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East Africa plans to spend its way out of Russia-created crisis

15 June 2022 - 08:22 By Fred Ojambo and Fumbuka Ng'wanakilala
Prime Minister Abiy Ahmed’s administration is under pressure to subsidize fertilizer and food following price surges due to a disruption in farming because of fighting in the nation’s northern Tigray region, and exacerbated by Russia’s war.
Prime Minister Abiy Ahmed’s administration is under pressure to subsidize fertilizer and food following price surges due to a disruption in farming because of fighting in the nation’s northern Tigray region, and exacerbated by Russia’s war.
Image: REUTERS/Tiksa Negeri/ File photo

East African finance chiefs increased spending plans to a record to sustain economic growth as they try to cope with the fallout from Russia’s invasion of Ukraine. 

Finance ministers of Tanzania and Uganda presented their budget speeches on Tuesday, while those of Kenya, Ethiopia and Rwanda submitted theirs earlier. Challenges they face as a result of Russia’s war and domestic issues, including prolonged drought and political disruptions, range from heavier debt burdens to mounting inflationary pressures and weakening currencies. 

Of grave concern are blocked supplies from Russia and Ukraine, which have increased the cost of key commodities — energy, wheat and fertiliser — forcing some governments to boost subsidies. Increased demand for dollars for imports has put east African currencies under immense pressure.

The following charts show some of the highlights of the spending plans in the wake of the war:

Six of East Africa’s governments increased spending plans for the year starting July as they look to spur economic growth, despite the affect of the war in Ukraine curtailing the region’s recovery from the coronavirus pandemic. 

To try curb inflation and ease pressure on currencies, Kenya and Tanzania have imposed measures, including subsidies on items such as fuel. Uganda ruled out subsidies, citing revenue risks, but joined Kenya in raising benchmark interest rates for the first time in years.

“The big picture is generally the same — inflation will remain high across East Africa over the coming months, dampening the regional economic outlook,” said Liam Carson, an economist with London-based International Growth Centre.

East African finance chiefs increased spending plans to a record to sustain economic growth as they try to cope with the fallout from Russia’s invasion of Ukraine.
East African finance chiefs increased spending plans to a record to sustain economic growth as they try to cope with the fallout from Russia’s invasion of Ukraine.
Image: Bloomberg

Tanzania may struggle to meet its target of keeping the budget deficit below 3% of GDP due to emerging spending pressures in the new fiscal year. Finance Minister Mwigulu Nchemba proposed to increase spending plans by 9% and start a fuel price-stabilisation fund. He cut this year’s economic growth forecast to 4.7% from 5% earlier.

“Although inflation has been slower to rise in Tanzania” at 4% in May, Carson said, “there are signs that it is set to rise over the coming months.”

Uganda’s inflation accelerated to 6.3% in May, the fastest pace in five years, while the shilling dropped to the weakest level in two years — prompting the central bank to hike interest rates for the first time since 2018. The government has resisted pressure to subsidise fuel as some of its peers have done. Finance Minister Matia Kasaija now targets to narrow the budget deficit to 5.4% of GDP in 2022-23, despite increasing spending plans to 48.1 trillion Ugandan shillings ($12.8 billion) for the fiscal year. 

The rising cost of food pushed Ethiopia’s inflation rate to 37.2% in May, the highest level in a decade. Prime Minister Abiy Ahmed’s administration is under pressure to subsidise fertiliser and food following price surges due to a disruption in farming because of fighting in the nation’s northern Tigray region, and exacerbated by Russia’s war. Ethiopia increased its 2022-23 spending plans to 786.6 billion birr ($15.1 billion) also because of higher-than-anticipated debt-servicing and defence costs. 

The debt-servicing costs of Kenya, East Africa’s largest economy, are expected to increase to 1.39 trillion Kenyan shillings ($11.8 billion) from 1.15 trillion shillings this fiscal year, according to the National Treasury. The National Assembly approved the lifting of the government’s borrowing limit by 11% to 10 trillion shillings. The debt burden is growing even as the government seeks cheaper borrowings, notably this week’s decision to scrap plans to sell Eurobonds and instead pursue $1 billion loans from banks at expected pricing of less than 10%.

The World Bank said fuel subsidies, at about $66 million monthly, are hurting the nation’s revenue recovery and forecasts economic growth to slow to 5.5% this year. Kenya’s Treasury Secretary Ukur Yatani delivered his budget in April, earlier than usual, to allow lawmakers to debate it before adjourning for the Aug. 9 general elections.

Rwanda’s spending plans for 2022-23 increased by 5% to 4.65 trillion francs ($4.5 billion) and the government plans to raise about 651.5 billion francs in foreign debt, according to Finance minister Uzziel Ndagijimana. In Burundi, the government may increase spending plans by almost 40% as it eyes revenue from a nickel concession.

More stories like this are available on bloomberg.com

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