President William Ruto came to power in Kenya in 2022, promising to make life easier for average Kenyan people. However, seven months into his presidency, Ruto’s chief economic advisor tweeted in April 2023, “Salaries or default? Take your pick.” This stark statement foreshadowed the dire economic situation Kenya was facing, with a burgeoning debt burden threatening to cripple the nation’s finances.
The government’s response was drastic: In May 2023, thousands of civil service workers found their paychecks withheld as the government prioritized paying off foreign loans. This act of desperation highlighted the severity of the financial crisis and sparked public outrage, particularly among the youth, who felt betrayed by Ruto’s promises.
Frustrated with the government’s handling of the economic situation, the youth took to the streets in a wave of protests, demanding the better life Ruto had pledged. The protests escalated into violence, with protesters setting fire to the Kenyan parliament building, damaging a part of it. In response, the Kenyan government resorted to force, leading to the deaths of more than a dozen protesters.
The catalyst for these violent protests was the new Finance Bill, which proposed a series of tax reforms and hikes in levies. The bill’s most contentious measures included new levies on monetized digital content creation, a five per cent tax increase on digital payments, 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.
These proposed tax hikes were particularly burdensome for Kenyans, given the country’s heavy reliance on mobile money and the already high cost of living. The bill also 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, further exacerbating public discontent.
Protesters argued that the bill would disproportionately burden the poor and middle class, while the government claimed the new taxes were necessary to raise an additional $2.7 billion in domestic revenue to address the country’s ballooning debt.
This debt, estimated at 11.1 trillion Kenyan shillings or $82 billion, is largely owed to China, a consequence of extensive borrowing under former President Uhuru Kenyatta, whom Ruto served as vice-president. These loans were used to finance infrastructure projects, including a Standard Gauge Railway (SGR) line connecting Nairobi to Mombasa.
However, the borrowing spree came with consequences. International lenders like the International Monetary Fund (IMF) and the World Bank demanded tax reforms and transparency in future borrowings, particularly those from China, whose loan terms are shrouded in secrecy.
The pressure on Kenya to address its debt situation became increasingly intense. Kenya is currently spending about 59 per cent of its revenues to service debts, leaving only 41 per cent for government expenditures, including salaries and development projects. The World Bank estimates show that Kenya’s total public debt stands at about 68 per cent of its gross domestic product (GDP) for fiscal 2023/24.
China’s role in Kenya’s debt crisis is particularly significant. It accounts for over 70 per cent of Kenya’s bilateral debts, amounting to 882.5 billion Kenyan shillings or $6.82 billion by June 2023. Kenya’s loan payments to the Export-Import Bank of China are a major driver of debt servicing expenditures.
The lack of transparency surrounding Chinese loans, coupled with a track record of defaults or near-default situations in other countries like Sri Lanka and Pakistan, raises concerns about the sustainability of Kenya’s debt burden.
Faced with mounting pressure from international lenders and public outrage over the proposed tax reforms, Ruto’s government found itself in a difficult position. While the tax reforms were intended to address the debt crisis, they were ultimately deemed unsustainable for a population already struggling with the high cost of living.
In response to the violent protests and the death of 23 protesters, Ruto relented, declaring he would not sign the tax reforms bill, allowing it to lapse. This move, while a temporary solution, has left the government scrambling to find alternative financing solutions to address Kenya’s debt crisis. The future of Kenya’s economy remains uncertain as the government grapples with the consequences of its past borrowing decisions and the growing public dissatisfaction with its handling of the financial crisis.
