Cost of living to go up as foreign debt weighs down EAC currencies

Thursday February 20 2020

Regional currencies are facing increased pressure against the dollar.

Regional currencies are facing increased pressure against the dollar. PHOTO | FILE | NATION MEDIA GROUP 

JAMES ANYANZWA
By JAMES ANYANZWA
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East Africans should brace themselves for an increase in the cost of living as households and businesses pay more for goods and services.

Market data shows that regional currencies are facing increased pressure against the dollar as escalating debt levels and increased servicing obligations threaten to erode foreign exchange reserves.

A weaker local currency increases import bills as importers have to pay more for goods they purchase from abroad effectively leading to an increase in the overall prices of goods and services in the domestic market.

The projected depreciation of regional currencies is largely attributed to the growing debt servicing obligations for foreign currency denominated debts, which requires a drawdown of the country’s foreign reserves to pay off external creditors.

According to analysts at AIB Capital, the Kenya shilling is expected to further depreciate against the dollar as pick-up in consumer demand increases imports. This will lead to an increase in the current account deficit as the country’s exports are likely to remain relatively uncompetitive.

“We expect the shilling to gradually depreciate against the dollar but remain relatively unchanged against the euro and pound,” said AIB.

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According to the Bank of Tanzania (BoT), last year the country’s import bill was $10.98 billion, up from $10.19 billion in 2018, on account of an increase in the value of goods imported.

In Uganda, the overall balance of payments position weakened in 2019 with the current account deficit dropping by 45.1 per cent to $3.29 billion, largely driven by higher private sector imports.

Uganda’s import bill increased by $850.2 million, surpassing the $352.9 million growth in exports receipt, while its trade deficit rose by 21.7 per cent to $2.78 billion in the same year.

According to the Bank of Uganda (BoU), there could be further depreciation of the local currency, translating to higher inflation.

“Worsening weather conditions, higher fiscal deficit, instability in the global financial markets and uncertainty during the election period constitute elevated upside risks to the inflation outlook,” the BoU says in its Monetary Policy report for 2019. “A rise in fiscal deficit could also lead to inflationary pressures going forward.”

Uganda’s provisional total public debt stock as at the end of October 2019 stood at Ush49.05 trillion ($13.23 billion), an increase of 3.8 per cent from 2018.

The rise in the stock of total public debt between June 2019 and October 2019 was mainly due to a 7.3 per cent increase in the public domestic debt.

However, the public external debt maintained a dominant share of 64.6 per cent of the total public debt.

“In the medium term the exchange rate may weaken on account of the weakening current account balance. This could be heightened by volatility in the global financial markets and policy uncertainty, including Brexit, that could lead to capital reversals on account of flight to safety,” BoU says.

In Tanzania, the total debt service payments for 2019 stood at $2.06 billion, of which $1.7 billion was principal repayment, BoT says. In the month of December, Tanzania’s debt service was $366.5 million, of which $319.1 million was principal repayment and the balance was interest payment.

The country’s stock of external debt was $22.38 billion at the end of December 2019, an increase of $1.32 billion from December 2018. Tanzania’s foreign reserves were $5.56 billion at the end of December 2019, up from $5.04 billion in the same period in 2018, enough to cover 6.4 months of projected imports of goods and services, bolstered by export proceeds.

In Kenya, the government will spend $6.54 billion on servicing its public debt obligations in the 2019/2020 fiscal year, according to the National Treasury’s Draft Budget policy statement for 2020: $3.53 billion and $3 billion will go towards serving foreign debt and domestic debt, respectively.

According to Treasury, the cost of deficits financing and refinancing maturing debt has remained higher since Kenya graduated to a lower middle income economy in 2014. “Debt service burden will greatly benefit from fiscal consolidation so as to ensure that the relative service of debt is brought down in the medium term,” said Ukur Yatani, Kenya’s Treasury Cabinet Secretary.

In Kenya the official foreign exchange reserves held by CBK r to $9.33 billion (5.7 months of import cover) in October 2019 from $8.55 billion (5.6 months of import cover) in October 2018. “The government continues to accumulate foreign exchange reserves to deal with any external shocks,” says Treasury.

In Rwanda, public and publicly guaranteed debt increased to 50.3 per cent of the GDP in 2019, according to the African Development Bank.

The country’s imports grew faster than exports, leading to the widening of the trade deficit by 3.5 percentage points to 11.3 per cent of GDP in 2019, and an increase in current account deficit by 1.5 percentage point to 9.2 per cent of GDP.

As a result, Rwanda’s franc depreciated against the dollar by five per cent in 2019 due to the growing trade deficit.

Rwanda’s fiscal deficit is projected to increase to 6.8 per cent in 2020 and 6.6 per cent in 2021, while the current account balance is projected to narrow to 9.1 per cent in 2020 and eight per cent in 2021 due to a pickup in traditional exports.

According to the World Bank, Rwanda’s debt will accumulate faster than was projected in the medium term, with its fiscal deficit for 2020 continuing to be well above the historical average. The Rwandan franc continued to depreciate due to increasing external imbalances, and pressure on the country’s foreign exchange reserves in the second half of 2019.

As of November 2019, the franc depreciated by an average of 4.4 per cent year-on-year in nominal terms against the dollar, after a 3.6 per cent depreciation in 2018.

The country’s gross international reserves dropped from a high of $1.31 billion in December 2018 to $1.17 billion in September 2019.

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