If only Greece had managed its debt like Kenya, Europe would be in a much better shape today. Greece's debt would stand at 45 per cent of GDP, less than a third of what it actually is. Recent global economic history would need to be rewritten and Europe's sick nation would be a macro-economic success with the luxury of deciding how to spend its resources well, rather than scrambling to mobilise them.
Kenya is one of many African countries that have managed to bring down their debt to sustainable levels over the last 10 years.
Many benefited from debt relief in the process, but Kenya's macro-economic success is home-made. In 2003, Kenya's debt stood at 60 per cent of GDP. Then, through prudent fiscal policies - particularly strong revenue mobilisation - and economic growth, it gradually brought the debt burden down to below 40 per cent of GDP by 2008. Back in this comfort zone, it was able to respond to the global financial crisis, the post-election violence and a severe drought with fiscal stimulus.
The amount of debt relief Kenya received (through rescheduling in the 1990s) was trivial compared with the "hair-cut" Greece has been receiving. According to the International Monetary Fund, Kenya is on track to return to the 40 per cent mark within the next two to three years.
Debt dynamics are a key driver of global economic change over the last decade. A look at the G20 countries, which just met at their annual summit in Los Carbos, tells the story well.
In 2000, the debt of the richest economist (G7) amounted to 68 per cent of their cumulated GDP. Back then, emerging economies the other 13 members of the G20) were doing better, with debt at 49 per cent. Since then, the gap widened enormously. The advanced economies' debt increased to 110 per cent, while emerging economies reduced theirs further to 36 per cent.
The EU remains the world's largest economic bloc but prospects are grim. Disintegration of the euro could herald a replay of the Great Depression and an unravelling of the union. Who would have thought, a decade ago, that many poor African countries, lambasted for their corruption, could teach Europe a lesson in macro-economics?
In the eurozone, only Estonia and Luxemburg can boast lower debt-to-GDP ratios than Kenya.
Time to pop the champagne (or a good Tusker) and open the spending tap? Not so soon. Reducing debt levels is a painful and long process. And upward pressure can build up quickly, especially if the government suddenly has to bail out banks or if growth collapses, while fiscal deficits continue to increase. Economic health is like physical fitness: you have to build it when it is good, afterwards it is too late. If the economy is healthy you are in a much better position to manage a crisis when it hits you.
Kenya still has many vulnerabilities which may well increase in coming years. Contingent liabilities are a good example. Kenya's large current account deficit could yet again trigger a decline of the shilling translating mechanically in higher debt (which is largely dollar denominated).
In 2013, Kenya will also need to find additional resources to manage the elections and the needs of county governments. So let us reverse the question: What can Kenya learn from Europe's woes and global experience? Three key lessons stand out. First, spend money wisely even - and especially - when times are good. Keep fiscal deficits under control and invest in sectors that grow your economy. In short, build buffers while you can, so they can be drawn upon when a shock occurs. Second, when a crisis does hit you, stay the course on growing the economy through structural reforms. What matters is not the absolute amount of debt, but its proportion to the overall economy. Greece's debt is not monumental, and spending is (now) under control; but it is dramatic because the economy is shrinking rapidly. No country has ever escaped a debt crisis without growing its economy. Third, when establishing county governments, make sure you follow the "golden rule" of fiscal decentralisation: finance follows function. Simply said, counties should not receive additional money without commensurate responsibility.
Also, find the right balance between local autonomy and the national macro-economic interest. For example, Brazil and later Argentina, slid into a debt crisis in the 1990s, mainly due to irresponsible borrowing by sub-national governments which eventually required a bail-out by the centre.
Kenya has already been applying many of these lessons in recent years. This country has been receiving deserved praise for its wise fiscal policies and budget management.
But implementing the next budget will be a tough act. The government will need to achieve the "hat-trick" of combining (i) fiscal prudence, to continue rebuilding its buffers, (ii) maintained focus on infrastructure, to help grow the economy, and (iii) implementation of the Constitution, ensuring that county governments are well-financed and equalisation becomes reality. Fortunately Kenya is not Greece, but hold off on that Tusker for now, there is still some way to go.
http://www.nation.co.ke/oped/Opinion/-/440808/1433790/-/item/1/-/ory1t8/-/index.html