Pandemic Borrowing & Frontier Economies

By Dave Nziza

The COVID-19 pandemic has required nations to borrow to meet the disease’s socio-economic related issues. However, as can be seen by the three Lake Victoria states (Kenya, Uganda and Tanzania) borrowing patterns have been different amongst states. 

The GDP to debt ratios will be used to measure the extent to which borrowing affects these countries. This statistic is useful because it allows one to see the extent to which GDP growth is tied to foreign capital in the form of loans. As these three economies have developed over the last decade there has for the most part (except Tanzania in the last five years) been increased dependency on foreign loans. Growth in economies, especially in developing economies such as these, that is tied so heavily to foreign debt may not suggest effective internal development of economies because one must consider that the cost of these loans may have great negative long term effects on these economies: interest payments, reduced growth of national industry and business capacity due to lender states ensuring contracts are performed by businesses from the lender states and lastly long term economic influence as these developing states become more reliant on foreign loans to drive growth. 

Borrowing was needed- According to an IMF report from May 2020, real GDP growth of Kenya was projected to drop 5 percentage points below the pre-COVID baseline.[1] Regarding Uganda, UNDP reported that from April 2020, projected GDP growth for Uganda was “revised downward from 6% to between 4.6% and 5.1% under the worst-case scenario”.[2] Lastly Tanzania’s real GDP growth according to the IMF, was projected to reduce from 6.3% in 2019 to 2.0% in 2020. [3] The pandemic resulted in reduced GDP growth and in light of the health crisis and economic downturn, the three Lake Victoria states needed to borrow, however the approaches to borrowing taken by the countries as will be seen below, may exacerbate increased foreign control as a result of greater foreign dependence.  

Kenya borrowed aggressively in response to the pandemic: according to Treasury, a total of Ksh1.11 trillion ($11.1 billion) for the nine months period to September 30 (January-September).[4] Within the first three months of the pandemic (March to June) public debt had grew 3.3 times compared to the preceding three-month period (December 2019 to February 2020). Uganda took a more moderate approach to borrowing: total public debt increased by 21.7% in FY 2019/20. Tanzania chose to strictly adhere to its conservative approach (as championed by President John Magufuli), as noted by an IMF report from June 2020, that projected public debt as a percentage of GDP would reduce by 0.9% during the year 2019/20 and the projected increase in the FY 2020/21 is only expected to be 1.7% as compared to FY 2019/20.[5]

Effects of Borrowing Approach- Kenya’s aggressive approach to borrowing is expected to result in public debt reaching 69.2% of GDP by 2023 and gross external debt, will equal 34.8% of GDP (which is a 10-percentage point increase over pre-pandemic levels)[6]. Despite this rapid increase in debt, the IMF has observed that Kenya’s debt still remains sustainable. Nevertheless, Kenya is going to find that access to foreign loans may become increasingly conditional (in the form of concessional borrowing, which allow for cheaper interest rates but tend to be more restrictive in the ways the finances can be allocated).  Heavier reliance on concessional borrowing suggests, Kenya will become increasingly at the mercy of foreign states because increased GDP debt to ratio indicates dependence on foreign loans to drive growth and as such Kenya will not have as much bargaining power when it comes to negotiating loans. This weakened bargaining I would argue would lead to greater economic influence e.g., by the institution of toll roads that may price out ordinary Kenyans from the enjoyment of economic growth, as foreign powers seek to extract the most value from their loan deals.[7] In contrast, Uganda by 2023, will only have increased her GDP-debt ratio to a manageable 50.4% & external debt to GDP ratio is expected to rise to 36.2% of GDP. [8] As a result of relatively moderate borrowing and expected commencement of production of oil, risk of Uganda suffering external debt distress is not expected to grow in the medium term. However, this forecast is highly dependent on oil prices, which recently have fluctuated greatly. The extent to which foreign lenders as opposed to foreign companies will affect the Ugandan economy, is highly dependent on when oil production begins and the extent to which oil prices remain stable to ensure Uganda can make enough profit off oil development to reduce her dependency on foreign lenders.[9] Tanzania’s debt to GDP growth projection by 2023 is negligible (2%).[10] Thus, Tanzania is not at risk of suffering external debt distress as its debt is not expected to increase substantially. However, radical avoidance of foreign loans may not necessarily be beneficial for the country either because the government may not be able to sufficiently fund its economic growth goals by its preferred means: domestic driven growth in the forms of providing cheaper bank loans to the national economy and lower bank deposit reserve requirements. This approach is inherently risk as reduced Tanzanian economy would result in the country not having sufficient capital relief to mitigate reduced economic growth which could result in a recession. Furthermore, this approach may result in Tanzania having to incur higher interest rates on future loans and tougher loan conditions, in the event that the country is unsuccessful at raising the necessary capital through domestic means and has to turn to foreign lenders. 

[1] (IMF Country Report No 20/156)

[2] (UNDP Uganda, Socio Economic Impact COVID 19 Uganda Brief) 



[5] (IMF Country Report No.20/203)

[6] (IMF Country Report No. 20/156)


[8] (IMF Country Report No.20/165)

[9] ibid

[10] (IMF Country Report No. 20/203)

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