Covid-19 leaves EAC states in $2.3b debt hole in three months

East African countries have borrowed nearly $2.3 billion new loans in less than three months since reporting the first Covid-19 positive case, adding to the region’s mounting debts at a time of shrinking tax revenue.

The biggest chunk of the loans, taken to fund the region’s response to the Covid-19 pandemic and cushion the economies against disruptions caused by the virus, have come mainly from the International Monetary Fund (IMF). 

Kenya has borrowed the most out of the six East African Community (EAC) members, having signed an estimated $1.5 billion since reporting the first Covid-19 positive case on March 13.

Uganda has added $540.2 million to its debt load, while Rwanda has borrowed $223.65 million.

President John Magufuli has called for cancellation of Tanzania’s foreign debts, but Dar es Salaam together with Burundi and South Sudan is yet to announce any new loans during this period.

The estimated $2.26 billion new debt accumulated in less than three months adds to the more than $110 billion loans that EAC countries were holding at the onset of the pandemic.

“The impact of this new debt on the economies is going to be huge. Export earnings and diaspora remittances are in trouble. Local currencies are going to be under a lot of pressure and when they depreciate then our debts, which are largely denominated in foreign currency become very expensive. That is a big issue,” said Nikhil Hira, a director and tax consultant at Kenya-based law firm, Bowmans.

The EAC agreement on debt ratios provides that member countries’ loans should not exceed 50 per cent of their respective gross domestic product (GDP).

The growing public debt-to-GDP ratios have left Burundi, Kenya, Rwanda, Tanzania and Uganda highly exposed to greater rollover and exchange rate risks, according to IMF analysis.

Closing ranks

With export earnings in free fall and diaspora remittances drying up as a result of Covid-19, regional governments will find it difficult to repay and service their loans, which are now largely commercial and foreign denominated.

Declining revenue collections and tumbling foreign exchange reserves have also exerted increased pressure on local currencies, making foreign debt repayment more expensive.

Kenyan President Uhuru Kenyatta and his Ugandan and Rwandan counterparts, Yoweri Museveni and Paul Kagame respectively, have called for a foreign debt repayment holiday to save on finances that will be required for the reconstruction of economies already battered by the deadly disease.

The virus had infected more than 4.4 million globally and killed over 300,000 as at Friday.

Kenya has reported the highest number of infections among EAC members with 830 positive cases, Tanzania, which has not updated its numbers for two weeks now has 509 patients, Rwanda 286, South Sudan 235, Uganda 203 and Burundi 15. 

Nairobi has so far turned to the IMF ($739 million), the World Bank ($6.6 million), and the US government to finance its Covid-19 response. Nairobi has also raised about $20 million from private sector firms and individuals.

Rwanda has borrowed $109.4 million from the IMF to smoothen foreign exchange pressures, $14.25 million from the International Development Association (IDA) for its Covid-19 emergency response kitty and $100 million from the World Bank for budget support.

Kigali, which under a special IMF programme is set receive up to $11 million in debt service relief for a period of six months, is expected to also borrow from the African Development Bank in the coming weeks.

President Kagame in an April 27 briefing confirmed that Rwanda is seeking to postpone debt repayments for at least two years to deal with the economic shock wrought by the coronavirus pandemic.

The government he said, is negotiating with lenders to delay repayments and use the money to stimulate the economy.

“The idea is to retain the disbursements due and reinvest in reviving the economy and fighting the pandemic. Some lenders have been positive,” said the president, without providing details.

Significant vulnerability

Uganda has signed a $491.5 million loan from the IMF, $32 million from the European Union, a total of about $14.2 million from USAid and $2.1 million from Denmark for health emergency response and to cushion its economy.

The Bank of Uganda (BoU) says there’s a risk of the country sliding into debt repayment crisis due to mounting expenditure pressures linked to the Covid-19 pandemic against the backdrop of a weakening economy and falling revenue collections.

“While Uganda remains at low risk of debt distress, significant vulnerabilities are evident. The rise in debt levels has been accompanied by a shift in the cost of the debt, which has become much more expensive,” says BoU.

“More expensive debt means that governments has to spend more of its revenues repaying it.”

EA governments were already running record high debt levels before the Covid-19 outbreak, with Kenya’s total debt soaring above the Ksh6 trillion ($60 billion) mark (over 60 per cent of GDP) while Uganda’s provisional total public debt stock as at January 31 2020 stood at Ush49.75 trillion ($13 billion), which is about 36.5 per cent of GDP.