East Africa’s finance ministers presented expansionary budgets
with ambitious revenue targets that are likely to be missed, leading to
more borrowing amid rising concerns over looming debt distress.
In
Uganda, Matia Kasaija presented a Ush40.5 trillion ($10.7 billion)
budget, a 21 per cent rise from this past year’s Ush32.7 trillion ($8.7
billion). To fund the rising budget, which is as a result of significant
increases in military, public administration and infrastructure
spending, East Africa’s third-largest economy plans to borrow more from
both local and foreign sources.
Kampala
is also targeting an already depleted Petroleum Fund, and is tightening
the screws on existing taxpayers to fund an 8.2 per cent fiscal
deficit.
Uganda’s fiscal deficit is
significantly above the 3 per cent ceiling agreed with the International
Monetary Fund in the charter for fiscal responsibility.
Rising
budget deficits across the region run against ongoing efforts to
establish the East African Monetary Union by 2024: Each EAC member state
should keep its budget deficit at around 3 per cent.
Kenya,
which unveiled a Ksh3 trillion ($30 billion) budget, is set to sink
deeper into debt under a proposed plan to borrow $5.9 billion to cover a
5.7 per cent deficit.
Kenya’s Treasury Cabinet Secretary Henry
Rotich dismissed rising concerns over debt sustainability. He maintained
that the public debt, which stands at around $50 billion, is within
sustainable levels, and that the burden is projected to decline.
“We
shall continue to remain on the planned path of reducing the fiscal
deficit in the medium term in order to create more fiscal space and
reduce the public debt,” he said.
The
fact that the Kenyan government intends to borrow $5.9 billion from
international and domestic markets to fill the budget gap during the
2019/20 financial year paints a picture of a country in a rut.
Kenya recently floated a third Eurobond in the international markets that raised $2 billion to repay maturing debt.
Although
Kenya’s budget deficit is on a downward trend, expected to drop to 5.6
per cent of GDP from 6.8 per cent this year and 7.4 per cent in 2017/18,
the fact that about 60 per cent of revenue is going to debt servicing
remains a cause for concern.
In
Rwanda, where Finance Minister Uzziel Ndagijimana unveiled a Rwf2.877
trillion ($3.16 billion) budget, the government has had to borrow
aggressively in recent years to fund growth. Dr Ndagijimana’s new budget
is 11 per cent more than the $2.7 billion for the 2018/19 fiscal year.
Although
the IMF’s analysis shows that Rwanda remains a low debt-risk economy —
at 32.9 per cent of GDP against a threshold of 50 per cent —
concessional loans stood at 63 per cent of the debt stock at the end of
2018. Most of the concessional loans were taken out to finance large
investment projects.
Tanzania’s
Finance Minister Philip Mpango tabled a Tsh33.1 trillion ($14.3 billion)
budget, up from Tsh32.48 trillion last year, with an ambitious plan to
grow the economy at 7.1 per cent.
Tanzania
is the only EAC state that plans to keep the fiscal deficit below 3 per
cent, with President John Magufuli pushing a non-donor-dependency
programme.
However, the government
has projected national debt to rise by Tsh3.4 trillion ($1.48 million)
in the coming fiscal year, even as 24 per cent of the budget ($3.4
billion) goes to service debt.
Burundi
has proposed a 7.2 per cent overall budget increase from the 2018/19
budget of $676 million, to $725 million. Finance Minister Domitien
Ndihokubwayo has proposed a punitive taxation plan to fund at least 88
per cent of the budget from domestic revenues, as the country continues
to suffer a high budget deficit that has only worsened with the aid
drought since President Pierre Nkurunziza controversially ran for a
third term in 2015.
The Burundian
economy is expected to grow at 4.2 per cent in the 2019/20 financial
year, and inflation is expected to stand at 8.1 per cent at the end of
the year.
Kenya hopes to further
lower the fiscal deficit to three per cent in the medium term (2022/23)
partly through a reduction in public spending and less borrowing.
In
the new financial year, Mr Rotich has proposed to spend $10.7 billion
on debt repayment, $3.4 billion of which will go to paying interests on
the loans.
During the year, Kenya is
expected to incur interest of $2 billion on domestic debt and a further
$1.4 billion on external loans.
While
Nairobi has been judicious in avoiding default so as to maintain
favourable credit scores and access to international markets, failure to
rein in corruption remains a major contributor to the pain of public
debt.
Kenya continues to feature
among the most corrupt countries in the world, ranking at position 144
out of 180 countries in the Transparency International Corruption
Perception Index 2018.
The
Parliamentary Budget Office (PBO) has warned that Kenya is slipping into
debt distress unless the country adopts careful management strategies.
“Debt
sustainability concerns in the medium term arising from a risk of debt
distress have been raised from low to moderate,” said the PBO.
Mr
Rotich says fighting corruption is a critical component in ensuring
prudent management of the country’s finances. Effectively, the CS
allocated $61.3 million to agencies charged with the fight against
corruption.
Fred Muhumuza, a Ugandan
economist, warned that big fiscal deficits risk rendering the private
sector unproductive, increasing unemployment, reducing exports and
causing high import bills.
Patrick
Ocailap, Deputy Secretary at Uganda’s Treasury, said bringing down the
fiscal deficit in time for the EAC Monetary Union timelines is now
impossible, but added that Uganda isn’t the exception in this failure as
other EAC member states like Kenya are facing a similar predicament.
Given
the current investments, Mr Ocailap said Uganda will reduce the fiscal
deficit to the levels required by the EAC in 2023, just one year before
the monetary union is supposed to be launched.
Other
EAC Monetary Union Protocol parameters are keeping the inflation rate
at 5 per cent for three years before 2024, as well as having a tax
revenues-to-GDP ratio of 25 per cent.
In
Tanzania, where President Magufuli is spearheading a drive to avoid
donor dependency in funding the country’s ambitious industrialisation
programme, Mr Mpango is proposing an Integrated Domestic Revenue
Administrative System to monitor internal tax collection.
The
domestic tax net is expected to widen even further by, among other
things, installing stronger controls on “transfer pricing” by
multinationals and speeding up ongoing efforts to “formalise” the
informal sector.
Steps will also be
taken to further ensure that all non-tax revenues are collected through
the Government Electronic Payment Gateway System introduced last year,
he said. This in effect puts further pressure on the country’s private
sector to stay afloat as avenues to make money outside a formalised
state system continue to be squeezed. Tanzania’s inflation is projected
to remain in the single digit range — between 3 and 4.5 per cent.
By
Dicta Asiimwe and Njiraini Muchira. Additional reporting by Moses
Havyarimana, Bob Karashani, Johnson Kanamugire, Moses Gahigi, Pierre
Afadhali and Ivan Mugisha.
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