16 April 2018

East Africa Grapples With Current Account Deficits

The failure by East African countries to produce high-value goods and services for export is said to be the cause of high current account deficits.

Regional governments are grappling with inadequate funds to finance their import bills and other operations, resorting to expensive borrowing.

Only Rwanda has reported a slight decrease in current account deficits, to 0.9 per cent in 2017, from 1.2 per cent in 2016.

Kenya has reported an increase to $5 billion in 2017, from of $ 3.65 billion in 2016. As a proportion of GDP, Kenya's current account deficit increased from 5.2 per cent to 7 per cent last year.

Tanzania's current account deficit is estimated at 5 per cent, and is expected to grow to 5.3 per cent in 2018 and 5.4 per cent in 2019.

The country banned exports of mineral concentrates and ores of metallic minerals like gold, copper, nickel and silver, which is expected to hurt inflows.

The ban, which was effected in 2017, aims to ensure that mineral value addition is carried out within Tanzania.

In Uganda, the current account deficit increased to 5.6 per cent in 2017, from 4.3 per cent in 2016.

Uganda imports mainly fuel, vehicles, electrical machinery, sugar, beverages, machinery, iron and steel, and animal/vegetable fats and oil.

Rwanda imports electrical machinery and equipment, vehicles, cereals, pharmaceutical products, salt, iron and steel, sugars, plastics articles, and fats and oils.

Its main sources of imports are the EAC, China, EU, India, SADC, and the United Arab Emirates.

Rwanda's exports include coffee, tea, ores, precious stones, products of the milling industry, and residues and waste from food industries.

Capital flight

Analysts say that East Africa is facing unprecedented capital flight due to the high number of expatriates and foreign companies operating in the region, increased foreign ownership of listed firms, high interest payments on foreign debt and increased imports of items including food, motor vehicles, garments and capital equipment.

The failure to add value to goods produced in East Africa has led to the loss of competitiveness in international markets.

"Unless we start adding value to the goods and services we are exporting, we are likely to have unfavourable terms of trade for a long time," said Scholastica Odhiambo, a senior lecturer at the School of Business at Maseno University.

"What we lack in East Africa is the ability to use the technology we have to produce high-value products for export."

East Africa's Industrial Competitiveness Report (2017) shows that the region's manufacturing value added has declined from 5.3 per cent (2005-2010) to 4.6 per cent (2010-2015), far below the annual growth rate of 10-15 per cent outlined in the EAC's industrialisation plan (2012-2032) and below the sub-Saharan African average.

According to the Kenya Association of Manufacturers, Kenya's export products are mostly primary in nature: Tea constitutes about 25 per cent of the total value of exports.

Some of Kenya's manufactured exports are food products, on-metallic mineral products, chemical and chemical products, metals, pharmaceutical and botanical products, textiles and apparel.

East Africa's governments import more goods and services than they export. Most exports are of unprocessed agricultural goods.

Governments have been borrowing from the domestic markets through Treasury bills and bonds and from the external lenders.

"Governments often go into debt to finance these deficits making them even more vulnerable. We are paying more to service debts secured either domestically or externally," said Dr Odhiambo.

Tanzania says the increase in its import bill has been triggered the high demand for capital goods and services for infrastructure projects. The country's exports include gold, cotton, tea, tobacco, coffee, sisal, cashew nuts, cloves, and horticulture products.

Kenya attributes its deficit to high payments for import of oil and machinery and transport equipment mostly on account the SGR project and foreign workers' remittances.

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