East Africans tighten belts as states cut spending, raise taxes

East Africans are bracing for tightening of belts as their broke governments cut spending and raise taxes amid a funding squeeze linked to higher levels of public debt and low domestic tax revenues.

The drastic spending cuts and new tax measures are expected to be announced in the 2023/24 financial year beginning in June, marking the beginning of the normalisation of fiscal policies as governments scale down on Covid-19 support measures including tax breaks as well as further tightening on monetary policy to address inflation.

East African governments are already choking on debt, but they will have to institute new measures to reduce debt or fiscal consolidation to reduce deficits, measures which experts warn will stifle growth.

Read: The Africa we want: A roadmap out of poly-crises for policy makers

The International Monetary Fund African Department Director Abebe Aemro Selassie says the region’s most pressing economic problem right now is the funding squeeze due to multiple shocks including loss of external market access, capital flight and the adverse effects of Russia’s invasion of Ukraine, particularly on food and fuel prices.

Funding alternatives

This is in addition to continued decline in official development assistance and much lower flows from China and other new sources of financing. The domestic cost of funding has also gone up, limiting recourse to that alternative.

With insufficient funding, there is concern that governments will be less able to protect their most vulnerable and be forced to divert resources from critical development sectors such as health, education and infrastructure, curtailing the region’s growth prospects.

“We are seeing a big funding squeeze, it is going to have an impact on governments’ ability to continue to invest in health and education…the dollar has strengthened against most currencies and again, that’s another source of pressure,” Mr Abebe told The EastAfrican.

Oxfam data shows that from 2022 to 2026, nine East African countries plan to reduce annual public spending by $4.7 billion.

 “This will stop them from combating the increase in poverty and inequality, which resulted from Covid-19. Not implementing these cuts would allow them to quadruple health spending from now until 2026,” Oxfam said.

Debt-to-GDP ratio

The challenge facing the region’s economic managers is how to introduce austerity measures without facing pressure and resistance from the public, as inflation and the cost of the living continue to bite.

For one, politicians may be hesitant to support tax increase for fear of losing support from their constituents, even if they are necessary for the long-term health of the economy and the sustainability of government finances.

There is also concern that tax increase could impact the economies, reducing investment and job creation and leading to a slowdown in growth.

Read: Debt, inflation weigh down on Kenya economy

Yet the region’s high debt levels remain largely unsustainable well above the IMF’s recommended debt-to-GDP ratio of 50 percent for developing economies, such as the EAC members.

“Many countries will need debt relief and additional resources to deal with current debt challenges. Going forward, countries need to raise more revenue by curbing corruption and tax evasion. They will need to ensure there are higher standards of budget transparency and lending and borrowing agreements are made public,” Eric LeCompte, executive director of Jubilee USA Network, a non-profit financial reform outfit based in Washington DC told The EastAfrican.

He added that the IMF needs to expand current and new debt relief processes to all developing middle-income countries. Currently, many African countries that need new debt relief tools don’t qualify because they are considered wealthy.

“The G20’s Common Framework is one example of a process that can be expanded to include more countries. The IMF should also improve its debt sustainability frameworks so countries are better prepared when they face natural disasters or other economic shocks that can lead to a debt crisis,” LeCompte said.

Kenya and Burundi have the highest loan distress profiles relative to their EAC peers, with their debt-to-GDP ratios estimated at 62.3 percent and 66.5 percent respectively. Rwanda is also above an estimated 68 percent of GDP, but the IMF considers it to be a moderate risk.

Analysts say that the current debt crisis is partly due to the prolonged impact of the Covid-19 pandemic, which forced governments to increase spending drastically to contain the health and economic crisis.

What’s more is that corruption and poor public project planning linked to failure to track return on investment had already made it difficult for countries to pay back as, most huge public investments are loss-making, making it difficult to service their debt obligations.

“Many countries in the region were doing a lot to invest in all the right areas in infrastructure and health and education. But they did not do enough to capture the rate of return on all of these investments through the tax system. If you look at revenue levels, they didn’t go up as much as they needed,” said Abebe.

What makes it worse now is that governments across the region are having to use an increasing share of their budget to service growing debt, rather than invest in their populations.

Estimates by Oxfam show that even before Covid-19, debt servicing was reaching astronomical levels in East African countries with governments spending on average five times as much on debt repayment than on health. South Sudan was spending 28 times as much.

Read: Survival of the richest as inequity skyrockets

Separate figures by the United Nations Economic Commission for Africa (Uneca) show that over 10 percent of export revenues and primary income in the region is spent on debt repayments.

For example, Kenya spends 22.6 percent of its export revenue on debt repayment, followed by Burundi (14 percent), Rwanda (12.6 percent), Uganda (12.2 percent), and Tanzania (8.4 percent).