High debt or gearing is not good for any economy. At a basic level, your assets should equal to your liabilities. That is called the balancing act. However, it occurs that your money could be tied somewhere in stock or with a creditor and you need short term or long-term liquidity to fix yourself or to run the business. In that case, you seek a loan.
At a company or personal level, you don’t want to be excessively exposed to lenders as the more they give you money, the more control and influence over your affairs they become.
Imagine owning a business with worth Ugx. 2billion assets; financed by a bank loan of Ugx. 1.5billion! Chances are that you are likely to be declared insolvent soon in case you failed to pay the debt. Or you voluntarily file for bankruptcy so that you exit honorably, but totally defeated in which case your capability to manage any other public office or be respected by peers gets dented.
As an individual or business, you have some options. But what if it is a country?
Matters of economics are not easy to comprehend even by the economists themselves. The bottom line is, when a country borrows more from the World Bank or International Monetary Fund or another country, its debt ratio worsens. Like a business or an individual, when you spend more than you earn, you are likely to find ways to service your high taste buds. First you will go to your local shop and buy on credit. You will pay back, and then get a bigger credit. The cycle will continue.
Meanwhile, at work you will ask friends for a loan, and then apply for a salary loan. Soon, your identifiable sources of income will be insufficient to cover your fixed and operating costs and debts. You will seriously try to steal and at first you might be successful and you will continue.
For a country, when technocrats over spend the revenues collected from taxes and other identifiable sources of revenue, they get loans. When the loan position worsens so that no one is willing to give more loans, the leaders resort to selling natural resources.
This is a very situation as another country or company takes over ownership of resources for a defined period of time. Sometimes the resources they get a worth a fortune! So, it is not good practice to spend more than you earn, unless you borrow to invest in long term assets with potential to improve on the countries competitiveness.
The global crisis
One of the most pronounced highly indebted countries is Greece. Its ratio of debt to GDP is a massive 179% of the economy. This implies that the level of debt is 79% larger than the value of all economic activity in the country.
Greece has to borrow at new rates of interest in order to service old debts. In addition, donors to the country have imposed tough measures such as higher taxes in almost all sectors, and lower government expenditure on welfare areas like pensions and elderly benefits.
As a result of the tough measures, the number of new jobs is low leading to a high unemployment rate, and incomes dropped.
As Greeks struggle to find a way through their country’s financial crisis, it is reported that, the Greek youth have abandoned life in the city in favor of a less complicated agrarian rural life.
Research by Greece’s Organization of Agricultural Vocational Education Training and Employment, or DIMITRA, shows that 1.5 million Greeks between the ages of 25 and 44 want to give up urban life and move to the countryside.
Further still, nearly half of respondents said they wanted to restart life as farmers. The country cannot afford to maintain its large stadiums and Olympic parks which are rotting away.
Like Uganda, despite Greece having a good climate and fertile soil to grow high quality agricultural products, the country has never managed to develop its farming industry and has a weak export market.
Greece’s unemployment rate is currently 21.8 percent. Other countries facing hard times are Ireland with a debt to GDP ratio of 122%. The country was one of the hardest-hit nations in the global recession.
The IMF expects Irish debt to remain above 105% of GDP by 2018.
Portugal currently has the same debt to GDP ratio as Ireland at 122% also due to the global economic recession which crushed the Portuguese economy.
Though not widely talked about, Italy, Europe’s third-largest economy has a debt to GDP ratio of 130%.
By posting a seventh straight quarter of economic contraction to start 2013, Italy now finds itself in its longest recession since the country began keeping quarterly economic records in 1970.
Italian cities like Rome are struggling to handle garbage and to maintain historical sites; some volunteers have taken on these duties.
The world’s most debt-burdened nation is Japan at 245% debt to GDP ratio as a consequence of the country’s two decades of stagnation combined with new Prime Minister Shinzo Abe’s ultra-aggressive stimulus tactics.
Though not in the top five indebted countries, the IMF estimates US debt to be 108% of GDP and expects that number to fall to just 106% by 2018 as the economy grows.
Implications for Uganda
Standard Bank economist, Mphumelele Mbiyo says the global economy has come under stress and that consequences of the 2008 financial meltdown are still being felt despite a brief revival in commodity prices in the year 2012.
He says that there are fears that Europe and the US could gravitate toward a prolonged period of deflation with falling commodity prices in the long term similar to what is happening in Japan.
Mbiyo says that falling international commodity prices have placed pressure on commodity exporting countries, a case in point, is Nigeria which devalued the Naira as its oil exports took a hit.
On the other hand, though the global financial environment is suffering under falling commodity prices, Eastern Africa which is a net importer is partially protected by the simple fact the region imports more than it exports.
This implies that the balance of payments in the region will improve as import prices drop.
Mbiyo says that the relatively high economic growth in the region has been caused by domestic reasons, especially infrastructure spend, which is expected to continue into the next decade.
He says that Eastern Africa countries should trade more each other to protect themselves from the effects of global recession in Europe and other oversees trading partners. Though he notes that the downside intra-African trade is that connectivity via road and rail is still poor. Mbiyo tips Uganda and East Africa to keep growing due to accommodative monetary policy.
The reality is the economy is hurting. You must be frugal with what you have. Avoid just keeping money on fixed deposit in the bank. It is losing value at a high rate.
Put the money in income generating projects. Now is the time to plant greens, rear animals – goats and cows as well as some birds like chicken.
The future is in farming as all those innovators and executives you see, have high appetite for great meals.