Economic prospects looking up, but low export earnings, mounting deficit could rain on parade

East Africa's economic prospects look good, but drops in commodity prices and rising debt could spoil the party. TEA Graphic/Anthony Sitti  Nation Media Group

By PETERSON THIONG’O The EastAfrican

In Summary

• The region’s growth is expected to average six per cent next year, up from about 5.5 per cent this year, driven by increased infrastructure investments, falling inflation and an expected surge in private-sector lending.
• Experts predict a rebound next year, saying the region has, to a certain extent, managed the aid cuts, revenue drops, political risks and constrained credit uptake that slowed economic growth this year.
• For governments to maintain the growth targets into 2014, they have to find the equilibrium between revenues and expenditures.

East Africa is expected to post strong growth next year, but falling commodity prices and the region’s mounting debt burden could offer the greatest challenge to its 136 million citizens.

The region’s growth is expected to average six per cent next year, up from about 5.5 per cent this year, driven by increased infrastructure investments, falling inflation and an expected surge in private-sector lending.

Experts predict a rebound next year, saying the region has, to a certain extent, managed the aid cuts, revenue drops, political risks and constrained credit uptake that slowed economic growth this year.

However, despite the positive projections, economists have raised concerns over the region’s high dependence on donor aid, low tax revenues, narrow export base and weak infrastructure, which they say are likely to create serious challenges for East Africa in light of its increased appetite for infrastructure spending and falling commodity prices in global markets.

The prices of tea and coffee — two of the region’s leading exports — have fallen to new lows, which is expected to hurt export earnings and widen the current account deficit for the region. Tanzania’s gold earnings have also fallen to a year low, reflecting the need to cut dependence on raw commodities as the main source of export earnings.

Commodities like tea, coffee, gold and diamonds contribute about 80 per cent of the region’s export earnings, but are prone to volatilities occasioned by weather, unstable global prices and political factors in key markets.

For example, coffee prices at the indicative Nairobi auction have dropped to a five-year low of $3.28 a kilogramme, while tea is currently attracting a price of $1.42 per kg, the lowest in seven years. Tea and coffee are Kenya’s main exports, and also account for about 80 per cent of Burundi’s and 70 per cent of Rwanda’s export earnings

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READ: Kenya forex earnings plummet on drops in tea, coffee prices

Reuters quotes ARFIC, Burundi’s coffee regulator, as predicting earnings will decline sharply in 2013/14, with output falling by almost half to 13,000 tonnes from 24,000 tonnes in the 2012/13 season.

In Tanzania, earnings from the country’s traditional exports declined eight per cent to $818.2 million in the year ending September 2013, according to data from the central bank, down from $889.4 million in the same period in 2012, due to a decline in both export volumes and prices of sisal, cashew nuts and cloves.

In the same period, the Bank of Tanzania said in its September issue of the Monthly Economic Review that the value of gold exports declined from $2.15 billion in the year ending September 2012 to $1.748 billion in the year ending September 2013; tourism surged from $1.61 billion to $1.82 billion during the same period.

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“The economy remains vulnerable to external shocks, particularly fluctuations in commodity prices. Thus, variations in gold and oil prices have to be monitored closely, given the significance of these commodities to Tanzania’s trade balance,” said the World Bank in its latest review of the Tanzanian economy.

“The strategy focuses on a limited number of products with a view to diversifying into non-traditional exports that are particularly agro-based, while taking advantage of traditional exports to extend production and add value,” said the International Monetary Fund in its latest review of the Rwandan economy.

The growing debt burden, coupled with low revenue collection, is also likely to have an impact on what direction the EAC economies take especially considering the myriad infrastructure projects planned throughout the region.