Kenya: How Ballooning Debt Burden Can Be Tamed

8 January 2020

The International Monetary Fund recommends to the developing countries that the total public debt as a percentage of the gross domestic product (GDP) should not exceed 40 per cent. From a record low of 38.20 per cent in 2012, a year before the current Jubilee regime, this ratio surged to a 62.3 per cent high last June.

INVEST PRUDENTLY

Economists warn of a crisis.

High level of debt diminishes government expenditure on essential services such as healthcare, education and other social empowerment programmes as a huge chunk of the revenue generated internally is channelled to debt servicing.

Public debt per se is not harmful if the borrowed funds are invested prudently in development projects that will accelerate economic growth, promote stability and alleviate poverty. In fact, governments mobilise resources for economic development through public debt. In the United States, public debt-to-GDP was 105.5 per cent as at last September. US citizens, banks, corporations and the Federal Reserve Bank own approximately two thirds of the debt in form of securities, including Treasury bills, notes and bonds with the rest held by foreign countries, especially China and Japan.

The federal government uses borrowed funds to pay for defence equipment, provide healthcare services, invest in infrastructure and enter into contracts with private firms who, in turn, increase their workforce. In the same period, Japan, the third-largest economy, had a staggering debt-to-GDP ratio of 246.1 per cent.

PROBITY CULTURE

The Asian economic giant, however, issues debt in its own currency, has a flexible exchange rate and controls its central bank, hence greatly diminishing the chance of plunging into a debt crisis. Moreover, close to 90 per cent of its debt is held domestically, by the citizens.

The two advanced economies have highly developed institutions able to absorb huge amounts of cash with inbuilt accountability mechanisms that deter peculation and guarantee transparency.

High as Kenya's public debt is, it can be prudently managed to avert an economic crisis and lower the debt-to-GDP ratio over the medium- and long-term. The government can make public the borrowed funds and enforce accountability in the use of the monies.

The office of Auditor-General should have unlimited access to the debt register and make its findings public for citizens to query and interrogate the government on its borrowing expenditure while helping to establish a culture of probity in handling public finances.

STIMULATE ECONOMY

Secondly, it should heighten its war on corruption as haemorrhaging of public funds causes serious damage on the economy. The legal system should impose punitive measures on the perpetrators of corruption to make the vice unappealing and expensive.

Thirdly, it should improve its tax collection. The Kenya Revenue Authority should continue to leverage on technology to end tax evasion while promoting integrity among its employees to eliminate inside jobs. It should also cease borrowing domestically to avoid 'crowding out' the private sector from accessing funds for expansion. That will also help to keep interest rates low, hence stimulate the economy, generate tax revenue and reduce the national debt. A low-interest regime will make it easier for businesses to borrow and spend that money, which creates jobs and increases tax revenues.

Mr Maosa is a banker. [email protected]

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