EAC heavyweight Ethiopia passes $13 billion budget

Debt levels may push East African economies into financial distress

East Africa’s growing debt levels could push regional economies into financial distress in the wake of volatile local currencies and falling export earnings, economists have warned. PHOTO | FILE

In Summary

  • The East African Community (EAC) partner states are borrowing heavily to finance infrastructure development but economists warn the region’s depreciating currencies would increase the burden of foreign debt repayment, a position which would be made worse by the declining export earnings.


East Africa’s growing debt levels could push regional economies into financial distress in the wake of volatile local currencies and falling export earnings, economists have warned.

The East African Community (EAC) partner states are borrowing heavily to finance infrastructure development but economists warn the region’s depreciating currencies would increase the burden of foreign debt repayment, a position which would be made worse by the declining export earnings.

Last year the United States Agency for International Development (USAid) warned that interest payments on debts had started squeezing East Africa’s national budgets and even resizing the economy by some economies such as Kenya and Uganda would not help.

In 2014, Kenya rebased its gross domestic product (GDP), growing the value of its annual output by about 25 per cent and reducing its debt to GDP ratio to 43.1 per cent from 52 per cent.

Uganda also did the same and eased its growing debt-to-GDP ratio from 39.8 per cent to 29.2 per cent.

READ: Mixed prospects for Uganda after rebasing economy

However, USAid through a report titled ‘Kenya Investment Climate 2015’ said rebasing of the economy is not a solution to the mounting debt levels whose repayment has started eating into development budgets, putting implementation of key infrastructure projects at risk.

According to the report, Kenya’s spending on public debt repayment was 70 per cent higher than its expenditure on development in the year 2013.

Unsustainable debt levels

“The trend of public debt in the region is worrying as the volume of exports fall. In fact the rate at which the level of public debt and budget deficits are growing is not matching with the rate of economic growth and sooner or later these debts will become unsustainable,” said Dr Joy Kiiru, a lecturer at the University of Nairobi’s School of Economics.

“The debts are supposed to grow the economy if the monies are invested wisely,” added Dr Kiiru.

According to the International Monetary Fund (IMF) the share of government debt as a proportion of GDP for the EAC member states increased between 2012 and 2016 with Kenya leading in terms of debt accumulation, followed by Tanzania, Rwanda and Uganda.

Kenya’s share of public debt as a proportion of GDP increased from 41.7 per cent in 2012 to 55.4 per cent in 2016, while that of Tanzania grew from 29.2 per cent to 42.4 per cent in the same period. Rwanda’s stood at 41.5 per cent from 20.1 per cent and Uganda expanded to 37.9 per cent from 24.2 per cent during the period under review.

On the other hand, Kenya’s exports as a percentage of GDP declined from 21.9 per cent in 2012 to 17.5 per cent in 2016, while Tanzania’s share of exports remained static at 20.9 per cent.

Rwanda and Uganda recorded an increase in the share of exports during the period growing from 14.1 per cent and 20 per cent to 16.5 per cent and 21.4 per cent respectively.

“Borrowing is not bad but what matters is what you do with the money you have borrowed. Some of the projects we have borrowed to develop were not well thought out and we are not certain of expected returns,” said Dr Emmanuel Manyasa, an economist and country manager of Uwezo Programme at Twaweza East Africa, a civil society organisation.

“We are also now in a position where we are borrowing to repay debts and this is worrying. We have fallen into a debt trap and need to have a policy shift,” he added.

Policies

In January this year, the United Nation's Economic Commission for Africa (Uneca) said countries which borrow from foreign financiers need to put in place policies which would allow them to pay their debts without compromising the macroeconomic conditions of the country.

Uganda’s gross public debt is estimated to be $8.81 billion by the end of this month (June 2016) of which $5.48 billion is external debt and $3.32 billion is domestic debt, according to the Budget Policy Statement for the 2016/2017 fiscal year.

