With a new Sh255bn loan on the way, who will “stop” the IMF?

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Economy

With a new Sh255bn loan on the way, who will “stop” the IMF?


The build-up of debt, including in international capital markets (Eurobond), has seen Kenya incur more than half of taxes on loan repayments in recent years. ILLUSTRATION | DEPOSIT

Kenyans signed an online petition asking the International Monetary Fund (IMF) to stop lending to the government.

Social media rage lashing out at the international lender was sparked after the IMF announced on Friday it had approved a new three-year loan for Kenya worth $ 2.34 billion (255 billion shillings) for the response to the Covid-19 pandemic and to address the country’s debt vulnerabilities.

But is the attempt to “stop” the IMF from “making” loans to Kenya barking in the wrong tree?

Why do governments borrow?

Governments borrow loans because they spend more than they can collect in taxes. The national budget is generally more expensive than the income generated, which creates a deficit.

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

Have taxes ever been enough to stay on budget?

Kenya’s first balanced budget where revenue met expenditure was presented by former finance minister David Mwiraria in fiscal year 2003/2004. The late Mwiraria created a system in which a project would only be undertaken if it had secured ring-fenced funding.

Why has Kenya borrowed so much?

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

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

“The real budget deficit, including grants, was on average 7.6% between fiscal years 2013/14 and 2019/20, against an average target of 4.0% over the same period, i.e. a gap of 3, 6%. This accounts for the inability to realistically forecast future incomes and budget deficits and implies that decisions in the overall budget are not guided by reality but rather by the need to indicate a favorable budgetary situation ”, a declared the Parliamentary Budget Office.

The build-up of debt, including in international capital markets (Eurobond), has seen Kenya incur more than half of taxes on loan repayments in recent years.

Moreover, the cost of servicing the public debt has increased alongside the ever-growing budget deficit, which has forced the government to increase its borrowing every year.

The government defended the increase in borrowing, arguing that the debt had helped build new roads, a modern railroad, bridges, power plants and transmission lines.

Who can stop the government from borrowing?

Budgets are prepared by the National Treasury with the participation of citizens and are approved by Parliament.

Thus, the deputies, who are the representatives of the citizens, have the mandate to check the borrowing frenzy by approving realistic budgets and putting the Treasury to the task on where it intends to obtain money to finance the loans. expenses.

Under the new PFM law, parliamentarians are also required to approve a budget cap – essentially determining 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 increase in external interest payments in recent years.

This has forced the government to rely again on semi-concessional loans, projects and programs, avoiding commercial loans deemed expensive given the current state of public finances.

Is the IMF loan bad? No and yes.

The IMF loan is like a bailout. Kenya has borrowed heavily from Eurobonds and expensive syndicated loans. IMF and World Bank loans, on the other hand, are cheaper, long term, and have a grace period where Kenya would not have to pay as it offsets costly bad loans. Multilateral loans help rebalance the books.

But IMF loans also come with conditions that allow the government to discipline itself and further raise taxes, cut spending, and reduce the deficit. As such, the government will need to raise taxes and cut subsidies on things like fuel, which are straining the pockets of households. In addition, civil servants will now contribute to their pensions and loss-making public enterprises will be privatized or merged or closed, which will have an impact on jobs as well as on the economy.

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