East Africa’s growing debt levels could push regional economies into financial distress in the wake of volatile local currencies and falling export earnings, economists have warned.

The East African Community (EAC) partner states are borrowing heavily to finance infrastructure development but economists warn the  region’s depreciating currencies would increase the  burden of  foreign debt repayment, a position which  would be made worse by the  declining export earnings.

Last year the United States Agency for International Development (USAid) warned that interest payments on debts had started squeezing East Africa’s national budgets and even resizing the economy by some economies such as Kenya and Uganda would not help.

In 2014, Kenya rebased its gross domestic product (GDP), growing  the value of its annual output by about 25 per cent and reducing its debt to GDP ratio to 43.1 per cent from 52 per cent.

Uganda also did the same and eased its growing debt-to-GDP ratio from 39.8 per cent to 29.2 per cent.

READ: Mixed prospects for Uganda after rebasing economy

However, USAid through a report titled ‘Kenya Investment Climate 2015’ said rebasing of the economy is not a solution to the mounting debt levels whose repayment has started eating into development budgets, putting implementation of key infrastructure projects at risk.

According to the report, Kenya’s spending on public debt repayment was 70 per cent higher than its expenditure on development in the year 2013.

Unsustainable debt levels

“The trend of public debt in the region is worrying as the volume of exports fall.  In fact the rate at which the level of public debt and budget deficits are growing is not matching with the rate of economic growth and sooner or later these debts will become unsustainable,” said Dr Joy Kiiru, a lecturer at the University of Nairobi’s School of Economics.

“The debts are supposed to grow the economy if the monies are invested wisely,” added Dr Kiiru.

According to the International Monetary Fund (IMF) the share of government debt as a proportion of GDP for  the EAC member states increased between 2012 and 2016 with Kenya leading in terms of debt accumulation, followed by Tanzania, Rwanda and Uganda.

Kenya’s share of public debt as a proportion of GDP increased from 41.7 per cent in 2012 to 55.4 per cent in 2016, while that of Tanzania grew from 29.2 per cent to 42.4 per cent in the same period. Rwanda’s stood at 41.5 per cent from 20.1 per cent and Uganda expanded to 37.9 per cent from 24.2 per cent during the period under review.

On the other hand, Kenya’s exports as a percentage of GDP declined from 21.9 per cent in 2012 to 17.5 per cent in 2016, while Tanzania’s share of exports remained static at 20.9 per cent.

Rwanda and Uganda recorded an increase in the share of exports during the period growing from 14.1 per cent and 20 per cent to 16.5 per cent and 21.4 per cent respectively.

“Borrowing is not bad but what matters is what you do with the money you have borrowed. Some of the projects we have borrowed to develop were not well thought out and we are not certain of expected returns,” said Dr Emmanuel Manyasa, an economist and country manager of Uwezo Programme at Twaweza East Africa, a civil society organisation.

“We are also now in a position where we are borrowing to repay debts and this is worrying. We have fallen into a debt trap and need to have a policy shift,” he added.

Policies

In January this year, the United Nation's Economic Commission for Africa (Uneca) said countries which borrow from foreign financiers need to put in place policies which would allow them to pay their debts without compromising the macroeconomic conditions of the country.

Uganda’s gross public debt is estimated to be $8.81 billion by the end of this month (June 2016) of which $5.48 billion is external debt and $3.32 billion is domestic debt, according to the Budget Policy Statement for the 2016/2017 fiscal year.

“Our total public debt is equivalent to 34 per cent of total economic output. The Government will therefore borrow in future for highly productive fixed capital investments that can generate financial and economic returns to ensure debt sustainability,” said Matia Kasaija, Uganda’s Finance minister.

Mr Kasaija said the increase in public debt is due to financing priority infrastructure investments like the Karuma and Isimba hydropower projects, rehabilitation and expansion of Entebbe Airport and phase three of the National Transmission Backbone Project, meant to enhance productivity in all sectors of the economy.

READ: Ministers look outward to plug budget deficits

Uganda’s earnings from exports are far less than what is spent on imports resulting in a large trade imbalance with its trading partners.

In the year to March, Uganda’s imports were worth $5.64 billion compared to export receipts of just $2.66 billion.

The depreciation of the Ugandan shilling between June 2014 and June 2015 increased the stock of external debt from $4.3 billion to $4.4 billion in the same period.

In the beginning of the 2015/2016 fiscal year, Kenya had the highest amount of debt in the region at $24 billion, with more than 60 per cent of it being domestic, while Tanzania’s public debt peaked at $19.14 billion, with 80 per cent of this being foreign.

Uganda’s government debt stood at $7.6 billion with 60 per cent of it being external, while Rwanda’s was at 1.85 billion of which 76 per cent was foreign debt.

Kenya plans to spend an estimated $4.66 billion on public debt repayments in the next  fiscal year (2016/2017), with an additional $6.89 billion earmarked for borrowing.

During the first nine months of the current fiscal year (2015/2016), Kenya used about 41 per cent of its tax revenues to pay off debts.