BROKE NOT BROKEN OR BROKEN NOT BROKE?

If you ask a question in your title then you should answer it immediately.

Government, that holds the financial records and purse strings for public money, says it isn’t broke. That’s hard to disprove at this point. Government will also add that Eswatini society is not broken. One might say fractured, yes, but broken no. More or less on that another time. There was clearly some concern, among the general public, about Government obtaining approval to obtain E5 billion by floating treasury bonds in the South African market. Our Minister of Finance, amid such eloquence as “secured to stabilise budgetary constraints and relieve the country from an economic suffocation,” could have added that governing a country includes taking punches – recessions, defence spending - that lead to debt. Unless you’re located in the Middle East, drowning in oil, your government is going to be borrowing money. An increase in such borrowing does not mean a government is broke.  

Accepted

It is, of course, much more pleasant to be free of debt. Nevertheless there’s debt and there’s debt, as well as different reasons for borrowing and different terms on which loans are obtained. What is important is that our debt to GDP percentage – an accepted basis for comparison, between countries, regarding the debt pressure on a government – is relatively low.  Ours, after the E5 billion loan, will be at 40 per cent, South Africa 70 per cent, while the USA is at over 130 per cent. Ironically, much of the American debt is lent and re-lent by China, its main global rival. The measure of financial stability within its percentage is whether a government can safely generate the resources to service the indebtedness; can we? If we can’t, then times will get hard.  In the final analysis – a flogged-to-death cliché of yesteryear recently replaced by ‘going forward’ – there are two key questions when assessing our decision to borrow. The first is: what’s the money for? And the second question: is Government able to service the debt?

Costs

The E5 billion loan will be for budget support; perhaps partly for new or unexpected costs, and simply easing the impact of the Budget deficit, and probably absorbing a pay increase for public servants. COVID-19 has led to corporate profits falling and, with that, revenue from value added tax (VAT) and income tax will have dropped. Governments are like companies; when times are bad their revenue drops but costs invariably continue increasing; and thus deficits. When assessing whether Government is able to service the debt, you have to look beyond the approved budget and into the medium term. A five year forecast, though with less robust detail, is essential. I don’t see a public display of such a projection. Does one exist? Eswatini has an excellent record in servicing debt.

I don’t recall any failure to meet its formal loan indebtedness, unlike many countries of the world, especially on this continent. A clean sheet, yes, though  Government for a number of years deferred the responsibility of full debt servicing by creating enormous delays in paying for goods and services. The private sector suffered. The minister of finance has provided the assurance that this area is now being brought under control. But a further key question is this: how can our Government sustain the required degree of self-discipline and integrity in its spending, when faced with the numerous uncontrolled challenges? Simple; it robs Peter to pay Paul.  Allocations to health, education and other social services plus development expenditure get reduced, the savings allocated to other expenditure.

Performances

Sadly, a significant amount of that expenditure is either unaccounted for over-expenditure by government ministries or investment by government in areas that the public sector should be avoiding. This country delivered one of the weakest performances in Africa in the global privatisation drive of 20-30 years ago, where governments stopped doing what the private sector could do much better. Privatisation was not easy for us, owing to a lack of the critical mass that would facilitate healthy competition. But, still, it could have avoided the reverse, namely new investment in areas far more suitable to the private sector; where, if any profit was ever going to be made, companies would be queuing up on the doorstep to invest.
The tragedy of unwise investment lies not just in paying off the cost of investment but in having to absorb future operating losses. Engaging the private sector to manage is a solution, but fees should always be linked to performance.

Most countries borrow to raise the resources to service their debt, continually ramping up the debt to do so. That’s a crazy financial strategy but many governments have no choice. We risk following suit with the E5 billion loan unless we resolve the political uncertainties which must surely be putting off the potential new investors. We crucially need their revenue and profits to provide the essential extra tax revenue to service the additional debt.

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