After a difficult year, will Govt dig itself out of financial hole?

Majority Leader Kimani Ichung'wah, Treasury CS Njuguna Ndungu, Majority Chief Whip Silvanus Osoro and  Kilifi North MP Owen Baya at Parliament during Budget Day, June 15, 2023. [Elvis Ogina, Standard] 

As Kenyans usher in the New Year, they will collectively breathe a sigh of relief having seen off 2023.

The just-ended year is one to forget for a majority of Kenyans having been characterised by economic hardship, political uncertainty, and relentless cost-of-living crisis.

And now as the sun rises in 2024, a flicker of optimism peeks through the clouds. Kenyans are choosing to look ahead with guarded hope. They yearn for a fresh start, a chance to leave behind the burdens of the past year and build a brighter future.

However, optimism is laced with trepidation. The scars of 2023 run deep. The wounds inflicted by inflation, job losses, and political turmoil will take time to heal. Kenyans remain wary of the challenges that lie ahead: The ever-present shadow of the economic downturn.

The ripple effects of global inflation continue to be felt in Kenyan households. Food prices remain high, unemployment is a constant threat, and businesses are struggling to stay afloat.

Below are some of the key economic events to shape the New Year.

Ruto’s economic tightrope

The Kenya Kwanza administration under President William Ruto is facing a critical challenge: balancing the need to raise revenue through taxes with the rising cost of living that is causing pain to many Kenyans. Previous tax proposals have drawn criticism from some Kenyans and various interest groups as well as the Raila Odinga-led Azimio la Umoja-One Kenya coalition, arguing the cost of living is already too high, leaving no room for additional taxes.

The government says it has “no other option” but to implement painful economic measures such as those prescribed by the International Monetary Fund (IMF) and the World Bank programmes through the budget cycles as a condition to revive the cash-starved economy through their generous but conditional bailouts.

Kenya, the IMF and the World Bank have agreed on lucrative loan programmes running into trillions of shillings to support the country.

Ballooning inflation, escalating borrowing costs, and a strong dollar have made repaying sovereign loans and raising money significantly more expensive for Kenya amid fears of default.

The cash shortage crisis has seen the government struggle to pay civil servants and disburse funds to the counties, National Government-Constituency Development Fund and schools.

The shilling has also weakened sharply against the dollar, piling further pressure on Kenyans amid a cost of living crisis that has pushed many into poverty and fuelled demonstrations.

The government sidestepped an economic landmine after settling a crucial instalment on one of its maturing international bonds through a last-minute interest payment.

The National Treasury made a Sh10.8 billion “coupon” payment for the $2 billion (more than Sh312 billion) Eurobond ahead of the last international banking working day in December.

Even then, there are jitters over Kenya’s debt distress after the government backtracked on an initial repayment plan trumpeted by President Ruto, say analysts.

There has been mounting anxiety and speculation on whether Kenya would default on its obligations.

The recent $68.7 million interest payment plan was a departure from President Ruto’s earlier intention to buy back part of the $2 billion Eurobond, signalling financial distress.

Ruto earlier said his administration planned this month to pay off the first $300 million (Sh46 billion) instalment of the $2 billion Eurobond debt that is due next year in June.

The President’s initial plan had, however, sparked negative sentiments with global ratings agency Moody’s equating it to a default.

Kenya will be watched closely with a new wave of sovereign debt defaults and restructurings underway across the world.

Early December, Central Bank of Kenya Governor Kamau Thugge revealed the county had suffered a setback after receiving only part of the expected proceeds to conduct the Eurobond buyback from the Trade Development Bank. The December payment averted disastrous economic consequences caused by a default, said analysts.

Burning midnight oil

Kenya Kwanza administration officials have been burning the midnight oil seeking to avoid a default on the Eurobond debt - an unprecedented move for a country that has never before defaulted on debt, which would have far-reaching and long-lasting implications.

In the event of a default, credit rating agencies would further downgrade the country. A default would also impact Kenya’s ability to borrow in the international markets in future, as global lenders would demand higher interest rates.

This is comparable to an individual’s credit score, affecting how likely it is for a bank to grant them a loan.

For a country, it is a situation that can take decades to recover from. The decline in investor confidence, limited credit availability and higher borrowing costs can significantly impact business investment, consumer spending and overall economic activity.

Additionally, budget constraints may lead to an increase in the unemployment rate, a decrease in government revenue and a reduction in essential public services.

This economic decline has the potential to trigger a cycle of slower growth, increased debt payments and financial strain.

Defaulting on a loan can exacerbate social injustices and financial problems, which in turn can ignite protests and other forms of political unrest.

Government-imposed austerity measures such as budget cuts, reduced public services and higher taxes are often the consequence of a default.

Kenya will be in the spotlight on its repayment plan at a time when Ethiopia recently became Africa’s third default in as many years after it failed to make a $33 million “coupon” payment on its only international government bond.

Azimio leader Raila recently announced the return of street protests popularly known as maandamano to agitate for lowering of the cost of living in 2024.

Businesses and investors took a hit running into billions of shillings last year following mass protests called by Azimio.