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EFFECTS OF REPRESSIVE FISCAL POLICY THAT MET ECONOMIC INJUSTICE.

OKOA UCHUMI ADVOCACY BRIEF – IMF/WB ANNUAL MEETINGS IN OCTOBER 2024: EFFECTS OF REPRESSIVE FISCAL POLICY THAT MET ECONOMIC INJUSTICE

Background

The International Monetary Fund’s (IMF) engagement with Kenya, since April 2021, under the Extended Credit Facility (ECF) and Extended Fund Facility (EFF), has increased inequalities and deepened poverty while taking all measures to ensure no default on foreign debt. Kenya has seen its borrowing from the IMF grow 143% from Ksh.178.2 billion in June 2021 to Ksh.433.5 billion in April 2024 to manage the persistent debt vulnerabilities[1]. The World Bank, on the other hand, has seen its level of credit to Kenya increase 42% from Ksh.1.07 trillion to Ksh.1.52 trillion over the same period.1

1 https://www.treasury.go.ke/monthly-bulletins/ Due to the inability to address the root causes of poor accountability over public spending, the IMF, in this context, has failed to realize meaningful fiscal and economic progress in Kenya under her ongoing fiscal consolidation program. By failing to encourage and strengthen existing democratic structures for good governance and accountability, the IMF has acted as a guarantor for irresponsible lending (creditor accountability) and borrowing (poor governance).

The tough conditions attached to IMF financing and the consequences of its unilateral and colonial policies have manifested in widespread civil unrest across Kenya. The recent #RejectFinanceBill2024 protests, which saw thousands of Kenyans take to the streets, at least 50 people fatally shot dead, several hundreds injured and others arbitrarily arrested and abducted, are a direct result of the IMF-backed fiscal measures that have pushed our citizens to the brink. Young Kenyans, facing a bleak economic future, have been at the forefront of these protests, decrying excessive taxation and budget cuts that have made life unaffordable for the majority. The increasing VAT on essential goods like the 8% increase on petroleum products, the introduction of a housing levy on salaried persons, a 2.75% deduction to the Social Health Insurance Fund (SHIF)and the proposal to privatize state-owned enterprises are additional burdens added without improved service delivery. Further tax proposals through the Finance Bill 2024 to raise Ksh.346 billion in additional revenue were met with fierce public opposition. The government sought to introduce 16% VAT on ordinary bread, increase the duty on telephone and data to 20%, and increase the duty charged on money transfer services to 20% by banks, transfer agencies, and cellular phones and payment services, a proposal to introduce an eco-levy as well as motor vehicle circulation cost, among others. These protests are not merely expressions of discontent; they are desperate cries against policies that threaten the very fabric of our society and economy.

The IMF’s continued push for these harmful measures as indicated in the institution’s Executive Board assessment, despite straightforward evidence of their detrimental socioeconomic impact, demonstrates a callous disregard for the welfare of Kenyan citizens and a violation of the Fund’s mandate to promote economic stability. The civil unrest we are witnessing is a direct indictment of the IMF’s failure to consider the real-world

consequences of its policy prescriptions. In Kenya, the IMF’s extractive policies have also been indicted by the cabinet secretary for treasury appointed after the mass protest, who, during his address on his first 50 days, informed the country that they would seek to lower the value-added tax as well as income tax for individuals and corporates.

Despite repeated cautions by civil society groups to the IMF review teams on the deleterious impacts of misinformed taxation measures, the Kenya government, in response to IMF conditions, has increased the tax burden on households, particularly low-income and vulnerable groups, and has aligned the tax system with a more regressive model. This has triggered the ongoing widespread citizen unrest in the country.

Under international norms and standards, the IMF is mandated to consult and engage with external actors. Still, it has consistently disregarded crucial stakeholder feedback and pursued fiscal and monetary policies that have directly exacerbated Kenya’s economic crisis and political instability. This approach not only undermines Kenya’s sovereignty but also contradicts global efforts towards more equitable and sustainable development.

Despite the growing momentum of the decolonial movement and ongoing reforms to the global financial architecture, the IMF remains entrenched in outdated and harmful practices. The fund’s actions in Kenya demonstrate an alarming disconnect from the evolving global consensus on development and economic governance.

Moreover, the IMF’s rigid conditionalities and repressive fiscal measures directly oppose the United Nations’ Sustainable Development Goals (SDGs), and AU Agenda 2063 which call for countries to achieve significant social and economic progress like the Kenyan Vision 2030. The austerity measures make it a challenge for Kenya to sustainably allocate necessary resources to critical areas such as healthcare, education, and sustainable infrastructure – all of which are essential for meeting the SDGs.

