Debt burden slowing development

Saturday June 27 2015

By JAMES ANYANZWA, The EastAfrican

Increased borrowing by the East African countries coupled with the burden of loan repayment is pushing the region into financial anguish, choking development and threatening to slow down the pace of economic growth.

A report by the United States Agency for International Development (USAid) shows that interest payments on debts are squeezing national budgets. The report adds that the “rebasing” of the size of the economy by some countries like Kenya will not help.

Last year, Kenya rebased its national accounts statistics, increasing the value of its annual output by about 25 per cent, and dropping the debt-to-GDP ratio to 43.1 per cent from 52 per cent.

Growing debt-to-GDP ratios have been eased by upward revisions of gross domestic product in Uganda and Ghana too.

But the US donor agency argues that the move is not a cure for the mounting debt, whose repayment has started eating into development budgets, putting implementation of key infrastructure projects at risk.

“Kenya’s interest payments on debt are starting to cut into its budget, which the revision will not help,” says USAid.

Kenya’s interest payment on external debt from the Consolidated Fund during the 2014/2015 financial year is Ksh29.73 billion ($295.88 million), and the figure is expected to rise to Ksh30.51 billion ($303.65 million) in the next financial year (2015/2016).

In the 2016/2017 and 2017/2018 financial years, Kenya is expected to pay Ksh35.37 billion ($352.02 million) and Ksh38.18 billion ($380 million) respectively in interest on external debt.

According to the report titled “Kenya Investment Climate 2015,” spending on public debt repayment by the country was 70 per cent higher than its expenditure on development in 2013.

Also of concern, according to the report, is the large public sector wage bill, which the Kenyan government is attempting to control.

Debt service (payment of interest and repayment of principal) discourages growth by reducing public resources available for investment in infrastructure and human capital.

According to the Economist, Africa has the fastest growing continental economy on the planet but the one thing that has been growing fastest of all is debt — personal, corporate and government.

Last year, Senegal, Côte d’Ivoire and Zambia sold  bonds worth as much as $1 billion, with all the issues oversubscribed.

Kenya’s debut sale of a $2 billion sovereign bond was oversubscribed by four times.

In Uganda, the total public debt stock (debt outstanding and disbursed) rose to $7.28 billion by the end of February, from a total of $7 billion by the end of March 2014.
External debt contributes 57 per cent of the country’s total debt, while 43 per cent is domestic debt.

In a report presented to parliament in April by Minister for Finance, Planning and Economic Development Matia Kasaija, new external borrowings increased by 82 per cent in 2014/15 compared with 2013/14, due to the need for the government to continue financing development programmes in the roads and energy sectors.

The total stock of outstanding government domestic debt at cost stood at $3.1 billion.

Last year, Uganda’s legislators cautioned that the increasing debt would distort the economy’s budget priorities as borrowing outpaced domestic revenue growth.

They argued that debt should be restricted to infrastructure projects that have an economic rate of return above 14 per cent.

Tanzania’s stock of national debt during the second quarter of 2014 stood at $19.43 billion, an increase of 22.4 per cent compared with the same period in 2013.

During the period under review, the Tanzanian government paid $560.5 million (being principal plus interest) on both external and domestic debt.

The total domestic debt service for 2017/18 is expected to increase to $2 billion, from $1.24 billion for 2014/15.

Likewise, external debt service projection is expected to increase to $1.05 billion from $444 million in the 2014/2015 financial year.