Kenya avoids dollar debt crunch, but economic fix remains elusive

Nairobi — Carpenter Jared Omondi has to walk several kilometres to work each day in Nairobi after public transport prices doubled. He is one of millions of Kenyans facing spiralling living costs caused by measures to tame surging public debt.

His wife and six of his children left Nairobi in 2023 for their village in western Kenya after life in the capital became too expensive, and Omondi said he has not had the money to make the trip to see them since last August.

Kenyan households like Omondi’s are dealing with the consequences of government policies such as tax hikes meant to tackle surging public debt and a weak currency. In 2023 the Kenyan shilling fell 20% against the dollar and markets questioned whether a $2bn Eurobond maturing this June could be repaid.

This week provided rare good news on the economy and bought much-needed fiscal breathing space for the government after its success in swapping out of that bond. Positive sentiment around the repayment of the bond and offshore investor demand for a tax-free domestic bond on auction this week helped push the shilling up more than 7% this year.

Yet analysts said higher interest payments on the new 2031 bond, which comes with an eye-popping 10.375% yield, and structural economic weaknesses would likely keep the currency weak and taxes high, providing no relief for household budgets.

“They have kicked the can down the road but the can is still the can,” said Robert Shaw, a Nairobi-based economic analyst. “We still have the same problems and, if anything, they are getting bigger rather than smaller.”

The higher interest costs — the new bond’s yield is nearly three percentage points higher than the one it is partly replacing — put fresh pressure on the government to increase revenue, Shaw said.

Kenya’s persistent trade deficit, importing far more than it exports, pointed to a “short-lived shilling rally”, said a currency trader with a commercial bank in Nairobi, who put the shilling’s sharp gains on Thursday down to currency speculation.

Tax pain

More pain, in terms of tax rises, could be on the horizon for Kenyans like Omondi. The cost of public transport for the father of eight became unaffordable after the government doubled the tax on petroleum products last June.

The government has also imposed new taxes to fund affordable housing and a health insurance programme, fuelling street protests in which more than three dozen people were killed last year.

Higher taxes are hitting business too. A survey by the Federation of Kenyan Employers of its 4,500 organisations, which employ 1.2-million workers, found 40% had cut jobs in the past year. Some said they were considering relocating to neighbouring countries.

“The decisions that we have taken in the policy environment, in the tax regime that we have, have made companies decide to exit this market,” said Jacqueline Mugo, the federation’s executive director.

President William Ruto’s government took power in September 2022 after a decade of debt-fuelled infrastructure spending that pushed public debt levels up to nearly 70% of GDP from just over 40% a decade earlier. Ruto has cast the new bond as a success, citing the more than $6bn of demand received from investors and the shilling’s recent gains.

“The successful transaction underscores investor confidence in Kenya,” finance minister Njuguna Ndung’u said on Tuesday.

By avoiding default, Kenya could receive additional support from the IMF and other financiers that would help reduce its overall interest payments, analysts said.

In an interview with Reuters late last month, Ruto said the new taxes were required to control debt levels and that his government’s actions had averted default. But businesses say the government’s high tax approach to controlling debt is threatening Kenya’s long-term competitiveness and status as East Africa’s biggest economy.

Kenya has been losing out on foreign direct investments to neighbouring Tanzania and Uganda in recent years, data from the Kenyan central bank shows.

“Kenya appears to be trying to tax itself to prosperity, which generally doesn’t work,” said Nikhil Hira, partner at Kody Africa LLP, a Nairobi tax consultancy.

Uganda and Tanzania have been recording inflation of about 3%, less than half of Kenya’s 6.9%, due to more stable currencies and more consistent agricultural production.

East African Breweries, a unit of Britain’s Diageo, saw its profit drop by a fifth in the six months to the end of December, partly hurt by the weaker shilling in Kenya, its biggest market.

Nairobi resident George Ogweno said the hard times made him less likely to kick back with friends over a drink. “Life has become has so tough, it is even difficult to put food on the table. The cost of everything has gone up,” he said.

Reuters