Most of the countries have no choice but borrow to bridge budget deficits. According to the IMF, the major EAC nations, namely Kenya, Uganda, Tanzania, Burundi and Rwanda, together, had borrowed more than $100 billion in both external and domestic borrowing.
With the global economy in teeters post Covid-19 and the impact of the Ukraine-Russia conflict, economies worldwide are contracting, leaving East African nations in a perilous situation.
According to the IMF, about 60 percent of countries eligible for the Debt ServiceSuspension are at high risk of debt distress or already in debt distress (DSSI).
This is when a country has started, or is about to start a debt restructuring, or when a country is accumulating arrears.
In East Africa, the three main economies of Kenya, Tanzania and Uganda’s economic woes has forced the respective nations to borrow further, rather than entering into debt restructuring.
This was on the back of reduced revenues as a result of low business activities during the 2021-2022 period, namely the post-Covid and Ukraine crisis timespan.
Kenya debt levels
Kenya for instance let go revenues as the government extended subsidies to cushion households from the tough economic times, which were characterized by rising commodity prices.
The region’s economic power house has been struggling with high debt causing concerns on economic sustainability and a potential debt default risk.
With national debt standing at approximately USD71.5 billion (Sh8.9 trillion),Kenya is confronted by various constraints such as recurrent drought affecting agricultural productivity, declining manufacturing productivity and skewed access to finance for business and development.
The weak shilling however remains a major headache on its debt repayment plans.
It is estimated that every time the shilling weakens by a unit to the dollar, the country’s debt increases by at least USD321.5 million (Sh40 billion.)
So far, the shilling has lost about 10 per cent of its value to the US currency, year-to-date.
This has pushed up the country’s debt, which is mainly dollar denominated, by at least USD3.1billion (Sh380billion).
The government has borrowed USD35.9 billion (Sh4.46 trillion) from foreign sources andUSD35.6 billion (Sh4.43)from the domestic market.
Total public debt to GDP ratio is expected to remain above the 55 per cent benchmark until 2025.
While Kenya’s debt remains sustainable, it is categorized as facing high risk of debt distress (IMF Country Report No. 22/383).
To cut the need for borrowing to bridge the budget deficit, the new government plans to increase revenue collections to meet its spending plans for the financial year 2023/24, whose budget is set at USD29.3 billion (Sh3.64 trillion), up from USD26.5 billion (Sh3.3 trillion )in the current financial year ending June.
In the FY 2023/24 revenue collection including Appropriation-in-Aid (A.i.A) is projected to increase to USD23.2 billion (17.8 percent of GDP),up from the projectedUSD20.1 billion (17.3percent of GDP) in the FY 2022/23.
“The fiscal policy stance over the medium term aims at supporting the economic recovery agenda of the Government through a growth friendly fiscal consolidation plan designed to slowing the annual growth in public debt and implementing an effective liability management strategy, without compromising service delivery to citizens,” Treasury Cabinet Secretary Njuguna Ndun’gu says.
This is expected to boost the country’s debt sustainability position and ensure that Kenya’s development agenda honours the principle of inter-generational equity, he adds.
Tanzania’s struggle with debt
Similarly, Tanzania’s economy has also remained exposed to shocks in post-pandemic era.
The Tanzanian shilling has weakened to a near four-year low to the US dollar, exchanging at Tsh2,338 in mid-January, compared to an average Tsh2,300 a year earlier.
While the decline is marginal, the currency is starting to form a slight weakening trend against the greenback, experts at AZA Finance note.
Tanzania’s central bank sold off a total of $124 million from its forex reserves during the first half of the financial year in a bid to cushion the economy against inflation and other costs related to goods imports.
In total, forex reserves had fallen to $4.5billion billion in November compared to$6.6 billion a year earlier.
They were supported by Tanzania increasing coal exports to almost $142million from $13million over the same period, as Europe sought alternative energy sources amid Russia’s war in Ukraine.
“While that boost is likely to be short-lived, the country is seeking to attract further investment and trade with the European Union in the year ahead. With that in mind, we expect the shilling to withstand any significant losses against the dollar in the near term,” says Kristine Van Helsdingen, forex dealer, AZA Finance.
