Africa
African Development Bank
Andrew Mold
Donald Kaberuka
East Africa
Economic Commission
IMF
Uganda

East Africa’s increasing debt burden termed ‘unsustainable’

Analysts say countries in the region are at risk partly because of the increasing share of debt on commercial terms from non-traditional sources which has intensified borrowers’ exposure to market risks and created new challenges for debt resolution.

While of the five member countries, only Burundi is rated by the International Monetary Fund at a high risk of debt distress linked to the economic situation in the country after the political impasse, there is concern over the region’s ability to meet its debt obligations in the coming years.

Moreover, domestic tax revenues that are needed to plug the deficit remain relatively low with most local tax administrative authorities not only inefficient but also the capacity to raise domestic revenue limited by generous tax incentives to investors.

The IMF cautions that despite the region’s positive economic outlook, these risks increase the likelihood that fiscal adjustment and growth projections will fail to materialise, causing more countries to move into debt distress in the coming years.

While the majority of LIDCs remain at low or moderate risk of debt distress, the number of countries at high risk or in debt distress has increased from 13 in 2013 to 24 in January 2018.

Higher interest rates on commercially-priced debt has led to higher debt servicing costs and market risks, while the rising importance of non-traditional creditors poses new challenges for potential debt resolutions, including difficulties in ensuring the creditor coordination needed to produce comprehensive agreements acceptable to all major creditors, according to the IMF.

While Rwanda with a debt ratio to GDP of approximately 36.6 per cent has room for sustainable debt absorption, Uganda who debt has more than double in the last three years to over 50 per cent of GDP, Kenya and Tanzania — at approximately 56 per cent each — are on the brink of the levels recommended by multilateral institutions such as the IMF.

“When I look at East Africa, I am satisfied that the debt levels are still manageable as long as we invest well and grow the economies,” Mr Kaberuka said.

Andrew Mold, the officer-in-charge at the sub-regional office for Eastern Africa of the Economic Commission for Africa underscored the need for countries to keep an eye on their ability to finance the loans taken to construct the infrastructure as external macroeconomic circumstances can change quite rapidly, and that can undo the best laid plans.

“Africa has to build its infrastructure and access to capital markets, especially now when the markets are favourable. The concern for me is not the level of debt whether in relation to GDP or to revenues or to exports.

“It is more about how are we invest that money and whether we have capacity to manage this debt,” Dr Donald Kaberuka, the former president of African Development Bank said, while commenting on the debt situation in the region.

“The issue is what we will use the money for. Building railways, dams, investing in manufacturing is the right thing to do. But if you do not have debt management capability, even a small debt could be a problem,” he added.

Share this Post

by

Search