Is EAC’s debt headed for the iceberg?

Sunday June 19 2022
Debt

National debts are there because governments the world over do borrow because of inadequacy of revenue from their own sources like tax

By Zephania Ubwani
By Gadiosa Lamtey

Arusha. National debts are overwhelming the economies of the East African Community (EAC) member countries even as they are yet to recover fully from the impacts of Covid-19 pandemic.

While Kenya is planning to enact a law on debt ceiling, Tanzania intends to borrow a whopping $2.34 billion to finance the $18.1 billion budget for 2022/23. National debts, which is money owed to the country by domestic and foreign lenders, now account for a significant portion of the gross domestic product (GDP) of the six EAC countries.

Kenya has the highest ratio of national debt to its GDP, estimated to be 64.2 percent in September 2021 compared to Tanzania’s present value of public debt to GDP which was at 31.0 percent in April 2022, less than a threshold of 55.0 percent. This is as the government (Tanzania) plans to borrow at least $2.34 billion from foreign financiers to finance its budget for the coming financial year. According to Finance and Planning minister Mwigulu Nchemba, the national debt has reached Sh69.44 trillion this April from Sh60.72 trillion in 2021.

He told Parliament in Dodoma last week that the government borrowed Sh8.7 trillion in the past year which is equivalent to 14.4 percent increase. The increase in national debt is largely attributed to the receipt of soft loans for financing development projects and release of special bonds worth Sh2.18 trillion for the funding of the Public Service Social Security Fund (PSSSF).

Although rising national debt has been a matter of concern, the Tanzania government maintains that it was still “sustainable in the short, medium and long run based on the international measures”.

National debts are there because governments the world over do borrow because of inadequacy of revenue from their own sources like tax to finance public goods and services.

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This makes a national debt a necessary ‘evil’ emanating from inability to generate own revenues that are adequate to foot public expenditure bills of governments. Generally, government debt as a percent of GDP, is used to measure a country’s ability to make future payments on its debt, thus affecting the country’s borrowing costs and government bond yields. But it continues to be a matter of hot debate as demonstrated in December last year when former Speaker of the National Assembly Job Ndugai was forced to resign when he criticized the Executive on the soaring debts.

According to the Kongwa legislator, the national debt, then, stood at $33.8 billion, insisting that it was not proper for the country to rely on external borrowing to finance grand infrastructure projects.

Kenya, the largest economy in the region with a worrying ratio of national debt to its GDP, says it will peg the government’s debt ceiling at 55 percent of its GDP from 68 percent. Only as recently as in 2019, the country raised its debt ceiling to Ksh9 trillion from Ksh 6 trillion previously but has not nearly run out of the additional room to borrow. When President Uhuru Kenyatta, who is expected to step down after the August 9, 2022 General Election, took over in 2013, the national debt accounted for 40 percent of the GDP.

Although much criticised for the rising debts, the outgoing government in Kenya defended itself on grounds that the borrowed funds have been spent on mega infrastructure projects.

Notwithstanding this, Kenya plans to float new sovereign bonds in the next six months to finance the budget for 2022/23 and repay part of its inaugural Eurobond it floated in 2014. Uganda’s total public debt is valued at $14 billion while the debt-to-GDP ratio is 49.7 percent. Overall debt repayment expenses account for over 15 percent of the total budget. In South Sudan, statistics show that the national debt in 2019 was approximately 28.9 percent of GDP and included debts of the state, the municipalities and the social insurances. In Burundi, the national debt amounted to $1.92 billion in 2020. In 2018, government debt was equivalent to 13.6 percent of the tiny country’s GDP.

For Rwanda, the national debt for 2019 amounted to $4.52 billion which was approximately 49.82 percent of the country’s GDP.

Uganda, on the other hand, recorded a government debt to GDP of 49.80 percent of the country’s GDP in 2020. However, Uganda’s debt is set to surpass the 50 percent threshold this year, according to projections by the central bank.

Uganda’s total public debt has hit a record Ush65.82 trillion as of December 2020, up from Ush49 trillion in 2019, with a Ush16.82 trillion increment due to increased government borrowing.

An economist from the Institute of Management and Entrepreneurship Development, Dr Donath Olomi, said basically the national debt was a huge burden that could hinder development projects and the problem was not the loan itself but also form of spending.

Dr Olomi said for loans that have already been disbursed, there was nothing to do but going forward, there must be transparency that shows the type of loan, its duration and how it will be repaid, before making a borrowing decision.

“For example, you find a loan for a short period and then you go to implement a long-term project. As a result, when the time comes to repay you find the project has not started generating income. So, transparency issues are very important for the future,” he said.

According to him, transparency will enable Parliament to make follow-up of the value for money.

For his part, an economist from the University of Dar es Salaam (UDSM), Dr Wilhelm Ngasamiaku, said countries with debts exceeding 50 percent of GDP are getting into debt distress because they need more money in advance to pay off debt. He said Tanzania’s debt is still sustainable because it is below 50 percent. “This provides room for further fiscal space in terms of borrowing and spending in development projects,” he said.

“The danger of high debts id that you may end up using much of your revenue collection to pay debts and impair provision of basic social services and other development projects.