East Africa’s economies spend their way out of crisis

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Kenya, Tanzania and Uganda all plan to boost spending on roads and energy projects in the coming financial year to stimulate their economies as the global slowdown hits traditional drivers of growth.

The global scenario has hit tourism, remittances from abroad, foreign direct investment and earnings from traditional agricultural exports such as tea and coffee in all three economies, Reuters adds.

Kenya, the biggest economy in the region, will boost government spending by nearly a quarter to push annual growth back to 3% after it plummeted to 1.7% in 2008, Finance Minister Uhuru Kenyatta said in his budget yesterday.

Kenya‘s economy expanded by 7.1% in 2007 before a combination of post-election violence, poor weather and the fallout from the financial crisis stunted growth.

Spending on development in the year starting in July was slated to rocket 83% with roads, energy, water and irrigation projects the big winners in Kenyatta’s first budget.

Uganda announced a budget spending increase of 15% with the focus on transport and communications infrastructure and developing reliable and affordable energy.

It was not hit as badly as Kenya in 2008 and is also profiting from interest in oil reserves estimated at a billion barrels on the border with Democratic Republic of Congo.

But it expects growth to slow to 6% in the 2009/10 financial year and hopes the increased spending will cushion the impact of the slowdown on agricultural exports, foreign investment and remittances from abroad.

Tanzania will spend 31% more in the financial year starting in July with infrastructure, farming, schools and health snaring nearly half of government spending.

Africa’s third biggest gold miner and a natural gas producer, Tanzania also expects economic growth to slow this year, but only to 5% from 7.4% a year earlier.

While the growth rates all look healthy compared to some developed nations, analysts worry that all three may be pushing their budget deficits too high — and will suffer in the future.

Kenya‘s budget deficit will jump to 6.6% of gross domestic product and Uganda‘s deficit excluding grants will be 7.5%.

Kenya, Tanzania and Uganda had all hoped to follow in Ghana and Gabon‘s footsteps and issue debut Eurobonds to inject much needed external financing into their economies.

But the financial crisis forced all of them to postpone those projects — so they are turning to borrowing from domestic markets, or relying on donor funding.

Donors provide about a third of budget financing in Tanzania and Uganda, but Kenya is turning more to its local market to fund the ambitious expansion plans.

Finance Minister Uhuru Kenyatta hopes to raise 109.5 billion shillings ($1.4 billion) on local financial markets — a prospect some analysts say may push up short-term rates.

“He has elected to use deficit financing to bridge the gap,” said independent analyst Aly Khan Satchu.

“It is unclear that the lemon that is the domestic money markets can be squeezed indefinitely.”