Are East African Finance ministers visionaries or just in denial? By JAINIDI KISERO for The East African | Sunday, June 17 2012 at 13:38
Basking in denial. This is what comes through as we read the budget speeches presented last week by the finance ministers of the member states of the 133-million strong East African Community.
The fundamentals don’t support the rosy growth projections. Indeed, the region is facing rising inflation, high budget deficits and large current account deficits — proof that the economies of the region continue to import more goods and services than they can produce locally.
Whereas, in the case of Uganda, you have a balance of payments surplus, it is a result of activity in the financial account — diaspora inflows and other sources of foreign exchange you cannot track down.
It is clear from the budget statements that all the five governments of the East African Community are experiencing major problems in financing recurrent costs, demonstrated by the fact that literally all member states devote a disproportionate share of budgetary resources to paying civil service salaries and in servicing debt —leaving very little money for running government operations.
In terms of fiscal strategy, the partner states have adopted a similar approach. In the past, it was “tax and spend.” Today, it is “borrow and spend.”
Which is why, even though the projections are that revenues will fall, all five countries continue to maintain large allocations for infrastructure, health, education and security.
With a relatively deeper domestic financial market, Kenya is able to raise the money. A new trend is emerging in the region where governments are now deliberately going to international debt markets to borrow non-concessional money for infrastructure projects.
Tanzania would appear to be the most aggressive in this regard.
Currently, the government carries a $1.2 billion loan it took from the Chinese EximBank to fund building and construction of the Mtwara-Dar es Salaam gas pipeline. The loan is already in the books but Tanzania had to provide resources in this year’s budget to cater for the counterpart funds to pay for local costs.
Last year, Tanzania signed a $320 million loan with Standard Bank of South Africa to pay for arrears owed to international road contractors.
A 60 million euro loan was also contracted with HSBC Bank to fund a power plant in Nyakato-Mwanza and another $320 million loan signed with Credit Suisse of the United Kingdom.
Less stringent conditions
Has Tanzania passed the limits of debt sustainability? Last year, a debt sustainability analysis by the IMF found that the country had not crossed the line.
This explains why Tanzania has gone ahead and contracted a consultant to help it enhance its international credit rating.
Finance Minister Dr William Mgimwa announced in his budget speech this week that Tanzania will this financial year be borrowing another $822 million in non-concessional loans from international debt markets.
Dr Mgimwa explained that Tanzania was beginning to prefer private debt because the facilities were not only cheaper than local debt but had less stringent conditionalities.
On his part, Rwanda’s Finance Minister John Rwangombwa said during his budget speech that although Kigali will still maintain preference for concessional loans from multilateral and bilateral lenders, the country will this year be seeking non-concessional loans to fund development projects.
The projects cited in this regard include Bugesera Airport, the Kigali Conference Centre and revival of regional railway systems.
The minister said that Rwanda had just conducted a debt sustainability study that revealed that its debt dynamics were still sustainable.
Presenting her budget speech this week, Uganda’s Finance Minister Maria Kiwanuka announced that Kampala also intends to play in the international debt market space.
She announced that the government will shortly be unveiling a new policy that will spell out how to use “contractor facilitated financing” as a means of raising money for development projects.
With China EximBank having emerged dominant in this space, regularly out-competing exim banks from OECD countries for major infrastructure projects, the statement by Uganda’s finance minister amounts to a notice that the Chinese bank is going to assume a higher profile in Uganda in the coming months and years.
Kenya, the region’s biggest economy, is entering a decisive year, having to implement one of the most ambitious devolution projects in the world — involving transferring of the money and functions of government to 47 entirely new county governments, all at one go.
The government must deliver on the promise of devolution not only by providing the money, but also by guiding the process by establishing systems of monitoring and accounting for the money.
If the government ends up in a situation where there is not enough money for either the counties or the national government, the negative consequences for service delivery and for the country’s fiscal health will be far reaching. On paper, devolution holds the promise of more equitable development. But the government will have to strike a delicate balance between redistribution and having to maintain pro-growth policies.
In the long run
Borrowing to fund infrastructure pays off in the long run. But whichever way you look at it, the trends you read from the budgets of the five countries this year expose the dire state of the economic fundamentals in these economies.
Clearly, what has kept the region going for the past 10 years is government borrowing.
Kenya, Uganda, Tanzania and Rwanda have borrowed heavily and spent the money on building roads, expanding ports and airports, digging geothermal wells, building new rural electrification networks and rehabilitating power transmission systems.
Never before has the region thrown so much money into building and rehabilitating roads. The policy of borrow and spend has major downsides.
The buoyant GDP growth figures the region has been posting year in year out come with pressures on the external account.
When you spend big money on infrastructure, your imports also go up. You have to bring in hundreds of thousands of tonnes of steel and equipment as you build physical infrastructure.
For instance, the Chinese working on roads and Tanzania and Kenya have been importing even cement from China.
The region has been consistently importing more to fund its impressive growth figures.
The huge gaps in the current account should have warned us that the impressive growth figures we were posting were not sustainable.
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