These 5 East African Countries May Have Walked Into A USD 100 Bn Debt Trap

Five member-countries of the East African Community — Kenya, Burundi, Rwanda, Uganda, and Tanzania — are together embroiled in what looks like a stifling debt trap.

The five countries have accumulated more than USD 100 Bn domestic and foreign debt, stretching their repayment budgets to the limit.

Kenya and Burundi have the highest loan distress profiles, with their debt-to-GDP ratio projected to exceed 60 percent this year.

Taking a view from the lens of the International Monetary Fund (IMF), a debt-to-GDP ratio of 50 percent is considered to be within the tolerable limit for developing economies like the EAC member states.

“With several countries facing increased foreign exchange and refinancing risks, it is critical to enhance debt management frameworks and transparency,” warned the IMF in its latest Regional Economic Outlook report released a week ago.

For East Africa’s largest economy, Kenya, the debt-to-GDP ratio is on course to hit 61.6 percent at the end of this year from 60.1 per cent last year, while Burundi’s ratio is expected to climb to a high of 63.5 percent from 58.4 percent in 2018.

The highest-ranking African country on the World Bank’s Doing Business list, Rwanda, has a debt-to-GDP ratio that is expected to reach 49.1 percent from 40.7 percent, taking the Paul Kagame-led country closer to the 50 percent benchmark.

For Uganda and Tanzania, the debt-to-GDP ratios will respectively increase to 43.6 percent and 37.7 percent from 41.4 per cent and 37.3 per cent respectively.

As the debt loads of EAC member-countries continue to swell, fears over the ability of these countries to meet repayment obligations in the future have only grown. There have been warnings about the region over-reaching with quick and rather expensive loans.

As a matter of fact, barely a week ago, Kenya’s parliament voted to increase the public debt ceiling to KES 9 Tn (USD 87 Bn), which was recommended by the country’s Treasury as a necessary move to give room for more borrowing to retire current, expensive debts.

With the region’s continued display of an insatiable appetite for debt, the Bretton Woods institutions — the IMF and the World Bank — have advised caution against the propensity for commercial loans that charge high-interest rates as opposed to concessional loans.

In May this year, the IMF warned Uganda to go slow on its borrowing plans after it emerged that the country’s growing debt had already weakened its debt metrics putting taxpayers in a situation whereby one out of every five Ugandan shillings they remit to government goes towards repayment of debts.

On the whole, it is feared that the skyrocketing public debt will lay waste to the region’s economic credibility, making it difficult for member countries to access more loans for investments.

Featured Image Courtesy: TheConversation