How the IMF’s meddling upset Ruto’s ‘soft life’ pledges

Despite remarks that IMF doesn’t make decisions for Kenyans, the disputed Finance Act and the other economic measures, say the opposite

By NLM Writer

During the campaigns leading to the 2022 General Election, then-candidate and now-President William Ruto painted a rosy picture of the life Kenyans would have if he were elected. The cost of living was to go down as soon he took office. Kenyans would have money in their pockets, and fuel would be affordable. On the latter, Mr Ruto wondered why fuel prices in Kenya were higher than in Uganda and Tanzania. That, he promised, would be corrected.

Almost a year later and none of these things have happened. Instead of affordability, the Finance Act, which has been challenged in court, added taxes on fuel and sought to introduce the housing levy. Further, the Kenya Kwanza government has proposed higher rates for National Health Insurance Fund (NHIF) and National Social Security Fund (NSSF).

Behind all these is the International Monetary Fund (IMF), which has overtly been calling most of the shots but taking none of the blame that the Kenya Kwanza administration has experienced – violent street demos, lampooning by the media for lacking empathy and insensitivity to the suffering of millions of Kenyans.

The Bretton Woods institution has backed the Finance Act and the 2023/24 budget because they are critical to reducing the country’s debt vulnerability.

“The approval of the 2023/24 fiscal year Budget and Finance Act 2023 are crucial steps to support ongoing consolidation efforts to reduce debt vulnerabilities while protecting social and development expenditures,” said Antoinette Sayeh, deputy managing director and acting chair of the IMF.

The IMF has not hidden that they pushed the decision to increase the VAT on fuel. In a recent interview with business newspaper Business Daily, IMF Mission Chief to Kenya Haimanot Teferra defended the increase in VAT. “The standard rate of VAT in Kenya is 16 percent, and therefore the change is adjusting to that,” she said.

Following the VAT increase, the government expects to collect an additional Sh50 billion in revenue, which will help narrow the budget deficit to 4.4 percent of gross domestic product (GDP). Kenya had promised the IMF to narrow the deficit by that margin.

For a long time, including during President Uhuru Kenyatta’s time as president, IMF has advocated for higher taxes because Kenya needs to finance the bulk of its budget with its revenue and less of debts which have ballooned over the last 10 years.

President Kenyatta resisted some of these IMF conditionalities and, for example, persisted with the fuel subsidies that the IMF vehemently opposed. These conditionalities for continued IMF support were passed on to the Kenya Kwanza government, which has been too willing to roll over and implement the same through higher taxes and new levies like the housing levy. The recent budget aligns with IMF calls to see Kenya shrink its deficits – through tax hikes and spending cuts. Yet this exposes tens of millions of Kenyans to tough economic situations.

President Ruto has said that IMF doesn’t make decisions for Kenyans, but the disputed Finance Act and the other economic measures his administration has instituted say the opposite: IMF’s hand in current citizens’ pain is overt and continues to be extended beyond the imagination of Kenyans.

The IMF conditionalities mirrored the Structural Adjustment Programmes (SAPs) of the early 1990s when the multilateral lender and the World Bank forced then President Daniel Moi’s government to accept steep economic policy changes and retrenchment of civil servants. The policies severely hurt families as prices of essential commodities shot up overnight. At the same time, thousands of civil servants were also being thrown into the streets with no means to care for their families.

As in the 1990s, the IMF has been pushing for tax hikes, spending cuts, restructuring of state-owned enterprises and Central Bank Rate (CBR) hikes, thereby increasing interest rates on loans.

Among the first acts of President Ruto after he took office was to implement steep spending cuts, which saw many departments and agencies left with just funds for salaries, rent and utilities. All programme and development budgets were drastically cut. For nearly eight months, the government was only paying salaries and utilities. This looks to be continuing as the battle over the Finance Act remains before the courts.

In the meantime, as per the IMF conditions, Kenya Power and national carrier Kenya Airways have to undergo a restructuring. They are among a dozen state corporations undertaking restructuring because of what IMF says is bloated payrolls. That can only mean one thing: retrenchments which would further hurt the affected staff.

In response to the Finance Act, the opposition coalition Azimio la Umoja has held countrywide demonstrations, some of which have turned violent and disrupted the economy. But amidst these protests and anger by Kenyans burdened by higher taxes and galloping food prices, IMF has told President Ruto to stick to its taxation measures and not be moved by the street protests while classifying the political risks as ‘medium’. These are contained in IMF’s Risk Assessment Matrix detailed in the Country Report for July 2023.

“Unrest could reemerge in connection with protests against the higher cost of living, need to raise more taxes and electoral process supported by the political opposition,” IMF acknowledges in the assessment but urges the Kenya Kwanza administration to ignore and “Remain committed to reforms under the programme.”

For President Ruto, the difficult task is to balance fulfilling his campaign promises of an affordable life for ‘hustlers’ while also pleasing the IMF and World Bank. Thus far, the latter seems to be carrying the day as the conditions they set for the government were at the core of the 2023/24 budget and Finance Act.

For the President, the bigger question is whether he was aware of the IMF conditionalities during the campaigns even as he made the promises to hustlers or they ambushed him after he assumed office.