Rising public debt in Namibia


A lot has been said and written of late about Namibia’s public debt. There are all kinds of alarm bells and concerns about government’s debt. I would like to add a stick to the fire to stimulate debate and pose the question whether there is an optimal debt-to-GDP ratio in designing fiscal policy.

The debt-to-GDP ratio is the ratio between a country’s public debt and its gross domestic product (GDP). Government’s debt has increased by over N$20 billion the past year in Namibia and now amounts to N$55 billion. Some analysts predict that this ratio may exceed 35% this year. Is it a good or a bad thing?

Most individuals put a limit on the amount of debt they can acquire. This is because at some point they will no longer be able to service the debt and insolvency, or default will follow. It is a known fact that during the credit bubble and recent financial and economic crisis the debt-to-GDP ratios have risen in most advanced economies.

From technical work conducted by the IMF, a debt-to-GDP ratio of 60% for the developed world and 40% for developing and emerging economies are often noted as prudential limits. There is thus a tendency to treat these benchmarks as optimal, in the sense of crossing these thresholds posing threats to debt sustainability and threatening fiscal sustainability.

From a study conducted by Anis Chowdhury and Iyanatul Islam, it is clear that the 60% figure was one of a handful of targets European countries set at the start of the 1990’s to prepare for economic and monetary union and the eventual formation of the Eurozone.

There was no hint of optimality; it was the median debt-to-GDP ratio, the two authors concluded. Does a debt ratio above 40% imply a crisis? No. There is a profound probability of not having a crisis.

The authors of a September 2010 IMF study on fiscal space emphasises that the debt limit found in their research “is not an absolute and immutable barrier… nor should the limit be interpreted as being the optimal level of public debt.”

Every country needs to decide what the appropriate prudential debt limit is. The US, for instance, has no requirement to balance its budget and can continue to overspend and keep the key elements of the ‘economic trinity’ artificially in balance.

The key is to target a debt level well below the chosen limit on the basis that the limit delineates the point at which fiscal solvency is called into question.

Two key factors affecting solvency are the response of primary balance – the budget balance net of interest payments on the debt – to increases in debts and the possibility of adverse shocks.

It is assumed that when debt gets very large, it may be difficult to generate a primary balance that is sufficient to ensure sustainability, and that shocks can push countries beyond their debt limit. So, the advice is to remain well below the limit for the sake of prudence. This advice is not derived from the analysis of liquidity/rollover risk.

The debt-to-GDP ratio has been rising in the developed world as depicted by the following between 2004 and 2014: Japan – 165.5 and 227.2%; Greece – 98.6 and 175.1%; Italy – 103.9 and 132.6%; Portugal -57.6 and 129%; Singapore 98 and 105.5%; USA 62.7% and 101.5%; Belgium – 94.2 and 101.5%.

As long as there is spare capacity in the economy or unemployment, higher fiscal deficits add to purchasing power and do not exert upward pressure on interest or inflation nor do they cause large current account deficits.
Claims that higher public debt today has to be paid by higher tax tomorrow are also not necessarily true. As long as the interest on the debt is less than the annual increase in nominal GDP, the debt need not be repaid, because it will be a shrinking fraction of GDP.

It is commonly accepted that the solution of the debt problem lies not in tying ourselves into a financial straitjacket, but in achieving faster growth on the Gross National Product.

We also need to be careful with external debt, because it is not only a question of being able to repay, but whether countries would be willing to continue to lend.

With the latest developments in the political economy of our southern neighbour, it will be prudent to set our own prudential debt-to-GDP limits and manage Namibia Inc within those limits.

* Johannes !Gawaxab is the executive chairman of Namibia’s Eos Capital.


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