Monetary Union still a pipe dream?
Goals on fiscal deficit and foreign exchange reserve levels are unmet
East African countries are struggling to comply with key macroeconomic targets on fiscal deficit, inflation, public debt and foreign exchange reserves ahead of the operationalisation of a single currency regime by 2024. A new study shows that challenges remain in attaining the targets on fiscal deficit and foreign exchange reserves.
East African countries are struggling to comply with key macroeconomic targets on fiscal deficit, inflation, public debt and foreign exchange reserves ahead of the operationalisation of a single currency regime by 2024.
The mixed performance of regional economies on these targets is likely to delay the delivery of the benefits of a monetary union to regional traders and citizens such as reduced costs of cross-border transactions.
A study by the United Nations Economic Commission for Africa (Uneca) conducted in October 2017 shows that while the partner states are on track to achieving the criteria on inflation, challenges remain in attaining the targets on fiscal deficit and adequate level of foreign exchange reserves.
This, according to the study, is due to the countries’ heavy spending on infrastructure projects and increased imports of capital goods.
Countries are expected to attain headline inflation of a maximum eight per cent, a fiscal deficit (including grants) of not more than three per cent of GDP, a public debt-to-gdp ratio of 50 per cent and forex reserves of at least 4.5 months of import cover, to qualify to join the East African Monetary Union.
Countries are also required to comply with the criteria for at least three years before the official launch of the single currency regime. This implies the countries have up to 2021 to comply with these conditions.
However, efforts towards fulfilling these conditions have been lacklustre with signs that some countries could be forced to scale down on huge infrastructure projects to reduce their ballooning debts and fiscal deficits.
Already, Uganda has announced plans to reduce investment in infrastructure in the run-up to joining the East Afri- can Monetary Union in 2024.
Dr Albert Musisi, the commissioner in charge of macroeconomic policy in the Ministry of Finance, said the move would help the country meet the fiscal deficit target of three per cent.
Uganda also passed the Public Finance Management Act in an attempt to control excessive use of oil revenues to finance its public spending. According to Uganda’s Ministry of Finance the country’s fiscal deficit stands at around 6.2 per cent.
According to Uneca, only Rwanda managed to comply with the requirement on fiscal deficit and inflation during the seven-year (2010 – 2016) period, while Uganda met the requirement on forex reserves.
Last year, Tanzania said it planned to increase spending by 7.3 per cent to Tsh31.71 trillion ($13.87 billion) with a focus on infrastructure development and growing the economy. The country’s fiscal deficit stood at 3.8 per cent last year. BMI, the research arm of Fitch Ratings, forecast Tanzania’s fiscal deficit would rise to 5.3 per cent this year due to an increased import bill.
Tanzania’s inflation stood at around 5.4 per cent between Jan- uary and November 2017, before dropping to 4.4 per cent.
Burundi recorded a government budget deficit of about 8.2 per cent in 2017 and an annual rate of inflation of close to 16 per cent.
In Uganda, total public debt was estimated at Ush37.9 trillion ($9.9 billion) as at December 2017, with external and domestic debts amounting to Ush25.1 trillion ($6.5 billion) and Ush. 12.8 trillion ($3.4 billion), respectively, according to data from the Bank of Uganda.
Foreign exchange reserves fell to $3.38 billion in April 2017, from $3.6 billion in March 2018.
In Kenya, fiscal deficit stands at close to nine per cent due to increased borrowing and heavy spending on infrastructure projects while forex reserves were equivalent to 6.36 months of import cover at the end of April. The Parliamentary Budget Committee last week tabled the budget estimates for the 2018/2019 fiscal year, with total spending rising to Ksh3.07 trillion ($30.7 billion), compared with Ksh2.6 trillion ($26 billion) in the 2017/2018 fiscal year.
While tabling the estimates in the National Assembly, the committee noted that the continuous underperformance in revenue collection and increasing spending pressures would make it difficult for the country to lower its fiscal deficit to three per cent by 2021.
“The committee has observed that over the past five years, there have been revenue shortfalls or underperformance mainly attributed to over projection of revenues,” said the committee’s chairman, Kimani Ichung’wah. “If the current trend continues, a lower fiscal deficit will continue to be a moving target and the country may not achieve the EAC convergence criteria to bring down the fiscal deficit to three per cent by the year 2020/21..”
According to Uneca, EAC countries’ increasing debt levels and high fiscal deficits are due to a lack of capacity to generate their own revenues to meet their financial demands.
“The high dependency on grants or aid for economic development is risky for any economy even more dangerous as nations implement the union given that such donor support is not sustainable,” said Uneca.
The high dependency on grants or aid for economic development is risky as nations implement the union.” Uneca