Kenya’s real problem is a debt crisis, not proposed tax hike

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Kenya, one of east Africa’s more economically developed and democratically stable countries, has been rocked this week by a political crisis that reveals the deep cracks in both sides of that stability.

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Massive protests broke out earlier this week after parliament passed a bill increasing taxes — including on a bevy of everyday essentials like cooking oil, diapers, and bread — on a population already suffering from inflation and high rates of unemployment.

As protests increased in size and intensity, even breaching parliament’s chambers, they were met with violent repression. Nearly two dozen people were killed Tuesday.

After initial recalcitrance, President William Ruto said Wednesday he would not sign the controversial bill. His decision was a victory for the protesters, but the saga leaves the country’s future more uncertain than ever, both economically and politically.

Ruto requested the bill to cover Kenya’s approximately $80 billion in domestic and external debt. Around $35 million of that debt is owned by foreign creditors, primarily China and powerful international groups like the World Bank and the International Monetary Fund (IMF). If Kenya doesn’t pay it, the possibility of borrowing in the future will become more difficult in the short term; over time, it could mean more unemployment, more poverty, and overall worse outcomes for Kenyans.

Kenya’s troubles are a distillation of the problems facing several dozen developing nations, crushed under debt: “More than 3 billion people across the world live in countries that are spending more on servicing their debt than public spending on education or health,” Binaifer Nowrojee, the president of the Open Society Foundations, wrote in Foreign Policy.

Complicating matters are Kenya’s other economic problems. Corruption, cronyism, financial mismanagement, and the vestiges of colonialism have hobbled Kenya’s once-impressive economic development and exacerbated class and ethnic inequalities.

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All of that has led to a long-simmering political crisis: Ruto was elected on a promise that he would improve the lot of Kenya’s youth and lower classes, presenting himself as a break from the old, corrupt, politically incestuous elite. But he’s been unable to deliver, despite the country’s wealth in resources and economic boom in the early 2000s — and that has left large swaths of the population displeased with him, and his government, leading to the rancorous protests of recent days.

Though Ruto has backed off from the taxation bill, Kenyans, especially young people, are mobilized against the government and the status quo — and they aren’t backing down. Protests continued Thursday in Nairobi and other cities despite military patrols. After the bill and the violent repression, some protesters are now calling for Ruto to resign.

Amid serious distrust of his administration, Ruto now must find a way to manage the East African country’s debt load and avoid default without further harming the economy or inflaming people’s very real anger. It’s unlikely he’ll be able to do all of these things. But inaction could drive Kenya further into economic disaster.

What happened at Kenya’s protests, and how Kenya’s economic situation got this bad
Kenya’s Finance Bill of 2024 was supposed to increase government revenue through taxes, satisfying a condition of the IMF loan. But Kenyans already struggling with high inflation and organizing on social media came out in cities including Nairobi, Mombasa, Homa Bay, and Kisumu to condemn the bill after it passed in parliament. Protesters breached the parliament on Tuesday, setting fire to part of the building and sending lawmakers fleeing.

The seeds of the recent protests, however, have been sown for years, as Kenyans see an economic and financial system stacked against them. They started to come to a head in earnest during last summer’s anti-tax protests, but they’ve taken on a slightly different character this year; so far, the movement seems to be composed of young people, leaderless and coordinated online. That’s no surprise, Nic Cheeseman, professor of democracy and international development at the University of Birmingham, told Vox.

“Young people were the first to get sacked during Covid, had higher unemployment, are less likely to be registered to vote, and are under-represented in parliament,” he said.

During his campaign, Ruto made his pitch to these young people, dubbing them the “hustler nation” and emphasizing his own rags-to-riches story. But his promises for “bottom-up” economic reform have rung hollow as Kenyans still suffer from severe economic inequality and lack of educational and job opportunities.

But Kenya’s economic woes didn’t start recently; the nation’s immense debt stems from an economic boom in the early 2000s, when the government borrowed money from a variety of international creditors to fund public infrastructure projects, supporting agriculture and small and medium businesses and external debt servicing but failed to invest those loans in ways that could grow the economy. Add to that a series of costly natural disasters (including floods and Covid-19), ineffective taxation strategy, and the long-term pattern of politicians overspending to make good on campaign promises, and Kenya was poised for crisis.

