Debt Spotlight: Kenya & Tanzania

Vol. 5, No. 2

June, 2002

by Figaro Joseph
50 Years Is Enough Network

There have been many plans put forth to address debt in the Global South, most recently the Heavily Indebted Poor Country (HIPC) Initiative, launched by the World Bank and the IMF in 1996.

All these plans failed to deliver on their promises. Most fundamentally, they have not managed to reverse the net outflow of resources. The targeted impoverished countries continue to pay out more in interest alone, and transferring net resources to the creditor nations far in excess of new capital inflows. Kenya and Tanzania are good illustrations of this scenario.

World Bank data for 2000 indicate that Kenya's gross domestic product was $10.4 billion, and that it had an external debt of $6.34 billion. For the year 2000, debt servicing and interest payments total $706 million flowing out of Kenya to its creditors. Also in 2000, Kenya's exports of goods and services totaled $2.84 billion, compared to imports of $3.57 billion. In other words, Kenya suffered, in this area, a net deficit of $737 million. Kenya's current account balance, which is an indicator of foreign transactions on its income, for 2000 stood at –$326 million. Of Kenya's $6.34 billion international debt, $2.61 billion (41%) is owed to the World Bank and the IMF.
The numbers are even worse for Tanzania. Tanzania's GDP is $9.0 billion and it has an external debt of $7.1 billion. In the year 2000, Tanzania paid a total of $213 million in debt service. Debt servicing and interest payments combine for a total of $250 million flowing out of Tanzania. In 2000, Tanzania's exports of goods and services totaled $1.33 billion, compared to its imports of goods and services of $2.15 billion. In other words, Tanzania suffered, in this area, a net deficit of $819 million. Tanzania's current account balance for the year 2000 stood at –$827 million. The World Bank and the IMF claim $2.93 billion (41%) of Tanzania's $7.1 billion international debt.
The HIPC Initiative, which was supposed to relieve qualified countries from some of the debt burden, has been a major constraint for Tanzania's development. Given the lack of capital inflows, HIPC has not only done little in terms of debt reduction but puts Tanzania through a long period of structural adjustment policies. For example, in April 2000, the World Bank and IMF announced that Tanzania had satisfied the required structural adjustment conditions under the HIPC Initiative and thus qualified for some debt cancellation. Tanzania's debt servicing payments would thus be reduced from $193 million in 1999 to $87 million in 2021. In other words, it will take about 22 years for Tanzania to get a reduction on its debt service payments of $106 million, which amounts to an average of $4.82 million a year. This meager reduction cannot make any meaningful difference in Tanzania's social programs and development.

The large amount of capital outflows - debt servicing and interest payments - in Kenya and Tanzania have had an adverse impact on their ability to develop. Government expenditures on education, health, and other social sectors had to be cut in order to meet conditions of donor countries and international lending institutions. The governments could have allocated more funds to health, education, and other development programs if it were not for the net loss of capital outflows in terms of debt services and interest payments. This net loss puts tremendous strains on these states' revenues—much- needed revenues for education and health.

An April 2002 report by the Structural Adjustment Participatory Review International Network (SAPRIN) documents the effects of international debt and cuts in public expenditures as a result of structural adjustment policies in health care and education. The findings in the report are the results of joint studies by the World Bank, governments, and civil society organizations in several states. It finds that structural adjustment programs caused a continuous decrease in health and education spending during the 1990s in Zimbabwe, Ghana, and the other countries surveyed by SAPRIN. In Zimbabwe, for example, "[h]ealth care spending dropped to 2.1% of GDP in 1996 from 3.1% in 1990. Government allocations to the Ministry of Health decreased from 6% of total government expenditure to about 4%. The per capita budget for health care fell from $22 in 1990 to $11 in 1996."

Education and health expenditures in Tanzania have been in constant decline throughout the years of imposed structural adjustment policies. Education's share in total budget percentage fell from 11.85% in 1983/84 to 6.95% in 1990/91. The same holds true for health expenditures, which experienced a decline from 5.46% to 4.93% during the same period as education. The cases of Zimbabwe, Ghana, Hungary, the Philippines, and other countries in the SAPRIN report illustrate the scope of the adverse impacts of external debt and structural adjustment policies.

The net loss between capital inflows and outflows also affects domestic savings. This does not mean that the almost non-existent level of domestic savings in Kenya and Tanzania is completely the result of external debt. However, there is a strong correlation between currency devaluations required under structural adjustment and a country's ability to institute sound fiscal policies that would create incentives and real interest rates to encourage domestic savings and investments. In other words, once a currency is devalued, incentives to invest in the economy and the prospects for real interest rates dissipate. Therefore, people lose confidence and are less likely to keep deposits in domestic financial institutions. The most dramatic example of this syndrome in recent years has been Argentina, where the economy collapsed following its currency devaluation as it defaulted on its external debt.

After decades of searching for development strategies, it is by now clear that Kenya and Tanzania can no longer afford to continue with the prescriptions of the IMF and World Bank. In choosing a new direction, there must be a recognition that some of their external debt simply cannot be repaid. In fact, many have argued that most of the debts have already been paid. The IFIs need to acknowledge these findings by canceling the debt.

Africans can seek a new beginning by recommitting themselves to collective strategies, such as the Lagos Plan, formulated by African governments over ten years ago. Food production and strong regional institutions should become the focus for development. The environment should also be a major focus in this new direction. Fostering local participation, food self-sufficiency, strong regional institutions and co-operation, and efforts to improve the environment will bring new confidence in the people as they work collaboratively toward this new development process.

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