Kenya: Will Ruto’s plan to up taxes and not default on debt work?

By Jaysim Hanspal
Posted on Friday, 6 January 2023 14:06, updated on Monday, 9 January 2023 09:29

Kenya's President William Ruto addresses a joint news conference with his South African counterpart Cyril Ramaphosa, after holding bilateral talks during his visit at State House in Nairobi, Kenya November 9, 2022. REUTERS/Monicah Mwangi

Kenya's President William Ruto has announced that the country will not default on its growing debt, but will instead increase its tax collection in the next two years. He says Kenya has "applied its breaks" on any further borrowing.

“This country of ours will not default. I want to give you my assurance. Our country will not default on our obligations”, he said, adding that he plans to almost triple tax collection to KSh5trn ($40.6bn)

The country has been facing increasing debt as its import bills have ballooned due to the global pressures caused by Russia’s invasion of Ukraine.

Since Ruto’s government took the helm in September, his administration has committed to curbing costly commercial spending in favour of cheaper lenders such as the World Bank. In December 2022, the IMF approved an immediate KSh55.1bn ($447.39m) loan.

Bigger picture

Despite these changes, the country still faces the risk of having a downgraded credit rating as global inflation continues to impact the continent.

As the US has recently made attempts to contain its own higher inflation levels, foreign investors are moving capital to safer economic regions that offer better returns, investing more in the dollar.

It will also require disciplined spending commitments over the medium term

In February 2022, credit rating agency Fitch said rising government debt levels and global interest rates increased the risk of credit rating downgrades in 10 African nations, with Kenya, Ghana, Lesotho, Namibia, Rwanda, and Uganda most at threat.

According to Thea Fourie, an analyst at S&P Global Market Intelligence, increased tax collection alone will not fix Kenya’s debt issue. “It will also require disciplined spending commitments over the medium term,” she says.

Stringent economic policy

In his New Year’s address, Ruto made it clear that his government would continue with their stringent economic policy. He said he would not be re-introducing the staple subsidies offered during Uhuru Kenyatta’s administration.

“We had to do away with those subsidies or they would cost our economy big time,” Ruto said.

Jermaine Leonard from Fitch Ratings says: “On one hand, the elimination of subsidies increases consumer fuel prices, increasing inflationary pressure; but on the other hand, it takes the pressure off the government’s balance sheet and supports its fiscal consolidation effort.”

Given that global fuel prices are likely to be lower in 2023 than in 2024, we believe that the positive [effect on] public finances will likely outweigh the higher inflationary pressures.”

Fourie says: “We can take comfort from the fact that Kenya’s newly-elected president, [William] Ruto, implemented some hard policies such as lifting fuel subsidies, while the IMF programme set solid anchors for both monetary and policy objectives [and thus debt sustainability] over the medium-term.

“What comes next is not going to be easy, nor politically popular [higher taxes and less spending], especially in the current global environment of lower global growth, high global and local inflation and limited access to global financial markets.”

Environmental impacts

Kenyatta’s policies, including numerous infrastructure construction projects, had a devastating impact on the country’s debt agency.

The new government has been quick to rock the boat, recently ending a decade-long ban on the growth and importation of genetically-modified (GMO) maize to quell food insecurity in the region after the worst drought in four decades.

The move has been intensely disputed by local farmers and the Kenya Farmers Association who argue that the move, as seen in countries like Burkina Faso with other staples, will only price smallholder farmers out and leave them utterly dependent on the foreign companies who hold GMO patents.

The country has struggled in recent years with rising import prices and has consistently had a deficit of 10 million bags of maize per year.

Leonard from Fitch believes that domestic output is the key to reducing inflationary prices. “Much of Kenya’s recent inflation has been imported, but a successful effort to improve agricultural output would help to lower domestic food prices.”

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