East Africa’s growing debt levels could push regional economies into
financial distress in the wake of volatile local currencies and falling
export earnings, economists have warned. PHOTO | FILE
By James Anyanzwa
In Summary
East Africa’s growing debt levels could push regional
economies into financial distress in the wake of volatile local
currencies and falling export earnings, economists have warned.
The East African Community (EAC) partner states are borrowing
heavily to finance infrastructure development but economists warn the
region’s depreciating currencies would increase the burden of foreign
debt repayment, a position which would be made worse by the declining
export earnings.
Last year the United States Agency for International Development
(USAid) warned that interest payments on debts had started squeezing
East Africa’s national budgets and even resizing the economy by some
economies such as Kenya and Uganda would not help.
In 2014, Kenya rebased its gross domestic product
(GDP), growing the value of its annual output by about 25 per cent and
reducing its debt to GDP ratio to 43.1 per cent from 52 per cent.
Uganda also did the same and eased its growing debt-to-GDP ratio from 39.8 per cent to 29.2 per cent.
However, USAid through a report titled ‘Kenya Investment Climate
2015’ said rebasing of the economy is not a solution to the mounting
debt levels whose repayment has started eating into development budgets,
putting implementation of key infrastructure projects at risk.
According to the report, Kenya’s spending on public debt
repayment was 70 per cent higher than its expenditure on development in
the year 2013.
Unsustainable debt levels
“The trend of public debt in the region is worrying as the
volume of exports fall. In fact the rate at which the level of public
debt and budget deficits are growing is not matching with the rate of
economic growth and sooner or later these debts will become
unsustainable,” said Dr Joy Kiiru, a lecturer at the University of
Nairobi’s School of Economics.
“The debts are supposed to grow the economy if the monies are invested wisely,” added Dr Kiiru.
According to the International Monetary Fund (IMF) the share of
government debt as a proportion of GDP for the EAC member states
increased between 2012 and 2016 with Kenya leading in terms of debt
accumulation, followed by Tanzania, Rwanda and Uganda.
Kenya’s share of public debt as a proportion of GDP increased
from 41.7 per cent in 2012 to 55.4 per cent in 2016, while that of
Tanzania grew from 29.2 per cent to 42.4 per cent in the same period.
Rwanda’s stood at 41.5 per cent from 20.1 per cent and Uganda expanded
to 37.9 per cent from 24.2 per cent during the period under review.
On the other hand, Kenya’s exports as a percentage of GDP
declined from 21.9 per cent in 2012 to 17.5 per cent in 2016, while
Tanzania’s share of exports remained static at 20.9 per cent.
Rwanda and Uganda recorded an increase in the share of exports
during the period growing from 14.1 per cent and 20 per cent to 16.5 per
cent and 21.4 per cent respectively.
“Borrowing is not bad but what matters is what you do with the
money you have borrowed. Some of the projects we have borrowed to
develop were not well thought out and we are not certain of expected
returns,” said Dr Emmanuel Manyasa, an economist and country manager of
Uwezo Programme at Twaweza East Africa, a civil society organisation.
“We are also now in a position where we are borrowing to repay
debts and this is worrying. We have fallen into a debt trap and need to
have a policy shift,” he added.
Policies
In January this year, the United Nation's Economic Commission
for Africa (Uneca) said countries which borrow from foreign
financiers need to put in place policies which would allow them to pay
their debts without compromising the macroeconomic conditions of the
country.
Uganda’s gross public debt is estimated to be $8.81 billion by
the end of this month (June 2016) of which $5.48 billion is external
debt and $3.32 billion is domestic debt, according to the Budget Policy
Statement for the 2016/2017 fiscal year.
“Our total public debt is equivalent to 34 per cent of total
economic output. The Government will therefore borrow in future for
highly productive fixed capital investments that can generate financial
and economic returns to ensure debt sustainability,” said Matia Kasaija,
Uganda’s Finance minister.
Mr Kasaija said the increase in public debt is due to financing
priority infrastructure investments like the Karuma and Isimba
hydropower projects, rehabilitation and expansion of Entebbe Airport and
phase three of the National Transmission Backbone Project, meant to
enhance productivity in all sectors of the economy.
Uganda’s earnings from exports are far less than what is spent
on imports resulting in a large trade imbalance with its trading
partners.
In the year to March, Uganda’s imports were worth $5.64 billion compared to export receipts of just $2.66 billion.
The depreciation of the Ugandan shilling between June 2014 and
June 2015 increased the stock of external debt from $4.3 billion to $4.4
billion in the same period.
In the beginning of the 2015/2016 fiscal year, Kenya had the
highest amount of debt in the region at $24 billion, with more than 60
per cent of it being domestic, while Tanzania’s public debt peaked at
$19.14 billion, with 80 per cent of this being foreign.
Uganda’s government debt stood at $7.6 billion with 60 per cent
of it being external, while Rwanda’s was at 1.85 billion of which 76 per
cent was foreign debt.
Kenya plans to spend an estimated $4.66 billion on public debt
repayments in the next fiscal year (2016/2017), with an additional
$6.89 billion earmarked for borrowing.
During the first nine months of the current fiscal year
(2015/2016), Kenya used about 41 per cent of its tax revenues to pay off
debts.
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