SUSTAINABILITY OF PUBLIC DEBT

23 Aug, 2021 0 comments
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By Anthony Wafula

A growing concern in the world today is the rising indebtedness of low-income countries. This continues to raise critical questions on debt sustainability. Many countries have elevated levels of debt as the primary concern now is whether they can meet their obligations without upsetting the future structure of revenue and income. Nonetheless, IMF has pushed countries to spend as much as is viable to protect the vulnerable. In May, the IMF provided $739 million in form of an interest-free loan under the Rapid Credit Facility to help Kenya weather the initial shock and balance of payment deficit. This helped to cover the cost of additional spending on health, social protection, and speeding up payments to bolster the economy. Unaided, Kenya would have to aggressively cut spending on investment and social programs, making it more difficult to achieve a durable and inclusive recovery. Debt sustainability has weakened over time with concessional loans and debt suspension have eased the situation with external debt as accelerated economic recovery remains key in returning to the fiscal consolidation path.

SOURCE: AUTHOR ‘S COMPUTATION

Rising budget pressures have been accompanied by a new wave of sovereign debt downgrades, surpassing peaks during prior crises. They have persisted even as major advanced economy central banks have eased credit conditions. Central bank purchases of corporate bonds to provide support for local firms in emerging markets and developing economies have also handicapped their debt ratings.

The debt problem was exacerbated by macroeconomic mismanagement in the 1990’s such as the Goldenberg scandal which fleeced Kenyan’s billions of shillings leading to a reduction of donor inflow. The government thus resulted to occasional debt rescheduling, and short-term domestic borrowing to finance its expenditure. Gross public debt has increased from 48.6% of GDP for some time at the end of 2015 to an estimated 69% of GDP in the final year of 2020 reflecting high deficits partly determined by the past spending on the contemporary Covid 19 shock and large infrastructure projects. 3.1% of GDP is used to capture non-guaranteed debt of State-Owned Enterprises (SOEs) and to Finance public-private partnerships. Notably, the baseline already incorporates the 0.3 percent of GDP assumed for SOE support as well as the amount borrowed directly by the Kenyan Government. At the end of the year 2020, multilateral creditors accounted for about 40% of external debt while debt from bilateral creditors represented close to 33%. Kenya’s bilateral debt of about 63 % is owned to non-Paris club members, mainly loans from China to finance development i.e., construction of the SGR; Roads. Public debt is one of the macroeconomic indicators which configure the countrys’ image in international markets forming an inward foreign direct investment flow of determinants. Prudent public debt management helps economic growth and stability through mobilizing resources with low borrowing costs while limiting financial exposure. Economic growth being a rise in total output, produced by a country which can be either positive or negative (shrinking economy) as negative growth is highly associated with economic recession and economic depression.

Naturally, the government is a special borrower as it is not expected to abruptly disappear any time soon thus there is no bitter end where all debts borrowed should be remunerated. Furthermore, as a state, we also benefit from external transfers to the budget in the form of grants which can be used to pay interest on the existing stock of debt.  In addition, the government is sovereign hence there is no bankruptcy procedure giving lenders any claim to its assets, it can also take a stand and make fiat money to fees its obligations or raise vast revenue at discretion by hiking taxes. Due to such aspect, its budget constraints are less easily understandable that applies over an infinite horizon. However, unsustainable debt causes decline in economic output, reduced investment, rise in risk premium, borrowing interest rates and erodes investors’ confidence. Hence, if we do act, the opposite is also true. If our long-term fiscal challenges remain unaddressed, our economic environment weakens as confidence suffers, access to capital is reduced, interest costs crowd out key investments in our future, the conditions for growth deteriorate, and our nation is put at greater risk of economic crisis. Contrarily, our current state of affairs is quite agonizing as we are undergoing crucial challenges in corruption which has led environmental damage, illegitimate leaders, organized crime and it also increased social polarization causing inflation which has grown exponentially high above market value. Governance and Management of taxes have been other demanding aspects as there has been low level of  competent contractors handling contractual projects in the country and revenue generated; Moreover, the threshold of governance which shows that the public debt has positive impact on economic growth when the governance level is higher than the threshold and adversely affects the economic growth in the case of low level of governance than threshold through which if such aspects are not looked into our debt unsustainability will prevail.

As an exercise in assessing debt sustainability is no doubt a demoralizing task.  In existence, there is no government that has been able to make a credible commitment. The economic environment that affects the evolution of debt ratios is highly variable and uncertain; no government can make a credible commitment for the foreseeable future to adhere to a particular policy stance hence the tendency of the Fund to bail out creditors and to lend into unsustainable debt positions not only aggravates financial instability by encouraging moral hazard but also tilts the balance against debtors in burden-sharing. The government has defended debt procurement as necessary to drive economic development. The president has argued that the government needs debt for development, adding that the country has a significant deficit of critical infrastructure needed to drive economic growth. The national treasury has defended additional borrowing by saying that the government requires the funds to drive the big four policy agenda. The government’s big four policy agenda include expansion of the manufacturing sector, provision of affordable housing and health care, and strengthening food security. If our long-term fiscal imbalance is not addressed, our future economy will be diminished, with fewer economic opportunities for individuals and families and less fiscal flexibility to respond to future crises.

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