Slightly more than a week ago his Excellency President Uhuru Kenyatta held a round table Q & A with journalists from NTV, KTN, K24, KBC, and Citizen, in which he answered questions ranging from corruption to the handshake. One of the topics thrown to the President, and this was done by NTV’s Mark Masai, is the question of the sustainability of Kenya’s debt. “As we look forward to the dream of the big four, there is a heavy clout of National Debt, some figures put it at 4.5 to 4.8 trillion shillings. One has to ask, even as we want to realise more, what are we doing, what’s your plan to manage debt crisis. Is it austerity, or seeking more growth by spending more?”, Mark Masai asked the president. The President on his part asked Mark Masai back, “By the way, when we talk about our debt, do you know what the debt of the Japanese Government is?” …. “No no no, … as a percentage of GDP … talk like an economist”. And Mark Masai provided 56% as the Debt/GDP Ratio for Kenya, then the President threw “well over 100%” as the Debt/GDP Ratio as Japan’s.
The exchange between Mark Masai and the president became a matter of national dialogue mostly on Twitter, with majority of people faulting Mark Masai for two reasons, 1. He was rude to the President (I don’t think so) and 2. He didn’t do his homework (I totally agree). Then there are those who faulted the President for comparing Kenya’s Debt/GDP Ratio to that of Japan led by Mohamed Wehliye, Advisor, Saudi Arabian Monetary Authority (SAMA). The president reasons that since Japan has been able to survive on a very high Debt/GDP ratio for years which currently stands at 251%, then a country like Kenya still has a very big headroom for borrowing. The President contends that what matters is not the debt accumulation, but how that debt is used. If used for infrastructural development, then all is well, but if used for consumption (or recurrent expenditure) then we would be in trouble. The President used the occasion to assure Kenyans that Kenya’s debt is not being used to finance recurrent expenditure.
Let’s start from the very basics to examine the President’s response.
Homes
Imagine two homes –
- One worth Kshs 10 million and a second one worth Kshs 100,000.
- The owner of the first home owes creditors a total of Kshs 20 million (that’s 200% of the home value) whereas the owner of the second home owes creditors a total Kshs 50,000 (50% of the home value).
- By monthly income (revenue), the owner of the first home nets in Kshs 3 million, whereas that of the second home is Kshs 20,000.
- The creditors of the first home owner happen to be his children who don’t need any interest on the money lent, whereas the creditors of the second home owner happen to be people in the business of lending money at high interest rates.
- Lastly, the first home owner has also lent a lot of money to others including to the second home owner, whereas the second home owner is not a creditor to anyone.
If these two people approached a bank for a loan, who do you think stands a better chance of getting some cash based on their credit worthiness? Definitely the first home owner. Despite have millions in debt, the first home owner has close to risk free debt (zero percent interest), has a huge revenue base (30% of his GDP) and also is a creditor to other homes. The second home owner however has a fickle GDP that may dry out pretty soon, owes 50% of his GDP to money hungry creditors who demand huge interests, and has no other home owner owing him anything. Thus, when it comes to comparisons, the two home owners are definitely not in the same league.
Global stage
One may think that the above example does not have any resemblance to real world macro economics, but there are numerous examples in which we can draw parallels, both for the first and the second home owners. Countries like Japan, Italy, and US are in a league of their own, whereas countries like Venezuela, Sri Lanka, and Djibouti are in another league of their own. The two sets of countries share some commonalities – the first set has countries that has debt/GDP ratio well above 100% but have little to nothing to worry about, whereas the second set has countries already undergoing economic shit despite having Debt/GDP ratio well below 100%, but have had their properties acquired by China for defaulting on debt.
Venezuela’s hyperinflation of over 83,000% didn’t come from a vacuum. Having taken a lot of loans from China, the country was forced to sell up to 28% of her oil production to China in order to pay debts. Coupled with global oil plummeting yet the country exported nothing else other than oil (the country imports basically every other item including food), and the government printing money in order to please the poor, it has reached a point where the only solution to carrying huge sacks of money to buy a simple item like a matchbox is to redominate the currency. Venezuela’s economic crisis happened despite having a Debt/GDP Ratio of 26% by 2017.
As the The New York Times puts it, “every time Sri Lanka’s president, Mahinda Rajapaksa, turned to his Chinese allies for loans and assistance with an ambitious port project, the answer was yes”, even though feasibility studies had found no economic justification for the project. In December 2017, the government of Sri Lanka was forced to handover the Hambantota to China on a 99-year lease as a means of repaying the huge loans the country owes to China. Sri Lanka’s Debt/GDP ratio is 79.6%.