[1] https://docs.google.com/document/d/1cbxHbmC-VxXGM2HB1J9ns7MzQJ_PQwSW/edit

[2] Impact of the International Monetary Fund Fiscal Consolidation Program on the Kenyan Economy, Livelihoods, and Overall Accountability Frameworks.

Kenya’s fiscal space and the county’s ability to respond to economic shocks with fiscal policy is continuously shrinking. Kenya faces myriad financial challenges, including payments of statutory obligations and capital flows. The current debt mix has domestic debt and foreign debt at nearly equal proportions. Domestic debt is acquired at a very high cost, which has locked out access to credit capital for the majority of people and businesses. The debt crisis not only compromises the country’s sovereignty but also dramatically impacts the human rights of the citizens.

The continued impact of invasive, aggressive, and undignified fiscal policies, including taxation, coupled with a deliberate obfuscation of massive corruption and the wastage of public resources has led the country to a point of very low trust in the government, IMF, and World Bank, as witnessed in the June to July public mass protest against revenue-raising measures and overall bad governance culture of impunity.

For this reason, as the IMF mulls over the next phase of the Kenyan program alongside the World DPO, we call on the shareholders to address the following:

Poor Public Debt Management Practice

Public debt has surged dramatically over the past decade, growing tenfold. In March 2013, it stood at KSh.1.79 trillion, with KSh.981.9 billion in domestic debt and KSh.812.7 billion in foreign debt. By March 2024, this figure had skyrocketed to KSh.10.4 trillion, comprising KSh.5.2 trillion in domestic debt and KSh.5.1 trillion in foreign debt. Of the total, 50.3% (KSh.5.24 trillion) was domestic debt, while 49.7% (KSh.5.16 trillion) was external.2

2 https://www.centralbank.go.ke/statistics/government-finance-statistics/ A combination of factors, including growing fiscal deficits, prioritization of recurrent expenditure, currency depreciation, and increased borrowing costs, has exacerbated this situation. The country’s debt-to-GDP ratio has hit 65.2%, significantly above the recommended threshold, while the debt service-to-revenue ratio has escalated to 64.3%, far exceeding the IMF’s recommended limit of 30%.

The steady increase in sovereign financial obligations has put the country at risk of a debt crisis, threatening its sovereignty and jeopardizing its citizens’ access to their fundamental human rights. The government continues to fall short of its revenue targets, while public debt servicing remains a significant burden. Accordingly, this has created a vicious cycle of borrowing to cover deficits and meet debt obligations, further increasing the debt burden. Between FY 2019/20 and FY 2023/24, spending on health, education, and social protection rose by Ksh 243 billion while debt servicing costs skyrocketed by Ksh 870 Billion, consuming 59.% of ordinary revenues.3

3https://cob.go.ke/reports/national-government-budget-implementation-review-reports/#1608725411997-89dbc2bb-c9db, Annual Reports for FY 2023/24 and FY 2019/20. According to Supplementary Budget (I) FY 2024/25, KSh.1.85 trillion is earmarked for debt servicing out of a total budget of KSh.3.87 trillion. This highlights the government’s skewed priorities, favoring debt servicing over protecting key public services towards enhancing the socio-economic well-being of Kenyans.

Additionally, there are significant variances between the actual debt borrowed and the projections made. Deviations between approved borrowing plans and long-term strategic goals undermine debt accountability in multiple ways. First, such discrepancies cast doubt on the credibility of government information, creating uncertainty about its reliability for accountability purposes. They also raise concerns about the government’s commitment to fiscal policy, its creditworthiness, and the market’s trust in its ability to manage debt prudently. Furthermore, when these deviations occur across key guiding documents like the Medium Term Debt Strategy, Budget Policy Statement, and Annual Borrowing Plans, they limit the government’s accountability in debt management because it remains unclear which targets the actual borrowing should be benchmarked to. This inconsistency hinders the promotion of prudent financial management and sustainable debt levels, which rely on the alignment of long-term fiscal objectives and rules.

Corruption & Illicit Financial Flows

The Government of Kenya must urgently address the high levels of corruption that hinder socio-economic growth, service delivery, and provision. The Ethics and Anti-Corruption Commission (EACC) and the Office of the Auditor General (OAG) have confirmed soaring levels of fraud, waste, and abuse at national and county government levels, with annual reports presented to parliament. It is estimated that the government has been losing an average of Ksh.40 billion (USD 307 million) every year through illicit financial flows since 2011 and close to 700 billion annually in budgeted corruption, almost equal to the budget deficit4

4 https://www.pasgr.org/wp-content/uploads/2018/09/Kenya-Illicit-Financial-Flows-Report.pdf . Transparency

International’s global Corruption Perception Index 2023 places Kenya at a score of 31/100, which shows a deterioration in anti-corruption efforts.

