Inflation worse than default
I have always found networking weird, the idea of meeting strangers for the first time and being put on the spot to say what I do for a living. It makes me ask myself uncomfortable questions on what I really do for a living.
As I fumbled with my introductions when I found myself at a panel session on implementing and financing renewable Energy projects in Africa organized by Canada, I sought refuge at the margins, where I could nod and smile kindly at passing strangers without having to do the work.
Being a journalist who is not attached to a big media house is difficult to introduce yourself because you learn very quickly the brand of the mainstream media and even the badge used to do the introduction for you, but now all of a sudden you have to repeat the name of your online platform, spell it out and explain whether it is simply a blog or a business-focused, independent digital media platform called Maudhui House.
But these are growth pains of building a greenfield brand. I have recently come to learn that with a little self-reflection we turn out to be something more than just our work. What I was simply a journalist, is now becoming a media entrepreneur, and Maudhui House is moving from simply a business-focused, digital disruptor to the content house that will aggregate journalists who have been pushed out of newsrooms onto a shared platform for freelancing for the future.
For long lengths of time we tell ourselves stories about ourselves and who we are and even believe them. The problem is the stories we tell ourselves, can be so singular we fail to explore alternative options until reality forces us to adjust our thinking.
So as I moved about trying not to look too awkward, I magnetically gravitated towards that table of the introverts. They are always there, huddled together at the margins pushed away by lively chatter of the most sociable events. So I joined one Ghanaian called Koffi, a tall but somewhat timid businessman who runs Canary Contract Works Ltd, a product marketing and distribution firm, and we quickly made our awkward company work.
I quickly realized that I had just stumbled on a new perspective from a man from Ghana that could give our readers insights on what it was like to default on our debt.
I have been seeking perspectives on Ghana, scouring their local news to understand how they were handling an economic catastrophe where the government had forced local banks and pension fund to restructure their loans and had a currency collapse that had pushed cost of living beyond imaginable rates.
Now Ghana defaulted on its foreign and local obligations and has been forced to restructure its debt which has left the country with 42 percent inflation in May while the currency depreciated 44 percent against the dollar last year and is expected to further slide 30 percent this year.
Read also: The IMF taxes on Africa’s petty traders of Nyamakima
In all discussions among debt experts trying to guess how Kenya will settle a Kes280.8 billion ($2 billion) principal it borrowed in 2014 (which at the time was just Kes174.8 billion at the exchange rate), the question has been whether we will become a Ghana.
While President William Ruto has become the first Kenya leader to delay civil servant’s salaries for months, has held back money for counties and hospitals have been turning away patients with government issued insurance cover the National Health Insurance Fund (NHIF); but he insists he will not become a Ghana, Zambia or Mozambique to default on debt.
Kenya’s debt is not discretionary, it is charged against the consolidated fund services (CFS) and this is specified in the Constitution. This means that before any taxes are spent, they must first be used to pay debt and pensions. But what happens when the non-discretionary funding grows so much it surpasses revenues?
Kenya’s CFS for the financial year 2023/24 hit Kes2 trillion yet the actual revenues and net exchequer issues as at May 31, 2023, shows actual receipts stood at Kes1.74 trillion with an average monthly collection of Kes130 billion meaning annual collection are below expected non-discretionary spend.
The impact is already being felt on pensions which is also non-discretionary yet with just days to the end of the financial year, Treasury disbursement delays has left the government racing to process and pay a whopping Kes77.45 billion in pension dues this month if it were to hit the Kes172.64 billion target for the current fiscal year.
President William Ruto believes that if the country keeps raising taxes, Kenya will outrun its spending problem and not even the logic of the Laffer Curve that states taxes start declining when they breach elasticity could convince his loyal Members of parliament to rethink the tax strategy.
I wonder, is the cost of not defaulting too high to pay? So I ask my new Ghana friend how bad is defaulting. Is Ghana as bad as I imagine since he has been in Kenya and can compare?
“Kenya is harder, you see fuel in Ghana is about one dollar a few cents and here you are getting to two with the new taxes, Nairobi is also very expensive with rent and business has really slowed down the consumption is shrinking,” he told me.
He told me he brings goods in a shipping container, but the charges the taxman is demanding is really pushing the business especially on the final cost to consumers at a time demand is muted.
A leading Banker overheard us and weighed in that Kenya is usually allowed to get away with a lot of things because it is strategic to interests of the West. Unlike Ghana, which is forced to confront some of its problems head on and fix them, Kenya perpetually kicks the can down the road until it runs out of runway.
And he is right, the World Bank recently created a new Development Policy Operation framework (DPO) for Kenya through which it granted the East African’s country request to lend out $1 billion instead of $750 million after talking to the IMF. This newly created operation used new Short Maturity Loan terms to offer extended repayment periods and over five years grace period.
The money for institutional reforms, fiscal consolidation as well as long-term goal of green and inclusive growth came almost as a blank cheque in terms of the Bank’s demands. The money would be wired to Kenya immediately, and as Aghassi Mkrtchyan, a senior economist at the World Bank told Maudhui House, the Board had confidence in the Kenyan government to deliver on reforms so much that it only needed prior commitments and would review whether Kenya has met the metrics in two years’ time.
