Raising the debt ceiling: Kenya is in good company

The government borrows to pay for services like salaries, pensions, debt and other obligations.  [iStockphoto]

Debt is the oil of capitalism, and governments are in it too.

The US government, just like ours, is debating raising the debt ceiling, making it an absolute figure, not a percentage of gross domestic product (GDP).  

The chair of the Federal Reserve, read central bank has explained the economic consequences of failing to raise the debt ceiling, which would mean the US failing to meet its financial obligations. 

The government borrows to pay for services like salaries, pensions, debt and other obligations.  

Few governments raise enough money from taxes to cover all obligations. They run a deficit, which is covered by debt, borrowing by selling treasury bills - short-term debt instruments - or bonds, which are long-term.

Sometimes, government use debt to pay off old debt, especially where the new debt is cheaper.

In Kenya, we run that risk because the interest rates have gone up; we could use expensive debt to pay off cheaper debt.  

The debt ceiling has become a hot potato in the US because of politics. Republicans control Congress, while Democrats control the Senate and presidency. Each is trying to get concessions from the other with the 2024 elections in mind. 

But why is the debt ceiling a hot potato? 

If the US does not borrow more by raising the debt ceiling, it will end up defaulting. This will have a ripple effect across the economy and beyond the borders. 

The first victim will be the image of the country. But it’s more than that. To borrow more in future, interest rates will go up, making borrowing more costly.

This time, the value of the dollar will go down as investors dump it. This will, in turn, strengthen the shilling.

But before we celebrate, remember high interest rates would reduce the value of bonds with dire consequences on bank balance sheets. Remember what brought down Silicon Valley Bank? 

High interest rates would mean the cost of living going up and the political consequences thereof. High rates also depress the economy, we borrow less and consume less, reducing demand for goods and services and fewer jobs. Never mind that lowers inflation. 

Stocks would lose value as owners try to dump them. A lot of wealth would be lost.  

If the US defaults, the contagion would spread. Anyone else can default, they would say. The fear and uncertainty across the globe would rattle economies under the shadow of the Ukraine war and echoes of Covid-19. 

It’s also possible that some countries under debt stress would celebrate and get a good reason to default.  

We can predict that the political contestants in the US will reach a consensus and raise the debt ceiling. There is too much at stake. Any lessons for Kenya?

 One is that debt is not going away. It seems the more a country develops the more it becomes entangled in debt. We shall expect the same as we develop. We must learn to manage debts. Noted how affluent individuals also get sucked into debt? 

We are trying to mute debt in Kenya, but it will be with us for years to come. We must learn to live with it and manage it.  

Two, politics and economics are entangled. They must learn to dance together. From the 2022 polls, the two are now closer in Kenya, perhaps a sign that after 60 years, our country has come of age.  

Let’s from now vote for leaders with economic credentials. When we did that in 2002, we saw what happened.  Three, developed countries are not that different from us. They face the same issues but manage them better. Why not us? 

Four, faced with a national crisis, politicians in developed countries close rank. We have an economic crisis in Kenya today. Shall our politicians close rank? Did the end of the opposition street demos mean they closed rank?

Can I speculate no matter how wildly that a government of national unity is a possibility? 

Five, though individualism is rife, we depend on one another. We borrow from those who have saved. Banks bring anonymous borrowers and savers together. Maybe the last loan you took was supplemented by one of your enemies! Through bonds, we lend to the government. Even China has lent the US money through bonds.

Simply put, economics is about interdependency and that is not about to change.  

Finally, before we talk about the US debt ceiling, have you paid your debt? Have you noted that non-performing loans in our banks have shot up?

And does the government include unpaid debts to contractors and suppliers when giving the level of the national debt? It should. 

When are we actualising our debt as a percentage of GDP like tax?