East Africa’s economic recovery teeters on debt and budget deficits

By JAMES ANYANZWA

The growing risk of debt distress, widening fiscal and current account deficits and limited economic diversification plans in East African economies have combined to weaken growth prospects this year.

The African Development Bank projects that the region’s GDP will stand at 4% this year, before recovering to 4.7% in 2023, helped by the reopening of economies after the Covid-19 containment measures.

However, the countries are yet to reach their pre-Covid growth levels, according to the East Africa Regional Economic Outlook 2022 released last week.

According to the report, the strong projected growth is not uniform across the East African region, with the top performers being Ethiopia, Kenya, Rwanda, Seychelles, Tanzania and Uganda.

Invasion of Ukraine

The Russian invasion of Ukraine, which has pushed up global food and energy prices, could further slow economic recovery, according to the AfDB.

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The report examines the economic performance of 13 countries (Burundi, Comoros, Djibouti, Eritrea, Ethiopia, Kenya, Rwanda, Seychelles, Somalia, South Sudan, Sudan, Tanzania and Uganda) over the past year with short term projections. and medium term.

IMF review says fuel taxes remain an option for countries looking to tackle high fuel prices and soaring inflation in the region, but this will depend on revenue and expenditure policies internal to countries.

Harsh and unpopular prescriptions

The fund also supported the elimination of fuel subsidies, careful management of public resources, comprehensive reforms of inefficient and loss-making public enterprises, and a balanced financing plan geared towards concessional loans to help weather the biting economic crisis.

“The options for considering these taxes (fuel taxes) are things that countries can consider. Countries have the opportunity to review national tax systems and reform measures taking into account specific government policies. It’s a sovereign decision they can make,” said Catherine Pattillo, deputy director in charge of the fund’s Africa department.

Rise in crude prices

EA’s pace of economic recovery from the pandemic faces new threats from rising crude prices and the Russian-Ukrainian war that has disrupted global supply chains, driving food prices higher and energy, a depreciation of currencies and a decline in foreign exchange reserves.

Currency depreciations caused energy and wheat prices to rise in local currency relative to the dollar price. In addition, Deloitte consultants say that EA countries are going through a difficult period that will see an economic decline this year, driven by political instability and unreliable rainfall which has negatively impacted agricultural yields.

Economists in the Resilience in Tough Times report show that the region’s GDP has been hit hard by political instability in Kenya and Ethiopia, the main drivers of economic growth in the region, and reduced growth in the agricultural sector .

EA’s inflation is expected to increase to 8.6% in 2022 from 7.7% in 2021 due to higher global food and energy prices amid the Russian invasion from Ukraine.

According to the World Bank’s latest commodity market outlook report released last week, the weakening currencies of most developing economies are driving up food and fuel prices in ways that could aggravate the food and fuel crises.

High prices for energy products that serve as inputs for agricultural production have driven up food prices, with food inflation in Africa averaging between 12 and 15 percent.

Globally, energy prices are still expected to be 75% above their five-year average next year, while the price of Brent crude oil is expected to average $92 per barrel in 2023. , well above the five-year average of $60 a barrel. barrel.

“The forecast of lower agricultural prices is subject to a range of risks,” said John Baffes, senior economist in the World Bank’s Prospects Group.

Globally, inflation is expected to rise from 5.3% in 2021 to 9.2% in 2022, largely due to high energy and food inflation resulting from the negative fallout from the Russian-Ukrainian conflict.

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