In September 2024, Tanzania’s national debt reached USD 45.05 billion, with 73% held in external debt, underscoring the country’s reliance on foreign financing for development. This external debt, totaling USD 32.89 billion, exposes Tanzania to risks from global economic shifts, such as rising interest rates and currency fluctuations. The domestic debt, focused on long-term government securities, reflects a cautious approach to managing short-term financial pressures. As Tanzania strives to balance its funding needs with sustainable debt levels, a diversified financial strategy will be essential to maintain resilience and support continued economic growth.

1. Debt Composition:
   • External Debt: Comprises 73% of the total debt, equating to approximately USD 32.89 billion. This reliance on foreign financing highlights Tanzania's exposure to external economic conditions, currency fluctuations, and interest rates.
   • Domestic Debt: Accounts for the remaining 27%, around TZS 32.6 trillion (roughly USD 12.16 billion). The domestic debt primarily includes long-term government securities such as Treasury bonds, which constituted 78.9% of the domestic debt portfolio.
2. Debt Growth:
   • External debt grew by 0.6% in September, driven by additional external loans primarily for government projects. This slight growth shows moderate increases in borrowing, indicating a cautious approach amid rising global borrowing costs.
   • Domestic debt, in contrast, saw a reduction in short-term instruments like Treasury bills, aligning with a strategy to keep interest expenses in check by favoring longer-term, lower-risk instruments.
3. Debt Servicing and Risks:
   • External Debt Service: In September, the government serviced USD 105.4 million in external debt, including USD 45.9 million for principal repayment and USD 59.5 million for interest. These payments indicate ongoing debt obligations that can strain foreign reserves if external conditions tighten or export earnings decline.
   • Domestic Debt Management: By focusing on long-term securities, the government aims to minimize rollover risks and ensure more predictable repayment schedules. This reduces the potential impact of short-term interest rate volatility.
4. Implications of High External Debt:
   • A high proportion of external debt can expose Tanzania to global economic shifts, such as rising interest rates or currency depreciation, which could make debt repayments more expensive in local currency terms.
   • The substantial external debt load could also limit Tanzania’s ability to borrow further for development if global financial conditions worsen, underscoring the need for diversified funding sources.

In summary, Tanzania’s debt management strategy involves controlled domestic borrowing and careful external debt expansion, yet the high reliance on foreign debt remains a vulnerability. Prudent management of this debt mix will be essential to maintain economic resilience and avoid financial constraints.

Tanzania’s debt profile, with the national debt at USD 45.05 billion and external debt accounting for 73% of this, provides insights into the country’s fiscal strategy and potential risks:

1. Reliance on Foreign Financing:
   • The high proportion of external debt (USD 32.89 billion) reveals Tanzania’s significant reliance on international funding for development and fiscal needs. While this allows the government to fund large-scale projects, it exposes the country to external risks like currency fluctuations and rising global interest rates, which can increase debt servicing costs in the future.
2. Debt Servicing and Foreign Reserve Pressure:
   • With over USD 105 million in debt servicing obligations in a single month, Tanzania must allocate foreign reserves to cover these repayments. If export earnings decline or global financing conditions tighten, maintaining these payments could become challenging, potentially impacting reserves and currency stability.
3. Balanced Approach in Domestic Borrowing:
   • Tanzania’s focus on long-term Treasury bonds for domestic debt (78.9% of domestic debt) reflects a prudent strategy, reducing the need for frequent rollovers and lowering short-term interest rate risks. This approach helps manage cash flow predictably and minimizes immediate repayment pressures, providing a level of financial stability.
4. Implications for Fiscal Flexibility:
   • While Tanzania’s controlled domestic debt growth is financially sound, the high external debt limits fiscal flexibility. In a global downturn, the country could face challenges in accessing affordable funding or may need to divert resources from domestic priorities to service external debt.
5. Need for Diversification:
   • The reliance on foreign debt emphasizes the importance of diversifying funding sources. Increasing domestic revenue, promoting foreign direct investment, or expanding export earnings could provide a buffer, reducing dependency on external loans.

In essence, while Tanzania is managing its debt prudently, particularly on the domestic front, the high reliance on external debt poses a risk if global conditions worsen. Ensuring a balance between funding needs and sustainable debt levels will be crucial for long-term fiscal health and economic stability.

Global growth faces multiple risks, including geopolitical tensions, which may disrupt trade and raise energy prices beyond $84 per barrel in 2024. Trade fragmentation could slow expected trade growth to below 2.5%, while persistent inflation, projected at 3.5% in 2024, might force central banks to maintain high interest rates of around 4% through 2026, dampening investment. Additionally, 40% of EMDEs are at risk of debt distress, with tightening global financing further constraining growth. Climate-related disasters and slower growth in key economies, like China, also pose significant threats to recovery. Conversely, faster disinflation and stronger U.S. growth offer potential upside.

