East Africa to rebound, grow by 6% in 2014

East Africa is expected to post strong growth next year, but falling commodity prices and the region’s mounting debt burden could offer the greatest challenge to its 136 million citizens.

The region’s growth is expected to average six per cent next year, up from about 5.5 per cent this year, driven by increased infrastructure investments, falling inflation and an expected surge in private-sector lending.

Experts predict a rebound next year, saying the region has, to a certain extent, managed the aid cuts, revenue drops, political risks and constrained credit uptake that slowed economic growth this year.

However, despite the positive projections, economists have raised concerns over the region’s high dependence on donor aid, low tax revenues, narrow export base and weak infrastructure, which they say are likely to create serious challenges for East Africa in light of its increased appetite for infrastructure spending and falling commodity prices in global markets.

The prices of tea and coffee — two of the region’s leading exports — have fallen to new lows, which is expected to hurt export earnings and widen the current account deficit for the region. Tanzania’s gold earnings have also fallen to a year low, reflecting the need to cut dependence on raw commodities as the main source of export earnings.

Commodities like tea, coffee, gold and diamonds contribute about 80 per cent of the region’s export earnings, but are prone to volatilities occasioned by weather, unstable global prices and political factors in key markets.

For example, coffee prices at the indicative Nairobi auction have dropped to a five-year low of $3.28 a kilogramme, while tea is currently attracting a price of $1.42 per kg, the lowest in seven years. Tea and coffee are Kenya’s main exports, and also account for about 80 per cent of Burundi’s and 70 per cent of Rwanda’s export earnings.

Reuters quotes ARFIC, Burundi’s coffee regulator, as predicting earnings will decline sharply in 2013/14, with output falling by almost half to 13,000 tonnes from 24,000 tonnes in the 2012/13 season.

In Tanzania, earnings from the country’s traditional exports declined eight per cent to $818.2 million in the year ending September 2013, according to data from the central bank, down from $889.4 million in the same period in 2012, due to a decline in both export volumes and prices of sisal, cashew nuts and cloves.

In the same period, the Bank of Tanzania said in its September issue of the Monthly Economic Review that the value of gold exports declined from $2.15 billion in the year ending September 2012 to $1.748 billion in the year ending September 2013; tourism surged from $1.61 billion to $1.82 billion during the same period.

“The economy remains vulnerable to external shocks, particularly fluctuations in commodity prices. Thus, variations in gold and oil prices have to be monitored closely, given the significance of these commodities to Tanzania’s trade balance,” said the World Bank in its latest review of the Tanzanian economy.

“The strategy focuses on a limited number of products with a view to diversifying into non-traditional exports that are particularly agro-based, while taking advantage of traditional exports to extend production and add value,” said the International Monetary Fund in its latest review of the Rwandan economy.

The growing debt burden, coupled with low revenue collection, is also likely to have an impact on what direction the EAC economies take especially considering the myriad infrastructure projects planned throughout the region.

The high dependence on aid could pose a challenge to regional economies. Aid cuts in Rwanda and Uganda have slowed economic growth, with the impact being heaviest on Rwanda, which saw its growth slow down from a high of 8.2 per cent in 2012 to 6.6 per cent this year.

The Bank of Uganda had estimated that the aid suspension would cut economic growth by 0.8 per cent, from a projected five per cent in the 2012-2013 financial year to 4.2 per cent.

Currently, donors finance 40 per cent of the country’s budget, leaving it susceptible to the negative effects of aid cuts as seen in 2011 when donors slashed funding, leading to a drop in economic growth.

“In view of the important investment spending that is needed, one of the main priorities will remain creation of fiscal space through accelerated domestic resource mobilisation and rationalisation of spending,” said the IMF.

But despite the challenges, the region’s economy is expected to pick up.

Rwanda’s economy is expected to grow by the biggest margin in 2014, by 7.5 per cent up from 6.6 per cent this year, from recovery in the agriculture and service sectors.

The African Development Bank (AfDB) projects the Ugandan economy will grow by 6.25 per cent in 2014, up from 5.5 per cent this year, driven by a strong recovery, stronger private activity in the telecommunications sector and the continued implementation of investment projects.

“The economic outlook is favourable. With low inflation and higher growth, market confidence is set to induce some recovery in credit to the private sector. 

"At the same time, significant investment in hydropower and road projects is expected to stimulate employment and help bring output closer to potential beneficiaries while addressing critical infrastructure bottlenecks,” said the IMF in its latest review of Uganda’s economy.

Burundi’s economy is expected to continue with recovery, growing by 4.7 per cent in 2014, up from the current growth of 4.5 per cent, reflecting the implementation of large infrastructure projects, improvements in electricity generation and a rise in tourism.

Kenya and Tanzania’s economies are projected to grow by 5.5 and seven per cent respectively, aided by a strong tourism performance and infrastructure projects.

“Kenya’s growth prospects are favourable, with growth expected to pick up in the years ahead. Activity will benefit from the boost to private-sector confidence, following largely peaceful elections in 2013. Inflationary pressures should remain modest given the favourable weather outlook,” said Razia Khan, head of Africa research at Standard Chartered Bank.

Nonetheless, there are concerns raised by the IMF and the World Bank.

The two institutions say the growing tendency by governments to overshoot budgets, added to low tax bases and poor fund utilisation, could pose serious challenges to regional growth.

In the 2012/13 financial year, for example, Kenya spent only 45.8 per cent of its total development budget. Overall, out of the country’s 2012/2013 total budget of Ksh1.4 trillion ($16.4 billion), the government will only be able to spend 72 per cent.
Source: The EastAfrican, reported by Peterson Thiong'o from Nairobi, Kenya
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