Kenya has been put under increased monitoring by the Financial Action Task Force owing to deficiencies in addressing terrorism financing and money laundering, despite the legislation enacted and institutions established to address these challenges. The lack of a clear strategy for the prosecution of money laundering offenses, inadequate investigations, and the inability to prosecute persons implicated in terrorist financing are the reasons Kenya is under watch. The grey-listing in March 2024 has affected Nairobi’s standing as the financial center of the region and poses a great risk to foreign aid and investments; has increased compliance costs for financial institutions, businesses, and individuals due to stricter adherence to anti-money laundering and countering terrorist financing regulations; and raises obstacles in international trade and payments due to increased scrutiny and enhanced due diligence from foreign banks and financial institutions Addressing the problem of illicit financial flows would play a significant role in improving the government’s fiscal position and reducing the reliance on borrowing. It is evident that political, economic and oversight structures have been captured to prevent debt accountability and in that gap money being borrowed has been repurposed for private gain.

Accountability of Public Spending

The IMF’s fiscal consolidation program, which started in April 2021 to address debt issues and balance-of-payment problems, has harmed Kenya. This arrangement required the Kenyan government to select, design, and implement specific fiscal consolidation requirements in exchange for access to cheap budget support not tied to development initiatives. This creates a two-fold problem. On the one hand, these fiscal consolidation reforms present the risk of increasing demand for but reducing access to public services through measures that have a negative effect on disposable income, such as increased regressive taxation and measures that do not protect critical social expenditures. On the other hand, the spending of IMF budget support by the Executive prohibits accountability on borrowed funds by creating the possibility of using the funds for purposes other than development, as is required by the constitution.

To most effectively deal with Kenya’s public debt crisis, the Kenyan government and the IMF need to explore and implement measures that strengthen the link between borrowed funds, public services, and inclusive economic growth, including but not limited to the bolstering of independent institutions, the rationalization of high administrative expenditures, the improvement and strengthening of public participation practices to ensure accountability over in-year expenditure and increase the probability of the reforms’ acceptability and success.

Unfavorable monetary policy

The IMF program prescribes monetary policy requirements that favor the creditor and continue undermining Kenya’s economic competitiveness due to inflations and exchange rate conditionalities, forcing the government to support the shilling artificially.5

5 https://theconversation.com/kenyas-shilling-is-regaining-value-but-dont-expect-it-to-last-expert-227386 Kenya’s trade balance continues to be unfavorable, threatening its long-term economic recovery plans. A significant accountability gap exists in monetary policy, with the IMF engaging primarily with the National Treasury, the Central Bank of Kenya (CBK), and a select few from the President’s economic advisor team while bypassing key institutions like Parliament.

Increased austerity measures

Fiscal consolidation and austerity have translated to reduced service delivery, protection of businesses, and payment of creditors rather than investment in citizens. The IMF strategies often involve strict fiscal policies to reduce deficits and stabilize economies. In Kenya, these policies included aggressive measures to increase taxes, cut subsidies, and reduce public spending, often targeting essential mass-based services. While these measures may seem practical, they still need to consider the social and economic realities, resulting in proposed taxes on necessities seen as direct attacks on the livelihoods of ordinary citizens, especially the poor and vulnerable. The austerity measures have also been out of touch with the daily struggles of Kenyans, who are already facing high unemployment, rising living costs, and inadequate social services. The austerity measures have made social protection a mirage, health a preserve of a few, and access to basic and higher education very costly and undignified. Most recently, the revenue-raising measures have targeted land rates for freehold properties and primary legal identity documents.

Weakened Democratic institution necessary for fiscal constitutionalism

Constitutionally, Parliament is tasked with legislative and oversight responsibilities over public finance. Parliament plays a crucial role in representing the needs and interests of the people by enacting laws on public debt management and approving the Annual Budget Estimates, Budget Policy Statement (BPS), and Medium-Term Debt Strategy (MTDS). It is also responsible for setting the public debt ceiling and the annual government borrowing limit while overseeing the executive’s public debt management. Additionally, Parliament provides objective and impartial leadership in managing public funds and ensures checks and balances on the executive’s power. In Kenya, Parliament has failed in its oversight and administrative accountability to enforce laws and regulations that protect the public from a runaway public debt, a highly regressive tax regime, and the massive misuse and abuse of public resources. Additionally, it needs to be stronger in providing oversight over audit reports and recommendations.

Unconstitutional funds further deepen oversight weaknesses, including the now infamous national government constituency development fund.

Okoa-Uchumi-Coalition-Advocacy-Brief.pdf (21 downloads )

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