The debt crisis in the LDCs: a case study of Tanzania

The debt crisis in the LDCs: a case study of Tanzania

How to reverse the debt crisis in Tanzania?

This article explores the current indebtedness of LDCs, policies leading to this situation, current economic difficulties arising in LDCs and policy recommendations to deal with this issue.

In the mid-1980s the deteriorating financial situation in a number of LDCs reached its climax. The ability of the LDCs to service their debts weakened and most of them failed to honour their outstandings. As a result the LDCs were subject to severe credit restraints. This position is reflected in rising debt/GNP and debt/export ratios. In spite of economic reforms, the debt situation has remained largely unchanged to date. A great proportion of LDCs, including Tanzania, are presently under the category of of severely indebted low income countries (SILIC). The main factors behind this debt crisis include: high interest rates, weak commodity prices, unstable oil prices, and restrictive trade arrangements. The persisting debt crisis undermines the economic growth of LDCs. In this light, countries are finding it hard to restore creditworthiness particularly at the level of international commercial banking lending.

Policy Recommendations:

  • Tanzania should adopt and pursue strong programmes of adjustment and reform in order to qualify for the stock of debt relief under the Paris Club arrangements and to prevent recurrence of economic failure, which results in debt crisis
  • The need to sustain good economic governance particularly at the level of fiscal management
  • Striking an effective balance between private investment and public consumption in order to grow the GDP
  • Tanzania has depended almost entirely on official aid in financial development. Future prospects from this source are bleak while the development financing needs are on the increase. Tanzania should encourage private capital flows to complement and, ultimately substitute official aid in financing development
  • Tanzania is a high tax country given her per capita income level. Should fiscal adjustment therefore focus more on expenditure and non-tax revenue, for instance, on privatisation of state-owned assets?
  • Need to improve the capacity of the Legislature in putting up greater demands on better budget and debt management
  • Debt management and project implementation should be improved to ensure that the newly contracted debts are used better to ensure that growth in fixed capital spurs economic growth and enhances export
  • A substantial increase in investment is required to correct the infrastructural deficiencies, which hamper economic growth
  • Tanzania should, on balance, attract more capital inflows, which are of equity rather than debt-creating variety
  • Should there be legislative intervention to impose limits of the government fiscal and monetary discretion

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