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Jubilee’s borrowing binge: Chickens are coming home to roost

Friday November 17 2017

Treasury

Housing and Urban Development Principal Secretary Aidah Munano (left) and National Treasury Cabinet Secretary Henry Rotich hold a press briefing at the Treasury on November 8, 2017, about the growth of the NHC. Despite the disastrous history, it is remarkable how much faith there is world over that debt can finance growth. PHOTO | DIANA NGILA | NATION MEDIA GROUP 

DAVID NDII
By DAVID NDII
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This column has warned of an impending debt distress for three years.

In “From rising star to almost basket case: Tough lessons for Kenya from Ghana” (Saturday Nation, August 16, 2014):

“It is not inconceivable that the appetite for African sovereign bond issues will wane as more African countries, us included, abuse their newly found financial freedom. Whatever the case, we cannot afford to continue on the fiscal path that we are on. It is reckless.

"This mega-infrastructure madness has to stop. If we do don’t do it ourselves, the iron laws of economics will do it for us — and that, take it from me, does not come cheap.”

CREDITORS
Early in the year in “Getting off the debt treadmill won’t be easy” (Saturday Nation, February 8):

“Sooner or later our debt ladder will run out of rungs.”

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A US$750 billion syndicated bank loan due late last month was not repaid.

The creditors were persuaded to reschedule settlement to April next year.

Some of the creditors, owed 10 per cent of the debt, rejected the deal and had to be paid.

PUBLIC DEBT
The Treasury has stretched financial jargon to the limit in an effort to call the transaction anything but what it is — a default.

We associate debt default with forfeiture of assets and bankruptcy proceedings.

But unlike private borrowers, lenders to sovereign borrowers rarely have legal recourse. They have no choice but to negotiate.

That we are running into debt service difficulties will come as a surprise to many.

We have been assured incessantly that our public debt burden is not onerous— it is less than 60 per cent of GDP.

Many developed countries’ ratios are well over 100 per cent of GDP.

The US ratio hovers around 105 per cent, Italy’s is 130 per cent and Japan’s an eye-popping per cent.

REVENUE
These countries borrow cheap and in their own currencies.

They do not borrow from banks — their entire public debt is made up of market debt, that is, bills and bonds that investors like to hold, hence their debt service consists of interest payments, which are quite stable. Interest on Japan comes to 12-14 per cent of revenue.

With a overall debt burden a fifth of Japan’s, we are now spending 20 per cent of revenue on interest up from 14 per cent four years ago.

Most importantly, these countries’ debt has been accumulated over a long time, and have grown commensurate with their economies and financial markets.

They did not double their debt in a couple of years in a mad rush to catch up with the Joneses. Greece did.

GROWTH
Despite the disastrous history, it is remarkable how much faith there is world over that debt can finance growth.

Economists have investigated this proposition extensively.

They find consistently that public debt actually hurts growth.

An expansive 2010 study by IMF economists Manmohan Kumar and Jaejoon Woo estimated that a 10 percentage point increase in a country’s debt to GDP ratio weighs down per capita income growth by 0.2 percentage points per year.

BORROWING

How does public borrowing harm growth. The obvious one is that governments are wasteful, and the more money a government has, the more it wastes.

Debt repayment crowds out other growth enhancing expenditures.

A good example is borrowing money to build new roads, and then having the debt repayments diverting expenditure from road maintenance.

At the core of irresponsible public borrowing is an enduring belief that economic underdevelopment is primarily capital shortage problem that can be solved by force feeding poor countries with capital.

FOREIGN AID
This belief is known as capital fundamentalism. Its best known proponent was an American economist Paul Rosenstein-Rodan who postulated the “big-push” industrialisation model in 1943.

A very influential 1994 study by Robert King and Ross Levine -- Capital Fundamentalism, Economic Development and Economic Growth -- reported unsettling findings for capital fundamentalists:

“Differences in capital-per-person explain few of the differences in output-per-person across countries; growth in capital stocks account for little of output growth across countries, and; the ratio of investment to GDP is strongly and robustly associated with economic growth -- but there is reason to believe that economic growth causes investment and savings than that investment and savings cause economic growth.”

Capital fundamentalism underpinned foreign aid, until it was challenged by the Washington Consensus, which emphasised “getting prices right”. It has returned with a vengeance.

In 2010, the African Development Bank (AfDB) costed Africa’s “infrastructure deficit” at US$ 93b per year to the year 2020, in effect, close to a trillion dollars.

This, it argued, was costing Africa two points to note. First, that Africa was at the time growing faster than any time since the 1960s.

LENDERS
In the five years preceding the global financial crisis, the sub-Sahara Africa economy as a whole was growing by a blistering seven per cent per year.

Second, the multilateral lenders such as the World Bank and the regional development banks such as the AfDB were being eclipsed by private capital and China as the leading sources of development finance.

In fact, China had just overtaken the World Bank as the biggest lender to Africa.

The AfDB paper was titled Infrastructure Deficit and Opportunities in Africa.

The bank was repositioning itself to be the infrastructure finance broker for the continent:

“Private sector investment opportunities in Africa’s infrastructure are huge and work to identify the projects is underway.”

SGR

If the projects were yet to be identified, how was the US$93b figure arrived at?

The same institutions that were preaching sound money and fiscal prudence for two decades were now cheering borrowing binges.

It should not surprise then that when we began to warn about the Jubilee administration’s binge borrowing four years ago, they kept mum.

When we challenged the SGR railway, which their own experts had advised against, all they could say was that the construction would boost economic growth. Where are we now?

ROADS
We have one half of a railway line that we did not need.

By the time it reaches the Uganda border we will have borrowed for one project more money than the entire foreign debt that the Jubilee administration inherited.

We have close to US$3 billion of outstanding bonds that we cannot show a single project we financed with the proceeds.

We have anywhere between 3,000 and 7,000 kilometres of phantom roads — you can see them winding through scenic countrysides in the “gokdelivers” portal.

The facts on the ground are as follows. The Grand Coalition government completed 2,000km of tarmac roads, and left another 3000km under construction.

BUILDINGS

The most recent data available shows that the Jubilee administration has completed 3,270km, just marginally more than those that those under construction when they took office.

There is report there was another 1,900km under construction.

In effect, the road building effort of the two administrations is the same, yet the Grand Coalition government did not mortgage the country in the process.

We have a few more billionaires and an oversupply of shopping malls.

Under Jubilee, investment in buildings has grown by 7.6 per cent per year, while investment in machinery has contracted by 6.3 per cent per year.

FOOD
Our foreign exchange earnings have slipped two per cent per year on average, down from US$11.6 billion in 2012 to US$10.3 billion last year.

We are struggling to feed ourselves. We have five million more mouths to feed, but food production has stagnated.

Maize harvest has dropped in four of the last five years, and is forecast to drop further this year.

Food availability measured in calories per person is down 12 per cent since 2012.

Last but not least, we have plenty of black marias, water cannons and riot gear.

A nation of 10 billionaires and 10 million beggars needs plenty of those.

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