East Africa’s economic recovery prospects facing headwinds

East African countries face more hurdles in efforts to recover from the effects of the Covid-19 pandemic, signalling hard times for households and businesses.

Rising public debt, mounting inflationary pressures, falling revenue collections, weakening currencies, and the Russian invasion of Ukraine have combined to slow down the pace of economic recovery.

East Africa’s situation is compounded by rising political temperatures in Kenya ahead of the August 9 General Election, as neighbouring countries fear possible disruption of the supply chain on the Northern Corridor linking the landlocked Great Lakes Region with the seaport of Mombasa.

“If the election is not peaceful, it could disrupt Uganda’s external trade flows, amplifying the effects of the commodity price disturbances,” says Bank of Uganda (BoU).

According to the Uganda central bank, private sector credit growth remains weak and below historical trends despite the full reopening of the economy in January as rising commodity prices continue to dent consumer0s’ perception of the economy and its near-term outlook.

“Although inflation remains moderate, it is projected to rise sharply. The increase is largely attributed to higher energy and other tradable goods prices,” BoU says in its monetary Policy statement for April.

Public debt yoke

“The upward pressure on inflation is expected to dissipate over time. However, as a result of the real income decline, household consumption growth could slow and the spare capacity in the economy could persist until 2023/2024 fiscal year.”

Uganda’s provisional total public debt stock stood at Ush74.43 trillion ($20 billion) in February 2022, a 16.3 percent increase from the same period in 2021.

Kenya is seeing fragile recovery, largely due to the high cost of living from increased food and fuel prices, high debt, corruption by state officers, election jitters and the weakening shilling, which has fallen to a record low of Ksh116 to the dollar.

Its national debt stood at Ksh8.4 trillion ($72.41 billion) in March 2022.

According to a note by the Kenya Bankers Association’s Centre for Research on Financial Markets and Policy, Kenya’s strong economic recovery registered in 2021 risks slowing down in 2022 due to unfavourable weather, higher oil prices and depressed business activity associated with periods of electioneering.

Downward spiral

“Upward inflationary pressure has continued to build up on account of rising oil and food prices, as well as the direct impact of a weaker currency via imported inflation. The three forces driving inflation continue to underpin expectations of higher inflation in the near term, strong enough not to be ignored.”

The elevated credit risk, coupled with the rising inflationary outcomes and expectations, implies that credit growth is at risk of being constrained further while fiscal consolidation may not be realisable with potential slowdown in economic activity amidst government expenditure pressures.

Central Bank’s Monetary Policy Committee is expected to meet on May 30, 2022, to review the economic developments and set an appropriate policy lending rate to shield the economy from a possible downward spiral.

“The external sector imbalances are projected to worsen, exposing the economy’s vulnerability to global market developments and the policy measures taken by advanced economies to raise interest rates,” says the note.

Kenya’s shilling’s weakening has been exacerbated by the excess demand for the dollar anchored majorly on the recovery of economic activity that has meant more imports, rising fuel import bill, and net sell-offs at the stockmarket, amid dwindling supply of foreign exchange as exports remained poor.

Kenya Association of Manufacturers and cereal millers have concerns about the biting shortage of maize and wheat, arguing that if unchecked, it will lead to a food crisis, further pushing up the prices of these commodities and worsening inflation.

In Tanzania, fuel prices have been on an upward trend since June 2020, mainly associated with the increase in oil prices in the world market, while private sector credit was strong, reaching an average growth of 11.8 percent in the quarter ending March 2022, compared with 2.5 percent in the same period in 2021, according to the Bank of Tanzania (BoT).

In Rwanda, the economy grew by 10.9 percent in 2021 after a contraction of 3.4 percent in 2020, helped by sizable fiscal and monetary policy support, easing Covid-19 containment measures, improving global and regional economies as well as good weather conditions.