Specter of defaults haunts EA as Covid-19 cuts exports and taxes

By BERNA NAMATA

East African countries face higher risk of default as governments grapple with lower tax revenues, lower export earnings, as well as limited access to resources exterior.

The Covid-19 pandemic has amplified this vulnerability with debt-to-GDP ratios exceeding 50%.

The latest data from the United Nations Economic Commission for Africa (UNECA) shows that on average more than 10% of the region’s export earnings and primary incomes are spent on debt repayment.

For example, Kenya spends 22.6% of its export earnings on debt repayment, followed by Burundi (14%), Rwanda (12.6%), Uganda (12.2%) and Tanzania (8.4%).

Debt levels have been highlighted by recent developments in the region. In Uganda, parliament has approved a plan to borrow $600 million from the International Monetary Fund (IMF) to fill funding gaps in the current budget made worse by the effects of the coronavirus pandemic. MPs also approved a Finance Ministry proposal to borrow an additional Ush 3.2 trillion domestically.

In June, Uganda’s debt stood at around $13.11 billion, according to a Central Bank report, with 20% of all government revenue going towards debt repayment, up from 100% in June. a decade. The country’s public debt is expected to climb to 46% of GDP in the current fiscal year to June, from 43% the previous year.

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In Kenya, the National Treasury announced that the country’s debt had reached Ksh 7 trillion, or 69.2% of the country’s GDP.

“This, combined with committed undisbursed debt of Ksh 1.35 trillion, results in a public debt stock of Ksh 8.41 trillion against a ceiling of Sh 9 trillion, implying limited space for additional borrowing,” the Treasury said in a document released to chart the country. post-Covid-19 strategy.

In June, Tanzania said it had started negotiations with its creditors on debt relief to manage the fallout from the coronavirus pandemic, including delaying debt repayments that were due to start from May to December 2020. The IMF then approved debt relief worth $14.3 million and the government was pursuing a further $272 million in relief from the European Union.

Reduced economic activity has reduced government revenue in the region, but Zambia’s recent default on its debt obligations has raised concerns that more governments will struggle to pay and face penalties and interest rates. higher interest on subsequent borrowings.

Zambia has become the first African country to default on its debts in the wake of the pandemic after missing a $42.5 million coupon payment on its bonds in October and another this month. The country is currently negotiating with the IMF a loan of 1.3 billion dollars.

Rwandan Finance Minister Uzziel Ndagijimana told parliament last week that the country’s debt outlook has changed from weak to moderate due to the decline in expected economic performance after GDP fell 12% in the second quarter. to Frw 2.1 billion from Frw 2.3 billion. in the second quarter of 2019.

Kenya is servicing a $2.1 billion Eurobond while Rwanda is set to repay its $400 million Eurobond in 2023. Economic managers in East Africa are facing tough choices between meeting debt obligations and reviving economies strangled by a year of reduced activity, in part because the region had maintained relatively high debt levels before the pandemic, leaving little room to borrow .

The region entered the Covid-19 crisis with far less debt legroom in 2019 than it had at the start of the global financial crisis a decade ago, with most countries being at high risk of over-indebtedness or already in distress.

Debt relief negotiations remain unsuccessful, with many donor and lender countries preoccupied with containing the pandemic and stimulating their own economies. While countries have so far received debt service relief from multilateral creditors, including the IMF and the G-20 debt initiative, private and institutional creditors remain reluctant to postpone payments.

The IMF has not yet acceded to the request of developing countries to access its reserves under special drawing rights (SDRs). The Trump administration reportedly blocked the initiative because it would also benefit hostile regimes in China, Iran and Russia.

In April, the G-20 proposed the Debt Service Suspension Initiative (DSSI) which was initially available until December but has now been extended until June 2021. Under this initiative, only about $5 billion in debt service relief for poor countries has been pledged. , which, according to the experts, is insufficient.

