Sky 5,

There isn't a defined "limit" on how much the debt to GDP ratio can do. The financial markets (whoever they are) tend to prefer the ratio being an amount lower than 60%. It's one of the key considerations for determining a country's sovereign credit rating.

In reality however, you will notice that countries where the ratio is greater than 100% yet they have high sovereing credit rating.Am referring to countries like Japan, UK and USA where their outlook is even worse than ours.

It makes you wonder why there is so much hue and cry about our debt ratios.

Regards

Scubidu,

Am more comfortable that the recent borrowing by our government is aimed at increasing our productive capacity as a country. I have in mind the recent infrastructure bonds that were done in 2009/2010.

Also, given the ongoing realignment in our political environment, I believe that there should be better fiscal responsibility going forward.

Thus any borrowing in future would ideally be for catering for the mismatch between the receipt of tax revenues and expenses nlcuding emergency expenses like the drought.

The reason for my conclusion is that much of the borrowing in countries like the USA is to finance their out-of control expenses. Its only a matter of time before their financiers (read China) will be fed up with funding them. Just look at the comments made by China during the recent G-20 conference in South Korea as an example.

In short, am not condoning blanket increments in debt. What I will be comfortable with is the increase in borrowing be accompanied by prudent fiscal responsibility.

As regards the interest rate spread within the banking sector, this is a structural issue within the sector that needs to be addressed now rather than later. There isn't much level of competition within the industry (to drive down interest rates) and most banks have higher than normal fixed expenses that they are reluctant to address.

For your comparioson of debt with GDP, maybe you could try to use the "Real GDP" numbers that are contained in the CBK Annual Report. The GDP deflator that you are talking about tries to explain the extent to which the market GDP numbers compares to the real GDP numbers

Regards

Scubidu,

I have attached for you excepts of the 2010 CBK Annual Report that contains both GDP at market prices and real GDP. It also outlines how the GDP deflators have been arrived at i.e. GDP at current market prices divide by Real GDP.

From the two GDP numbers, it seems that the government is using GDP at market prices to compute its Debt to GDP ratio as indicated in the Monthly Economic Reviews. It would therefore mean that greater increments in the GDP (at market prices) could temper the increase in Debt to GDP ratio over time.

Hence, I had suggested that you recompute the debt to GDP ratio using real GDP numbers to make your comparison more meaningful. Let me know if my logic makes sense to you

Regards

http://www.2shared.com/d...010_Annual_Report_.html

@scooby. This is an interesting topic ... I'm glad we can discuss it thoroughly.

With regard to the debt gdp ratio, I looked at the issue in post 17, 19, 20 and 21. But what I’m addressing is the maths behind the figures that suggest no incremental increase in GDP, but in fact a decrease. Which implies debt productivity is zero. Do you agree? Look at the figures and ratios in the economic monthly page 39 below.

http://www.centralbank.g...ns/mer/2010/CSept10.pdf

If CBK is targeting a competitive rate for exporters then that’s what forex dealers are referring to as manipulation. The CBK would also need hard currency to make payments on their SDR allocations and Eurodollar purchases (both of which have gone up by over $320 million each).

If I recall correctly money supply is a function of net domestic assets and net foreign assets, the former being currently driven by domestic credit growth and the latter by CBK forex reserve accumulation. Yes interest rates play a factor but I believe CBK is trying to target a NFA/money supply target of 20%. That ratio has fallen from 30% to 22% over the last two years meaning that money supply is rising but foreign assets aren't. Does that make sense?

The World Bank is not buying gold; The 57 billion in Gold was a typo; we own only 57 million. To the best of my knowledge RAMP Africa is not buying gold but making eurodollar bond purchases most of which are probably issued by the World Bank themselves. What is the investor policy when the World Bank proposes to buy bonds its issuing?

From the CBK's point of view, all this is done to cushion reserves and make payments on government bills. By all fronts mentioned above the CBK is either managing reserves or making some sort of payment. So our reserve assets are diversified mostly into cash (diversified currency), bonds (US), SDR (IMF). Is there a risk to this strategy?

Scubidu,

Am not aware about CBK's plan to target a NFA/money supply target of 20%. Maybe you could shed some light on that...if that is Ok with you.

There was a time when CBK was pursuing an inflation targetting policy where they tried to "ensure" that inflation does not rise above 5%. They were therefore tracking the growth over time of M2 - which has been deemed by economists to be an indicator of inflation pressures. I have attached a table in the link below to explain what am referring to...

http://www.2shared.com/d...A/CBK_Money_Supply.html

I do understand your argument that CBK could be "purchasing" World Bank bonds which won't make sense in addition to be a conflict of interest. Hopefully, one day, our politicians will come round and request for more disclosure about the program. It could turn out to be a bad deal for the tax payers as what was discovered about the Federal Reserve and their bailout programs last week.