KIEYAH: Economic growth a cure for debt woes

There is seemingly euphoric sentiment about Kenya’s economic take-off based on data from international financial organisation like the World Bank and the International Monetary Fund.

During his Kenyan visit in July, US President Barack Obama painted an optimistic image of Kenya as a country whose better days are yet to come.

However, such a buoyant view is not supported by locally generated data, which reveals a decelerating economy but still growing at respectable average grow rate of above five per cent.

A rigorous scrutiny of some macro indicators like debt reveals a policy concern of its sustainability as embodied in the brewing cash crunch phenomena.

Debt is a claim of future wealth that the creditors are expected to be paid. Conventionally, the stock of debt in any country is driven mainly by expectation of bright future through a pursuit of expansionary policies.

Countries borrow with the expectation that their wealth will rise or the investment from the borrowed loan will yield sufficient return to cover the principal as well as the interest. The creditors share the same optimism.

But if the wealth does not sufficiently rise for whatever reasons to justify the optimism, creditors get disappointed.

Debtors may default, which may stir the creditor to cut back on further lending thus creating a liquidity trap even for solvent borrowers. The best way to cope with debt is to spur growth.

Indeed the international exuberance aforementioned combined with newly acquired status of middle income status following the rebasing of the economy triggered adoption of the expansionary policies.

This euphoria was epitomised by the can-do attitude of a newly elected government in a hurry to restore the pre post-election violence economic growth of seven per cent by pursuing a development agenda.

The cost of the expansionary policies is reflected in the surge of public debt. For example in 2014, domestic and foreign debt grew at 23 per cent and 35 per cent respectively.

As of March 2015, public debt grew by 4.8 per cent from Sh1.31 trillion in December 2014 to Sh1.37 trillion with a debt obligation of Sh 181.15 billion.

Foreign debt on the other hand grew at a rate of 9.2 per cent to Sh1.28 trillion from Sh1.17 trillion in December 2014 at cost Sh94.3 loan repayment.

The public debt is expected to translate to 45.6 per cent of the Gross Domestic Product (GDP) this year, which is precariously close to the recommended 50 per cent threshold. Borrowing is a credible policy to spur economic growth.

The choice between external and internal borrowing is determined the characteristics of domestic and international capital markets.

While domestic borrowing minimises default risk, it carries the risk of increasing interest rate. External borrowing on the other hand, mitigates effects of crowding out but it exposes a country to susceptibility of external shock.

Moreover realities of slowing momentum of the economy have been gradually taming the ebullience aforementioned.

This deceleration is a manifestation of headwinds of politics of entitlement that indiscriminately captured our national psyche with unrealistic demand for equitable distribution.

The government’s transformative strategy lays a strong foundation for a long-term economic growth but in the meantime it must contain the recurrent expenditures.

Undeniably the debate on equity is inevitable given our historical inequalities. However, such debate must be alive to the fact Kenya is a developing country.

Pragmatism demands an effective balance between equity and economic growth agenda. A developing country that does not embrace growth policies cannot save the many who are poor or few rich.

Prof Kieyah is acting programmes co-ordinator at Kenya Institute for Public Policy Research and Analysis.