High cost of living, debt to cut short Ruto's honeymoon

Honeymoon for the for new Kenya’s administration members will be cut short by growing list of challenges the country is currently facing.

After being declared winner of the presidential election William Ruto said there was little time for luxury: His administration would hit the ground running after being handed the instruments of power.

This oomph is borne of the huge responsibility ahead for the new government: A severely divided nation and a battered economy.

Economy
Dr Ruto’s campaign was centred on revamping the economy, uplifting the lowly and the neglected, lowering the cost of living within the first 100 days and creating jobs for the youth. Indeed, Kenyans have high expectations of his leadership, if he overcomes the impending legal challenges placed in his path by his rival Raila Odinga who has rejected the result.

But, as many now look up to him to fulfil his campaign promises and make life easier, observers say it will not be easy, given the prevailing economic and political conditions.

The Kenyan economy is in the doldrums, with a heavy debt, high inflation rate, high unemployment rate, and an unstable currency weighing heavily on recovery efforts.

With a debt stock of over $70 billion — about 70 percent of GDP — Kenya is on the brink of debt distress and the International Monetary Fund has advised that it slow down on borrowing.

Monetary policy interventions targeted at taming running inflation have so far been ineffective, as experts argue that they need to be complemented by fiscal policies such as a reduction of value added taxes and import duties.

But, with the public coffers already low on funds, the fiscal interventions could not be an option and the high cost of living may remain a riddle for this government.

The country is also facing food insecurity after four failed rain seasons, which has resulted in “the worst drought” in the country and across the region in 40 years.

Already, more than four million Kenyans are on the brink of starvation and in need of immediate food assistance, which will require $180.7 million, according to the latest data from the Intergovernmental Authority on Development.

At the same time, nearly 27 percent of Kenyans of working age are unemployed, while more than 61 percent are employed in the informal sector, with the youth being the most affected.

Parliament had to raise the country’s debt ceiling thrice during President Uhuru Kenyatta’s tenure to allow the state to finance persistent budget deficits through borrowing.

Now, public debt is capped at Ksh10 trillion ($83.6 billion), which leaves very little headroom for the incoming government to borrow to supplement domestic income.

Debt ceiling
Raising the debt ceiling again may not be easy for the government if one side of opposes it. Mr Odinga’s Azimio la Umoja One Kenya coalition won a majority in the National Assembly. But 10 of the independent MPs are leaning towards Dr Ruto’s side, although Odinga’s side could still enjoy majority as six of the elected members whose parties had earlier defected to Ruto’s camp are bound to stay loyal to Azimio until three months after election.

This way, a supremacy battle awaits a Ruto administration and amendment Bills, let alone new ones that could be introduced from his side of the aisle, could face opposition if a political deal is not arrived at.

But the legislature is not the only hurdle a Ruto government will have to overcome to raise funds through borrowing; there is increasing apathy among local investors to purchase government paper due to low interest.

This month, the Treasury bond fell 23 percent below target as investors demanded higher rates which forced the Treasury to reject most offers.

In June, the government failed to issue a $1 billion Eurobond due to increased costs in the international market, resorting to more concessional loans.

Economic transformation
Kathleen Klaus, a professor at the University of San Francisco told The Conversation this week that Dr while Dr Ruto has promised “bottom-up” economic transformation, his role as Deputy President in the previous administration provides little indication of his ability, or will, to push through transformative economic policies.

“In the short-term, what may matter most for ordinary Kenyans is the ability to resume normal life. But with the leadership of Ruto’s rivals and a section of electoral body’s officials questioning the presidential results, the resumption of normal life may remain on hold,” she said in an interview.

Kenyan economist XN Iraki told the same publication that Dr Ruto’s victory means Kenyans face more of the status quo.

“He, and the coalition behind him, seem to be firm believers in the market economy where the government hardly intervenes in production and price setting. But the coalition will be faced with the problem of placating the “hustlers” who have been promised a transformation through bottom-up economics.

Dr Ruto has used “hustlers” to refer to informal sector players and young people who struggle to make ends meet.

“Beyond easy credit, the people Dr Ruto was referring to will expect some quick fixes to feel good about their victory, such as the ease of doing business or tax reduction,” said Prof Iraki, professor at University of Nairobi’s Faculty of Business and Management Sciences.

“We can expect some economic drag in the first six months — lower economic growth than expected — as the new regime tries to balance off its promises with reality. Of interest is how it will accommodate key foreign and local economic players.

Foreign investors have also fled the capital markets in the face of a depreciating currency and uncertainty due to external economic shocks, leaving the country’s stockmarket in limbo.

Furthermore, the state is running on a severely strained budget following a series of subsidies meant to cushion citizens from rising fuel and commodity prices, some of which have since been discontinued due to “inadequate exchequer releases.”

It will be nearly impractical to revive the subsidy programmes, as the IMF has showed lack of support for them, urging targeted interventions instead.

Reports show that several Kenyans are taking personal and household loans to catch up with the spiralling cost of living as the monthly rate of inflation has risen to 8.1 percent, a level not seen in five years.