Bloomberg News

East African Nations Raise Investment as Growth Outlook Dims

June 09, 2011

(Updates with comment by Deloitte in 12th paragraph, currency in 14th.)

June 9 (Bloomberg) -- Kenya, Tanzania and Uganda outlined plans to increase spending on roads and power plants as they struggle to maintain economic growth that has been damped by rising fuel and food costs.

Budget plans for the year through June 2012 announced yesterday showed the investment will stymie attempts by Kenya and Uganda to narrow their fiscal deficits.

Higher fuel prices and food costs, driven by poor rains in parts of East Africa and increased international prices, have constrained consumer spending and hardened expectations for weaker economic growth. The three governments aim to attract more private investment by upgrading road and rail links and improving the reliability of electricity supplies.

“The economic prospects for 2011 remain strong, but the impact of high fuel and commodity prices as well as delayed rains is a source of concern,” Kenya’s Finance Minister Uhuru Kenyatta said in Nairobi, the capital, in his annual budget speech to parliament yesterday.

Growth in East Africa’s largest economy is projected to slow to 5.3 percent in 2011 from 5.6 percent last year, and rise to 6.1 percent in 2012, Kenyatta said.

Kenya will boost spending by 15 percent to 1.15 trillion shillings, pledging 100.9 billion shillings to upgrade roads, up a fifth from a year earlier, and doubling energy investments, he said.

Deficit Spending

The government also plans to remove the excise duty on kerosene, a fuel used for cooking, eliminate the levy on wheat imports, and lower the tax on imported corn to 10 percent from 50 percent, to offset the rising cost of living, Kenyatta said.

Those measures will contribute to the budget deficit widening to 184.3 billion shillings, he said. Excluding the rollover in domestic debt and taking into account external debt redemptions, the deficit will widen to 236.2 billion shillings, or 7.4 percent of gross domestic product.

The government had forecast in March that the fiscal gap would narrow to 152.6 billion shillings, or 5 percent of GDP, from 162.5 billion shillings, or 6 percent, this fiscal year.

“The deficit is going up because this is a very expansionary budget,” Elizabeth Irungu, investment manager at Stanbic Investment Management Services, said by phone from Nairobi yesterday.

Borrowing Demands

Kenya’s target of net foreign financing of 116.7 billion shillings, from an estimated 37.6 billion shillings in 2010- 2011, may ease pressure on local bond yields, Yvonne Mhango, an economist with Renaissance Capital Ltd., said in an e-mailed note today. Domestic borrowing is targeted at 119.5 billion shillings in the next financial year, down from 125 billion shillings this year, Kenyatta said.

Kenya’s debt to GDP ratio, which has “crept up” over the last several years to 47 percent, is at a manageable level, Sammy Onyango, chief executive officer of Deloitte East Africa, told reporters in Nairobi today.

The yield on one-year Treasury bills jumped to 10.249 percent, the highest level in at least five years, at a sale yesterday, tracking rising inflation.

The Kenyan shilling has depreciated 7.9 percent against the dollar this year, and is the world’s third worst-performing currency after Suriname’s dollar and the Maldives’ rufiyaa. The currency was trading 0.1 percent stronger at 87.55 per dollar at 4:48 p.m. in Nairobi, compared with yesterday’s close of 87.64. Tanzania’s shilling has retreated 5.7 percent, the fifth worst performer, while Uganda’s currency fell 3.8 percent.

Uganda Investment

Uganda plans to increase “development expenditure” by 40 percent to 3.47 trillion shillings in the next fiscal year as it builds highways and develops hydropower projects, Finance Minister Maria Kiwanuka said yesterday in the capital, Kampala. About 1.22 trillion shillings will be invested in the transport sector, she said.

The Finance Ministry on June 7 cut its economic growth forecast for the fiscal year through June to 6.3 percent from an earlier projection of 6.4 percent.

The budget deficit will widen to 4.8 percent of GDP from 4.7 percent a year earlier, it said. Kiwanuka didn’t give a figure yesterday for the deficit next year. The fiscal gap may increase to 5 percent of GDP in 2011-12, Yvette Babb, a strategist for Africa with Standard Bank Group Ltd., said in an e-mailed note today.

Tanzanian Finance Minister Mustafa Mkulo pledged to lift expenditure on electricity projects, road-building and irrigation schemes in 2011-2012 by 85 percent to help spur the economy.

The objective of the budget is to “allocate resources for areas with economic multiplier effects like infrastructure for electricity, water, roads, ports, agriculture, irrigation schemes and information and communication technology,” Mkulo said.

Tanzania’s economy will expand 6 percent in 2011, down from 7 percent the year earlier, the International Monetary Fund said on May 10.

--With assistance from David Malingha Doya in Dodoma, Tanzania, and Heather Murdock in Kigali. Editors: Philip Sanders, Karl Maier

To contact the reporters on this story: Sarah McGregor in Nairobi at smcgregor5@bloomberg.net. Fred Ojambo in Kampala at fojambo@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.


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