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Vol 60 No 13

Published 28th June 2019

Singing from the same spreadsheet

Despite growing fears about rising debt levels, the region's finance ministers have unveiled a series of expansionary budgets

The four major players in the East African Community completed the annual ritual of unveiling their national spending plans on 13 June. 'Transforming lives through industrialisation and job creation for shared prosperity' was the theme for the budgets of Kenya, Rwanda, Tanzania and Uganda.

Copyright © Africa Confidential 2019

The headline growth forecasts paint an equally optimistic picture: East Africa is the fastest growing sub-region in Africa, with an estimated growth rate of 5.9% in 2018 up from 5.3% in 2017, largely on the back of strong performances by the agricultural sector in Kenya, Uganda and Rwanda. The African Development Bank reckons growth in the region will hit 6.1% in 2019 – compared to 4% across the continent – driven by manufacturing sector growth (AC Vol 60 No 3, Glitches in the growth).

All four governments continued to follow a recent pattern of presenting expansionary budgets with ambitious revenue targets that, say most local economists, are almost certain be missed. The result is likely to be more borrowing and ever-rising concerns about debt distress. That has been the case for the previous five years, with Kenya, Uganda, Rwanda and Tanzania all going for a mix of infrastructure investment with protectionism to promote domestic industrialisation (AC Vol 55 No 14, Banking on big infrastructure & Vol 57 No 13, A new deal in the East).

Nairobi's budget is actually slightly smaller – down to $27.5bn from $30bn in the 2018/19 financial year, while Uganda has increased its spending by around 20%*. Rwanda also unveiled a hefty budget increase to $3.16bn in 2019/20 from $2.87bn.

None of these are pre-election giveaway budgets motivated by short-term political gain. With the exception of Tanzania's President John Magufuli, who faces elections next year, none of the governments are going to the polls any time soon. But they follow the traditional pattern of government spending in the 'good times' – few tax hikes other than higher 'sin levies' on alcohol, gambling and tobacco (with the exception of a capital gains tax increase in Kenya, and the Tanzanian government's planned 25% tax on imported wigs and hair extensions), and a focus on more efficient tax collection to raise revenues.

Legacy hunt
But while spending is slightly down in Kenya, Treasury Cabinet Secretary Henry Rotich's grandly titled 'Creating Jobs, Transforming Lives – Harnessing the Big Four Plan' is about legacy rather than concerns about austerity. Out of the $4.5bn allocated to President Uhuru Kenyatta's 'Big Four' agenda, $3.3bn has been ear-marked for 'critical infrastructure'.

Locally made and grown products will be given priority in public procurement, while government authorities agencies will be required to provide exclusive preference in procurement of motor vehicles and motorcycles to domestic assembly plants.

In Uganda, Finance minister Matia Kasaija's Ush40.487trn ($10.8bn) budget focuses on funding increased spending on military, public administration and infrastructure spending.

East Africa's third-largest economy plans to borrow more from local and foreign sources with the Uganda Revenue Authority expected to increase its tax take from around $4.3bn to $4.85bn.

Kenya, the region's biggest spender, unveiled a $27.5bn budget, that involves plans to borrow $5.9bn to cover a 5.7% deficit. A hefty hike on capital gains tax from 5% to 12.5% is the only major tax rise in the budget, although the government expects the Kenya Revenue Authority to continue improve its efficiency in collecting taxes – the tax take has doubled under the Kenyatta government. Rotich argues that public debt is within sustainable levels, and that the burden is projected to decline – he has promised to cut the budget deficit to 3% by 2022/23, though most analysts are sceptical that this target will be met.

'We shall continue to remain on the planned path of reducing the fiscal deficit in the medium term in order to create more fiscal space and reduce the public debt,' he said.

But that claim doesn't sit comfortably with the fact that it has increased from 39.9% of GDP in 2011 to the present record high of 59.2%, and although Kenya's budget deficit is on a downward trend, expected to drop to 5.6% of GDP from 6.8% in 2018/19 and 7.4% in 2017/18, 60% of revenue is currently being spent on servicing debt.

The Parliamentary Budget Office has warned that Kenya is slipping into debt distress unless the country adopts careful management strategies. 'Debt-sustainability concerns in the medium term arising from a risk of debt distress have been raised from low to moderate,' said the PBO.

