East Africa's appetite for borrowing grows as repayments eat up bulk of revenues

Three East African governments will spend more than $14 billion on debt repayment in the 2018/19 financial year.

This is about half of their target revenue collections, raising questions about the states’ debt sustainability as their appetite for borrowing grows, fuelled by investment in big infrastructure projects and rising budget deficits.

Out of this amount, Kenya takes the biggest share — $8.6 billion — even as it seems bent on heading again to the international markets to borrow $3 billion.

Tanzania plans to spend $4.2 billion in paying off its national debt, while Uganda projects to spend around $1.3 billion on debt repayment in the new financial year.

But, in their budget statements, Tanzania, Uganda and Kenya acknowledge that their revenue authorities are struggling to meet the collection targets, underlining the potential burden of expensive short-term debt.

Debt repayment

Kenya expects a $2.59 billion growth in debt repayment against the current $6.01 billion.

In the 2018/19 budget estimates tabled in parliament, National Treasury Cabinet Secretary Henry Rotich said that the government is banking on the Kenya Revenue Authority (KRA) to collect $17.21 billion in the new financial year. The country’s new budget is $25.02 billion. A half of it will go into recurrent expenditure.

Kenya’s debt hit $45.2 billion as at the end of last year, from $41.91 billion as June 2017, and $34.33 billion as at end of June 2016.

Domestic debt repayments are expected to rise by more than 40 per cent to $5 billion in the next fiscal year, from $3.64 billion in the 2017/18 financial year, while external debt is forecast to rise to $3.6 billion from the current $2.37 billion.

But the government is enjoying rollover options that have seen creditors move ahead more than $10 billion in 2017/18.

This, however, puts pressure on the National Treasury as the World Bank, IMF and others continue to advise against bingeing on debt, warn of debt sustainability problems in the near future.

Credit rating

Last year, rating agency Moody’s raised the red flag over the country’s high loan repayments, which may force it to source new and expensive debt to ensure it does not default.

In the year to June 2017, the total cumulative debt service payments to external creditors amounted to $896.8 million, comprising $341.4 million (38.1 per cent) as principal and $555.3 million (61.9 per cent) as interest.

“A key area of focus in the rating agency’s liquidity analysis is the government’s increasingly large rollover of Treasury bills, which amounted to 9.4 per cent of GDP in June 2017, and the external debt payments to private creditors, including the $750 million Eurobond due in June 2019,” said Moody’s.

Kenya is expecting to roll over $1.89 billion in the year starting July 2018. It also says it plans to narrow its deficit for the 2018/19 financial year to $5.56 billion, from $6.19 billion this year.

Tanzania on the other hand has seen more than $2.199 billion rolled over as at the end of January.

With its $3 billion borrowing plan for the 2018/19, Kenya could be seeking a new Eurobond or syndicated loans to raise these funds on commercial terms. Nairobi successfully issued a $2 billion listing in February that was oversubscribed with orders running to $14 billion.

Tanzania plans to raise more than $3.96 billion from both domestic and foreign sources during the 2018/19 financial year.

In January, Bank of Uganda said in the 2018/19 financial year   debt repayments will eat up 16 per cent of the expected spending, the largest chunk of the budget.

Now, Kampala expects its revenues for the coming financial year to be $4.15 billion. The country’s national debt as at the end of last year stood at $11.69 billion.

It plans to spend $7.81 billion in the coming new financial year to finance its development and recurrent expenditures.

As at December 2017, Uganda’s external debt was $7.9 billion while the domestic debt amounted to $3.7 billion, which is an increase of 12.2 per cent and 4.2per cent, respectively, compared to June 2017.

In the 2018/19 financial year, the country will spend $ 236.5 million as external debt repayments, which it says is relatively high compared to past levels because of repayment of the PTA loan.

It will also be spending $725.12 million on interest payments. The country will be borrowing $251.2 million from the domestic market in the 2018/19 financial year.

“Interest payments constitute 9.8 per cent of total resources available for spending next financial year,” says the Finance Ministry in the 2018/19 budget estimates.

“We will continue to diversify the sources of financial resources over the medium term by maintaining a presence in the international capital markets. Non-concessional and commercial external borrowing will be limited to development projects with high financial and economic returns,” Mr Rotich said in the budget estimate summary.

Tenure bond

Kenya will be paying an annual interest of $149.3 million for the February Eurobond starting in the 2018/19 financial year. The country issued a 10-year tenure bond at the rate of 7.25 per cent and a 30-year bond at the rate of 8.25 per cent.

“We are more inclined to tap into the international markets as opposed to the domestic in order to finance this deficit. We are still favouring the international markets because of the concessional terms. We are very cautious on this and will direct the funds received to the development projects,” Mr Rotich said during last year’s budget presentation.

Tanzania is also expecting to collect $9.63 billion in revenues in the 2018/19, with $4.2 billion going into paying off its national debt that stood at $19.41 billion at the end of January 2018.

The country is also expecting its expenditure for the new financial year starting July to stand at $14.16 billion. The country’s revenue collection in the 2016/7 financial year reached $8.98 billion against a target $13.26 billion.

In January alone, Tanzania paid out $200 million in interests out of the outstanding $1.05 billion. Tanzania also saw $2.6 billion cumulative debt fall due during the year ending January 2018.

“The skyrocketing national debt is a source of concern. This rise in debt, if left unchecked, would go out of hand, plunging us into debt distress,” the country’s Controller and Auditor General Prof Mussa Assad had warned.

Concerns

Tanzania President John Magufuli brushed off the debt distress concerns saying that his country still had further room for borrowing. It has since approached World Bank and the African Development Bank (AfDB) to fund some of its multibillion dollar energy, aviation and railway projects.

“We still have room for further borrowing. What matters is the projects we are investing in these borrowed funds. The most important thing is how we will manage these borrowed funds to ensure that the projects they are invested in are able to repay themselves,” President Magufuli said.

Early this year Barclays Africa Group chief economist Jeff Gable, at the launch of Barclays Africa 2017/18 Macro-Economic Report warned that the country should expect debt repayments to take a larger share of its tax collections unless the private sector is involved in infrastructure investment.

“We are seeing countries spend $0.01 for every $0.03 they collect, which we find high. We must start seeing the private sector getting into more infrastructure investments under partnerships with governments so that we can start seeing these taxes go into other important areas, outside of debt repayments,” Mr Gable said.