Recent headlines on the status of the East African Community’s (EAC) economy have decried the region’s debt profile as being unsustainable.
Backed by warnings from the International Monetary Fund (IMF) and the World Bank, the current narrative warns that the region is at risk of debt distress, having considered the debt profile of the region’s member states.
According to the IMF and the World Bank, the region’s average debt to Gross Domestic Product (GDP) ratio stood at 72.5% as at December 2021 and is on a growth trajectory that may result in adverse consequences if not appropriately tempered. This is further supported by data from the World Bank which places the overall risk of debt distress with respect to Kenya, South Sudan and Burundi at ‘high’, Democratic Republic of Congo at ‘in distress’ and Rwanda, Uganda and Tanzania at ‘moderate’.
While economists argue for the need to reign in the region’s public debt, policy makers contend the region’s debt remains sustainable factoring in the region’s anticipated economic growth in the medium term and long term. Indeed, the EAC region is forecast as being the fastest growth market in Africa with anticipated GDP growth of 5.2% for the year of income 2022.
Despite the region’s positive growth trajectory, it is evident that unsustainable increases to the EAC’s debt portfolio will only result in adverse economic consequences down the road.
While it is not in contest that aggressive infrastructure development projects being carried out through the region are capital intensive, thereby requiring public debt as an option for financing the same, it is cautioned that increased debt burdens not support by sufficient revenue raising measures may lead to potentially devastating short-term consequences. Risks associated with aggressive and unsustainable borrowing include constrained access to credit to private sector players, increased and punitive taxation and ultimately higher costs of living and doing business.
Perhaps a key consideration in managing the EAC’s debt profile is ensuring the bankability of debt funded projects within the country. Unfortunately, a significant portion of the region’s debt is targeted at either meeting recurrent expenditure costs, financing debt repayment obligations or financing big-ticket infrastructure projects with long term economic dividends.
This model prevents EAC member states from achieving the full economic potential of procured debt, in terms of return on investment, and further forces the states to commit a significant portion of government revenues on debt servicing, which ultimately squeezes development flexibility.
In addition, reliance on non-concessional debt models with relatively higher interest rates and lower maturity periods forces EAC governments to incur significant debt servicing obligations, and therefore carry higher refinancing risks in the event of lower-than-expected economic performance. As a solution to the latter, the EAC region should take advantage of innovative debt structuring models that link debt service to predefined macroeconomic variables, such as GDP growth and changes in commodity prices.
Karen Kandie