“Our total public debt is equivalent to 34 per cent of total economic output. The Government will therefore borrow in future for highly productive fixed capital investments that can generate financial and economic returns to ensure debt sustainability,” said Matia Kasaija, Uganda’s Finance minister.

Mr Kasaija said the increase in public debt is due to financing priority infrastructure investments like the Karuma and Isimba hydropower projects, rehabilitation and expansion of Entebbe Airport and phase three of the National Transmission Backbone Project, meant to enhance productivity in all sectors of the economy.

READ: Ministers look outward to plug budget deficits

Uganda’s earnings from exports are far less than what is spent on imports resulting in a large trade imbalance with its trading partners.

In the year to March, Uganda’s imports were worth $5.64 billion compared to export receipts of just $2.66 billion.

The depreciation of the Ugandan shilling between June 2014 and June 2015 increased the stock of external debt from $4.3 billion to $4.4 billion in the same period.

In the beginning of the 2015/2016 fiscal year, Kenya had the highest amount of debt in the region at $24 billion, with more than 60 per cent of it being domestic, while Tanzania’s public debt peaked at $19.14 billion, with 80 per cent of this being foreign.

Uganda’s government debt stood at $7.6 billion with 60 per cent of it being external, while Rwanda’s was at 1.85 billion of which 76 per cent was foreign debt.

Kenya plans to spend an estimated $4.66 billion on public debt repayments in the next fiscal year (2016/2017), with an additional $6.89 billion earmarked for borrowing.

During the first nine months of the current fiscal year (2015/2016), Kenya used about 41 per cent of its tax revenues to pay off debts.

Debt levels may push East African economies into financial distress


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Very good Geza, now from the above report, what are Kenya's and Tanzania's external debts respectively?

Nitaijibu. 60% of Kenya's 24bn debt is domestic, leaving 40% as foreign owned, whereas 80% of Tanzania's 19.14bn debt is foreign owned. Hii foreign owned ndio external debt, of which ni $9.6bn for Kenya na $15.39bn for Tanzania. So who has the larger external debt?

Na Kisha hesabu ya huyo jamaa ni duni sana $24bn is not 55% of a $64bn economy, ni 37.5% of Kenya's gdp. Hata io 19.14bn ni 41% of Tanzania's gdp and not 42%
 
debt is debt and IMF puts it at 55% above all! As a matter of fact borrowing from internal strains the availability of affordable loans to locals as banks prefer to loan Government! a reason interest rates in Kenya are above 15%! Mind u this percentage excludes the recent loan kenya took from China!



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Money Markets

Long-awaited Sh60bn loan from China lifts forex reserves

Chinese railway workers and locals at a construction site. PHOTO | FILE

In Summary

  • Receipt of the cash resulted to a net spike in the country’s foreign currency reserves by Sh54.1 billion last week to a record Sh787 billion.
  • Disbursement of the loan also helped the Treasury lower its overdraft position at the Central Bank of Kenya (CBK), which was at Sh44.2 billion at the end of the financial year.
  • China’s loans to Kenya stood at $2.7 billion (Sh270 billion) last December with the new loan expected to push it to $2.8 billion (Sh280 billion), triple its position two years ago.


The National Treasury has received the long-awaited Sh60 billion syndicated loan from China, which will enable the government to pay outstanding amounts to contractors.

Receipt of the cash resulted to a net spike in the country’s foreign currency reserves by Sh54.1 billion last week to a record Sh787 billion ($7.87 billion), which is equivalent to 5.15 months of import cover.

“The syndicated loan was for the last financial year – it was one of the budget funding requirements,” said Finance secretary Henry Rotich in an interview. It means that contractors will be paid arrears.

The amount had been expected in the country in mid-April indicating the government had to look for temporary liquidity while delaying other payments as it awaited the cash.

Disbursement of the loan also helped the Treasury lower its overdraft position at the Central Bank of Kenya (CBK), which was at Sh44.2 billion at the end of the financial year.

“The overdraft figure should be lower than that [Sh44.2 billion]; we reduced it in the first week of the year,” said Mr Rotich.

