High indebtedness of nations and implications

BY: The Mirror

A debt is something, in the form of money, goods or services that a person, corporate body or a nation owes.

National debt has been defined as “debt of a central government incurred by expenditure which could not be met out of revenue.”
The debts of the central and local governments are, invariably, described as public debt.

National debt, also known as public debt, occurs in two segments – domestic debt and external debt.

Domestic debt is debt that the central and local government owe the citizens of a country.

External debt is defined as “the total public and private debt owed to non-residents payable in internationally accepted currencies, goods and services.”

External debt has also been described as “combined total liabilities plus interest that corporations, private citizens and the government owe to entities outside their boarders.”

Generally, the debt that a country’s central government owes its citizens presents less difficult problems to that nation.
Experts regard external debts as more problematic to a country than domestic debt.

Josh Bivens, an economist with the Economic Policy Institute, has said that “external debt is more worrisome and important than public debt (domestic debt) as public debt is generally recycled back into the economy.”

“External debt represents pure leakage out of the country and is money that citizens will not have because they’ve borrowed it in the past,” he said.

“External debt creates a much bigger hole than public debt (domestic debt), for public debt is pretty clear cut, giving away future income to support today’s standard of living,” Josh Bivens said.

For a clear picture of the extent of the indebtedness of a country, the total debt must be divided by the nation’s Gross Domestic Product (GDP) to get the debt-to-GDP ratio expressed in percentage.

Economists do agree that there is no particular percentage of debt-to-GDP ratio that indicates that a critical point in national indebtedness is reached. It is believed, however, that a “lower ratio is better.”

A debt-to-GDP ratio measure is a standard that shows “how likely it is that a nation is going to be able to pay its bills”, according to a writer on Investopedia-on-line.

The writer stated: “In this sense, GDP is income, so the more GDP you have, the more debt you can service.”

It has been stated above that a big external debt is worrisome or problematic because of the difficulty in paying.

Economists believe there is no problem at all if a nation has the capacity to absorb huge debts and the economic leverage to pay.

According to Charlie Skeete, a retired senior economic advisor of Inter-America Development Bank, the size of a nation’s debt is not the “most critical indicator of how likely a country would have debt-management problems in the future.”

“Yes, it is a red flag, one of the accepted indicators. It is something that countries and institutions (are concerned about) while looking closely at a nation’s economic wellbeing,” he said.

Charlie Skeete a typical example of a nation that has a huge debt but has economic leverage to back it – Japan.

“Japan’s debt is 230 per cent of GDP and it isn’t in danger of paying anybody. It has one of the strongest export sectors in the world and its currency, the Yen, even though not at the same level of the US dollar, is accepted for practical purposes as a reserve currency,” he said.

“Nobody is going to dump the Japanese Yen tomorrow because of the debt as a percentage of GDP,” Charlie Skeete said.
Before the advent of the 21st Century, the debt burden of nations of the world had been considerably light, as well as their debt-to-GDP ratios.

For example, in 2000, the US debt was $5.75 trillion.

Italy’s debt-to-GDP ratio of 103.6 per cent was the lowest in 2004. Singapore had a ratio of 87.1 per cent in 2008.

The Global Financial Crunch of 2008 and the Great Global Economic Recession that started in 2007 and lingered for seven years, had been the causes of the huge indebtedness of many countries.

The US, especially, the United Kingdom and other European countries, pumped billions of dollars or Euros into their systems to jack up their economies to avoid total collapse.

In 2007, American debt was $10,000 billion with a GDP of $14,000 billion. In 2012, the US debt rose to $13,454 trillion with a debt-to-GDP ratio of 94.3 per cent.

Japan, Greece, Italy and Portugal topped the list of the most highly indebted countries of the world.

Japan’s GDP was $5,944 billion. Its debt-to-GDP ratio was 230 per cent, with a debt of over $10,000 billion. Greece had a debt of $255 billion with a ratio of 163 per cent. Italy’s debt ratio was 120 per cent with a GDP of $1,980 billion.

Portugal’s GDP was $21 billion and its debt ratio was 107 per cent. Ireland was among the most highly indebted countries. It had a GDP of $204 billion and a ratio of 105 per cent.

Brazil, Singapore, China, India, Kenya and Algeria were among nations with the lowest debt and debt-to-GDP ratio.

Brazil had 13 per cent debt ratio; Singapore, 10.7 per cent; China, 4.7 per cent, India, 4.6 per cent; and Algeria, 1.2 per cent.
Kenya’s debt of $3.6 billion in 2014 was among the lowest in Africa and the world.

The debts of Uganda, Namibia and Algeria were relatively low. Uganda’s debt was $4.1 billion; Namibia, $4.2 billion and Algeria, $4.3 billion.

What about Ghana? How does Ghana place? Is Ghana capable of paying its debt in the future?

According to Ghana’s Finance Minister Seth Tekper, the country’s public debt (national debt) increased to GH¢79.6 billion at the end of December, 2014 – from GH¢69.7 billion or $21.7 billion in September, 2014.

Ghana’s provisional debt stock stood at GH¢90 billion in May, 2015. That amount represents 67.53 per cent of GDP.

Compared with debts and debt-to-GDP ratios of African countries mentioned above, the indications are that those African countries are more capable of settling their debts in future than Ghana.

To be able to settle its debt in future, like Japan, Ghana’s export sector must be strong, the Ghanaian Cedi must be strong and reliable and above all, economic growth must be high enough to buttress the Cedi and debt payment.

As of now, although there are signs of improved management of the country’s finances, a lot needs to be done to lift up the chief economic growth indicators: GDP, inflation, interest rate and employment.

“If we have learned anything from the global economic crisis, the policy of taking on excessive debt cannot be sustained, no matter the size of the debtor-nation’s economy,” Paul Toscano, a producer on CNBC, has stated in an article.

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