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The outlook had appeared to be brightening for emerging markets that in recent years had teetered on the brink of debt crises. Several developing countries defied expectations by avoiding default and accessing international capital markets. Violent clashes between protesters and police last week in Kenya, however, show the tensions below the surface.
Kenyans took to the streets to oppose a sweeping tax rise put forward by President William Ruto. They argued that the proposal, designed to meet fiscal targets required for an IMF loan, would cause undue harm to struggling citizens through steep increases on everyday products including bread and sanitary pads. Public dissent was met by force, including the use of live ammunition. After days of unrest and 39 deaths, Ruto’s administration withdrew the bill.
This was, in truth, a poorly designed tax policy. Substantial tax rises on essentials are ill-advised in an economy with an official poverty rate of 38.6 per cent. Rolling out the wave of new levies simultaneously shows a lack of political acumen, and a disregard for the plight of impoverished Kenyans.
The unrest also reflected a deeper rot. Profligate borrowing and poor economic management have taken Kenya’s debt above 70 per cent of output. Debt service costs have risen to 32 per cent of annual government revenues — money that would be better spent on climate resiliency and public services.
Ruto’s government struggled to meet a $2bn payment on a maturing 2014 Eurobond. In another era, the choice might have been to default and pursue debt relief. Having seen the costly restructuring processes for Zambia and Ghana, Ruto’s team took another path. They used IMF funds and issued $1.5bn in new debt at the high price of 10.375 per cent to pay back the bond.
Kenya’s success in tapping the capital market appeared to many a sign of economic strength. Yet, that Ruto had to trade a 6.875 per cent Eurobond for the higher coupon to avoid default — in essence delaying the payment and passing a higher cost on to Kenyans via tax rises — is a symbol of how dysfunctional the global debt architecture has become.
The G20’s 2020 Common Framework for Debt Treatment has been unable to corral the competing interests of bilateral and private creditors, plus China. The result is lengthy, expensive restructurings that damage economies and stymie development. Ruto, balancing a large number of private creditors and a big Chinese loan due in 2025, is understandably trying to avoid that fate.
Internal improvements at the IMF have reduced delays. But more needs to be done. Lawmakers in New York, where nearly half of all EM bonds are governed, proposed legislation that would penalise uncooperative private creditors and encourage comparable treatment between them and sovereign lenders. Since the latter had been a sticking point for China, this could both speed up the process and help to bring Beijing to the negotiating table.
The IMF should recognise that a flawed system requires more adept fiscal recommendations, potentially including guidance on ways to plug fiscal gaps beyond tax rises. It could also go further by advising countries on when to reprofile debts, instead of refinancing them at higher rates.
As for Kenya, the road ahead is unclear. Better fiscal management is desperately needed. Yet the options are limited. Ruto’s decision to favour government cost reductions over a tax rise is sensible, but it will not be enough to plug the financial gap. He may need to borrow more — further limiting his room for manoeuvre between creditors and an angry populace.