By Brenda Osoro
Source: The Star Kenya/Sketch: Lunapic | President William Ruto meets World Bank President Ajay Banga
In the delicate dance between economic development and public debt, Kenya finds itself at a critical juncture, grappling with the consequences of imprudent debt management.
Debt, when not managed wisely, can be a double-edged sword, a fact starkly illustrated in Kenya’s current economic situation.
The Kenyan government has racked up substantial debt to the tune of Ksh10.25 trillion, surpassing its Ksh10 trillion ceiling. This has created immense pressure to service it which in turn has led to some rather expedient and potentially detrimental decisions.
One such decision involves the government’s push to increase taxation. In June 2023, lawmakers approved the passing of the Finance Bill 2023, containing a number of deductions.
With these changes, including a doubling of the VAT on petroleum products from 8% to 16%, a rise in income tax for individuals earning more than Ksh 500,000, the introduction of a 1.5% housing tax, and a 2.5% medical insurance tax, many Kenyan citizens now find themselves allocating nearly 40% of their income towards various taxes and levies.
Since then, hardly a month has gone by without some new form of tax proposal.
Desperate to meet debt servicing demands, the government has cut development spending and increased taxes without adequate regard for their regressive impact.
This has disproportionately affected low and middle-income households, deepened socioeconomic disparities, and stifled domestic enterprises. When the private sector struggles to thrive under the weight of excessive taxation, economic growth suffers.
In a desperate bid to manage the ever-increasing debt load, the government has chosen to take out new loans to pay off existing debt, a short-term solution that perpetuates the cycle and leads to unsustainable debt levels, creating a precarious financial future.
While it’s essential to understand the domestic factors that have led Kenya into its current debt quagmire, the International Monetary Fund (IMF’s) involvement cannot be ignored.
The IMF often plays a significant role in shaping a country’s economic policies and offering financial support in times of crisis. However, the conditions attached to such financial support can have far-reaching consequences for a nation’s economy.
In Kenya’s case, the IMF’s involvement has come with specific conditions, including austerity measures and fiscal reforms, as prerequisites for loans or financial aid.
The pressure on the government to meet IMF-imposed conditions often leads to further cuts in public spending, particularly in crucial areas like health and education, which have long-term impacts on the well-being and development of the nation.
As Kenya’s longstanding association with the IMF dates back to 1964, one cannot help but question why – despite the purported significance and substance of the reforms advocated by the institution- tangible transformation remains elusive.
In fact, while billions continue to be lost to needless tax expenditures and corruption, the allure of easy money from the institution has created false comfort and killed innovation in improving the tax regime and related policies.
In general, there has been a notable lack of political will to pursue fiscal reforms that create just tax policies because of easy access to debt.
Kenya’s debt crisis is a cautionary tale that underscores the severe consequences of imprudent debt management and external influences, such as those exerted by the IMF.
It is imperative for the country to strike a balance between securing necessary financial resources and maintaining fiscal responsibility, charting a course towards sustainable growth and development that doesn’t come at the cost of its citizens’ well-being.
The author is Program Assistant at the East African Tax and Governance Network (EATGN).
