Burundi has joined a group of nine African countries at a high
risk of debt distress while Kenya’s risk of default has increased to
moderate from low.
This has seen the International
Monetary Fund raise a red flag over the rate at which East African
countries are accumulating debt.
The region’s economies
have fallen into a financial fix as they attempt to fund persistent
budget deficits and implement mega infrastructure projects against a
backdrop of declining revenue collection.
As a result,
the economies have resorted to massive borrowing, both from the domestic
and international markets to quench their loan appetite, with fears
that the increasing uptake of commercial loans could push most of them
into debt distress.
“An over-reliance on commercial
public debt exposes sovereign balance sheets to greater rollover and
exchange rate risks. Also, an increase in debt from domestic creditors
could crowd out financing for private sector projects,” said the IMF.
So
far Kenya, Uganda and Tanzania are among the top 50 countries in the
world that are highly indebted to China, according to US-based research
firm Brookings Institution.
According to Brookings, countries are now shifting away from
official multilateral creditors who come with stringent conditions to
non-concessional, (commercial) debt with relatively higher interest
rates and lower maturities.
But this trend is raising
concerns around debt sustainability given the possibility of higher
refinancing risks and foreign exchange risks.
The IMF,
in its regional economic outlook report for sub-Saharan Africa released
last week, says that surging public debt-to-GDP ratios for Burundi,
Kenya, Rwanda, Tanzania and Uganda has left them highly exposed to
greater rollover and exchange rate risks.
“With several
countries facing increased foreign exchange and refinancing risks, it
is critical to enhance debt management frameworks and transparency,”
says IMF.
In May, Kenya went for a third Eurobond
raising Ksh210 billion ($2.1 billion) to pay off other maturing debt
obligations, finance development programmes and fund government
operations.
In September, the country’s lawmakers also
voted to increase the government’s borrowing ceiling to Ksh9 trillion
($90 billion) in the current 2019/2020 fiscal year, breaching the EAC
debt ceiling on debt accumulation, which is set at 50 per cent of the
GDP.
According to the IMF, EAC countries will close 2019 with very high debt-to-GDP ratios.
Burundi’s
ratio will reach a high of 63.5 per cent from 58.4 per cent last year.
It will be followed by Kenya and Rwanda whose debt-to-GDP ratios are
expected to increase to 61.6 per cent and 49.1 per cent from 60.1 per
cent and 40.7 per cent respectively during the same period.
The
debt-to-GDP ratios for Uganda and Tanzania will increase to 43.6 per
cent and 37.7 per cent from 41.4 per cent and 37.3 per cent
respectively.
The
EAC Monetary Union protocol, which was signed by the regional heads of
states in November 2013, sets a 50 per cent debt-to-GDP ratio as the
convergence criteria for the attainment of a single currency regime
whose 2024 deadline is currently a subject of review by the member
states.
Government debt as a per cent of GDP is an
important economic parameter used by investors to gauge the country’s
ability to make future payments on its financial obligation thereby
affecting the country’s borrowing costs and government bond yields,
according to economists at Trading Economics.
According
to the IMF, further fiscal consolidation is needed over the medium term
among regional economies to reduce debt vulnerabilities and create
fiscal space for development needs.
Kenya and Uganda’s
total debts as at June stood at $58.1 billion and $12 billion
respectively. Tanzania’s public debt stood at $36.78 billion in the same
period according to the Bank of Tanzania.
Finance and
Planning minister Philip Mpango attributed the increase to new loans
secured to fund infrastructure projects such as construction of the
terminal III of the Julius Nyerere International Airport, power
generation projects, and the construction of roads, bridges and the
standard gauge railway line.
In Rwanda, increased
public investment, real exchange rate depreciation and government
guarantees have aided a surge in national debt according to the World
Bank.
According to Brookings Institution, concerns
about an impending debt crisis in Africa are rising alongside the
region’s growing debt levels.
As of 2017, 19 African
countries had exceeded the 60 per cent debt-to-GDP threshold set by the
African Monetary Co-operation Programme for developing economies, while
24 countries had surpassed the 55 per cent debt-to-GDP ratio suggested
by IMF.
According to the IMF, despite the stabilisation
of debt dynamics, public debt vulnerabilities remain elevated in some
African countries.
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