Kenyan Protests, Part Three: Thoughts on potential pathways forward

This is the third of a three part series on the current economic and political crises in Kenya. Part One addresses the political foundations of the crisis. Part Two will tackles the real economic challenges that the current administration inherited, and arguably made worse. Finally, Part Three concludes with some thoughts on the set of bad options on the table for the administration.

I: Three difficult options

There are no easy policy options out of Kenya’s fiscal crisis. There’s a decade-long “refinancing wall” ahead, with debt servicing already gobbling up about half of all revenues. Since access to and misappropriation of state resources is the glue that binds his political coalition, President William Ruto is unwilling to facilitate public finance management (PFM) reforms in the direction of better service delivery and less wastage/corruption. Talk of a national dialogue and the impending “unity” Cabinet that includes opposition politicians are tactics to buy time and political cover, and not good faith responses to protesters’ demands.

Ruto’s preferred course of action — riding out the protests and maintaining the status quo — has been revealed by his administration’s behavior so far. Police brutality has so far resulted in more than 53 deaths and dozens of abductions. Bizarrely, Ruto has been searching for scapegoats (and dabbling in increasingly incoherent misinformation campaigns) rather than confronting the well-known root causes of public anger at his administration.

This is one reason why nationwide protests are unlikely to abate any time soon, despite Ruto’s decision to veto the 2024 Finance Bill and fire his Cabinet.

The other reason the protests are likely to persist is that far-reaching public sector reforms and improvements in the “real”’economy will take time. In addition, the protesters’ demands come with an inherent contradiction: Kenyans want more investments in higher-quality public services, but don’t trust the government (and Ruto) enough to tolerate new tax increases. To be blunt, Ruto is not going to quickly figure out how to maintain or increase public spending levels, improve the quality of service delivery, and reduce corruption/waste, all without increasing taxes or defaulting on Kenya’s debt.

Under the circumstances, I see three potential pathways forward. Below I least them in decreasing order of likelihood.

1) Extend the IMF program when it expires in early 2025: This is most likely Ruto’s preferred option and would be the least reformist path. It would allow him to stabilize Kenya’s deficit trajectory, keep accessing credit markets (even if at unconscionably high rates), and kick several cans down the road as he prepares for the 2027 election. As argued in Part Two of this series, the incentives in the current program are stacked against real reforms (not to mention the program’s several technical shortfalls).

This option also comes with enormous risk. Without appreciable improvements in service delivery and economic growth, factors like political instability, widespread tax evasion, increased informality, and slower growth will weigh heavily against the government’s ability to meet the dozens of IMF’s conditionalities under the current program.

2) Debt restructuring: This would be a very costly nuclear option. Under a restructuring process, Kenya would negotiate with its external creditors to alter the terms of its debt (total amount owed and repayment timeline) in the direction of sustainability. Taking this route would be messy and take time (the Common Framework isn’t all that it was touted to be). Kenya’s reputation in global credit markets would take a hit, with potential significant ramifications for the domestic financial sector (and “real” economy as well).

A potential upside is that debt restructuring would be the painful and embarrassing medicine that Kenyan elites need to reform PFM practices and improve service delivery. It would also force a rethink of Kenya’s macroeconomic future not just in terms of accounting gimmicks around debt sustainability, but a broader discussion about growth and broad-based development.

3) Getting a bilateral bailout: This would be an unorthodox and therefore very unlikely option. Kenya has recently emerged as an important geopolitical player from the perspectives of Beijing, Washington, Abu Dhabi. As part of a growth-focused agenda, there is a world in which Nairobi would be able to get a bailout (as a grant or concessional loan) from either China, the United States of America, or the United Arab Emirates. Spread over multiple years, such a bailout would enable government policy to focus on growth and the ability to comfortably service debt. This approach could provide a framework through which high-income countries (or multilateral institutions) could support high-ambition developing countries with elites committed to broad-based growth and poverty eradication.

The biggest obstacle to this option is feasibility. China, the U.S., and the U.A.E. are not dying to give Kenya billions over the next decade. Plus even if that were to happen, Kenyans would be highly skeptical of the deal, not least because of Ruto’s trust deficit and the fear that he would readily mortgage away the country for trinkets.

II: Restoring the fiscal pact

Given that the IMF program route is the most likely path moving forward, it is important to discuss how Ruto could right the ship and repair Kenya’s tattered fiscal pact. The first and most important task should be to restore trust in the Kenyan state. Second, Ruto should monomaniacally focus on economic growth and effective service delivery, and mobilize the Kenyan public towards these ends.

1) To restore public trust, Ruto must understand that the old playbook of intra-elite ethnic coalition politics will not bail him out:

There are no good politicians, just optimally constrained individuals. I say this because the current protests have been tinged with very targeted animosity towards President William Ruto on account of his career history and political style since he was elected. All that is fair. However, everyone involved mustn’t forget that Kenya is much bigger than Ruto.

It will be near impossible for Ruto to regain the public’s trust. Yet there are several things he can do to restore trust in the Kenyan state. First, in appointing a new Cabinet, he should focus on service delivery and prioritize quick wins to demonstrate effectiveness. Not ethnic politics. Not cosmetic reforms that have little bearing on Kenya’s lived realities. Not the creation of prebends. Now is the time to ensure that the school and hospital systems work, that agricultural extension services work, that the incidence power and water rationing is rare, that people feel secure, and that government policy actively promo