James Anyanzwa’s article “East Africa faces debt crisis as borrowing surpasses $100b mark” in The East African newspaper for November 9-15 showed that the rapid build-up of loans by the East African Community (EAC) member States is stretching their repayment budgets to the limit.
The article indicates that Kenya and Burundi have the highest loan distress profiles relative to other EAC countries. Furthermore, it shows that domestic revenue mobilisation (DRM) is still a major challenge among the EAC countries.
Therefore, EAC countries cannot afford to overlook the increasing government expenditure and inefficiencies in the use of government resources, which are undermining DRM efforts. To escape the debt trap (or crisis), the countries need to strongly consider other options beyond domestic revenue mobilisation.
EAC country governments’ interventions to contain the widening budget deficits are mainly focusing on strengthening the DRM strategies, which reduce dependency on external assistance.
Domestic revenue mobilisation refers to the generation of government revenue from domestic resources (tax or non-tax sources). These strategies include tax administration, tax policy and legislative reforms that have resulted in increased government revenue.
However, the increasing government expenditure and inefficiencies in resource use are eroding the revenue increases (however small they are). This partly explains why budget deficits and debts have continued to increase irrespective of the DRM efforts.
First, EAC countries need to consider policy options such as strategically reducing government expenditure (or curbing the creation of more spending units).
For economic, social and political reasons, governments find it hard to reduce their expenditure, especially with elections nearing and citizens to appease. Therefore, governments find it easier to raise taxes than reduce government spending.
In addition, whereas tax increases are spread among the paying population, expenditure reductions are more concentrated on particular sector budgets.
For example, in Uganda, the increase in public spending consists of nearly hard to reverse expenditures, especially with the creation of more local government administrative units and government agencies. Such expenditure increases put pressure on the meagre domestic revenues.
The government may not borrow to meet the increasing recurrent expenditure such as wages, but these expenses crowd out the available revenues for meeting development expenditure needs. Therefore, this could explain the increasing borrowing to finance development expenses.
Second, EAC countries need to take deliberate efforts to spend efficiently by moving away from wasteful and inefficient expenditures that drain government revenues.
The onus is upon governments to identify the areas where spending is inefficient concerning individual sector budgets and address them.
For example, governments need to scrutinise the amount of resources (time, money and other inputs) used to provide quality public goods or services. This will enable governments to know how much they lose by spending inefficiently (spending more resources than needed) on wages, allowances, procurement, subsidies, pensions and grants. In other words, it uncovers the various ways the government is doing the right things wrongly.
Furthermore, EAC countries often state that they are prioritising necessary and expensive infrastructure and energy investments that often require borrowing – and it is true.
However, governments can use resources efficiently by reallocating money from non-priority to priority sectors instead of borrowing, since resources are always scarce.
In addition, governments do not need to undertake massive and expensive infrastructure and energy investments at the same time. These can be sequenced strategically to ensure minimal borrowing at a single point in time thereby ensuring favourable repayment periods.
In conclusion, therefore, EAC countries need to enhance domestic resource mobilisation efforts by strategically reducing their expenditure (or curb the creation of more spending units) and ensuring efficient use of government revenue.
This will ensure that countries slow down their uptake of loans to finance essential but expensive investments and avoid the debt trap (or crisis).
The author is a research associate at Economic Policy Research Centre