Austerity cannot give you prosperity

The National Treasury’s debt management office has just published the latest numbers on the national debt situation covering the period up to June this year.

Here are the highlights. Total debt is now at Sh7.7 trillion, or 69.3 per cent of all the wealth produced in Kenya. Scary, to put it mildly.

The statistic I find most illuminating is the ratio of debt service to revenue that has now jumped to 50 per cent. In plain language, we are now spending 50 per cent of all the money collected by the Kenya Revenue Authority on debt servicing.

In terms of the composition, what we have borrowed from outside has surpassed what the government borrows locally through Treasury bonds and bills.

The ratio of external debt has hit a level of 52 per cent of total debt. It means that we’ve borrowed more hard currency than our economy is able to generate.

And, commercial banks now hold 49 per cent of domestic debt. Put plainly, our banks are not doing what banks in a growing economy do: Engage in intermediation and lend to businesses and entrepreneurs. Instead, they’re shovelling half of the money they collect from the public in deposits into Treasury bills and bonds.

Put plainly, it means that half of lending by our commercial banks end in funding the expanding waistlines of governors, senators, MPs and those highly-paid principal secretaries we imported from the private sector.

Funding consumption

Do we really have a chance of sustainable growth when most of your national savings and credit is spent on funding consumption—where a disproportionate share of banking assets end up gobbled by debt service and civil service wages?

In the new report, the National Treasury has warned that the public debt stock will increase to Sh663 million by June 2025.

How have we managed to muddle through and not gone into default? The debt payment suspensions by our creditors last year helped. The Covid money we received from the World Bank and the International Monetary Fund last year also helped. But the symptoms that we have been struggling with bare all out there for everyone to see: Inordinate delays in disbursements to county governments and mounting pending bills.

A senior Treasury official whispered to me the other day that the stock of pending bills in the Ministry of Infrastructure are at a whopping Sh400 billion.

What must be done? I’ve been following statements by the presidential candidates about the debt problem. Clearly, none of them has done a correct diagnosis of the underlying cause of the public debt problem. They approach the problem as if what is at stake is a mere moral issue—reckless imprudent behaviour by the Jubilee administration.

Why aren’t we discussing the economic weaknesses that led us in the first place to start relying too much on borrowing? The big mountains of debts in our books are but a symptom of a bigger problem, namely, anaemic and jobless growth this economy has suffered in the last 10 years under the Jubilee administration.

All the presidential candidates can promise us is that they will restructure the debt. This thing cannot be redressed by mere financial engineering. The statements ‘we must start making do with less’ has become common. Austerity, or the new catch phrase—fiscal consolidation—is the prescription. In an economy that has suffered jobless and anaemic growth for almost a decade, austerity can’t give you prosperity.

Why am I talking about sluggish and jobless growth when what we see in official statistics are rosy numbers projecting positive growth? The trends of anaemic growth may not be apparent from official statistics, but the evidence and symptoms have been out there for everybody to see: widespread retrenchment of staff by companies, a shrinking number of profitable companies in the economy, and sluggish take up of credit by businesses.

Lies, damn lies and statistics

Why should we believe official statistics when all we see on the ground is an upsurge in the number of companies issuing profit warnings, proclivity by companies to ship out capital in dividends instead of putting it in expansion, and zombie and large manufacturing companies that are only able to survive by piling up cases at the tax tribunal and by circumventing payment of power bills?

How do you explain the phenomenon of bankrupt public universities and a banking system that devotes a hugely disproportionate share of its deposits on lending to the government and a fall in consumption of electricity by industrial users? The answer to these questions lies in the famous statement by Benjamin Disraeli about official statistics: ‘Lies, damn lies and statistics’. 

We’re in deep debt because we didn’t put the billions borrowed into funding the restructuring of the economy. Instead of putting the borrowing in prudently and transparently procured infrastructure projects, we put the money in Arror and Kimwarer dams and in Galana Kulalu. We blew most of the money up in conspicuous consumption and in kick-back motivated projects.

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