Rail sleepers for standard gauge railway at Kathekani production site in
Makueni County on March 17, 2016. Estimates by the International
Monetary Fund show that the EAC needs in excess of $90 billion, or about
70 per cent of its combined GDP in 2014, to fund key large-scale
infrastructure projects in energy and transport, such as the standard
gauge railway above, and foster economic growth. PHOTO | FILE
By BERNA NAMATA
In Summary
- Analysts say public debt has been rising across the region over the past few years, principally on the back of rising public expenditure, particularly the large infrastructure projects.
- Estimates by International Monetary Fund, show that the EAC needs in excess of $90 billion, or about 70 per cent of its combined GDP in 2014, to fund key large-scale infrastructure projects in energy and transport.
- While it is not wrong for countries to continue borrowing, economists insist a balance must be struck between borrowing and internal generation of revenue.
East African countries are faced with spiralling debt and
narrowing funding options due to limited domestic revenue sources and
the unpredictability of key donors.
Moreover, borrowing costs are likely to be higher than in recent
years in the face of an appreciating US dollar. The EAC states also
face adverse global conditions, including the slowdown in emerging
markets such as China and low commodity prices.
Now there is concern over the region’s ability to meet its debt obligations in the coming years.
While it is not wrong for countries to continue borrowing,
economists insist a balance must be struck between borrowing and
internal generation of revenue.
Governments have been advised to abandon short-term and
expensive loans for long-term and concessional loans. Governments have
to widen the tax net and bring in more taxpayers to plug the deficit.
Analysts say public debt has been rising across the region over
the past few years, principally on the back of rising public
expenditure, particularly the large infrastructure projects.
Estimates by International Monetary Fund, show that the EAC
needs in excess of $90 billion, or about 70 per cent of its combined GDP
in 2014, to fund key large-scale infrastructure projects in energy and
transport.
Yet most of these projects are at different planning stages, and
some may well not come to fruition, owing to such factors as lack of
financing or operational challenges.
Risk of debt distress
Analysts say if projects have not been included in the fiscal
framework — as seems to be the case for a number of them — their large
scale nature has the potential to significantly add to the fiscal
deficits and debt burden, unless savings are made elsewhere in future
budgets or these projects are financed by the private sector.
Other economic issues could arise, such as the risk of overheating or running into absorption-capacity constraints.
However, current debt levels are still low by international
standards. Of the five member countries, only Burundi is rated by the
IMF at a high risk of debt distress.
“Rwanda’s foreign debt has risen over the past three years by 15
per cent of GDP but this type of increase is natural in an economy that
is in the early stages of development and in need of a large influx of
foreign capital, said Alun Thomas, the IMF resident representative for
Rwanda.
“Even with this increase, the economy remains at a low risk of
debt distress, which allows greater access to development financing,” he
added.
In 2015, Rwanda’s capital account balance declined by 11 per
cent to $299.9 million, from $337.1 million in 2014, due to the fall in
capital grants. The financial account balance recorded a net borrowing
of $795 in 2015 compared with $616.2 million in 2014.
ALSO READ: Tough times as Rwanda cuts down on spending
While Rwanda and Uganda — with debts at 25 per cent and 35 per
cent of their GDPs, respectively — have room for sustainable debt
absorption, Kenya and Tanzania — at 50 per cent each — are on the brink
of the levels recommended by multilateral institutions such as the IMF.
According to Andrew Mold, a senior economic affairs officer with
the United Nations Economic Commission for Africa (ECA), though debt
levels remain low by international standards, because of low average per
capita incomes, and a weak balance of payments across the region — and
especially weak export earnings, it means that the capacity of the
region to endure large external debt burdens is also weak.
Expanding domestic debt markets
At the same time, across Africa, domestic debt markets have been
expanding. This is partly in response to the decline in concessional
financing from donors, but is also due efforts to increase domestic
resource mobilisation.
“Kenya is the most advanced in our region on that score. Over
the past decade, the Central Bank of Kenya embarked on an ambitious
programme to develop its domestic debt market. They have been trying to
restructure their domestic debt from short-term Treasury bills to longer
term Treasury bonds,” Mr Mold said.
Although this removes the exchange rate element of risk, Mr Mold
argued that because domestic interest rates are so high, “This can also
turn out to be quite an expensive way of servicing public debt. For
instance, over 80 per cent of Kenya’s debt interest payments are now on
domestic debt.”
Much of Kenya’s debt is dedicated to financing large-scale
infrastructure projects, which is partly why the Bretton Woods
institutions (IMF/WB) are yet to raise the red flag as these are
considered “productive” investments.
However, there are growing concerns about the viability of the
Lamu Port South Sudan Ethiopia Transport (Lapsset) Corridor projects
that consist of road and rail, fibre optic cables, crude oil pipeline,
high tension power transmission lines and an airport to connect Kenya to
South Sudan and Ethiopia.
Yet the Lapsset Corridor project is expected to inject some 2-3
per cent of GDP into the economy from the core projects alone, and 5-8
per cent of the country’ s GDP through attracting and generating
investments.
“The Lapsset Corridor and the postponement of oil production,
could turn things around quite quickly. These investments need to start
generating benefits in the medium-term (2-5 years) otherwise it will be
increasingly difficult to pay back the debts,” Mr Mold said.
READ: Kenya, Ethiopia in rail, pipeline deals
Falling oil prices have dampened oil prospects for the region,
recently seen as the most promising frontier for oil and gas exploration
with 2.3 billion barrels of oil discovered in Uganda and Kenya; and
more than 50 trillion cubic feet of natural gas in Tanzania.
However, natural resources are macroeconomic and fiscal risks,
and need to be managed even before production starts to ensure fiscal
sustainability, according to an analysis by IMF staff.
For example, the fiscal position could deteriorate if borrowing
increases are based on expected natural resource revenues that do not
materialise. Given the large fluctuations in their prices, natural
resources introduce volatility in revenues — and that can lead to
boom-and-bust cycles.
The most recent public debt sustainability analysis conducted by
IMF and World Bank staff suggests that, in the baseline scenario, the
public debt (in present value terms) would remain below the 50 per cent
of GDP ceiling established by the East African Monetary Union
convergence criterion for all EAC countries by 2021.
No comments :
Post a Comment