Yet while the government's appetite for new debt is causing plenty of consternation among domestic analysts, there is little sign yet that financial markets are overly perturbed by Kenya's economic credibility.

Kenyatta's government recently agreed a $750m loan from the World Bank which followed an oversubscribed $2.1bn Eurobond issue in May, both to contribute to Big Four spending.

The government is also set to make peace with the International Monetary Fund after signing a deal with selected banks to release close to $10bn in loans to the private sector that appears to have persuaded the Fund to renew its $1.5bn standby credit facility.

In Rwanda, where Finance Minister Uzziel Ndagijimana unveiled a $3.16bn budget, the government has had to borrow aggressively in recent years to fund growth. Rwanda recorded the highest GDP growth rate in the region at 8.6%, and its budget assumes real GDP growth of 7.8% for 2019/20, in line with the recent forecasts from the African Development Bank and the IMF.Ndagijimana's new budget represents an 11% hike from the $2.7bn for the 2018/19 fiscal year.

Although the IMF's analysis suggests that Rwanda remains a low debt-risk economy – its debt burden of 32.9% of GDP is one of the lowest in sub-Saharan Africa – concessional loans stood at 63% of the debt stock at the end of 2018. Even so, Ndagijimana points to a Debt Sustainability Analysis conducted in April which confirmed the sustainability of his country's debt in the medium and long term.

Tanzania is the only EAC state that plans to keep its budget deficit below 3% in 2019/20, with President Magufuli pushing a non-donor-dependency programme, perhaps mindful of the threats of aid suspension from a handful of European countries and the European Union (AC Vol 60 No 3, From bullet to ballot).

Finance Minister Philip Mpango's $14.3bn budget plans to grow the economy at 7.1% this year, largely on the back of infrastructure investment in the Standard Gauge Railway and Stiegler's Gorge hydropower project, but that also means projected national debt will rise in the coming fiscal year.

Intra-EAC trade is the highest among all regional economic communities in Africa – above 20% of exports and significantly higher than the continental average. That, in turn, makes the region likely to be one of the main beneficiaries from the recently ratified African Continental Free Trade Area, if and when it becomes reality.

But there are headwinds on regional trade (AC Vol 60 No 7, Birthday blues). The escalating diplomatic row between Uganda's President Yoweri Museveni and Rwandan counterpart Paul Kagame is almost certain to weigh heavily on Rwanda's and indeed the region's growth in 2019, even though both countries have sought to offset the damage by improving trade relations with other regional partners (AC Vol 60 No 6, Sibling rivalry turns ugly). 

Burundi has also joined in the spending, proposing a 7.2% increase from the 2018/19 budget of $676m to $725m, although, in his case, Finance Minister Domitien Ndihokubwayo plans to fund at least 88% of the budget from domestic revenues.

While the World Bank has been relatively sanguine about Kenya and Tanzania ramping up infrastructure investment on the grounds that it was long overdue, the continued, and, in many cases, growing appetite of foreign investors to push their money into the region is another reason for leaders' optimism.

The latest World Investment Report 2019 by the United Nations Conference on Trade and Development (UNCTAD) shows that despite flat growth in FDI in the wider East African region, which remained largely unchanged at $9bn due to contractions in Ethiopia, the East African Community partner states recorded impressive growth.

In Uganda, inflows reached a historic high, increasing by 67% to $1.3bn, while Kenya posted 27% growth to $1.6bn and Tanzania an 18% increase to inflows to $1.1bn.

Aside from the yet-to-be imposed discipline of the financial markets, it is hard to see what other tools can rein in growing debts and deficits. The East African fiscal convergence framework requires EAC members to keep public debt below 50% of their GDP in Net Present Value Terms and maintain reserves of at least four and a half months of imports as precondition for entry into a planned monetary union by 2024, modelled on the European Union's Stability and Growth Pact. The EU's fiscal rules were happily flouted by many of its member states for over a decade until the double dip recession caused by the 2007-08 financial crash prompted a sovereign debt crisis. East Africa's leaders will hope that is not a portent for the future but it serves as a reminder of the economic pain that comes when the good times suddenly come to an end.

* Budget totals are in US dollars to enable comparison.

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