EXPORTS KEY TO TANZANIA'S DEBT SUSTAINABILITY

C O N F I D E N T I A L DAR ES SALAAM 001483

SIPDIS

SIPDIS
SENSITIVE

DEPT AF/E FOR B YODER AND AF/EPS FOR T HASTINGS
DEPT FOR SCA/RA FOR SECOR ANDS EB/OMA FOR DETWILER
PASS TO TREAS FOR DONOVAN

E.O. 12958: DECL: 08/29/2011
TAGS: EFIN PREL EAID TZ
SUBJECT: EXPORTS KEY TO TANZANIA'S DEBT SUSTAINABILITY

REF: STATE 106631

Classified By: Mary B. Johnson, Economic Counselor, for reason 1.4(d).


1. (SBU) SUMMARY. New lines of bilateral credit from
non-Paris Club Members do not currently appear to be
threatening Tanzania's long-term prospects for achieving debt
sustainabilty. Neither the Bank of Tanzania (BOT) nor the
International Monetary Fund (IMF) reported significant,
bilateral loans in the recent past or on the horizon from
non-Paris Club creditors. Post did learn that China will
soon extend a new line of credit to Tanzania for
rehabilitation of the Tanzanian-Zambia Railway Authority
(TAZARA) and that South Korea has provided financing to
Tanzania for the construction of four vocational centers.
Tanzania continues to have outstanding debts with several
non-Paris club creditors, including Iran, who have not yet
officially offered debt relief. To ensure long-term debt
sustainability, Tanzania's export performance will be
critical along with debt relief efforts and prudent borrowing
from bilateral partners and commercial sources. In FY 2006,
Tanzania's export sector grew as a result of increased
exports of tobacco, cotton, cloves, manufactured goods and
tourist receipts. Still, however, the export sector remains
vulnerable to external factors such as weather and terms of
trade shocks. END SUMMARY.

New Lending from China, South Korea, Islamic Development Bank
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2. (SBU) On June 29, China, Tanzania and Zambia signed a
loan agreement to assist the Tanzanian-Zambia Railway
Authority (TAZARA),which China helped finance and construct
some 30 years ago. Access to this new line of credit was a
result of Chinese Premier Wen Jiabo's eight day African visit
in mid June 2006, which included stops in both Dar es Salaam
and Lusaka. According to the Guardian newspaper, the loan
agreement amounted to USD 10.8 million. Few other details
about the loan agreement were released, however, if the loan
resembles previous loans from China to Tanzania, interest
rate terms are probably near or close to zero.


3. (SBU) South Korea has also opened up a line of credit to
Tanzania for the establishment of four information and
communications (ICT) vocational centers in Lindi, Manyara,
Dar es Salaam and the coastal region. South Korea agreed to
loan the Government of Tanzania USD 18 million toward the
total project cost which was estimated at USD 22.5 million
and the GOT agreed to cover the remaining cost of USD 4.5
million. This loan agreement was one outcome of a high-level
visit to Tanzania by South Korean Foreign Minister, Ban
Ki-Moon, in January 2005.


4. (SBU) The Islamic Development Bank (IDB) has also
recently announced a new, albeit small, loan for the
Government of Tanzania. On July 2, 2006, the Islamic
Development Bank reported its decision to provide USD 4.4
million as part of an export finance operation for petroleum
products from Arab countries to Tanzania. Terms of the loan
or further details on the program have not yet been released.

External Debt Stock: Relatively Stable
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5. (C) Tanzania's total external debt stock amounted to
about USD 8.23 billion in June 2006 compared to 8.13 billion
in June 2005. The GOT owes approximately 67.7 percent of its
external debt to multilateral institutions such as the World
Bank, International Monetary Fund (IMF),and African
Development Bank, 21.4 percent of its external debt to
bilateral creditors and the remaining 10.9 percent to
commercial and export creditors. Tanzania's debt stock has
stabilized largely as a result of both bilateral and
multilateral debt relief initiatives. As of June 2006,
multilateral institutions under the Heavily Indebted Poor
Country's Initiative have provided Tanzania with cumulative
debt relief of approximately USD 435 million. Under the more
recent Multilateral Debt Relief Initiative (MDRI),the World
Bank, IMF and African Development Bank will provide relief
over the next ten years for all of Tanzania's debt
outstanding since 2004.

