China hand behind Kenya’s collapsing economy?

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Kenya hopes that the protests would die down after President Ruto decided not to sign the new tax reforms bill. A debt-stricken country, Kenya finds it hard to service loans, much of which is owed to China. Is this the real problem?

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

A month later, the government held back paychecks to thousands of civil service workers to save cash to pay foreign loans, news agency Associated Press reported in May 2023.

In less than two years, the same people whom Ruto promised to ease their hardships are baying for his blood. They are out on the streets, demanding the life Ruto had promised. A vast majority of protesters are youth. They have turned violent and set the Kenyan parliament building to fire, damaging a part of it. In response, the Kenyan government has used force killing more than a dozen protesters.

On Wednesday, Ruto relented, declaring he would not sign the tax reforms bill that had triggered the violent protests, resulting in the death of 23 agitators. The bill will now lapse.

The catalyst for protests: Why youth are on streets in Kenya

The new Finance Bill proposed a series of tax reforms and hikes levies, sparking public outrage.

• Among the most contentious measures were new levies on monetised digital content creation and a five per cent tax increase on digital payments, including bank transfers and mobile money payments. Given Kenya’s heavy reliance on mobile money, these measures were particularly burdensome.

• What tipped the scales against the Ruto government were a 16 per cent value-added tax (VAT) on bread and a 25 per cent excise duty on domestically produced raw and refined vegetable cooking oil.

• Additionally, the bill proposed a 2.75 per cent income charge on salary earners enrolled in the national medical insurance plan and a 2.5 per cent annual tax on motor vehicles.

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

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

But why hike taxes so sharply

Ruto justified the tax-hike proposals. He said they were necessary 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, a result of extensive borrowing under former President Uhuru Kenyatta, whom Ruto served as vice-president. These borrowings financed infrastructure projects, including a Standard Gauge Railway (SGR) line connecting Nairobi to Mombasa, a major coastal city.

Kenya approached lenders for fresh loans but agencies like International Monetary Fund (IMF) and the World Bank demanded tax reforms and transparency in other loans (read borrowings from China, whose loan conditions are never disclosed and always shrouded in the cloud of secrecy). China is already Kenya’s biggest lender.

The problem: A pattern of consequences

The thing with debts is that they need to be serviced to avoid defaulting on them. A loan default complicates future borrowings for a country. The debts become harder to come, and those available come at very high interest rates, complicating the finances further. It becomes a vicious cycle.

It is estimated that Kenya is currently spending about 59 per cent of its revenues to service debts, leaving only about 41 per cent of tax revenues to finance government expenditures including salaries and development projects.

The World Bank estimates show that the total public debt of Kenya stands at about 68 per cent of its gross domestic product (GDP) for fiscal 2023/24. If things go as per the Ruto government’s plan, it may fall to about 65 per cent for 2024/25. Kenya’s fiscal year follows the July-June cycle. In June 2023, the debt-GDP ratio had gone up to almost 72 per cent.

The China angle to Kenya’s problem

About one-fourth of the debt finance money goes to service borrowings from China, which is not only Kenya’s biggest lender but also accounts for over 70 per cent of the total bilateral debts that the east African country owes. This amounted to 882.5 billion Kenyan shillings or $6.82 billion by June 2023. Figures for the ongoing fiscal are not clear.

Bloomberg cited a lawmakers report to say that Kenya’s loan payments to the Export-Import Bank of China “is a key driver of debt servicing expenditures”. According to Kenya’s National Assembly’s Public Debt & Privatisation Committee, China accounts for 147.9 billion Kenyan shillings or $1.2 billion in interest and principal payments in the next fiscal year through June 2025.

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

Kenyan media reports show China, Finland and France are top lenders. The problem with Chinese loans has been the lack of transparency and a track record of defaults or near-default situations for the nations that have had China as their primary lender — Sri Lanka and Pakistan, for example.

Last year, an Associated Press analysis of a dozen countries most indebted to China — including Pakistan, Kenya, Zambia, Laos and Mongolia — found paying back that debt is consuming an ever-greater amount of the tax revenue needed to keep schools open, provide electricity and pay for food and fuel. It said the debt servicing was draining foreign currency reserves these countries use to pay interest on those loans, leaving some with just months before that money is gone.

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

The other issue is, as it has been discovered in recent years, that China requires borrowers to put cash in hidden escrow accounts to safeguard its loans. This puts China at the forefront of the line of creditors that are to be paid. Others then prefer to stay away.

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

This explains why posts on social media gave a call to occupy the president’s office and residence, and also the local offices of the World Bank and the IMF. Now that Ruto has withdrawn the Finance Bill, his government requires to find new ways to finance the Kenyan economy.