By Jee-A Van Der Linde – Economist
Finance ministers of East Africa are expected to table their respective budgets in coming days for the new financial year that begins on July 1. The reading of East African budgets is normally a joint exercise.
The new budgets come at a pivotal time, as the unexpected Covid-19 pandemic has placed pressure on government finances in 2020.
Authorities have little choice but to provide fiscal support where they can. However, there will be challenges and the governments will need to closely monitor developments to avoid the budget deficits from spiralling out of control.
Government finances will take a hit across the region. We believe that this will for the most part be driven by the collapse in fiscal revenue due to the marked deterioration in the economic outlook.
The region’s largest economy, Kenya, has provided fiscal support through tax relief, which will further weigh on the revenue side.
In general, on the expenditure side we expect to see a lot of reprioritisation away from sectors that have seen activity halted due to the Covid-19 pandemic. This could include a reduction in direct spending in the tourism sector and construction.
These resources will likely be redirected towards containment efforts – particularly health care – and social support.
Regardless, East African fiscal finances will look a lot worse during the next fiscal year than what was expected a few months ago. Fiscal deficits will be wider than previously anticipated and public debt will increase at a faster rate.
We have seen multilaterals stepping up support, which could reduce the longer-term fiscal impact of the Covid-19 crisis, but commitments to date will undoubtedly have to be supplemented to ensure that the Covid-19 pandemic does not have a long-term fiscal legacy.
Furthermore, most East African nations have been able to assess the impact of the virus and incorporate this new reality into their budgets.
This is a lot more efficient than having to adjust a budget midway through a fiscal year.
Rwanda, the region’s fastest-growing economy in 2019, is to delay publishing its budget for the new financial year. The break from tradition comes down to the Rwandan Cabinet not yet having approved the finance minister’s budget proposal.
The government expects to spend RWfr3.245trn during the fiscal year 2020/21 – RWfr228.7bn more than the revised budget estimates.
Although we do not expect government to curb non-essential expenditure during this time, stimulus measures to fight against the fallout of the virus are unavoidable.
Rwanda’s fiscal deficit is expected to widen this year, in step with its regional peers. Moreover, public debt levels have risen over the years and 2020 will be no exception.
Given the extraordinary circumstances, forecast adjustments are likely.
Room to deploy fiscal policy to combat Covid-19 is limited.
It seems investors globally have made peace with the fact that many countries will have to increase borrowing to combat the pandemic, and if containment efforts show positive results, these countries should not struggle to find capital to fund the recovery.
The East African region is fighting an economic battle on two fronts.
Covid-19 is disrupting supply chains, curtailing economic activity at large and devastating regional tourism.
Meanwhile, the unprecedented locust infestation is wreaking havoc in the region’s agricultural sector – an industry generally spared from the Covid-19-induced economic slump.
The World Bank announced the commencement of an emergency programme to help countries in Africa fight the ongoing locust infestation.
The Bank noted that the first East African countries to be financed under the initial phase of the programme are Djibouti, Ethiopia, Kenya, and Uganda, with a total financing package of $160m.
Despite this support, the unprecedent nature of both the Covid-19 pandemic and the locust infestation will derail the region’s economic growth trajectory.
We expect Africa’s fastest-growing region to record a 1.8% GDP contraction this year.
For more coverage on COVID-19 visit: https://www.cnbcafrica.com/covid-19/