Debt burden, lower export revenue dim EA prospects for 2015

Monday March 02 2015

The region’s growth is expected to average 6pc, up from about 5.5pc in 2014, but plummeting prices for tea and coffee have reduced export earnings. PHOTO | TEA GRAPHIC

East African economies are showing promising growth prospects for 2015, but the falling prices of key commodity exports and the region’s mounting debt burden remain a threat.

The region’s growth is expected to average six per cent this year, up from about 5.5 per cent recorded in 2014, driven by increased investments in infrastructure, falling inflation and an expected surge in private-sector lending.

However, this growth is dimmed by plummeting prices for tea and coffee, the region’s two leading exports, which have reduced export earnings and widened the current account deficit of Tanzania and Kenya. Tea prices have been depressed by oversupply, while poor rainfall has hurt coffee output.

In Uganda and Burundi, a supply glut and lower production have seen depressed earnings from tea and coffee.

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In the 2014 season, Uganda reported coffee exports worth $394 million, representing a 2.3 per cent drop in volume and nine per cent decrease in value from the previous year. Uganda sold its coffee at an average of $1.87 per kg, down from $2 per kg the previous year.

In Burundi, earnings from coffee fell to $23.8 million in 2014, from $66.3 million in 2013, attributed to unpredictable weather conditions and a lower-yielding crop cycle. Tea earnings fell six per cent in the first nine months of 2014.

Kenya’s tourism sector, one of the key drivers of dollar earnings, contracted by about 14 per cent during the third quarter of 2014, but is expected to make a comeback as the security situation stabilises. The country also saw a 10 per cent drop in earnings from its flower exports in 2014.

For Tanzania, its gold earnings — one of its main sources of foreign income — have dropped as a result of falling global prices and lower export volumes. Earnings from gold continued on a downward spiral, falling 32.45 per cent to $1.29 billion in 2014.

Thomas Kinyonda, an economist said that the falling prices reflect the urgent need to cut dependence on raw commodities as the main source of export earnings for the region.

“The region has been overly dependent on traditional commodities such as gold, coffee, tea and horticulture as its key export earners. These commodities are prone to volatilities occasioned by weather, unstable global prices and political factors in key markets,” said Mr Kinyonda.

High dependence on aid could pose a challenge for some regional economies, with Tanzania already feeling the heat. In its monthly economic report, Tanzania’s central bank noted that its current transfer inflows, which comprise donor aid and loans, declined substantially after a group of international donors said in October that they will only pay outstanding pledges of budget support worth nearly $500 million unless the government took appropriate action on graft allegations in the energy sector.

“The current transfers fell to $513.1 million in 2014, a 35.1 per cent drop from $790.5 million in 2013. The overall balance of payments swung into a deficit of $259.9 million from a surplus of $538.4 million in 2013,” said the Bank of Tanzania.

READ: Tanzania in plans to amend budget, exclude donor funding

Earnings from tourism rose to $1.93 billion from $1.85 billion in 2013 while the value of tobacco, cotton and coffee exports fell to $785.1 million from $867.1 million due to a decline in export volumes and prices.

“We expect growth at 7 per cent in 2015 with inflation in the mid-single digits. The economic performance in 2014 was satisfactory through June, but has deteriorated and risks have risen, stemming from delays in disbursements of donor assistance and external non-concessional borrowing, and shortfalls in domestic revenues,” the International Monetary Fund said in a review of the Tanzanian economy.

Standard Chartered Bank projects a lower economic growth for Tanzania due to elections later this year.

“The heightened political climate in Tanzania, including a constitutional referendum, will deflect attention away from a regulatory framework for development of the country’s natural gas sector that would have boosted growth. Tanzania also faces a further downside growth risk due to donors’ governance concerns,” says the Standard Chartered report.

The growing debt burden, coupled with low revenue collection is also likely to have an impact on what direction the EAC economies take especially considering the planned infrastructure projects.

Kenya, on its part, expects a growth of 6.4 per cent this year, up from the 5.7 per cent projection in 2014, because of the various administration reforms and infrastructure spending it is engaged in. This is despite the World Bank cutting the country’s growth forecast by 0.5 per cent to 4.7 per cent in 2014, attributing it to tighter global credit, insecurity and weak budget execution by the Kenyan government.

