Kenya’s escalating debt crisis is set to worsen following deadly protests that led to the rejection of a finance bill intended to raise revenue. President William Ruto has warned, “It will have huge consequences.”
In response to public calls for his resignation, Ruto has announced plans to halve the $2.7 billion budget deficit and borrow the remaining funds, although he has not specified the sources of this borrowing.
Amid public outcry over excessive government spending and the opulent lifestyles of senior officials, Ruto has pledged to cut funding for his own office and eliminate funding for the offices of the first lady, the “second lady” (the vice president’s wife), and the wife of the prime Cabinet secretary. Additionally, nearly four dozen state enterprises with overlapping functions will be closed.
Ruto’s popularity has significantly declined during his two years in office due to his efforts to introduce new taxes to help repay Kenya’s $80 billion public debt, owed to lenders including the World Bank, the International Monetary Fund (IMF), and China. This debt constitutes approximately 70% of Kenya’s gross domestic product, the highest in 20 years.
The key question is how Ruto’s administration will manage to repay the debt without further inflaming public sentiment or slowing down the economy, which grew by 5.6% in 2023.
Economist Mbui Wagacha, a former adviser to previous President Uhuru Kenyatta, stressed the need for a professional budget and management body similar to the U.S. Office of Management and Budget. Currently, Kenya’s treasury prepares budget estimates, which are then reviewed by the parliamentary finance committee to create finance bills.
“Parliament has abdicated its mandate on public finances in the Constitution and is looking after its own interests,” Wagacha said in an interview. He warned that further borrowing could be “disastrous” and suggested using diplomacy to attract investment and restructuring the debt to persuade creditors to write off some of it.
Economist Ken Gichinga concurred, noting that additional government borrowing would slow down Kenya’s economy. “When the government borrows more, interest rates go up. And when interest rates go up, businesses slow down, the economy slows down due to the high cost of repayment,” Gichinga explained.
President Ruto has advocated for self-sustainability, asserting that Kenya should increase its revenue rather than rely on borrowing. “If we are a serious state, we must be able to enhance our taxes,” he stated in May. However, Kenyans have rejected attempts to raise taxes amid rising prices for basic goods, with some even storming parliament during recent protests.
Last week, after announcing he would not sign the finance bill he previously supported, Ruto said he had worked hard “to pull Kenya out of a debt trap” and warned of severe consequences ahead.
Wagacha emphasized that economic growth must precede increased revenue targets and tax collection. “You create an expanded economy with employment and investment, and people have money in their pockets. It’s much easier for them to hear about your request for taxes,” he said. He suggested facilitating access to low-interest credit for businesses in key sectors like tourism and agriculture, noting that small businesses are crucial to Kenya’s economic growth due to their capacity to absorb many employees. This could also help address high youth unemployment.
Gichinga recommended incentivizing businesses to create jobs through low taxation and lower interest rates, stating, “At the end of the day, we need a jobs-centered economic policy. That’s what we’ve been lacking.”
The IMF, which had recommended some of the controversial tax changes, has been a target of public dissatisfaction. Some protesters displayed posters with messages such as “IMF stop colonialism.” In a statement late last month, the IMF said it was monitoring the situation in Kenya, emphasizing its goal to help the country “overcome the difficult economic challenges it faces and improve its economic prospects and the well-being of its people.”
Gichinga added that the IMF should do more for Kenya beyond focusing on debt sustainability and should be a “strong development partner.”
(AP)
