Kenya at 61: Economic Struggles, Debt, Taxes and the Path Forward

Nairobi, 

Thursday, 12 December, 2024 

McCreadie Andias 

Kenya’s economic journey is at a crossroads. The country is grappling with escalating debt, soaring inflation, and the increasingly unpredictable impacts of climate change. 

President William Ruto, who assumed office in 2022, faces immense pressure to steer the nation through these turbulent waters while ensuring political stability and economic recovery.

A Rising Debt Crisis

Over the past 15 years, Kenya’s debt has ballooned from 39% of GDP in 2010 to a staggering 68% by 2023. Much of this borrowing took place during the administration of President Uhuru Kenyatta, who embarked on ambitious infrastructure projects, many of which failed to generate the expected returns.

The $5.3 billion loan from China for the Standard Gauge Railway (SGR) project linking Nairobi and Mombasa serves as a prime example of such risky borrowing, compounded by allegations of corruption and mismanagement.

By 2020, the country’s debt situation became critical, worsened by the economic impact of the Covid-19 pandemic. 

Kenya faced a deteriorating trade balance, with imports far exceeding exports. The Kenyan shilling depreciated by 31% against the US dollar, making it harder to meet debt obligations, most of which are denominated in foreign currency. 

Despite these challenges, Kenya managed to secure loans from the World Bank and the International Monetary Fund (IMF), which provided short-term relief.

The IMF has played a significant role in supporting Kenya’s debt management but has also insisted on austerity measures, including raising taxes to address the budget deficit. 

This push for fiscal discipline has sparked mass protests, particularly among young urban Kenyans who feel the brunt of the economic strain.

The 2024 Tax Controversy

In May 2024, the Kenyan government proposed a raft of tax hikes aimed at raising approximately $2.7 billion to address the fiscal shortfall. This plan, which primarily focused on increasing VAT, was met with widespread opposition. 

Protesters, led by young people, took to the streets in droves, criticizing the government for imposing burdensome taxes on the poor while the country’s elite remained largely unaffected.

The protests culminated in violence, with at least 50 people killed in clashes with the police. In response, President Ruto dismissed his entire cabinet, signaling a shift in his approach. 

The tax bill, which had been endorsed by the IMF, was left unsigned. The protests exposed a deepening discontent with the government’s handling of the economy and the rising cost of living.

Debt and the Role of China

While the IMF and World Bank have provided critical support to Kenya, much of the country’s debt burden can be traced to Chinese loans, particularly for large infrastructure projects. 

Critics argue that these loans have trapped Kenya in a cycle of debt, with the potential for China to seize key assets like the Mombasa port if the country defaults. 

However, experts suggest that China’s role in Kenya’s debt crisis has been overstated. Of Kenya’s $80 billion debt, only $6 billion is owed to China, and much of the burden lies with high-interest Eurobonds issued on international markets.

The danger of default remains real. In 2024, Kenya faced a looming deadline to repay a $2 billion Eurobond. With the IMF’s help, the government managed to delay default by securing a $941 million loan. 

However, the country also issued a new international bond worth $1.5 billion at a high interest rate of 10.4%. This move relieved short-term pressure but highlighted the unsustainable nature of Kenya’s fiscal situation.

The Protests and Political Repercussions

Protests in Kenya are not just about taxes; they are a reflection of deep-seated frustrations with inequality, corruption, and poor governance. Urban youth, often left without jobs or opportunities, have taken the lead in these demonstrations, viewing the government as unresponsive to their needs. 

Unemployment among young Kenyans is as high as 67%, and many are forced into debt traps through microloans to finance basic livelihoods like motorbikes for transportation.

President Ruto’s response to the protests has been harsh, labeling demonstrators as “treasonous” before eventually moderating his stance. 

He reshuffled his cabinet in a bid to address discontent, even including members of the opposition in an attempt to present a unified front. However, the protesters remain disillusioned with the political class and their promises, and the demands for social and economic justice are growing louder.

Inflation and Economic Growth

While Kenya has managed to stave off an immediate default, the country’s inflation rate remains a pressing concern. With inflation averaging 6.5% over the last decade, recent external shocks, such as the Covid-19 pandemic and the war in Ukraine, have caused prices to spike. In 2024, inflation stood at 7.7%, just above the regional average for sub-Saharan Africa.

Despite these pressures, Kenya’s economic growth has remained steady, with GDP growth hovering around 5.5% year-on-year. 

However, much of the revenue generated is being swallowed by debt repayments, with 60% of Kenya’s revenue allocated to servicing its debt, half of which goes toward interest payments alone. This leaves little room for social spending, exacerbating poverty and inequality.

The Climate Crisis

Adding another layer of complexity to Kenya’s economic challenges is the escalating threat of climate change. The country has suffered repeated droughts, most notably the 2021-2022 drought, which left millions facing food insecurity and decimated livestock. 

Agriculture, which accounts for 33% of Kenya’s GDP and the bulk of its exports, is highly vulnerable to climate variability, with 98% of farming relying on rainfall rather than irrigation.

By 2050, crop yields are expected to drop by up to 45%, while food prices could rise by as much as 90% by 2055. 

The economic toll from recurring droughts is already costing Kenya 2-2.8% of GDP annually. To secure its future, Kenya must develop climate resilience through better land and water management practices and invest in sustainable farming techniques.

The Road Ahead

Kenya’s future economic path remains uncertain. While President Ruto has avoided a default for now, the country’s debt burden, inflation, and climate challenges continue to pose significant risks. 

The government must find a delicate balance between raising revenue through taxes and avoiding further social unrest. There is an urgent need to tackle corruption, reduce inequality, and create more inclusive economic growth.

The IMF’s call for austerity measures, though necessary to avoid default, risks deepening the divide between the government and its citizens. 

The protests of 2024 serve as a stark reminder that Kenya’s path to recovery must include listening to the voices of its most vulnerable citizens.

In the end, Kenya’s ability to weather these crises will depend on the government’s capacity to enact meaningful reforms that address both the root causes of its debt crisis and the social disparities that fuel political instability.