Public debt weighs on East African economies

Tuesday November 7 2017

A resident of Lamu County carries a sack of relief food in March following prolonged drought in most parts of Kenya.

A resident of Lamu County in Kenya carries a sack of relief food in March following prolonged drought in most parts of the country. FILE PHOTO | AFP 

By NJIRAINI MUCHIRA
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Runaway public debt is expected to continue casting a shadow on sub-Saharan African economic growth as most countries redirect dwindling revenue to debt servicing instead of development.

Despite economic growth in the region being on the rebound, driven by rising commodity prices and improved food security, a significant increase in public debt in recent years remains a threat to sustainable growth.

According to the International Monetary Fund, the pressure of public debt coupled with a slowdown in credit flows to the private sector is holding back economic growth.

In its latest Regional Economic Outlook report, the IMF observes that the median level of public sector debt in sub-Saharan Africa rose from about 34 per cent of gross domestic product in 2013 to 48 per cent in 2016 and is expected to exceed 50 per cent in 2017.

This has meant increased debt service costs with the median debt service-to-revenue ratio increasing from five per cent in 2013 to almost nine per cent in 2016; it is expected to reach nearly 10 per cent this year.

“Debt-servicing costs are becoming a burden, especially in oil-producing countries. In Angola, Gabon and Nigeria they absorb more than 60 per cent of government revenues,” said the report.

Negative trend

In Kenya, the ratio of public debt to GDP stood at 52.6 per cent last year and is expected to increase to 56.2 per cent this year while Tanzania’s increased from 37.4 per cent to 38.3 per cent while in Uganda, it rose from 38.6 per cent to 39.9 per cent.

Credit growth to the private sector, on its part, has decreased from 18.6 per cent on average in 2011-2013 to 11.2 per cent in 2014-2016.

This negative trend has accelerated in recent months, with private sector credit contracting in real terms in 18 countries between March 2016 and March this year.

In East Africa, the slowdown in credit to the private sector has been attributed to the weakening of credit demand due to the inability by clients to service outstanding debt, a tightening of credit qualifying standards by banks and, in the case of Kenya, the impact of the capping of bank interest rates.
East African countries, however, have seen an easing of inflation, which remained subdued after it temporarily picked up at the beginning of the year following a drought-induced spike in food prices.

In Kenya, food price inflation increased from 11.2 per cent in December 2016 to peak at 21.5 per cent in May this year, and headline inflation stayed above 7.5 per cent but has since declined to 5.72 per cent last month following a drop in food prices.

In Uganda and Tanzania, inflation has stabilised around the 5 per cent target, while in Rwanda it has averaged 7.5 per cent in recent months.

According to the report, the economic slowdown in sub-Saharan Africa is easing although the underlying situation remains difficult.

Depressed oil price

This year, growth is expected to reach 2.6 per cent, up from 1.4 per cent last year driven a recovery in oil production in Nigeria and the easing of drought conditions in East and Southern Africa.

“Growth in the region is expected to pick up further in 2018 and reach 3.4 per cent, but ongoing policy uncertainty in Nigeria and South Africa hinders a stronger rebound and growth is not expected to increase further in 2019,” the report adds.

Excluding Nigeria and South Africa, the average growth rate in the region is expected to be 4.4 per cent in 2017, rising to 5.1 per cent in 2018-19.