BUDGET

EACs 2021-22 Budget Cycle - The Role of Debt

EAC budgets should stimulate Covid-19 recovery

In Summary

•Debt remains a significant factor for consideration in the region’s budgetary requirements

•On a positive note, a large chunk of the region’s 2021/22 budget estimates will be raised internally through tax revenue

The East African Community’s (EAC) 2021/22 budget cycle is fast approaching with the respective Cabinet Secretaries/Finance Ministers expected to read the 2021/22 budget in June 2021.

This will provide a clear picture of the EAC governments’ priorities in the 2021/22 fiscal period, keeping in mind the region’s post-COVID economic recovery initiatives, infrastructure development ambitions, recurrent expenditures and debt servicing commitments.

Based on the 2021/22 budget estimates released by the Governments of Kenya, Tanzania, Uganda and Rwanda, it is unsurprising that Kenya is once again leading the pack. Kenya has budgeted to spend USD 33.92 billion in the upcoming fiscal cycle, as compared to USD 15.63 billion in Tanzania, USD 12.45 billion in Uganda and USD 3.82 billion in Rwanda.

On a positive note, a large chunk of the region’s 2021/22 budget estimates will be raised internally through tax revenue, with budget deficits experiencing a downward trend. From a Kenyan perspective, the National Treasury anticipates that Kenya’s budget deficit for the 2021/22 fiscal period will reduce to 7.7% of GDP down from 9.0% in the 2020/2021 fiscal cycle. Through the region, budget deficits will be largely be plugged through debt, both foreign and domestic, whilst foreign aid, grants and donations will play a minor role.

Of concern, however, is the increased debt servicing commitments through the region. To plug its budget deficit of 7.7%, Kenya expects to finance USD 8.86 billion though a mix of domestic and foreign debt. This will consist of 30.4% foreign debt and 69.6% domestic debt. Though this represents a significant portion of its 2021/22 budgetary requirements, it is notable that the debt required in the 2021/22 financial cycle is slightly lower than that required in the 2020/21 fiscal cycle, representing a 1.9% decrease.

However, despite the reduction, public debt remains a critical concern with Kenya’s debt burden standing at 69.6% of GDP as at December 31, 2020, higher than its regional counterparts with Tanzania and Uganda recording debt to GDP burdens of 55% and 49.9% as per projections in the 2020/21 fiscal cycle. Rwanda, however, leads the pack with a debt to GDP burden of 71.3% as at  December 31, 2020.

Budgetary constraints occasioned by the COVID-19 pandemic played a significant role in increased debt commitments through the 2020/21 fiscal cycle as the EAC region was forced to pursue external funding arrangements to plug ballooning deficits in the face of reduced tax revenue collections.

Similarly, the region’s aggressive developmental strategies, with a focus on infrastructure, contributed to increased pressure on the exchequer. A silver lining, however, is the debt suspension granted to members of the EAC region from foreign creditors, providing much needed wiggle room.

As a whole, it is evident that debt remains a significant factor for consideration in the region’s budgetary requirements, the sustainability of which is key to prevent the region facing a debt crisis.

Karen Kandie – MD, IDB Capital