Kenya has experienced a remarkable transformation in its democratic governance. This change has been inspired by its dynamic, vibrant, fearless, though frustrated, youth population. In June 2024, Kenya witnessed a wave of demonstrations against the Finance Bill 2024 , a proposed law that sought to introduce new taxes and levies.

Many viewed the proposed tax measures as excessive, extortionate, ill-timed, not aligned to the needs of citizens, and punitive - particularly given the high cost of living, reduced income and diminished availability of quality public services. Members of the public organised numerous protests across the country, urging the government to withdraw the Bill. Consequently, the President declined to assent to the Bill, returning it to Parliament with a recommendation that all clauses be deleted.

The dynamics surrounding the Finance Bill are complex and multifaceted. The narrative from the Government has been that Kenya needs to repay its high level of debt. On the other hand, critics of the Government have argued that high taxation (particularly in the haphazard manner the Finance Bill aimed to achieve this), does not lead to a nation’s prosperity but only promotes inequality, deepens poverty and undermines citizens' social welfare.

Although public debt is often necessary and central to economic progress and should be a tool to spur development, it has left many governments with unsustainable debt levels and at risk of debt distress. Regular borrowing to finance budget deficits without effective investment in productive sectors of the economy leads to a massive debt burden and limited economic growth/development. Africa’s economic development has been stunted by several challenges, including growing debt, high interest rates, weakening currencies, high levels of unemployment, geopolitical conflicts, climate change, worsening inequality, shrinking tax revenue and deteriorating quality of essential public services against an old and unfavourable global financial architecture. 

At the start of 2024, at least nine African countries were in severe debt crisis, 15 at high risk of distress, and 14 others at moderate risk. Several countries, such as Chad, Ethiopia, Ghana, Niger, and Zambia, have already defaulted on their debts. According to the African Development Bank, Africa’s total external debt, which stood at $1.12 trillion in 2022, had risen to $1.152 trillion by the end of 2023. Further, Africa will pay $163 billion toward debt servicing in 2024, an increase from $61 billion in 2010. IMF recognizes that high debt servicing costs are a growing challenge for low-income countries. And that further, financing pressures due to relatively high-interest payments and the pace at which low-income countries need to repay debt are straining budgets.

Many more African countries, including Kenya, face escalating public debt trends. According to the 2024 Medium Term Debt Management Strategy (MTDS) - at the end of June 2023, Kenya’s debt levels reached 70.8% of the GDP while total debt service as a percentage of revenue was 58.8%. With Kenya being characterized at high risk of debt distress, it is evident that debt is expending a significant portion of the country’s revenue. The unsustainable public debt is also slowing growth in Kenya as the government, instead of spending on essential public services, is using most of its resources to repay debt. Coupled with poor returns on investment, public debt is neither improving public services, promoting development, reducing inequalities nor inspiring a greater quality of life for Kenyans.

Many internal and external factors drive and contribute to the accumulation of unsustainable debt. Internally; poor debt governance structures, weak public finance management systems, incoherent and porous tax and revenue collection regimes glaringly play out. Others such as ineffective debt management systems, poor parliamentary oversight, weak fiscal discipline, excessive wastage by government and increasing developmental and infrastructure demands heavily impact our debt governance structures and revenue collection.

Externally, Africa's debt has been rising due to several factors - including the global financial crisis of 2008, the COVID-19 pandemic, growing appetite for financing from bilateral lenders and loan programmes that impose adverse macroeconomic and fiscal policies (such as fiscal austerity) on borrowing countries. 

Increasing taxes while simultaneously increasing debt poses a double tragedy for taxpayers.  Raising taxes solely to repay debt while neglecting social services is neither optimal nor beneficial for socioeconomic development. Considering that debt transparency is low, it has become increasingly difficult to observe any demonstrable positive impact from the accumulated debt, and is not delivering any tangible benefits to ordinary Kenyans. Worse still, despite increasing taxes and accumulating significant debt, public services in Kenya are reported to be deteriorating in terms of quality, accessibility and availability. A recent study by the Kenya Institute for Public Policy Research and Analysis (KIPPRA) in its Kenya Economic Report (2024), reveals that economic growth performance in key public and social services declined between 2018-2023.

Studies have also found that government spending on social sectors such as education and health raises labour productivity and contributes to accelerated economic growth. However, the analysis by KIPPRA has further shown that performance in the social sectors such as education steeply dropped from 22.8% in 2021 to 5.1% in 2022 and 3.2% in 2023. The health sector also recorded a similar decline - registering 8.9% in 2021 and sharply dropping to 3.4% in 2022, and 4.9% in 2023. 

While there was a slight increase in its later performance, the current trajectory is lower than the one recorded between 2018 (5.4%), 2019 (5.5%) and 2020 (5.6%). Shrinking budget allocations to healthcare could be a contributor to the poor performance. This is manifested in Kenya’s significantly underfunded healthcare budget which falls short of the global minimum standards of 15% outlined in both the Abuja Declaration and WHO guidelines. This is despite evidence that investing in pro-public sectors such education, and healthcare drives human-capital development, accelerates economic development, reduces poverty and bridges inequalities. Taxes should enable governments to provide public goods, services, and programs. It undermines the purpose of taxation if people must rely on costly private facilities to access basic services like healthcare, education, and transportation.

It is widely recognized that the international financial architecture is colonial and does not encourage, foster or spur any meaningful development in Africa. Despite decades of being present in Africa and meting out highly restrictive loan programmes, most African countries have not experienced any realistic improvement in their economies. At the same time, industrialization, which is needed to unlock Africa’s economic transformation, does not feature as a priority for international financial institutions. The existing debt repayment mechanisms, which comprise high interest rates, force countries into deep austerities. Kenya and Africa need meaningful debt relief, including debt cancellation, to reduce fiscal pressures. 

African countries must now overcome the debt crisis by advocating for debt cancellation if they are to attain any significant economic development and prosperity. Concessional financing is not at the scale and intensity needed to overcome or overtake debt repayment. Governments are increasingly imposing regressive taxes on their people to service the the burgeoning debts, worsening an already dire economic situation. 

In overall, taxes and public debt have not led to better quality of public services or improved quality of life. No country has ever taxed its ciizens to prosperity. While unsustainable public debt is not desirable, a regressive tax regime to meet revenue targets as per the IMF conditionalities to repay debt is not optimal either (it is only a classic case of robbing Peter to pay Paul).  

 
 

 

“high debt servicing costs are a growing challenge for low-income countries. Further, financing pressures due to relatively high-interest payments and the pace at which low-income countries need to repay debt are straining budgets.”

IMF
Blog topic
Tax Justice