A Comparative Analysis of External Debt in the East African Community Countries

Abstract

Borrowing to finance public infrastructure has pushed debt levels to record highs within the East African Community (EAC) countries. Total external debt stock grew by 333.38 percent between 1970 and 2020. The rise in external debt exceeded growth in GDP and exports in all the countries except for the Democratic Republic of Congo between 2010 and 2020. The situation could have been worse had it not been for a massive external debt cancellation by the international community under the Heavily Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI) programmes that benefitted all the EAC countries except Kenya. Virtually all the countries are increasingly borrowing more long-term than short-term external loans. Multilateral and official bilateral creditors continue to be the major financiers in all the countries even though these countries are gradually diversifying their sources of borrowing. All the EAC countries except Burundi had publicly guaranteed private sector external debt from commercial banks between 2010 and 2020. Three of the countries, Kenya, Tanzania and Rwanda, had nonguaranteed private sector external debt during the period. Two countries, Kenya and Rwanda, have joined a fast growing number of African countries that are issuing international sovereign bonds. The EAC countries are in a vulnerable position, with public external debt already at elevated levels. Trends in some of the external debt ratios including debt-to GDP, debt-to-exports, and debt service-to-exports ratios suggest that these countries could face challenges in servicing their external debts and meeting other foreign exchange obligations. High levels of external debt seem to have led to a vicious cycle of debt. Even after benefitting from the HIPC and MDRI debt relief programmes, the countries are once again facing high debt ratios. In light of the above findings, governments of the EAC countries should: look for improved terms on new loans; restructure external commercial loans that have heavy maturities and high interest rates; continue to diversify sources of external financing to reduce high dependency on expensive loans; make concerted efforts to increase concessional public external debt; explore non-debt creating financing options for public investments such as Public Private Partnerships; and look into refinancing expensive debt with debt on more favourable terms.

Keywords: External debt, multilateral and bilateral debt, publicly guaranteed debt, external debt indicators, vicious cycle of debt

DOI: 10.7176/JESD/14-4-01

Publication date: February 28^th 2023