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With new Sh255bn loan on the way, who will ‘stop’ IMF?

Kenyans have been signing an online petition asking the International Monetary Fund (IMF) not to give the government any more loans.

The social media rage castigating the international lender was triggered after the IMF on Friday announced it had approved a new three-year loan for Kenya valued at $2.34 billion (Sh255 billion) for the Covid-19 pandemic response and to address the country’s debt vulnerabilities.

But is the attempt to ‘stop’ the IMF from ‘giving’ Kenya loans barking up the wrong tree?

Why governments borrow?

Governments borrow loans because they spend more than they can raise in taxes. The national budget is usually more expensive than the revenues raised, creating a deficit.

To meet the budget deficit, governments can borrow loans or raise taxes. However, raising taxes is a political hot potato.

Have taxes ever been enough to meet the budget?

Kenya’s first balanced budget where revenues met expenditure was delivered by former Minister of Finance David Mwiraria during the 2003/2004 financial year. The late Mwiraria created a system where a project would only be undertaken only if it had secured ring-fenced funding.

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Why has Kenya borrowed so much?

Under President Uhuru Kenyatta’s government, the size of the budget has been increasing while tax collected by the Kenya Revenue Authority has stagnated resulting in a deficit that has forced the country to borrow more and more.

The Parliamentary Budget Office – which advises lawmakers on financial and budgetary matters – has already warned against unrealistic budgets.

“The actual fiscal deficit including grants averaged 7.6 per cent in the period FY 2013/14 to FY 2019/20 compared to an average target of 4.0 per cent during the same period, representing a 3.6 per cent deviation. This captures the inability of realistically forecasting future revenues and fiscal deficits and implies that the decisions in the overall budget are not being guided by reality but rather by the need to indicate a favourable fiscal position,” said the Parliamentary Budget Office.

The accumulation of debt, including from international capital markets (Eurobond), has seen Kenya commit more than half of taxes to paying loans in recent years.

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Further, the cost of servicing public debt has gone up in tandem with the ever-growing budget deficit, which has made it necessary for the government to increase its borrowing every year.

The government has defended increased borrowing, arguing debt has helped build new roads, a modern railway, bridges and electricity plants and transmission lines.

Who can stop the government from borrowing?

The budgets are prepared by the National Treasury with input from citizens and are approved by Parliament.

So MPs, who are the citizens’ representatives, have a mandate to check the borrowing spree by approving realistic budgets and putting Treasury to task on where it intends to get money to fund the expenditure.

Under the new Public Finance Management Act, MPs are also required to approve a budget ceiling – essentially drawing the line on how much the government can borrow.

Why is Kenya borrowing from the IMF and is it bad for the country?

The government’s appetite for commercial loans such as Eurobonds and syndicated loans between 2014 and 2019 has resulted in a sharp rise in external interest payments in recent years.

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This has forced the government to once again rely on semi-concessional, project and programme loans, shunning commercial loans that have been deemed expensive given the current state of government finances.

Is IMF loan bad? No and yes.

The IMF loan is like a bailout. Kenya has borrowed heavily from Eurobonds and syndicated loans which are expensive. The IMF and World Bank loans, on the other hand, are cheaper, long-term, and have a grace period where Kenya would not be required to pay as it clears the bad expensive loans. The multilateral loans are helping re-balance the books.

But the IMF loans also come with conditions for the government to discipline itself and raise more taxes, cut expenditure and narrow the deficit. As such, the government will have to raise taxes and reduce subsidies on things like fuel, putting a strain on households’ pockets. In addition, public servants will now contribute to their pensions and loss-making government businesses will be privatised or merged or closed, which will impact jobs as well as the economy.

About Whispers from the North

Whispers from the North is an online platform that appreciates the ecological, cultural and socio-economic diversities of Northern Kenya. We also acknowledge that the lives of the communities of northern Kenya has been shaped by a number of intrinsic and extrinsic factors which have led to complex challenge that calls for a multifaceted approach.

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