Tanzania's Debt Stock with Non-Paris Club Creditors
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6. (SBU) Tanzania's total debt stock with non-Paris club
creditors amounted to USD 859 million as of June 2006,
according to statistics provided by Tanzania's IMF country
office. Tanzania's largest debt is owed to Iran: USD 262
million (77 million in DOD and USD 184 million in interest
arrears). Tanzania's second largest debt is owed to Iraq:
USD 171 million (with 36.3 million in DOD and 135.1 million
in interest arrears); and its third largest debt to China:
USD 145.5 million (145.5 DOD with 0 in interest arrears).


7. (C) Brazil, a Paris Club Member on a case-by-case basis,
has been another significant creditor for Tanzania, providing
financing for the construction of roads, dams and other
infrastructure projects. Tanzania owes Brazil approximately
USD 239 million from a series of loans which it took in the
late 1980s. While Brazil has not officially provided any
type of debt relief, Brazil's Ambassador to Tanzania, Appio
Claudio Acquarone, told Econoff on August 29 that the
Government of Brazil had agreed in 2002 to waive all of
Tanzania's debt and is currently working with the GOT to
finalize a bilateral agreement to that effect. Ambassador
Acquarone also noted that until a bilateral agreement on debt
relief was signed, credit lines to Tanzania would be
suspended so that the two countries could start from a clean
slate.

Bilateral Debt Relief from Non-Paris Club Creditors
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8. (C) As noted above, Tanzania has received significant
debt relief from bilateral creditors, including Paris and
non-Paris club members. As of June 2006, total debt relief
from bilateral creditors amounted to USD 1.04 billion, 17.7
percent of which came from non-Paris Club creditors.
According to the BOT, non-Paris Club creditors have provided
the following in terms of debt relief for Tanzania (USD):

-- Libya: In 2005, Libya canceled 101.7 million in debt and
restructured 40 million into Treasury Bonds. Tanzania used
financing from Libya for its energy sector.

-- China: In 1999, China canceled 15 interest free loans
amounting to 37.7 million or one-third of Tanzania's
bilateral debt to China. Tanzania used financing from China
for rail transport (40.8 percent),ground transport (27.9
percent),industrial development (4.9 percent) and general
budget support (26.3 percent).

-- India: In 2004, India eliminated all of Tanzania's debt
worth 19.7 million. Tanzania used loans from India primarily
for rail transport.

-- Kuwait: Recently, Kuwait canceled Tanzania's debt worth
31.8 million. The BOT did not specify the date when debt
relief was granted.

-- Bulgaria: Recently, Bulgaria has also canceled USD 15.1
million. The BOT did not specify the date when debt relief
was provided.

Comment: Strength of Tanzania's Export Sector is Key
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9. (SBU) Representatives from both the BOT and IMF
emphasized the importance of Tanzania's export sector to its
overall debt position. (Note: One measure of debt
sustainability is the ratio of external debt to exports). In
FY 2006, exports of goods and services increased by 8.9
percent and 5.1 percent respectively. The rise in exports
emanated from increased traditional exports such as cotton,
cloves, and tobacco and a rise in non-traditional exports
such as gold, textiles and other manufactured goods. The
positive trend for Tanzania's export performance, coupled
with additional bilateral and multilateral debt relief
initiatives, bodes well for Tanzania's debt situation
overall. Important vulnerabilities do remain such as
Tanzania's dependence on foreign aid, drought conditions that
exacerbate food and energy shortages, and external factors
such as terms of trade shocks. END COMMENT.
RETZER