Kenyan unrest shows emerging market debt is a tightrope walk
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Kenyan unrest shows emerging market debt is a tightrope walk

Kenyan unrest shows emerging market debt is a tightrope walk

Citizens and investors in emerging markets should all want the same thing: a thriving economy. In practice, their interests and desires are all too often at odds.

The recent riots in Kenya over proposed tax increases are a prime example of the narrow and rocky path governments in developing countries must tread.

Recently, Kenya, a country of 52 million people whose gross public debt is expected to reach $98 billion this year, or 73% of GDP, was seen by emerging-market bond investors as being at risk of default.

The government wanted to raise an additional 346.7 billion Kenyan shillings ($2.7 billion) through a new finance bill.

But that was met with protests that turned violent. Protesters set parliament on fire and dozens of people were killed, some by security forces. Then President William Ruto caved and put some of the tax increases on the table.

Given that they included a 16 percent tax on bread, as well as taxes on cars, mobile payment services and cooking oil, it is not surprising that they were unpopular.

However, the crisis forced the Kenyan government to look for money elsewhere.

Worse still, the Finance Bill formed the basis for reforms demanded by the International Monetary Fund as part of its loan programme for Kenya.

Before the protests, the IMF said the draft finance bill showed Kenya was taking “decisive” steps towards fiscal consolidation.

Countries benefiting from IMF programs must follow the Fund’s rules to receive any of the funding — it’s money with certain restrictions.

Many other African countries benefit from concessional financing such as that provided by the IMF.

While no two countries are the same, others will be watching Kenya’s struggles with concern. They will be forced to make reforms that could expose them to similar hostility.

Kenyans weren’t just angry and stressed about the threat to their livelihoods posed by the tax bill, they were also annoyed that 59% of government revenues, from June 2023, were to be used to service the debt.

About 53% of the debt is external, leading critics to accuse the government of favouring foreign investors over its own citizens.

Unfortunately, despite the understandable complaints of the public, Ruto’s attempt to appease them will now worry the IMF and investors.

Yields on Kenyan government bonds have risen since the protests. A $1.5 billion, 9.75% 2031 bond that Kenya issued in February to help pay off a bond due in June was yielding 10.6% on Tuesday, according to Tradeweb, from about 9.75% in early June.

Kenya will have to find other ways to plug the budget hole.

The bank has already signaled that it may need to raise borrowing significantly — and that is not something the IMF or investors want to hear, given how precarious its debt position has been over the past few years.

Or it could cut spending. Austerity is always unpopular with voters, and developing economies like Kenya need to spend money to keep growing. As one economist has noted, it is hard for EM governments to find any spending they can actually cut.

The watered-down version of the finance bill may still not go down well with Kenyans and may not be good enough for the IMF.

Kenya is in trouble. There are no good options.

This situation shows the difficult path that governments in many developing countries are taking in their search for stability and growth.

IMF money can be a significant source of financing, helping countries pay for development and avoid debt problems. Private creditors, such as bondholders, are another fruitful, if more expensive, avenue.

Keeping these lenders on our side is crucial to ensuring the economy has the best chance of success.

But when it requires painful sacrifices, no government can tolerate riots and violence, especially in a democracy where it can be recalled at the next election.

Balancing the needs and desires of the population and foreign lenders is a difficult task. Erring one way or the other can have dire, real-world consequences.

It is impossible to keep either constituency happy. The best that can be hoped for is to keep both from openly revolting.