June 25th was undeniably a historic day for many Kenyans. The country, rocked by youth-led protests triggered by the Finance Bill of 2024 exhibited deep public upset, directed not only at the bill but at the Kenyan government.
Initially, the uproar also targeted International Financial Institutions (IFIs), particularly the International Monetary Fund (IMF). As citizens vehemently opposed President Ruto’s administration, several also raised placards with messages reading: “IMF, get your hands off our taxes” and “We aren’tIMF bitches”. Protesters asserted the promise of their constitution, that “All sovereign power belongs to the people of Kenya” and chanted that the President was an “IMF puppet.”
Why? They believed the IMF was – to use an analogy – attempting to milk a starving cow – pushing the government to impose tax raising revenues through the finance bill that would make people’s already difficult lives unbearable. While poverty in Kenya has been declining, today still over 30% live below the national poverty line (the equivalent of US $300-600 per year). Moreover, although Kenya’s official unemployment rate is around 6% – having risen sharply since 2016, this is heavily skewed towards young people – estimated at over 30%.
Meanwhile, youth in countries such as Zambia, whose government had a year or two ago already agreed to austerity measures first proposed by the IMF to be able to get new loans for its own debt crisis, looked on somewhat jealously. Recent analysis by Oxfam revealed that for every dollar the IMF encouraged developing countries to spend on public goods, including Zambia, it instructed them to cut four times as much through austerity measures, at the expense of social wellbeing. It seemed that Kenya’s was just the latest case of a starving cow being milked by the IMF – but this time young people were fighting back.
The reason why the IMF was in the picture in Kenya was that since 2021 – the year before President Ruto was elected – the country had been undergoing a new “reform program” with the IMF in order to access emergency funds from two of its instruments known as the Extended Fund Facility (EFF) and the Extended Credit Facility (ECF). EFF funds come with a 3.5-4.5% interest rate and are expected to be paid back within 4.5 to 10 years, while ECF funds come with zero interest but are also expected to be paid back between 5.5 and 10 years. In 2023, Kenya also applied to access another new IMF instrument known as the Resilience and Sustainability Facility (RSF), which carries 2.25-3.15% interest but a longer repayment period over 10.5 to 20 years.
Kenya faced a financial crisis as early as 2021 due to several factors, not least the COVID-19 pandemic. For most African governments, this led to a major fall in government revenues, impacting everything from tourism to business taxes. At the same time, there was a pressing need to increase spending to ensure socially distanced populations could access essential services and purchase medical equipment and vaccines. Compounding the issue, African governments only got 7% of global emergency funds from the IMF, amounting to just $33 billion for the entire continent. This limited support exacerbated the financial challenges faced by Kenya and other governments.
The first negotiated disbursement from the IMF under Kenya’s new program was therefore in April 2021, worth just over US $300 million, and the latest disbursement $941 million in January 2024 – bringing Kenya’s exposure to the IMF under the entire program to about $3.9 billion.
For context, in 2023, Kenya’s total external debt was $38.1 billion, and its exposure to the IMF at the time was under $2.9 billion – around 7% of the total. Kenya’s largest single external creditor is the IMF’s sister – the World Bank – at 32% of the total.
The finance itself as well as the program is therefore significant for Kenya. It is also significant for Africa, because the continent as a whole has very limited access to IMF’s automatic, unrestricted funds known as “Special Drawing Rights”. Since African countries have such limited access to automatic funds they have to formally apply to the IMF each time they face a financial crisis, enabling the IMF and its major shareholders – each time – to demand “reforms”. Kenya itself, for example, only has automatic access to approximately $US 739 million worth of the IMF’s billions of SDRs. Hence, today, Kenya is one of Africa’s top 5 borrowersfrom the IMF. According to Development Reimagined, Kenya has applied to the IMF’s various instruments 23 times since inception, compared to African and global averages of 12 and 10 times, respectively. That means Kenya has undergone numerous “reform” programs, with the 2021 program being just the latest. And while Kenya might be one of the top IMF borrowers, it is not alone. There are only three African countries – Botswana, Eritrea and Libya – who have never borrowed from the IMF’s instruments.
It was under the 2021 onwards “reform” program that certain measures in the 2024 Finance Bill were first introduced and proposed to Kenya’s government broadening of the tax base through revenue-enhancing measures such as new taxes and repealing of previous tax cuts.
