What level of public debt is desirable for Kenya?

Debt is a sign of economic difficulty. FILE PHOTO | NMG 

By NDIRANGU NGUNJIRI

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Summary

• Debt is a sign of economic difficulty, which by its nature is fast accumulating and therefore, the minimal amount is even a threat to the healthy development of a society.
• I prefer societies to live within their means to stay out of debt and make a positive leap towards a healthy economic life that is free of debt.

In the last few weeks Kenya borrowed more than Sh200 billion, increasing the national debt to over Sh4.5 trillion. This means every Kenyan has a debt of Sh100,000, most of the borrowed funds have been spent on long term infrastructure projects.

A debt-to-GDP ratio of 40 per cent is quite often noted as a prudential limit for developing countries.

This suggests that crossing this limit will threaten fiscal sustainability. Currently, our debt ratio stands at 54 per cent. How did we get this level?

“What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?” writer Adam Smith.

Debt is a sign of economic difficulty, which by its nature is fast accumulating and therefore, the minimal amount is even a threat to the healthy development of a society.

I prefer societies to live within their means to stay out of debt and make a positive leap towards a healthy economic life that is free of debt.

The level of the debt depends on many factors (GDP, growth rate etc), and mainly on the capacity of a given country to reimburse the debt.

Debt is a form of barrier to growth and increases dependability on the donor. Kenya needs to see the budget (revenue vs expenses), apportion the debt repayment in the expenses and work out a ROI and BOP, to make a wise decision.

Always understand that debt payment when not properly managed ‘‘Is a load that is shared with the future generations’’.

No debt is desirable for an individual. Why should any debt be desirable for a community?

No one is indispensable since the way government is drowning Kenya in a sink and leaving it’s positions after increasing the debt and GDP is frozen.

It is argued that high debt-to-GDP ratios cause macroeconomic instability, which is not good for growth and hence make debt unsustainable.

As long as there is spare capacity in the economy or unemployment, higher fiscal deficits add to purchasing power and do not exert any upward pressure on interest rates or inflation, nor do they cause large current account deficits.

However, it is often claimed that higher public debt today has to be paid by higher tax tomorrow. This is not necessarily true.

As long as the interest on the debt is less than the annual increase in nominal GDP, the debt need not be repaid because it will be a shrinking fraction of GDP.

Essentially, public debt ought to be considered undesirable whatever the amount of debt is there.

However, the transactions in the modern world may involve a necessity for debt but this has to be kept to a minimum.

It is apparently unwise for an individual to live beyond the available means. The same applies to a country whether it is developed or developing.

Good public debt management can help reduce borrowing cost in many ways.

A well designed and implemented borrowing program can give confidence to investors and thus reduce the lending spread.

READ: IMF warns over Kenya's rate in taking new debts

A carefully balanced composition of securities can contain risk—which are harder to manage in countries having few alternative sources of finance.

Good public debt management can also help develop the domestic financial market.

Domestic financial institutions benefit from having available public debt instruments in which to invest and which can provide benchmarks for the pricing of other instruments.

Moreover, firms and individuals also benefit for similar reasons. In turn, a well-developed domestic financial market can facilitate economic development, and make the economy more resilient to external shocks, such as capital outflows.

The present generation does not have the right to burden the next generation with heavy debts.

In my opinion, if Kenya keep on increasing huge debts we heading towards disaster despite the “bright” appearance that covers the interior illness.

I am afraid that most cases of debt in Kenya are corruption, fraud and nothing else. I do not think I have added much, just a warning that theoretical levels cannot be applied on the ground without a good local context check.

Ndirangu Ngunjiri, Watermark Consultants, Nairobi.