Tanzania has cut short borrowing from the country’s pension funds as directed by donors after accumulating huge liabilities, which are more than the sector’s total assets of about Tsh7 trillion (about $4.11 billion), The EastAfrican has reliably learnt.

The outstanding obligations to the five mandatory schemes and the public health insurer, which jeopardise their solvency and liquidity, amounted to Tsh8.43 trillion at the end of last year.

The liabilities mostly comprised pensioners’ benefits arrears and loans for projects implemented by the government and its agencies.

The government has also in recent years been borrowing from the pension system to finance the budget in the wake of persistent revenue shortfalls, increasing unpredictability of aid flows and failure to timely contract loans from external commercial lenders.

Treasury sources said the borrowing will resume after a big chunk of the outstanding debts and arrears have been cleared and a strategy put in place on how to deal the fiscal problem and honour future obligations.

Led by the International Monetary Fund (IMF), the donors also want all future loans to the government by the funds to be transparently recorded in the budget unlike it was in the past.

READ: IMF warns Tanzania over borrowing spree

“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,” IMF in its latest country report, which outlines fiscal and monetary directives to Tanzania.

Last December, the government committed itself to the IMF that it would 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 Tsh6.6 trillion in 2013/14.

The government 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.

For quite some time, the government had been adamant on the issue but finally it has succumbed to donor and lawmakers’ pressure to also address other inherent weaknesses in the sector that for many years have handicapped its efficiency and haunted its overall performance.

Available latest sectoral figures show that membership of the five mandatory pension schemes was 1.3 million in 2012/13 while membership for health insurance stood at 536,829. Whereas the number of pensioners was only 87,000, less than two million of the 22 million working population was covered.

Senior government officials said repayment of the outstanding debts and arrears will start next month. According to them, the major beneficiary will be the Public Sector Pension Fund (PSPF), which has been paying civil service pensioners on behalf of the government.

“The government has committed to start repayment of the arrears by addressing the pre-1999 (PSPF) outstanding debt from April 2015 onwards,” SSRA director-general Irene Isaka told The EastAfrican.

She said the strategy to sort out the funds will include issuance of special bonds to deal with investment debts and cater for the pre-1999 PSPF arrears.

Noting that currently Treasury was working with the funds to verify matured debt obligations in order to expedite their issuance, Ms Isaka said the bonds will be non-monetary instruments but can traded at the Dar es Salaam Stock Exchange.

For several years now, the government has failed to timely and fully servicing due pension investment loans subjecting the sector to financial and financing nightmares. The situation became so bad that major international financial institutions had to make the clearance of the debts and other liabilities a condition for supporting Tanzania.

Projects that have been undertaken using pension loans include Dodoma University, which cost Tsh230 billion ($135 million) to build, the new Bunge Chambers in Dodoma and the ongoing construction of the Kigamboni Bridge in Dar es Salaam whose cost will be $136 million. The bridge connects the Dar es Salaam central business district to Kigamboni peninsula.

According to World Bank staff analysis of the sector, most of the government obligations to the funds are arrears to the public sector scheme.

Prior to July 1999, the pension scheme for civil servants was non-contributory and pension benefits were all paid from the government budget. The system was transformed to the contributory Public Service Pension Fund in (PSPF) July 1999.

During the five- year transition period (July 1999–June 2004), all the pension benefits were paid from the budget. Although the government was expected to cover benefits associated with the pre-July 1999 scheme beyond the transition period, the PSPF has been paying retirees on behalf of the government.

The latter’s failure to timely refund PSPF has always constrained the scheme’s operations and subjected it to a huge actuarial deficit. A few years back, the fund almost went bankrupt leading donors and the parliamentary Public Accounts Committee (PAC) to exert pressure on the government to pay up quickly.

READ: Withdrawals cause alarm for Dar pension schemes

“Governments from all over the world borrow from this sector, including others pension funds. The problem in Tanzania is that the government doesn't pay, which calls for accountability to be enhanced on the borrowing,” PAC chairman Zitto Kabwe told The EastAfrican.

Late last year, the acting Controller and Auditor-General, Mr Athuman Selemani, told PAC that most of the government’s liabilities emanate from the Tsh7.06 trillion it owes PSPF due to the accumulation of unremitted members’ contributions since its establishment in 1999.

He said the loans from pension funds to the government that had been invested in various development projects amounted to Tsh1.37 trillion.

Whereas the Parastatal Pensions Fund (PPF) was owed Tsh192 billion (nearly $113 million), the outstanding debt to the National Social Security Fund (NSSF) and the National Health Insurance Fund (NHIF) were Tsh467 billion ($274 million) and Tsh107 billion (almost $63 million) respectively. PSPF was owed Tsh429 billion ($252 million), the Local Authorities Pension Fund (LAPF) Tsh170 billion ($100 million) and Government Employees Pension Fund (GEPF) Tsh7.06 billion ($4.15 million).

In a December 18, 2014, policy note to the IMF, Finance minister Saada Mkuya said the strategy to address the government liabilities would be developed and adopted in the first quarter of this year.

Late last week, she told The EastAfrican that the strategy was adopted through a Cabinet paper that was tabled in February. Through it, the government has promised to clear all arrears in 2015/16 and be more transparent in its future borrowing from the sector, whose weaknesses include high operational costs and inadequate return on investments.

“Any future lending will be properly recorded as government financing, and the corresponding expenditures will also be recorded in the fiscal accounts,” Ms Mkuya noted in the 2014 Memorandum of Economic and Financial Policies to the IMF.

The debts and arrears clearance strategy also proposes modalities for settlement, which include rescheduling and securitisation. According to it, future government budgets will explicitly take into account the servicing of these debts and any future pre-1999 liabilities that may remain after the reforms will be transparently budgeted for each year.

Ms Isaka said the focus of the new measures and past reforms was to stabilise the sector through adequate funding, good governance and optimal coverage.

The reforms also target to enhance sustainability of the schemes, ensure adherence to prudent investment principles, improve benefits and promote public confidence.

Currently, the pension system in Tanzania covers only eight per cent of the population but the ongoing reforms target to uplift the coverage rate to 40 per cent by 2018/19. Accounting for 12 per cent of the country’s GDP, the system has no universal social pension arrangement, but SSRA and the Ministry of Labour and Employment have already begun to work on the idea.

During 2013/14, the sector’s total investments were Tsh5.65 trillion compared to the previous level of Tsh4.83 trillion. Most of these investments are currently in fixed income assets, which account for 68 per cent of the total investment portfolio.