Thursday, December 15, 2005

URGENTLY NEEDED: A public debt counter

I don't recall on which avenue I saw this (not so far from Times Square), but one of the most enduring images I have of New York was this public debt counter - in public. 
An adboard that constantly keeps count of the American's level of indebtness. 
I suggest that one such adboard be installed in Nairobi's CBD and in all the country's other major urban centers. 
It certainly wouldn't cost much (if we could appeal for famine relief from the donor community while pumping millions into referendum campaigns and if we can still waste so much cash on luxuries like a bloated Cabinet). 
Such an adboard would help the country to constantly reflect on levels of its domestic and foreign debt in the manner that Americans always do (giving President Bush sleepless nights over his budgetary deficits / Democrats a nostalgia for the Clinton surplus and 10 million jobs p.a years). 
That, I think, is one way we might be able to rein in the excesses of the executive and a sold-out legislature.
Kama madeni yetu siyo siri (na kama ni kweli sisi ndiyo tunayalipia), mbona basi wizara inayohusika haijawajibika kuweka wazi hesabu hizi kila kukicha? 
Na benki kuu ya Kenya ina jukumu gani hapa? 

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Anonymous jizafrik said...

As noble as your idea might be, i do not think such a billboard will have any effect whatsoever here for the following reasons:

1. Very few people actually know what puclic and foreign debt is. Case in point i hear aout it all the time but have never known what effect it has to my life (and yes i'm in the upper bracket of literacy)

2. People are too busy looking for food to hold the government accountable. For the Americans the basic needs are not an issue of concers, for Kenyans this is what concerns us. This will just be another eye sore in the streets of Nairobi.

3. Majority of Kenyans live in the rural areas and slum areas in urban centers.

SO what can be done?

I think a volunteer (meaning no payments/allowances except re-embursment of authorised expenses!!) organisation that will educate the people on these matters and form lobby groups to constantly hold the government accountable, using all forms of medis i.e telly, radio, newspapers.

12/15/2005 01:35:00 pm  
Anonymous Jesse said...

Thanks Jizafrik -

As my journalism lecturer always insisted, "radio remains by far the most useful media outlet in Africa - people die by radio (Rwanda); people are appointed and 'disappointed'", etc.

A radio campaign would be useful in Kenya; one would have expected TI-Kenya and / or other related civil society to steer such a campaign, for instance, but you know where such NGOs now stand regarding public policy.

Having said that, I still would recommend that the adboards be installed in all our country's major urban centers; an eye-sore they might be, but the more their messages will sink in, the more hollo polois (in the slums / villages or outside them) will stand up and say NO!!!

12/15/2005 01:37:00 pm  
Anonymous Kimanimungai said...

Puplic debt or domestic debt is a term used to refer to the level of borrowings made by the government when it wants to finance its recurrent expenditures including salaries for ministers and civil servants and other short term "government projects". It is one soource of governement revenue other than taxation and foreign financing(Foreign aid and grants and foreign debt/borrowing). The government uses treasury bills and bonds to borrow from the domestic market (From banks and individuals who invest in the treasury bills).These are just pieces of paper which act as a guarantee to you that the government owes you this much and are redeemable after at the maturity of the bond. The bills are attractice because they are not risky and the interest rates (Treasury bill rates) on them are fixed. Theoretically the government only borrows from the domestic market when the revenue from taxation and foreign sources are not enough to finance its planned expenditures. There is therefore a paradox here. KRA is surpasing its targets, and domestic debt is rising!! Government borrowing from the domestic market has the affect of "crowding out" private investments. This means that there will be no finances for the public (You and me) from the banks to use to start small businesses and borrow for mortgages. THis is because the banks will prefer to invest their money in the government bonds where they are assured of fixed returns after 91 days (For the 91-day treasuty bills), than give the same money to me to use to construct my flat and go through the trouble and costs of the loan recovery and the risk of the loan becoming non-perfoming. So increase in doemestic debt is detrimental to private investments as it stiffles private credit and private investments.

12/15/2005 01:43:00 pm  
Anonymous Jesse said...

Thanks Kimani, I had overlooked that bit of the question in my enthusiasm to insist on the adboards.

12/15/2005 02:49:00 pm  
Anonymous Kimanimungai said...

I think the adboards are important to monitor the several variables that are important in the common man's day to day life but there is at the same time a need for some kind of an organization to explain the variables. Otherwise the government is better off putting in place an independent monetary and fiscal policy monitoring and hamornization unit to reconcile the inconsistencies. It was good the govt in June this year appointed members to the much publicised MOnetary POlicy Commitee (MPO) to advice the central bank on its monetary policy operations. The commitee other than not being independent and lacks the authority to ensure the governor implements its advice, has no mandate to advice the fiscal policy (The treasury). The finance ministry can therefore be extravagant and nobody will police them and you know the way our MPs pass the finance and appropriation bills without looking at them twice. They cannot therefore police the treasury.

