Mega infrastructure projects in East Africa may stop once the monetary union is put in place seven years from now to avoid breaching the regional fiscal deficit and debt policies.
East African Community (EAC) countries will be forced to stick to the three per cent maximum fiscal deficit as opposed to the current situation where Kenya is at 9.4 per cent deficit — largely due to the construction of the standard gauge railway (SGR).
Bank of Uganda (BoU) deputy governor Louis Kasekende said countries in the region would have to ensure their infrastructure or other spending ambitions are in line with the fiscal deficit ceiling set under the monetary convergence criteria.
“Countries in this region have big infrastructure projects going on. These must in future be consistent with the EAC macroeconomic and monetary union convergence criteria,” he said.
The BoU deputy governor was speaking during a symposium called by the Central Bank of Kenya (CBK) as part of its celebration of 50 years since it was set up.
In Kenya’s case the fiscal deficit has been hovering around 8-11 per cent in the past few years, though it is projected to come down in the coming years.
The fall in the deficit is associated with the conclusion of the SGR. Kenya borrowed more than Sh300 billion from China for the construction of the railway that is set to be completed by mid-next year.
Greater integration
Mr Kasekende said the countries in the region would also need to ensure greater integration of operations in terms of trade.
He noted that there had been residual barriers to trade, movement of capital and labour which prevented the full realisation of the integration project.
Among the monetary union convergence criteria is to have headline inflation of not more than eight per cent, fiscal deficit ceiling of three per cent of the gross domestic product (GDP), gross public debt ceiling of 50 per cent of the GDP and foreign reserve cover of 4.5 months of imports.
Kenya’s public debt is currently just over 50 per cent of the GDP, but the ceiling set in the Medium-Term Debt Management Strategy as passed by Parliament is 74 per cent. The National Treasury however says it intends to restrain the debt to no more than 45 per cent of the GDP in the coming years.
In Uganda, public debt stands at about 38 per cent of the GDP while in Tanzania it is at 50 per cent.
Mr Kasekende said a common currency would have profound implications for the countries when it came to periods of crisis, noting that the experience of the European Union was a good example. When Spain, Greece and Portugal fell into problems in the recent past, the other countries in the region had to come to their rescue.
