East Africa Seeks $16 Billion of Debt to Spur Economies

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

East Africa’s largest economies plan to borrow at least $16 billion to fund an economic revival, while striving to ease their debt burdens after the coronavirus pandemic battered governments’ revenue.

Finance ministers in Kenya, Uganda and Tanzania will present their 2021-22 spending plans on Thursday, providing details on funding key projects, including building railways and ports, in the wake of heavy indebtedness. The three governments will contend with a combined budget shortfall of about $16.4 billion in the fiscal year. Kenya, East Africa’s largest economy, faces a gap of $8.8 billion equivalent to 7.7% of gross domestic product, which it plans to fill with external and domestic borrowing.

“Policy makers will this year need to lay bare their fiscal consolidation plans and address the elevated debt burdens,” Jacques Nel, head of Africa Macro at NKC African Economics, said in emailed responses to questions. “Developmental needs and projects already underway mean that there is little room to cut spending.”

The countries are betting on a strong economic recovery for a rebound in revenues that will help narrow fiscal deficits. The International Monetary Fund projects 2022 growth of 5.7% for Kenya, 5% for Uganda, 4.6% for Tanzania and 8.7% for Ethiopia.

Here’s what to expect when the finance ministers present their budget statements for the year starting July 1:

Kenya

President Uhuru Kenyatta’s administration is poised to borrow more to fund an 8.8% increase in spending to 3.66 trillion shillings ($33.9 billion). The added expenditure is fueled by Kenyatta’s need to continue investing in expressways, ports and railways as he nears the end of his second term in office next year.

Treasury Secretary Ukur Yatani asked lawmakers on Wednesday to approve a 4% increase in spending for year ending June 30, which is set to widen the budget gap.

The public debt-service costs will probably surge to a record 1.17 trillion shillings, consuming about two-thirds of domestic revenue, according to the parliamentary budget office. That exceeds the 660 billion shillings that Yatani proposes to spend on development projects.

Read more: Kenya 2021-22 Budget Gap Seen Narrowing to 7.7% of GDP vs 8.7%

Tanzania

The government has increased its budget by 4% to 36.3 trillion shillings ($15.7 billion) in Samia Suluhu Hassan’s first fiscal year as president. She has approached the IMF for a program to support her administration in mitigating the impact of the pandemic, and to implement a recovery plan.

Tanzania plans to borrow close to 10.2 trillion shillings, about half of which will come from external sources.

Hassan is preparing to procure vaccines for her people, begin delayed investments such as the $30 billion liquefied natural gas project led by Equinor ASA, and continue multi-billion programs including an oil-export pipeline with Uganda. Still, the government is optimistic of keeping its fiscal deficit below 3% of GDP.

Uganda

Uganda has reduced its planned expenditure by 2% to 44.7 trillion shillings ($12.6 billion), and intends to narrow the fiscal deficit to 6.4% of GDP from an estimated 9.7% in the year ending June 30. The government of Africa’s largest coffee exporter is in talks with the IMF for a $1 billion loan to boost its recovery plan.

Debt could approach 50% of GDP at the end of June, according to Moody’s Investors Service. “Persistently large fiscal deficits” lifted the government’s debt burden to about 40% of GDP in fiscal 2020 from 22% in 2013, Moody’s said in a statement.

Ethiopia

Planned expenditure for Africa’s second-most populous nation will grow by nearly a fifth to 561.7 billion birr ($13 billion) for the fiscal year starting July 8. The government is walking a tight rope between sustaining the fastest pace of economic growth in the region, and keeping a lid on debt.

Prime Minister Abiy Ahmed’s administration sold a telecommunications license to a Safaricom Plc-led consortium last month under a plan to liberalize the economy. Doing business in the country might, however, depend on the impact of U.S. sanctions against Ethiopia over its handling of the war in the northern Tigray region. The restrictions could also affect Ethiopia’s access to funding from the IMF and the World Bank, and probably complicate its intention to restructure some liabilities under the Group of 20 debt-relief initiative for poor nations.

Rwanda

The government has raised its annual budget by 10% to 3.81 trillion francs ($3.8 billion), and is also in talks with the IMF for a funding program. About a third of the budget will be funded from external sources.

The IMF concluded discussions with Rwanda on the fourth review of an ongoing Policy Coordination Instrument last month. The Fund projected Rwanda’s economy to grow at 5.1% this year, compared to a contraction of 3.4% in 2020.

“Most countries don’t have an option but to seek concessional borrowing in order to plug funding gaps,” said Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes Holdings. “In the short term, it will be all about stabilization.”

©2021 Bloomberg L.P.