Ruto hustles to dodge a debt trap

For all its economic and governance woes, Kenya seems to be on a better long-term trajectory than South Africa.

Published on 14 July 2023 in ISS Today

By

Peter Fabricius
Consultant, ISS Pretoria

Ten months into his presidency, Kenya’s President William Ruto is battling strong headwinds. He won office as the champion of the ‘hustlers’ – the little guys battling to make ends meet in a country he said was being run for the benefit of the dynastic elite.

Yet those hustlers and just about everyone else are struggling now as Ruto enforces tough austerity measures. These include postponing the payment of public servant wages, steep tax hikes and subsidy cuts to service huge debts and avoid defaults and forced restructuring.

Even though the High Court has thrown out Ruto’s Finance Bill, which included the tough tax increases, two rounds of street protests against the measures have erupted over the past week, with police shooting dead several protesters.  

Higher interest rates and a stronger dollar have made financing options more expensive. Kenya spends about US$10 billion annually on debt repayments to China and other lenders, and has a US$2 billion Eurobond due next year. Debt servicing costs jumped from 59.5% of total state revenue in the 2021-22 fiscal year to 63.5% in 2023-24, says the Financial Times.

It notes that Uhuru Kenyatta, Ruto’s predecessor, borrowed heavily from Beijing and the international financial markets to fund rail, road and port projects. Many of these failed to generate enough to pay the debts. So Ruto is resorting to austerity to remedy Kenyatta’s legacy, one could argue.

Yet John Githongo, publisher of The Elephant and chairman of Transparency International’s International Council, told ISS Today: ‘The unpopular measures were not accompanied by any measures to halt profligacy or graft and conspicuous consumption. There is a deeper angst around governance – economic mismanagement, corruption, fiddling elections, our demography – that is driving the discontent.’

Ruto, previously very domestically focused, has lately been raising his international profile

These problems might help explain why Ruto, previously very domestically focused, has been raising his international profile lately. He was widely considered Africa’s star of French President Emmanuel Macron’s big Paris summit last month on a New Global Financing Pact.

Ruto called for the World Bank and International Monetary Fund to be replaced as the main global lenders as part of an overhaul of the financial system. He said revenues from a worldwide financial carbon tax shouldn’t be paid to the Bretton Woods Institutions, but to a system in which Kenya and other African states had an equal say.

Africa Confidential notes that Ruto has visited every head of government in the Horn of Africa and lobbied Washington, London and Brussels. Kenya secured an Economic Partnership Agreement with the European Union, and pledges of funding and technical support from Germany for geothermal energy. It has negotiated a Just Energy Transition programme, and will host September’s Africa Climate Summit.

Closer to home, Ruto called for a merger of the African Union (AU) chair and AU Commission positions to make the AU more effective. He also deployed his predecessor Uhuru Kenyatta on peace missions in Ethiopia and the eastern Democratic Republic of the Congo.

But if Ruto has generally impressed the West, especially by consistently supporting United Nations (UN) General Assembly resolutions condemning Russia’s invasion of Ukraine, he is also moving more carefully in a polarising world. Recently CNN’s Fareed Zakaria failed to persuade him to personally condemn Russia’s war on air. This caution was perhaps aimed at ensuring continued supplies of Russian fertiliser, a local analyst suggested.

While Ruto has generally impressed the West, he is also moving more carefully in a polarising world

A comparison of Kenya, East Africa’s regional powerhouse, with its Southern African equivalent, South Africa, is instructive. Recently Democratic Alliance leader John Steenhuisen said after a trip to Washington that, ‘Kenya is eating South Africa’s lunch,’ citing all the Kenyan delegations he encountered there.

And this month Michael Power, recently retired global strategist for Ninety One, eulogised Kenya as a shining example for South Africa. He praised Kenya’s dexterity in remaining non-aligned in the Russia-Ukraine war while still voting to condemn Russia’s invasion. This while welcoming Chinese and Indian investment, expanding trade with Russia and allowing US special forces a base in Kenya to repel al-Shabaab.

Power noted that Kenya had been running a +5% GDP annual growth rate for two decades while South Africa managed only 2.4% yearly. South Africa’s GDP, which had been 10.2 times Kenya’s in 2011, was just 3.8 times bigger in 2021. And South Africa’s current unemployment rate was 33% and Kenya’s was 5%. He fully endorsed Tyler Cowen’s assessment in Bloomberg that ‘Kenya Is Poised to Become the “Singapore of Africa”’.

Power attributed Kenya’s success largely to its embrace of the private sector and its balanced and pragmatic approach to the geopolitical divide. He implicitly compared this to South Africa’s continuing suspicion of business and its tilt towards Russia globally.

Kenya has had a +5% GDP annual growth rate for two decades while South Africa managed only 2.4%

Jakkie Cilliers, Head of African Futures and Innovation at the Institute for Security Studies, largely agreed. He noted that Ruto had quickly tackled Kenya’s troubled economic legacy by, for example, reducing fuel subsidies and hiking taxes to cut to the heart of Kenya’s structural problems.

‘Kenyans are inherently optimistic, go-getters. South Africans are waiting for someone to help us and develop us – we complain endlessly. The [African National Congress] is creating a culture of entitlement and dependency. Kenya is a country of entrepreneurs and action – largely because they’ve vigorously embraced a free market culture and have moved beyond the post-colonial blame game.’

However, Kenya still faces deep problems such as corruption and governance deficits. And Power’s comparison of unemployment rates flatters Kenya, says Jacques Nel from Oxford Economics Africa. Kenya considers subsistence farming a job, and many Kenyans live in rural areas. Kevin Lings, Stanlib’s Chief Economist, agrees, noting that Kenya’s farm employment accounts for over 30% of total employment versus around 5.5% in South Africa. He says ‘Kenya also seems to adopt a lenient approach to classifying someone as employed.’

Nevertheless, Kenya seems inherently more dynamic. And if that quite dramatic convergence in the economic growth of the two countries' economies over the past decade continues at the same pace, South Africa could be overtaken sooner than later.

Peter Fabricius, Consultant, ISS Pretoria

Image: © State House Kenya

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