Weaker currencies increasing EA debt payments burden

Friday November 06 2020

A trader at Muthurwa market in Kenya's capital Nairobi counting money after the day’s sales. PHOTO | FILE | NATION MEDIA GROUP


East African economies are facing a potential rise in debt servicing burden owing to the depreciation of regional currencies currently weighed down by uncertainties in the global economy, disruption of global trade by the Covid-19 pandemic and political jitters linked to the region’s election cycles.

Monetary authorities are concerned about stability of the currencies, with fears their persistent fall in value against major foreign currencies could make repayment of external loans in foreign currencies an arduous task.

The resultant increase in interest payments is expected to be a substantial drain on resources which could have otherwise been used to finance development programmes.

By June this year, EA economies (Kenya, Uganda, Tanzania and Rwanda) had accumulated over $86 billion worth of public debt, with Kenya holding 77.11 per cent of the debt, followed by Uganda (17.4 per cent), Rwanda (five per cent) and Uganda (0.4 per cent).

The increase in the EA debt is largely explained by the countries’ attempts to grow the economies through borrowed funds spent mainly on infrastructural development amid revenue shortfalls.

Kenya’s public debt stands at Ksh7.06 trillion ($70.6 billion) of which domestic and external debt stands at Ksh3.4 trillion ($34 billion) and Ksh3.66 trillion ($36.6 billion) respectively.



The Kenya shilling has lost 7.4 per cent of its value against the dollar for the last 10 months to stand at Ksh108.82 on October 28 from Ksh101.3 against the greenback on December 31, 2019.

Ugandan shilling depreciated by 1.77 per cent against the US dollar to trade at Ush3,730.43 from Ush3,665.21 while Rwandan Franc lost 1.96 per cent of its value to rwf953.39 from Rwf935 against the greenback during the period under review. The Tanzania shilling gained marginally by 0.2 per cent trading Tsh2,297.65 against the dollar from Tsh2,303 December 31, 2019.

The Bank of Uganda (BoU) cautiously noted in its state of the economy report (September 2020) that while the country’s currency is expected to remain stable on the account of matched corporate activity there is already a bias to depreciation due to Covid-19-related market uncertainty.

“The economic outlook is extremely uncertain largely because of the unpredictable intensity and duration of the Covid-19. The pandemic could persist beyond the second half of 2020 or there could be a more severe second wave, with adverse consequences for the global economy,” the Bank said.

“Going forward, the exchange rate is likely to remain stable on account of matched corporate activity; with a bias towards depreciation due to Covid-19-related market uncertainty.”

According to BoU the Ugandan shilling has been adversely impacted by o lower foreign direct investment inflows coupled with sustained portfolio investment outflows both occasioned by the impact of the coronavirus on business activity, investor confidence and risk appetite.

The World Bank through its Africa Pulse Report dated October 2020 classified Kenya and Rwanda’s risk of debt distress as ‘high’ and ‘moderate’ respectively while Tanzania and Uganda were considered as ‘low’ risk.


In 2018, Kenya’s risk of debt distress increased from low to moderate, having breached three indicators (external debt service-to-export ratio, external debt service-to-revenue ratio, and the present value (PV) of external debt to export ratio).

Analysts at Cytonn Investments Ltd attributed the shilling depreciation to the uncertainty in the global economy and also the decline in dollar in inflows as global trade is impacted.

“Going forward the shilling shall remain under pressure due to continued uncertainty globally making people prefer holding dollars and other hard currencies and a deteriorating current account position,” the market report said.

However, the depreciation by the Rwanda Franc was relatively subdued in the beginning of this year due to lower economic activities caused by Covid-19 pandemic.

In June the Franc weakened by 1.6 per cent against the dollar although this was slower compared to the 2.2 per cent depreciation in the same period (June) last year, according to the National Bank of Rwanda (NBR).

According to the Bank of Tanzania, the country’s stock of public debt, (domestic and external), increased to Tsh824.5 billion ($353.38 million) on June 30, from Tsh808.8 billion ($346.66 million) in the same period last year, largely on account of exchange rate depreciation.

It is argued that the Covid-19 pandemic, volatilities in the financial markets and the global disruptions of demand and supply in international market will likely weigh on local currencies in the region.

The EAC’s annual headline inflation is projected at 4.5 percent in 2020 compared with 3.8 per cent in 2019 according to the NBR.

In August, Moody's Investors Service downgraded the foreign and local currency issuer ratings of the Government of Tanzania to B2 from B1 and changed the outlook to stable from negative.

The downgrade to B2 in Moody’s view is that governance remains very weak, raising risks to Tanzania's credit profile. According to the agency the stable outlook balances it’s relatively large and diversified economy against institutional weaknesses which undermine fiscal strength.