I worked as an intern at the Institute of Economic Affairs (IEA) in the early 2010’s preparing presentations for the institution’s annual budget analysis which had begun tracking the roots of the economic nightmare Kenya finds itself in today.
IEA CEO Kwame Owino has for over a decade tried to warn the country that running huge fiscal deficits will end in premium tears because the rate at which debt has been growing would eventually make it impossible for the government to function.
Owino was largely ignored, sometimes accused online of belonging to the wrong tribe – the Luo – and assumed to be advancing the criticism of his tribesman Mr Raila Odinga who had lost to the tribal euphoria that brought the Jubilee administration to power.
The derailed Kenya express
A decade later, Kenya is exactly where Owino had predicted it would be and he is surprised that people are still having conversations about the debt, a train that left the station long ago and has since crashed.
“I do not talk about debt anymore,” he says, referring to a decade of trying to explain that taking huge commercial loans to fund vanity projects like the Standard Gauge Railway would come back to haunt us.
“People can say what they say about David Ndii but he is just right. I am not sure us [economists] managed to pass the message across but somehow it did not get through. We are already in the structural adjustment programme; we have been in here since COVID-19. It is like the train has crushed and people are surprised, looking outside and seeing ambulances and fire fighters. That’s the IMF,” he said.
Ndii has been administering shock therapy to Kenyans on X, formerly twitter, for them to come to terms with the realities of structural adjustment. He recently tweeted:
“Ni maskio hamna ama ni nini? [Is it that Kenyans have no ears?] We are implementing the solution. It is called structural adjustment, IMF programme, austerity, call it what you like. It is painful. There are still plenty of people who lived through the last one in early 90s. Ask them. Choices consequences.”
SAPs 2.0
For Kenya to qualify for the IMF bailouts, the government has had to restructure the economy either by cutting spending or by increasing taxes to attain a primary balance – the difference between revenue and expenditure excluding debt payments. The government has chosen to increase taxes and sell parastatals to raise money for debt repayment.
In a December 2021 country report, the IMF says that “the multiyear fiscal consolidation plan highlighted in the 2021 Budget Policy Statement (BPS) and substantiated by the FY21/22 Budget is premised on a more conservative approach to revenue projections and a commitment to additional policy steps to increase tax revenues and control expenditures under the EFF/ECF program with the specific objective of anchoring debt sustainability”.
For Kenya to qualify for the IMF bailouts, the government has had to restructure the economy either by cutting spending or by increasing taxes to attain a primary balance – the difference between revenue and expenditure excluding debt payments.
Kenya received the first budgetary support loan from the IMF in May 2020, soon after COVID-19 was reported in the country. The government has since imposed value-added tax on petroleum products and Liquid Petroleum Gas, increased capital gains tax, imposed excise duty on data and airtime, Sim cards, bank transactions, bank loan fees, scrapped home ownership tax exemptions, increased excise duty on alcohol, and pledged to adjust excise duty every year in line with inflation.
Kenya has also committed to increasing charges on water and privatising the most important commodity on earth. The government also plans to privatise scores of state-owned enterprises and will charge toll fees on public roads. The government has also started deducting civil servants’ salaries to fund pensions, is raiding paychecks for a housing levy, and has increased social security and health insurance contributions.
The government is also going after appropriation-in-aid (A-I-A) – fees, fines and levies on government services – with the aim of increasing collections by 35 percent immediately and by 70 percent in just two years. This means that all government services will cost more, from school fees, applications for identity cards and passports, marriage certificates, etc.
The Kenyan shilling has also been devalued, taking a 23 percent plunge in just one year, lighting an inflationary fire on an economy already doused with high energy prices and the aftershocks of a drought and a pandemic.
Policy alternatives
The result has been a total collapse in demand and a plunge in sales that has brought in its wake losses for small business and loan defaults as the contagion spreads.
The Federation of Kenya Employers, which has been conducting a survey on employers to determine the impact of the increased tax costs on jobs, says that preliminary results show that between October 2022 and November 2023, Kenya lost 3 percent (70,000) of the jobs in the formal private sector and 40 percent of employers have reported that they are planning to reduce employee numbers in order to meet the increasing costs of operating in Kenya.
The private sector has come out to demand that the government review some of the taxation measures in order to protect jobs and businesses and avoid an economic collapse.
