Is the IMF responsible for Kenya's tax hike protests?

In today’s Finshots, we tell you why Kenyans are protesting against the government’s new Finance Bill and what the IMF (International Monetary Fund) has to do with it.

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The Story

Kenya's streets were a hotbed of chaos just a few days ago. What started as peaceful protests quickly spiralled into violent clashes and arson, tragically claiming hundreds of lives.

The trigger?

A new Finance Bill from the government aiming to collect a hefty $2.7 billion by hiking taxes on everything from cars and digital gadgets to basic essentials like bread, cooking oil, sanitary napkins and diapers.

And amidst the turmoil, many are blaming the IMF (International Monetary Fund) for Kenya's plight. So, what’s going on, you ask?

Let’s take it from the top.

In 1963, Kenya broke free from British colonial rule. Back then, the average annual income per person, or Gross National Income (GNI) per capita, was just about $100. And you can imagine how tough life must have been with such little income.

To move away from poverty, Kenya needed to boost its GNI per capita to over $1,036, the World Bank's benchmark for lower middle-income status. So, the government started pouring money into building the country's infrastructure, agriculture and industry, aiming to kickstart the economy and improve living standards.

But, in a struggling economy like Kenya's, this money wouldn’t just appear out of thin air. So the government naturally had to borrow to fund these ambitious projects.

Initially, things were looking up. With the extra money, the government could invest more in improving agricultural productivity, especially in tea and horticulture. This led to a boost in exports, which helped Kenya's economy grow even more. By the early 2000s, Kenya had achieved some political stability, which made investors more confident and attracted foreign money. Its economy went from shrinking by 1% in 2002 to growing by 7% in 2007. It was seen as Kenya's economic miracle, the highest growth since 1980.

But here’s the catch. Debt can help a country's economy grow, but only if it's used wisely. And that's where Kenya missed the mark.

Its government diverted funds earmarked for public infrastructure, like dams and railways, for corrupt purposes, causing these projects to stall. In fact, Edward Ouko, Kenya’s former auditor general, suggests that half of Kenya’s debt could be attributed to corruption. But over the years, delays were blamed on cost overruns and funding shortages.

Facing a funding crunch, Kenya borrowed heavily from commercial lenders and countries like China to finance massive infrastructure projects. And since most of these loans were commercial, they came with high interest rates. As debt mounted, it also sought assistance from international agencies like the IMF and World Bank, deepening its debt burden in a vicious cycle.

But here’s something you should know about monetary aid that comes from international agencies like the IMF. Countries facing economic challenges can receive aid, sometimes at zero interest rates if they're considered poor.

However, this money comes in instalments and with strings attached. In return for the loan, the IMF might slap conditions that could include reduced spending and a boost in revenue through tax hikes and other means. It then regularly follows up on how well the country is meeting these conditions. And only if it's satisfied with the progress, does it release the next instalment of funds.

And for a long time, Kenya's government has been trying to tackle its debt to please the IMF. It raised taxes, cut subsidies on fuel and electricity, and even slashed spending on crucial sectors like education and health.

Despite these efforts, it couldn't escape the debt trap. Most of the extra revenue and savings went towards servicing the debt, which only grew worse after the pandemic hit.

The pandemic battered Kenya's economy even more, pushing the country to seek additional funds from the IMF in 2021.

The deal?

Kenya had to boost its revenue collection to 25% of its GDP.

So, when the new government took over in 2022, they raised a bunch of taxes and introduced new ones.

But things got worse when the Russia-Ukraine war started. A major problem was that a big chunk of Kenya’s loans was in Dollars, not the local currency, the Kenyan Shilling.

To put things in perspective, when global events like a pandemic or war occur, foreign currency borrowings become more expensive as the local currency weakens. For example, if $1 was equal to 120 Kenyan Shillings when Kenya borrowed the money, a weakened Shilling could mean that the same $1 is now worth 130 Shillings. This means Kenya has to pay back more in Shillings for every Dollar borrowed.

By 2023, Kenya's debt-to-GDP ratio had ballooned to nearly 70%, far above the 55% recommended by the World Bank and IMF. This left its government with no choice but to hike taxes again in its new budget, covering just about everything.

The end result was that Kenyans who were already struggling to make ends meet, took to the streets to protest these steep tax increases. They were frustrated at having to give up more of their hard-earned money to a government they believed had mismanaged funds in the past. Adding to their frustration was the fact that the IMF's conditions were making their lives even harder. And that only fuelled their anger further.

So here’s something to think about. While Kenya’s frustration with its government is completely understandable, is their anger towards the IMF equally justified?

Well, the IMF has a history of favouring richer countries while being stricter with economically weaker ones. For instance, the interest rates for loans to struggling countries in Africa are often disproportionately higher than those for other developing nations. Plus, for every $1 the IMF lends to these governments, it demands six times that amount in austerity measures, like budget cuts.

What's worse is that these countries have little say in how the IMF is run. The IMF doesn’t operate as a one-member-country, one-vote system. Instead, voting rights are based on how much each member country contributes. And that means that richer countries naturally have more influence. For context, the US alone holds nearly 17% of the voting power, and the wealthy G-7 countries together command over 40%.

And this might make the IMF seem unfair.

But here’s the thing. The IMF is accountable to its member countries, who fund the bailout programs. And to keep doing this, the IMF must ensure that countries repay their debts so that the funds can be made available to other member countries too.

Besides, the higher interest rates for poorer countries aren't just a punitive measure. It’s about risk. If a country has a history of defaults, like how Kenya does, lending to them is risky, and the IMF has to protect itself against such risks. Hence, loans to them become expensive.

The other thing is that the IMF doesn’t have a lot of funds. When it was created 80 years ago, it was supposed to have resources equal to about 3% of the global GDP. But today, it only has about 1% of global GDP, which isn’t enough to address all the world's financial problems, especially with pressing issues like climate change, digitalisation, governance, gender and income inequality.

So, while the IMF might seem like the villain, it’s clear that the Kenyan government's mismanagement and corruption are major reasons for its current predicament.

How will Kenya pull itself out of this conundrum? Only time will tell.

Until then…

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