Kenyan President’s Signature Fiscal Policy Faces Court Test

Kenyan President William Ruto’s fiscal policy is on the line as a judicial panel begins hearing a litany of petitions seeking to block his signature tax hikes — unpopular domestically but key, the government argues, to avoiding debt distress.

(Bloomberg) — Kenyan President William Ruto’s fiscal policy is on the line as a judicial panel begins hearing a litany of petitions seeking to block his signature tax hikes — unpopular domestically but key, the government argues, to avoiding debt distress.

Fighting to keep a raft of levies including doubling value-added tax on fuel is one of the many battles Ruto faces a year into his tenure leading East Africa’s most-developed economy. The others include burgeoning debt, the rising cost of living, a plunging currency, high unemployment and a $2 billion eurobond maturing in June.

Since Ruto took office last September, he’s faced mass protests organized by the opposition — which is seeking to overturn the election — built on widespread frustration with the economy. 

“The unholy trinity of high voter expectations, necessary fiscal prudence and an inflationary environment puts Ruto in an unenviable position,” said Eurasia Group analyst Connor Vasey.

The president is showing no signs of letting up.

On Tuesday, on the eve of the court battle over his new taxes, the Treasury announced a raft of new proposed levies it says will help boost Kenya’s tax-to-gross-domestic-product ratio to 25% by 2030. Government revenue fell to 14.1% of GDP in the fiscal year that ended in June, down from 18.1% a decade ago.

Eurobond Buyback

Ruto isn’t only facing resistance on the streets — the market is also pushing back on his plan to buy back half of the country’s $2 billion of Eurobonds that mature in 2024 before the end of this year.

S&P Global Ratings in August warned that Kenya’s ratings may be lowered “if we perceive any potential debt-repurchase operations to be akin to a distressed exchange.” Moody’s Investors Service has also cautioned that redeeming the bonds at a price below par value would constitute an economic loss to investors and treated as a default.

The president has slammed the comments as “outright corrupt.”

His criticism may only sour market sentiment further, said Mahesh Kotecha, president at New York-based financial advisory firm Structured Credit International Corp.

“Don’t say you are about to default in public,” he said via email.

Yields on the notes have surged more than 150 basis points so far this month to 16.06% on Tuesday.

Biblical Collector

Ruto’s aggressive efforts to grow revenue has earned him a nickname: Zakayo — Swahili for the biblical tax-collector Zacchaeus.

“The government’s push to increase taxes is not grounded on our realities as a country, which includes the fact that we are currently in a debt crisis,” said Eric Kinaga, programs manager at the Nairobi-based Institute for Social Accountability. “And we are trying to get out of it by overtaxing a small minority of the population, instead of first pursuing measures intended to widen our tax base.”

A mandatory 1.5% housing levy for employees and matched by employers, as well as a five-percentage point increase in personal income tax for the highest income band are among the levies the government says will raise an additional 211 billion shillings ($1.44 billion) in the fiscal year through June 2024.

Debt Service

Nearly a dozen cases have been filed at the High Court challenging the legality of the taxes. Ruto has taken his case on the road.

“For every 10 shillings we collect in taxes, we spend 6 shillings to service debt,” he said at a rally in Meru, 200 kilometers (124 miles) northeast of the capital, Nairobi, on Sunday. “If we continue the path of accumulating debt, we will get to 7 shillings, eight shillings and finally our entire job will be servicing debt.”

Kenya is ranked the ninth-most vulnerable to a debt crisis among 60 developing economies, according to a report by Bloomberg Economics. Public debt stood at 10.2 trillion shillings iin June, breaching a 10 trillion-shilling debt ceiling. The government’s proposal to set the debt anchor at 55% of gross domestic product in present value terms is awaiting lawmakers’ approval.

Read More: AFRICA INSIGHT: Default Wave Won’t Extend Beyond Ghana, Zambia

The cost of servicing public debt is expected to hit a record 1.8 trillion shillings in the current fiscal year, more than half of projected state revenue.

Ugali Index

In May, Ruto’s government signed an extension of an International Monetary Fund program to help reduce debt vulnerability originally signed in February 2021, increasing the package by 45% to $3.52 billion. 

Across the board, Kenya’s economy is under pressure. Unemployment hit 13.9% in the quarter to December 2022, compared with 13.3% in the same period a year earlier. The shilling has hit a series of record lows — currently 146.52 per dollar — and may weaken to 182 by the end of the year, according to Charlie Robertson, head of macro strategy at FIM Partners UK Ltd.

While inflation has slowed down to within the central bank’s 2.5% to 7.5% target range, prices have remained sticky. Higher fuel prices have impacted manufacturing costs, transport and electricity generation.

The high cost of living, including surging prices for ugali — a staple made from corn flour — has given opposition leader Raila Odinga fresh ground to stage anti-government protests challenging Ruto’s presidency.

Opposition Ruckus

The opposition doesn’t have the legislative numbers to force Ruto’s hand on policy, but it can cause enough of a ruckus to make his political life — and life for average Kenyans — difficult.

At least 35 people died in protest-related unrest in July, according to Independent Medico Legal Unit, a Nairobi-based nonprofit that tracks cases of torture and extra-judicial killings. In the same month, the government and opposition agreed to form a panel to hold talks and agree on how to resolve their differences.

Still, Ruto’s second year is shaping up to be just as hard fought as his first.

“This fiscal year, Ruto needed to raise taxes to stay on track,” said Yvonne Mhango, Africa economist at Bloomberg Economics. “This means his second year in office will be characterized by tight monetary and fiscal policy. His popularity will take a knock from high interest rates and a bigger tax burden.

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