Kenya is banking on six options after Finance Bill collapse, not two

Protestors in Kisumu as they marched in the streets of city demanding total rejection to Finance Bill. [Michael Mute, Standard]

“There are decades where nothing happens and there are weeks when decades happen.”  Lenin describes a society, stable on the surface while social, economic and political problems grow to breaking point. GenZ’s awesome protest against the Finance Bill achieved a positive outcome, but will it drag Kenya down?

President Kibaki left Kenya’s economy 500% larger, $16bn debt (28% to GDP), facing East. He kept international, investment, shadow and other banks at arm’s length.

Uhuru Kenyatta’s government shattered Kibaki’s legacy, leaving $71bn debt (70+% to GDP) and vaulting Kenya well over the safe maximum debt level of 55% to GDP. The damage potentially catastrophic.

With China wary of African debt, Kenya turned West financially and geo-politically, allowing US military bases in Kenya and appointing US investment banks JP Morgan and Citibank as joint-lead managers of Kenya’s Eurobonds.

The World Bank became our largest foreign creditor ($10mn), then China ($7bn), bondholders ($7bn), Western and Other Lenders ($3.5bn), IMF ($2.5bn) and the African Development Bank ($2bn).  

The IMF is a short-term lender, providing low interest rate loans and the ability to blame the IMF for unpopular decisions needed to balance the books. Kenya and the IMF agreed an MOU to implement a structural adjustment plan to reduce borrowing and debt over time. 

The IMF lends in tranches, paid until 2025. Default on the IMF plan, i.e. reject taxes or cuts, means it can cancel further installments and is almost as bad as a debt default. 

Under President Ruto, Kenya has $80bn domestic and foreign debt (67% GDP). It cut public spending (12%), raised taxes and tried to borrow less and more cheaply. Amidst political excess and mismanagement, the government has done some good things, but it is fighting a losing battle, “debts that can’t be paid, won’t be paid”, Professor Hudson.

Contrary to CS Ndungu’s statement, Kenya has 6 options, not two (Finance Bill taxes and cuts). The others being: (1) Re-negotiate with the IMF, likely being done, is there a viable alternative route to achieve financial goals; (2) Restructure Debt (e.g. pay Chinese debt in Yuan through BoC reducing USD debt, incentivize cross-creditor haircut by e.g. cutting government salaries and benefits); (3) Default on the IMF Plan; or (4) Default on USD Debt.  None easy or even viable.

Default means Kenya can’t borrow, or borrows at high cost, is downgraded and banking stability comes into play, plus creditors can grab overseas state assets. However, Zambia defaulted in 2020, hit 4.6% GDP the next year, grew its mining and agricultural sectors and agreed a debt restructuring plan this year. 

Kenya, like Sri Lanka (2022 default, strong 2023 recovery), is a lower middle-income country, so it's harder to get debt relief and better to default sooner than later. Kenya could mimic Russia and pay X% of debt in USD and the balance in KSH in local bank accounts for creditors while working on growth and recovery. 

Are Kenyan institutions prepared for default? Are we seeking restructuring? A Finance Bill without the most controversial elements and sunset clauses on taxes (e.g. taxes automatically end after 3 years unless extended by 75% of MP’s after public consultation) might sell, if, Government explains the economic plan, how will this get us to a better place (e.g. debt to 55% GDP) and when?

All this overlooks one thing. The Finance Bill was designed to provoke anger and unrest. Who designed it that way?

Why did the female-led IMF think it was better to tax pads of poverty-stricken girls and cut school meals from poor children than ask Kenyan politicians, the second highest paid in the world, to take a pay cut? Or require Kenya to account for Eurobonds, loans, taxes and recover proceeds of theft by public officials as a lending condition between tranches? Why did they ignore international child, and women’s rights and labour standards? Or corrupt land and tax cartels and systemic corruption? (Good morning EACC!)

China accuses the West of “debt-trap diplomacy”, lending to countries they know can’t pay on conditions that allow the West to take political control, exploit open markets and asset strip the country as the middle class and economy contracts. 

So, if IMF-creditor negotiations fail, default and restructure, we can’t keep borrowing. That fails, sue the IMF for harming Kenya, sue US investment banks under the Foreign Corrupt Practices Act and hold former and current public office holders and the EACC firmly to Constitutional account, they bear most blame.

Gen Z is awesome on impunity but calls for the President to go need to follow the Constitution. Why? Because entire generations sacrificed for our Constitution. One cannot rely on Constitutional protest rights and deny the President Constitutional due process. Will the VP be better?

The President can be impeached under s.145 of the Constitution by MPs and Senators. Under the Elections Act all MP’s can be recalled for “mismanaged public resources”.

Sun Tzu observed prolonged fighting never benefitted any country: “He will win who knows when to fight and when not to fight.” Also, who to fight.

Ashminder Kaur is a legal finance expert