It’s time we addressed the question of public debt with brutal honesty
By Patrick Muinde
| Apr 2nd 2022 | 6 min read
Today marks the first anniversary of this column. While the dominant news of the week was the 2021 KCPE examination results, allow me to touch on a news item that did not capture the attention of majority of us.
An article in one of the local business dailies reported that the country’s annual debt service charge is projected to surpass the government’s total recurrent expenditure in the 2021/2022 fiscal year. This is according to the supplementary budget estimates tabled in Parliament in January.
As I reflected on a befitting gift to celebrate our one-year journey, it occurred to me that we are exactly where it all began. This column is founded on the universality of the rules of economics and how they shape and/or dictate micro- and macro-economic choices. Besides, the question of the quality and sustainability of our public debt has been neatly woven into the 2022 presidential contest. Thus, it is only fair we deal with it objectively and candidly.
It is not normal for public debt to become a campaign issue in a functional economy. While it is common for questions on dealing with fiscal deficits to take centre-stage among competing candidates in many countries, a campaign against public debt is largely an outlier. The obvious reason is that decorum dictates that outgoing administrations should use public debt responsibly to allow adequate fiscal space for successor administrations to drive their developmental agenda.
There are two central questions here: one, is there any persuasive evidence or indicators for these assertions, and two, should the incoming administration, whoever it may be, be genuinely concerned
Probably inspired by inter-generational wisdom or drawing lessons from our troubled economic and political history, the drafters of the Constitution unambiguously pronounced themselves on their intents on public debt. Article 201 demands public borrowing to be shared equitably between present and future generations, and the burden of taxation to be shared fairly as basic principles in public resource management. Essentially therefore, debt is specifically restricted to development expenditure only.
By extension, these principles have sound theoretical and policy underpinnings. As clearly discussed here in previous articles, public debt is nothing more but taxes collected in advance under monetary economics. Eventually, every penny borrowed by government must be repaid with taxes either in the medium or long-term. That means that the borrowing choices of the government of today can place restrictions and/or limitations on the policy choices of the governments of tomorrow.
The supplementary estimates submitted to the National Assembly by the National Treasury project a revised debt interest charge of Sh605.3 billion up from Sh560.3 billion projected at the beginning of the year. Principal debt redemption is revised to Sh546 billion down from Sh608.9 billion set at the start of the year. Thus, the total revised expenditure on debt is Sh1.151 trillion. This simply means that the government has overborrowed within the fiscal year compared to what had been planned, and has got some moratoriums on principal repayments on some debts.
The interest charge is projected to hit Sh715.4 billion and total debt redemption Sh1.571 trillion in the medium term 2024/25 fiscal year. A separate interest charge for overdrafts is revised to Sh5.8 billion. The revised total development expenditure in the 2021/22 fiscal year is capped at Sh681.4 billion. Money borrowed at the national level does not constitute shareable revenues with the county governments. Thus any excess borrowing beyond planned development cannot be presumed to have been sent to county governments.
These figures should be read together with the ongoing debate to open the debt ceiling from Sh9 trillion to a new criteria pegged on the present value of the gross domestic product (GPD). It would also help to remember the 9 trillion debt limit was a reversal from a GDP pegged ratio in 2018/19 fiscal year to an absolute figure.
The National Treasury submitted to Parliament that this new measure was more robust and objective. Further, the new borrowing window was projected to open a fiscal space for 10 years. Unfortunately, like the others before it, the new debt window has been blown off in a record three fiscal years.
The painful truth is that the borrowed funds have not been restricted to development expenditure as envisioned in the Constitution. In a presentation to Parliament, the Controller of Budget last year submitted that part of the public borrowing has been used to retire maturing debt obligations contrary to the law. The only other logical deduction is that part of the debt has found its way into recurrent budgetary support. This negates the debt principles enshrined in the Constitution and pushes part of current consumption to our children.
But the most fundamental policy question to ask is: why has the debt criteria become a moving target without a clear, open, transparent and accountable framework?
At the technical level, borrowing is desired to create leverage, meaning one uses other people’s money to profit and then pay back with some modest interest. In a perfect world, it is highly encouraged that if one can leverage 100 per cent, then they should borrow as much. However, in the real economic world, debt comes with financial distress costs that limit the borrowing capacity of both private economic units and governments.
If not put into prudent and productive investment opportunities, the distress costs increase dramatically. That means that new borrowings become more toxic with high-interest rates, conditionalities or poison pills attached to them. The debt burden becomes heavier if not matched by corresponding growth on the revenue side. That means less of the ordinary taxes are available to run other affairs of the State since the public debt has a priority charge on government revenues.
Three important indicators point to a ship sailing through turbulent waters. This must draw the attention of those desirous of becoming the next chief executive officers of this great nation. One, the shifting of goalposts on the debt ceiling criteria and what ought to be that measure from Treasury mandarins is the clearest warning sign. For obvious reasons, they have insider information and better evidence than the politicians. With hindsight, it should not be forgotten that the huge debt appetite has be justified on legacy projects. That is politics not economics!
Two, over the past decade, the debt portfolio has significantly shifted from bilateral to more expensive commercial loans under Eurobonds and project financing. This has also seen the return of ‘conditionalities’ from the multilateral lenders after two-decade break. In finance lingua, exchanging cheaper loans with more expensive loans are indicators of bad things to come. It is like a person borrowing from a bank to pay a Sacco loan and then going to a Shylock to pay the bank loan. Those are signs of real trouble.
Three, the aggressive shift to opaque public-private partnership arrangements and their attendant new forms of taxation. Tolls are taxes no matter what impressions policy documents may want to create. As postulated in an earlier article here a fortnight ago, PPPs are innovative financial products to accelerate public investments, attract private sector efficiency and access expertise. But they are only as good as those that draft them. Among the corrupt, they are lethal weapons against the sovereignty and long-term macroeconomic stability.
Finally, to our boys and girls who sat the 2021 KCPE exam. Hearty congratulations! You inspire and give us hope that you shall soon pick up the pen from me to chart a new frontier for this column.
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