EDITORIAL: East Africa debt load is pain for future generations

Sunday November 10 2019

Loans

Grand infrastructure projects are great if you can afford them. In our context however, the current push of corruption-laden projects amounts to transferring the price of our folly to future generations. ILLUSTRATION | JOHN NYAGA | NMG 

The EastAfrican
By The EastAfrican
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The latest economic outlook reports from the World Bank and the International Monetary Fund paint a mixed forecast for African countries.

Oil dependent economies will continue to feel the pinch from depressed energy prices. That will suppress their growth, while their less commodity-reliant counterparts, in which East Africa falls, will continue to enjoy growth rates above 5 per cent.

Despite that, both groups face potential headwinds.

How they maneuverer to sustain growth while minimising fiscal risk will largely determine whether they all get home in one piece.

A major component of the downside risk relates to the debt that many African countries have accumulated. The average debt ratio across sub-Saharan African is now running at the critical margin of 55 per cent of gross domestic product.

The IMF and World Bank are now warning that East Africa’s economies are heading towards economic asymmetry—a situation in which debt servicing will be met at the expense of equally pressing social commitments.

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At a debt-to-GDP ratio of 64 per cent, South Sudan is already in dangerous territory but Kenya and Burundi are not far behind.

A healthy South Sudan is important for the region for very basic reasons. Its heavy dependence on oil revenues and its role as a major customer—especially to Kenya and Uganda, makes it a key transmission path to the rest of the region of the effects of any movement in energy prices.

Its present troubles are already being felt in the form of subdued trade with its neighbours.

The bulk of East Africa’s debt—now standing at more than $100 billion—has been contracted in the past seven years to feed the region’s appetite for modern infrastructure.

Economic infrastructure, notably modern railways, power stations, transmission lines, and expressways account for a significant fraction of that figure.

A major problem for the region is that while it needs an infrastructure makeover, planners have failed to distinguish between technological and economic efficiency.

The objectives of projects such as the standard gauge railway, could probably have been met by a revamped metre gauge rail at a fraction of the cost.

Besides the cost of ownership of the SGR, the relatively long gestation period between inception and delivery means that there will be a critical time lag during which new infrastructure will not be contributing revenue to support debt commitments.

For instance Uganda has invested billions in power generation at a time when it can dispatch only about half of installed capacity. That mismatch has burdened the consumer with high tariffs to support loan repayments.

East Africa must take cognisance of external risk. The ripples of the China-US trade war are already being felt. A further escalation will disrupt global trade and with it demand and with it our earnings from exports. That is why it is important that we cut our suit according to our cloth.

Grand infrastructure projects are great if you can afford them. In our context however, the current push of corruption-laden projects amounts to transferring the price of our folly to future generations.

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