May 30, 2023

Tumbler Ridge News

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Today the economy – default threatens Kenya

So a Kenyan weekly newspaper headlined this week, “ A bankrupt government “. In Ukraine, poor people are reeling from covid, drought and war. It is the first time in sixty years of independence that the salaries of the country’s civil servants have been cut. The same fate for ministers. And regions, they are waiting for transfers from the state from December. Two civil servant unions are working to demand payment of arrears. have called for a cease-and-desist strike, but President William Ruto is indecisive: he has refused to borrow to cover current spending that would further worsen the state’s debt.

Is the new president elected in September responsible for this bankruptcy?

The main accused is his predecessor. Uhuru Kenyatta He spent a lot, so he borrowed a lot to invest in infrastructure. Especially the famous train connecting Nairobi to Monbasa was built with money and resources from China. A site where costs are overflowing due to corruption. Michael Sage, an economist at the University of Nairobi, said the former president increased tax gifts to power cronies, which undermined tax collection. Kenya’s government debt is now 62% of GDP. Repayment of this debt, which the current president considers “monumental,” now swallows up half of public revenue.

This high level of debt is not new

It has accumulated over a dozen years. Kenya is still paying the price for the political unrest of 2007-2008, when a presidential election escalated into violence, plunging the country into one of the worst crises in its history. Since then, Kenya has continued to offer affordable credit. Until it was kicked out of international markets in 2022, the situation suddenly changed for many developing countries. Rising US rates tightened credit conditions and pushed the local currency down. As 20% of Kenyan debt is denominated in dollars, repayment costs have increased. Inflation caused by the war in Ukraine is further deepening foreign exchange reserves. The perfect combination to trigger a liquidity crunch.

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And in the process, is the debt crisis inevitable?

This credit crunch has already begun according to Michael Sage. It penetrates slowly and steadily. Kenya has already renegotiated part of its domestic debt but in international markets, there is no problem in repaying the debt. To maintain its reputation as a reliable payer, the government wants to sacrifice civil servants to honor the next big debt maturities. In a sense, he is carrying out forest restoration on the backs of the citizens.

Will Kenya soon suffer the fate of Zambia, Ghana or Sri Lanka?

Unlike these countries that have experienced painful defaults, Kenya, recalls Michael Seke, is under IMF assistance from May 2021. This should prevent cracking. He expects $1.2 billion in new IMF financing in the coming months. (The World Bank is set to provide a billion in budget support in May). Nevertheless, the economist says, at one point or another the government will have to restructure its debt, which is an essential condition for reviving growth. For this, it is necessary to find common ground with its main bilateral creditor, China. William was an ally who criticized Ruto during his campaign, but has now denounced agreeing with him.