IT is in the public domain that Africa’s looming debt crisis demands immediate action.
Experts have been proposing actions that need to be taken urgently if this brewing crisis is to be arrested. The proposed actions include, but are not limited to, boosting alternatives to borrowing, managing borrowing and lending better, increasing accountability to improve the behavior of borrowers and lenders, and introducing better ways of managing shocks and crises.
Of interest, is a proposal for debt ceiling. Though its not a new idea in constitutional economics circles, the particularity of the this proposal requires a special attention. But let’s put this debt situation in perspective.
The Covid-19 pandemic has exacerbated African economic turmoil. Experts now believe Africa’s debt could touch off cascade of complex social, economic, political and even environmental predicaments.
China, Africa’s largest bilateral creditor, holds nearly 21 per cent of the continent’s debt. Payments to China account for about 30 percent of debt service obligation in 2021, while multilateral lenders such as IMF and World Bank account for 20 percent of Africa’s debt service. Similarly, bondholders account for 19 per cent of the continent’s debt service obligation this year.
Sub-Saharan Africa public debt has climbed above 50 percent of Great Domestic Product in more than half the countries. For example, according to the Central Bank of Kenya; Kenya’s public debt was estimated at Shs 7.7 trillion ( about $70 billion), against a GDP of about $100 billion. South Africa’s debt is about 83 per cent of its GDP.
With 40 percent of the region’s countries now at high risk of debt distress, Sub Saharan Africa is careening into a new debt crisis. The proportion of countries in debt distress is double the proportion five years ago. Debt distress looms when Africa economic growth contracted by over two percent owing the pandemic. According to the African Development Bank, real GDP growth was projected to grow by a merely 3.4 percent in 2021.
While African countries are out of debt headroom, wealthy nations of Europe and North America borrowed nearly $17 trillion significantly increasing deficits during the pandemic. Unlike African countries, the wealthy nations such can take gradual action thereafter, where needed, to bring debt ratio back to targeted levels. African countries have not been so lucky.
It is no surprise that Africa is now the front and centre of post-pandemic global economic recovery. Some countries will need help with debt stocks, beyond repayments. Outright debt cancellations, longer suspension of servicing of repayment for the poorest countries dominate the current discussions of Africa’s debt.
Interest rates on public debt must get into the discussion. African governments are paying interest of five to 16 percent on 10- year government bonds. This is in grotesque contrast to near zero to negative rates that prevail in Europe and North America. Interest repayments account for the highest proportion and is the fastest expenditure line in the fiscal budget of most African countries.
Let’s face it, heavy debt servicing obligations, caries a grim and immediate implications for macroeconomic and political stability, and consequently undermines growth and economic development. The number of African countries already unable to service their debts has doubled in the past five year to eight, and IMF is urging African countries to raise taxes on vital consumer goods to provide more scope for paying debt interest. And this is tragic.
In Tanzania, national debt stands at shs. 78 trillion while GDP stands at shs.160 trillion. According to the Bank of Tanzania’s October monthly economic review, the stood at $33.7 billion at the end of July this year, having increased by $3.9 billion from July 2020.
Now, let’s go back to the debt ceiling proposal
The fact that there is such a proposal says much about the broken structure of fiscal structures. But, is the idea a bad thing?
Ideally, debt ceiling is anchored on using law as a macroeconomic tool to check the market negative externalities. First it moves the debt from being weighted on GDP to an absolute. This is sensible because debt-to-GDP has peoven to be flawed because they shift with unforeseen changes in the economy and requires Parliament to choose targets targets it cannot control.
In Tanzania, for example, the Treasury has been getting away from Parliament’s accountability by playing around with the Net Present Value members of our GDP, so an absolute figure gives Parliament a clear a clear and precise objective in legislating the debt ceiling issue.
Second, which is the crux of the matter is that it allows Treasury to borrow up to a certain limit. But the public sector of any country will always expand and consequently a need for more financial resources. When that happens, government will argue that it has little room to raise taxes, therefore, needs to raise the debt ceiling to avoid derailing the budget.
Now, this legal limit is a safety -gap for Parliament as the constitutional body mandated to oversight the executive to champion debt discipline against reckless spending by government.
In the US where we draw much experiment on debt ceiling, one of the few developed countries that has a debt ceiling legal structure, was created in 1917 to allow the Treasury Department to pay expenses for government activities through borrowing without having to submit requests to Congress to approve already allocated spending for that first year.
When Treasury reaches the debt limit, it provides a good opportunity for Congress to periodically revisit public debt and make demands to discipline government spending going forward.
Thus, debt ceiling is the Rubicon moment that prompts and mandates Parliament to take action that puts the budget spending back on sustainable path. But this is a constitutional duty of Parliament even without a ceiling. So, this is a constitutional duty of Parliament even without a ceiling. So, it is unfortunately stupendous to hear the a member of Parliament lamenting on public debt without calling in check government spending.
It is with the Parliamenterians mandate to make sure the government lives within its means, but MPs seem to rescind their constitutional duty for political entrepreneurship.
Introducing a debt ceiling is always wrongly anchored because it gives Treasury acres of debt headroom that will not be subject to Review by Parliament any time soon. This encourages government reckless spending and looking at our debt sustainability trajectory, the taxpayer stands over burdened by more public debt leading to a default even before reaching the limit.
But a sober looking at the whole debt ceiling issue, the big question about it as a policy intervention response is, do we really need a debt ceiling?
This question arising from the fact that, the problem with debt ceiling is that it attempts to stop the debt without directly adressing the process that generate debt.
Debt Ceiling is a mathematical absurdity because Parliament has the last say on the appropriation process deciding what and how government spends as well as the tax laws that determine how much revenue comes in-and this are laws and processes that actually determine how indebted we become as a country.
So, having a debt ceiling is just legislative gymnastics afterthought, spending reductions and revenue control measures must be predominant elements that are part of the solution if we are having a convention about controlling out public debt.
In fact, in counties like Kenya where they have had debt ceiling, there is enough evidence from the Budget and Appropriation Committee that any time government wants to borrow, it comes to Parliament even with the existence of a debt ceiling Act.
So, we need a debt ceiling or a Parliament that enforces its constitutional mandate on having the country on a sustainable fiscal path?