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For union boss Constantine Wesonga, there is a clear reason for the Kenyan state’s failure to pay its workers on time — its $70bn of total public debt.
“We’re having a crunch time because of the debts [built up] by the previous regime,” said Wesonga, secretary-general of Kenya’s public universities union. “So the government, whatever they collect now, first they pay the debt, then they collect for salaries.”
In addition to delayed delivery of state employees’ wages — “for the first time” in Kenya since it gained independence from Britain in 1963, according to opposition lawmaker Opiyo Wandayi — President William Ruto has faced mounting criticism for slashing subsidies, implementing austerity measures and aggressively collecting taxes.
The measures are part of the government’s bid to find enough cash to meet creditors’ demands and avoid the defaults and forced restructurings of African peers such as Zambia and Ghana.
Higher interest rates and a stronger dollar have made financing options more expensive, adding to the risk premium for African countries. Ruto said Kenya spends about $10bn a year on debt repayments to China and other lenders and is focused on paying a $2bn eurobond due next year. Debt servicing costs have jumped from 59.5 per cent of total state revenue in the 2021-22 fiscal year to 63.5 per cent in 2023-24.
Uhuru Kenyatta, Ruto’s predecessor, borrowed heavily from Beijing and the international financial markets to fund rail, road and port projects. But many of these schemes have failed to generate enough income to pay back debts.
About $5.9bn of Kenya’s $36.6bn external debt comes from China, with the rest from domestic, other bilateral and multilateral lenders as well as eurobonds, according to March data from the treasury.
Ruto, who was Kenyatta’s deputy, took office last September promising to ease the financial burden on Kenyans. As markets watch how east Africa’s economic powerhouse manages repayments in a tougher financing environment, he now plans to partially privatise some state-owned assets.
“We’ll have to tighten our belts for a few months,” Kenya’s treasury secretary Njuguna Ndung’u, who has led efforts to shore up government finances, told the Financial Times.
Ruto last month signed a controversial finance bill that introduced a series of new taxes, including levies on fuel and housing, which have now been frozen by the courts.
Veteran opposition leader Raila Odinga has called on Kenyans to “embrace tax boycotts” with a series of nationwide protests that began on Friday and resumed on Wednesday. More than a dozen people have been killed, according to the Kenya Human Rights Commission.
Odinga, who lost last year’s election to Ruto, has led various demonstrations against a government he accuses of failing to help households after an inflationary surge partly driven by Russia’s full invasion of Ukraine.
“I don’t know what kind of magic people expect one can do to recover when you have persistent shocks,” Ndung’u said.
IMF managing director Kristalina Georgieva said on a visit to Nairobi in May that African countries faced tough headwinds. “The continent is being squeezed by higher interest rates, as well as dollar appreciation,” she said, with 19 of the 35 countries in sub-Saharan Africa “at or near debt distress”.
Kenya is classified by the IMF as being at high risk of debt distress. Although its debt was “sustainable”, Georgieva added, “the country finds itself cut off from international markets”.
Until it reached a deal with Zambia in June, China was generally reluctant to extend maturities of loans to sovereign African creditors. Ruto, whose government faces an annual debt servicing bill from Beijing of roughly $1bn, recently vowed “to have a conversation” this year with his Chinese counterpart Xi Jinping.
With about half of Kenya’s total public debt being external, estimated at 32.2 per cent of gross domestic product, “exposure to foreign currency risk remains high”, the World Bank warned last month. The Institute of Economic Affairs, a Nairobi think-tank, said dollar-denominated repayments cost 25 per cent more in March than at the start of 2021 as a result of the shilling’s decline.
Ruto has shrugged off currency woes and promised to avoid a debt default. “Default is not an option,” said David Ndii, his economic adviser, adding: “I don’t think we’re anywhere close to the vulnerability of Ghana or Zambia.”
He said that “if push comes to shove” Kenya could pay the 2024 eurobond maturity with foreign reserves, which currently stand at $7.5bn.
Multilateral lenders are willing to continue extending credit to Kenya, seen as one of Africa’s more pro-business hubs, as long as it continues its fiscal consolidation, completes reforms and increases revenue collection. Georgieva said the IMF supported Kenya “very strongly” as the country was “acting responsibly” in the face of external shocks, including a severe drought.
Ruto has vowed to increase tax collection. “My emphasis is to raise resources locally rather than borrow,” he said in Paris last month.
But concerns persist despite Nairobi’s assurances. In May, Moody’s cut Kenya’s credit ratings one notch, citing “an increase in government liquidity risks”, adding that “domestic funding conditions have deteriorated considerably”. The rating agency placed Kenya on review for a downgrade, noting its “constrained external financing options”.
“I don’t think the probability of default is zero,” said Kwame Owino, IEA Kenya’s chief executive. “They’re trying to manage that very consciously, but I think it’s the strongest possibility of a default in any time in the last 10 years.”
Additional reporting by Kenza Bryan in Paris
