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Doubts increase over falling revenue, region’s ability to repay rising debts

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Rail sleepers for standard gauge railway at Kathekani production site in Makueni County on March 17, 2016. Estimates by the 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, such as the standard gauge railway above, and foster economic growth. PHOTO | FILE 

By BERNA NAMATA

Posted  Saturday, June 25   2016 at  14:01

In Summary

  • 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.
  • While it is not wrong for countries to continue borrowing, economists insist a balance must be struck between borrowing and internal generation of revenue.

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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