The debt owed by the five East African Community member states is spiralling to new highs on the back of weak currencies and growing public spending, causing fears that the overhang will hurt the region’s fragile economies and jeopardise the introduction of a single currency in the region.

With inflation biting ever harder and currencies falling, angering households and businesses, EAC economies are being squeezed from all sides. Figures from the respective central banks show debts incurred by member countries in the past one year have increased by between 10 and 25 per cent.

The surging debts are worrying politicians, policymakers and economists, especially at a time when Eurozone countries like Greece, Spain, Ireland and Italy have been pushed to the brink by unmanageable debt levels.

This development has left the European Union facing its worst political and economic crisis as leaders dither on how to rescue the affected nations.

Both foreign and domestic debt in Tanzania, Uganda, Kenya, Rwanda and Burundi is expected to continue rising as demand for goods and services for the region’s 141.8 million population increases.

Since January, the Uganda, Kenya and Tanzania shillings have plummeted against the dollar by over 20 per cent and inflation has climbed to the current historic levels.

Rwanda has, however, seen its franc only depreciate by 0.9 per cent against the dollar this year, according to the country’s central bank.

As at June, Kenya’s public debt-GDP ratio had increased by 6.2 per cent from 48 per cent to 54.2 per cent, more than five percentage points above the International Monetary Fund’s recommended ceiling of 45 per cent.

The public debt of East Africa’s largest economy increased from $12.25 billion last year to $14.9 billion as at June this year. As a result, Kenya exceeded by $100 million the projected interest payment on public debt in the first two months of 2011/2012.

Tanzania’s public debt, currently at 40 per cent of GDP, also increased from $1.83 billion to $2.3 billion. As for Uganda, according to the National Budget Framework Paper for 2011-2016, the compounded external debt rose to $4.3 billion at the end of June 2010 compared with $4.0 billion as at December 2009, a trend that was attributed to fresh borrowing intended to finance new infrastructure projects.

Though the 7.5 per cent rise in Uganda’s external debt has raised eyebrows, experts say the burden remains within sustainable margins in light of the higher domestic financing in the national budget, modest growth in fiscal deficits and foreign reserves that remain robust even with questionable spending decisions.

The trend of surging public debt in the region, economists said, was risky for the EAC economies as it will gobble up resources in the form of interest payments.
“Like the other EAC countries, Tanzania’s debt is too high — a problem not only for the national economy but also for the convergence of a single currency,” said economist Honest Ngowi of Mzumbe University, Tanzania.

Experts say if the spiralling debt is not brought under control, the goal of establishing a Monetary Union could come a cropper.

Concerned about the rising debt, the IMF last week advised Kenya to put in place austerity measures to reduce its high debt-GDP ratio to below 45 per cent by 2013.

Economist have also cautioned that the 2012 deadline is too ambitious, saying it will disrupt the economies of the member states given the variations in the strength of the region’s currencies.

The problem is also complicated by the fact that the EAC Secretariat is yet to develop an effective monitoring system for fiscal and monetary data needed to guide member states on economic convergence indicators and so help them implement the necessary laws. Jared Osoro, senior research economist at the East African Development Bank head office in Kampala, said such a system is necessary in the establishment of a Monetary Union.

A Regional Economic Outlook for sub-Saharan Africa, released last September, projected Kenya’s expenditure to GDP ration to rise to 31.4 per cent by the end of the year from 29.7 per cent two years ago. Uganda’s was projected to rise to 23.9 per cent, Tanzania to 29.7 per cent, Rwanda to 28.7 per cent and Burundi to 47.4 per cent.

Uganda’s balance of payment had shot up from $694 million last year to $1.7 billion as at June this year. The increase is partly a result of a major shift in development priorities, with the landlocked country devoting significant resources to projects in the energy and roads sectors.

Analysts say Uganda’s debt burden remains sustainable.

“We believe Uganda’s debt burden is fairly sustainable because of stable debt levels and a strict fiscal approach that has minimised borrowing for budget needs,” said Dr Thomas Richardson, the IMF’s senior resident representative in Uganda.

Mr Osoro said that for the time being, Uganda’s external debt burden appears sustainable because of huge benefits received under the Highly Indebted Poor Countries initiative and the Multilateral Debt Relief Initiative.

“The two initiatives helped bring down accumulated debt arrears that granted Uganda room to restructure its borrowing strategy. So far, most of the loans extended to Uganda have been very concessional and bear low interest rates; this has enabled the country to achieve fairly minimal external debt compared with other countries,” said Mr Osoro.

However, analysts fear the current situation may not last long as demand-driven inflation continues to rise in the region.

While Uganda’s debt to GDP ratio is unclear, it is believed to be higher than that of Kenya due to a smaller tax base of roughly 12.5 per cent of GDP compared with the latter, whose tax to GDP ratio stands at 24 per cent, according to figures from the IMF.

Uganda’s Finance, Planning and Economic Development Ministry declined to comment on the matter when contacted by The EastAfrican last week.

Economists have also warned that Rwanda’s low export base poses a risk of debt distress.

Though the country’s current level of external debt, estimated at 14 per cent of GDP as of last year, is deemed low, IMF and World Bank experts have warned the country is still vulnerable to debt distress and needs to diversify its export base.

Rwanda’s external current account deficit including grants, for example, worsened from $378 million in 2009 to $407 million in 2010 mainly due to trade imbalance and service deficits, according to figures from the National Bank of Rwanda.

Joseph Kinyua, Permanent Secretary in Kenya’s Finance Ministry, announced recently that the government planned to lobby development partners for at least 35 per cent of new debt to be in grants, which do not have to be repaid.

Reporting by Jeff Otieno, Emmanuel Were, Rosemary Mirondo, Bernard Busuulwa and Berna Namata.

Mr Kinyua linked the expenditures to the stimulus funds released to help the economy survive the global financial crisis in 2008 and 2009.

The PS said the government plans to address the challenges in a new Medium Term Plan under Vision 2030, which is being drafted to replace the current one, which ends next year.