The IMF itself also approved an extra $1.1 billion (Kes152 billion) and expanded the Fund programme by another two years, after the fifth review set for a board approval in July. The additional resources bring total programme loans to $3.52 billion.
In December last year, IMF again expanded Kenya’s debt facility after the 38-month IMF program signed in February 2021 was increased from $2.34 billion to $2.416 billion to cover external financing needs on droughts and challenging global markets.
The World Bank had also given the country an enhanced loan kitty by Kes32.3 billion ($250 million) bringing the expected disbursement from its previous Development Policy Operations (DPO) facility to Kes129 billion.
Kenya needs these favours to keep the economy from collapsing in the face of huge foreign debt payments while it is facing a dollar shortage. Inflows like diaspora remittances slumped at the beginning of the year and source markets for its exports such as Pakistan also struggling to find dollars to settle trades.
Meanwhile the demand of the greenback for the mounting loan payments and from foreign investors seeking to escape from currency restrictions, oil importers amidst elevated global prices and speculators cashing in on the shortage, is pushing the shilling on a freefall.
For these favours, however, the IMF had to exact a price, giving President William Ruto one of the most radical and brutal tax laws that previous administrations have considered to be political suicide.
But Dr Ruto is different, according to US Ambassador Meg Whittman, “the new President is very strong. He is smart, strategic, and gets things done.”
And it appears US top diplomat made the right assessment. President Ruto publicly dared members of parliament to try and defy him in what has come to be seen as intimidating Parliament. And despite overwhelming public opinion against the Finance Bill 2023, the ruling coalition voted for it to the man, backed by opposition legislators who have shifted allegiances to the President.
“Tunataka order, rais akisema yes, wote tunasema yes, akisema jump, tunauliza, Your Excellency, how high can we jump,” said Nandi senator Samson Cherargei.
The new President had managed to eliminate the subsidies of the previous government, and imposed full value added tax on petroleum. He scrapped Covid-19 support on small business and expanded those that qualify for gross sales taxes. He has promised to sell off state owned companies and allowed the forex market to determine the value of the shilling.
In his coup de grace in Paris, President Ruto was even bolder asking the multilateral lenders to create a new Bank for countries such as Kenya with a $500 billion annual credit line to refinance maturing official debt for struggling economies into new long-term loans of 50-year maturity and a 10 to 20-year grace period. Speaking during a round table in Paris, France, the President called for a new financial tax at the global level that would be paid even by the member countries in proportion to their economic strength.
But as President Ruto’s global image expands and multilateral lenders consider his bold proposals, analysts know that bureaucracy will render them a long-term solution which perhaps will not address immediate problems.
Kenya’s new Central Bank of Kenya (CBK) Governor Kamau Thugge held his first monetary policy committee (MPC) today amid rising inflation and a weakening shilling in the face of declining dollar reserves.
Despite getting a boost from dollar loan flows from the World Bank, Kenya’s foreign exchange reserves have dropped by Kes21.7 billion in the last two weeks to Kes1 trillion in the week ending June 22. This signals fresh trouble for the apex bank being watched closely by investors on how the regulator will handle mounting payments, importer demand and speculator behaviour.
The local currency closed the market at 140.31 units against the US dollar, having dropped almost 20 per cent in the past 12 months. Domestic borrowing rates are going through the roof where investors are not buying Treasury Bills above 31 days or charging an arm and a leg for a short to medium term bonds.
President Ruto claimed he can pay off half of the loan without elaborating how, meaning the bet seems to be the government will mostly bank on higher collections.
The President appears strong backed by the multilateral lender, but his weakness lies at home where he returns to a country where his popularity is waning and opposition is coalescing civil support for a showdown that will either cripple business or threaten his legitimacy.
Azimio la Umoja One Kenya has announced plans to resume public engagement today at the historic Kamukunji grounds in Nairobi. While the civil society groups under the Okoa Uchumi banner have been warning that if Parliament and negotiations fail to halt the punitive tax bill they will square it out with the government on the street. This ushers in a period of political tension, national shut downs and crackdowns that will hit business and affect normal operations for the economy.
The obvious antipathy towards paying taxes with businesses feeling bullied by the Kenya Revenue Authority, citizens feeling overburdened by multiple layers of taxes yet all this money is going down the drain or being passed off to some American and European creditor is bound to crop up.
Worse still with inflation clambering up so fast from the impact of the taxes, the currency and the El Nino, the President might soon realize taxes and the resultant inflation can be more damaging than default. It is no wonder the Central bank of Kenya, the custodian of inflation which understands its impact was suddenly jolted to hike interest rates on the day the Finance Act was signed into law, an ominous indication of things to come.
The President should always be wary of history lessons that taxes brought the Magna Carta, the Boston Tea Party that led to the American Revolution, the French Revolution and the Yellow Vest revolution and the ‘hut tax’ was partly what pushed the Mau Mau against the British.
