East African Nations May Slow Deficit Reduction to Support Economic Growth

Kenya, Tanzania and Uganda may scale back deficit reduction plans in the next fiscal year as they ramp up investment to maintain economic growth and cut taxes to ease the impact of rising food and fuel prices.

Finance ministers from the three nations, which have a combined gross domestic product of $67.5 billion and 111 million people, will tomorrow release budgets plans for the year through June 2012.

Persistent fiscal deficits and higher inflation are raising borrowing costs, with the yield on Kenya’s 91-day Treasury bill surging to a nine-year high of 8.8 percent at the last auction on June 2. The rate on Uganda’s three-month security jumped to 11.9 percent on June 1, almost triple the level of a year earlier.

“You’re not likely to see a significant decline in the fiscal deficit for at least a couple of years given the spending pressure from projects in the pipeline and because they’ll have to trim revenue to ease the cost of living,” Yvonne Mhango, an economist with Renaissance Capital Ltd., said by phone from Johannesburg on May 26. Government debt yields may “come under pressure to increase.”

Mhango forecasts Kenya’s budget deficit at 5.5 percent of GDP in 2011-2012, wider than the 5 percent envisioned in a government budget statement in March. Tanzania’s shortfall will shrink to 6 percent of GDP next year, from 6.5 percent in 2011, John Wakeman-Linn, the International Monetary Fund’s representative in the country, said in an e-mailed response to questions on June 6.

Food and Subsidies

Uganda’s deficit may widen to 4.8 percent of GDP in 2010- 2011 from 4.7 percent the year earlier, the Finance Ministry said today. Protests in April and May by opposition supporters over the rising cost of living have added to pressure on the government to raise spending.

Kenya, which is preparing for a presidential election next year, has reduced taxes for cooking fuels, diesel and imported wheat and corn. In Tanzania, the inflation rate jumped to a 12- month high after power outages led businesses to rely on costlier diesel-power generators. The government may cut fuel levies in the budget, said Finance Minster Mustafa Mkulo, according to the Dar es Salaam-based Daily News on May 2.

“Rising prices are causing massive stress, and if they want to avoid civil unrest they are going to have to reduce the pain on food and fuel,” Aly-Khan Satchu, a Nairobi-based independent financial analyst, said by phone on May 30.

Currency Decline

Kenya’s shilling has declined 7.8 percent against the dollar this year and is the world’s third-worst performing currency over the period, according to data compiled by Bloomberg. Tanzania’s currency has weakened 5.5 percent, the world’s fifth-worst, while Uganda’s shilling fell 3.6 percent.

Kenya may ask lenders such as the World Bank and African Development Bank for more financial help, while Tanzania and Uganda have scope to step up borrowing from the local market, David Cowan, Citigroup’s Africa economist, said by phone from London on May 26. Tanzania and Kenya aim to revive plans to issue sovereign bonds in the next two fiscal years, he said.

In the long-run, upgrading poor roads, ports and power plants is the top investment priority to remove some of the main obstacles to faster economic growth, Cowan said.

Growth Outlook

The World Bank on June 2 cut its estimate for Kenyan expansion to 4.8 percent this year from 5.3 percent after dry weather reduced farming output. Tanzania’s growth may ease to 6 percent from 7 percent last year due to power outages, the IMF said on May 10.

Uganda’s Finance Ministry today cut its growth forecast for the fiscal year ending June 30 to 6.3 percent from 6.4 percent following a slump in the production of cash crops. Uganda is Africa’s second-biggest producer of coffee after Ethiopia.

Kenya will increase spending by 16 percent to 1.16 trillion shillings ($13.3 billion) in 2011-2012, including a 35 percent jump in infrastructure investment, Finance Minister Uhuru Kenyatta said on June 2. Uganda plans to spend 828.6 billion shillings ($347 million) in 2011-2012 developing the 650- megawatt Karuma Hydropower project along the Nile River, the Finance Ministry said May 30.

A third of Tanzania’s 12.8 trillion-shilling ($8.2-billion) budget, up 10 percent from last year, is earmarked for development projects, Zitto Kabwe, chairman of the parliamentary accounts committee, said on June 1.

While investment is rising, tax collection is weaker than expected. Kenya’s third-quarter revenue was 7.3 percent below target, while Uganda fell 6 percent short of its income goal in the financial year ending June 30, 2010.

“I can’t see them reducing their deficits in the near- to short-term,” Nikhil Hira, a tax partner with Deloitte East Africa, said by phone from Nairobi, Kenya’s capital, on May 31. “Tax revenues aren’t to target and they just can’t stop spending if they want economic growth.”

To contact the reporters on this story: Sarah McGregor in Nairobi at smcgregor5@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.

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