EAC economies’ debt scare

Kampala. Burundi has joined a group of nine African countries at a high risk of debt distress, with Kenya, Uganda and Tanzania among top 50 countries in the world that are highly indebted to China, according to a US-based research firm, Brookings Institution.

Debt across East Africa continues to grow, data show. According to Brookings, such countries are now shifting away from official multilateral creditors to non-concessional, (commercial) debt with relatively higher interest rates and lower maturities.

The trend is raising concerns around debt sustainability given the possibility of higher refinancing risks and foreign exchange risks. 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,” the IMF says.

The IMF, in its regional economic outlook report for sub-Saharan Africa released last week, says surging public debt-to-GDP ratios for Uganda, Burundi, Kenya, Rwanda and Tanzania has the countries highly exposed to greater rollover and exchange rate risks.

In May, Kenya went for a third Eurobond raising $2.1b 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 $90b in the 2019/20 financial year , breaching 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.

According to IMF, Uganda’s debt ratio to is expected to rise to 49.5 per cent by the 2021/22 financial year because of continued large fiscal expenditure by government.

Burundi’s ratio will reach a high of 63.5 per cent in 2019 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.

Status of public debts across East Africa

Kenya and Uganda’s total debts as at June stood at $58.1 billion and $12 billion from $10.7 billion (Shs41.326 trillion) in February, respectively.

Tanzania’s public debt stood at $36.78 billion in the same period according to the Bank of Tanzania.

The country’s Finance 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.