Rising public debt is increasingly stifling East African Governments Development Budgets

From Uganda Debt Network newsletter

Introduction

The East African region has sustained an average growth rate in excess of 6% between 2012 and 2017 which is more than double the global average. Although there are prospects for continued economic growth ascribed to improved investments in infrastructure, debt related increased public expenditure is increasingly stressing budgets of EA Economies.
Three EA governments (Uganda Tanzania and Kenya) will spend more than $14 billion on debt repayment in FY 2018/19. This, being about half of their target revenue collections, raises the question: “Can the EAC countries stem Debt sustainability as their appetite for borrowing grows, fueled by investment in big infrastructure projects and rising budget deficits?”
In their budget statements, Tanzania, Uganda and Kenya acknowledge that their revenue authorities are struggling to meet the collection targets, underlining the potential burden of expensive short-term debt.

The case of Uganda
Government spending for the financial year 2018/19 will increase from 19 trillion to over 22 trillion with significant outlay on public infrastructure and related interest payments. The country’s resource envelope must however rise to achieve this expenditure. Tax collections for the financial year 2018/19 are projected to increase from 14 trillion to 16 trillion. The projections notwithstanding, we would like to note that the actual tax collections for the financial year 2017/2018 are underperforming.
The ratio of Uganda’s tax collections as a percentage of Gross Domestic Product (GDP) has stagnated at under 13% for the past 5 years against the International Monetary Fund (IMF) recommended benchmark of 24%.The Government hopes to increase this ratio to 14%
In the 2018/19 financial year, the country will spend $ 236.5 million on external debt repayments, $725.12 million on interest payments and also borrow $251.2 million from the domestic market.

The case of Kenya
The 2018/19 budget estimates tabled in parliament, Kenya Revenue Authority (KRA) is to collect $17.21 billion in the new financial year. The country’s new budget is $25.02 billion and half of it will go into recurrent expenditure.
Claudio Fernandes (Email), in respect to : UDN Special Newsletter Edition 166
It is quite amazing how sometimes government loose a great opportunity of doing it just right, but messes things up in a certain way.
This comment refers to the indiscriminate 1% tax on mobile transactions in Uganda. It is a bold measure, but that is quite large a chunk of a very regressive levy on a new bank-ing operation that will grow regardless of the tax or not, just for being lower cost than normal banking. But wouldn’t it be nice if there were different levies for different volume of transactions, so a shopper would not pay as much as company or a corporation?
Why insisting on such indiscriminate asymmetrical way of governing with public funds? We now have enough data and reasoning for really move toward progressive tax sys-tems if global governments are serious in aiming for the SDGs. Be it what it is, taking for the face value, much can be done with properly designed policies. Thomas Sargent, economist, would agree with that.
In Brazil, when using a direct bank transactions tax, the levy was 0.38%. The money went mostly to public health and poverty eradication. We was defeated in 2007. Though we still have FTTs on all types of financial transactions, includ-ing insurance and credit.
Julius Kapwepwe – jkapwepwe@udn.or.ug , Gilbert Musinguzi – gmusinguzi@udn.or.ug & Priscilla Naisanga- communications@udn.or.ug
Kenya takes the biggest share — $8.6 billion debt — even as it seems bent on heading again to the international markets to borrow $3 billion. Kenya’s debt hit $45.2 billion as at the end of last year, from $41.91 bil-lion as June 2017, and $34.33 billion as at end of June 2016. Kenya is expecting to roll over $1.89 billion in the year starting as it will also fork out Sh365 billion ($3.6 billion) in debt repayment and interests, the highest over the next five years.

The case of Tanzania
Tanzania expects to col-lect $9.63 billion in reve-nues in FY 2018/19, with $4.2 billion going into paying off its national debt that stood at $19.41 billion at the end of January 2018.
The country is also expecting its expenditure for the new financial year starting July to stand at $14.16 billion. The country’s revenue collection in the 2016/7 financial year reached $8.98 billion against a target $13.26 billion. Tanzania has seen more than $2.199 billion rolled over as at the end of January.

Concerns
1) According to the International Monetary Fund the region’s ability to finance its debt could be undermined by adverse exogenous shocks, including falling commodity prices and a rise in interest rates. These, coupled with civil conflict and looser fiscal policies, with fraud/corruption playing a key role in some of the cases, have led to in-creased debt vulnerabilities in many countries.
?? Domestic tax revenues that are needed to plug deficits of these countries 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 mainly to foreign investors.
3) 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.

Conclusion
The skyrocketing national debt is a source of concern, the rise in debt, if left unchecked, would go out of hand, plunging them into debt distress and without improving tax collection. The countries will not be able to effectively finance the building of infrastructure and the provision of public services.

Recommendations
East African governments must register improvement in domestic revenue mobilization, efficient and cost effective Public Investment Management (PIM), within the overall realm of prudent public resources management. These should supplement other such viable strategies, in managing the balance between Debt and service delivery outcomes in emerging and developing economies particularly in EAC countries.