Mind good debt for economic growth
By Josef Kefas Sheehama.
While not all debt is bad, as a nation we need to understand that it comes with much responsibility. Therefore, debt financing is beneficial for the economy. However, it is important to keep debt levels at a healthy level. Otherwise, excessive debt levels can lead to a financial crisis, which would cost us greatly.
Honestly, debt feels like an obstacle. If I could remove that obstacle, I imagine that I’d be able to make choices more freely. If money brings up a lot of emotions for you, you’re not alone. Anything important in our lives is emotional. Our relationships are emotional, our work is emotional, and so is our money. Even though the loan paid for our university education, we still experience guilt when we think about our debts. Rationally, we know getting the degree was a good decision, but it doesn’t feel good anymore. Imagine that you are going out to climb a mountain. You spend months training for it, you buy your gear and equipment, and you get to the bottom of the mountain. You feel good.
That’s how a lot of us feel when we are starting at university or applying for a loan. You may not fully understand how that’s going to impact the rest of your life but you are ready to go. You might start thinking about everything you need to do to keep going. The end of university can feel the same way. Now, you have a university education, but you also have debt. This is where it gets tricky because a lot of us fixate all our feelings around how much there is left to do. In terms of a loan, that looks like thinking about what you have mortgaged, the interest on your loan, how much money you have to set aside every month to make a payment, and the kind of job you’d have to do to get where you want to go next.
Okay, let’s look at that more closely. When you speak about debt, it sounds like you want to go back to zero and start fresh. Good debt is debt that offers you a favourable return on your investment, whether it’s in the form of financial value or quality of life. Furthermore, here we will take a look at government debt. Namibia recorded Gross government debt (total debt stock) to increase to N$140.2 billion, equivalent to 71 percent of GDP. In my view, that the extent to which government is able to achieve fiscal sustainability will depend on implementation of expenditure curbs and accelerated growth-enhancing reforms. This is critical for supporting the ongoing fragile economic recovery and should counteract the negative impact of several headwinds, ranging from higher energy and food prices to a relatively less accommodative interest rate environment.
The government is determined to implement reforms to stimulate demand through investment in infrastructure; employment programmes and tax incentives that should boost consumption, easing the skills constraints, and modernizing network industries, which should ultimately lead to increased productive capacity. The economy of a country is always linked to the world economy through external economic activities such as foreign investment and foreign trade. In an effort to attract FDI and spur economic growth, Namibia has established the Namibia Investment Promotion and Development Board and have introduced policies that include fiscal and financial incentives. As with most economic events, it’s difficult to predict precisely what the impact will be.
Furthermore, contrary to high level criticism on Namibia’s rising debt, I believe that the government should intervene in the economy to solve market failures and to transform it. In my view Namibia should not hesitate to borrow if it wants to transform the economy into a production-based model. Thus, government debt, in one sense, has the revenue effect, and, in another sense, has the expenditure effect. This means that our borrowing produces different effects on the economy.
However, the exact effects of borrowing will greatly depend on the sources of borrowed amounts. If loans are raised for productive purposes, scarce resources may be distributed rationally. In other words, resource allocation will take place to sub-serve national interests. Consequently, national income will rise. But if loans are raised to finance unproductive activities like repayment of loans or to prop up the bloated government wage bill, resources then may not be allocated in an optimal manner. Even then, the effect of public borrowing on consumption spending is likely to be less adverse. Again, public borrowing does not produce any significant adverse effect on investment.
Thus, public borrowing can produce favourable multiplier effects on national income. Furthermore, we need to understand that government debt is not necessarily inflationary in character. If debt is used to raise income, employment and output, the inflationary effect will then be greatly minimized. But inflation, under the circumstance, is unavoidable.
Additionally, government spending financed through public borrowing may revive the economy from a state of depression. Thus, public borrowing is not necessarily dangerous. On the contrary, public borrowing is unavoidable under certain circumstances. That is why modern governments borrow money from different sources. But, one thing that is certain is that if the volume of public borrowing grows to an abnormal extent, it will then destabilize the economy. The benefits of borrowing or objectives of borrowing will then be defeated. Thus public borrowing has to be made carefully and judiciously.
To that end, borrowing is a normal practice, but it becomes the worst of strategies when borrowing for consumption rather than production. It is even more devastating when the borrowings are principally for servicing of the existing debts coupled with the absolute absence of practical measures or capacities for sustainability, not to talk of a possible halt to future borrowing.
Therefore, government debt can be used productively for capital formation, increase in national income which eventually leads to increased revenue generation, employment generation and overall growth of the economy.
The increasing amount of public debt and the corresponding rise in net interest payments would be something to worry about because as the burden of interest payments increase, the government will have less money to spend on other necessary expenditure thus cutting costs on required investments.