Ruto seeks balance between IMF heavy demands, of rioting citizens

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Opposition supporters hold posters that read 'Tumechoka' (Swahili for ‘We are tired’) as they participate in a public rally against the high cost of living after the passing of the finance bill at the Kamukunji grounds in Nairobi, Kenya on July 7, 2023. PHOTO | LUIS TATO | AFP

What you need to know:

  • The agency revised the outlook on Kenya’s long-term foreign currency issuer default rating to negative from stable and affirmed the IDR at ‘B’.
  • KAM leaders say that the country’s ambitious plan to grow the manufacturing sector contribution to GDP threefold to 20 percent by 2030 may not be achievable at the current rate.
  • President Ruto eliminated fuel subsidy when he came into office last year.
  • The Law Society of Kenya has also opposed the controversial tax law, saying some proposals are “extremely harmful.”

President William Ruto’s advisers are racking their brains to save the Kenyan economy, now characterised by weakening fundamentals and rising debt, amid mounting pressure to quell a political crisis caused by new taxes and high cost of living.

Recently, the opposition Azimio la Umoja One Kenya Alliance has been sponsoring civil disobedience in protest against the unpopular Finance Act 2023, which introduced double value added tax on petroleum products, effectively raising the cost of commodities, on top of new taxes on salaried workers.

This week, Azimio chiefs led by former prime minister Raila Odinga called for a three-day protest starting Wednesday, shutting down many businesses and causing losses running into millions of dollars, according to local manufacturers.

In a media briefing on Friday, the Kenya Association of Manufacturers (KAM) said they suffered the most on the Northern Corridor, as movement of goods was disrupted.

KAM chairman Rajan Shah said: “Our manufacturing sector contribution to the Kenyan economy stands at about Ksh1 trillion as per the Economic Survey 2023. This translates to Ksh2.86 billion ($20.2 million) daily in value addition. Therefore, the country stands to lose up to Ksh2.86 billion daily if the protests continue to disrupt businesses as we have witnessed in the past two weeks.”

Since the demonstrations began, the manufacturers say they have lost close to $42 million.

“These disruptions have hampered the ability to transport raw materials and finished goods thereby affecting the entire manufacturing process, leading to delays and increased costs,” said Shah.

But economists say the figures are exaggerated, as there was no complete shutdown of the manufacturing industry.

But even as the Ruto administration heavily clamps down on the rioters, Kenya’s loans just got more expensive as, on Thursday, rating agency Fitch revised the country’s credit status, citing a poor macroeconomic environment and uncertainties over the government’s debt repayment capacity as a result of weakening revenue position.

The agency revised the outlook on Kenya’s long-term foreign currency issuer default rating (IDR) to negative from stable, and affirmed the IDR at ‘B’.

This means that taxpayers will have to pay more in interest on loans procured by the government from the international financial markets.

Dr Ruto ascended to power about 10 months ago on the platform of transforming the economic plight of the poor, popularly known as ‘hustlers.’ But he is now walking a tightrope in trying to balance the interest of the World Bank and International Monetary Fund (IMF), which has provided strict guidelines on economic reforms, amid a population demanding relief at the till.

The pressure has also expanded to governance, with human rights watchdogs and global organisations such as the Commonwealth calling for a quick resolution to the crisis and respect of people’s rights to picket.

“Under both Kenyan and international law, all people have the right to peaceful assembly and protest,” said Michele Heisler, a medical director at Physician for Human Rights, a New York-based lobby. “We condemn the wanton and disproportionate force used by authorities against protesters and bystanders.

The deployment of live ammunition and indiscriminate use of dangerous crowd-control weapons like rubber bullets and tear gas have had devastating health consequences, including both severe injuries and deaths.”

Excessive force

The UN human rights office (OHCHR) said it was very concerned over reports of police using excessive force to quell protests which have left dozens dead and injured.

