The immediate trigger for the angry protests that gripped the Kenyan capital on Tuesday was a series of proposed tax increases – additional shillings that ordinary citizens would owe their government. However, the underlying cause is the billions of dollars their government owes its creditors.
Kenya has the fastest growing economy in Africa and a vibrant business hub. But his government is desperately trying to avoid default. According to a recent report from the United Nations Conference on Trade and Development, the country’s staggering $80 billion in domestic and foreign government debt accounts for almost three-quarters of Kenya’s total economic output. Interest payments alone consume 27 percent of income.
Kenyan President William Ruto had endorsed the tax law as necessary to avoid the country’s default, but the strong reaction to Parliament’s approval of the bill led Mr Ruto to abruptly change course on Wednesday and not pass the law he had demanded sign for.
But the debt that causes misery in Kenya and across Africa remains. More than half of the continent’s people live in countries that spend more on interest payments than on health or education.
“The children of this generation who are uneducated today will be left with lifelong scars,” said Joseph Stiglitz, a former chief economist at the World Bank. He pointed out that there is growing evidence that “countries going through a crisis do not – perhaps never – recover to where they would be.”
The global debt crisis is the relatively dull label used to describe the brutal cycles of unsustainable borrowing and bailouts that have long ensnared developing countries.
In Kenya’s case, after a period of economic recovery in the early 2000s, the government borrowed heavily to cover the costs of infrastructure projects, including roads, railways, huge dams and rural electrification. However, this latest global debt crisis cycle, considered the worst ever, was triggered by events far beyond the control of any single country.
The deadly coronavirus pandemic has crippled already fragile economies. The sudden need to provide vaccines, medical supplies, protective clothing for hospital staff and subsidies for people who cannot afford food or cooking oil placed additional strain on the government’s bank accounts.
A war between Russia and Ukraine and sanctions imposed by the United States and its allies led to a rise in global food and energy prices. The richest countries then curbed soaring inflation by raising interest rates, which led to a rapid increase in debt payments.
Adding to these problems, recent floods in Kenya destroyed infrastructure and agricultural land and displaced thousands of people.
M. Ayhan Kose, deputy chief economist at the World Bank, said: “40 percent of developing countries are vulnerable to a debt crisis in one way or another.”
It is more difficult than ever to find a solution to the current debt trap facing poor and middle-income countries.
Thousands of creditors have replaced the handful of major banks in places like New York and London that once managed most countries’ foreign debt. One of the most consequential new players is China, which has loaned billions of dollars to governments in Africa and around the world.
For more than a decade, China has entered the ranks of the top lenders to emerging markets, and the size of its portfolio now rivals the International Monetary Fund and the World Bank.
Of the $37.4 billion in external debt Kenya owed at the end of 2022, at least $6.7 billion was owed to China, according to the IMF. At that time, Kenya also owed $11.1 billion to the World Bank, $7.1 billion to bondholders, $3.8 billion to developed countries, $3.5 billion to the African Development Bank, 2.4 billion US dollars to the IMF and 1.9 billion US dollars to international commercial banks. Its debts to the IMF have since increased.
To avoid default, countries like Kenya are forced to borrow even more money, only to find their overall debt burden grows even greater. And the higher the debt, the less willing lenders are to offer additional financing.
China has scaled back its lending in recent years after concluding that it was taking too many risks by lending to low-income countries. It has called in previous loans and issued fewer new loans.
It’s not the only player to retire. Japan and France as well as major commercial banks in Italy, Germany and Great Britain have also reduced their exposure.
After the first default, Zambia took four years to reach an agreement with its creditors. After defaulting on billions of dollars in debt last year, Ghana just this week reached an agreement with private creditors to restructure $13 billion in loans. And Ethiopia is struggling to negotiate a restructuring agreement.
In February, Kenya paid more than 10 percent on international bonds to have the funds to pay a $2 billion 2014 Eurobond due this month.
The World Bank, IMF and African Development Bank have all offered lifelines and increased their lending to Kenya to fill the gap when no one else would. However, in return they want the government to take measures such as tax increases to create a more stable financial basis.
An agreement this month between Kenya and the IMF to provide additional funds warned of a “significant deficit in tax collection” and a worsening fiscal outlook.
In May, Mr Ruto said he was confident Kenyans would eventually support his actions. “I have been very open about the fact that I cannot continue to borrow money to pay salaries,” he said in an interview. “And I explained to the people of Kenya that we have a choice of either borrowing money or collecting our own taxes.”
But on Wednesday, in an address to the country, he said: “I am listening carefully to the people of Kenya who have been vocal that they want nothing to do with this finance bill and I admit that I will not sign off on the 2024 funding.” “Invoice and it will subsequently be withdrawn.”
The reversal has temporarily silenced the protests, but it has left the country’s finances more precarious than before.
This month, Pope Francis called a meeting at the Vatican and called for debt relief and a rethinking of the world’s financial architecture to prevent debt crises like the one shocking Kenya.
Unmanageable debt would “deprive millions of people of the possibility of a decent future,” he said.
Declan Walsh and Ruth Maclean contributed reporting.
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2024-06-26 16:33:50
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