Prophets of doom are missing the point

In the run-up to the 2017 General Election, critics of the Jubilee administration had a field day criticising the level of Kenya’s public debt. I submit that this was fraudulent political talk with no sound economic grounding. Now that we are done with the politics, we must set the record straight on all these false alarms.

The fact of the matter is that Kenya’s risk of external debt distress remains low, while overall public sector debt dynamics continue to be sustainable. It is true that public debt has risen in recent years, while revenue margins have generally narrowed, but we shall revisit why this is the natural order of things.

Our national debt to GDP ratio closed 2016 at 56 per cent. Germany closed at 68 per cent, Japan at 250 per cent, Singapore at 112 per cent, South Africa at 52 per cent, Brazil at 70 per cent and Ghana at 73 per cent. I have decided to spread these comparators across the diversities of economies; to show how our debt/GDP ratio is should actually be no reason for worry. Please note that South Africa and Ghana are extractive economies -a luxury that Kenya doesn’t have- at least until we can commercially produce oil and natural gas.

Tax collection

It is true that KRA has missed its targets for the last few quarters, thereby causing a mismatch between our public debt and our revenue collection. But we need to break down the circumstances under which this state of affairs transpired.

First off, the Jubilee duo took the reins of this with uncertainty as to what shape and from the county governments will take, with a constitutional requirement to make transfers to the devolved units pegged at 15 per cent of revenue collected.

The Uhuru administration, in its wisdom and probably some level of largesse, decided to up this figure to 32 per cent, while still taking care of national government level expenditure. The transfers to the county governments and huge infrastructure developments would definitely give rise to budget deficits, occasioning further borrowing. But it is the focus on KRA not meeting targets that is misplaced. This is simply a manifestation of undergraduate “J Curve” economics.

Our huge borrowings will have to be given incubation period for the effect on the GDP to bear fruit. The common scuffle we are treated to year on year is that of County governments accusing the treasury of delaying disbursements.

What the county governments don’t tell us is what they are doing to enhance revenue collection at the local level. If the devolved units could drop the dependency syndrome and develop local capacity to generate and collect revenue, it would ease the national government pressure to borrow, and probably the naysayers would be happy. The bashing that KRA is getting for not meeting targets is either ignorant, or informed by a political motive.

Debts

World War II leader Winston Churchill once said: “I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” He made this remark while justifying why having colonies like India and Kenya then were important for the economic wellbeing of Great Britain.

Today we do not have the luxury of annexing another territory and make ourselves prosperous. But the analogy of a man standing in a bucket trying to lift himself up is very relevant to counter the bellows of “living within our means”.

I submit that being a market economy, we cannot grow and develop without borrowing. Even at the microeconomic level, we all know that companies that have been levered balance sheets are healthier than those that run on shareholders’ funds. Such funding is known as lazy capital, because the managers have no pressure to perform to make a good turn that will pay obligations and save the company from insolvency.

Everybody hails Bills Clinton for handing George Bush a healthy economy growing at 4 per cent, but what is also true is that Clinton added the public debt by $1.396 trillion, a 32 per cent increase from the $4.4 trillion debt he inherited from George Bush senior in 1993.

While I can’t hold a candle to an authority such as Dr David Ndii, I respectfully submit that the criticism on our national debt as it stands is unwarranted, and the Government should actually borrow more to meet its manifesto pledges.

Mr Karugu is a management consultant (strategy and analytics)[email protected]