regional peers

Dar es Salaam. Tanzania may be borrowing huge sums to finance a number of key infrastructure projects, including construction of the standard gauge railway, but the country’s debt remains sustainable compared to its regional peers, latest data shows.

This is largely due to the fact that the lion’s share of Tanzania’s debt stems from multilateral lending sources, making the loans relatively cheap.

For instance, in June 2023, Zambia agreed with its official bilateral creditors to restructure $6.3 billion of external debt, including $4.1 billion owed to China.

Similar initiatives could be going on in Kenya where the public debt is equivalent to about 70 percent of the country’s GDP, the highest level in 20 years.

In contrast, 67 percent of Tanzania’s external debt has been sourced from multilateral institutions, according to the World Bank Group’s International Debt Report 2024.

The World Bank provided 47 percent, with the African Development Bank and multilateral organisations accounting for 13 percent and seven percent, respectively.

Basically, multilateral lenders offer their loans on concessional terms, meaning that they come with more favourable terms than market loans, including lower interest rates and longer repayment or grace periods.

According to the World Bank report, only 17 percent Tanzania’s debt has been sourced from private commercial entities, while bilateral lenders such as China, India and Japan account for only 16 percent.

In comparison, 55 percent of Kenya’s debt has been sourced from multilateral lenders, with bilateral lenders accounting for 23 percent, of which 16 percent is owed to China alone. Twenty-two percent of the debt has resulted from borrowing from commercial lenders.

Multilateral lenders account for only 28 percent of Zambia’s debt. In contrast, private lenders, including commercial entities and bondholders, account for 42 percent of the country’s debt, with bilateral accounting for 30 percent, of which 22 percent is owed to China alone.

The debt and data management assistant commissioner at the Finance ministry, Mr Omary Khama, told us that Tanzania borrows to fund large development projects quickly.

“Since Tanzania does not have enough domestic resources to fund all its development initiatives, it turns to loans with favourable terms, which are typically long repayment periods of 30 to 40 years and low interest rates,” he said.

Mr Khama added that Tanzania relies heavily on multilateral institutions for these loans because they come with more favourable terms than commercial loans, which tend to have shorter repayment periods and higher interest rates.

He noted that the country conducts annual debt sustainability assessments to ensure its borrowing remains manageable. With the lion’s share of Tanzania’s loans coming from institutions such as the World Bank and the African Development Bank, which offer long-term, low-interest loans, the country’s debt remains sustainable.

The national debt stock stood at $45.139 billion at the end of October 2024, according to the Bank of Tanzania’s Monthly Economic Review (MER) for November 2024. Total external debt constituted 73.1 percent of the total debt stock. In actual terms, the stock of external debt stood at $32.977 billion at the end of October 2024.

External debt owed to the central government continued to account for the largest share of the external debt stock, accounting for 77.2 percent.

Dr Abel Kinyondo of the Dar es Salaam University College of Education said Tanzania’s debt situation is stable when measured by the GDP-to-debt ratio.

However, he cautioned that despite this relative stability, the country’s domestic resources remain limited. “It’s crucial to carefully evaluate the types of debts being taken on,” Dr Kinyondo said.

The World Bank report also highlights global debt trends, noting that in 2023, developing countries spent a record $1.4 trillion on debt servicing, with rising interest payments comprising a large portion of this increase.

Many countries, especially those eligible for assistance from the International Development Association (IDA), have seen debt servicing divert resources from critical sectors like health and education.

The Covid-19 pandemic worsened debt burdens in low- and middle-income countries (LMICs), which had to borrow heavily to address the pandemic’s economic fallout. By 2023, LMICs’ total debt stock had surged to $8.8 trillion, with external debt in the poorest nations rising by 17.9 percent since 2020.

The structure of external borrowing has also shifted. During and after the pandemic, private creditors became more risk-averse, and multilateral institutions like the World Bank increased their support.

In 2023, 15 percent of LMICs’ external debt was owed to multilateral institutions, marking a four-percentage-point rise from pre-pandemic levels. Although private lending has somewhat recovered, net debt outflows from LMICs to bondholders remain a challenge for many countries.

In comparison, Tanzania’s multilateral borrowing strategy has allowed it to manage its debt burden more effectively than many other nations struggling with severe debt distress.