The Kenyan shilling has also been devalued, taking a 23 percent plunge in just one year, lighting an inflationary fire on an economy already doused with high energy prices and the aftershocks of a drought and a pandemic
Kenya Bankers Association CEO Dr Habil Olaka says that the IMF has asked Kenya to move towards fiscal consolidation which could either mean more taxes, cuts in spending or a mix of the two. In his view, the government should consider these policy alternatives rather than just resorting to harmful taxation.
“It is an issue of balancing act (…) I do not think the IMF conditions are cast in stone. What they are telling the government is to move in a certain direction which they can do by increasing revenue or controlling costs,” he said.
Olaka also said that the private sector is making a point about how the current policies are impacting negatively on business, with the private sector staring at an economic crash. They hope the government can heed their concerns and give them breathing space in order for them to remain operational. The government should also communicate predictable strategies so they can align their plans accordingly.
Positive side to SAPs?
IEA CEO Kwame Owino says that while structural adjustments are viewed negatively from the point of view of job losses and the economic pain they cause, it is the only way to significantly alter the economy and render it sustainable. Kenya had spent itself into unsustainable debt with most of the resources bled out through poorly managed state companies. The country needed to cut expenditure below tax estimates including support to parastatals, and to sell the profitable ones to raise money to dig itself out of the debt hole. The sale of state corporations will allow the private sector to grow and run the economy.
Further, Owino observes that structural adjustments are not new; under the Marshall Plan in post-War Europe, the Asian economies after the 1997 debt crisis, and African states in the 1990s, they helped countries to rebalance their books and find new ways to grow their economies.
The IEA boss is a libertarian and a hard-nosed economist who is convinced that the outrage over the proposed sale of the Kenyatta International Convention Centre and the Kenya Seed company, among other parastatals, is misplaced because it costs taxpayers more to keep them running than if conference services and seeds were provided by the private sector.
The private sector has come out to demand that the government review some of the taxation measures in order to protect jobs and businesses and avoid an economic collapse
These liberal ideas – which I first came across in Francis Fukuyama’s End of History and the Last Man at the IEA library – might have just run their course. Three decades ago, just as communism was crumbling, Fukuyama’s 1989 book seemed almost prophetic as communism collapsed and private capitalists’ markets emerged on top. The capitalist society would be the end of all human political struggle and global markets led by the private sector would solve all our problems as governments stepped back to allow the markets to produce efficiently.
Today, his views could not be further from the truth, as globalisation is facing its own undoing and the liberal idea that we can outsource supplies has been debunked by the hording of COVID-19 vaccines and supply chain dislocations.
At a time when Kenyans need greater state support to cushion them against bruising inflation, subsidised education and healthcare, neoliberal theorists want the country to spend 70 percent of their taxes on loan payments while eliminating all tax subsidies.
The East African Tax and Governance Network (EATGN) says that while the government has the right to require that citizens pay their taxes diligently and faithfully as per the law, the government also has a duty to provide goods and services such as security, health, schools, infrastructure, and water.
This in essence means applying a human rights-based approach to taxation – the principle that the provision of goods and services by the state is not an act of benevolence but a duty.
“For instance, being hungry (needing food) does not bestow a responsibility on the government to provide for you. But when your ability to provide food for yourself is compromised to the extent that hunger is endangering your life, then the government has an obligation to intervene. Failure to do so constitutes a violation of your right,” observes the EATGN.
A failed experiment
It should be noted that the IMF is prescribing a painful solution for a problem it helped create.
“Despite following the IMF’s advice for decades, 19 of Africa’s 35 low-income countries are in debt distress or facing a high risk of debt distress. Most countries are now facing an acute cost of living crisis and rising debts, largely owing to external factors such as Covid, the war in Ukraine and rising global interest rates, over which they have had no control,” Action Aid said in a recent report, Fifty Years of Failure: The IMF, Debt and Austerity in Africa.
Kenya’s debt accumulation was prompted by the Fund following the 2008 crisis when the West printed cheap money that was looking for investment opportunities.
In effect, after the 2008 economic crisis, the IMF encouraged African countries to borrow the cheap capital to kick-start their own economies by boosting infrastructure spending. Having received bailout funds at low interest rates, Western bankers went in search of highly rated investments, with most settling on African sovereign bonds that combined high yields with the relative safety provided by government bonds.
