East Africa: A looming debt crisis?

Date first published: 19/07/2018

Key sectors: all

Key risks: debt distress; frustration of process

East Africa is projected to be the fastest growing region within sub-Saharan Africa this year. Kenya, Uganda, Tanzania and Rwanda continue to integrate their economies with the aim of creating a single market and, eventually, a common currency.  To this end, a raft of headline multi-country infrastructure projects are underway, including railways, oil pipelines and power projects. Increasing debt burdens, however, are, to varying extents, threatening this progress and members of parliament, international financial institutions and ratings agencies have begun to sound alarm bells over the risk of a debt crisis.

On the face of it, only Kenya appears to currently be in an overly worrying position. Debt stands at around 56 per cent of GDP and is projected to rise above 60 per cent in the 2018/19 fiscal year. This is above the IMF’s benchmark 56 per cent threshold associated with heightened debt vulnerabilities and well above the 50 per cent East African Monetary Union convergence criterion. Interest repayments will consume 19 per cent of revenues this year, and a first Eurobond payment of US$750m is due in 2019. Nairobi currently has ample reserves, the equivalent of 5.9 months of import cover, which means it should meet its obligations in the short term, but much of these will go towards refinancing debt and the government is considering alternative financing options for some infrastructure projects while some could be scrapped altogether as it seeks longer term sustainability.

Comparatively, Tanzania, with debt standing at just below 40 per cent of GDP, is at a lower risk of debt distress. Dar es Salaam is also forecast to grow at a quicker pace than its northern neighbour, despite concerns over President John Magufuli’s at times business unfriendly policymaking. Rwanda’s debt is higher, at 49 per cent, but, positively, is not projected to rise in the coming years and has a comparatively better institutional framework and policy effectiveness record that will help it contain the risk of overspending and mismanagement, and in turn debt distress. Both in theory should be able to manage their debt burdens.

In Uganda some MPs have long sounded alarm bells over a rise in debt, which currently stands at 38 per cent of GDP. This is less than Kenya, Rwanda or Tanzania, but Uganda’s debt is forecast to rise quicker than other East African countries to 44 per cent by 2019 as it undertakes oil infrastructure projects. Major governance concerns, poor project implementation, as well as weak revenue collection – in February the government announced domestic borrowing will be 75 per cent higher than anticipated in the initial budget after shortfalls in revenue collection – mean that debt could rise even quicker, and higher than anticipated, with its debt-service-to-revenue ratio currently among the highest among low-income countries. Kampala has pinned its hopes on its nascent oil sector, but production dates have already been pushed back and corruption concerns remain.

There are also several trends that have and will continue to worsen debt profiles across the region.  There has been a notable shift away from concessional borrowing, particularly in Kenya, with Uganda and Tanzania increasingly following suit as they seek private creditors for rail and oil projects. The appreciation of the dollar is making debt servicing costs more expensive and higher global interest rates means it is becoming more expensive for countries to roll over debt. All countries also need to drastically improve revenue collection and policy effectiveness in order to prevent slippage and an unanticipated rise in debt.