Kenya's President Warns of Consequences After $80 Billion Debt Plan Fails

Post by: Elena Malik

NAIROBI, Kenya — The economic situation in Kenya has taken a turn for the worse as the country's ballooning debt is expected to increase further following the rejection of a crucial finance bill amid deadly protests. President William Ruto had championed the bill as essential for raising revenue to address the nation's mounting financial challenges. With the bill's failure, Ruto has warned of "huge consequences" for the nation.

Facing significant public discontent and calls for his resignation, Ruto has announced that the government will attempt to slash a $2.7 billion budget deficit by half and borrow the remaining funds, though he has not specified the sources for this borrowing. The protests were fueled by anger over the perceived bloated bureaucracy and the luxurious lifestyles of senior officials. In response, Ruto has pledged to cut funding to his own office and eliminate funding for the offices of the first lady, the vice president's wife, and the wife of the prime Cabinet secretary. Additionally, nearly four dozen state enterprises with overlapping roles will be closed.

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In his two years in office, Ruto has become increasingly unpopular due to his efforts to introduce new taxes aimed at enabling Kenya to repay its $80 billion public debt to international lenders, including the World Bank, the International Monetary Fund (IMF), and China. The public debt currently accounts for approximately 70% of Kenya's gross domestic product (GDP), marking the highest level in two decades.

The pressing question now is how Ruto's administration will find the necessary funds to pay off the debt without exacerbating public discontent or stifling economic growth. Kenya's economy grew by 5.6% in 2023, but further borrowing could have serious implications. Economist Mbui Wagacha, a former adviser to previous President Uhuru Kenyatta, argues that Kenya needs a professional budget and management body similar to the U.S. Office of Management and Budget. Currently, Kenya's treasury makes budget estimates and forwards them to the parliamentary finance committee, which then creates the finance bills.

"Parliament has abdicated its mandate on public finances in the Constitution and is looking after its own interests," Wagacha said. He warned that further borrowing could be "disastrous" and suggested a strategy that includes diplomacy to attract investment and restructuring the debt to persuade creditors to write off some of it.

Economist Ken Gichinga also expressed concerns about the impact of government borrowing on Kenya's economy. He noted that businesses have not yet recovered from the effects of the COVID-19 pandemic and the war in Ukraine. "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, arguing that Kenya should raise more revenue instead of relying on borrowing. "If we are a serious state, we must be able to enhance our taxes," he stated in May. However, Kenyans have strongly opposed tax increases, especially as they struggle with rising prices for basic goods. The recent protests even saw demonstrators storming parliament.

Last week, after announcing that he would not sign the finance bill he previously supported, Ruto emphasized his efforts to pull Kenya out of a debt trap and warned of the severe consequences that lie ahead. Wagacha argued that economic growth must precede any increase in 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.

Wagacha suggested facilitating access to low-interest credit for businesses in key sectors such as tourism and agriculture, noting that small businesses are crucial for Kenya’s economic growth as they tend to employ a significant number of people. This approach could also help address the high youth unemployment rate. Gichinga concurred, advocating for job creation incentives through low taxation and lower interest rates. "At the end of the day, we need a jobs-centered economic policy. That’s what we’ve been lacking," he stated.

The IMF, which had recommended some of the controversial tax changes, has faced public backlash in Kenya. Some protesters carried posters with messages like "IMF stop colonialism." In a statement late last month, the IMF indicated that it was monitoring the situation in Kenya and aimed to help the country "overcome the difficult economic challenges it faces and improve its economic prospects and the well-being of its people." Gichinga called on the IMF to do more for Kenya, urging it to be a "strong development partner" rather than focusing solely on debt sustainability.

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