East Africa should heed warnings on ballooning debt
Saturday March 05 2022
East African leaders can run from the implications of its rising debt but they cannot hide forever. ILLUSTRATION | NMG
In a region that is more often at war than in tandem over trade, the news that the East African Community Secretariat had, without breaking ranks, agreed on a 35 percent Common External Tariff, on a range of imported products is bittersweet.
But, following almost immediately, were the twin revelations that Kenya had flexed its debt ceiling to accommodate additional borrowing and the World Bank was warning Tanzania of rising debt.
Even after rapidly piling up debt over the past two years as concessional lenders, spurred by the Covid-19 crisis, relaxed their guard, East Africa’s appetite for debt continues unabated.
In 2021, the average government debt in the region shot up 10 percent to 72.5 percent of the regional GDP. That is 22.5 percent higher than the agreed monetary convergence criteria ceiling of 50 percent of GDP.
According to the World Bank, the Democratic Republic of Congo, the soon-to-be seventh member of the EAC, is in debt distress while Kenya, South Sudan and Burundi are in the high distress category. Uganda, Rwanda and Tanzania are at moderate risk of distress.
Yet warnings about the associated risk continue to fall on deaf ears even as policy actions show that negative effects are setting in. The net losers are small and medium-sized enterprises and individuals who will be hit by constricted access to credit, taxation, higher cost of living and borrowing and, in general, higher costs of doing business.
Whether they realise it or not, policymakers are setting the region up for another debt trap. This became amplified when China’s terms for lending to Uganda’s $350 Entebbe International Airport expansion project became public.
To insulate against potential default, the China Exim Bank has covered itself by requiring that all commercial revenues earned by the Uganda Civil Aviation Authority be deposited in a jointly controlled escrow account. Demonised for its stance on lending to Africa, Beijing’s stance reflects a basic reality.
Whatever margins might exist today, external borrowing is not cheap. In a region where borrowing is not exactly matched by existing but rather anticipated economic output, the risk is amplified. Add to that a near non-existent culture of accountability and the risk is always going to attract a high premium. It is perhaps in recognition of this reality that the EAC Secretariat easily signed off the new CET.
A closer examination of the inward benefits shows that the new tariff is revenue, rather than domestic capacity building is driven. For a 0.3 percent reduction in imports, Uganda, for instance, stands to earn 8.5 percent more from import duty. And the regional industrial output will rise by 0.04 percent, or $12million, and 6,781 new jobs.
Take textiles and automobiles for instance. None of the partner states has the capacity for A-Z manufacture of textiles or automobiles in the near future. In effect, the CET protects a non-existent industry but has the benefit of ramping up import revenues from import duty in the short to medium term.
The region’s leaders can run from the implications of its rising debt but they cannot hide forever. This is the time to listen to the voice of caution because the anticipated benefits of big-ticket projects need to be weighed against the potentially devastating short-term impact on the economies.