East Africa govts brace for vibrant 2019, but many hurdles stand in the way

Ngong Road in Nairobi under construction. It is estimated that the EAC countries requires $78 billion to finance mega infrastructure projects in the pipeline. PHOTO FILE | NMG 

In Summary

• Governments are betting on increased spending on infrastructure projects and a growing domestic demand for goods and services.
• A report by the Institute of Chartered Accountants in England and Wales shows that the region’s economic growth is expected to ease slightly to 6.3 per cent in 2018, from 6.8 per cent in 2017.
• The EAC governments have prioritised infrastructure spending to strengthen their growth agenda.

By JAMES ANYANZWA
More by this Author

East African governments are optimistic about more vibrant economic growth in 2019, largely driven by increased spending on infrastructure projects and a growing domestic demand for goods and services.

But the weakening of regional currencies, declining credit to the private sector, public expenditure pressures, growing public debt, weather-related shocks and uncertainty in the global markets due to the USA’s economic and trade policies stand in the way of this rosy outlook.

According to Kenya’s National Treasury, public expenditure pressures, particularly wage-related recurrent expenditures and erratic weather pattern could impact agricultural output, energy generation and cause high inflation.

“We continue to monitor these risks and will take appropriate measures to safeguard macroeconomic stability,” said Dr Kamau Thugge, Principal Secretary in the Ministry of Finance.

According to Dr Thugge, the slowdown of credit to small and microenterprises — which are among the cogs that drive economic growth — has not been unique to Kenya.

He says the same is playing out in the other EAC big economies Tanzania and Uganda.

Related Content

• AfDB to give $2b for mega projects in East Africa
• China takes centrestage in Africa through infrastructure
• EAC needs $78bn for infrastructure projects

Debt overhang

A report by the Institute of Chartered Accountants in England and Wales shows that the region’s economic growth is expected to ease slightly to 6.3 per cent in 2018, from 6.8 per cent in 2017, attributed to limited credit to the private sector, a challenging investment climate and poor performance of the agriculture sector due to erratic rainfall patterns.

It is argued that while infrastructure development is important to the economic development of a nation, funding for these projects is slowing, leaving regional economies facing a debt overhang, with most of the expensive loans coming from China in exchange for project contracts.

Economists at Kenya’s Institute of Economic Affairs recommend that regional governments enforce austerity measures to control expenditure, especially recurrent, and tame the rising public debt.

These measures, according to the economists, include cutting down on non-core expenditure items, streamlining the public service and enhancing efficiency in the operations of state-owned corporations to stem financial bleeding through corruption and mismanagement.

Uganda’s Ministry of Finance has also raised the alarm about the pressures on local currencies, which increase the import bill and the cost of living.

While EAC currencies depreciated in November, the Uganda shilling appreciated against the dollar by one per cent, compared with October.

The Kenyan and Tanzanian currencies fell by 1.3 per cent and 0.03 per cent respectively, while the Burundi and Rwanda Francs each depreciated by 0.4 per cent.

US interest rates

According to the global rating agency Moody’s Investor Service, the rising US interest rates that lead to capital outflows across emerging markets, in conjunction with increasing government debt levels and currency depreciation, could significantly harm African banks’ loan quality and access to foreign currency funding.

In Uganda, the growth in credit to the private sector has been hampered by both the increased lending rates and the banks fear of loan defaulters.

In Kenya, the controlled interest rate regime that came into force in September 2016 has seen banks reduce lending to the private sector in favour of investment in government securities.

Effects of drought

According to the Bank of Tanzania, most of the loans extended to the private sector by Tanzanian banks are directed to personal loans to households and salaried employees.

The National Bank of Rwanda said banks would continue curtailing credit extension by tightening their lending protocols, considering that credit risk has a direct bearing on the underperforming loans.

The EAC governments have prioritised infrastructure spending to strengthen their growth agenda.

It is estimated that the EAC countries requires $78 billion to finance mega infrastructure projects in the pipeline.

For instance, the construction of two major trans-national roads is set to take off in 2019 with funding from the African Development Bank.

The Bank’s board had approved a $322 million loan to Burundi and Tanzania to finance the Rumonge-Gitaz and Kabingo-Kasulu-Manyovu road-upgrading project.

The bank is also set to finance the construction of the Malindi-Mombasa-Lunga Lunga/Horohoro-Tanga-Bagamoyo highway.

In 2017, the EAC economies’ growth rate slowed to an average of 5.3 per cent due to the effects of drought and reduced credit to households and businesses.

Growth stood at 6.1 per cent and 5.4 per cent in 2015 and 2016 respectively.

Economic growth

In 2017, Kenya was the worst performer among its regional peers as its economic growth decelerated to a five-year low of an estimated 4.8 per cent in 2017.

The economies of Tanzania, Rwanda and Uganda are estimated to have grown by 6.4 per cent, 6.1 per cent, and 4 per cent respectively.

According to the African Development Bank, the agriculture sector is the main driver of East Africa’s growth, followed by industry and the minerals subsector.

All EAC countries had relatively high fiscal deficits, partly due to weak domestic resource mobilisation and high public investment spending.

Kenya, Rwanda, and Tanzania are expected to drive the region’s growth further in 2018 and 2019.

Public debt

In Kenya, the total public debt hit Ksh 5.04 trillion ($50.4 billion) in June this year (2018), comprising external debt worth Ksh2.56 trillion ($25.6 billion, 51 per cent) and domestic debt worth Ksh2.48 trillion ($24.8 billion, 49 per cent).

Uganda’s public debt has been sporadically rising from as low as $1.9 billion in the 2008/2009 financial year to over $11 billion by December 2017, accounting for an estimated 38.4 per cent of the country’s gross domestic product.

In Tanzania, the public debt for the three months to September 30 increased to Tsh469.6 billion ($203 million) from Tsh373.1 billion ($162 million) in the same period last year, owing to an increased uptake of new loans and depreciation of the local currency.

According to the Bank of Tanzania, revenue collection has also been below target prompting increased borrowing from domestic and external markets to bridge the deficit.

Of the total debt external debt and domestic debt amounted to Tsh360.3 billion ($156 million) and Tsh109.3 billion ($47 million) respectively.

In February 2018 Kenya issued the second $2 billion sovereign bond to pay off its maturing debts and fund its development plans.

The bond was issued in two equal tranches of 10 years at a coupon of 7.25 per cent and 30 years at a coupon of 8.25 per cent.

In Uganda the Parliamentary Accounts Committee queried the rate at which the government was borrowing, terming it not sustainable and is putting national assets in danger of being auctioned in the event of default.

In the wider East African region, Ethiopia, which has overtaken Kenya as the region’s largest economy, maintained a strong growth of 10.3 per cent in 2017, mainly driven by the public sector’s investment in infrastructure.