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Treasury paralysed as BoT fiscal management methods fail

1st January 2012
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Bank of Tanzania

Hard thinking is traversing various quarters in the Ministry of Finance and the Presidency, as the routine use of debt instruments has failed to show positive potential to defend the current Budget plan without a ‘mini-budget’ to raise taxes to meet its expenditure expectations.

The moment of confusion was reached midweek when the Bank of Tanzania (BoT) raised a Sh20bn ten-year government bond at yields comparable to its usual 180-days Treasury bill, making the bond unworkable as a financial market instrument.

The unusually long period for that bond, and inability to bring its yield to levels acceptable to the market were both signs of brewing crisis, as debt is already too large according to the local office of the International Monetary Fund (IMF), lately.

There still existed an option of refloating the bond at much higher levels of yield, though a measure of suspicion already casts a shadow in that direction, while it is unclear how far the government is capable of reaching a long term bond agreement with a specific commercial bank.

Over the past three years or so its favorite deal making bank has been Stanbic Bank, but feelings of over-exposure to government debt may limit further take up of debt with that bank, while most others prefer cash outlays for mercantile purposes, or short term government debt.

No privileged bank is available for long term debt, including banks where the government has privileged shareholding, like NBC Ltd or CRDB Bank; it would amount to liquidating its share values by debt.

Certain analysts hold that the Sh20bn ten year government bond and its scintillating failure in the financial market was a mirror that had taken too long to be held before the Treasury, as to the real market value of government debt instruments.

The point is if it fails to raise Sh20bn in the local money market where it has absolute privileges in the banking system, what chances did it have in the first place in seeking, effusively, credit rating early last year so that it places a Sh500bn sovereign bond?

Would the latter succeed because foreign commercial banks have the cash, or would their evaluation of the usefulness of such debt be any better than local commercial banks’ evaluation of the Sh20bn ten year government bond? In what manner therefore can it be said that the government strategy of financing infrastructure like construction of railways or major highways by debt is workable?

Other indicators of the intensity of the budget implementation crisis include the now admitted feature of sector cost cutting, where recruitment of teachers finishing diploma training, where all or most of them were supposed to be recruited at completion has been cut by half.

Whether that measure is temporary or structural cannot be said but it is clear only private secondary schools or primary schools provide a possible avenue for employment for many of those finishing teacher training, as government has failed to find the cash to implement its promise, both in election campaign and in the president’s regular review of policy action over the past year, urging full recruitment. It raises the spectre of schools without teachers, and teachers without schools!

That same phenomenon is being replicated for training in other sectors of economy, for instance for agriculture experts coming from various colleges, while the government had already started making efforts to place graduates of economic planning institutes (for instance a principal one in Dodoma) as part of regular local government recruitment focus.

This too looks like it will fail for its need or implementation urgency is even less pronounced than in the case of teachers finishing diploma training and for that matter those finishing bachelor’s degrees in Education. The shortage of funds, when touching recurrent expenditure, would also cut back on expectations of various cadres, for instance construction of teachers’ houses, or those of the police force, military…

Virtually as a side-show to a rising crisis of budget implementation, a dispute arose during the week between Finance Minister Mustafa Mkulo and Shadow Minister Zitto Kabwe (pictured), where the latter attempted to explain the budget deficit, put at Sh780bn and for which the Sh20bn debt instrument was only a drop in the ocean, from galloping inflation.

The minister said he had no such data on his desk, that budget non-realization was due to inflation, and wondered where the Kigoma North MP (Chadema) had obtained the datum, falling far too short of explicitly saying the argument was incorrect, and showing clearly where the problem arises.

For it is scarcely on the revenue collection aspect, where performance levels for the first quarter of this financial year – or third quarter in the calendar year – were in averages of 96 per cent to 99 per cent in major tax collection departments, including customs.

The Chadema MP, either figuring out this explanation on his own or being part of a wider think tank which sought to put up a plausible explanation that leaves the BoT and Treasury in a dignified posture, that there is nothing that can be done, could have explained matters differently.

In the first place currency depreciation - which usually accompanies inflation – is positive for liquidating government debt and ensuring that the budget is implemented, when the state receives more from US dollars than would otherwise obtain if the currency was strong.

This translates into eased implementation of the budget but is negative in actual purchasing power, where the problem would be directed at development projects – sensitive to local prices of materials.

Inflation is pointed out by the MP as the big problem for the economy, whereas all responsible economists in the US urge the government to allow inflation to rise somewhat, so that companies invest and people are employed, whereas if the currency mill stops churning out money, credit falters and growth is stymied.

At the regional level, both Kenya and Uganda have higher levels of inflation than Tanzania but face no budget crisis, in which case the budget crisis is not due to inflation but the public sector burdens that the Treasury is carrying, beefed lately by a massive energy sector rescue package without donor agency backing.

And as the Kigoma North MP was among the key pushers of the massive Sh1.2trillion additional budget, it is evident he has to avoid pointing a finger in the right direction, as it would also point at the need to start restructuring the power sector as such.

That is basically where the matter is, to so speak, left standing, namely that the BoT has reached the limits of its use of debt instruments that conforms to existing commitments as to monetary stability generally, but is nowhere attaining the fiscal balances promised in the budget.

The critical aspect there is twofold, one that is beyond reach and another, beneath reach in the sense that no one is interested in it, especially those around the Kigoma North MP, but the minister had lounged in that direction in his previous Budget speech (2010/11, at paragraph 56 and 57, on the need to review the law on parastatals).

What is beyond reach is donor reticence to extend promised Budget support, as they disbursed close to Sh100bn lately, almost as an emergency, and it is unclear how much of the three trillion shillings donor financing is likely this year, or has already been confirmed for disbursement.

The other option, restructuring the public sector to cut fiscal burdens and bring in massive forex in so doing, will be resisted by all quarters in the National Assembly - until Minister Mkulo goes to the IMF for a standby loan.

SOURCE: GUARDIAN ON SUNDAY
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