12/15/2005 02:50:00 pm  
Anonymous Jesse said...

The last time I checked, Nominated MP Ollo aringo was pushing for a fully-fledged Budget Control Office in Parliament. What I'm not certain about is whether its role will merely be advisory or, as you and others have ably suggested previously in other fora, policing. Fiscal indiscipline thrives in circumstances where there's lots of policy ambiguity; I think lack of political will only capitalizes on the former.

12/15/2005 02:52:00 pm  
Anonymous jizafrik said...

Thanks y'all for enlighting me( n the rest of us) on what governement debt means. I gues that's one of the reasons why borowing from the Banks is extremely expensinve since they can always give it to government (apart from them being multinational sharks).

SO i guess it is important the debt be minimised.

On the issue of policing spending. Cleary the government cannot create and give powers to a commision for obvious selfish reasons, parliament is a beneficiaries to the spending (look at their salaries and perks). Are there any legal avenues where an ordianary citizen like me can compel the govt to spend my takes correctly, or any other channels, like refusing to pay taxes until services are rendered?

12/15/2005 03:12:00 pm  
Anonymous Jesse said...

Jizafrik -

"No represenation, no taxation" was the cry on the East Coast at the start of the American war of Independence.

Kenyan attempts at that have always ben half-hearted ever since some of our founding fathers sowed the wrong political and economic seeds in our midst (look at the oft-refrained Ombudsman's office).

Personally, I'm hard pressed to think we are going to find a respite for your concerns in this (the Third) or the Fourth Republic.

I take the view that some of the ideas expressed on this site might only find room for application 1212 thereabouts.

I'm not an anarchist, but I think our country is at a point where such might be a possibility.

Trouble is that such an idea has only gained currency among the poor, - the middle class and the political elite are resting easy in some obscene Nirvana.

12/15/2005 03:13:00 pm  
Anonymous jikz said...

@jesse, a nice idea! I've seen those counters too. But even ordinary Americans (save for the enlightened) really don't give a damn about the dificits. What we need are watchdog organizations, TI-Kenya can't do it for obvious reasons.

@kimani, the jury is still out on the "crowding-out" effect, especially about the threshhold public borrowing that triggers it. Regarding the reasons for borrowing, one issue, often hushed, is domestic borrowing to finance foreign loan repayments. This is a most retrogressive form of accumulating public debt.

12/15/2005 07:45:00 pm  
Anonymous jikz said...


Foreign interest servicing are normal for all developing governments and because of debt accumulation over time, we cannot avoid it. One thing that the government through the monetary authority fails to do is to use exchange rate appreciations to cushion against this. Because you repay your foreign debt in forreign currency (dollars for instance), apprecaiting the exchange rate will make the dollar cheaper in terms of the shilling. For every dollar, you need less Kenya Shillings in exchange if you appreciate the shilling. If you were to repay 100 dollars at 75 shillings per dollar, total 7500 shilling, appreciating the exchange rate to 70 shillings per dollar will reduce your foreign intrest obligations since now you will only need 7000 shillings to repay the 100 Dollars. i.e 70 shillings times 100 Dollars = 7000 shillings. This means that there are ways to exploit to reduce foreign interest debt obligation. But ofcourse the debate about whether to appreciate or depreciate the shilling is another given the benefits and the reservations against either way. Depreciating the exchange rate will make export prices lower and import prices higher, and hence it helps protect the infact industries (The infant industry argunent) But it will hurt the domestic industries if a higher proportion of their prduction cost consist of imports because the policy makes import prices higher). It can only be reasonable that the government postponds interest repayments (For fived interest loans) when the exchange rates are more depreciated. Because it will pay more hence it must borrow more to service the debt. This normally is not a serious problem in accumulating domestic debt than run-away goverment expenditures.

12/15/2005 08:01:00 pm  
Anonymous jikz said...

I have Economics 2001. But thanks for educating the public. I don't agree that borrowing domestically to repay your foreign debts is common practice across developing countries. Save for sub-Saharan Africa, the practice in the developing world is to reschedule or default on their repayments, if they can't raise revenue to service external debt. Anyone with some accounting knowledge would know that it's stupid to borrow to repay your loans, especially when there's an XR premium--that's akin to creating a Ponzi Scheme (I hope you know what I mean!). In contrast, it's no big deal borrowing to finance public expenditure because that money not only circulates in the economy but could also trigger investments in productive economic activities.

12/15/2005 11:29:00 pm  
Anonymous Jesse said...

And Kimani -

As you respond to that (as this appears to be genuinely your forte) would you assess the role of our capital markets / the bourse in responding to the whole question of our domestic and foreign debts?

