Debate on size of national debt ignores fundamental issues

In recent months, a lot has been said regarding the rise and size of public debt. The reference point of most commentaries is that debt is a financial obligation, which it is. And yet exclusive focus on this reference point obscures a more obvious view point; that debt is also financial instrument. A few examples will help illustrate this point. Individuals borrow, not so much to add burden to their lives, but to improve their long-term net worth. Businesses borrow, not so much to fund present working capital, but also to finance long-term growth. And nations borrow, not so much to meet current budgetary needs, but more so to enable long-term, national wealth creation.

Debt is therefore more than just financial burden - as expressed in the debt-to-GDP ratio. It is also a vital financial instrument. One that acts as a bridge between today’s hopes and tomorrow’s reality. When debt is used judiciously, it catalyses rapid economic growth. Indeed this is evident if one examines data from around the world. All of the G7 nations have high debt-to-GDP ratios in percentage points; Japan (239.2), Italy (132.6), US (107.4), France (96.6), Canada (92.3), UK (89.2) and Germany (67.6). And most of the BRIC nations (Brazil, Russia, India and China), have above average debt ratios; Brazil (78.3), India (69.5), South Africa (50.5) and China (46.2). Of interest is all of the G7 nations and two of the BRIC nations have higher debt ratios than Kenya.

Economic development

Clearly there is more to this debt issue than ratios and financial burden. To better understand this, one may wish to look at Ethiopia. Ethiopia and Kenya have adopted similar strategies when it comes to economic development. Though the timing and sequencing of specific events may differ, both nations are currently in the middle of ambitious industrialisation programmes.

At the heart of these ambitious programmes are key infrastructure projects. Development projects that are large in scale and broad in terms of social impact. Both nations have constructed modern railways, built key roads, expanded airports, erected large dams and so on. Both governments are now focused on providing strategic support to their respective private sectors. And remarkably, they have targeted similar sub sectors, including leather manufacturing, Agribusiness value-addition and ICT/Telecoms. And while Kenya is slightly ahead in terms of parastatal liberalisation, Ethiopia is not far behind.

Both nations are funding their respective transformation agenda using a similar strategy; external public debt. It is important to note that as at 2004, Ethiopia’s debt-to-GDP ratio stood at 103 per cent, much higher than it is today. The ratio was brought down substantially following successful debt relief agreements. Yet from 2012, Ethiopia’s debt-to-GDP ratio rose steadily to 54.9 per cent of GDP by 2017.

Similarly, as at 2003, Kenya’s debt-to-GDP ratio was 60.13 per cent - again higher than it is today. It, too, declined somewhat, before rising steadily from 2012. Kenya’s total public debt as at 2017 was 54.4 per cent of GDP. Of particular interest are economic projections that show these debt ratios declining steadily over the next five years. These projections indicate that Ethiopia and Kenya will reduce their debt ratios to around 41per cent by 2022 - well below that of most Western countries.

Likely impact

Furthermore, in its most recent debt sustainability analyses, IMF classifies both economies as having low default risks. The IMF supports such conclusions with detailed assessments of various economic fundamentals.These assessments of economic fundamentals enable the IMF to provide objective economic forecasts. Such forecasts indicate the extent to which economic growth – national wealth creation - can be sustained. For it is national wealth creation that determines debt sustainability.

It is only by understanding such key economic fundamentals, that one can safely predict what the future may look like. It is only by understanding the behaviour of these economic drivers, that one can then deduce their likely impact on the economy. In the absence of such understanding, one can only speculate. The debate on Kenya’s public debt has thus far focused on debt as financial obligation. Yet such debate ought to give equal attention to debt as financial instrument. For neither the size of debt nor the debt-to-GDP ratio, are in themselves faultless predictors of economic boom or doom.

The debt ratios of the G7 and BRIC nations suggest that further study is needed. Such study must include a deeper interrogation of key economic drivers.

This study will enable us to better understand Kenya’s economic engine. And in so doing, we will understand what the future may hold, if we maintain our present heading. Granted, we ought to discuss the concerns of debt as financial obligation. Yet we must also discuss how debt as financial a instrument can help Kenya achieve its national objectives, in particular sustained economic growth.

Mr Karanja is a Management Consultant