How public debt is administered impacts economic performance

No expression quite captures the prevailing state of affairs of emerging economies as the famous words uttered by Polonius in Act I, Scene III of William Shakespeare’s play, "Hamlet": “Neither a borrower nor a lender be: for a loan oft loses both itself and friend; and borrowing dulls the edge of husbandry (economy).”

The saying can be applied to daily realities as it includes a pedantic tone with a universal application. In economics, the quote is applied to caution the State against taking up a huge debt burden by pointing out the adverse effects of borrowing to the economy.

Debt can be perceived as the quickest way to an expedient goal. Economist Peter Warburton, in his book Debt & Delusions, notes that debt fosters immediate satisfaction of a need or want regardless of the current revenue.

In most low-income nations, the current expansion of debt is linked to infrastructural projects such as roads, railways and hydroelectric dams. The assurance of each loan agreement is that the debtor applies the funds to meet desired future financial returns.

Economic literature establishes a strong nexus between higher absorption of debt and the anticipated increase in economic output. Yet, in several emerging nations the expansion of debt is out of control and evidently outpaces the growth in national income.

IMF’s "Regional Economic Outlook on Sub-Saharan Africa"(April 2020) shows that in 2019, the average level of foreign debt as a ratio of GDP in sub-Saharan Africa was 57 per cent, contrary to an external debt sustainability threshold of 55 per cent.

DEBT DISTRESS

From the report, seven low-income nations were in debt distress, nine States were at high risk of debt distress, whereas a couple of middle-income countries held high levels of debt.

Further to this, overreliance on debt from commercial sources had augmented debt servicing costs occasioned by higher exposure to stricter international financial conditions.

As a consequence, efforts by developing countries to tackle the Covid-19 pandemic have been hindered by existing debt payments and rising borrowing costs.

According to the Central Bank of Kenya’s Weekly Bulletin, the country’s total public debt as of March 2020 stood at Sh6.285 trillion.

The share of external debt to aggregate public debt was Sh3.2 trillion (51.1pc), while the share of internal debt to aggregate public debt was Sh3 trillion (48.8pc).

IMF reports that Kenya’s external debt as a percentage of GDP expanded from 22.1pc between 2010 and 2016 to 31.3pc in 2019.

This indicates deviation towards external debt, a trend that might be ascribed to favourable debt conditions consistent with the State’s external debt strategy of sourcing loans on highly concessional terms.

LACK OF FRUGALITY

Though Kenya’s external funding is sourced from official creditors, the level of aggregate borrowing requirements could expose the country to a fragile credit profile.

In an article in Business Daily, Treasury CS Ukur Yatani highlights various State measures meant to rein in ballooning public debt.

In particular, the Cabinet has approved the Public Debt and Borrowing Policy aimed at adopting a principle of “least cost and minimum risk” approach to public debt.

How public debt is administered has a substantial impact on overall economic performance. Hence, this raises the question: as the State is working towards fiscal consolidation over the medium term, why does the budget still contain hefty compensation packages for State officials, retired and deceased?

US President Ronald Reagan, in reference to his country’s federal debt that had almost tripled in nominal terms during his tenure, said: “We don’t have a trillion-dollar debt because we haven’t taxed enough, we have a trillion-dollar debt because we spend too much.”

The writer is an economist; [email protected].