The immediate cause of the angry protests that gripped Kenya’s capital on Tuesday was a series of proposed tax hikes — extra shillings that ordinary citizens would owe their government. The underlying cause, however, is the billions of dollars their government owes its creditors.
Kenya has Africa’s fastest growing economy and a vibrant business centre. But the government is desperate to avoid bankruptcy. The country’s staggering $80 billion in domestic and foreign public debt accounts for almost three-quarters of Kenya’s entire economic output, according to a recent report of the United Nations Conference on Trade and Development. Interest payments alone eat up 27 percent of revenues.
Kenyan President William Ruto had promoted the tax bill as necessary to prevent the country from defaulting on its debts, but the violent reaction to its passage in Parliament prompted Ruto to abruptly reverse course on Wednesday and reject the legislation he had called for. “I listen carefully to the people of Kenya,” he said, “I will not sign the Finance Bill of 2024, and it will subsequently be withdrawn.” He suggested a fourteen-day period of discussions to chart a new economic course.
Mr Ruto’s U-turn may have temporarily calmed the protests, but it leaves the country’s finances more vulnerable than before. Just two weeks ago, the International Monetary Fund and Kenyan authorities reached a agreement on a package of comprehensive reforms and tax increases needed to make the country more financially stable.
The policy review, which is required when the IMF lends money to distressed countries, warned of a “significant shortfall in tax collections” and worsening fiscal prospects. The IMF’s lending to the troubled East African nation now stands at $3.6 billion.
The type of debt that is causing misery in Kenya is found all over Africa. More than half the people on the continent live in countries that spend more on interest payments than on health or education.
“The children of this generation who will not get an education today will be scarred for life,” said Joseph Stiglitz, a former chief economist at the World Bank. He noted that there is growing evidence that “countries that go through a crisis do not recover — perhaps ever — to where they would have been.”
The global debt crisis is a relatively boring name for the vicious spiral of unsustainable loans and bailouts that developing countries have long found themselves in.
In the case of Kenya, after a period of economic expansion in the early 2000s, the Kenyan government took out huge loans to cover the costs of infrastructure projects, including roads, railways, massive dams and rural electrification. However, this latest cycle of the global debt crisis, considered the worst ever, was set in motion by events far beyond the control of any single country.
The deadly coronavirus pandemic paralyzed already fragile economies. The sudden need to provide vaccines, medical care, protective gear to hospital workers and subsidies to people who cannot afford food or cooking oil further depleted government bank accounts.
A war between Russia and Ukraine, coupled with sanctions imposed by the United States and its allies, sent global food and energy prices soaring. The richest countries then tamped down rising inflation by raising interest rates, sending debt payments soaring.
On top of this misery, there are the recent floods in Kenya destroyed infrastructure and farmland and displaced thousands of people.
M. Ayhan Kose, deputy chief economist at the World Bank, said this month that “40 percent of developing countries are vulnerable to a debt crisis in some way.”
It is more difficult than ever to find a solution to the current debt trap that poor and middle-income countries find themselves in.
Thousands of creditors have replaced the handful of big banks in places like New York and London that used to handle most countries’ foreign debts. One of the most influential new players is China, which has lent billions of dollars to governments in Africa and around the world.
More than a decade ago, China established itself among the leading lenders to emerging markets. The size of China’s total loan portfolio now rivals that of the IMF and the World Bank.
In total, Nairobi owes $35 billion to foreign lenders. The World Bank is the country’s largest creditor.
According to the IMF, Kenya owed at least $6.7 billion to China by the end of 2022. In addition, the country owed another $7.1 billion to bondholders, $3.8 billion to industrialized countries, $3.5 billion to the African Development Bank and $1.9 billion to international commercial banks.
To avoid default, countries like Kenya are forced to borrow even more money, only to find that their total debt burden becomes even heavier. And the larger the debt, the less likely lenders are to offer additional financing.
China has cut back on lending in recent years after concluding it was taking too many risks by lending to low-income countries. It has collected previous loans and made fewer new loans.
It is not the only player to pull out of Kenya. Japan and France, as well as major commercial banks in Italy, Germany and the UK, have also reduced their exposure.
This month, Pope Francis convened a meeting at the Vatican calling for debt cancellation and a rethink of the world’s financial architecture to manage the growing crisis.
Unmanageable debt, he said, is robbing “millions of people of the possibility of a decent future.”
It cost Zambia four years to reach a deal with its creditors after it first defaulted. Ghana, after defaulting on billions of dollars in debt last year, only this week reached an agreement with private creditors to restructure $13 billion in loans. And Ethiopia has difficulty reaching an agreement.
The World Bank, the IMF and the African Development Bank have all offered lifelines and increased their lending to Kenya to plug the gap when no one else would. But they in turn want the government to take steps, such as raising taxes and cutting spending, to stabilize the country’s finances. In a nod to the toll such belt-tightening would exact, the recent agreement with the IMF noting that the country also needed to strengthen its social safety net.
“How do you fill that gap in tax revenue?” said David Shinn, a former U.S. Foreign Service officer in Africa and lecturer at George Washington University’s Elliott School of International Affairs. “If you borrow money at an even higher interest rate than what you pay off, you dig an even deeper hole.”
In May, Mr Ruto said he was confident Kenyans would ultimately support his actions. “I have been very open that I can no longer borrow money to pay salaries,” he said in an interview. “And I explained to the people of Kenya that we have the choice to borrow money or collect our own taxes.”
As this week’s protest showed, it appears that the public is not yet willing to accept this choice.
Declan Walsh in Nairobi and Ruth Maclean in Dakar, Senegal, contributed to the reporting.
