Relief as govt halts borrowing from pension funds

By The guardian reporter

                                                 PROF.BENNO NDULU The BoT Governar

 The government has at last paid heed to experts’ advice and bowed to donors’ pressure to stop borrowing from pension funds after accumulating huge liabilities that are now more than the industry’s total assets of...
nearly 10trn/-, The Banker can authoritatively report today.

Led by the International Monetary Fund (IMF), Tanzania’s fiscal mentors and monetary prefects want borrowing to resume after a big chunk of the outstanding debts and arrears have been cleared and a strategy put in place for clearing them and honouring future obligations.

Sectoral and diplomatic sources say the outstanding obligations and contingent liabilities to the five mandatory schemes and the public health insurer that had amounted to 8.43trn/- in 2014 are now above the 12trn/- mark.

“The Bank of Tanzania (BoT) has instructed the funds not to undertake any new loans until the 10 per cent limit in the investment guideline has been achieved,” a donors’ policy note on the fiscal sustainability of the pension funds reads in part.

The document was part of the 2014 public expenditure review literature, when the largest social scheme in the country was on the brink of collapse.

BoT says in a review of the sector between January and September last year that the pension funds complied with the prudential Investment Guidelines of 2015 during the period.

However, it adds that the ratio of government loans to total assets increased to 21.7 per cent in September, 2015 from 19.3 recorded in March, 2015 owing to accumulation of interest. During the period, the industry’s total assets values were 9.9trn/- and 9.4trn/- respectively.

“This (debts) would be addressed once the government strategy to fund the liabilities through issuance of non- cash bond is finalized and implemented,” BoT notes in the September 2015 Financial Stability Report.

The donors also want all future loans to the government by the funds to be transparently recorded in the budget unlike it has been in the past and documented as part of the public debt.

The Banker has reliably learnt that the government has promised to settle all the due obligations in the current financial year and during fiscal year 2016/17. It has also pledged to sort out suppliers especially contractors who it owes over 1trn/-.

On Tuesday, The Guardian’s Smart Money magazine exclusively reported that the government has now developed the strategy to sort out its obligations. According to the Deputy Minister of Finance and Planning, Dr Ashatu Kijaji, the strategy includes issuance of non-cash bonds to the pension funds.

“Progress has been made in the reconciliation of arrears to pension funds,” the minister noted in a recent policy note to the International Monetary Fund (IMF).

She said the bonds to be used to settle the obligations would have maturities ranging between three and 20 years. The issuance of the bonds is expected to start next month for settling the 2.7trn/- arrears to the PSPF.

“Loans from the three pension funds to the government have now been reconciled, while work is progressing on loans from three other pension funds (namely the PSPF, LAPF and NSSF),” Dr Kijaji notes in the Letter of Intent, Memorandum of Economic Financial Policies, and Technical Memorandum of Understanding dated December 24, 2015.

“The Government expects to take over these loans entirely and recognize them as public debt, and will issue non-cash bonds to the pension funds in compensation by end-June 2016,” she added.

According to her, “new loans to the government will not be extended until the share of these loans to total pension fund assets falls below the regulatory limit of 10 per cent; this limit might be further reduced in the future. Future loans will be recorded explicitly as budget financing, with the corresponding expenditure properly recorded in the budget and fiscal reports.”

The government’s inability, and sometimes reluctance, to timely honour obligations to the sector was not only jeopardizing survival of the social security system but also putting the funds in an awkward financial position to pay current and future retirement benefits.

The unpaid sums, which had exposed the schemes to insolvency, negatively impacted on their cash flows and put them on poor liquidity footing, that mostly comprised of overdue public sector contributions and non-performing loans.

They include arrears to the Public Service Pension Fund (PSPF) on pre-1999 pension benefits it paid pensioners on the government’s behalf and funding of public projects such as Dodoma University and the Kigamboni bridge in Dar es Salaam.

Faced by persistent revenue shortfalls, increasing unpredictability of aid flows and failure to timely contract loans from external commercial loans during the last regime, the government resorted to borrowing from the pension system for financing both budget deficits and its recurrent spending.

“Enhancing the sustainability of the pension system, including by addressing existing government arrears to the pension funds, is critical,” the IMF notes in its latest country report, which outlines fiscal and monetary directives to Tanzania.

“It is important to ensure that the central government settles its obligations vis-à-vis the pension funds in a timely manner, and that pension funds are not used to finance government activities,” it adds.

In December 2014, the government committed itself to the IMF that it will not borrow from the sector until what it owes the funds drops to below 10 per cent of their total assets, which the sector’s regulator put at nearly 7trn/- during 2013/14.

The authorities also agreed to draw a comprehensive strategy on how to sort out the current liabilities, deal with future borrowings and handle upcoming obligations.

The fiscal directives and the changes embraced by the government are a key component of measures Tanzania is required to undertake to further reform the pension system, which is yet to play its due role in the national economy and adequately serve the country.

Among other things, the new reforms seek to enhance the financial soundness of the funds and make a substantial dent on the actuarial deficit in the system, which the Social Security Regulatory Authority (SSRA) has put at 25 per cent of GDP.

Treasury sources said the government started clearing the outstanding debts and arrears in 2014/15. The major beneficiary will be the Public Sector Pension Fund (PSPF), which for over six years now has been paying civil service pensioners on behalf of the government.

In 2014, the loans from pension funds to the government that had been invested in various development projects amounted to 1.37trn/-. According to BoT figures, the pension funds’ loans to the government topped 2.15trn/- at the end of the third quarter last year.

Whereas the Parastatal Pensions Fund (PPF) was owed 192bn/- by late 2014, the outstanding debt to the National Social Security Fund (NSSF) and the National Health Insurance Fund (NHIF) were 467bn/- and 107bn/- respectively.

The PSPF debt was 429bn/-, the Local Authorities Pension Fund (LAPF) was owed 170bn/- and Government Employees Pension Fund (GEPF) 7.06bn/-.