A rapid build-up of loans has pushed East African countries close to a debt crisis, putting at risk the region’s long-term economic stability.
Five East African Community member countries have together amassed more than $100 billion domestic and foreign debt, stretching their repayment budgets to the limit.
Kenya and Burundi have the highest loan distress profiles relative to their EAC peers, with their debt to gross domestic product (GDP) ratios projected to exceed 60 per cent this year.
The International Monetary Fund considers a debt to GDP ratio of 50 per cent to be within the tolerable limit for developing economies such as the EAC members.
“With several countries facing increased foreign exchange and refinancing risks, it is critical to enhance debt management frameworks and transparency,” warned the IMF in its latest Regional Economic Outlook report released a week ago.
Kenya’s debt-to-GDP ratio is on course to hit 61.6 per cent at the end of this year from 60.1 per cent last year, while Burundi’s ratio is expected to climb to a high of 63.5 per cent from 58.4 per in 2018.
Rwanda’s debt-to-GDP ratio is expected to touch 49.1 per cent from 40.7 per cent, taking Kigali closer to the 50 per cent threshold.
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 surging debt loads of EAC countries have stoked fears over future capacity to meet repayment obligations, with indications that the region is headed into a debt overhang prompted by increased appetite for quick and expensive loans.
Kenya’s Parliament this past week passed a vote increasing the public debt ceiling to Ksh9 trillion ($87 billion), which the Treasury said was necessary to give room for more borrowing to retire current, expensive debts.
With the region’s appetite for debt showing no signs of abating, the IMF and the World Bank have cautioned against the increased tendency to go for commercial loans that charge high interest rates as opposed to concessional loans.
It is also feared that the ballooning public debt will destroy the region’s economic credibility, making it difficult for member countries to access more loans for investments.
“If invested wisely, debt is likely to improve the well-being of citizens. What we are experiencing in the region is, however, not the case. Excessive debt in infrastructure, mostly transport, is not translating into improved well-being,” said Dr Scholastica Odhiambo, a senior lecturer at Kenya’s Maseno University’s School of Business.
“The amount the EA countries are paying to redeem the debts will result in capital flight at the expense of social services delivery. The debts are choking us, we might mortgage our countries in the near future.”
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.
Rwanda’s public debt tally was $5.4 billion by 2018, having risen from $4.8 billion the previous year, according to a World Bank report released in October.
Burundi’s national debt is currently estimated at $2.34 billion according to global business data provider Statistica. This adds up to $100.34 billion debt for the five EAC countries.
According to Uganda’s Ministry of Finance, the country’s debt sustainability over the medium-to-long term faces several risks relating to slow growth and diversification of exports, increased rate of debt accumulation, particularly on non-concessional terms and low domestic revenue collection.
“Although debt is sustainable over the medium to long term, there are a number of risks that still need to be carefully monitored to ensure prevalence of debt sustainability,” notes Uganda’s Debt Sustainability Analysis Report for the fiscal year 2017/2018.
So far Burundi has joined a club of nine African countries at a high risk of debt distress, while Kenya’s risk of defaulting is increasing according to the IMF.
Low revenue collection levels have seen Kenya spend more than half of its tax income on debt repayment, curtailing development projects.
According to the African Development Bank, domestic resource mobilisation has become a major challenge in East Africa with countries having tax revenues below 15 per cent of GDP finding it difficult to fund basic state functions.
“East Africa has multiple fragile states, so domestic resource mobilisation is far below what is needed to spur investment and growth. The low domestic saving and high necessary investment are leading to persistent fiscal deficits and growing indebtedness,” AfDB says in its Economic Outlook report for East Africa (2019).
According to the Kenya institute for public policy research and analysis the high level of public debt is mainly attributable to increased public investments that are financed from external borrowing, with expectations that that upon completion of the investment projects, strong economic growth will be realized thus reducing the debt ratio.
However, the EAC region’s debt service-to-total revenue ratios are coming under pressure as governments struggle to collect enough resources to service their debts while the window for concessional loans narrows.
In May this year, the IMF warned Uganda to go slow on its borrowing plans after it emerged that the country’s growing debt had already weakened its debt metrics putting taxpayers in a situation whereby one out of every five Ugandan shillings they remit to government goes towards repayment of debts.
According to the IMF some of Uganda’s projects implemented using borrowed funds may not generate the projected returns while interest payments on loans are rising.
In Kenya, the National Treasury expects the country’s public debt service to revenue ratio which stood at 30.5 per cent in 2018 to increase further to 33.4 per cent this year (2019) largely due to the failure by the taxman to meet its revenue collection targets.
In Tanzania, the government’s revenue collected as a proportion of gross domestic product (GDP) declined to 14.4 per cent in 2018, from 15.2 per cent in 2017, as per World Bank data.
The country heavily has relied on non-concessional loans to finance development projects due to declining resources from traditional creditors, Dar es Salaam’s share of concessional debt has declined from about 79.1 percent in 2012/13, to around 61.2 percent in June 2018 as government continues to borrow from non-concessional sources.
In Rwanda, the government’s debt service to revenue ratio in 2018 stood at 9.2 per cent and is expected to increase to 9.6 per cent in 2019 and 13.5 per cent in 2020 as the country shifts to non-concessional loans.
Although concessional loans still constitute the majority of public debt, Rwanda’s non-concessional loans have increased significantly in recent years.