Odinga and Ruto offer competing visions on Kenya’s debt challenge – African Business | Vette Leader

Since February, the cost of living for Kenyans has increased significantly, with price inflation expected to peak at 7.3% this year, while the food sub-index surged to 15.3% in July. As a result, economic policy is likely to play a significant role in voter decision-making, especially since the two candidates differ on a key issue: debt management.

Incumbent President Uhuru Kenyatta’s anointed successor, Raila Odinga, intends to continue the massive spending on infrastructure projects launched by his rival and benefactor, while scaling back social spending with a basic income subsidy of $50 (KSh 6,000) a month to two million poor raise families. But he says he will also seek improved debt repayment terms to avoid having to return to the IMF for future bailouts.

In March, Odinga warned that the rising debt “puts Kenya in the group of the most debt-ridden middle- and low-income developing countries, which are now being forced into IMF loans and IMF-supervised austerity programs… Such austerity programs are usually carried out in the sole interest Paying off debts at the expense of people’s livelihoods. We have no choice in this matter.”

Rival William Ruto, on the other hand, wants to increase tax revenues to cover rising debt service costs. Last month he ruled out a debt restructuring for the nation if he wins next month’s elections, the opposite of what Odinga plans.

“I’m not going anywhere near or even having a discussion about debt restructuring. We have to pay our debts. We have the capacity to pay our debts… We will curb borrowing.”

He has launched plans to digitize tax mobilization, which he says will help more than double VAT collection from 3.6% to 8% of GDP.

“We will have more resources to pay down our debt and we will borrow less, which is a double win.”

He criticized Odinga’s restructuring plans as “summary and ruthless”. But he has unveiled ambitious spending plans of his own, including launching a $420 million annual “Hustler Fund” aimed at providing affordable credit to 10 million small and medium-sized businesses.

Challenging environment

East Africa’s largest economy is growing in a challenging environment, suffering from the global impact of Russia’s invasion of Ukraine, including food and fuel inflation, the end of the Covid-19 pandemic and the rising costs of climate change, including regional droughts.

Despite an unexpected rebound in economic growth, which is expected to grow by 5.7% in 2022. In late July, Bloomberg Economics ranked the country the sixth most vulnerable to a debt crisis in a ranking of 50 developing countries.

Debt grew from just $37.7 billion, or 34% of GDP, when current President Uhuru Kenyatta was re-elected in 2017, to $68.8 billion in 2021, or 62.5% of GDP. On August 5, 2022, banking institutions were the largest owners of domestic debt with 48.3%, followed by pension funds (32.6%) and insurance companies (7.20%).

In terms of external debt, the latest World Bank data (late 2020) shows that 63% of Kenya’s bilateral debt to China is owed – about $7 billion – mostly for large infrastructure projects like the Nairobi Expressway – at an estimated cost of $668 million Dollar partially funded by China Road and Bridge Corporation. According to Bloomberg, the yield on $2 billion in Eurobonds maturing in 2024 rose above 20% for the first time in July.

Kenyatta has insisted modern road and rail networks will help spur development. But Odinga’s pledge to continue infrastructure spending at similar levels while achieving better terms for debt repayment could be difficult.

“Odinga’s pledge to restructure existing debt lacks details of how that might be achieved, and will face strong opposition from the IMF, whose economic reforms are expected to begin reducing Kenya’s debt burden by 2024,” said Benjamin Hunter, analyst at Verisk Maplecroft .

“The debt restructuring is going well in the elections because Odinga has promised to invest the money saved in social security programs. However, the plan is likely to fail in practice as Kenya’s rising debt levels and struggling economy will leave Odinga with limited leverage over eventual negotiations with creditors,” Hunter said.

The IMF’s Debt Management Advice

Kenya currently has signed a $2.34 billion three-year IMF financing package, approved last year, to address the country’s program to address debt vulnerabilities, the authorities’ response to the Covid-19 pandemic and global shocks to support as a result of war in Ukraine.

Last month, the Washington-based institution authorized an immediate disbursement of $235.6 million in special drawing rights under the program to support Kenya’s budgetary needs.

The IMF warns that despite a strong economic recovery, downside risks prevail in the near term, and the fund encouraged authorities to expand tax collection and maintain careful spending controls.

“Kenya’s economic program, supported by the Fund’s Extended Fund Facility and Extended Credit Facility Arrangements, provides an essential political anchor for debt sustainability and public confidence,” Antoinette Sayeh, deputy chief executive and acting chairwoman, said on July 18 .

“Despite the robust economic recovery, the program remains subject to downside risks, including from deeper disruptions from the war in Ukraine, unsettled global market conditions and rising food insecurity. In this context, the authorities’ continued unwavering commitment to prudent policies and pushing ahead with structural reforms remains crucial to maintain macroeconomic stability and ensure Kenya’s positive medium-term prospects.”

Leave a Comment