*This analysis was produced by the team at Signal Risk
On 02 April, the International Monetary Fund (IMF) approved a joint three-year Extended Credit Facility (ECF) and Extended Fund Facility (EFF) for Kenya. Valued at USD 2.34 billion, the joint facility is intended to support the next phase of Kenya’s public health and economic response to the coronavirus pandemic and its externalities.
Given the apparent deficiencies in Kenya’s financial and structural conditions, both Kenya and the IMF have agreed on numerous reform-oriented conditionalities. These include broadening the tax base, freezing public sector recruitment, reassessing and restructuring state-owned enterprise debt, strengthening public and general financial regulation (including anti-corruption and anti-money laundering), and reviewing the statutory debt ceiling. In terms of specified targets, the government has committed to maintaining the deficit and debt-to-GDP ratios at 8.7 and 70.4 percent, respectively, in 2021.
Reception of Kenya’s new programme has been mixed.
Of particular concern has been Kenya’s borrowing plans. As per the IMF, Kenya plans to borrow up to USD 12.4 billion from foreign sources between April 2021 and June 2022. This includes USD 7.3 billion in Eurobonds, USD 4.8 billion in concessional loans, and USD 282 million in semi-concessional loans. Roughly USD 2.3 billion of the acquired funds will be spent on infrastructure projects, and USD 5 billion will be allocated towards refinancing a Eurobond maturing in 2024 and other syndicated loans. All things being equal, the total borrowing over the 14-month period is forecast to amount to between 6 and 7 percent of GDP.
There are further concerns – as expressed in a petition to cancel the loan, signed by 160,000 citizens – that the latest IMF facility will prompt an increase in taxes for purposes of reducing the deficit. Of particular contention is the possibility of an upward adjustment of the VAT rate on fuel from the current 8 percent, to 16 percent. This, according to civilian, civil society and labour interests could accelerate the ongoing hike in the price of the commodity – which has prompted some Kenyans to resort to cheaper purchases from Tanzania and Uganda – and lead to a wage-price spiral that would negatively impact consumers and producers. A final concern by the general public relates to the potential for the IMF funds to be lost to corruption.
Rifts upon rifts
The administration of President Uhuru Kenyatta has yet to respond to the grievances surrounding the IMF programme. This is likely due to Kenyatta’s pre-occupation with the ongoing fallout with his deputy, William Ruto.
The dispute between Kenyatta and Ruto reached a crescendo in recent weeks, as the president intensified his efforts to weaken the deputy and his allies. First, on 12 February, Kenyatta openly castigated Ruto and insinuated that he should resign – the first such suggestion since the rift between the duo became clear roughly two years ago. Addressing a crowd in the capital, Nairobi, Kenyatta stated that “you can’t be speaking of the failures of a government where you serve while at the same time outlining what…we have achieved as a government. You better resign”. Although Kenyatta did not mention Ruto by name, it was clear given the fractious relationship between the president and his deputy that he was referring to Ruto. A day later, Ruto confirmed these suspicions when he stated in the town of Isiolo that he will not resign and that there is no contest between him and Kenyatta.
Days later, on 18 February, Kenyatta undertook a cabinet reshuffle that saw eight members of the opposition ODM of Raila Odinga appointed to executive positions. The new appointments primarily affect the positions of chief administrative secretary and principal secretary in multiple portfolios, including finance, labour, and trade. Previous occupants – many of whom were allied to Ruto – were demoted.
Ruto’s misfortunes were somewhat compounded by the performance of the UDA party – a new political entity established by his allies – during municipal by-elections that were held on 05 March. The pro-Ruto formation claimed a single seat from the available seven, despite rigorous campaigning by the deputy. The remaining six were shared by a plurality of parties including Jubilee, the ODM, ANC and Ford Kenya.
Kenya’s uptake of an International Monetary Fund (IMF) programme is seen as pragmatic, and does not necessarily signal a tendency towards prudence. For one, IMF endorsement will likely ensure that Kenya acquires its planned USD 12.4 debt haul at relatively favourable terms. This, as noted, will be used to refinance more strenuous Eurobond and syndicated loans, and thereby ease the country’s repayment burden. Additionally, the availability of USD 2.34 billion in financing from the IMF should ease potential fiscal, balance of payments and general liquidity concerns. This includes potential funding gaps that may arise due to vaccine procurement and potential corrosion of foreign reserves due to a deteriorating trade balance. Furthermore, the availing of funds to finance President Kenyatta’s Big Four infrastructure agenda could win crucial political capital for the statesman and his allies if the projects are indeed delivered.
The Kenyatta administration will be selective in its choice of mechanisms to satisfy conditionalities associated with the joint facility, especially at such a politically sensitive period. A particular mechanism that the government will likely shy away from is an uptick in value-added tax (VAT) on fuel as a means to contain the deficit. In 2018, Kenyatta was reluctant to impose the full 16 percent VAT on fuel that was recommended at the time by the IMF, largely due to pressure from the political opposition, the public, and trade unions. Should Kenyatta gesture towards any such increase in VAT – especially at a time when public welfare has been corroded by coronavirus-related factors – it could trigger a wave of socio-economic unrest. There is also a risk that grievances associated with a VAT hike could be exploited by Kenyatta’s rivals ahead of the 2022 elections. Instead of an uptick in VAT, the Kenyatta administration may prioritise tax measures that have the lowest risk of socio-economic and political backlash, such as small levies on mobile transactions.
The absence of severe austerity should maintain the advantage held by Kenyatta and his allies in the ongoing political power play. Not only has the president consolidated his grip on governing institutions in Kenya by flushing out Deputy President Ruto’s allies, but the popularity that Kenyatta and his allies wield was affirmed by the recent by-election outcomes. Due to the fact that Ruto was voted in on the same ticket as Kenyatta, the president cannot unilaterally fire Ruto. Instead, his removal requires a formal impeachment process. Such a process is loosely ongoing, and is based on corruption allegations involving Ruto; however, it has yet to gain any significant traction, with no motion filed in parliament as yet. Should this be the case, it could trigger countrywide anti-government demonstrations by Ruto allies and a push within government to obstruct such a motion.