EAC states must avoid falling into Covid-19 debt trap

Saturday May 16 2020

Uganda currency notes

Uganda currency notes. Uganda a fortnight ago secured approval for a $491 emergency facility from the IMF. In that, it joined Rwanda and Kenya that, to varying degrees, had earlier been tipped for similar financial interventions. PHOTO FILE | NMG 

The EastAfrican
By The EastAfrican
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An unexpected outcome of the Covid-19 pandemic for many poor countries, East Africa included, is the extent to which it has raised the International Montery Fund and World Bank’s appetite for lending.

As the devastating social and economic impacts of the pandemic manifested themselves in the United States, the UK, France, Italy and Spain, the IMF and World Bank duly announced emergency credit lines for roughly two dozen African countries.

In near unison, East Africa’s finance ministers have whipped out the begging bowls and approached a variety of lenders for ‘corona response’ and ‘budget support’ funding. The effort has not been in vain.

Although it was not on the initial list, Uganda a fortnight ago secured approval for a $491 emergency facility from the IMF. In that, it joined Rwanda and Kenya that, to varying degrees, had earlier been tipped for similar financial interventions.

For Uganda, the IMF package supplements plans to borrow another 600 million Euros from the EU.

Separately, President Yoweri Museveni is seeking another two facilities worth $500 million for balance of payments support. If all goes according to plan, Uganda will in a short time have added $1.6 billion in debt to her already existing burden in the region of $14 billion.

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With a GDP of 28.5 billion in 2019, the additional borrowing will tip the debt to GDP ratio past 50 percent.

Uganda’s example is a cautionary tale of the inherent risks in the Covid-19 debt relief bonanza.

Concerted campaign

Until now, Uganda has been the only country in the region with a debt to GDP ratio below the critical 50 per cent threshold. Her neighbours who were hovering in the high 50s and lower 60s, have similarly piled up additional credit.

From the concerted campaign for debt cancellation and payment holidays that has been mounted by African leaders, it would seem that secretly, they hope their slate will be wiped clean by benevolent Western donors.

The major obstacle to such a prospect however, is the West’s insistence that China, which holds a huge chunk of African debt, must be part of any multilateral debt relief effort for the continent. China has not warmed up to this proposition so far, choosing instead to negotiate bilaterally with its African debtors.

The calls for cancellation suggest that African leaders are conscious of the precarious position previous borrowing has put their economies into. The debts of many of these countries is already unsustainable.

In some instances, 100 percent of export revenues and upwards of a third of the annual budget are dedicated to debt servicing.

The need for Covid relief is not debatable but it also underscores the risk one assumes when borrowing against the future. Ultimately, public debt has to be repaid by taxpayers. That should not be a problem if debt worked for the public god and helps achieve verifiable economic benefits.

It is erroneous for Africa to assume that its debt will always be forgiven. Failure to pay debt is equal to becoming insolvent. Unless Africa demonstrates a willingness to be disciplined and to meet its financial obligations to others, it might become ineligible for credit in the near future.

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