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East African governments hike infrastructure spending

By peterguest | Published: 15 June, 2010

Kenya, Uganda and Tanzania will all significantly increase government spending in 2010/2011 as they look to improve infrastructure and education and sustain their recovery from the economic downturn.

Uganda, which expects its newly discovered oil to come onstream towards the end of 2011, will increase spending to $3.31bn, up 16 percent on 2009/2010, with the majority spent on education and infrastructure – $506m and $466m, respectively. The country hopes to mobilise domestic resources for development once the oil revenues start to flow, and investing in education to improve local skills is seen as one method to ensure local businesses and talent benefit from the inflow of capital. Of the budget, some 25 percent is sourced from donor loans and grants.

Kenya’s finance minister, Uhuru Kenyatta, announced a 15 percent increase over 2009/2010 budgets, with the allocation for infrastructure increased by 20 percent. Close to $1bn will be spent on roads alone in order to prime the economy for increased trade and to reduce the cost for local enterprises to move goods around the country and the region. $423m will be spent on power infrastructure, of which $144m is allocated for geothermal projects. The remainder will be used to upgrade the country’s transmission networks, according to the budget statement. The government intends to develop 500MW of additional geothermal power. The country’s Rift Valley regions are well suited to this form of generation, and recent droughts and diesel price increases have highlighted the fragility of Kenya’s dependence on hydroelectric power and fossil fuels. Three existing plants currently generate around 160MW.

Tanzania will increase spending by 22 percent in 2010/2011, up to $3.3bn, according to its finance ministry. 28 percent of the budget comes from foreign loans and aid. The government intends to borrow $1.4bn from domestic and international sources to fund its budget, with $960m earmarked for infrastructure projects.

“When the global economic downturn hit in 2008/2009, the IMF was very keen for these countries to relax fiscal policy and have a procyclical fiscal stance,” explains David Cowan, chief Africa economist at Citigroup. “What happened was that because of their own capacity constraints, they weren’t really able to get as much money as they thought they would out of the door, and so we’re seeing a very gradual widening of fiscal deficits now, as they start to get the budgets out of the door.” Kenya certainly is making some better strides in getting money out of the door in the past six months and it looks like that will continue. I think that pattern is the same in Uganda and the same in Tanzania.”

Despite a predicted recovery in the region, there is little incentive for fiscal tightening, Mr Cowan says, as all three countries enter their election cycles. Tanzania will vote in October, Uganda in February next year and Kenya, pending a constitutional reform referendum, will vote later in 2011.

The global economic downturn hit growth in all three economies. Ugandan GDP growth fell moderately from 8.7 percent in 2008 to 7.1 percent in 2009; Tanzania’s fell from 7.4 percent in 2008 to 5.5 percent in 2009. Kenya, whose growth in 2008 was already depressed following the country’s post-election violence, remained low at 2.1 percent, well down on 2007 highs of 7 percent. Prolonged drought reduced agricultural outputs and a volcanic eruption in Iceland which shut off air traffic in Europe in April hit Kenya’s horticultural exports, albeit briefly. However, the IMF is forecasting 4.1 percent growth this year. Tanzania and Uganda are predicted to hit 6.2 percent and 5.6 percent respectively.