By Allan Olingo

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Kenya and Uganda are among countries that are at debt risk if they do not pat better policies in peace to manage their commercial debt repayments, the International Monetary Fund has warned.

IMF’s sub-Saharan Africa Outlook report says the two regional economies need to strengthen their capacity to undertake cost-risk analysis of borrowing options and manage repayments on commercial borrowing.

“Cost-risk analysis has helped increase awareness of debt portfolio risks and of the importance of developing government securities markets in the medium term,” says the IMF report, released on Thursday. “Deepening domestic debt markets could provide ways to lower currency and interest rate risks.”

However, the IMF has praised Kenya and Tanzania’s move to update their medium-term debt strategy to address contingent liability risks.

Fiscal adjustment

According to the Washington-based lender, there are concerns over the quality of the fiscal adjustment, and underlying vulnerabilities in the regional economies, which have yet to be decisively addressed.

“More progress on domestic revenue mobilisation is needed to ensure debt sustainability and create fiscal space for much needed investment and development spending,” the IMF said.

The fiscal adjustment that the regional governments have undertaken so far largely reflects the oil price rebound for oil exporters, coupled with sharp cuts in capital spending in several countries.

“With a few exceptions, there has been relatively little progress in strengthening domestic revenue mobilisation; domestic arrears remain large, contributing to a build-up in non-performing loans and, beyond the central government, state-owned enterprises are becoming a major fiscal risk in some countries. As it is, financial sector vulnerabilities remain elevated with high non-performing loans weighing on banks’ balance sheets and constraining credit to the private sector,” the IMF said.

East African economies led by Nairobi and Dar es Salaam have been grappling with a slowdown in credit to the private sector and a high non-performing loan ratios that have seen banks crowd out the private sector in favour of government paper.

IMF has also flagged the risks of rising US interest rates pose for sub-Saharan Africa economies, pointing out that debt refinancing is now on the line.

“Higher US interest rates and a stronger dollar could also heighten the risks of a financial crisis, in emerging and developing economies. In particular, the probability of a large reversal in foreign flows in sub-Saharan Africa is significantly higher as US interest rates go up, while around one-third of currency crises have been associated with a reversal in foreign flows. Thus, the large amounts of maturing bonds for the region’s frontier markets in 2019–2020 and in 2024–2205 suggest substantial refinancing risks,” the Fund said.

Serious refinancing risks

Rwanda, Kenya and Tanzania have debt obligations due within this time frame and are all at risk, if the foreign direct investment reversal continues.

Last week, the World Bank warned that these countries were among 14 sub-Saharan economies that will struggle to pay their loans post-2021, posing a serious refinancing risks.

“These three regional economies, which have debt maturities starting in 2020, are currently facing rising currency risk that could jeopardise their loan repayments. Large Eurobond repayments from 2021 could pose significant refinancing risk in the region.

“Sharper than anticipated currency weaknesses could make the servicing of foreign currency denominated debt, already a rising concern in the region, more challenging as financial market pressures have intensified in some emerging markets and concern about their dollar-denominated debt has risen amid a stronger dollar,” the World Bank Pulse report says.

The IMF is calling for an improvement in the quality of fiscal adjustment that will net these countries more revenues, which it says are key to creating fiscal space that will allow the East African countries to pursue development priorities.

“With average revenue estimated at three to five per cent of GDP below potential, there is substantial scope for all countries to raise revenue. Countries that succeeded in raising revenues paid special attention to measures to build the tax base, simplify the tax system, and tackle exemptions and incentives,” the IMF says.

Already Kenya, with IMF backing, has enhanced its taxation policies in an attempt bid to raise more revenues, while Tanzania and Uganda have championed budget cuts and pushed for austerity within governments to cut down on wastage.