East Africa: Mounting debt cost an arm and a leg

East African Community member states, like other sub-Saharan African countries, are facing mounting debts that deplete their meager resources to service and squeeze spending for important social services.

They are facing the spillovers from the war in Ukraine that halted their recovery from COVID-19 pandemic and the situation is made worse by aggressive monetary stance by developed countries that have led to a sharp spike of interest rates.

Developing countries now find it harder and expensive to secure capital and to service their debts denominated in the US dollars which is depleting government revenues. While that happen, they face depreciation of their local currencies against the US dollar and soaring inflation.

Africa’s debt is at its highest level in over a decade. In 2022, public debt in Africa reached USD 1.8 trillion. While this is a fraction of the overall outstanding debt of developing countries, Africa’s debt has increased by 183 per cent since 2010, a rate roughly four times higher than its growth rate of GDP in dollar terms.

Debt sustainability has been a critical issue in the Sub-Saharan Africa region as several countries are facing high risk of debt distress.

Tanzania

Tanzania’s public debt-to-GDP ratio has risen, but its risk of debt distress remains moderate. The public and publicly guaranteed (PPG) debt stock increased from 41.3 percent of GDP at end FY2020/21 to 43.8 percent at end-FY2021/22, largely due to the government’s efforts to strengthen the balance sheets of state-owned enterprises (SOEs).

The government converted about 4.8 tri/- (2.8 percent of GDP) on-lent debt of National Insurance Company to equity to strengthen its balance sheet.

However, the public debt-to-GDP ratio remains well anchored and relatively modest by the standards of neighboring countries. The latest IMF Global Debt Database (2022) reported that Tanzania’s neighboring countries have a higher debt-to-GDP ratio than Tanzania in 2021. For instance, Kenya’s government debt is 68 percent of GDP, Uganda’s is 52 percent, Rwanda’s is 67 percent.

Tanzania’s government is mobilizing domestic revenues and external resources to finance strategic projects including construction of Standard Gauge Railway(SGR) and Julius Nyerere Hydropower Power Plant (JNHPP).

Kenya

Kenya’s overall public debt has increased in recent years. Gross public debt increased from 44.4 percent of GDP at end-2015 to 67.4 percent of GDP at end of 2020

Public debt covers the debt of the central government, Social Security Fund, central bank debt taken on behalf of the government, and government guaranteed debt.

Economist Intelligence Unit says Kenya’s External borrowing grew briskly in 2013-20, as the government waded into the Eurobond market, drawn by competitive financing terms—with coupon rates in the 7‑8 per cent range—and borrowed US$5bn on commercial terms from China, in three tranches, to finance a new standard-gauge railway (SGR).

Uganda

The stock of public sector debt increased from USD 19.54 billion in FY 2020/21 to USD 20.99 billion in FY 2021/22, according to Debt Sustainability Analysis Report for 2021/22 Financial Year.

As a percentage of GDP, public sector debt rose from 47.0 percent in FY 2020/21 to 48.4 percent in FY 2021/22. External accounted for 29.6 percent of GDP, while domestic debt contributed 18.8 percent of GDP.

In Present Value (PV) terms, public sector debt amounted to 39.5 percent of GDP at end June 2022 up from 37.5 percent the year before.

The debt outlook is faced with moderate risk of debt distress, with the major vulnerabilities relating to the slow growth of exports and the increasing debt service burden.

Rwanda

The economy of Rwanda is officially reported as having a debt-to-GDP ratio of 61 per cent in 2022 down from 66.7 in 2021, according to IMF statistics.

The debt level has been driven by borrowing to meet the development needs envisaged in the National Strategy for Transformation (NST), but also from the robust COVID-19 response.

The development needs are supported by a long-planned comprehensive public investment strategy, including three large projects namely the construction of the Kigali Convention Centre (KCC), completed in 2016, the expansion of the national airline, RwandAir, that is now completed, and the construction of a new airport in the Bugesera district of eastern Rwanda.

Burundi

Burundi’s economy was still recovering from the 2015 political crisis when it was hurt by the COVID-19 pandemic

The debt-to-GDP ratio stood at 66.4 per cent as of 2022, with the IMF expecting it to remain stable over the forecast horizon (67.6 per cent in 2023 and 65.5 per cent the following year).

Nevertheless, there is a significant risk to debt sustainability due to the substantial stock of accumulated debt and deficits that are still projected to exist.

The Debt Sustainability Analysis (DSA) assesses Burundi at high risk of external and overall debt distress, unchanged from the July 2022 DSA.

DR Congo

Following a slowdown in real GDP growth induced by the COVID-19 pandemic, the Democratic Republic of Congo (DRC) posted a robust rebound (6.2 percent) in 2021. According to recent IMF forecasts, economic growth remained above 6 percent in 2022, with GDP growth projected to reach 6.3 percent in 2023.

DRC’s growth will thus remain above the average for sub-Saharan Africa (SSA), driven by the extractives sector and improved utilization of other natural resources.

The country’s overall public and publicly-guaranteed debt is also relatively low—at 24 percent of debt-to-GDP as at the end of 2022, it is less than half of the SSA average with only moderate risk of debt distress. High political and security risks, however, continue to dampen economic prospects and underscore the importance of governance reforms.

The ratio of public and publicly-guaranteed external debt (PPGE) to GDP dropped to 14.5 per cent in 2022 from 15.9 per cent in 2021, according to IMF data.

South Sudan

More than a decade after independence in 2011, South Sudan remains impacted by fragility, economic stagnation, and instability. Poverty is ubiquitous, exacerbated by conflict, displacement, and external shocks, the World Bank says in its economic overview of the country.

The economic outlook of the world’s youngest nation is clouded by production bottlenecks in the oil sector, with production dwindling in the face of limited new investment, highlighting the need to diversify the economy.

Furthermore, since South Sudan depends on neighboring Sudan as the only route to export oil to international markets, the conflict in Sudan poses acute downside risks to South Sudan’s macroeconomic stability amid limited fiscal resources and pressing humanitarian needs.

Fitch Solutions forecast South Sudan’s real GDP will expand by 2.4 per cent in 2023—a modest recovery given that the economy has been in recession since 2020.

Its total public debt was estimated at US$3,457 million (67 percent of GDP) as of December 2021.