East Africa in a tight squeeze amid austerity & growth challenges

East African economies are currently navigating a wave of tough choices and critical decisions. Kenya's government recently announced a significant budget cut for the fiscal year 2024, reducing it to 3.91 trillion Kenyan shillings. The reduction, amounting to 273 billion Kenyan shillings, was primarily driven by underperformance in revenue tax collections, which fell short of the projected 3 trillion shillings. This move aims to align the budget with a more realistic tax base and pursue a strategy of fiscal consolidation. The goal is to curtail government expenditure and borrowing, ultimately lowering the country's debt-to-GDP ratio from around 71-70% to 60% by 2029. By taking these measures, the Kenyan government hopes to streamline its fiscal policies and enhance economic stability. Chad Nyakatura, Money Market Sales Manager at Stanbic Bank Uganda, shed light on the banking sector's resilience amidst these challenges. In Uganda, NCBA Uganda reported a notable 17% increase in net profits, signaling a positive trajectory for the banking industry. Analyzing Uganda's banking landscape reveals three key indicators of its health. Firstly, liquidity levels have remained robust, with a liquidity ratio averaging 200%, double the minimum requirement of 100%. This surplus provides banks with a safety net for unforeseen liquidity needs. Secondly, capital adequacy ratios have consistently hovered around 23.8%, well above the mandatory 10% threshold. Strong capital buffers equip banks to withstand financial shocks and support lending activities. Finally, improvements in asset quality, reflected by a declining non-performing loan (NPL) ratio and rising gains on assets, underscore the sector's resilience and prudent risk management practices. Amid Uganda's recent tax hikes and budget challenges, tax revenue remains a focal point for addressing budget deficits. While tax increases serve as a common method to balance budgets, overreliance on this approach poses potential drawbacks. Recent tax amendments affecting excise duty, stamp duty, and income tax have sparked concerns among individuals and businesses, impacting disposable incomes and the overall cost of doing business. Notably, Uganda's tax-to-GDP ratio stands at 13%, lagging behind regional neighbors like Kenya and Tanzania, which average 15-16%. To achieve sustainable fiscal health, Uganda must enhance tax collection efficiency and explore diverse financing options beyond tax hikes. Diversifying revenue sources and strengthening tax compliance mechanisms could enable Uganda to achieve fiscal sustainability and propel economic growth amidst challenging times.