The overdraft facility is short-term borrowing that is repayable within 12 months from the date of disbursement.

The decision to cross over to a new financial year with the overdraft further points to a cash crunch within government, which was attributed to revenue collections falling short of target.

Mr Rotich has kept the amount above the Sh20 billion mark during most of the year signalling increased reliance on the short-term funding.

The Treasury secretary noted the government had deposits exceeding Sh50 billion with the CBK leaving it in a net credit position.

Kenya had targeted to borrow a total of Sh154 billion in commercial loans in the last financial year. It borrowed an initial Sh75 billion last October, leaving it with room for an additional Sh80 billion in the second half of the year.


The syndicated debt from China means the Treasury fell short of its target by Sh20 billion even as questions persist over the country’s debt levels.

The Treasury has insisted the country’s debt levels are sustainable with the economy able to take in additional debt to the tune of 74 per cent of the gross domestic product (GDP) compared to the current 55 per cent.

International policy bodies have supported the Treasury position but raised queries on the use of the borrowed funds.

Portion of the country’s loans have been used to pay recurrent expenditures which do not create future cash flows to be used to repay the loan.

The syndicated loan from China cements its position as the key source of bilateral debt for the country. China’s loans to Kenya stood at $2.7 billion (Sh270 billion) last December with the new loan expected to push it to $2.8 billion (Sh280 billion), triple its position two years ago.

The government plans to borrow an additional Sh154 billion in commercial loans this financial year to help bridge the budget deficit.

The Treasury has been turning to international markets for financing for fear of crowding out the private sector by borrowing in the domestic market.

Long-awaited Sh60bn loan from China lifts forex reserves
 
Ethiopia is not in east Africa. .....she is at horn of Africa. ...damn. ..!!
 
At 1st ulikua unasema ati external debt ya Kenya hawezi kua ndogo kuliko ya Tanzania. Sahii you are just shifting goal posts. Halafu there is no way internal borrowing can be worse than external borrowing, no absolute way. The reason why during the great depression the ussr hardly felt the punch or even during the 2008 financial crisis, Japan which has the largest debt to gdp ratio did not suffer like the likes of Greece, Spain, Italy, etc is because of the fact that it's debt is largely owned by the Japanese hence the country was not exposed to the volatility of the world's financial sector.

About the Imf even claiming 24bn is 55% of Kenya's gdp, hata wewe umesema hapa. Mara nyingi eti they hardly capture the reality, io ni very simple mathematics bana.

That debt is inclusive of the 2.7bn Chinese debt, hence it being called the 2016 debt level of kenya
 
That is 2015 debt go through the post!
 
The 1st statement highlighted in red says 2016, all over the report the rhetoric is 2016 debt levels, nikama haukusoma ripoti yenyewe
 
Livale said:
The 1st statement highlighted in red says 2016, all over the report the rhetoric is 2016 debt levels, nikama haukusoma ripoti yenyewe
Click to expand...
If GOK can lie on the pipeline deal why do u hav to trust this blablah! The naked fact is Kenya's debt is over 60%
 
Geza Ulole said:
If GOK can lie on the pipeline deal why do u hav to trust this blablah! The naked fact is Kenya's debt is over 60%
Click to expand...
So now that the report does not support your perceived wishes as you had intended by posting it here it now is not credible?

Alafu ushatoa debt level yako ya over 60% sasa, sijui niache kufuata figures published by the government and echoed by the Imf nianze kufuata cooked up figures of an avid anti-kenyan in jamii forum because he appears to be more credible or what. I think I'll actually follow your figure. Kenya ina debt ya $24bn ambayo ni 60% ya its gdp, kwa hivyo gdp ya Kenya ni $40bn, ma Nyang'au Wana shida kubwa Sana aisee
 
Fitch downgrades Kenya currency over cost of international debt

The rating agency had warned of a possible downgrading of the local currency last year when it classified the country’s outlook as negative. PHOTO | FILE

In Summary

  • Fitch had warned of a possible downgrading of the local currency last year when it classified the country’s outlook as negative.
  • The rating agency noted that the country’s growing stock of foreign currency-denominated debt, 42 per cent of total public debt, makes the country vulnerable to exchange rate shocks.
  • The Treasury has defended its decision to accumulate international debt, arguing that it is cheaper and it ensures the government does not crowd out the productive private sector from the domestic credit market.


