Debt, deficit and a monetary union conundrum in EA’s expanded budgets

Monday June 17 2019

Rising budget deficits across the region run against ongoing efforts to establish the East African Monetary Union.

Rising budget deficits across the region run against ongoing efforts to establish the East African Monetary Union by 2024. PHOTO | FILE | NATION MEDIA GROUP 

The EastAfrican
By The EastAfrican
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East Africa’s finance ministers presented expansionary budgets with ambitious revenue targets that are likely to be missed, leading to more borrowing amid rising concerns over looming debt distress.

In Uganda, Matia Kasaija presented a Ush40.5 trillion ($10.7 billion) budget, a 21 per cent rise from this past year’s Ush32.7 trillion ($8.7 billion). To fund the rising budget, which is as a result of significant increases in military, public administration and infrastructure spending, East Africa’s third-largest economy plans to borrow more from both local and foreign sources.

Kampala is also targeting an already depleted Petroleum Fund, and is tightening the screws on existing taxpayers to fund an 8.2 per cent fiscal deficit.

Uganda’s fiscal deficit is significantly above the 3 per cent ceiling agreed with the International Monetary Fund in the charter for fiscal responsibility.

Rising budget deficits across the region run against ongoing efforts to establish the East African Monetary Union by 2024: Each EAC member state should keep its budget deficit at around 3 per cent.

Kenya, which unveiled a Ksh3 trillion ($30 billion) budget, is set to sink deeper into debt under a proposed plan to borrow $5.9 billion to cover a 5.7 per cent deficit.

Kenya’s Treasury Cabinet Secretary Henry Rotich dismissed rising concerns over debt sustainability. He maintained that the public debt, which stands at around $50 billion, is within sustainable levels, and that the burden is projected to decline.

“We shall continue to remain on the planned path of reducing the fiscal deficit in the medium term in order to create more fiscal space and reduce the public debt,” he said.

The fact that the Kenyan government intends to borrow $5.9 billion from international and domestic markets to fill the budget gap during the 2019/20 financial year paints a picture of a country in a rut.

Kenya recently floated a third Eurobond in the international markets that raised $2 billion to repay maturing debt.

Although Kenya’s budget deficit is on a downward trend, expected to drop to 5.6 per cent of GDP from 6.8 per cent this year and 7.4 per cent in 2017/18, the fact that about 60 per cent of revenue is going to debt servicing remains a cause for concern.

In Rwanda, where Finance Minister Uzziel Ndagijimana unveiled a Rwf2.877 trillion ($3.16 billion) budget, the government has had to borrow aggressively in recent years to fund growth. Dr Ndagijimana’s new budget is 11 per cent more than the $2.7 billion for the 2018/19 fiscal year.

Although the IMF’s analysis shows that Rwanda remains a low debt-risk economy — at 32.9 per cent of GDP against a threshold of 50 per cent — concessional loans stood at 63 per cent of the debt stock at the end of 2018. Most of the concessional loans were taken out to finance large investment projects.

Tanzania’s Finance Minister Philip Mpango tabled a Tsh33.1 trillion ($14.3 billion) budget, up from Tsh32.48 trillion last year, with an ambitious plan to grow the economy at 7.1 per cent.

Tanzania is the only EAC state that plans to keep the fiscal deficit below 3 per cent, with President John Magufuli pushing a non-donor-dependency programme.

However, the government has projected national debt to rise by Tsh3.4 trillion ($1.48 million) in the coming fiscal year, even as 24 per cent of the budget ($3.4 billion) goes to service debt.

Burundi has proposed a 7.2 per cent overall budget increase from the 2018/19 budget of $676 million, to $725 million. Finance Minister Domitien Ndihokubwayo has proposed a punitive taxation plan to fund at least 88 per cent of the budget from domestic revenues, as the country continues to suffer a high budget deficit that has only worsened with the aid drought since President Pierre Nkurunziza controversially ran for a third term in 2015.

The Burundian economy is expected to grow at 4.2 per cent in the 2019/20 financial year, and inflation is expected to stand at 8.1 per cent at the end of the year.

Kenya hopes to further lower the fiscal deficit to three per cent in the medium term (2022/23) partly through a reduction in public spending and less borrowing.

In the new financial year, Mr Rotich has proposed to spend $10.7 billion on debt repayment, $3.4 billion of which will go to paying interests on the loans.

During the year, Kenya is expected to incur interest of $2 billion on domestic debt and a further $1.4 billion on external loans.

While Nairobi has been judicious in avoiding default so as to maintain favourable credit scores and access to international markets, failure to rein in corruption remains a major contributor to the pain of public debt.

Kenya continues to feature among the most corrupt countries in the world, ranking at position 144 out of 180 countries in the Transparency International Corruption Perception Index 2018.

The Parliamentary Budget Office (PBO) has warned that Kenya is slipping into debt distress unless the country adopts careful management strategies.

“Debt sustainability concerns in the medium term arising from a risk of debt distress have been raised from low to moderate,” said the PBO.

Mr Rotich says fighting corruption is a critical component in ensuring prudent management of the country’s finances. Effectively, the CS allocated $61.3 million to agencies charged with the fight against corruption.

Fred Muhumuza, a Ugandan economist, warned that big fiscal deficits risk rendering the private sector unproductive, increasing unemployment, reducing exports and causing high import bills.

Patrick Ocailap, Deputy Secretary at Uganda’s Treasury, said bringing down the fiscal deficit in time for the EAC Monetary Union timelines is now impossible, but added that Uganda isn’t the exception in this failure as other EAC member states like Kenya are facing a similar predicament.

Given the current investments, Mr Ocailap said Uganda will reduce the fiscal deficit to the levels required by the EAC in 2023, just one year before the monetary union is supposed to be launched.

Other EAC Monetary Union Protocol parameters are keeping the inflation rate at 5 per cent for three years before 2024, as well as having a tax revenues-to-GDP ratio of 25 per cent.

In Tanzania, where President Magufuli is spearheading a drive to avoid donor dependency in funding the country’s ambitious industrialisation programme, Mr Mpango is proposing an Integrated Domestic Revenue Administrative System to monitor internal tax collection.

The domestic tax net is expected to widen even further by, among other things, installing stronger controls on “transfer pricing” by multinationals and speeding up ongoing efforts to “formalise” the informal sector.

Steps will also be taken to further ensure that all non-tax revenues are collected through the Government Electronic Payment Gateway System introduced last year, he said. This in effect puts further pressure on the country’s private sector to stay afloat as avenues to make money outside a formalised state system continue to be squeezed. Tanzania’s inflation is projected to remain in the single digit range — between 3 and 4.5 per cent.

 

By Dicta Asiimwe and Njiraini Muchira. Additional reporting by Moses Havyarimana, Bob Karashani, Johnson Kanamugire, Moses Gahigi, Pierre Afadhali and Ivan Mugisha.

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