This archive report was first published on 28 June 2021.
June 28, 2021, marked a turning point for East Africa's economies, as the region's finance ministers embarked on a borrowing spree to mitigate the effects of the Covid-19 pandemic. However, this move has only exacerbated the region's debt crisis, which is now on the brink of collapse.
According to a report, the region is projected to borrow $16 billion more this year to shore up flagging growth, with most of the new debt being contracted in the name of post-Covid recovery. However, the question remains: what happened to the money borrowed last year?
The deficits in the health system exposed by the current third wave of the pandemic have shown that resources have been mismanaged. Health system capacity has been overrun by surging patient numbers, basic inputs are in short supply, and health workers are succumbing to the coronavirus due to fatigue and a lack of personal protective gear.
With such a lackadaisical attitude to public resources, the public's concern about new debt is justifiable. Borrowing is necessary, but debt has to be productive. Debt is premised on the assumption that the loans would facilitate internal and external linkages, putting economies on the path to sustainable growth. However, in reality, economies are fragile and are drifting towards debt unsustainability because money borrowed is not generating sufficient yield.
Currently, 10 percent and 30 percent of annual spending in some countries is going to debt service. Metrics such as debt-to-GDP ratio that are used to measure sustainability are unreliable in the current environment because growth is uncertain. Lockdown measures are stifling private consumption while a global recession triggered by the pandemic is limiting export earnings.
Historically, cheap money and a large syndicated loan market have encouraged borrowing in developing countries, eventually building up to a financial crisis when recession hits. Covid-19 is sending the global economy into recession, and a crisis is inevitable.
Governments can mitigate fallout if they change character. Money must go where it brings a return. Debt has largely been opaque and mismanaged. To ensure discipline, regulators need to become more vigilant and transparent. Money needs to be spent wisely, the cost of borrowing must be brought into focus, and public procurement watched over with an eagle's eye.
