Soaring public debt, a threat to an economy

Kenya is weighed down by the swelling public debt, and soon it faces the possibility of a debt crisis, where the government cannot repay what it owes.

The current public debt stands at Sh6.6 trillion, more than 60 percent of the country’s gross domestic product (GDP).

This is up from 42.8 percent in 2008. For developing countries like Kenya, the International Monetary Fund (IMF) recommends that the ratio of public debt to GDP should not be higher than 40 percent.

The outbreak of coronavirus has made an already bad situation worse. The government has gone on a borrowing spree to shore up its financial war chest to combat the virus.

According to the Central Bank of Kenya, the government debt stood at Sh6.649 trillion as at the end of May, composed of Sh3.496 trillion in external debts and Sh3.153 trillion in domestic borrowing.

The government’s unsurmountable appetite for expensive debt is worrying. According to the draft 2020 Budget Review and Outlook Paper, there are plans to borrow a record Sh1 trillion between July and June next year to plug a budget hole that has been deepened by the negative impact of the Covid-19 pandemic.

The Jubilee administration has been in the spotlight over its high appetite for loans, but its officials are quick to defend the borrowing by comparing Kenya with other countries around the world whose public debt surpasses their GDP.

For instance, in 2017, South Africa’s public debt stood at 53.1 percent, while that of China, India, and Brazil has surpassed the 40 percent mark.

It is worth noting, however, that these economies are several times larger and more prosperous than ours.

Unsustainable debt levels are harmful to the economy. One of the effects includes the redeployment of resources that should support development to debt repayment. At worst, the country’s sovereignty is put at risk.

The State might be compelled to cede control of its strategic national assets to international creditors, just like Sri Lanka which handed over its port to China.

But, borrowing is not necessarily bad for the economy. If well utilized and synchronized with the business cycle, the funds can go a long way in stabilizing the economy and bolstering economic development.

However, the downside is that principal and interest repayments are made in foreign currency, and borrowing for large infrastructure projects, that have attracted elite or foreign interests, that do not yield the anticipated returns.

Worrying also, is borrowing for recurrent expenditure, mismanagement of the borrowed funds, and poor choice of projects.

Another lacuna in Kenya’s debt management is corruption and embezzlement of public money, including, for instance, funds meant to support the fight against Covid-19.

With the economic viability of several of the investments already in question, overinflating of costs, and other forms of corruption surrounding these projects, the country’s image and credit rating are dented. This should not be allowed to continue.

When the government borrows to repay another debt, as is the case, there is no new capital injected or generated, meaning the country will most likely be unable to repay its debts in the future. This is bound to affect its credit rating, curtailing future financing for development.

But all is not lost, to reverse the current trend, the government must focus on long-term investment in productive sectors.

In the short-term, there is a need to institute measures that enhance revenue collection, public participation in loan procurement, and parliamentary oversight.

There is also a need to curb government spending, specifically by scaling down on non-essential expenditure on political flag ship projects and plugging corruption loopholes by employing robust transparency measures.

 

Correspondent
Author: Correspondent

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