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Kenya’s Tax U-Turn Highlights Political Realities of Africa’s High Debt Burden

President William Ruto says he will seek budget cuts after dropping bill to raise taxes following deadly protests

Kenyan President William Ruto announced the proposed law’s withdrawal at the State House in Nairobi on Wednesday. PHOTO: SIMON MAINA/AGENCE FRANCE-PRESSE/GETTY IMAGES

Kenyan President William Ruto announced the proposed law’s withdrawal at the State House in Nairobi on Wednesday. PHOTO: SIMON MAINA/AGENCE FRANCE-PRESSE/GETTY IMAGES

Kenyan President William Ruto said Wednesday that he would withdraw a proposed law on large-scale tax increases, a day after nationwide protests against the measures turned deadly. The move highlights how the burden of repaying near-record high debts is increasingly running up against political realities in African countries. 

Standing in front of rows of lawmakers, Ruto said he would seek new austerity measures, including in his own office, to make up for the public’s rejection of the so-called finance bill, which was meant to raise an extra 200 billion Kenyan shillings ($1.55 billion) in taxes. The funds—including new levies on everyday items like imported diapers and sanitary pads—were meant to help East Africa’s most developed economy pay off a mountain of loans and bonds.

The surprise announcement came a day after crowds of protesters, led mostly by young Kenyans, stormed the country’s Parliament minutes after lawmakers voted to pass the bill. Police opened fire on demonstrators, a move that Ruto and other members of the government defended as necessary to protect public infrastructure, but which was widely criticized by Western governments and rights groups.

Ruto said six people lost their lives in the clashes and more than 200 were injured. Earlier in the day, a group of Kenyan rights groups said they had counted at least 23 dead.

“It has become evident that members of the public still insist on the need for us to make more concessions,” Ruto said.

 

A woman wept after viewing the body of her son, who was allegedly shot by police during Tuesday’s protests, at a funeral home in Nairobi on Wednesday. PHOTO: BRIAN INGANGA/ASSOCIATED PRESS
A woman wept after viewing the body of her son, who was allegedly shot by police during Tuesday’s protests, at a funeral home in Nairobi on Wednesday. PHOTO: BRIAN INGANGA/ASSOCIATED PRESS

Like many other African countries, Kenya has seen its public debt rise sharply over the past decade, as successive governments sold billions of dollars worth of bonds and took out infrastructure loans from China. Ruto said his government now spends 61 of every 100 shillings it raises in taxes on debt service. Across sub-Saharan Africa, debt service on average ate up 47.5% of government revenue last year, more than double the level a decade ago.

Since he was elected to the presidency last year, Ruto has won plaudits from international investors for staving off a default, including by signing a bailout deal with the International Monetary Fund and pledging to increase government revenue. In February, Kenya successfully tapped international debt markets, albeit at much higher interest rates than previously. 

But a growing number of Kenya’s 54 million citizens—more than a third of whom still live in poverty, according to the World Bank—have balked at his government’s funding plans. Over the past week, thousands had marched through the streets of Nairobi and other Kenyan cities and called for nationwide strikes, demanding that Ruto and Parliament drop the planned tax measures.

Ruto late Tuesday called the incursion of Parliament a “treasonous” act and pledged to move forcefully to clamp down on further unrest.

 

The wreckage of a car burned down during deadly protests in Nairobi against a proposed law to raise taxes. PHOTO: LUIS TATO/AGENCE FRANCE-PRESSE/GETTY IMAGES
The wreckage of a car burned down during deadly protests in Nairobi against a proposed law to raise taxes. PHOTO: LUIS TATO/AGENCE FRANCE-PRESSE/GETTY IMAGES

Shani Smit-Lengton, an economic analyst with Oxford Economics Africa, said the withdrawal of the finance bill would make it hard for Ruto’s government to cut its deficit to the targeted 3.3% of gross domestic product in the current fiscal year, from 5.7% the previous year.

“The withdrawal of the finance bill was our less likely scenario, so we will need to reassess the magnitude of this decision on the economy,” she said. “The government will also need to consult the IMF, as its staff level review was completed earlier this month.”

The IMF didn’t immediately respond to a request for comment on Ruto’s announcement.

Razia Khan, head of Africa research at Standard Chartered Bank, said financial markets could welcome Ruto’s reversal on the bill, after the Nairobi stock market and Kenya’s dollar-denominated bonds sold off in response to the protests.

“In a concession to protester demands, spending will be addressed in a political compromise that might meet both the need for fiscal consolidation as well as popular opinion,” Khan said.

Ruto said that his government would be forced to delay plans to hire more teachers and support coffee and sugar-cane farmers and that he would seek dialogue with opposition parties and civil society on how to manage spending going forward.

“That is because the people of Kenya have spoken loudly that they want a leaner budget,” he said.

Write to Gabriele Steinhauser at Gabriele.Steinhauser@wsj.com and Nicholas Bariyo at nicholas.bariyo@wsj.com

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Author: Editors Desk, Gabriele Steinhauser, and Nicholas Bariyo

Source: WSJ:

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