KENYAN NATIONAL DEBT – TO BORROW OR NOT TO BORROW?

By JAYMO WA THIKA

There has been a lot of talk about Kenya’s national debt and if it is ok or healthy for the government to keep borrowing.

Before we discuss this, let’s first try and understand what Public Debt or National Debt is. Public debt is money borrowed by countries to get extra funds to invest in their economic growth. 

There is nothing wrong for countries to borrow money for investment. However, there is an absolute limit to the amount of debt that a government can borrow. If it exceeds that limit, the government will default. This risk is measured by comparing the debt to the country's total economic output, known as Gross Domestic Product (GDP). The debt-to-GDP ratio gives an indication of how likely the country can pay off its debt.

When such debt approaches a critical level and a country starts experiencing trouble paying off external debts, creditors start demanding higher interest rates when lending.

Kenya’s public debt burden currently stands at about seven trillion Kenya shillings. The country’s National Debt to GDP Ratio now stands at 55.50%

Japan has the highest national debt in the world at 234.18% of its GDP, followed by Greece at 181.78%. The US national debt stands at 106.70% of its GDP.

Germany’s debt ratio is currently at 59.81% compared to China’s at  54.44%.

Russia’s debt ratio is one of the lowest in the world at 13.79% of its GDP.

Within our region, Sudan has the highest at 177.87% of its GDP, followed by Eretria at 127.34%, Burundi 63.54% Rwanda 50.00% Uganda 44.81%, South Sudan 37.81% Tanzania 36.57%

By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts. 

A study by the World Bank found that countries whose debt-to-GDP ratios exceed 77% for prolonged periods, experience significant slowdowns in economic growth. Every percentage point of debt above this level costs countries 1.7% in economic growth. This phenomenon is even more pronounced in emerging markets, where each additional percentage point of debt over 64%, annually slows growth by 2%.

In conclusion, there is nothing wrong for a country to borrow money for investment but it becomes a concern if it borrows to repay loans. In the latter, there is no generation of new wealth and the country may not be able to repay its loans in future.