LETTERS: It’s time to ease heavy public debt burden


Letters

Most developing countries are drowning in public debt. FILE PHOTO | NMG 

Kenya – like most developing economies, is drowning in public debt, which is also known as the necessary means to an end for governments to borrow financial resources both domestically and externally to spur economic growth.

The accumulation of public debt in Africa has skyrocketed, with no real signs of slowing down. In Kenya specifically, the public debt to GDP ratio is close to 20 percent higher than what the International Monetary Fund would recommend, indicating a red flag for subpar economic growth.

Critics would argue that Kenya is now in a stalemate situation; trapped by debt with irreversible detrimental impacts on the economy. Has the nation really fallen that far down the rabbit hole?

On the one hand and according to basic economic models, debt-financed public expenditure can reduce future economic growth by crowding out private investment.

This is because the scale of borrowing can increase interest rates, discouraging the private sector from making capital investments, rendering the whole thing cost-prohibitive.

In the most extreme of cases, an economic downswing may occur, reducing the amount of government revenues (most notably through taxes) resulting in additional needing additional money and by extension a vicious cycle of borrowing and crowding out.

On the other hand, private investment behaves differently. Perhaps, these precarious times might in fact be the official genesis of much needed sustained private investment which historically has been significantly underutilized.

While public debt has felt like being stuck in the mud – particularly if the borrowings are ineffectively and inefficiently used -, the wheels on private investment keep on turning.

Ernst and Young recently reported that Kenya is now the third most attractive market on the continent for private funding, underscoring not only the potential of this diverse economy but also the high interest of global capital looking for opportunities.

To give credit where it is due, there is no denying that efforts made by the Government to enhance private investment in the country have paid off, and investment is now forthcoming.

For example, over the last decade the Kenyan private equity industry has evolved both in terms of the range and depth of participants drawn to attractive valuations of assets and a relatively stable political environment.

From DFI’s investing directly as well as indirectly, through to the top global GPs establishing Africa-focused vehicles, and well-connected and increasingly well-capitalised local investors – private investment has grown year on year.

Although significant headway has been made, policymakers need to keep the iron hot on economic reforms to help offset the headwinds from external factors and build up financial resilience that can map out the path for improved and inclusive future growth.

As is already well documented: the private and the public sector need to work together, ultimately combining several tactics. Without a doubt, the two are highly related and public investment significantly enhances private investment, particularly in terms of the large ticket items such as infrastructural development.

The government therefore needs to continue to strive for robust and appropriate macroeconomic policies that can secure a moderate budget surplus without imposing controversial interest rates.

In turn private investment needs to be embraced as a viable dynamic force to co-lead the country into a well-equipped economy and lay the foundation for a more prosperous tomorrow.

Grace Kiire, senior consultant at africapractice.

By Kenyan Digest

The Kenyan Digest Team