EAC projected growth rates a mirage due to debt, deficits

Sunday January 5 2020

Analysts project a slowdown in the region’s economic growth to 6.1 per cent in 2020 from 6.3 per cent in 2019. PHOTO | FILE | NATION MEDIA GROUP

Analysts project a slowdown in the region’s economic growth to 6.1 per cent in 2020 from 6.3 per cent in 2019. PHOTO | FILE | NATION MEDIA GROUP 

The EastAfrican
By The EastAfrican
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East Africa’s economic landscape is replete with contradictions: While it is cited as being ahead in economic growth in sub-Saharan Africa with its GDP projected to expand by 6.1 per cent against a continental average of 3.6 per cent in 2020, the region is swimming in tough economic times.

Across the region, analysts caution that economic growth is largely superficial since it is being driven by public infrastructure investments as opposed to being private sector-driven.

“Rising debt servicing costs against a backdrop of sluggish revenue growth will limit governments’ capacity to stimulate economic activity and/or worsen fiscal balances, posing downside risks to investor sentiment,” said a Fitch Solutions report released in December.

Analysts at the Institute of Chartered Accountants in England and Wales (ICAEW) project a slowdown in the region’s economic growth to 6.1 per cent in 2020 from 6.3 per cent in 2019.

EAC countries are therefore facing another challenging year of balancing budgetary books amid the burdens of servicing public debts, failure to meet revenue targets driven by a slugging private sector, shedding of jobs, flattening FDIs and declining volumes of exports.

Across the region, over 40 per cent of revenues will be directed towards debt servicing at a time when the IMF is warning that debt across the region is gravitating towards unsustainable levels

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The new year finds the region saddled with debt to the tune of $100 billion, widening budget deficits and expanding current accounts, as governments undertake mega projects.

Kenya and Tanzania’s total public debts as at June 2019 stood at $58.1 billion and $22.5 billion respectively, while Uganda’s stock of public loans was $12 billion and Rwanda’s $5.4 billion.

Across the region, key sectors of the economy like agriculture, tourism, building and construction and transport are underperforming while manufacturing has slowed down and intraregional trade is on a decline precipitated by both tariff and non-tariff barriers among the EAC member states.

With traditional exports declining and imports receipts rising, putting pressure on the current account, remittances are emerging as the main source of foreign exchange.

In Tanzania, analysts at Fitch Solutions are forecasting a sluggish year for the economy, a situation that could be compounded by national elections in October.

In 2020, Tanzania’s economy is projected to grow at 5.3 per cent, way below a 10-year average of 6.3 per cent registered between 2007 and 2017 on the backdrop of weak investment, poor agricultural harvest and challenging global macroeconomic headwinds.

“Private consumption and government fiscal stimulus will be supportive of growth, but will be insufficient to prevent the economy performing below its potential over the coming quarters,” said Fitch.

It added that with FDIs declining, budget deficit is bound to increase to 3.7 per cent in the 2020/21 financial year from 3.5 per cent this year.

Despite the gloomy projections, Tanzania’s Minister for Finance and Planning Dr Phillip Mpango said the country has not exhausted its window for borrowing considering that debt ratios are below international thresholds.

“The ongoing debt assessment shows the country still stands a chance to continue borrowing from within and abroad to finance its development activities and pay off maturing loans using its internal and external revenue on time,” he said.

In Uganda, the government is already on the spot over plans to borrow $2 billion in 2020/21 financial year from external lenders to partly finance its $17 billion budget. This will be a slight decline from the $2.6 billion borrowed in this financial year.

The Budget Framework Paper shows that with revenues expected to increase marginally to $9.3 billion from $8.8 billion, borrowing will be the only option in plugging the deficit.

Kenyan taxpayers are bound to lose $217.2 million in a dam scandal that has hugely exposed the economy to corruption and wastage of public resources.

Despite the huge cost of corruption, Kenya is facing a monumental burden of servicing China’s debt for the standard gauge railways following the expiry of the five-year grace period.

ECONOMIC MALAISE

Loan repayments to China’s Exim Bank will jump from the $303.3 million paid in the year to June 2019 to $698.6 million in the current fiscal period, reflecting a 130 per cent increase.

Kenya’s Central Bank Governor Dr Patrick Njoroge is on record accusing the National Treasury of fudging revenue figures, forcing the country on a borrowing spree to plug a rising budget deficit. Speaking after the Monetary Policy Committee meeting in November, he blamed the economic malaise on a lack of commitment in fiscal consolidation.

“There is lack of a long-term strategy on how to manage the economy because governments are focused on implementing the budget with debt repayment being a major priority.

This compromises development funding,” said Ken Gichinga, chief economist at Mentoria Economics.

He, however, added that across the region, a proactive stance by central banks to contain inflation, stabilise currencies and guarantee a stable interest rates regime has saved the region from deeper economic problems.

In Kenya, that key sectors of the economy are struggling is evident with official data showing that economic growth decelerated to 5.1 per cent in the third quarter of 2019 compared with 6.4 per cent in the same period in 2018.

Only Rwanda, which over the past decade has been among the fastest growing economies, is expected to anchor growth in the region expanding at eight per cent from 7.8 per cent.

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