I raise this in view of the market speculation in some countries and - in the US context, the bubble - that, all in all, have served to reduce some Economic Tigers into Cats, the same examples we almost always want to ape.

12/16/2005 12:23:00 am  
Anonymous Kimanimungai said...

jikz, I am sorry I said all developing countries, I meant most developing countries. But glad you understand what I am talking about and this is what the Kenyan govt dont do. The Ponzi game or the Dutch disease is the name of this borrowing to repay loans.

On the role of capital markets. This is another area of debate. But all in all, they are never efficient in most developing countries because of lack of information. Thats why George Soros used his speculative ability to reduce some Asian Tigers into cats as jikz rightly mentioned. Unfortunately the government cannot raise revenue through the bourse and hence it cannot act as a cushion for debt problems. I wish we revive this topic tomorrow, because I have to do something else now.

12/16/2005 11:40:00 am  
Anonymous Kimanimungai said...


By the way I forgot. You mentioned that it is no big deal borrowing domestically since the money will be circulating in the economy to create investments. You are assuming that the money is used to produce investment goods including investment in roads to expand jobs or some investment in an irrigation scheme somewhere in Mwea, but if the money is used to pay salaries, without increasing the production capacity, it leads to inflationary pressures. I will give you an example, If you doubled the salary of councillors and dont increase the capacity to produce sugar, then more money will be chasing few goods. I know you must be familiar with this phrase. The result? The price of sugar will go up because supply has not expanded to match the increased demand resulting in increased prices of sugar and increased overall inflation. What if the money was used to fund something like the referendum? Domestic debt increasing, private credit restricted, investments crowded, consumer prices up, inflation up, living standards up, poverty for the majority up, general welfare down.

Good night guys.

12/16/2005 11:40:00 am  
Anonymous Mugutha said...

Just a note to clarify that prudent financial management does in fact behoove you to borrow to pay your debts. This is so in instances where the cost of capital (read the coupon rate or interest to be paid) on the reissued debt is lower than the cost at which you initially borrowed.
In this instance what you would be doing is to reissue your debt or borrow at a lower rate and use the proceeds to repay the debt previously borrowed at a higher rate of interest, reduce your debt burden and take advantage of the lower rates currently on offer. This is why you hear corporations reissuing their debt/bonds to take advantage of lower market rates.

Turning to the issue raised by Kimani at the tail end of his write up, what would be the effect of time in this scenario. Correct me if i am wrong but it seems what you have explained is the short term effect of using debt proceeds towards recurrent expenditure. Would the situation not stabilize given that the increase in demand will force producers to rump up production to cater for it in the medium to longer term? Most production companies run way below capacity for a number of reasons and i imagine the demand pull occassioned by an increase in peoples take home packages will trigger efficiencies in production that would otherwise go untapped.
Moreover, once the common man is able to sate his/her need for consumer goods given the extra cash on hand, will he/she not demand more capital goods if not save what extra he/she has in hand? Demand for capital goods will cause production to increase and hence higher GDP,not to mention that tax revenues will increase.
Am i in the right direction????

12/16/2005 11:44:00 am  
Anonymous jikz said...

Re-issuing debt is fine in practice. But, like you correctly say, it has to be from high to low interest debt. We, however, do know that our domestic interest rates have never been lower than the IDA or international rates, which invalidates the hypothesis of debt reissuance. More so, our domestic borrowing is short-term (the average maturity of Kenya's debt is about 3 years) while external debt is long-term.

Your analysis is fine, but it's partial. As mugutha pointed out, throw other variables into the mix or do a GE analysis, you can get a completely different dynamic. I'm not a sympathizer of the IMF's Inflation Economics; only lunatics believe in IMF/World Bank freakonomics. I know government expenditure will have to be really massive and skewed for it to impact significantly on inflation. Moreover, there's nothing wrong with inflation per se. Received evidence shows that any inflation level below 30% would not affect economic growth.

If you want to know the folly of stupid IMF economics, look at the recent advice they gave the CBK to increase interest rates, when economic fundamentals read the opposite. We all know the consequences of that.

12/16/2005 11:45:00 am  
Anonymous Mugutha said...

Once again, well articulated.It is refreshing to read your posts and i thank you for the insight.
Take care now.

12/16/2005 11:52:00 am  
Anonymous jikz said...

You too mugutha! Till the next round. Have a good one.

12/16/2005 11:53:00 am  
Anonymous Swaleh said...

I agree, Masai that there is need for more accountability in all sector of government not only because we want to check against misuse but also as a way of challenging and reminding ouselves that we have a role to play as citizens of a given country. I live in the Philippines, where citizens keep their government on close check on t expenditures, revenue collection and foreign debt servicing. Such could be replicated in Kenya. Bravo for thoughts of wisdom.

12/16/2005 11:54:00 am  

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