Enter China

In June, Chinese President Xi Jinping pledged to cancel interest-free debt owed by “concerned” African countries as part of Beijing’s move to help the continent during the Covid-19 pandemic.

China, which is one of the largest bilateral lenders to countries in the region – the continent owes it some $145 billion – is part of the G-20 proposal, but has not yet given any indication on the bilateral debt relief it wishes to provide to its debtors in East Africa and the rest of sub-Saharan Africa.

The Covid-19 crisis has exposed the fragmented nature of Chinese lending as well as Beijing’s reluctance to fully align with global debt relief plans.

The Chinese Foreign Ministry, however, said the country has signed debt relief agreements with the majority of African countries that have requested it and is consulting with the other countries.

Earlier this month (November), China’s Exim Bank refused a request from Uganda for a delay in repayment of loans needed to build the $1.7 billion Karuma Dam project.

Urgent funding need of $100 billion

Estimates released in March by the United Nations Economic Commission for Africa (UNECA) after a meeting with finance ministers show that African countries need urgent financing of around $100 billion to deal with the crisis. negative impact of the pandemic, of which $44 billion will go to debt relief for all African countries.

If the crisis continues, an additional $50 billion could be needed to support growth in 2021, including continued interest payments.

“…Containing the pandemic allows a return to growth but does not guarantee it. The ability of countries to finance economic recovery varies widely. Africa, in particular, does not have access to the monetary policy tools of more developed economies…,” President Paul Kagame recently said during the virtual G-20 summit hosted by Saudi Arabia, highlighting the central importance of the debt service suspension initiative.

“But this crucial program will not be enough. Additional stimulus will be needed in developing countries, just as it is in advanced economies…,” added President Kagame, who has actively lobbied for debt relief for African countries.

If fully implemented, the G-20 DSSI is expected to provide more than $12 billion in additional liquidity to the 76 least developed countries in 2020, and another $14 billion in 2021, according to panel estimates high-level African leader leading efforts to galvanize debt relief and mobilize resources.

According to Ms. Mama Keita, Director of the ECA Subregional Office for East Africa based in Kigali, countries need fiscal space to cope with the crisis, save lives and means. subsistence and continue to provide the public goods and services under their responsibility.

“Spending of course includes debt payment requirements. Obviously, without economic growth, default risks are increased. Ms Keita observed, arguing that countries must create the conditions under which they can continue to grow if economies are to recover and be able to meet their debt service payments.

“We hope that the corresponding conditionalities will be sufficiently flexible and advantageous to encourage governments to join without fear that their access to international capital markets in the future will be compromised by a tarnished reputation as debtors. The fear is indeed of being downgraded by the rating agencies,” Ms Keita said.

A decade of increased borrowing

The World Bank reports that between 2009 and 2019, countries in the region increased their external borrowing nearly fourfold, from $19.9 billion to $73.8 billion. Kenya was the largest borrower, increasing the stock of external debt from $8.5 billion to $34.2 billion, followed by Tanzania from $7.6 billion to $19.5 billion. dollars. Uganda and Rwanda accumulated $13.9 billion and $6.2 billion in external debt over the decade, down from $2.7 billion and $1.1 billion respectively.

Today, countries remain stuck between a rock and a hard place. According to the IMF, without additional help from the international community, many countries in sub-Saharan Africa could find themselves in a situation where they must raise tax rates to pay down their debt and, in doing so, stifle growth in the short term. , adding to social tensions and locking them into a cycle of low growth and high debt.

“To catalyze external support, authorities can reassure creditors by committing to improving transparency and accountability.

Many countries have moved to put in place enhanced governance measures to track Covid-19-related spending, including independent audits of crisis-related spending and publication of crisis-related supply contracts (Cameroon, Central African Republic, Chad, Kenya, São Tomé and Príncipe, South Africa, Uganda). said the IMF in its October 2020 report on the regional economic outlook for sub-Saharan Africa.

Additional reporting by James Anyanzwa

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