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Vol 65 No 14

Published 5th July 2024


Kenya

How the fiscal squeeze threatens the patronage machine

After dropping the planned tax hikes, President Ruto insists he is listening to the protestors’ calls for change

As they regroup from the political defeat of 26 June, President William Ruto and his finance minister Njuguna Ndung’u are torn between the demands of a highly organised protest movement with national support, and an economy that is heading towards a cliff edge unless it can pick up more multilateral support. Ruto’s and Ndung’u’s immediate task is to raise the US$2.4 billion in tax hikes they were forced to drop after protestors stormed parliament on 23 June.

Ruto turned 180 degrees from his unyielding response on 24 June in which he labelled the protestors as treasonous when the following day he scrapped the tax hikes and promised governance reforms, a serious crackdown on corruption and a national dialogue with Kenya’s discontented youth. That may paint him into a corner – if he wants to prove those were not idle promises. Yet he will struggle to run his political machine without the aid of corrupt political patronage.

In his election campaign in 2022, Ruto signalled that he would restructure Kenya’s debt burden. That set up 2024 as the toughest in terms of repayments and the austerity needed to make them (AC Vol 65 No 8, Austerity the price of debt workout dodge).

The Treasury’s most recent medium-term debt management strategy (MTDS) in February reported that ‘Kenya’s debt remains sustainable with high risk of debt distress’. It put the present value of public debt at 68.2% of GDP against the approved debt anchor of 55% of debt to GDP.

Debt service-to-revenue and grants ratio was projected to jump from 55.2% in 2023 to 68.9% in 2024, before dropping to 58% in 2025, 55.5% in 2026, and 50.5% in 2027. Treasury data in April showed that the government spent roughly 1.2 trillion shillings ($9.34bn) to service debt between July 2023 and March 2024, compared with KSh1.1trn on salaries and development projects – such as roads, healthcare, education and other vital infrastructure. Ken Gichinga, chief economist at Mentoria Economics, said that Kenya spent a record KSh1.86trn on servicing the debt this fiscal year.

Debt increases
Kenya’s debt redemption in 2024 – around KSh600bn ($4.63bn) in external debt and KSh800bn ($6.18bn) in domestic debt – is double the amount due in 2025, 2026 and 2027. This will increase to around KSh1,000bn ($7.72bn) in 2028. Last June, the public debt in nominal terms amounted to 70.8% of GDP, of which 37.5% was external debt and 33.3% domestic.

Treasury bonds accounted for 83.1% and Treasury bills accounted for 12.7% of total domestic debt. Of the $38bn in external debt recorded in the MTDS, $16bn is owed to the International Development Association or the International Bank for Reconstruction and Development – the World Bank’s two concessional lending arms – and the African Development Bank.

A further $7.1bn comprises sovereign bonds, $600 million in called-up guaranteed debt and $2.5bn is owed to commercial banks. Bilateral and multilateral debt amounts to $11.8bn.

The profile of Kenya’s debt repayments has become more challenging. The worsening market conditions due to global and geopolitical economic shocks have resulted in the average maturity of Kenya’s new external debts reducing to 15.7 years from 25.9 years in June 2022.

Total interest payments as a share of GDP increased to 5.5% by June 2023 from 5.3% in December 2022. This increase was explained by increased interest rates in the domestic market and depreciation of Kenya shillings against major currencies.

What happens next may be the choice that defines Ruto’s presidency. Going back with a new bill with lower tax rises is unlikely to fly and Ruto’s comments on 30 June that new borrowing will be needed to plug the budget hole left by the abandoned taxes appear to recognise that.

For Kenya’s squeezed middle, taxes are already high. High food and fuel prices have driven an acute and prolonged cost-of-living crisis in which millions of Kenyans are already struggling. ‘What are we paying for?’ is a regular slogan of Kenya’s Gen Z protestors.

In the 2024/25 fiscal year, revenues were predicted to exceed 19% of GDP. That tied in with the government push, encouraged by the IMF, to increase the tax take to 25% of GDP. A big problem lies in the structural flaws of Kenya’s tax system. There is particularly a large informal sector at both the bottom and, most damagingly, at the top of the income structure that pay little direct tax (AC Vol 65 No 13, A fragile recovery). Tax avoidance by the oligarchs and looting by the political class, many of whom made fortunes via politics, leaves Kenya’s middle class footing the bill.

It is impossible to fix this quickly and would require President Ruto to attack the system of patronage on which he relies for political support. On 27 June, Ruto said that spending cuts would be made in State House and to politicians’ budgets, pay and expenses, notoriously bloated and largely tax free. But he did not set any specific figures.

Many protestors watching Ruto’s press conference were unimpressed. One yelled: ‘At no point did you address the way forward on important national issues such as resources embezzlement.’

‘Some of those who have pending court cases are your appointees to various offices. Working for you is a sure bet that corruption cases would be dropped either immediately or in the near future,’ another added.

Critics point out that despite the billboards dotted around Nairobi on which Ruto proclaims that Kenya is ‘corruption free’, most graft cases against the his allies have been dropped.



AFTER THE U-TURN ON TAX, ANOTHER ON CORRUPTION

To regain credibility on corruption, President William Ruto would have to encourage the public prosecutor’s office to reopen graft cases against some of his ministers. Just weeks after the Supreme Court confirmed Ruto as the elected president in September 2022, then Director of Public Prosecutions Noordin Haji withdrew a raft of high-profile corruption cases, including one against Deputy President Rigathi Gachagua (Dispatches 19/10/22, Freedom for Ruto allies as prosecutors drop corruption cases).

Gachagua, whose poor relations with the President were evident in their separate press conferences on 27 June, is facing scrutiny after having sought to pin the blame for the protests on the National Intelligence Service, of which Haji is now Director-General.

Yet there is little sign that Kenya’s political class understands the existential crisis it faces. In their statement to Ruto, the protestors pointed to the ‘blatant display of opulence by your people with utter disregard to our pleas’. The statement continued that ‘their collection of toys ranging from high-end vehicles, expensive leather belts and designer clothing is shocking. Such behaviour coming from a government calling for austerity measures is quite telling.’

The jeers and laughter from United Democratic Alliance MPs following a reporter’s question about funding for development projects quickly went viral on social media.

Having already provided more than US$5 billion from its loan facilities, Ruto must reckon that the IMF and World Bank would prefer to offer more to avoid Kenya moving towards debt distress or default. 

The IMF, among others, advised the Treasury to aim for tax revenue worth 25% of GDP, and then to proceed with the tax reforms despite the threat of public protest. Now the Fund is vulnerable to the charge that it helped impose the austerity measures which Kenyans have rejected.

The IMF’s statement on 26 June, hours after the storming of parliament, that ‘our main goal in supporting Kenya is to help it overcome the difficult economic challenges it faces and improve its economic prospects and the well-being of its people,’ was greeted with contempt by the protestors.

Carlos Lopes, the former UN Economic Commission for Africa and African Union High Representative, points out the Bretton Woods loans do not solve the underlying issue of high-interest payments which are driving the debt crisis. 

‘A more productive approach would include stimulating growth investments in local industries and debt restructuring,’ he added. The latter could include emerging funding sources such as debt swaps, especially debt for nature swaps and debt for food security swaps, both of which the Treasury says it is already working on with the United Nations. 

Ruto, who has made reform of the international financial system one of his campaigns, is now under pressure to ensure that calls for change go beyond rhetorical flourishes.



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