Experts push for ‘smart borrowing’ for projects, not consumption

Saturday November 18 2023

Kenya introduced a housing levy to help finance the billion-shilling government’s Affordable Housing Programme. PHOTO | NMG


Countries in the East African region should entice taxpayers with elaborate policies that put public money in proper use, combining taxation with transparent expenditure in a single loop.

And as authorities in the region place more emphasis on local revenue generation to dodge the debt burden, experts say the idea of introducing new taxes without sufficient clean-ups and revenue leakage seals could prove counterproductive.

The proposals emerged this week from the Africa Economic Conference (AEC) in Addis Ababa, where experts pored over the twin problem of raising money, improving business environment and dodging the debt bullet.

Read: Is debt restructuring solution for Africa’s problems?

Prof Kevin Urama, Chief Economist and VP for Economic Governance and Knowledge Management at the African Development Bank (AfDB) admits there is an urgent need for ‘smart borrowing’ such that countries borrow for development projects, not consumption.
But those seeking to tax more and raise local revenues like Kenya should tie that to expenditure.

“Countries need to do their best to improve domestic revenue mobilisation, but also improve the quality of use of those revenues by blocking leakages and misuse,” he said at a press conference on the sidelines of the Conference.


“When citizens start seeing how taxes are serving them, it becomes an incentive to pay more taxes.”

Sealing leakages could save the continent some $75 billion annually while sealing illicit outflows can save up to $90 billion, one estimate by the AfDB shows.

The conference organised by the UN Economic Commission for Africa, the United Nations Development Programme (UNDP) and the AfDB was discussing ‘the Imperative for Industrial Development in Africa.’

But the biggest headache has been how to finance projects and improve environment for businesses to take advantage of an integrating continent.

Kenya, for instance, has introduced new taxes on oil, introduced a housing levy and raised statutory contributions for health and social security. Burdened by more than $6 billion in debt, Nairobi had argued that it needed to raise more locally to wean itself from borrowing.

Experts on the general economic situation in Africa, however, say the taxation regime needs other pillars to stand on, such as a deliberate policy to reduce exporting raw materials and embrace value addition as well as reducing trade barriers and protecting investments.

Read: Intra-EAC trade slumps after execution of 35pc tax on imports

“The business environment borders on the public administration space and governance. That means we need to have policies and legislation in place to support ease of doing business,” said Matthias Naab, at the UNDP Regional Service Center in Addis Ababa.

“This can be supported by the political leadership, which is why the unconstitutional changes in government we see today are not helpful. But these changes are also an issue of development. We cannot transition to democratic governance if not everybody is carried along.”

African countries have, since 2021, launched the Africa Continental Free Trade Area agreement which seeks to raise Intra-African trade to at least half from the current 14 percent. Yet the problems are beyond taxes and should include security and a deliberate cushioning of their currencies.

This week, the Economist Intelligence Unit projected that East African countries will generally be among the fastest growing economies in 2024 with Kenya, Uganda, Tanzania, Rwanda and the DRC generally performing about 5 percent.

They will be buoyed by the good performance of the services sector “including resurgent travel, tourism and hospitality, resilient transport and logistics, and vibrant financial and telecommunications industries,” according to the EIU’s Africa Economic Outlook 2024, which also added that on-demand natural resources like minerals in the DRC will be handy.

But like peers across the continent, EAC countries will face a “financial squeeze created by excessive debt and a heavy repayment burden in 2024.”

Kenya, for instance, has promised to repay its $2 billion Eurobond ahead of the June 2024 deadline, shielding itself from potential image damage on the international scene.

Read: Kenya calms markets with $300m early Eurobond repayment

Kenya will still be faced with debt owed China and other lenders, however, and will still have to plan for repaying another $1.9 billion Eurobond by 2027.

Burundi is likely to be an “inflation hotspot” according to the Economist Intelligence Unit, which expects Burundi’s to hit over 10 percent.
Each of the EAC member states will also suffer currency depreciation with Rwanda and Burundi expected to drop up to 20 percent of their currency values, Kenya to lose 9 percent, DRC (-8), Tanzania (-3) and Uganda (-1).

“We need to find monetary policies that can reduce risks to our currencies,” said Prof Urama while discussing how to shield currency drops.

“I would encourage African countries to open their economies and leverage all factors of production.”