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Want to spur growth and create jobs? Pay your debts

FINANCIAL STANDARD
By XN IRAKI | May 6th 2014

ECONOMIC INSIGHT with XN IRAKI

We have blamed terrorism, corruption and poor attitudes for low levels of economic activity and, therefore, joblessness. But there is another “soft” cause rarely talked about but equally serious: failure to pay debts.

A friend of mine recently told me that if you borrow Sh10,000 from him, he will give you Sh1,000 free rather than lend you money he will never get back.

Talk to most Kenyans and they will complain about a debt that was never paid — or one they never paid back in the hope that the lender would forget. No wonder they ask in most funerals if the deceased had a debt.

If all my debts were paid, some dating back 20 years, I could upgrade from a Vitz to something that would help me make a statement.

Economists define Gross Domestic Product (GDP) as money in circulation multiplied by velocity. This is where the drag on the economy comes through debts.

If people do not pay their debts, money does not circulate (velocity reduces) and this reduces the GDP. The same way reduced velocity on the road makes you cover less distance with the possibility of having to pay for lodging if you do not reach your destination. 

We normally do not keep money in our pockets, we spend it creating demand for goods and services, and by extension, jobs.

For example, when you go shopping, you give jobs to manufacturers, distributors, cashiers and others along the supply chain. Even when you take your money to the bank, it is not stored in vaults; it’s lent out, more debts.…

ECONOMIC CONSEQUENCES

Yet, paying debt is not part of our culture. In fact, debt collection has created lots of jobs! Landlords have to close houses to get rent, auctioneers are also doing very well. It is also suspected that lots of unexplained murders may result from debts, another cost to the economy.

The Government has also joined in debt management with the licensing of credit reference bureaus (CRBs), which keep track of your ability to pay debts. The argument is that if you pay your debts regularly, you are more creditworthy, and if you go borrowing money from financial institutions, you can get it at a lower interest rate. This is intended to incentivise debt payment.

Banks, too, worry about debts, captured by non-performing loans, and even provide for them in their accounts. They go to great lengths to get your background information to gauge if you will pay your debt. CRBs are making their work easier. When you do not pay your debts, you deny other people a chance to put that money into circulation and grow the economy and create jobs.

Incidentally, the Government is very good at paying debts — defaulting can have serious economic consequences. There is even a whole section at Central Bank that deal with debts. Many governments, including in developed countries, cannot run without debts.

Some have argued that remnants of our traditional culture have made debt payment very hard. We want to be helped and see debt as help. Lots of people, including the well educated, are dishonest. But paradoxically, our traditional cultures put a premium on honesty. 

The more plausible explanation is that there isn’t a big enough penalty for not paying your debts.

For those aspiring for big jobs, now the penalty is big, but for the vast majority who refuse to pay little money and are not in debt registers, they can get away with it. There are also not many people who have gone to jail for not paying debts, at least in Kenya.

It is also possible that despite high literacy rates, we still do not understand how a modern economy operates.

MUTUALLY BENEFICIAL

Debts are not bad because there shall always be people or governments with surplus money and some with deficits. Through banks or even shylocks, the two groups mutually benefit from each other by keeping the money circulating and growing economies and creating jobs. Non-payment of debt breaks this cycle and slows the economy.

Imagine what happens if you do not pay your Mama Mboga’s debts, who may have another person’s debt….

In the next one month, lots of discussions on the Budget will make the headlines. We shall keep discussing who will get more money and who loses. In this formal discussion, we forget “soft issues” that matter, like debt payment.

We could estimate that if Kenyans paid their debts on time, we could add around 3 per to GDP growth and easily reach the targeted 10 per cent growth rate needed to make Kenya a middle income economy (without rebasing).

If we paid our debts on time, we would go a long way towards making the economy more vibrant and reduce the number of unhappy people owed lots of money and create lots of jobs.

If you owe someone a debt (including dowry), please pay (wewe ripa), you will have played your small but important role in turning round the reluctant wheel of progress. You could help in making Kenya the Swahili Tiger.

The writer is a senior lecturer at University of Nairobi’s School of Business.

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