Ruto caught in a Catch-22 over IMF and restless Gen Z demands

President William Ruto finds himself on the horns of a dilemma.

He now has to choose between heeding demands by the public, spearheaded by a fearless Generation Z, to reduce the tax burden and conditionalities imposed by the International Monetary Fund (IMF).

Since last year, Kenya’s access to billions of shillings in loans from the Bretton Woods institution has been hinged on tough conditions the country has been implementing, including a national tax policy that would broaden the tax net, scrapping fuel subsidies, fighting corruption, and reforming State corporations.

Apart from undertaking reform of State-owned enterprises, the government was also challenged in May last year to stop the drain on budget resources stemming from, among others, Kenya Airways and Kenya Power. 

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Kenya first found itself under IMF’s purview in April 2021 when it secured a Sh276 billion loan under the special drawing rights with more conditions being imposed in July 2022 putting Ruto, who succeeded Uhuru Kenyatta in October 2022, in a fix as his government prepared its budget.

The IMF stance has persisted in subsequent negotiations as the country seeking funding under the Extended Fund Facility (EFF), the Extended Credit Facility (ECF) and the Resilience Sustainability Facility (RSF) to support its economic programme.

This includes maintaining robust and inclusive growth while preserving macroeconomic stability and debt sustainability to the tune of Sh569 billion.

A statement issued by the IMF on November 15, 2023 after the sixth review under the programme, for instance, reiterated the need for a tighter fiscal stance to help reduce debt vulnerabilities and achieve a PV debt/GDP of 55 per cent, the authorities’ debt anchor, by 2029. 

“A tighter fiscal stance is envisaged under the programme to help reduce debt vulnerabilities and achieve a PV debt/GDP of 55 per cent, the authorities’ debt anchor, by 2029. This will entail the timely implementation of reforms to broaden the domestic tax base and improve tax compliance. These are critical for achieving the authorities’ revenue objectives of reversing the trajectory of the tax revenue-to-GDP ratio while promoting equity and fairness in the tax regime,” it said.

IMF also called for continued expenditure rationalisation with a focus on enhanced efficiency of public investments, better targeting of subsidies and transfers, addressing weakness in state corporations, and digital delivery of public services. 

However, it is the push to expand the tax base that has seen the introduction of myriad new taxes and a rise in others in the last two Finance Bills formulated under the Ruto regime that have pushed Kenyans to the corner sending thousands to the streets in protest.

While the police cracked down hard on demonstrations called by Opposition leader Raila Odinga last year resulting in the death of 75 demonstrators and arrested scores of leaders, President Ruto was later forced to dialogue with Azimio resulting in a process that ended the protests.

At the time, the ire was targeted at the increase of Value Added Tax (VAT) on fuel and removal of maize meal and fuel subsidies which saw a spiral in the cost of living as a result of a push to net Sh289 billion in ordinary revenue. 

This time, however, it remains to be seen whether President Ruto will succeed in bringing the youth to the dialogue table or whatever other forum since the latest protests are organic and leaderless.

On Sunday, he offered to have a conversation with Gen Z in a statement posted on X, formerly Twitter, by State House spokesman Hussein Mohammed and later reiterated the same at a church function in Nyahururu.

“Our young people have stepped forward to engage on the affairs of their country. They’ve done their democratic duty, to stand and be recognised. I’m proud of them,” Mohamed tweeted.  

“We’ll have a conversation with you to identify your issues and work together as a nation,” he added, making his first public comments on the protests.” 

The government’s dilemma is complicated because it has been exposed to intense scrutiny for using brutal force against peaceful Gen Z protesters resulting in deaths and injuries. 

It, however, does not help that the ruling Kenya Kwanza Alliance refused to entertain Azimio’s push for the lowering of the cost of living during the National Dialogue Committee talks and is thus unlikely to do much even this time round given IMF pressure. 

Nevertheless, the government has been forced to give various concessions though it remains to be seen whether Kenya Kwanza MPs will support amendments to proposals in the Finance Bill, which critics say will lead to job losses, business closures and migration of investors, in addition to adding more pain to already overtaxed Kenyans.

The government was seeking Sh302 billion from the new taxes to reduce the budget deficit and thus the need for more borrowing.

National Treasury Cabinet Secretary Prof Njuguna Ndung’u is already warning of a budget crisis if the National Assembly votes for the changes proposed by the Finance and National Planning Committee and endorsed by State House. 

The National Treasury is targeting to raise Sh58 billion from the motor vehicle tax alone as part of efforts to fund the Sh2.9 trillion 2024/25 budget.