EAC economies to end the year with alarming debt ratios- IMF

Burundi has joined a group of nine African countries at a high risk of debt distress while Kenya’s risk of default has increased to moderate from low.

This has seen the International Monetary Fund raise a red flag over the rate at which East African countries are accumulating debt.

The region’s economies have fallen into a financial fix as they attempt to fund persistent budget deficits and implement mega infrastructure projects against a backdrop of declining revenue collection.

As a result, the economies have resorted to massive borrowing, both from the domestic and international markets to quench their loan appetite, with fears that the increasing uptake of commercial loans could push most of them into debt distress.

“An over-reliance on commercial public debt exposes sovereign balance sheets to greater rollover and exchange rate risks. Also, an increase in debt from domestic creditors could crowd out financing for private sector projects,” said the IMF.

So far Kenya, Uganda and Tanzania are among the top 50 countries in the world that are highly indebted to China, according to US-based research firm Brookings Institution.

According to Brookings, countries are now shifting away from official multilateral creditors who come with stringent conditions to non-concessional, (commercial) debt with relatively higher interest rates and lower maturities.

But this trend is raising concerns around debt sustainability given the possibility of higher refinancing risks and foreign exchange risks.

The IMF, in its regional economic outlook report for sub-Saharan Africa released last week, says that surging public debt-to-GDP ratios for Burundi, Kenya, Rwanda, Tanzania and Uganda has left them highly exposed to greater rollover and exchange rate risks.

“With several countries facing increased foreign exchange and refinancing risks, it is critical to enhance debt management frameworks and transparency,” says IMF.

In May, Kenya went for a third Eurobond raising Ksh210 billion ($2.1 billion) to pay off other maturing debt obligations, finance development programmes and fund government operations.

In September, the country’s lawmakers also voted to increase the government’s borrowing ceiling to Ksh9 trillion ($90 billion) in the current 2019/2020 fiscal year, breaching the EAC debt ceiling on debt accumulation, which is set at 50 per cent of the GDP.

According to the IMF, EAC countries will close 2019 with very high debt-to-GDP ratios.

Burundi’s ratio will reach a high of 63.5 per cent from 58.4 per cent last year. It will be followed by Kenya and Rwanda whose debt-to-GDP ratios are expected to increase to 61.6 per cent and 49.1 per cent from 60.1 per cent and 40.7 per cent respectively during the same period.

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 EAC Monetary Union protocol, which was signed by the regional heads of states in November 2013, sets a 50 per cent debt-to-GDP ratio as the convergence criteria for the attainment of a single currency regime whose 2024 deadline is currently a subject of review by the member states.

Government debt as a per cent of GDP is an important economic parameter used by investors to gauge the country’s ability to make future payments on its financial obligation thereby affecting the country’s borrowing costs and government bond yields, according to economists at Trading Economics.

According to the IMF, further fiscal consolidation is needed over the medium term among regional economies to reduce debt vulnerabilities and create fiscal space for development needs.

Kenya and Uganda’s total debts as at June stood at $58.1 billion and $12 billion respectively. Tanzania’s public debt stood at $36.78 billion in the same period according to the Bank of Tanzania.

Finance and Planning minister Philip Mpango attributed the increase to new loans secured to fund infrastructure projects such as construction of the terminal III of the Julius Nyerere International Airport, power generation projects, and the construction of roads, bridges and the standard gauge railway line.

In Rwanda, increased public investment, real exchange rate depreciation and government guarantees have aided a surge in national debt according to the World Bank.

According to Brookings Institution, concerns about an impending debt crisis in Africa are rising alongside the region’s growing debt levels.

As of 2017, 19 African countries had exceeded the 60 per cent debt-to-GDP threshold set by the African Monetary Co-operation Programme for developing economies, while 24 countries had surpassed the 55 per cent debt-to-GDP ratio suggested by IMF.

According to the IMF, despite the stabilisation of debt dynamics, public debt vulnerabilities remain elevated in some African countries.