How East African countries struggle with mounting debts

Dar es Salaam. One of the issues causing headaches for leaders and citizens of East African countries is the size and trend of debt in these nations, as economists advise caution in the use of borrowed funds.

A few days ago, President Samia Suluhu Hassan, during the swearing-in ceremony of the new Commissioner of the Tanzania Revenue Authority (TRA), emphasised the Commissioner’s critical role in ensuring proper revenue collection to reduce the need for borrowing.

“What we need is to reduce borrowing. We borrow; we struggle every time… the World Bank bullies us just because we have development projects and no money, so we are forced to borrow,” she said.

She stressed the hardships involved in borrowing, emphasising the need to increase domestic collections, which is why the government has created a conducive environment to attract business and investment.

The Debt Management Commissioner at the Ministry of Finance, Japhet Justin, says that as of March this year, Tanzania’s government debt was Sh91 trillion. With private sector debt at Sh23.7 trillion, this translates into a total national debt stock of Sh115 trillion.

“The size of the debt increases based on economic goals. Targets are presented in Parliament; for instance, we may propose borrowing a specific amount for the next year. The recently read budget outlines expenditures and expected revenues for the fiscal year,” he explained.

He emphasised that the debt is sustainable and that borrowing procedures are firmly grounded in legal foundations.

Going by Tanzania’s Sh49.3 trillion budget for the fiscal year 2024/25, the country will rely on loans and grants by 30 percent, while debt repayments for the year will amount to Sh13.12 trillion, which is 26 percent of the total budget and 44.6 percent of tax revenues.

In Kenya, in an interview with editors two weeks ago, President William Ruto said he has been making efforts to save Kenya from the burden of debts that have escalated rapidly over the past 10 years.

He said to effectively run the government this fiscal year, they will need to borrow KSh1 trillion, but with increased taxes, the country could avoid this debt increase, which currently stands at 68 percent of the GDP.

Ruto said in the past fiscal year, his government collected KSh2.3 trillion in tax revenues, of which KSh1.1 trillion was used to repay debts and KSh1 trillion for salaries.

“Because of this, the country had to borrow externally to pay counties and fund social services. Now, with the budget bill not passing, our deficit will force us to increase borrowing by nearly KSh1 trillion,” he said.

In these interviews, Ruto mentioned that his country is in a precarious financial situation, and without increasing domestic revenue collections, it will not achieve growth that its citizens can be proud of.

He noted that in 2013, Kenya’s national debt was KSh1.8 trillion, which increased to KSh11 trillion over five years, funding many development projects through loans.

“Today, we have reached our borrowing limit; all the money we borrowed during that time has matured, and now it’s a problem because we use KSh1.1 trillion every year from ordinary taxpayers’ funds just to pay interest; adding to the principal, it totals around KSh1.8 trillion,” he said.

In Uganda, this fiscal year plans to collect and spend USh72.13 trillion, with USh32.2 trillion coming from domestic taxes and USh39.93 trillion from other sources, including loans and grants.

However, Uganda expects to spend USh21.7 trillion to finance government debt, which has reached USh96.1 trillion by 2023.

Uganda’s budget for this year has significantly increased due to what is described as the maturation of many loans and the implementation of numerous development projects.

Among the funds allocated to service government debt, USh3.1 trillion is for debt repayment, USh9.5 trillion for interest payments, USh19.8 trillion for domestic debt, USh9.1 trillion to be paid to the Bank of Uganda, and USh200 billion for domestic claims.

Regarding the debt situation in East African countries, economic analyst Prof Abel Kinyondo said the challenge with loans for many African countries stems from their lack of discipline in spending.

“The expenditure of many governments does not match their economic reality; even audits of government accounts in different countries reveal that the amount lost through various misappropriations is larger than the loans themselves,” Prof Kinyondo said.

He noted that domestically collected revenues suffice for the needs of many nations, though not entirely, primarily due to being managed within a leaking basket.

“If we control theft, we won’t need to borrow. If expenditure control isn’t good and the tax base expands and domestic revenues increase, it’s futile because borrowing has its own addiction, once you start, you can’t stop,” Prof Kinyondo said.

Professor Kinyondo, a researcher and lecturer in economics at the University of Dar es Salaam, said that huge debts hinder a country’s ability to implement development projects and affect the value of its currency. He explained that since most debts are in foreign currencies, they strain local funds needed to service them.

He stressed the importance of countries being cautious because huge debts risk being put under the supervision of the World Bank, as was the case for many countries in the 1990s, affecting a nation’s sovereignty.

Executive director of the Debt and Development Network Tanzania (TCDD), Hebroni Mwakagenda, said for developing countries, including those in East Africa, loans are inevitable, but it is crucial to use them appropriately.

To avoid the debt burden, as advised by Prof Kinyondo, Mwakagenda said it is crucial to use loans correctly while also increasing domestic collections to reduce dependency on loans.

“Every year we see an increase in the budget, but much of it, often less than 60 percent, is spent due to using a lot to repay debts rather than our development activities,” Mwakagenda said.

He said the risk of not controlling the national debt trend is that countries may fail to provide social services or do so in minimal amounts, leading to increased taxes to raise enough money to pay debts, which could increase the difficulty of life for people.

“Several factors need to be considered to avoid the challenge of large debts, such as expanding the taxpayer base and increasing tax education, as now the loans we take have more risks because they come from commercial institutions,” Mwakagenda said.