“We forecast 2015 growth of 5.6 per cent versus the IMF’s more upbeat 6.9 per cent projection. Ongoing government investment in infrastructure will keep capital goods imports and the current account deficit elevated,” notes the standard Chartered report.

Kenya expects its inflation to improve significantly in 2015, based on lower oil, electricity and food prices. According to Brenda Gitahi, a research analyst, Kenya’s growth momentum gained at the start of the financial year.

“We have seen a reassuring growth momentum after the rebasing of the economy and we expect that with the tackling of the insecurity issues, tourism will make a comeback,” Ms Gitahi said.

Kenya’s Treasury said in a budget statement that it expects growth to be more robust this year, thanks to momentum picking up in the real estate, tourism and financial services sectors.

In Uganda, the 2016 elections will result in an increase in public investments. This, together with weaker oil prices and regional projects such as the standard gauge railway means the economy will grow by 6 per cent this year and 6.2 per cent in 2016, says the report.

Uganda is also staring at a fiscal shortfall in the range of between four per cent and six per cent of GDP over the next four years as it struggles to boost its narrow tax base against its heavy public infrastructure investments and persistent recurrent spending pressures. Uganda’s economy grew by 4.5 per cent in the financial year 2013/14, with economic growth forecasts of 5-6 per cent for real growth in 2014/15.

The Governor of the Bank of Uganda, Emmanuel Mutebile, said that the 2014/15 growth is supported by increased public investment and the recovery of private sector credit, which in turn boosts private sector investment and consumption.

“The risks that we are looking at in this financial year include a widening trade deficit, the possibility that investments in the oil sector will be delayed given the fall in global oil prices and possible volatility in global financial markets,” said Mr Mutebile.

Razia Khan Standard Chartered Bank’s head of Africa macroeconomics said that Uganda’s monetary policy exposes the economy to shocks and changes.

“We have seen Uganda leave the interest rate unchanged in its monetary review but the pressure on the shilling could trigger an earlier change in the monetary stance than many currently expect,” said Ms Khan.

Burundi’s economy had a good run in 2014 with the trade deficit narrowing to $640 million in 2014, down from $717 million in 2013, as the level of imports fell and its local currency strengthened against the dollar.

“Export revenues rose 32.4 per cent to $125 million, while imports fell 5.7 per cent to $765 million. Burundi’s franc gained 0.5 per cent against the dollar in 2014,” the Burundi central bank said in a statement.

Burundi’s elections coupled with uncertainties of President Pierre Nkurunziza’s alleged plan for a third term will be the key determinant in its 2015 growth, even though the Finance Ministry sees a 5.4 growth because of the major infrastructure projects
Desire Musharitse, spokesman for the Finance Ministry, said that this growth projection was due to the implementation of key infrastructure projects.

“We have embarked on projects including the construction of roads, hydropower dams and ongoing installation of the sea cable for the telecoms sector. These will be the drivers of growth,” Mr Musharitse told Reuters.

The IMF, however, puts Burundi’s growth forecast below the government’s projections, at 4.8 per cent up from up from 4.7 per cent in 2014, citing improvements in the business climate and the coffee and energy sectors.

Global Risk Insight (GRI), says that the 2015 economic outlook for Burundi remains fragile, with downside risks related to the run-up to the elections

“Burundi, which is aid dependent, will see most of its project aid attached to conditionalities tied to the election process. The political developments before the elections could affect these conditionalities and the projects,” GRI notes.

Rwanda which managed to overcome a 2013 donor aid shock, has a positive economic outlook for 2015, with international credit rating agency Fitch upgrading it to ‘B+’ from the ‘B’ rating.

“We upgraded Rwanda based on its prudent and coherent fiscal monetary policy and stellar growth record,” Carmen Altenkrich, director Sovereign Group at Fitch, told CNBC Africa.

Mr Altenkrich anticipates Rwanda’s real GDP growth to be 6.5 per cent resulting from stronger local integration within the EAC and gains in agriculture, mines and tourism.

Last month, the World Bank renewed a $250 million per year commitment to support its economic strategy till 2019.

“The economy is projected to have grown more than 6 per cent in 2014 and we expect the expansion to exceed 7 per cent in 2015,” Rwandan Finance Minister Claver Gatete said.

Overall, the region’s growing debt burden, weak budgetary executions, and low revenue collections will affect the economic growth prospects, especially now that almost each country is involved in multibillion-dollar infrastructure projects.