1. Geopolitical Tensions

• Geopolitical risks remain a significant factor that could destabilize global growth. Escalating tensions, especially in areas like the Middle East and Eastern Europe, could lead to increased volatility in commodity prices, particularly energy.
  • Disruptions in the supply of oil could push prices higher than the projected $84 per barrel in 2024, dampening global economic activity​.
  • Geopolitical conflicts can disrupt global trade networks and heighten uncertainty, which has already reached historically high levels in recent years due to trade restrictions and sanctions​.

2. Trade Fragmentation

• Trade fragmentation and rising protectionism continue to threaten global trade. Trade policy uncertainty in major economies has reached its highest level since 2000, partly due to elections and new trade measures aimed at restraining cross-border flows​.
  • Trade growth is expected to recover moderately to 2.5% in 2024, but further trade barriers could reduce this significantly​.
  • A breakdown in global supply chains, especially in critical sectors such as semiconductors and energy, could cause delays and price increases that slow down production and economic recovery.

3. Inflationary Pressures

• Persistent inflationary pressures, especially in core areas like services, pose a risk to growth, as central banks may need to maintain tight monetary policies for longer.
  • Global inflation is forecast at 3.5% in 2024, but if inflationary trends continue to be more stubborn than anticipated, central banks might delay easing interest rates​.
  • Higher-than-expected inflation could lead to continued high global interest rates (expected to remain around 4% through 2026, double the previous two decades' average), dampening investment and consumer spending​.

4. Higher-for-Longer Interest Rates

• The risk of higher-for-longer interest rates could further slow down global activity. Monetary policy rates in advanced economies, especially in the United States and Europe, are expected to stay elevated as long as inflationary pressures persist.
  • This is particularly problematic for emerging market and developing economies (EMDEs), as it increases borrowing costs and leads to capital outflows. EMDE borrowing costs remain high, with about 40% of EMDEs vulnerable to debt-related stress​.
  • If interest rates remain high, global growth could deviate downward by 0.3-0.5 percentage points over the next two years, and investments could suffer​.

5. Debt Vulnerability and Fiscal Stress

• Many countries, particularly low-income countries (LICs) and EMDEs, are facing elevated levels of debt distress. The report highlights that around 40% of EMDEs are at high risk of debt-related stress​.
  • As global financing conditions tighten, servicing this debt will become more difficult, constraining governments’ ability to invest in growth-stimulating projects.
  • Public investment could be significantly reduced as countries try to balance fiscal sustainability with their debt obligations​.

6. Climate-Related Natural Disasters

• Increasing frequency of climate-related natural disasters could severely impact growth, especially in vulnerable regions like Sub-Saharan Africa and small island developing states.
  • These disasters can disrupt agriculture, infrastructure, and production chains, leading to output losses and exacerbating food insecurity.
  • Food prices could spike if global agricultural supply chains are hit by extreme weather events, with potentially significant implications for inflation in vulnerable economies​.
  • The report emphasizes that climate-related risks can stall or even reverse the progress made in disinflation efforts​.

7. Slower Growth in Key Economies

• Weaker-than-anticipated growth in key economies, such as China, poses a significant downside risk to global growth.
  • China’s growth is expected to slow to 4.8% in 2024, and any deeper or more prolonged downturn in China’s property market or overall economy could negatively impact commodity-exporting countries that depend on Chinese demand​.
  • A more severe slowdown in advanced economies, such as the Eurozone (projected to grow at only 0.7% in 2024), could drag down global trade and investment​.

8. Upside Risk: Faster Disinflation and Stronger Growth in the U.S.

• On the upside, faster-than-expected disinflation could occur if global supply chains recover more quickly, or if there is more progress in technological adoption that improves productivity.
  • In such a scenario, central banks could ease monetary policy faster, leading to a stronger growth outlook, particularly in advanced economies​.
  • U.S. growth could outperform expectations if labor force participation continues to rise and investment in technology-driven sectors remains strong​.

Key Figures:

• Global inflation: Forecast at 3.5% in 2024, but inflation risks remain high due to ongoing supply chain disruptions and persistent service sector inflation​.
• Interest rates: Expected to average 4% through 2026, but could stay higher if inflation remains stubborn​.
• 40% of EMDEs are vulnerable to debt-related stress, which could slow down growth if financial conditions tighten​
• Trade growth: Projected at 2.5% in 2024, but fragmentation and geopolitical tensions could reduce this further​.

Summary of Risks to Global Growth:

• Geopolitical tensions and trade fragmentation are critical risks that could disrupt global supply chains and trade flows.
• Inflation remains a major concern, with the possibility of persistent inflation forcing central banks to maintain high interest rates, which could dampen investment and growth.
• Debt vulnerability in EMDEs and climate-related disasters pose significant challenges, while slower-than-expected growth in key economies like China could impact global demand for commodities.
• On the upside, faster disinflation and stronger growth in the U.S. could help mitigate some of the risks, improving the global growth outlook.

Source: Global Economic Prospects June 2024 report