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September 23, 2018

Public debt is sustainable in the long term

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One of the priority areas of focus in the Fiscal Budget for 2016-17 is the increasing level of public debt and specifically whether the debt is sustainable. Public debt arises when the expenditure budget exceeds the revenue budget and the arising gap is financed through borrowing. Debt is therefore the second most important source of income after the tax receipts and the main instrument for covering the budget deficit. What gives debt special focus is the fact that it is an obligation that is repayable in future at a cost. Besides, debt has to be repaid before funds can be allocated to essential services including education, health and security.

This means increasing levels of debt could lead to reduction in the funds available for essential services. The question of sustainability is essentially one of whether the economy will be in a position to repay the debt, without cutting down on essential services or going into a financial crisis. The decision to run a deficit is built on the assumption that there are necessary expenditures that need to be met in the current year in order to foster economic progress. Debt ensures projects that require significant amounts of investment and are long-term in nature such as building of roads, airports, seaports, railways and energy plants are achieved. When borrowed funds are utilised for such good purposes, it increases productivity and sufficient money is generated to both repay the loan and to grow the economy. Consequently, good debt is one that goes towards building the ability to repay the debt in future.

The debt-to-GDP ratio which is currently 57 per cent indicates the level of public debt is sustainable. Whether it will remain sustainable in the near future is however uncertain, especially because budget deficit is growing every year.

That said, the increasing budget deficit is perhaps a call for prudent debt management going forward to avoid future debt sustainability issues. The current year’s deficit is Sh691.5 billion against last year’s Sh398.1 billion with the latter excluding the cost of the Standard Gauge Railway.

The deficit is growing, rather than reducing, and currently stands at 9.4 per cent although there is the commitment to bring it to four per cent of GDP in the medium term. There is also the need to go behind the numbers and critically analyse how the debt is fostering economic progress. This calls for good debt management practices, and continuous monitoring of the debt levels against the gains it brings to the economy.

 

Karen Kandie is a financial and risk

consultant with First Trident

[email protected]

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