East African countries are faced with spiralling debt and narrowing funding options due to limited domestic revenue sources and the unpredictability of key donors.
Moreover, borrowing costs are likely to be higher than in recent years in the face of an appreciating US dollar. The EAC states also face adverse global conditions, including the slowdown in emerging markets such as China and low commodity prices.
Now there is concern over the region’s ability to meet its debt obligations in the coming years.
While it is not wrong for countries to continue borrowing, economists insist a balance must be struck between borrowing and internal generation of revenue.
Governments have been advised to abandon short-term and expensive loans for long-term and concessional loans. Governments have to widen the tax net and bring in more taxpayers to plug the deficit.
Analysts say public debt has been rising across the region over the past few years, principally on the back of rising public expenditure, particularly the large infrastructure projects.
Estimates by International Monetary Fund, show that the EAC needs in excess of $90 billion, or about 70 per cent of its combined GDP in 2014, to fund key large-scale infrastructure projects in energy and transport.
Yet most of these projects are at different planning stages, and some may well not come to fruition, owing to such factors as lack of financing or operational challenges.
Risk of debt distress
Analysts say if projects have not been included in the fiscal framework — as seems to be the case for a number of them — their large scale nature has the potential to significantly add to the fiscal deficits and debt burden, unless savings are made elsewhere in future budgets or these projects are financed by the private sector.
Other economic issues could arise, such as the risk of overheating or running into absorption-capacity constraints.
However, current debt levels are still low by international standards. Of the five member countries, only Burundi is rated by the IMF at a high risk of debt distress.
“Rwanda’s foreign debt has risen over the past three years by 15 per cent of GDP but this type of increase is natural in an economy that is in the early stages of development and in need of a large influx of foreign capital, said Alun Thomas, the IMF resident representative for Rwanda.
“Even with this increase, the economy remains at a low risk of debt distress, which allows greater access to development financing,” he added.
In 2015, Rwanda’s capital account balance declined by 11 per cent to $299.9 million, from $337.1 million in 2014, due to the fall in capital grants. The financial account balance recorded a net borrowing of $795 in 2015 compared with $616.2 million in 2014.
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While Rwanda and Uganda — with debts at 25 per cent and 35 per cent of their GDPs, respectively — have room for sustainable debt absorption, Kenya and Tanzania — at 50 per cent each — are on the brink of the levels recommended by multilateral institutions such as the IMF.
According to Andrew Mold, a senior economic affairs officer with the United Nations Economic Commission for Africa (ECA), though debt levels remain low by international standards, because of low average per capita incomes, and a weak balance of payments across the region — and especially weak export earnings, it means that the capacity of the region to endure large external debt burdens is also weak.
Expanding domestic debt markets
At the same time, across Africa, domestic debt markets have been expanding. This is partly in response to the decline in concessional financing from donors, but is also due efforts to increase domestic resource mobilisation.
“Kenya is the most advanced in our region on that score. Over the past decade, the Central Bank of Kenya embarked on an ambitious programme to develop its domestic debt market. They have been trying to restructure their domestic debt from short-term Treasury bills to longer term Treasury bonds,” Mr Mold said.
Although this removes the exchange rate element of risk, Mr Mold argued that because domestic interest rates are so high, “This can also turn out to be quite an expensive way of servicing public debt. For instance, over 80 per cent of Kenya’s debt interest payments are now on domestic debt.”
Much of Kenya’s debt is dedicated to financing large-scale infrastructure projects, which is partly why the Bretton Woods institutions (IMF/WB) are yet to raise the red flag as these are considered “productive” investments.
However, there are growing concerns about the viability of the Lamu Port South Sudan Ethiopia Transport (Lapsset) Corridor projects that consist of road and rail, fibre optic cables, crude oil pipeline, high tension power transmission lines and an airport to connect Kenya to South Sudan and Ethiopia.
Yet the Lapsset Corridor project is expected to inject some 2-3 per cent of GDP into the economy from the core projects alone, and 5-8 per cent of the country’ s GDP through attracting and generating investments.
“The Lapsset Corridor and the postponement of oil production, could turn things around quite quickly. These investments need to start generating benefits in the medium-term (2-5 years) otherwise it will be increasingly difficult to pay back the debts,” Mr Mold said.
Falling oil prices have dampened oil prospects for the region, recently seen as the most promising frontier for oil and gas exploration with 2.3 billion barrels of oil discovered in Uganda and Kenya; and more than 50 trillion cubic feet of natural gas in Tanzania.
However, natural resources are macroeconomic and fiscal risks, and need to be managed even before production starts to ensure fiscal sustainability, according to an analysis by IMF staff.
For example, the fiscal position could deteriorate if borrowing increases are based on expected natural resource revenues that do not materialise. Given the large fluctuations in their prices, natural resources introduce volatility in revenues — and that can lead to boom-and-bust cycles.
The most recent public debt sustainability analysis conducted by IMF and World Bank staff suggests that, in the baseline scenario, the public debt (in present value terms) would remain below the 50 per cent of GDP ceiling established by the East African Monetary Union convergence criterion for all EAC countries by 2021.