East African governments could be forced to raise taxes for their citizens as they move towards a common currency.

Rwanda, Burundi, Uganda, Kenya and Tanzania have agreed to keep the gross public debt ceiling at 50 per cent of GDP in net present value terms as part of the EACs primary macroeconomic convergence criteria.

Countries are expected to observe and maintain the criteria for three consecutive years in the run-up to the adoption of the monetary union and single currency in 2024.

“This means that government spending will be controlled and countries will not be allowed to borrow beyond the set limit, forcing them to look for the other ways of generating revenue to fund their projects,” said Peter Njoroge, director of economics at Kenya’s Ministry of EAC Affairs, Commerce and Tourism.

“The majority of countries look to raising taxes for their citizens to generate funds to run projects. They also include the other groups of citizens that were previously not in the tax bracket, such as non-governmental organisations, to generate revenue.”

According to Mr Njoroge, the 50 per cent ceiling is likely to constrain EAC countries from undertaking huge infrastructure projects to avoid exceeding the debt ceiling.

Alternatively, countries may be forced to phase the implementation of the huge projects in such a way that they do not break the debt ceiling thus projects take longer to implement.

“In a way, it will instil fiscal discipline among partner states,” he said. “But the agreed upon ceiling will start applying after 2021.”

Currently, all the EAC partner states’ public debt ceiling of GDP is below 50 per cent. Kenya is at 46.5 per cent, Rwanda and Tanzania 42 per cent, Uganda 34.5 per cent and Burundi 32 per cent.

“With a 50 per cent debt ceiling, the five partner states will have to ensure that they collectively remain debt-sustainable under the monetary union to avoid the adverse effects of asymmetric shocks whose consequences will have broader ramifications for the whole region,” said Jared Osoro, director of research and policy at the Kenya Bankers Association, adding that the five countries can maintain their borrowing at different levels but below the 50 per cent ceiling.

The EAC partners are expected to present a medium term convergence plan on how they will maintain and sustain this ceiling starting this financial year for two years on July 22, in Dar es Salaam. This will be approved by the EAC finance ministers.

“Among the things the five countries will include in the plan is how they will generate funds at a set target of 25 per cent of their GDP to avoid borrowing,” said Mr Njoroge, adding that although this is not a mandatory obligation for the EAC partners, it is an indicative parameter for the partner states.

He said that if any of the EAC partners goes beyond the 50 per cent limit, it will experience difficulties in servicing its debts, which could lead to a crisis similar to that Greece is experiencing, for defaulting to pay the principal amount and the interest.

“One country may force inflationary increases for the entire union to maintain national solvency or seek a bailout,” said Mr Njoroge.

Henry Rotich, Kenya’s Treasury Cabinet Secretary, said that if the 50 per cent ceiling is maintained, the government will address debt sustainability issues by containing the overall fiscal deficit and putting emphasis on the efficiency and effectiveness of public spending, as well as improving revenue performance.

“Specifically, the fiscal policy aims at a revenue effort of 21.8 per cent of GDP over the medium term and containing growth of total expenditure,” said Mr Rotich.

The World Bank and International Monetary Fund require that developing countries maintain their gross public debt ceiling below 50 per cent of the GDP in net. The European Union has a debt ceiling of 60 per cent while the Economic Community of West African States has a debt ceiling slightly above 50 per cent.

Among the proposed debt instruments the EAC partners are expected to consider to raise funds are the traditional instruments used by the partner states. These include debt securities, loans and special drawing rights. But the EAC countries will agree on which instruments they will stick to.

The EAC single currency is expected to be introduced by 2024 by member states that comply with the convergence criteria. Joint monetary policy will be governed by an independent EAC central bank with a system of national central banks as its operational arms.

The central bank’s primary objective will be price stability; secondary objectives will be financial stability and economic growth and development. The single exchange rate will be free floating.

Source: The East African

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