The Kenya shilling has been downgraded by international rating agency Fitch due to the county’s high exposure to exchange rate movements implying higher cost of borrowing from external markets.

The rating agency had warned of a possible downgrading of the local currency last year when it classified the country’s outlook as negative, a position that it has retained in the latest statement. The exposure is in the dollar-denominated debt Kenya holds or may raise in future.

“Fitch Ratings has affirmed Kenya’s long-term foreign currency IDR [Issuer Default Rating] at ‘B+’ and downgraded the long-term local currency IDR to ‘B+’ from ‘BB-’. The outlooks are negative,” said the firm in a statement.

Fitch noted that the country’s growing stock of foreign currency-denominated debt, 42 per cent of total public debt, makes the country vulnerable to exchange rate shocks.

Weakening of the shilling results in expansion of the dollar-denominated debt, thereby increasing the country’s interest obligations.

The National Treasury plans to borrow Sh450 billion from the external market this fiscal year of which Sh154 billion will be commercial, Sh209 billion from other governments and Sh88 billion from international organisations.

It also plans to borrow Sh225 billion from the domestic market to bridge its budget deficit.

The Treasury has defended its decision to accumulate international debt, arguing that it is cheaper and it ensures the government does not crowd out the productive private sector from the domestic credit market.

“Fitch expects Kenya’s general government interest payments to remain high in 2016-2017, at 14 per cent of revenues, which is significantly higher than the eight per cent of revenues for the ‘B’ median (Kenyan economic peers),” said the agency.

Treasury Cabinet Secretary Henry Rotich has announced plans to issue a second sovereign bond this year after a successful issue in 2014 that raised Sh275 billion.

Claims by Opposition politicians that the sovereign bond money was diverted from National Treasury had seen the value of the securities in the international market take a hit, signalling investors’ lower desire to lend to the country.

Mr Rotich has also disclosed intentions of a Samurai bond and a Sukuk bond to raise funds to sate the government’s appetite for cash to fund a ballooning national budget.

Fitch also cited rising political tensions as 2017 general elections near as cause of the negative outlook rating.

“Kenya’s general election is more than a year away, but there are already signs of heightened political tensions. These tensions have already resulted in several deaths,” said Fitch in reference to the weekly protests held by the opposition in May and June.

The Treasury and the Central Bank of Kenya have maintained that they have the ability to stabilise the shilling with accumulated foreign currency reserve and a standby precautionary loan from the International Monetary Fund (IMF).

The CBK is currently holding reserves equivalent to 5.15 times the country’s monthly import bill.

The Treasury has also secured two credit facilities from the IMF worth $1.5 billion (Sh150 billion) which the CBK can tap into to protect the shilling.

Fitch’s “B” ratings indicate that material default risk is present, but a limited margin of safety remains.

The Treasury insists the country’s debt levels are sustainable with the economy able to take in additional debt to the tune of 74 per cent of the gross domestic product (GDP) compared to the current 55 per cent.

International policy bodies have supported the Treasury’s position but raised queries on the use of the borrowed funds.

Back to The East African: Fitch downgrades Kenya currency over cost of international debt

Fitch downgrades Kenya currency over cost of international debt
 
Funny coming from a person whose country is not even rated
 
tuusan said:
Ethiopia is not in east Africa. .....she is at horn of Africa. ...damn. ..!!
Click to expand...
There are five regions of Africa, according to the African Union. North, South, East, West and Central. The entire horn of Africa is part of East Africa.
 
You look young but focused. If the economy on papers sounds good while the moody on the ground is like what you mentioned above, then these countries have to do self examination. Kudos guy for very interesting observation.
 
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