De pecunia et all the other advantages of debt
Despite the disparity between statistics prepared by the Namibia Statistics Agency, the Bank of Namibia and the Ministry of Finance, a broad consensus is emerging amongst analysts of the macro-economic environment.
From a purely statistical point of view, these disparities can be disconcerting given that deviations are often in the 30% range, but from a developmental point of view, over time this becomes merely academic.
Let me provide two examples that drive the statisticians up the wall but are blissfully ignored by everybody else involved in economic planning, and more specifically, in the execution of the fourth National Development Plan. The first is real growth, and the second, which has a major impact on the first, is the so-called GDP Deflator. Compare three data sets from the three mentioned institutions and you get three widely divergent answers.
That casts a certain shadow on the way we collect data, but more importantly, on the methods we use to turn this into statistics. But ultimately, when this divergence is discussed, I get a shoulder shrug and basically a “So What” for an explanation.
Rereading the entire NDP4 document this week, I realised we are now into its fourth year indicating that by the end of next year, we shall have opportunity to start comparing outcomes to targets. Although, strictly speaking we shall not be fully at the end of NDP4 by November next year, I assume that the preliminary estimates will cross the desks of those involved with the Article IV consultations with the International Monetary Fund under its Terms of Agreement.
Why we need them is not clear, but that the report following the Article IV consultations is very important for our independent sovereign ratings, is very clear. And that any negative assessment by the IMF has the potential to impact our cost of borrowing is also clear. Whether it matters to local policy makers is an entirely different consideration.
In my mind, the most important two issues will be the growth in debt, and leading from this, the overall economy’s ability to sustain this debt over the period leading to maturity of the various instruments.
It is in this regard that I believe the debt debate for domestic conditions, has become obsolete. We are approaching the 30% threshold for debt expressed as the ratio between debt and Gross Domestic Product.
In other words, the comparison between gross fixed capital formation and the investment required to drive this process, becomes key. But, as in the previous five years, I suspect that even if the sovereign debt goes to 32% or 33% of GDP, the momentum in the broader economy, will generate faster growth, which eventually will quickly lead to a debt ceiling, again below the 30% threshold.
But this 30% threshold is an imaginary benchmark, the same as the hastily concocted 35% debt ceiling. I am not aware of any literature that sets this benchmark on a sound footing. It seems to be rather arbitrary and the only reason why it is important, is because it has become an important part of the Article IV assessment. The only authoritative work I know of that considers the impact of debt on future growth is that done by Kenneth Rogoff and Carmen Reinhardt, and if my memory serves me correct, I believe a 90% debt to GDP ratio is the debilitating tipping point. Below this, all government debt, if it is used to invest in the economy, helps it grow faster and more robust.
So why are we concerned about debt when our own very conservative ceiling has been set at 35%. South Africa has exceeded the 60% mark and every single country in Europe is above 100%. The black sheep, Greece, is around 160%, and in the US, nobody knows for sure how big their sovereign debt is with monetisation, asset purchases, and all that.
This brings me back to the start of my argument. Why worry about debt when it seems only to have academic value. In terms of our development trajectory, the doubling in debt we have created over five years, becomes somewhat irrelevant.
That debt-fuelled investment has created much more economy than we could ever have anticipated.
I do not claim we live in Nirvana but our debt is so modest and the return we have generated so generous, I do not think we need to worry right now about the 90% threshold.