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A Focus on Household Indebtedness

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As mentioned in the previouspiece, the International MonetaryFund (IMF) missionheld Article IV consultation discussionswith the Botswana governmentbetween 28 June and 11 July 2013.While the mission was enthused byBotswana’s fi scal health, it reiterateda concern that it red-fl agged as farback as 2011; continued and continualhousehold indebtedness. Giventhe intractableness of the problem, ishousehold indebtedness in Botswanaanother social disease?Even though we all know whatdebt is and are probably sinking undera heavy weight of debt, a workingdefi nition of the concept is vital.Debt is defi ned as, ‘a specifi c subsetof liabilities identifi ed according tothe types of fi nancial instrumentsincluded or excluded (Organisationfor Economic Co-operation and Development[OECD], 2013; OECDFact book, 2013; Economic, Environmental& Social Statistics, para3).’

 

In other words, debt is defi ned asall liabilities that require payment orpayments of interest or principal bythe debtor to the creditor at a date ordates in the future (ibid).There are various ways of measuringindebtedness and, as an example,the US Federal Reserve Board usesthe Debt Service Ratio (DSR); andFinancial Obligation Ratio (FOR).The DSR is an estimate of the ratioof debt payments to disposable personalincome. Debt payments consistof the estimated required paymentson outstanding mortgage and consumerdebt. The FOR adds automobilelease payments, rental paymentson tenant-occupied property, homeowners’insurance, and property taxpayments to the debt service ratio(The Federal Reserve Board, 2013;Household Debt Service and FinancialObligations Ratios).

 

Thus, an indebtednessratio of more than 100%indicates that the household debt islarger than its annual disposable personalincome (see Dynan & Kohn,2007; The Rise in U.S. HouseholdIndebtedness: Causes and Consequences).Thus, ideally, we shouldall aim for low indebtedness ratios.Households are sometimes forcedto borrow for a good reason andthis result in indebtedness. Since itstands to common reason that householdswill, unavoidably, borrow,the all-important question is, ‘whatare they borrowing for?’ Is it forconsumption? Is it for investment?While it is productive to borrow forinvestment purposes, debt becomesa problem when households borrowfor consumption purposes as it happensto be the case with a majorityof households in Botswana.

 

In theend, consumption borrowing resultsin continual and continued indebtednessthat manifests in a vicious cycleof indebtedness. Thus, once trappedin the cycle, it is very diffi cult, if notimpossible; to get out of the cycleand the ready response is to borrowfrom one creditor to pay another.Thus, banks offer debt consolidationpackages that allow borrowersto take out a new loan to pay existingones. At the end of the day, thesolution creates more problems; continualand continued indebtedness.Ending, there is ample evidencethat suggests that many householdsin Botswana have a contracted a serioussocial disease; indebtedness. Asit is, this disease, like consumerism(another social disease), threatenslife at all levels; (i) micro; (ii) meso;and (iii) macro.

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