Global growth data show that East Africa had the sharpest fall in economic performance in 2015, a year when low commodity prices, subdued trade and instability in financial markets ruled.

Internal factors combined with global shocks to pull down economic growth from 5.8 per cent to 3.4 per cent.

This reversal was bigger than the global average of 3.4 per cent to 3.1 per cent, and Africa’s at 5.1 per cent to 3.8 per cent.

“This was mainly associated with political instability in Burundi and uncertainties associated with the General Election in Tanzania,” says PricewaterhouseCoopers in a pre-budget bulletin.

This backdrop highlights the challenges ahead for Treasury managers as they prepare to read the 2016/7 budgets in Kenya, Rwanda, Uganda and Tanzania this week.

Burundi’s was read in February. The crisis in Burundi may have reduced but for political uncertainties, Kenya will replace Tanzania with an election in August 2017.

Ongoing agitation for removal of the electoral commission officials, and the falling out in the Supreme Court suggest the election will be aggressively contested.

The rapid fall in the growth rate at a time when oil prices averaged $52.53 per barrel compared with $99.45 in 2014 is also likely to accelerate with the commodity having recovered in recent weeks.

“The rate of inflation would have been higher (dimming growth) were it not for the counteractive effect of the low oil prices,” the Parliamentary Budget Office says in its critique of Budget Policy Statement released by the Kenya Treasury.

With all countries looking to address infrastructure gaps, reduce budget deficits and create jobs, the recent breaking of ranks over regional projects like the standard gauge railway and the oil pipeline is likely to make it more difficult to sell the region as one investment destination.

Spectre of red tape

Even when funding is available red tape in procurement and donor disbursements has seen most of the development projects run behind schedule.

Despite Kenya receiving Ksh411 billion ($4.11 billion) for the budget to be read this week, for instance, the Treasury expects only Ksh195 billion ($1.95 billion) – less than half – to be used during the financial year.

That could as well be a blessing in disguise as the Kenya Revenue Authority has over the past three years failed to meet its targets. Treasury expects KRA to increase its collections to Ksh1.37 trillion ($13.7 billion), the target for this year was Ksh1.18 trillion ($11.8 billion).

“There are many loopholes at the borders and failure to collect taxes from all payers. KRA needs to restructure and improve on efficiency. It also needs to think how to diversify and collect more revenues from other sources because half of the revenues come from income taxes. It should not increase income taxes because that would put a lot of pressure on workers,” said Mentoria Consulting in its “State of the Economy – Countdown to Budget” bulletin.

Despite these gaps, Kenya collected slightly more revenue ($13.2 billion in 2014) than the rest of East Africa combined. Uganda collected $6 billion, Tanzania $5.7 billion and Rwanda $1.3 billion in 2014 while Burundi figures are not readily available.

While all countries have announced smaller budget deficits – gap between expenditure and revenue – as they start moving towards the East Africa Community convergence criteria of three per cent of Gross Domestic Product, Tanzania’s taxation measures will be keenly watched especially after President John Pombe Magufuli promised local businessmen fiscal protection aimed at growing local industries.

Under the EAC Common External Tariff, countries are allowed to impose additional taxes on sensitive products – largely foodstuffs – once they convince the Secretariat that this will shield nascent industries from competition and help them grow steadily. Should Tanzania make unilateral moves, it is likely to upset its neighbours and renew discussions on the Customs Union protocol.

The election in Kenya poses a key risk to realising the budget goals for the coming financial year especially because goods to the landlocked countries pass through the port of Mombasa.

“The threat of violence during the upcoming elections could cause investors to hold back on investments until after the elections. The series of protests against the IEBC that have turned violent could have caused concerns among investors,” PwC says in its Economic Outlook for 2016.

With the exception of 2013, when economic growth reached 4.2 per cent, the three previous elections came with growth rates of less than one per cent.

Mounting debt in the face of sluggish export revenue growth is another challenge facing finance ministers.

While Rwanda and Uganda have some headroom for sustainable debt absorption, Kenya and Tanzania are on the brink of the levels recommended by multilateral development institutions like IMF. Kenya’s debt is now equivalent to 50 per cent of GDP, the same as Tanzania’s, followed by Tanzania 50 per cent, Uganda 31 per cent and Rwanda 25 per cent.

A tenth of foreign exchange earnings in Kenya is currently going to service debt, a ratio that could worsen with increasing imports and higher petroleum prices.

Kenya had a trade deficit equivalent to 28 per cent of GDP in 2014, compared with 16.2 per cent in Rwanda, 11 per cent in Tanzania and 8.5 per cent in Uganda.

This combined with budget deficits ranging from 3.8 per cent to eight per cent in the EAC countries threaten exchange rate and price stability, and, by extension, inflation growth.

So far, Kenya has stabilised the exchange rate through borrowing – syndicated loan and a standing IMF facility – implying a need to grow the export base. Over the years this has been constrained by consumption of imports, which hamper industrialisation and job creation.

Out of the 841,600 jobs the economy created in 2015, only 126,240 were in the formal sector. Informal sector jobs tend to be of low productivity impacting disposable incomes, reducing spending power and economic expansion.