On annual basis, the country’s central bank says; “The shilling depreciated marginally by 0.27percent from Tsh2,310.41 per US dollar registered in the quarter ending September 2021.”
Nevertheless, the weaker currency means the country will spend more in debt repayment on foreign borrowed monies, with Tanzania’s national debt having hit$39 billion (Tsh91.1 trillion)in December.
The government plans to spend USD18.5 billion (Tsh43.3 trillion) in the financial year 2023/24, according to a budget draft recently presented by Finance and Planning Minister Mwigulu Nchemba, up from USD$17.8 billion(Sh41. 48 trillion).
This means if revenue collection remains low, the government will have to continue borrowing to bridge the budget deficit.
Addressing Uganda’s debt
On January 17, 2023 the IMF executive board announced it had completed the combined second and third reviews under the Extended Credit Facility (ECF)Arrangement for Uganda.
Approval of the combined second and third reviews enabled the immediate disbursement of the equivalent of SDR180.5 million, about USD240 million (Ush882.6 billion).
The economy is projected to grow by 5.3 percent in financial year 2022/23 (revised down from six percent at the time of the first review in March 2022), while headline inflation is expected to rise to 8.3 percent (marked up from 4.6percent at the first IMF review).
“The forecast revisions reflect the impact of the war in Ukraine, tighter external financial conditions, drought and rising domestic borrowing costs. Risks to the outlook remain elevated, including from higher imported inflation, lower external demand, climate change, and public health outlook,” IMF says.
The Ugandan government expects to borrow around USD2.6 billion (Ush9.56trillion) for the coming fiscal year.
It cancelled a USD2.3 billion (Ush8.55 trillion) railway project with a Chinese contractor after failing to attract Chinese funding.
The government is now seeking investment from Turkey for the project.
“We expect the (Ugandan) shilling to depreciate over the long term after the government slashed the country’s tourism budget, potentially reducing the amount of forex coming into the country,” notes Yadhav Panday, forex dealer, AZA Finance.
In January, the shilling weakened against the dollar, trading at an average 3670.
Uganda’s public debt hit USD21.7billion (Ush80 trillion).
According to the Budget Framework Paper, external debt repayments are projected to amount to USD667.1 million (Ush2.453 trillion), compared to USD665.9 million (Ush2.412 trillion).
The weak shilling is expected to continue piling more pressure on the exchequer as debt continues to rise, projected to go above 53 per cent of the GDP this year.
Assessing the Greater EAC Region
As 2023 unfolds, other EAC member states of Rwanda, Burundi, South Sudan and DR Congo are also expected to put in measures to stabilise their currencies, increase revenues to cut on borrowing while enabling MSMEs to grow.
Rwanda’s debt to GDP is expected to reach levels of 68.56 per cent this year.
Public external debt is projected to trend aroundUSD5.6million in 2023,according to Trading Economics, up from USD5.5million at the end of 2022.
While Burundi’s public debt ration to GDP is projected to fall to 66.5 per centin2023, from 71.9per cent in 2021, on budget consolidation, it is above the 50 percent mark meaning the country is still burdened with a heavy debt stock.
DRC is among the five poorest nations in the world. In 2021, nearly 64 per cent of Congolese, just under 60 million people, lived on less than $2.15 a day.
However it is considered as the richest country in Africa in terms of its natural resource wealth.
According to the World Bank, DRC remains at a moderate risk of external and overall debt distress, with limited space to absorb shocks.
The debt coverage has been improved since the last DSA (Debt Sustainability Analyses, which are structured examinations of developing country debt based on the Debt Sustainability Framework).
“The external nominal debt ratios are lower than at the time of the 2015 DSA, however the country shows vulnerability in debt repayment capacity, even under the baseline, due to weak revenue mobilisation,” World Bank notes.
Most external debt thresholds are breached under the stress tests, highlighting the country’s vulnerability to external shocks.
Given limited buffers, prudent borrowing policies are essential by prioritising concessional loans and strengthening debt management policies, the global lender advises.
Generally, the East African Community economies remain exposed to increasing risk of debt distress, widening fiscal and current deficits and limited economic diversification plans, which could alter growth prospects this year.
