Kenya’s President Warns of Fallout After $80B Debt Relief Failure
Facing public calls to resign, President Ruto announced the government’s plan to cut a $2.7 billion budget deficit by half and borrow the rest, though he did not specify the sources of the borrowing.
In response to anger over the bloated bureaucracy and the luxurious lifestyles of senior officials, Ruto has promised funding cuts in his own office. Additionally, funding will be stopped for the offices of the first lady, the “second lady” — the wife of the vice president — and the wife of the prime Cabinet secretary. Almost four dozen state enterprises with overlapping roles will be closed.
Ruto has become deeply unpopular during his two years in office due to his efforts to introduce taxes intended to enable Kenya to repay its $80 billion public debt to lenders, including the World Bank, the International Monetary Fund, and China. This public debt constitutes about 70% of Kenya’s gross domestic product, the highest in 20 years.
The crucial question is how Ruto’s administration will find the money to pay off the debt without further angering millions of struggling Kenyans and without slowing down the economy, which grew by 5.6% in 2023.
Economist Mbui Wagacha, a former adviser to previous President Uhuru Kenyatta, argued that Kenya needs a professional budget and management body like the Office of Management and Budget in the U.S. Currently, Kenya’s treasury makes budget estimates and forwards them to the parliamentary finance committee, which creates the finance bills. Wagacha criticized the parliament for abdicating its mandate on public finances in the Constitution and focusing on its own interests.
He warned that further borrowing by Kenya could be disastrous and proposed using diplomacy to attract investment and restructuring the debt to get creditors to write off some of it. Another economist, Ken Gichinga, agreed that government borrowing would slow down Kenya’s economy, noting that businesses have not yet recovered from the effects of the COVID-19 pandemic and the war in Ukraine. He explained that increased government borrowing raises interest rates, which slows down businesses and the economy due to the high cost of repayment.
Kenya’s president has advocated for self-sustainability, arguing that the country should raise more revenue instead of borrowing. “If we are a serious state, we must be able to enhance our taxes,” he said in May. However, Kenyans have rejected attempts to raise taxes as they struggle with rising prices on basic goods, even storming parliament during recent protests.
Last week, days after announcing he would not sign the finance bill he once championed, Ruto said he had worked hard “to pull Kenya out of a debt trap” and warned of significant consequences ahead. Wagacha emphasized that economic growth must come before the government increases revenue targets and tax collection. He suggested expanding the economy with employment and investment, making it easier for people to accept tax requests.
He recommended making access to low-interest credit easier for businesses in key sectors like tourism and agriculture, noting that small businesses hold the key to Kenya’s economic growth as they tend to absorb many employees. This could help address high youth unemployment. Gichinga added that the government should incentivize businesses to create jobs with low taxation and lower interest rates, stressing the need for a jobs-centered economic policy.
The IMF, which suggested some of the controversial tax changes, has been a target of public dissatisfaction in Kenya. Some protesters carried posters with messages such as “IMF stop colonialism.” In a statement late last month, the IMF said it was monitoring the situation in Kenya, with its main goal being to help Kenya “overcome the difficult economic challenges it faces and improve its economic prospects and the well-being of its people.” Gichinga called for the IMF to do more for Kenya beyond focusing on debt sustainability and to be a “strong development partner.”
