EAC economies to close 2019 with rising debt ratios

Burundi has joined a group of nine African countries at a high risk of debt distress.
Debt across East Africa continues to grow with Kenya’s risk of default increasing from low to moderate.

So far Kenya, Uganda and Tanzania are among the top 50 countries in the world that are highly indebted to China, according to a US-based research firm, Brookings Institution.

According to Brookings, such countries Uganda inclusive, are now shifting away from official multilateral creditors to non-concessional, (commercial) debt with relatively higher interest rates and lower maturities.

The trend is raising concerns around debt sustainability given the possibility of higher refinancing risks and foreign exchange risks.

This has forced the International Monetary Fund (IMF) to raise a red flag over the rate at which East African countries are accumulating debt.

The region’s economies have fallen into a financial fix as they attempt to fund persistent budget deficits and implement mega infrastructure projects against a backdrop of declining revenue collection.

As a result, the economies have resorted to massive borrowing, both from the domestic and international markets to quench their loan appetite, with fears that the increasing uptake of commercial loans could push most of them into debt distress.

“An over-reliance on commercial public debt exposes sovereign balance sheets to greater rollover and exchange rate risks. Also, an increase in debt from domestic creditors could crowd out financing for private sector projects,” the IMF says.

The IMF, in its regional economic outlook report for sub-Saharan Africa released last week, says surging public debt-to-GDP ratios for Uganda, Burundi, Kenya, Rwanda and Tanzania has the countries highly exposed to greater rollover and exchange rate risks.

“With several countries facing increased foreign exchange and refinancing risks, it is critical to enhance debt management frameworks and transparency,” says IMF.

In May, Kenya went for a third Eurobond raising $2.1b to pay off other maturing debt obligations, finance development programmes and fund government operations.

In September, the country’s lawmakers also voted to increase the government’s borrowing ceiling to $90b in the 2019/20 financial year , breaching EAC debt ceiling on debt accumulation, which is set at 50 per cent of the GDP.

According to the IMF, EAC countries will close 2019 with very high debt-to-GDP ratios.
According to IMF, Uganda’s debt ratio to is expected to rise to 49.5 per cent by the 2021/22 financial year because of continued large fiscal expenditure by government.

Over the past five years, Uganda’s budget on repayments has been increasing exponentially, due to growth in the level of public expenditure, especially on infrastructure.

Burundi’s ratio will reach a high of 63.5 per cent in 2019 from 58.4 per cent last year. It will be followed by Kenya and Rwanda whose debt-to-GDP ratios are expected to increase to 61.6 per cent and 49.1 per cent from 60.1 per cent and 40.7 per cent respectively during the same period.

The debt-to-GDP ratios for Uganda and Tanzania will increase to 43.6 per cent and 37.7 per cent from 41.4 per cent and 37.3 per cent respectively.

The EAC Monetary Union protocol, which was signed by the regional heads of states in November 2013, sets a 50 per cent debt-to-GDP ratio as the convergence criteria for the attainment of a single currency regime whose 2024 deadline is currently a subject of review by the member states.

Government debt as a per cent of GDP is an important economic parameter used by investors to gauge the country’s ability to make future payments on its financial obligation thereby affecting the country’s borrowing costs and government bond yields, according to economists at Trading Economics.

According to the IMF, further fiscal consolidation is needed over the medium term among regional economies to reduce debt vulnerabilities and create fiscal space for development needs.

Status of public debts across East Africa
Kenya and Uganda’s total debts as at June stood at $58.1 billion and $12 billion from $10.7 billion (Shs41.326 trillion) in February, respectively.

Tanzania’s public debt stood at $36.78 billion in the same period according to the Bank of Tanzania.

The country’s Finance Minister Philip Mpango attributed the increase to new loans secured to fund infrastructure projects such as construction of the terminal III of the Julius Nyerere International Airport, power generation projects, and the construction of roads, bridges and the standard gauge railway line.

In Rwanda, increased public investment, real exchange rate depreciation and government guarantees have aided a surge in national debt according to the World Bank. According to Brookings Institution, concerns about an impending debt crisis in Africa are rising alongside the region’s growing debt levels.

As of 2017, 19 African countries had exceeded the 60 per cent debt-to-GDP threshold set by the African Monetary Co-operation Programme for developing economies, while 24 countries had surpassed the 55 per cent debt-to-GDP ratio suggested by IMF.

According to the IMF, despite the stabilisation of debt dynamics, public debt vulnerabilities remain elevated in some African countries.