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Government borrowing still far from breaching debt ceiling

By Editorial | August 23rd 2013

Kenya: Fears that Kenya’s increased local and foreign borrowing could erode its sovereign rating might be somewhat exaggerated.

Contrary to conventional wisdom, debt is actually a beneficial and recommended pursuit provided the money borrowed is used to fund projects and programmes that will generate enough funds to meet repayment of the principal and interest.

What is true for a nation is equally true for an individual.  Borrowing enables countries or individuals to equalise their income and expenditure over time thereby improving their standards of living earlier than what would otherwise been attainable.

Viewed in this light, Kenya’s national debt of Sh1.9 trillion and indications that it would climb to Sh2.4 trillion over the next three years appears huge, until placed in its proper context.  Too big or too small in the context of national debt is relative because it must be benchmarked to the size of the national economy and income. This is why the national debt is usually viewed as a percentage of the gross domestic product (GDP).

Looked at this way, the national debt is not high by international standards, as its combined total is currently about 41 per cent of GDP. It should also be noted that other countries, although wealthier than Kenya, have a much bigger ratio.

Japan, for example, has a national debt of 212 per cent, Brazil’s stands at 65 percent while India’s is 68 per cent, United Kingdom’s 91 per cent and Italy’s 125 per cent. The US national debt is close to 102 per cent of its GDP.  So, in effect, some of these countries owe more than what they make in a year. But their high debt levels do not mean their economies are on the road to ruin.

In Kenya’s case, the country owes less than half what it makes in a year and even when its debt climbs to Sh2.4 trillion, as projected over the next three years, it will still be only 45 per cent of GDP. To contextualise it better, compare it to an individual who has borrowed money equivalent to his/her annual income to buy a house or a car. Undoubtedly, such investments are considered prudent.

It is also worth noting that Kenya’s national debt is in fact lower than it has been in the past 20 years when it ranged between 63 and 82 per cent except for a brief period during former President Mwai Kibaki’s second term.

The real risk from the government debt, as for an individual or business, is the burden of interest payments. Countries can remain in debt perpetually as long as the interest payments can be made comfortably. What is important is the debt’s annual carrying cost, especially in relation to the size of the economy.

To determine the carrying cost, it is necessary to look at the yearly interest expenses on the national debt relative to GDP. Debt servicing as a percentage of GDP stood at 3.2 per cent as at the end of April. The consensus is that a country should begin being afraid that it might default on loan repayments when the interest expenses reach12 per cent.

Equally significant, the amount of money the country spends servicing the debts relative to GDP is lower than its development expenditure meaning that more funds go into development than on debt servicing.

Yet another issue to consider is that about 57 percent of the national debt is domestic and is held by local commercial banks, insurance companies, parastatals and building societies leaving the balance of 43 per cent held by foreigners.

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