East African finance ministers are walking a tightrope as they try to fix economies ruined by the prolonged effects of the Covid-19 pandemic and repair national balance sheets saddled with huge debts, shrinking revenue sources and increasing expenditure needs.

As the ministers gear up to table the 2021/2022 fiscal year budgets in June, they must come up with ways to fund economic recovery plans without loading more taxes on an already burdened citizenry, or taking up additional debt. Debt servicing obligations have become a nightmare for regional economies, which have seen significant portions of tax revenues used in paying interest on loans rather than fund government operations and development projects.

Debt Distress

According to the Bank of Uganda (BoU), the increasing public debt calls for adjustments in fiscal policies through higher taxes, lower expenditure or both in the coming years, and this could limit demand. BoU notes that the new wave of Covid-19; slow uptake of the vaccine; an increase in non-performing loans as credit relief measures are lifted, and unpredictable weather patterns could impact the country’s growth projections for the 2021/2022 fiscal year. Economists, policymakers and civil society organisations argue that while borrowing in itself is not bad if the resources are channelled to productive sectors of the economy, misuse of the borrowed cash through wastage and corruption risk pushing countries into debt overhang.

“The use of the money is what we need to concentrate on. I’m in agreement with everyone that we need more prudent management of public finances,” said Amos Kimunya, a former Kenyan finance minister and Majority leader in the country’s National Assembly.

The risk of debt distress remains high in Kenya. Public debt stood at Ksh7.28 trillion ($68.03 billion) in December 2020, with the servicing of the debt stock increasing to Ksh850 billion ($7.94 billion) in the 2018/2019 fiscal year, from Ksh392 billion ($3.66 billion) in the 2014/2015 fiscal year.

Phyllis Wakiaga, CEO of the Kenya Association of Manufacturers, said that borrowing to finance infrastructure is not sustainable for the economy.

“We are borrowing to pay outstanding loans, which highlights the need to have a discussion on the sustainable debt threshold. Long-term loans run the risk of higher interest charges,” she said.

Kenya’ Treasury Cabinet Secretary Ukur Yatani announced a record Ksh3.63 trillion ($33.92 billion) budget for the 2021/2022 fiscal year, with a focus on rebuilding an economy battered by Covid-19 containment measures, including lockdowns and restriction of movement, which have left key sectors such as tourism, hospitality and industry on their knees.

The funds will also be directed to the implementation of President Uhuru Kenyatta’s legacy projects branded the Big Four — universal healthcare coverage, affordable housing, manufacturing and food security.

According to Mr Yatani, the $33.92 billion budget is aimed at stimulating economic recovery while also responding to the challenges of the Covid-19 pandemic. “In preparing the estimates, we have been alive to the challenges of the pandemic, while ensuring that we continue on a steady path of economic recovery by investing Ksh26.6 billion ($248.59 million) on the post-Covid-19 Economic Stimulus Programme and Ksh135.3 billion ($1.26 billion) on the President’s Big Four Agenda,” he said.

In Tanzania, the government has signalled its intention to continue pursuing several ambitious development projects initiated by the late president John Magufuli. According to the draft budget estimates tabled by Finance Minister Mwigulu Nchemba, the budget will rise to Tsh36.26 trillion ($15.63 billion) in the 2021/2022 financial year, from Tsh34.88 trillion ($14.98 billion) in 2020/2021. About 72 percent of the revenues is expected from internal sources.

The expanded budget is expected to help repay outstanding public debt. Tanzania’s stock of public debt stood at $31.36 billion in March, comprising $24.42 billion and $6.94 billion of external and domestic debts respectively, according to the Bank of Tanzania’s latest Monthly Economic Review.

The 2021/2022 financial year will also be the first year for the implementation of the Five-Year Development Plan 3 dubbed Building a Competitive and Industrial Economy for Human Development. It is estimated that out of the $15.63 billion budget, domestic tax and non-tax revenues will account for Tsh26.03 trillion ($11.22 billion) and the remaining Tsh4.99 trillion ($2.15 billion) will be obtained through loans from the domestic market.

In Rwanda, the National Treasury has increased its budget for the 2021/2022 fiscal year by 10 percent to Rwf3.8 trillion ($3.82 billion), of which 16 percent will be funded by donors and 84 percent through taxes and borrowing.

“We admit that the debt levels have gone up... we have not yet reached debt distress level,” said Richard Tushabe, State Ministry in charge of the National Treasury.

Public debt rise

The debt level climbed by 13 percent last year due to borrowing aimed at combating Covid-19. The country’s total public debt rose to 71 percent of GDP at end of 2020 and is seen reaching 79.7 percent at the end of this year.

A copy of the draft budget seen by Reuters shows that “the main risk associated with Rwanda’s debt portfolio is the approaching repayment of the 2023 Eurobond of $400 million.”

In Uganda, the stock of public debt stood at Ush65.97 trillion ($18.49 billion) in January 2021, representing an increase of 18.6 percent from June 2020, mainly due to a Ush5.76 trillion ($1.61 billion) increase in external debt largely attributed to the disbursements from the multilateral and bilateral creditors largely to finance Covid-19 mitigating measures, according to the BoU’s Quarterly state of the economy report for March.

According to the 2020 Debt Sustainability Assessment, Uganda’s public debt is projected to increase in the medium term on account of the scaled-up borrowing to finance key infrastructure projects, especially in the transport and oil and gas sectors. Debt servicing as a share of tax revenue is projected to average about 30 percent between 2021 and 2025. The report said fiscal operations have been constrained by revenue shortfalls and slow execution of infrastructural projects.

Uganda’s domestic revenue was below the target in the first seven months of the 2020/2021 fiscal year. Public debt is expected to rise to 39.3 percent of GDP in financial year 2020/2021, peaking at 42.9 percent in 2022/2023.

Report by James Anyanzwa, Beatrice Materu, Mohamed Issa and Reuters