Rising public debt stifling EA countries development budgets

The East African region has sustained an average growth rate in excess of 6 per cent between 2012 and 2017, which is more than double the global average. Although there are prospects for continued economic growth ascribed to improved investments in infrastructure, debt-related increased public expenditure is increasingly stressing budgets of East African economies.

Three EA governments - Uganda, Tanzania and Kenya - will spend more than $14b on debt repayment in the financial year 2018/19. This, being about half of their target revenue collections, raises the question: “Can the EAC countries stem Debt sustainability as their appetite for borrowing grows, fuelled by investment in big infrastructure projects and rising budget deficits?” In their budget statements, Tanzania, Uganda and Kenya acknowledge that their revenue authorities are struggling to meet the collection targets, underlining the potential burden of expensive short-term debt.

The case of Uganda, the country’s resource envelope must rise to achieve government expenditure. Tax collections for the financial year 2018/19 is projected to increase from Shs14 trillion to Shs16 trillion. But we would like to note that the actual tax collection for the financial year 2017/2018 is under-performing.
The ratio of Uganda’s tax collections as a percentage of Gross Domestic Product (GDP) has stagnated at under 13 per cent for the past five years against the IMF’s recommended benchmark of 24 per cent. The government hopes to increase this ratio to 14 per cent. In the financial year 2018/19, the country will spend $236.5m on external debt repayments, $725.12 million on interest payments and also borrow $251.2 million from the domestic market.

The case of Kenya: The 2018/19 budget estimates tabled in Parliament, Kenya Revenue Authority (KRA) is to collect $17.21b in the new financial year. The country’s new budget is $25.02b and half of it will go into recurrent expenditure
Kenya takes the biggest share - $8.6b debt - even as it seems bent on heading again to the international markets to borrow $3b. Kenya’s debt hit $45.2b as at the end of last year, from $41.91b as at June 2017, and $34.33b as at end of June 2016. Kenya is expecting to roll over $1.89b in the year starting as it will also pull out Sh365b ($3.6b) in debt repayment and interests, the highest over the next five years.

Tanzania expects to collect $9.63b in revenues in financial year 2018/19, with $4.2b going into paying off its national debt that stood at $19.41 billion at the end of January 2018. The country is also expecting its expenditure for the new financial year starting July to stand at $14.16b. The country’s revenue collection in the financial year 2016/7 reached $8.98b against a target of $13.26b. Tanzania has seen more than $2.199b rolled over as at the end of January.

Concerns: According to IMF, the region’s ability to finance its debt could be undermined by adverse exogenous shocks, including falling commodity prices and a rise in interest rates. These, coupled with civil conflicts and looser fiscal policies, with fraud/corruption playing a key role in some of the cases, have led to increased debt vulnerabilities in many countries.

Domestic tax revenues that are needed to plug deficits of these countries remain relatively low, with most local tax administrative authorities not only inefficient, but also the capacity to raise domestic revenue limited by generous tax incentives mainly to foreign investors. Higher interest rates on commercially-priced debt has led to higher debt servicing costs and market risks, while the rising importance of non-traditional creditors poses new challenges for potential debt resolutions. This includes difficulties in ensuring the creditor coordination needed to produce comprehensive agreements acceptable to all major creditors.

East African governments must register improvement in domestic revenue mobilisation, efficient and cost-effective public investment management, within the overall realm of prudent public resources management. These should supplement other such viable strategies, in managing the balance between debt and service delivery outcomes in developing economies particularly in EAC countries.

Ms Naisanga works with Uganda Debt Network.