For any developing country the prospect of financing projects through foreign investment particularly infrastructure related ones is obviously attractive. However it’s important to realise that these ‘investments’ often constitute debt and there needs to be a payoff to GDP in order to finance them.
This is the worry that many economists see in Tanzania, a country who has been increasing their national debt in order to finance a variety of different schemes. It was thought that this increase in debt would lead to a similar improvement in the country’s export capacity but it looks like this isn’t the case. Economists are suggested that the increase in Government borrowing is simply being used to service existing debts rather than investing in the country. Anyone knows that borrowing to pay off loans is rarely a successful strategy from the individual level to National exchequers.
The levels of debt are not yet of huge concern, as the country is still showing a growth in it’s economy. The 6% rise in the last five years means that Tanzania’s debt is still relatively sustainable, the worry is that the rise in debts is having little economic impact. An example was in a recent documentary detailing some of the failed projects which have been increasingly common, unfortunately this is now restricted and you can’t access without a local VPN (see article – my VPN stopped Working)
A country like Tanzania which is increasing it’s level of foreign debt needs to ensure that these create wealth and new investments. Using further debt to simply service existing positions is likely to lead to economic problems in the future. Tanzania has areas which would benefit from increased investment particularly those which would stimulate exports and generate foreign capital in a more sustainable way than simply borrowing it. There is also concern that the mineral sector is under funded and there is substantial options for investing in this sector too.
There are worrying signs in the economy despite the modest growth, there are increasingly reports that the population are short of liquid cash too. Inflation is falling, which is obviously good in some senses however it is often the sign of a failing private sector. As spending falls, prices tend to fall in line with the falling demand. Many Tanzanian businesses are struggling too, many banks are struggling because of lack of deposits.
A major hotel in Dar-es-Salaam has closed and been turned into a hostel and many others are struggling which will potentially close in the next year.