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East African countries at high risk of debt distress again

EAC countries at risk of debt distress


“Those countries which borrowed on international bond markets the interest rate now is much higher than were borrowed in 2007.”-
Fanwell Kenala Bokosi the executive director of AFRODAD.

East African countries at high risk of debt distress again

The African Forum and Network on Debt and Development (AFRODAD) has warned East African countries of the eminent risk of debt distress if no action taken, this comes as the regional total debt stock shows an incremental trend from 2010 to 2017. The total debt stock from EAC countries excluding South Sudan was at $16, 404 billion in 2010 and increased to $45,086 billion in 2017.

“The risks are increasing much faster because we are close to the levels that were there before the HIPICs process because the needs are huge,” said Fanwell Kenala Bokosi the executive director of AFRODAD.

Public debt in the EAC region has been on an upward trajectory in the last decade. At the beginning of the current millennium, EAC countries had a very high debt and all countries except Kenya were classified as Heavily Indebted Poor Countries (HIPCs).

The Heavily Indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDRI) are comprehensive approaches to reducing the external public debt of qualifying countries. These countries must pursue macroeconomic and structural reform programs and have implemented a poverty reduction strategy.

Burundi, Rwanda, Tanzania and Uganda are the EAC countries that have received the full amount of debt relief for which they are eligible under HIPC and MDRI.

Following several rounds of debt forgiveness under the HIPC and Multilateral Debt Relief Initiative (MDRI), debt levels went down significantly from an average of 89.4% of GDP in 2002 to 26% in 2009. However there have been buildup of debt levels since the last rounds of debt forgiveness, with now the average debt estimated at 47.5% of GDP in 2018.

Among the factors causing the high risks of debt distress in East Africa are the huge demand in infrastructure projects and increased interest rates that were lower because of the recovery of the global financial market, and now are getting higher hence the repayment costs are expected to be higher.

“Those countries which borrowed on international bond markets the interest rate now is much higher than were borrowed in 2007,” said Mr. Bokosi.

Since 2010 the sub regional debt stock has been rising steeply mainly driven by Kenya and Tanzania who have been borrowing heavily from international and domestic markets.

In 2010 Burundi was indebted with $382 million and by 2017 the figures hiked to $425 million, Kenya was indebted with 6,989 billion (2010) and by 2017 the debt hiked to $22,275 billion. Rwanda was indebted $759 million in 2010 and by 2017 the country was indebted with 2,821 billion.

Tanzania’s debt in 2010 was at $5,601 billion increased to $12,659 billion by (2017) and Uganda debt was at $2,673 billion in 2010 to $6,906 billion in 2017.

The period between 2006 and 2009 saw declines in public debts across the EAC which was mainly driven by the relief, at the end of 1998 Tanzania external debt stood at $ 5 billion larger than Tanzania’s estimated GDP. By the end of 2000 the external debt had increased to $ 7.9 billion.

According to the AFRODAD lack of debt management capacity with weak debt management systems still persists in the East African member states.

“all the electoral and governance systems we currently have are a source of problems in terms of governance… as long as a person has been sponsored by foreign country that person will not rule in favor of the people but to please those who put him or her in government,” said Paul Musamali a law maker from Uganda.

The major drivers of public debts in East Africa includes the infrastructure deficits as most countries still have a huge infrastructure bottle necks, and the pressure to resolve these deficits push governments to borrow heavily as is the case in countries which still can access to concessional debt.

According to the AFRODAB Tanzania’s debt may become worse if the country’s parliament do not take charge in scrutinizing borrowing and enforce for transparency, currently there is no constitutional or legal requirements that gives powers to Tanzanian law makers on scrutinizing loans and transparency on loans contract.

Burundi and South Sudan are the two east African countries who are at a very high risk of debt distress, and declared incapable of paying the public debt and external debt. Uganda is the only country in East African Community with no risk of debt distress.

The increase in public debt in developing countries has raised concerns about public debt sustainability among policy makers, analysts and international financial institutions.

In Africa15 countries that are at high risk of debt distress which includes Burundi, Angola, Namibia, Ethiopia, Ghana, Sierra Leone, Gabon, Chad, Cameroon, Cape Verde, DRC, Djibouti, Mauritania, Zambia and Seychelles.

In order for the implementation of the EAC Monetary Union protocol, there is need for at least three partner states to achieve the convergence criteria, the EAMU ceiling on gross public debt is 50 percent of GDP in present value terms while the target on the fiscal deficit including grants is at 3 percent of GDP.

Most East African countries are still under convergence criteria threshold with the exception of Kenya. Which exceeded the 50% threshold in 2016 and has continued to be in the breach since then. Other member states are still below the threshold and can be able to comply with the debt criterion by the 2021 EAMU protocol deadline.

Despite the debt to GDP ratio being still low in some EAC countries the medium term debt sustainability analysis by the IMF showed that debt can quickly become unsustainable in the face of increased macro financial shocks.

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