Djibouti is a country that has been identified as the next Sri Lanka, having signed an agreement with a Singapore based company that works in partnership with China Merchants Port Holdings Co. or CMPort—the same state-owned corporation that gained control of the Hambantota port in Sri Lanka, for the construction of Doraleh Multipurpose Port, a port that not only “sits next to China’s only overseas military base but also is the main access point for American, French, Italian and Japanese bases in Djibouti and is used”, writes George Tubei for Business Insider.
Just like Venezuela, Kenya has become a largely importing nation, with many manufacturing companies closing shop in the recent past citing economic hard times particularly high cost of capital expenditure mainly energy.
Even though the President promised to make public the contract between the Chinese Government and Kenya over SGR, the fears that Mombasa Port was used as a collateral for the SGR still stands. This is because the President has not kept on his promise to make the contract public. The Chinese Government coming out on December 27 to state that Mombasa Port was not used as a collateral does not help either, because the terms of the contract could have been something else close to Mombasa Port, or worded in such a way that the port still remains technically a collateral. The issue of Mombasa Port as a collateral for Chinese Loans makes Kenya be so similar to Sri Lanka. Not only on the collateral sense, but also on white elephant project sense. Economists led by Dr. David Ndii have been vocal on the viability of SGR as a project that would expand Kenya’s economy. These economists were vindicated when in 2018 SGR made a cool Kshs 1 billion loss after operating for one year – meaning SGR will never be able to pay the loan it owes to China.
The reason Venezuela and Sri Lanka defaulted on their loans to China was not because their Debt/GDP ratios were too high as that of Japan or even US, but because their economies did not provide the much needed revenue for debt repayment. As Ephraim Njega, an economic analysts who posts of his economic opinions on his Facebook Timeline, always reminds us, GDP does not pay debt, revenue does. In 2019 for example, Kenya is expected to spend well over 50% of revenues on debt repayment, with 30% of the revenues going to pay external debts. Kenya’s revenue is slightly less than Kshs 1.5 trillion, yet the budget for 2018/2019 financial year stood at Kshs 3 trillion. With 50% of the Kshs 1.5 trillion going to debt repayment (Kshs 750 billion), it means the country planned to borrow Kshs 2.25 trillion to finance her budget. This type of fiscal policy is definitely not sustainable despite whatever figure one may put on the Debt/GDP ratio.
Other reasons why comparing Kenya’s Debt/GDP ratio to that of Japan is silly
As mentioned above, Economist Mohamed Wehliye provided interesting rebuttals to the President’s take on Japans debt, and comparing that debt to Kenya’s. Here are the points Wehliye raised:
1. Your Excellency Uhuru Kenyatta- We can’t compare our debt/gdp ratio to that of Japan. Different countries have different tipping points when it comes to debt. Japan is a wealthy nation. Their 200% debt/gdp is our 50. Japan is one of our big creditors. Sisi we can lend to who?
2. Japan’s debt is mostly in ¥¥¥, a global & liquid currency & is held by its own citizens. It can adjust interest rates at low levels so that repayment values stay low relative to the overall debt level. Its interest rates are negative ie they borrow 100 & repay 99. More than 50% of ours is in foreign currency. Slight macroeconomic turbulence & BOOM!
3.This is an argument I have seen used also by politicians & surprisingly by Treasury mandarins who should know better. You can’t compare our debt/gdp ratios to the US, Japan etc ones. US has reserves of over $3 trillion. Japan over $1.2 trillion. Both $ & ¥ = reserve currencies.
4. Japan’s foreign currency reserves is at $1.3 trillion. Kenya’s GDP is $80 billion. With their reserves only, they can buy all the goods and services produced in Kenya for the next 15 years.
5. Japan’s currency depreciates, they win big time. For every 1 shilling ours depreciates, we add Ksh 26 billion to our debt.
6. Ni kama ku compare my debt/wealth ratio na debt/wealth ratio ya my wealthy friend Wangathika Thuu of King’eero. He is AA+ rated na mimi ni junk. His debt is in highly sought bonds held as liquid assets by investors & mine is either held by speculators looking for high yields or is bank loans. He is a net creditor & I have no body who calls me a creditor.
7. If Japan & USA are our benchmark re debt/gdp ratio, then we are headed for a disaster!
