PREVIEW
Uganda’s and Tanzania's oil and gas plans offer little short-term help amid ballooning state deficits and public debts
As East Africa's economies began to emerge from the Covid-19 pandemic, the effects of the war in Ukraine on food supply and inflation have been a hammer blow to economic prospects and stability. Faced with more economic hardship, the region's six governments have set out plans to increase spending in their 2022/23 budgets.
Tanzania and Uganda were the only two countries in the region to keep to the traditional mid-June budget day this year, with Kenya's Treasury Secretary Ukur Yatani tabling his budget in April to give the National Assembly plenty of time to pass it ahead of August's presidential elections. Rwanda's Finance Minister Uzziel Ndagijimana followed in May.
The common theme of the 2022/23 budgets agreed by East African Community members is 'accelerating economic recovery and enhancing productive sectors for improved livelihoods'. In reality, securing food imports and agricultural inputs, as well as reacting to rising energy prices are now the priorities (Dispatches 1/6/22, Elections, Russia's wars and rocketing food prices drive up rates).
The combination of the high cost of living from increased food and fuel prices, rising debt, and imported inflation, is also weakening local currencies, with the Kenya shilling falling to a record low of 116 to the dollar.
Inflation is rising, prompting recent interest rate increases in Kenya, Tanzania and Uganda, though with commercial bank rates already prohibitively high for most businesses, this is unlikely to result in a major drop in lending. Inflation rates vary wildly from 4.4% in Tanzania to 37% in Ethiopia, though price increases are averaging around 6% across the region. 'The upward pressure on inflation is expected to dissipate over time. However, as a result of the real income decline, household consumption growth could slow and the spare capacity in the economy could persist until 2023/24 fiscal year,' the Bank of Uganda warned in a note.
The region's treasuries are limited in what they can do to mitigate the pain for consumers. Kenya and Tanzania have introduced fuel subsidies, and the World Bank has warned that Kenya's subsidies, which cost around $66 million per month, are hurting the nation's revenue recovery. In Uganda, President Yoweri Museveni insists that the government cannot afford subsidies, despite a series of recent opposition protests, led by Forum for Democratic Change (FDC) president Kizza Besigye, in response to the high cost of living.
Distress risk
In Kenya, an election year 'would be an inopportune moment to introduce measures that negatively impact taxpayers', remarked Deloitte's Fred Omondi, and the result is that budgetary discipline will take a back seat for now despite the fact that Kenya's debt burden has increased to 70% of GDP, from about 45% in the eight years of Uhuru Kenyatta's presidency, leaving the country at a growing risk of facing debt distress (AC Vol 63 No 8, Battling over the legacy).
The budget deficit is projected to fall to 6.2% of GDP in the year through June 2023, from 8.1% in 2021/22, though the prospect of likely supplementary budgets under the next president could throw these numbers out of the window. And while the growth rate is expected to decline, the figures remain strong – at 6% in 2022/23, compared with 7.6% in 2021/22, according to Kenya's official forecasts (AC Vol 62 No 13, Banking on a fast recovery).
The bulk of Kenya's additional spending has been allocated to education, energy, infrastructure and ICT and national security, under President Kenyatta's 'big four' programme.
However, that strong economic growth – though the World Bank has estimated growth will only reach 5.5% - won't curb a rising debt burden. The budget has a $7.5 billion funding gap, which Yatani plans to cover with more borrowing, around 70% of which will come from domestic sources and 30% from abroad. Meanwhile, 63% of projected 2022/23 ordinary revenues will be swallowed by debt repayments, a 21% increase.
The interest rates will also mean more expensive debt. Earlier this month, Yatani abandoned plans to issue a new Eurobond and instead plans to secure $1bn in bank loans, citing higher interest rates.
Rwanda's economy is also slowing down significantly and is forecast to grow by 6% in 2022 compared with 10.9% in 2021, though last year's recovery was particularly pronounced because of the country's fast recovery from the Covid-19 pandemic-induced recession. Finance Minister Ndagijimana's budget sets out spending increases of 5%.
Kenya's neighbours also fear that the August election could slow their economies. Analysts say that many investors are holding up investment decisions until after the polls, due to fears of unrest.
'If the election is not peaceful, it could disrupt Uganda's external trade flows, amplifying the effects of the commodity price disturbances,' said the Bank of Uganda.
Uganda's Finance Minister Matia Kasaija also set out plans to increase spending by more than 7%, as it tries to drive economic recovery. Kasaija told lawmakers that a larger than projected increase in budget and grant revenue would drive down the budget deficit to 5.4% of GDP, down from 7.3% of GDP in 2021-22. However, Uganda's total public debt stock stood at about $20bn in February 2022, a 16.3% increase on the previous year.
Tanzania's Finance Minister, Mwigulu Nchemba, meanwhile, will also struggle to meet his target of keeping the budget deficit below 3% of GDP, after proposing to increase spending plans by 9% and start a fuel price-stabilisation fund designed to cap prices. Nchemba also revised down this year's economic growth forecast to 4.7% from 5%.
Difficulties in obtaining fertilisers and other farming inputs mean that Tanzania's agriculture and industry sectors are forecaste to grow by 9% and 8%, a decline from 11% and 15% in 2021 respectively. That has prompted Nchemba to impose increases to the fees for exporting fertilisers in order to protect domestic agriculture.
The Tanzanian minister proposed the introduction of a new income tax rate of 3.5% on turnover between $4,700 and $47,000 and plans to impose a 2% digital tax on global tech giants offering services in the East African country. Although both measures are symbolic of a trend to broaden the tax base, they are unlikely to result in significant new revenue any time soon.
Deloitte says that, with high spending on infrastructure, Tanzania 'will have a challenge mitigating the increased cost of living for its citizens.'
Treasuries in East Africa, as is the case across most of the continent, have little wiggle room. Other than offering small relief for fuel and food prices, they can do little beyond waiting for the storm to end.
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