A Moody’s report titled: ‘East Africa: Institutional weakness and limited policy effectiveness constrain ability to manage higher debt burdens’ indicates that the growing debt burdens for East African countries are putting pressure on their financial strength and credit quality.
The countries, Kenya, Uganda, Tanzania, and Rwanda are at risk of their economies being exposed “to exchange rate troubles, deteriorating affordability and increasing reliance on non-concessional financing.”
“Such countries will be increasingly tested in coming years,” the report stated.
Moody’s, however, notes that the debt-to-GDP ratios for the four countries remains fairly stable with Uganda’s debt expected to increase by six per cent of GDP to 44 per cent in 2019. In the four countries, government debt surged by 13 to 21 per cent of GDP between 2012 and 2017.
East Africa’s Debt Situation
The report indicates that Kenya holds the highest government debt in the region due to infrastructure spending, the increasing cost of debt, and low revenue collection. Moody’s predicts that the debt will approach 60 per cent of GDP in the coming two years. Currently, Kenya’s public debt stands at 58 per cent of GDP.
On the other hand, Rwanda has the lowest government debt but has the highest rate of accumulating debt which signals “a transition in donor support from concessional loans and grants.”
The report also indicates that Tanzania, Uganda, and Rwanda are experiencing a rising and significant share of foreign and external-currency denominated debt which exposes them to exchange rate depreciation risk.
“Increasing debt burdens and deteriorating debt affordability, even when linked with public investment aimed at enhancing growth, and generating foreign exchange to service outstanding debt, constrain fiscal space and weigh on our overall assessment of credit quality in Kenya, Rwanda, Tanzania, and Uganda,” Moody’s assistant vice president, analyst and co-author of the report David Rogovic said.
“Their ability to contain any further rise in debt burdens for the foreseeable future and direct limited domestic resources toward productive uses will be important credit considerations in all four countries,” he added.
In Rwanda and Tanzania, debt remains highly affordable due to a large share in concessional debt while in Kenya the high dependency rate on commercial borrowing has made debt affordability worse.
In Uganda, the shift to domestic borrowing costs and non-concessional external borrowing is deteriorating the country’s debt status.
The Strength of Policy and Institutional Frameworks in Managing Debt
Moody’s observes that limited policy effectiveness and the weakness of institutions will affect the ability of Tanzania, Uganda, and Kenya in managing high debt levels and credit levels. However, the policies and institutions of Rwanda are strong enough to manage the risk that comes with high debt.