By most measures, finance ministers in East Africa expected 2011 to point their economies finally on takeoff paths.

The rosy economic forecasts of early 2008 saw a period of uninterrupted growth, save for the rising crude oil prices brought about by the war in Iraq and a surging commodity boom that was driving up inflation. To many people, these were problems of prosperity.

Then hell broke loose later that year, with the collapse of Bear Stearns and Lehman Brothers, starting what would be known as the Great Recession of 2008.

East African economies sailed through safely after going on major spending sprees, with a little help from the International Monetary Fund and the World Bank. Now, though, the risk of a widespread recession in the region has been averted. This after all, was a problem that technocrats and politicians could easily throw money at.

Last week, however, Maria Kiwanuka of Uganda, Uhuru Kenyatta of Kenya, Tanzania’s Mustafa Mkulo, Rwanda’s John Rwangombwa and Burundi’s Nizigama Clotilde faced a different kind of force as they read their budget speeches.

The popular uprisings in the Middle East that have brought several governments down have painted a strong metaphor in East Africa that masses of unemployed youths can draw inspiration from in the face of rising food and transport costs.

With Mr Kenyatta and his rivals positioning themselves for the 2012 General Election, and Uganda’s Yoweri Museveni embarking on an acrimonious second term, with the economy plagued by inflation, it is understandable that this year’s budget speeches devoted a significant amount of time spinning political stories.

Tanzania, too, is devoting a lot of resources this year to improving funding for agriculture.

East African economies are growing faster than ever before, and there are signs that a strong middle class is emerging. This is, however, happening alongside a parallel increase in lower class workers and unemployed youths.

At the end of the day, the success of East Africa’s serving presidents is likely to be judged on one data point: job creation.

Cushion the poor

Kenya, for instance, is also spending $380 million on unique programmes to cushion the poor from economic shocks and to create employment opportunities. Half of this money will go to social protection projects which will involve paying monthly welfare stipends to thousands of senior citizens. The government will spend $3.5 million buying sanitary pads for poor girls so that they can stay in school.

It is such pressures — a surging unemployment rate, high cost of living and weakening currencies in EAC — that forced governments to sharply raise spending for the coming financial year... but in so doing sending their frail economies into their biggest budget deficits ever.

Statistics show that while governments across East Africa have been pumping billions of dollars into job creation initiatives, unemployment remains one of the biggest headache.

Conservative estimates put Uganda’s unemployment rate at 23 per cent, close to Tanzania’s 24 per cent. With a population of 33 million, and one of the youngest populations in the world — with a median age of only 15.2 years — 1.5 million jobs need to be created every year to reduce joblessness.
But Uganda’s formal job market has been unable to keep pace with the ever-growing demand for employment. In Kampala, the youth unemployment rate is estimated at 32.2 per cent. Among university graduates, only 36 per cent are formally employed. According to the Uganda Bureau of Statistics 2010 population report, of the 400,000 Ugandans who enter the labour market each year, only about 80,000 are absorbed in formal employment. Uganda has one of the highest population growth rates — 3.2 per cent per annum — which translates to 1.5 million births every year.  

Kenya’s latest economic survey indicates that 504,000 jobs were created in 2010, largely as a result of improved economic conditions coupled with increased access to affordable credit from the Women Enterprise and Youth Development Funds.

Still, this is an increase of only 1,000 jobs from the previous year, with unemployed estimated at 40 per cent. Census data shows Kenya’s population is growing by 1 million people annually.

Rwanda’s working age population currently stands at 5.3 million, or half of the population, of which two per cent are public servants, leaving an unemployment rate of 8 per cent, the lowest in the region.

On average, between 100,000 and 140,000 new jobs are created per year out of a target 200,000 new jobs a year by 2017.

Infrastructure spending

EAC member countries are allocating billions of dollars to infrastructure and social welfare projects.

The infrastructure projects include roads, railways and new power plants and transmission lines.

Tanzania will spend TSh2.78 trillion ($1.7b), up from TSh1.51 trillion  ($952 million) last year, on upgrading roads, railway and ports, as well as investing in ICT infrastructure.

Kenya will increase spending on roads by Ksh11 billion ($125.6 million)  and nearly double its spending on energy infrastructure to Ksh65.7 billion ($773m). Rail transport upgrade will take up Ksh6 billion ($70m), which will be on the envisaged Thika-Nairobi Commuter Railway, set up the Mombasa Malaba standard gauge line and a new link to the Jomo Kenyatta International Airport (JKIA). Rwanda will spend Rwf 25.7 billion ($41.5million) to boost its ICT infrastructure Rwf75.2 billion ($124 million) on roads and the Kigali International Airport, and  Rwf98.6 billion ($16.3 million) to expand electricity for an additional 65,000 households.

Among the key allocations for infrastructure projects in Uganda are Ush1 trillion ($416 million) on road networks and USh850 billion ($354) on energy projects, including the 250 MW Bujagali hydropower project and the 600MW Karuma hydropower project.

