Take away Treasury’s power to incur debt

The National Treasury Building
The National Treasury Building. FILE PHOTO | NMG 

Finally, you get the impression that the government is beginning to come to terms with the reality that public debt is galloping out of control.

Last week, the government put out a notice by which it seeks to launch massive recruitment of experts in the department of debt management currently based at the National Treasury.

Clearly, the government is slowly getting out of the denial mood. We have had enough of that spin about how our debt levels are still within sustainability thresholds set by the International Monetary Fund.

When you reach a point where your debt service to revenues is at 21 — as the government admits in the current Budget Policy Statement — whether you are still operating within debt sustainability frameworks and threshold crafted by experts sitting in carpeted rooms in Washington is academic.

If no drastic action is taken, we will soon be staring at a Mozambique-style sovereign debt meltdown.

Merely hiring new staff to run an inefficient debt management division at the National Treasury will not do the trick.

As long as the debt department remains under the control of the minister and the political establishment, hiring more heads will be as useless and futile as increasing the number of pall bearers to help you carry a hearse. You will not return life.

We need an independent debt management agency that does not take instructions and orders from the Cabinet Secretary in charge of Finance. Indeed, the culprit in the galloping public debt is the National Treasury itself.

It is the Cabinet and Cabinet Secretary for the National Treasury who decide whether we should borrow more or not.

How do you expect a debt management department to function without autonomy and independence?

The need of the hour is creation of an independent national treasury management agency.

We must face the truth and do what other countries have done when they were faced with galloping debt. We need to go back to Ireland of the early ‘90s.

The country found itself in a tricky situation where its debts were such that a full 19 per cent of government revenue was required to service the loans.

It took drastic steps. Through legislation, Ireland created an independent debt management agency—known by the acronym, NTMA.

The new body took over all issuance and redemption of government securities. The agency was allowed to hire staff and pay them at rates equivalent to Wall Street salaries.

Finally, the Irish allowed the agency to take over management of Treasury’s current account at their Central Bank.

This agency was given only one objective: minimise the risk-adjusted cost of public debt to three per cent over the long term- and in particular, glide down the public loans service cost to revenue, to 30 per cent within 10 years.

Incredibly, Ireland’s NTMA achieved the feat by 2007. Today, the model has been copied widely across the world, including by the USA and France.

What is my point? That our debt levels have ballooned to a level that requires an institutional solution, not merely hiring new people to work under a model that has failed.

We need a strong debt management agency that is independent enough to stop politicians from bankrupting the country through excessive borrowing.

We must take away the powers of the Cabinet Secretary to incur debt. But we must also accept that the long-term solution to galloping debt is fiscal consolidation.

And, fiscal consolidation works when the accent is put on cutting tax rates and deep cuts on sending programmes.

As we learnt in economics 101, cutting taxes result in higher tax revenues and, eventually reduction of debt service costs.

When you raise taxes without cutting expenditure as the finance Cabinet Secretary did in the recent budget, you will have raised the appetite for borrowing.