Mone­tary Union still a pipe dream?

Goals on fis­cal deficit and for­eign ex­change re­serve lev­els are un­met

The East African - - FRONT PAGE - By JAMES ANYANZWA The Eastafrican

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

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