What do the IMF and external debt have to do with Kenya’s current crisis? | Business and Economic News

Weeks after the protests began, determined Kenyans continue to take to the streets to voice their dissatisfaction with the government.

But when protesters first took to the streets in June to rally against proposed tax hikes, it wasn’t just President William Ruto and members of parliament who received flak.

During the protest, which later turned dead, people carried signs blaming the International Monetary Fund (IMF) and the World Bank, which they blame for creating the crisis, with one reading: “Stop the IMF, the World Bank, modern slavery.”

Graffiti condemning the organisations has been seen across the capital, Nairobi, even as protesters continue to demand Ruto’s resignation.

So what is the IMF’s role in the current crisis and what do Kenyans want from the IMF?

What did the IMF do?

For years, multilateral lending institutions, particularly the IMF, have earned a bad reputation in African countries for providing loans to struggling countries under strict conditionalities that critics say always disproportionately affect the poor.

Including African leaders rootcriticizes international financial institutions for charging disproportionately high interest rates compared to other developing countries.

In Kenya, the anger is raw because the tax hikes that Ruto withdrew and a similar bill passed in 2023 are both linked to IMF loans as the country struggles under the weight of a severe debt crisis.

While some of the complaints about the IMF are valid, African leaders are often to blame, Dumebi Oluwole, an economist at data intelligence startup Stears, told NDMT. Rising interest rates are often the result of a record of defaults on loans, she said. While tough conditions from lenders like the IMF have been applied to other distressed countries, such as Greece, which was hit by an economic crisis in 2009 and partially rescued by lenders, African leaders often resort to options that harm the majority, she said.

“African leaders are traitors,” she said. “Everyone knows that IMF loans come with strings attached, but when asked to raise revenues, some leaders choose to raise taxes rather than cut spending. Then they blame the IMF. Those who don’t know how to cook can only dangle breadcrumbs.”

What is Kenya’s debt situation?

When Ruto took office as president in August 2022, Kenya was already in crisis, with external debt of about $62 billion, or 67% of gross domestic product.

Former President Uhuru Kenyatta borrowed heavily from commercial lenders and countries like China to finance massive infrastructure projects, including a rail line linking Nairobi with the port city of Mombasa and 11,000 kilometers (about 7,000 miles) of paved roads. Most of these loans were commercial and carried high interest rates. Meanwhile, the infrastructure failed to generate the expected revenues.

There were also lingering inflationary pressures from COVID-19, plus supply chain disruptions in Kenya’s agriculture. All of this combined to send food and living costs in general soaring in 2022, and Kenya’s debt load also increased as interest charges piled up.

The debt currently stands at $82 billion, of which about $8 billion is owed to China. a creditor include IMF, World Bank, United States, Saudi Arabia. Debt includes domestic borrowing. More than half of government revenue goes towards debt service.

On the left is former President Uhuru Kenyatta, and on the right is current President William Ruto. [File: Thomas Mukoya/Reuters]

When did the IMF come into existence?

In April 2021, Kenya, led by President Kenyatta and then Deputy President Ruto, reached an agreement with the IMF for a bailout.

The IMF said the 38-month program will help Kenya manage its debt and create a favorable economic climate for needed private investment. The program will provide Kenya with $3.9 billion in financing. A separate climate fund of $542 million was also approved.

The IMF made the loan conditional on higher taxes, reduced subsidies, and an end to government waste. Said It would increase government revenues while cutting spending.

The measures were launched last year. Prime Minister Leuven has made the IMF programme a priority for 2022 and beyond. Disbursements will be based on regular reviews of how well the government has pushed through some of the reforms. The last review in January saw $941 million disbursed.

What are some of the IMF-supported reforms that Kenya has pursued?

  • As part of his policies since taking office, President Ruto suspended fuel and fertiliser subsidies, but after protests erupted the fuel subsidy was reinstated in 2023.
  • The Finance Bill 2023 also received IMF support. Passed in June 2023, it introduces a 2.5% housing tax for employed persons and increases the VAT on fuel from 8% to 16%. Demonstrators took to the streets last year to protest the bill, but the turnout was less than in June this year.
  • The now-withdrawn 2024 Finance Bill, which included tax hikes, was backed by the IMF. The bill was set to generate $2.7 billion. Analysts said Kenya still needed to close the gap to meet the IMF program targets.
  • The IMF loan helped Kenya avoid defaulting on a $2 billion euro bond maturing in June. Kenya has no immediate short-term needs for repayments.
William Root
A priority for President William Ruto is meeting the conditions of the IMF loan. [Patrick Ngugi/AP]

How has the IMF responded to the protests?

Root withdrew the tax hikes on 27 June, the day after protests turned violent. Police opened fire on protesters who tried to break through barricades and enter Parliament, forcing MPs to flee. Root did not sign the bill into law, saying his government would listen to the public.

The IMF said it was monitoring the situation as the country descended into turmoil. “Our primary objective in supporting Kenya is to help the country overcome the difficult economic challenges it faces and improve its economic prospects and the well-being of its people,” said Julie Kozak, director of IMF communications.

According to Reuters, Root met with IMF President Kristalina Georgieva a few days after the protests, but it is unclear what they discussed.

Diplomatic sources told the news agency there was agreement among major donors that the IMF needed to show flexibility in its targets for Kenya. The organization is due to review the country again this month. In its January review, the IMF said Kenyan authorities had made progress on reforms but were lagging behind in collecting taxes.

What’s next?

Analysts said Kenya would likely now have to submit a new revenue plan to the IMF.

Ruto announced new austerity measures on Friday that are expected to fill the gap left by the repealed tax bill. He said the government would cut 177 billion shillings ($1.39 billion) from the budget for the financial year that starts this month and raise the needed funds by borrowing about 169 billion shillings ($1.31 billion).

He added that 47 state-owned enterprises would be dissolved, the number of government advisers would be halved, non-essential travel for civil servants would be suspended and budgets for the wives of the president and vice president would be cut.

“I believe these changes will put our country on a trajectory towards economic transformation,” Root said.

The escalation of protests in recent weeks has dampened investor sentiment, causing the Kenyan shilling to fall 0.29 percent against the dollar, but the currency is likely to recover in coming weeks if the government presses through with spending cuts, economist Oluwole said.

“They’re basically doing everything they were supposed to do before,” she said. “When the IMF imposes conditions, if you know your own situation, you don’t have to pass the burden on to your people.”

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