KHAYA SITHOLE: IMF trade-offs and social discontent weigh on Kenya

Over the past few days citizens of Kenya have taken to the streets to express their discontent about the proposed tax increases their government recently tabled.

The tax increases are envisaged to balance the national balance sheet. Like many other nations, Kenya finds its commitments underfunded since its resources are not keeping up. The natural solution for most nations is to borrow from multiple sources, including multilateral institutions such as the IMF.

In Kenya’s case its latest conversations with the IMF have resulted in a recommendation that it either generate more revenues or spend less. This always sounds simple in theory, but in reality it is notoriously difficult to apply. When countries have a fragile economy characterised by high unemployment and weak growth, they inevitably find that the social wage is proportionately high.

Within the social wage dimension are the type of public services that many consider non-negotiable, ranging from healthcare to education and social services. When more citizens fail to get on the economic bandwagon, the use of public services is higher and the state needs to spend more. 

The spending itself requires the mobilisation of resources that include taxes and borrowings. In a cruel twist of economic fate, countries with weak economies reach a tax collection ceiling far faster than they desire, and the reliance on borrowing increases.

Multilateral institutions that stand ready to provide such funds unfortunately come with conditions that are primarily based on the need to ensure borrowed funds are eventually repaid. Given their status as “the ones you go to when all else has failed”, their bargaining power in relation to setting conditions is much stronger than most countries would prefer.

It is also notable that the outsize influence of multilateral lenders on the entire financial ecosystem means countries are loath to breach conditions imposed by such lenders, not only because defaults are generally undesirable but because the capacity to find alternative lenders after a default is even more challenging. 

Over the years various deliberations about the oversized influence of such lenders and the consistency and fairness of conditions they impose have been initiated, without much change to the nature of relationships between countries that end up seeking assistance. Ideas that have been initiated include adding more players to the multilateral lender ecosystem such as the Brics bank.  

Regrettably, the sum of resources such institutions have does not solve the underlying problem of how to get the borrowers on the pathway towards permanent financial sustainability. Addressing the fundamental building blocks of an economy is a long-term project that should define how the economy’s size will be expanded in a manner that addresses the root causes of the problem.

With a larger and more inclusive economy, the prospects of raising the tax collection ceiling and funding the social wage are better. With greater inclusion comes a lower reliance on public services and resources, which frees up space for governments to deepen and widen the social assistance to those who need it most.  

In the absence of this road map the type of social discontent being witnessed in Kenya becomes inevitable. When a country seeks to solve this by squeezing more taxes from an already strained population, the social discontent mutates into the type of unrest Kenya is now dealing with.

If the government abandons its proposed taxes, it will eventually have to cut public spending, thereby deepening the plight of those already under strain. If it presses ahead, it starts the clock towards its own electoral decimation.

Finding a solution to an issue that is old in nature requires new ways of thinking that most governments still struggle to muster. The lesson for other countries already bedevilled by the same economic fundamentals is to avoid letting it simmer for too long, as the response of citizens in an age of new ways of mobilisation is increasingly unpredictable. 

• Sithole (@coruscakhaya) is an accountant, academic and activist.