East Africa’s rapidly expanding economies unveiled spending plans geared to more growth, but the positive effect of increasing foreign and private investment will be dampened by food and fuel price inflation.
Tanzania, Uganda and Kenya on Wednesday presented budgets that increased spending on infrastructure but that also included grain imports and fertiliser subsidies to ward off food shortages in their largely agricultural economies.
”Growth looks like it will remain robust,” said David Cowan, Africa economist at Citigroup, but added that getting inflation rates back under control would be a challenge for the governments in the second half of this year.
”You’ll see largely deteriorating terms of trade because the rising oil price will remain and they are running quite substantial current account deficits and there is still this issue of inflation in Kenya which is also starting to feature a little bit in Uganda.”
Kenya’s inflation has spiralled the fastest, deepening to 31,5% in May compared with Uganda’s 11,2% and Tanzania’s 9,1%, mainly on rising food prices.
Kenya has been hit by the inflation striking across the world, but a post-election crisis disrupted planting and forced farmers out of their homes in bouts of ethnic violence in January and February.
Like most on the continent, the three nations derive most of their income from agriculture but despite higher market prices, farmers will still struggle because of the cost of fertiliser, seeds and pesticides.
Tanzania is considering introducing an export tax on cereals.
Going for growth
Cowan said the outlook for the three was positive because foreign exchange reserves have picked up, domestic debt numbers remained relatively low and external debt positions improved.
”All three countries have tried to dovetail their budgets into their long-term plans,” said Charles Muchene, country leader for PriceWaterhouseCoopers in Kenya.
Analysts generally attribute that to fiscal discipline and stable macroeconomic conditions in all three.
”They are all trying to preserve the resources that they’ve got and they are going for growth because growth is the only thing that will reduce unemployment.”
Uganda and Tanzania have been talked of along with Zambia and Ghana as part of a new generation of African ”frontier markets” emerging behind the established economies of South Africa, Nigeria and Kenya.
Both Tanzania and Uganda said they would rely less on foreign budgetary support, cutting it back to 34% and 30% from 42% and 38,7% respectively last year.
”The budget indicates a sign of maturity. We are now learning that dependency is risky and dangerous,” Haji Semboja, an economist at the Economic Research Bureau at the University of Dar es Salaam, wrote in the private Citizen daily.
Kenya risks?
Kenya on the other hand announced a larger-than-anticipated $513,6-million sovereign bond to fund infrastructure expansion.
”This [bond] is subject to an improved rating from rating agencies — which creates some uncertainty around timing,” said Razia Khan, Africa economist at Standard Chartered Bank.
”The authorities are likely to take encouragement from the recent Safaricom IPO … even though with a sovereign bond, one might argue that domestic political risk matters more.”
The just-concluded share sale in Kenya’s biggest mobile operator Safaricom was five times oversubscribed despite the crisis earlier in the year that killed 1 300 people and displaced 300 000 people.
Both Uganda and Kenya foresee slower economic growth in 2008 because of post-election violence in Kenya after the disputed re-election of President Mwai Kibaki. Landlocked Uganda suffered when the violence choked supplies of fuel and other commodities.
Uganda’s growth prospects have been revised downwards to 8,1% from 8,9% previously and Kenya’s is seen expanding at 4,5% in the worst-case scenario. Tanzania sees GDP growth of 7,8% in 2008 from 7,1% in 2007.
”If [Uganda’s] slows to 8,1%, that’s still pretty rapid growth, the second strongest in Africa after Angola,” said Richard Segal, Africa fixed income strategist Renaissance Capital. – Reuters