“We call for prompt, thorough, independent, and transparent investigations into the deaths and injuries,” said OHCHR Spokesperson Jeremy Laurance. “Those responsible must be held to account. Effective measures to prevent further deaths and injuries must be adopted. We call on the authorities to ensure the right to peaceful assembly as guaranteed by the Kenyan Constitution and international human rights law.”

The Ruto administration has demonstrated its commitment to the IMF guidelines by aggressively pursuing fiscal consolidation and debt sustainability measures in exchange for budgetary support.

Among the painful IMF-led policy measures is tightening of monetary policy (increasing interest rates), imposing 16 percent VAT on fuel, merging and reforming state-owned corporations, elimination of fuel subsidy and rationalisation of the public service, effectively implying job losses.

The government is battling a backlash linked to high food and energy prices, high cost of doing business, skewed state appointments and a fresh surge in state borrowing, which has made it difficult for businesses to access cheap loans from banks for investments.

Fitch reckons that the government’s fiscal consolidation process (increasing revenues and reducing spending) faces several risks, including the protests and legal challenges surrounding the VAT on petroleum products and the projected increase in government spending, especially on debt servicing, pension and gratuity costs.

The past two weeks have characterised a nation sliding into anarchy as demonstrations turned violent, with security agents shooting at protesters, and arresting dozens.

KAM leaders say that the country’s ambitious plan to grow the manufacturing sector contribution to GDP threefold to 20 percent by 2030 may not be achievable at the current rate.

Foreign direct investment has fallen as foreign investors are shifting funds from the Nairobi Securities Exchange (NSE). On Wednesday, only $400,000 was traded, with foreigners making up 25 percent of it.

Over the past 18 months, foreigners have not been the drivers of activity on the market mostly due to forex issues, according Mwathi Kilonzo, head of equities at EFG Hermes Kenya.

The government is seeking to mobilise resources to fund a Ksh3.6 trillion ($25.53 billion) budget for the 2023/2024 fiscal year, with a hole of Ksh718 billion ($5.09 billion).

About 50 percent of the revenue goes to debt repayment, with the National Treasury spending nearly Ksh1.02 trillion ($7.23 billion) on debt repayments during the 11-month period to May 2023.

Kenya’s debt currently stands at Ksh9.63 trillion ($68.29 billion) comprising Ksh4.54 trillion ($32.19 billion) and Ksh5.09 trillion ($36.09 billion) of domestic and external debt respectively, of which Ksh856.38 billion ($6.07 billion) is owed to China, according to the National Treasury.

External debt

This month, the Treasury is expected to pay external debt service worth Ksh63.5 billion ($450.35 million) , the bulk of which covers the biannual repayments for the standard gauge railway loans procured from China, and in June 2024, a $2 billion Eurobond is due for repayment.

The implementation of the controversial Finance Act, 2023, which is meant to raise Ksh211 billion ($1.5 billion) through punitive tax measures such as VAT on fuel and a 1.5 percent housing levy on employees’ salaries to be matched by the employer was suspended by the courts. But the government went ahead to implement the fuel tax.

President Ruto eliminated fuel subsidy when he came into office last year.

The Catholic Church has joined the chorus for a review and the bishops want the President repeal the unpopular law.

Archbishop Anthony Muheria said the Finance Act places an unsustainable burden on already-distressed citizens, especially those in the low-income bracket.

“We do realise part of disappointment and disillusion that is leading to grave agitation and anger is severe economic distress. The high cost of living has created a burden on individuals and families making it difficult for them to meet the basic needs and maintain a descent standard of living,” the cleric said.

“We therefore ask the President to repeal the Finance Act and institute a process that will seek to achieve the same goals within the context of the current economic situation.”

The Law Society of Kenya has also opposed the controversial tax law, saying some proposals are “extremely harmful.”

But Foreign Affairs Cabinet Secretary Dr Alfred Mutua defended the government policy, saying the high cost of living is not unique to Kenya but a global phenomenon.

Additional reporting by Luke Anami