China props up Kenya’s collapsing economy?

President William Ruto came to power in Kenya in 2022, promising to make life easier for the average Kenyan. But seven months into his presidency, Ruto’s chief economic adviser tweeted in April 2023, “Salary or default? Take your pick.”

A month later, the government withheld salaries for thousands of civil service workers to save money to pay off foreign loans, the Associated Press news agency reported in May 2023.

In less than two years, the same people who Ruto promised to ease their hardships are baying for his blood. They have taken to the streets, looking for the life that Ruto had promised them. The vast majority of protesters are young. They became violent and set fire to the Kenyan parliament building, damaging part of it. In response, the Kenyan government has used force, killing more than a dozen protesters.

On Wednesday, Ruto surrendered, declaring he would not sign the tax reform bill that had sparked violent protests, resulting in the deaths of 23 agitators. The invoice will now expire.

Catalyst for protests: Why are young people on the streets in Kenya?

The new finance bill… The bill proposed a series of tax reforms and tax increases, causing public outrage.

• Among the most controversial measures were new taxes on the creation of monetized digital content and a five percent tax hike on digital payments, including bank transfers and mobile money payments. Given Kenya’s heavy reliance on mobile money, these measures were particularly severe.

• What tipped the scales against the Ruto government was a 16 percent value added tax (VAT) on bread and a 25 percent excise duty on domestically produced crude and refined vegetable cooking oil.

• Additionally, the bill proposed a 2.75 percent income tax on wage earners enrolled in the national health insurance plan and a 2.5 percent annual tax on vehicles.

Protesters argued that these taxes would significantly increase the cost of living. They were also alarmed by the bill’s provision that allows revenue authorities to access bank and mobile money accounts to enforce tax collection.

The new bill aimed to raise an additional $2.7 billion in domestic revenue for the Ruto government. Ruto also intended to use the new taxes to meet a 2024 revenue target of 3.3 trillion Kenyan shillings ($26 billion).

But why raise taxes so sharply?

Ruto justified the tax hike proposals. He said they were needed to pay off a public debt of 11.1 trillion Kenyan shillings or $82 billion that Kenya had to repay or service.

Much of this debt is owed to China, as a result of extensive borrowing under former President Uhuru Kenyatta, whom Ruto served as Deputy President. These loans financed infrastructure projects, including a standard gauge railway (SGR) connecting Nairobi to Mombasa, a major coastal city.

Kenya turned to lenders for new loans, but agencies such as the International Monetary Fund (IMF) and the World Bank demanded tax reforms and transparency in other loans (read borrowings from China, whose loan terms are never disclosed and always covered up of secrecy). China is already Kenya’s biggest lender.

Problem: A model of consequences

The thing about debts is that they must be serviced to avoid default. A lack of credit complicates future borrowing for a country. Debt becomes harder to come by and those available come with very high interest rates, further complicating finances. It becomes a vicious circle.

It is estimated that Kenya is currently spending about 59 percent of its revenue on debt servicing, leaving only about 41 percent of tax revenue to fund government spending, including salaries and development projects.

World Bank estimates put Kenya’s total public debt at about 68 percent of gross domestic product (GDP) for the 2023/24 fiscal year. If things go according to the Ruto government’s plan, it could drop to around 65 per cent by 2024/25. Kenya’s fiscal year follows the July-June cycle. In June 2023, the debt-to-GDP ratio had risen to almost 72 percent.

China’s angle on Kenya’s problem

About a quarter of the debt financing money goes to servicing borrowings from China, which is not only Kenya’s biggest lender but also accounts for over 70 percent of the East African nation’s total bilateral debts. This amounted to 882.5 billion Kenyan shillings or $6.82 billion by June 2023. Figures for the upcoming fiscal are not clear.

Bloomberg quoted a report by lawmakers as saying that Kenya’s loan payments to the Export-Import Bank of China “is a major driver of debt service costs.” China accounts for 147.9 billion Kenyan shillings or $1.2 billion in interest and principal payments in the next fiscal year to June 2025, according to the Public Debt and Privatization Committee of Kenya’s National Assembly.

Overall, external debt payments are forecast at 590.6 billion Kenyan shillings or $4.5 billion in the financial year that begins July 1, adding up to about a third of total debt service.

Kenyan media reports indicate that China, Finland and France are the main lenders. The problem with Chinese loans has been a lack of transparency and a history of default or near-default situations for countries that have had China as their main lender – Sri Lanka and Pakistan, for example.

Bilateral lenders

Last year, an Associated Press analysis of a dozen countries most indebted to China — including Pakistan, Kenya, Zambia, Laos and Mongolia — found that debt repayment is eating up an ever-increasing amount of needed tax revenue. to keep schools open. electricity and pay for food and fuel. He said debt service was draining the foreign currency reserves these countries use to pay interest on those loans, leaving some with just months before that money runs out.

There are two other complications with Chinese loans. China has been reluctant to forgive the debt. Coupled with its extreme secrecy about the amount of money and the terms of its loans, China’s hand keeps traditional lenders — the U.S. and others — from stepping in to help the struggling economy restructure its debt and debt service. .

The other issue is, as has been revealed in recent years, that China requires borrowers to put money into hidden escrow accounts to protect its loans. This puts China at the top of the line of creditors to be paid. Others then prefer to stay away.

The same thing was happening with Kenya. But as Ruto approached international agencies, they sought to improve Kenya’s tax revenues and fix flaws in the fundamentals of its economy. Kenya brought in a pro-reform budget in April. And the Finance Bill for tax reform was a step in that direction, but an already struggling population was not ready to shoulder the burden.

This explains why social media posts called for occupying the president’s office and residence, as well as the local offices of the World Bank and the IMF. Now that Ruto has withdrawn the Finance Bill, his government is looking to find new ways to finance the Kenyan economy.