EAC budgets signal new wave of huge borrowing

East Africa’s finance ministers presented expansionary budgets with ambitious revenue targets that are likely to be missed.
This could lead to more borrowing amid rising concerns over looming debt distress.
In Uganda, Matia Kasaija presented a Shs40.5 trillion ($10.7b) budget, a 21 per cent rise from the Shs32.7 trillion ($8.7b) to fund increased spending on military, public administration and infrastructure spending.
East Africa’s third-largest economy plans to borrow more from local and foreign sources with Uganda Revenue Authority (URA) expected to collect slightly about Shs18 trillion in taxes.
Uganda is also targeting an already depleted Petroleum Fund, and is tightening the screws on existing taxpayers to fund an 8.2 per cent fiscal deficit, which is significantly above the 3 per cent IMF ceiling.
Kenya, which unveiled a Shs111 trillion ($30b) budget, is set to sink deeper into debt under a proposed plan to borrow $5.9b to cover a 5.7 per cent deficit.
Kenya’s Treasury Cabinet Secretary Henry Rotich dismissed rising concerns over debt sustainability, maintaining that public debt, which stands at around $50b, is within sustainable levels, and that the burden is projected to decline.
The fact that Kenya intends to borrow $5.9b from international and domestic markets to fill the budget gap during the 2019/20 financial year paints a picture of a country in a rat-trap.
Although Kenya’s budget deficit is expected to drop to 5.6 per cent of GDP from 6.8 per cent this year, the fact that about 60 per cent of revenue is going to debt servicing remains a serious concern.
In Rwanda, where Finance Minister Uzziel Ndagijimana unveiled a Shs11.5 trillion ($3.16b) budget, government has had to borrow aggressively in recent years to fund growth.
Dr Ndagijimana’s new budget is 11 per cent more than the $2.7b for the 2018/19 fiscal year.
Although the IMF’s analysis shows that Rwanda remains a low debt-risk economy - at 32.9 per cent of GDP against a threshold of 50 per cent - concessional loans stood at 63 per cent of the debt stock at the end of 2018.
Most of these were taken out to finance large investment projects.
Tanzania’s Finance Minister Philip Mpango tabled a Shs52.4 trillion ($14.3b) budget with an ambitious plan to grow the economy at 7.1 per cent.
Tanzania is the only EAC state that plans to keep the fiscal deficit below 3 per cent, with President John Magufuli pushing a non-donor-dependency programme.
However, government has projected national debt to rise by Shs5.1b ($1.48m) in the coming fiscal year, even as 24 per cent of the budget Shs12.4b ($3.4b) goes to debt servicing.
Burundi has proposed a 7.2 per cent overall budget increase from the 2018/19 budget of Shs2.48 trillion ($676m), to Shs2.66 trillion ($725m).
Finance Minister Domitien Ndihokubwayo has proposed a punitive taxation plan to fund at least 88 per cent of the budget from domestic revenues, as the country continues to suffer a high budget deficit that has only worsened with the aid drought since President Pierre Nkurunziza controversially ran for a third term in 2015.
Burundi expects to grow at 4.2 per cent in the 2019/20 financial year, and inflation is expected to stand at 8.1 per cent at the end of the year.

How it will work

Mr Fred Muhumuza, an economist and a lecturer at Makerere University, warned that big fiscal deficits risk renders the private sector unproductive, increasing unemployment, reducing exports and causing high import bills.
However, according to Mr Patrick Ocailap, Deputy Secretary Treasury, bringing down the fiscal deficit in time is now impossible, noting that Uganda isn’t the exception in to have failed as other EAC member states such as Kenya are facing a similar predicament.
Given the current investments, Mr Ocailap said Uganda will reduce the fiscal deficit to the levels required.

Debt distress

In Kenya, the Parliamentary Budget Office has already warned that Kenya is slipping into debt distress unless the country adopts careful management strategies, saying bebt sustainability concerns in the medium term arising from a risk of debt distress have been raised from low to moderate.

Additional reporting by Njiraini Muchira, Moses Havyarimana, Bob Karashani, Johnson Kanamugire, Moses Gahigi, Pierre Afadhali & Ivan Mugisha