As of 2016, the Kenyan Government Debt equivalent to the Gross Domestic Product was 55.20% from 38.2% in 2012, representing a steady 17% increment since 2012. Debt-to-GDP ratio is a country’s government debt (amount) and its Gross Domestic Product (years), with 60% being the accepted barometer (E.U standard criteria), meaning the National debt should not go beyond 60%. Making us believe the Kenyan Government Debt Ratio is somehow sustainable but the steady increase over the year’s means we are on track to surpass the 60% mark.
But what has prompted the steady increase of the Ratio over the years, from 38.2% (2012) to 55.2 %( 2016), what underlying factors have contributed to the increase of the Ratio overtime, has the Government deliberately encouraged the steady increase of the Ratio, has there been a positive or negative impact in the economy, can the Government manage the runaway public debt, can unlimited total monetary sovereignty help to tame the runaway Public debt.
What is Public debt? According to Wikipedia, Public Debt is how much a country owes to lenders outside of itself, which can be categorized as internal debt (owed to lenders within a country), and external debt (owed to foreign lenders), or in terms of duration; Short (1 to 2 years), mid (in between long & short), or long term (10 years or more).
As of September 2016, our public debt was Ksh 3.6 trillion from Ksh 1.5 trillion (2012), of which the external debt was Ksh 1.7 trillion, and internal debt was Ksh 1.85 trillion (Central Bank of Kenya). Meaning for every Ksh 100 collected by the Kenya Revenue Authority, Ksh 32 was spent on servicing her debts.
As the National Budget increases yearly, and K.R.A missing her revenue collection target, we are faced with Budget deficits, forcing the Government to borrow funds either externally or internally. Perpetuating a vicious cycle where the only outcome is the steady increase in our National Debt.
If we compare our Debt-to-GDP ratio with other countries for example; Japan- 250.40 %( 2016), U.S.A- 106 %( 2016), & United Kingdom- 89.3 %( 2016), we presume our Debt-to GDP ratio is lower hence sustainable & on the right trajectory, but in contrast the rate its increasing, it will become untenable, and likely heading in the opposite direction according to the World Bank and the I.M.F. Then why are countries with a higher Debt-to-GDP ratio than ours have a sustainable national debt? What mechanisms do they use to manage their National Debt? Can our Government with its limited options use those mechanisms, instead of the heavy taxing & borrowing, with their effects passed on us?
Unlimited Monetary Sovereignty shows how countries like Japan, U.S.A & U.K are able to sustain their National Debt. Monetarily Sovereign Government means; they have the exclusive & unlimited power or ability to create their own sovereign currency i.e. they have total & absolute control over their sovereign currency.
Which means, these Governments can do as they wishes with their own currency, i.e. they can equal their currency to any unit or amount (1 USD = 10 Euros or 1 USD = 5 Ounces of Gold), as creators of their own currency they have absolute ownership, hence have other reliable options other than taxing or borrowing, or be forced into bankruptcy, and can pay any invoice of any size, at any time.
In contrast, Non-Monetary Sovereign Nations like those in the E.U, have surrendered their exclusive unlimited power to create their own currency, hence use one currency; the Euro. Limited to create Euros, these states ability to create or obtain money is pegged on the existing laws guiding on borrowing & taxing.
Kenya is a Monetary Sovereign Country, but does it have Unlimited power or control over its own currency, can it be used to settle debts or payments to another country, and is it able to stand on its own without the backing of another currency or commodity like Gold.
Despite being a Monetary Sovereign Nation, Kenya has limited control over its own currency; it creates issues & controls its circulation in the country, and accepts in payment of taxes and other obligations. But it will be difficult or impossible to pay other countries using Ksh. instead a generally acceptable Currency like U.S.D. will be used for payment.
Our currency is backed by other Currencies like the U.S.D, British Pound, Euros, or Commodities like Gold where the Central Bank has created Reserves for such currencies to meet the Country’s obligation in payment of external debts and for Imports.
Hence to equate our currency like U.S, Japan where they have a free reign in printing more money to meet their obligations and use it to pay external debts is impossible. We have no option but to find other ways to raise money like increasing taxes, borrowing (internally or externally), selling of Government bonds etc.
If the Government can create good fiscal policies, reduce or eliminate institutional corruption, promote local industries, maintain favorable balance of payment position, reduce recurring expenditure, create employment opportunities and engaging in developmental projects. Then we can maintain a favorable Debt-to- GDP Ratio and sustain our Public debt without necessarily burdening the citizens with Taxes.