It was however, only after Ruto became President that the IMF program took effect. Shortly after taking office, President Ruto met a critical IMF condition by eliminating subsidies which had been provided by previous governments. In the Finance Bill 2024, the government proposed a raft of new taxes on basic commodities such as bread which had been tax exempt under the previous tax regime but now attracted a 16% VAT levy. The Billalso proposed repealing relief of excise duty for raw materials used in manufacturing other excisable goods. All this was in consonance with the IMF’s prescription of fiscal consolidation.
The question remains, however, could Ruto have pushed back against the IMF, and gone a different route? Did the Kenyan cow have to be milked? Or could it be fattened in some way first?
Our view is that Ruto could have pushed back. The Kenyan government was essentially trying to raise the equivalent of $US 2.7 billion through new regressive taxes in the 2024 Finance Bill 2024.
However, currently Kenya spends much more – the equivalent of $US 4.6 billion every year – on servicing existing debt, some of which – especially from some of the World Bank’s, China’s, and private sector lenders – have actual interest rates at over 7%, grace periods of under 5 years, and some must be repaid within 10 years. There is a strong argument that Kenya’s creditors – significantly wealthier than Kenya’s citizens – should be able to manage a debt restructuring which would enable Kenya to find savings of the same amount Kenya was trying to extract through the Finance Bill.
Restructured amounts of this degree would have been – and would still be – a temporary blink on the balance sheets of Kenya’s creditors. In turn, for Kenya, this could have been the difference between a parliament on fire and a resurgent economy. The IMF could have supported Kenya to fatten itself.
Indeed, there is no chance Kenya can or should escape raising new debt to stimulate growth, but it must be cheap, cheaper than IMF debt and managed effectively at government level. Just to build basic the infrastructure to meet the Sustainable Development Goals in Kenya —for example, to ensure that every young Kenyan has access to safe drinking water, a little electricity, and the internet— Development Reimagined has calculated that the government needs to be spending between $14 billion and $21 billion per year, taking up around 15% of Kenya’s GDP. The international financial system exists because Kenya cannot and should not source this basic finance purely from often unemployed, poor taxpayers.
So what next for Kenya? How to stop the starving cow being milked?
The fact is, the initial anger at the IMF among Kenyan youth, and Africans at large, was not in any way misdirected. Indeed, Kenya’s precarious economic situation today is both a consequence of, and an indictment on, the IMF’s approach to its most vulnerable members.
And while there is some debate over whether Kenya should have defaulted on its debt like Zambia did in November 2020, rather than go to the IMF in 2021, this would not have solved Kenya’s problems today. Kenya would still have had to engage with an IMF program, as debt relief from some creditors requires this. In this case, the austerity measures in the Finance Bill 2024 may just have been proposed earlier.
We must also remember that President Ruto has been one of the most vocal leaders in recent times on the need for international financial architecture reform.
Now he has his very own case study of why and exactly how it needs reimagining. He has a chance to both advocate for reform and serve as an example of best practices in managing debt with minimal misuse of funds coupled with transparent and detailed debt auditing.
However, despite the unprecedented protests that swept the nation and claimed over 60 lives, President Ruto has revived the Finance Bill 2024 from its supposed grave. A move that proves that like failed promises, some bills, have a way of coming back to haunt you.
His proposals however in our view should have entailed three key elements, based on Kenya’s experience;
First, debt restructuring needs to be fast, untied to IMF programs, and possible to achieve creditor-by-creditor, so that Kenya can make the most of its own bilateral relationships and market reputation.
Second, all new debt for Kenya and other countries needs to be cheaper, now. Ruto’s own proposal for IDA to be replenished by donor contributions of around 35 billion is a start but he can and should increase this number, while also advocating for replenishment of the African Development Fund, which is also a very concessional source of finance for African countries such as Kenya.
And last but not least, African countries like Kenya should have easier and more access to IMF’s emergency finance, through massive reforms to IMF quotas which in turn determine Special Drawing Rights. Kenya should have not had to have its domestic policies determined by unaccountable IMF staff and its executive board to get emergency funds.
For Kenya’s prosperity and that of many African nations, President Ruto should view this domestic crisis as a pivotal opportunity to solidify his reputation as an international spokesperson for global financial architecture reform. Whether the President’s most recent actions were driven by personal conviction or pressure from Washington remains unclear. What is certain, however, is that Kenya’s youth will remain disillusioned unless swift and meaningful change is implemented.
Contributed by;
Trevor Lwere, an Economist at Development Reimagined. He has a background in Economics and Global Affairs.
Teta Mukulira, a Junior Policy Analyst at Development Reimagined with the Decolonising Development team.
