East Africa lacks policies to deal with debt crisis

China Roads and Bridges Construction Company engineers erect rail walls on the T-beams across the ocean before putting the Standard Guage Railway (SGR) line to connect the Island and Changamwe mainland, May 24, 2018. [Gideon Maundu/Standard]

Rating firm, Moody’s, has singled out weak policy, poor budget planning and its implementation as factors that have made it difficult for Kenya, Uganda and Tanzania address their ballooning debt portfolio.

The agency report indicates that East Africa region is faced with a debt crisis that is weighed down by institutional weakness that limits their ability to create policy solutions.

In a report on the state of debt in the region, Moodys say that only Rwanda has the institutional and policy framework that is stronger thus its government should be more effective in managing risks associated with a higher debt burden.

“Weaknesses related to public financial management and shortcomings in budget planning and implementation pose challenges in Kenya, Tanzania and Uganda,” the firm said.

The firm says that the region has to try and contain any further rise in debt burdens in the foreseeable future, and direct limited domestic resources toward productive use.

This, it says, will be important to how creditors view their ability to repay. Debt in the region has been driven by wider gaps in revenues generated by taxes and the expenditure plans, which is normally referred to as fiscal deficits.

Moodys says that fiscal deficits are largest in Kenya, where large infrastructure-related development spending combine with subdued revenue collection has seen rising cost of debt. “Kenya, which relies less on grant funding, has posted the widest fiscal deficits over the past five years, where they averaged close to 7 per cent of GDP,” Moodys said.

“Large fiscal deficits in Kenya also reflect a narrowing of the domestic revenue base as government revenue net of grants has declined as a percentage of GDP. Kenya is the only country of the four that has failed to grow its revenue net of grants,” the firm said.

The firm says that the erosion of fiscal metrics was a key reason behind its decision to downgrade the sovereign rating of the country to B2 in February. However, Kenya rarely spends all the money they set out in its budget, executing only 70 to 80 per cent of the budget.

The taxman collects 90 per cent of the targets and unlike other countries in the region, Kenya has less reliance on donor funding, hence greater control of spending.

The report shows that East Africa countries are either taking up so much debt or their debt levels are so expensive owing to its reliance on commercial loans that pose risk to its currency.

According to a Moody’s review, Kenya has the highest debt burden in the region, while Rwanda is seen the most rapid accumulation of debt.

“Kenya’s debt affordability has weakened, mostly driven by an increase in commercial external borrowing,” says Moodys in its report.

An increase in commercial borrowing in Tanzania has also increased. In Uganda, external debt remains mostly concessional, but its recourse to non-concessional domestic and external sources has increased.

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