EDITORIAL: Public debt: Is East Africa digging itself into a hole?

 

US President Barack Obama (left) and his Kenyan counterpart Uhuru Kenyatta during a joint press conference in Nairobi on July 25, 2015. The two leaders agreed that the United States and Kenya would work closely together on the refugees issue to better ensure that the needs of refugees and host communities are met. AFP PHOTO | FILE 

By The EastAfrican

In Summary

• The current economic difficulties highlight the importance of addressing vulnerabilities in each country — particularly budget deficits — before the EAC monetary union takes effect.

East African Community member states are facing fresh pressure to tame spiralling public debt.

Fears are now rife that it will hurt growth and make it more expensive for the nations to borrow from the international market; even worse is the risk that the debt will become unsustainable in the long term.

Economists say East Africa’s public debt, while still low by international standards, requires careful attention from governments to avert the risk of pushing interest rates higher, as governments gear up for more borrowing to finance various projects.

More borrowing also means that the taxes of East African citizens are increasingly going towards servicing debts rather than paying for other services.

With an ambitious infrastructure development programme, bureaucrats are looking at borrowing even more as experts warn of downside risks such as spikes in global interest rates and currency stability.

Economists cite exhausted potential for concessional loans, possible foreign-exchange shocks and high project overheads as obstacles to sustainable public debt.

If governments need to continue to borrow to pay off these debts, it is likely to lead to a rise in interest rates to attract investors to the debt, and that in turn could squeeze private-sector credit.

Unlike in the past when governments largely relied on traditional lenders, multilateral development institutions such as World Bank, African Development Bank, they are now increasingly opting for private money.

And as a result, in recent years, a number of African governments have issued Eurobonds, diversifying their financing away from the traditional sources such as concessional debt and foreign direct investment.

This is a positive development. Market-oriented reforms have succeeded in placing several African countries in a position to tap international financial markets by improving their public debt profiles and strengthening their reserves.

Thus, the ability to issue Eurobonds reflects both the abundant liquidity and improved economic stability in those countries.

This is also good news, as it provides an opportunity to diversify finance sources. That said, it is crucial to ensure that the borrowed money goes to finance good investments that help countries to grow faster.

These government borrowings are in essence massive bets that the East African growth story will continue to be rosy. Yet the region is currently facing international and domestic risks.

Already East Africa’s economic managers face a major challenge in maintaining macroeconomic stability, particularly in the face of a series of major external shocks to export revenues, with falling commodity prices and depreciating currencies.  

Now, there is concern that if the borrowing goes on unchecked, countries may need debt relief sooner rather than later. The current economic difficulties highlight the importance of addressing vulnerabilities in each country — particularly budget deficits — before the EAC monetary union takes effect.