Prior to 2008, only South Africa and the Seychelles had issued Eurobonds. Over the next decade, however, 21 sub-Saharan African countries including Kenya had issued several Eurobonds denominated in dollars.
When the IMF held a meeting with Kenyan officials to discuss the global financial crisis and later met with the Deputy Prime Minister and the then Finance Minister Uhuru Kenyatta in 2009 to solidify the loan agreements, it urged Kenya to issue a Eurobond to fund its infrastructure ambitions.
“The authorities were considering staff’s proposal to move to a fiscal anchor of total public debt (including domestic and external), in light of increased external borrowing opportunities. Concerning a planned sovereign bond issue, the authorities agreed that its size, costs, and maturity profile needed to be carefully evaluated in order to mitigate potential risks,” reads the IMF Article IV 2009.
However, when the money began flowing into African bureaucracies riddled with runaway corruption and a lack of capacity to absorb the huge loans, it inevitably led to an explosion of procurement fraud, tenderpreneurship and vanity projects that are now turning into white elephants with little or no returns for the debt-funded investments.
The orthodox solution
The IMF has returned a decade later to take credit as the saviours of these troubled economies, taking little or no responsibility for its role in creating the mess.
Kenyans first need to understand what the IMF’s role is. This Bretton Woods institution is the multilateral lender of last resort that helps countries that cannot meet their international trade or debt obligations to ensure the stability of the international market. The Fund gives you new money when no one else can, and at a cheaper rate since it is meant to stabilise the economy rather than earn interest.
During the release of the 2023 third quarter results of the KCB Bank Group where he now sits as board chairman upon his retirement, Dr Joseph Kinyua – a government insider for 44 years and an IMF guy – tried to explain that the Fund is jointly owned by Kenya and the other member countries.
A highly regarded economist with experience at both the Treasury and the CBK, shaping policy across four presidencies, Kinyua is also associated with the IMF, having served as an economist for the multilateral lender between 1985 and 1990.
He said that, unlike the Eurobonds that are lent to governments by commercial banks, the IMF and World Bank are lenders that are owned by governments and hence are not driven by the profit motive – any income they make is put back in the kitty to support member countries.
Kinyua said the IMF and World Bank loans are long-term, sometimes giving a country up to 40 years of repayment, as well as a grace period of about 10 years during which the principal is not repaid. The loans also come at very low interest rates compared to the market prices.
“The interest rate – going back to the time I was a young man working for the IMF – has never changed; it is half a percent and on the World Bank side it is about 1 percent,” Mr Kinyua said.
“Kenyans need to know those two institutions are your own institutions, they are owned by governments and the Kenyan government is a shareholder,” he said.
However, this money does not come without strings attached; the fund will require you to restructure your economy so that you deal with the challenges that brought you to the IMF’s doorstep in the first place.
It has come with the IMF’s typical orthodox approach of one-size-fits-all policy recommendations which prescribe fiscal austerity by cutting spending and raising taxes in line with the Fund’s free-market ideology.
Euthanasia
The structural adjustment is, however, being implemented at the worst possible time, when global risks are elevated and Kenya is just recovering from a pandemic, the longest drought in four decades and facing a destructive El Nino season that has left common folks staring at starvation.
Even Kwame Owino agrees that even though the IMF’s policies may be well intentioned, they could create lasting damage as consumption collapses, losses spread, defaults rise and companies liquidate.
Owino says that he has witnessed cases of parents unable to afford school fees and people literally sleeping hungry. The government is not even able to pay examiners and the breakdown of the education sector is showing with the crisis of confidence in the credibility of the exams recently administered.
The structural adjustment is, however, being implemented at the worst possible time, when global risks are elevated and Kenya is just recovering from a pandemic, the longest drought in four decades and facing a destructive El Nino season that has left common folks staring at starvation
The liberal economist even admitted that despite the IMF’s aversion to subsidies, a targeted food stipend for poor homes that have suffered almost 30 percent inflation should have been pursued rather than eliminating transfers and subsidies and then offering tax cuts to importers and deal makers.
“The IMF has given Kenya about 35 conditions; that’s a lot and it is very difficult to keep government focused on all these goals. A criticism to their approach is that they are simply doing too much too fast,” Mr Owino said.
–
This article is part of the East African Tax and Governance Network (EATGN) Media Fellowship Initiative as part of the Scaling Up Tax Justice (SCUT) in collaboration with Tax Justice Network Africa (TJNA).
