President William Ruto warns of significant repercussions following the failure of an $80 billion debt relief effort.

The ballooning debt in Kenya, East Africa's economic hub, is expected to grow even further after deadly protests led to the rejection of a finance bill that President William Ruto said was necessary to raise revenue. Ruto now warns that the rejection "will have huge consequences."

Facing public calls to resign, Ruto has announced that the government will slash a $2.7 billion budget deficit by half and borrow the remainder, without specifying the source of the borrowing.

In response to public outrage over government bloat and the luxurious lifestyles of senior officials, Ruto has promised funding cuts within his own office and said funding would cease for the offices of the first lady, the "second lady" (the vice president's wife), and the wife of the prime Cabinet secretary. Nearly four dozen state enterprises with overlapping roles will be closed.

Ruto's popularity has plummeted in his two years in office due to his push to introduce taxes aimed at enabling Kenya to repay its $80 billion public debt, owed to lenders including the World Bank, the International Monetary Fund (IMF), and China. This public debt accounts for about 70% of Kenya's gross domestic product, the highest in 20 years.

The critical question is how Ruto's administration will manage to pay off the debt without further angering millions of struggling Kenyans and without slowing down the economy, which grew by 5.6% in 2023.

Economist Mbui Wagacha, a former adviser to previous President Uhuru Kenyatta, suggested that Kenya needs a professional budget and management body like the U.S. Office of Management and Budget. Currently, Kenya's treasury makes budget estimates and forwards them to the parliamentary finance committee, which creates finance bills.

“Parliament has abdicated its mandate on public finances in the Constitution and it’s looking after its own interests,” Wagacha said in an interview.

He warned that further borrowing could be “disastrous” for Kenya and proposed using diplomacy to attract investment and restructuring the debt to persuade creditors to write off some of it.

Economist Ken Gichinga concurred that government borrowing would slow down Kenya's economy. Businesses have not yet fully recovered from the impacts of the COVID-19 pandemic and the war in Ukraine, he noted.

“When the government borrows more, interest rates go up. And when interest rates go up, businesses slow down, the economy slows down, due to the high cost of repayment,” Gichinga said.

President Ruto has advocated for self-sustainability, arguing that the country should raise more revenue instead of borrowing. “If we are a serious state, we must be able to enhance our taxes,” he stated in May.

However, Kenyans have rejected attempts to raise taxes as they struggle with rising prices on basic goods, even storming parliament during the recent protests.

Last week, days after announcing he would not sign the finance bill he once championed, Ruto said he had worked hard “to pull Kenya out of a debt trap” and that significant consequences were imminent.

Wagacha stressed that economic growth must precede the government's increased revenue targets and tax collection.

“You create an expanded economy with employment and with investment, and people have money in their pockets. It’s much easier for them to hear about your request for taxes,” he said.

He suggested making access to low-interest credit easier for businesses in key sectors like tourism and agriculture, arguing that small businesses hold the key to Kenya’s economic growth as they tend to employ many people. This could also help address high youth unemployment.

Gichinga added that the government should incentivize businesses to create jobs with low taxation and lower interest rates: “At the end of the day, we need a jobs-centered economic policy. That’s what we’ve been lacking."

The IMF, which had suggested some of the controversial tax changes, has been a target of public dissatisfaction in Kenya. Some protesters carried posters with messages such as “IMF stop colonialism.”

In a statement late last month, the IMF said it was monitoring the situation in Kenya, adding that its main goal was to help the country "overcome the difficult economic challenges it faces and improve its economic prospects and the well-being of its people.”

Gichinga argued that the IMF needs to do more for Kenya beyond focusing on debt sustainability and become a “strong development partner."