The cost of living for Kenyans has increased significantly since February, with inflation expected to peak at 7.3% this year, while the food sub-index soared to 15.3% in July. As a result, economic policy is likely to play a significant role in voters’ decisions, especially since the two candidates differ on a key issue: debt management.

Incumbent President Uhuru Kenyatta’s successor, Raila Odinga, intends to continue the large-scale spending on infrastructure projects launched by his rival-turned-patron while boosting social spending with a basic income subsidy of $50 (6,000 kroner) a month to two million poor. families. But he says he will also aim to improve debt repayment terms in a bid to avoid going back to the IMF for future bailouts.

In March, Odinga warned that the rising debt “places Kenya in the group of middle- and low-income developing countries that are now forced to lend to the IMF and implement IMF-supervised austerity programs… Such austerity programs are usually implemented in the sole interest of satisfying repayment of debt at the expense of means of subsistence of the population. We have no choice in the matter.”

In contrast, rival William Ruta wants to increase tax revenue to cover rising debt servicing costs. Last month he ruled out restructuring the national debt if he wins next month’s election, the opposite of what Odinga plans to do.

“I’m not going to and I’m not even going to discuss debt restructuring. We must repay our debt. We have the opportunity to pay off our debt … We will brake the loans.

He launched plans to digitize tax mobilization, which he said would help more than double VAT collection from 3.6% to 8% of GDP.

“We’ll have more resources to repay the debt and we’ll borrow less, which is a double win.”

He described Odinga’s restructuring plans as “indulgent and reckless”. But he unveiled his own ambitious spending plans, including the creation of a $420 million annual “swindler fund” aimed at providing affordable loans to 10 million small and medium-sized businesses.

Complex environment

East Africa’s largest economy is growing in a difficult environment, suffering from the global effects of Russia’s invasion of Ukraine, including food and fuel inflation, the end of the Covid-19 pandemic and rising costs of climate change, including regional droughts.

Despite an unexpected recovery in economic growth, which is forecast to grow by 5.7% in 2022. At the end of July, the Bloomberg Economics agency ranked the country sixth in the ranking of the most vulnerable to the debt crisis in the assessment of 50 developing countries.

The debt level rose to $68.8 billion in 2021, or 62.5% of GDP, from just $37.7 billion, or 34% of GDP, when current President Uhuru Kenyatta was re-elected in 2017. As of 5 August 2022 .banking institutions were the largest holders of domestic debt at 48.3%, followed by pension funds (32.6%) and insurance companies (7.20%).

In terms of external debt, the latest World Bank figures (as of end-2020) show that 63% of Kenya’s bilateral debt is owed to China – about $7 billion – mostly for large-scale infrastructure projects such as Nairobi. The expressway is estimated to cost $668 million and was partially financed by the China Road and Bridge Corporation. The yield on $2 billion of Eurobonds maturing in 2024 rose above 20% for the first time in July, Bloomberg reported.

Kenyatta insisted that modern roads and rail networks would help spur development. But Odinga’s pledge to continue similar levels of infrastructure spending while seeking better debt repayment terms could be difficult.

“Odingo’s pledge to restructure existing debt lacks detail on how this can be achieved and will face strong opposition from the IMF, whose economic reforms are forecast to start easing Kenya’s debt burden by 2024,” says Benjamin Hunter, Verisk Maplecroft analyst. .

“Debt restructuring is playing well in the election because Odinga has promised to invest the money saved in maintenance into social welfare programmes. In practice, however, this plan is likely to fail because Kenya’s mounting debt and difficult economic situation will leave Odinga with limited leverage in any possible negotiations with creditors,” says Hunter.

IMF advice on debt management

Kenya has now signed up to a three-year IMF financing package worth $2.34 billion, which was approved last year to support the country’s program to combat debt vulnerability, the authorities’ response to the Covid-19 pandemic and the global upheaval of the war in Ukraine.

Last month, the Washington-based institution authorized the immediate disbursement of $235.6 million in Special Drawing Rights under a program to support Kenya’s fiscal needs.

The IMF warned that despite a strong economic recovery, downside risks prevailed in the near term, and the fund called on authorities to expand tax collection and maintain tight spending controls.

“Kenya’s economic agenda, supported by the Fund’s Enhanced Financing Facility and the Enhanced Lending Facility, is an important policy pillar for debt sustainability and public confidence,” Antoinette Saye, Deputy Managing Director and Acting Chair, said on July 18.

“Despite a sustained economic recovery, the program remains vulnerable to downside risks, including from more severe disruptions caused by the war in Ukraine, volatile global market conditions and increased food insecurity. In this context, maintaining the authorities’ strong commitment to sound policies and advancing structural reforms remains important to maintaining macroeconomic stability and preserving Kenya’s positive medium-term outlook.”

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