Among the key allocations to infrastructure projects in Uganda are Ush1 trillion (road networks) and Ush850 billion (energy projects), including the 250 MW Bujagali hydropower project and the 600MW Karuma hydropower plant.

However, the big budgets — seen by some analysts as ploys to gain political mileage — will see governments turn to donors for help.
But will the spending plans end the woes in East Africa?

While this was supposed to be a stress-free year for East African leaders and finance chiefs, owing to the momentum the economies had gathered towards the end of 2010, recent street protests in Nairobi and Kampala over the rising cost of food and fuel are the biggest headache for the ruling elite.

Governments globally have been taking measures to address surging inflation and unemployment — which have stoked social unrest, especially in African countries such as Libya, Tunisia, Algeria, Egypt, Morocco and now Uganda — by changing taxation regimes, introducing price controls and taking in more imports to boost supplies.

Some analysts, led by those at PricewaterhouseCoopers (PwC), are cautiously optimistic that the spending plans, the taxation and policy proposals will solve the economic problems of East African countries. They, for example, see no major policy shifts in boosting businesses. 

“The highlights on food security, unemployment and other social protection interventions will hopefully maintain the aggregate demand for goods and services. However, inflationary pressure may lead to economic contraction,” said analysts at PwC in their post budget analysis. 

Kenya, for example, will be seeking $1.4 billion from donors to seal its widening budget deficit, effectively keeping it away from the domestic markets, an option which could increase the already high lending rates. Kenya, Uganda and Tanzania also hope to borrow from the international debt market through Eurobonds.

Sharp increases in deficit levels usually raise governments’ borrowing costs, divert resources from vital social services like health and affect the standards of living in a country.

“If tax revenues are not met under the current market conditions, the government will turn to the domestic market and this will have a negative impact on growth,” said Daniel Kamande, an analyst at Ernst &Young, a financial advisory firm.

Kenya’s Finance Minister Uhuru Kenyatta, who unveiled a Ksh1.15 trillion ($13.3 billion) budget — slightly 15 per cent more than last year’s — said he expected a deficit of 7.4 per cent of GDP, higher than a 6.8 per cent projection a year ago.

This translates to a Ksh236.2 billion ($2.70 billion) deficit. Half this deficit will be funded by borrowing from multilateral donors like the World Bank and the AfDB, or from bilateral donors like China and Japan. The rest could come from speculators on Third World debt.

“Deteriorating growth outlook implies that the budget deficit may be wider than the target for Kenya,” said Yvonne Mhango, the South Saharan Africa economist at Renaissance Capital.

“The risk to ramping up net foreign financing to $1.4 billion from an estimated $440 million under the revised budget is a weakening shilling that will inflate the government’s cost of servicing its debt,” he said.

Tanzania’s Finance Minister Mustafa Mkulo said he did not expect a deficit this year, although government spending would go up 16 per cent to $8.6 billion as EAC’s second biggest economy seeks to sort out its infrastructure mess and end a power crisis which has hurt manufacturers and led to business closures.

However, donors finance half of Tanzania’s spending. Mr Mkulo made clear the government’s concern on the high cost of living and outlined strategies to mitigate this, focusing on control of inflation and generation of employment.

Rwanda –– which will spend Rwf1062.8 billion ($1.77 billion) in the fiscal year, up  8.3 per cent from last year, expects to record a deficit of at least 2.3 per cent, or Rwf 96.8 billion ($159 million). 

Government officials in Rwanda said the country’s focus this year would be to speed up economic growth, reduce poverty and maintain sustainable fiscal and external positions. For a government that has been pushing a policy aimed at reducing dependency on donor aid, donor budgetary grants are projected at a high 11.4 per cent of GDP.

External borrowing

“The government has increasing demand to finance development projects and this cannot be done without recourse to external borrowing. However, it is the policy of the government to keep the total debt at sustainable levels, especially now that Rwanda has been classified as a ‘moderate risk of debt distress’ country, and is therefore eligible for both grant and concession loan financing by the World Bank Group,” said Finance Minister John Rwangobwa.

Uganda is projecting its fiscal deficit to reach 6.8 per cent in 2011/2012, compared with 6.2 per cent in financial year 2010/11, mainly because of rising infrastructure related expenditure and escalated costs of public administration. It will spend roughly Ush9.2 trillion ($3.8 billion), compared with Ush7.3 trillion ($3.1trillion) last year.

Kampala expects external financing from development partners to amount to Ush2.9 trillion ($1.2 billion) — 29 per cent of the budget.
Most of the countries have nearly doubled their spending on infrastructure, as they open up their borders to regional trade.

Uganda hopes its new Youth Entrepreneurship Venture Capital Fund will help reduce biting unemployment. The government has allocated Ush25 billion ($10.4) as seed capital to reach youths starting or expanding their businesses.

But even as the government’s looked for domestic solutions to problems like poverty and high costs of living, they were also increasingly turning their eyes to the region for new opportunities.

“Various policies indicate that EAC member states are focusing on tax and regulatory changes that broaden their tax bases while moving towards regional harmonisation. This is a good sign for expanding regional trade which is fuelling growth,” said experts at PWC.