“The drivers of [the] debt crisis are predominantly political, in other words, and can only be solved by political solutions,” Cheeseman said.

By that he means a deeper problem needs to be solved: Ultimately, Kenyans don’t trust their government, and understandably so; high levels of government waste and corruption, as well as a patronage system that relies heavily on favors, nepotism, and quid-pro-quo relationships with roots in Kenya’s British colonial period, mean the government isn’t responsive to the Kenyan people.

Though Ruto positioned himself as an alternative to this system, promising voters that he was a break from the political dynasties of the past, that’s simply not true. Ruto has been in the government in some form since 1997, and he was part of the system that brought this crisis about.

Now, protesters have stormed the parliament and called for his resignation — and say they won’t stop until he is gone.

What happens to Kenya now?
The question of what’s next — both politically and financially —is murky at best. For now, Ruto has refused to sign the tax bill, but the government will have to enact austerity measures to both save money and comply with a 2021 loan agreement with the IMF, which requires Kenya to increase taxes and cut government spending while also protecting and strengthening the social safety net.

That agreement is likely to cause Ruto more political headaches, if other countries in similar situations are any indication.

“It happens again and again,” W. Gyude Moore, a fellow at the Center for Global Development and former public works minister of Liberia. “Countries go to the IMF, get recommendations, and do everything they can to remain on the good side of the IMF. And in the process of doing that, people end up hurt.”

In the meantime, Ruto has said that he will introduce austerity measures aimed at cutting government spending to align with the IMF’s guidelines, starting with slashing his own office’s budget. Those austerity measures don’t seem to be cutting into public programs like infrastructure, health care, and education yet — but such cuts could still come. The central government could decrease cash transfers to Kenya’s counties, further fueling the inequality that plagues Kenyan society, and could cut into critical programs like meals for school-age children.

Kenya spends about 60 percent of its revenue on debt payments; a third of that revenue goes toward interest. While continuing to service its debt plays well for creditors, it negatively affects the population, because that money isn’t being spent on programs and services for them.

Kenya doesn’t have many options when it comes to dealing with its debt burden. It could default on its payments — simply not pay the loan back, in other words. While this could ease some of the burden on Kenya’s population in the short term, it would tank the country’s credit rating, impacting the country’s ability to borrow in the future. Should it need fast cash for another Covid-level crisis after defaulting, it could find itself out of luck. It could also have even more trouble accessing foreign currency and struggle to pay for imports, leading to higher inflation as Sri Lanka experienced in 2022 — which resulted in ended in mass civil upheaval and the ouster of the country’s president.

Renegotiating the terms of its loans is another option. That could help lower the amount that the country pays to external creditors so Kenya isn’t paying more than half of government revenue to service its debts. That would likely still mean implementing some austerity measures and increased taxes, though perhaps not as extreme as the shelved tax bill.

Finally, Kenya could keep its present course. But again, that means little to no money would be left for stoking internal economic development, and scant resources for the sorts of services citizens expect from their governments. Ruto has proposed a two-week period to discuss options for a new economic plan.

All that means Kenya does need to find some money from somewhere. Any increase in taxes, Cheeseman said, would have to be targeted at Kenya’s ultra-wealthy, to demonstrate a sensitivity to the plight of ordinary Kenyans, if Ruto hopes to regain some of their support. However, that’s unlikely to be popular among Kenya’s powerful elite.

Ultimately, even raising capital is a short-term financial fix to the long-term political problems of corruption, waste, and mismanagement. Efforts to undo those patterns are likely to anger the ultra-wealthy, whose businesses depend on corrupt relationships with the government to thrive.

Whether or not the Ruto administration finds a way to manage its debt payments, the problem is that Kenyans don’t feel that their government is looking out for their best interests. That has played out in protests over the economy, but those circumstances are a product of Kenya’s political culture and international financial institutions that have failed developing countries.

By Naija247news
By Naija247newshttps://www.naija247news.com/
Naija247news is an investigative news platform that tracks news on Nigerian Economy, Business, Politics, Financial and Africa and Global Economy.

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