August 20, 2024
Protests ignited by recent IMF-backed reforms in Kenya show no signs of abating. Demonstrations began in June when Kenyan president William Ruto proposed taxes on essential goods including food, health care, and fuel in line with IMF-supported budget reforms. In response, Kenyan police resorted to a brutal crackdown, arresting protestors and opening fire on crowds. At least 60 have been reported dead, along with numerous allegations of police abductions and torture. Ruto has since walked back the reforms in an effort to stem a burgeoning legitimacy crisis. Still, protesters continue to call for him to resign.
The events in Kenya should serve as a wake-up call about the global debt crisis — and the inadequacy of multilateral lending in breaking the cycle of debt.
Last year, Kenya spent nearly 60 percent of its revenue on debt servicing alone. While many blame China for Kenya’s debt woes, Kenya’s debts to multilateral lenders are almost twice its borrowing from all bilateral lenders, combined. But the country’s increasing reliance on multilateral lenders hasn’t enabled it to escape vicious cycles of indebtedness.
In 2021, the IMF’s response to the economic devastation caused by the COVID-19 pandemic included an issuance of $650 billion of Special Drawing Rights (SDRs).1 SDRs can be thought of as a kind of currency that the IMF issues to its member countries. They constitute the most meaningful support developing countries have received from the Fund since the beginning of the COVID-19 pandemic. SDRs provided developing countries, including Kenya, with immediate and unconditional relief. Kenya received $738 million of the IMF’s 2021 SDR issuance which it used to support public spending during the pandemic, including for critical public health and social protection financing. However, Kenya’s quota-based allocation was nowhere near enough to meet its spending needs.
That same year, Kenya entered into an additional agreement to borrow $2.4 billion, with policy conditionalities, from the IMF over the next three years. This has since been increased to $3.6 billion. As part of the agreement, Kenya is subject to periodic IMF reviews. In January, the Fund advised Kenya to increase revenue collection through taxes, and two weeks before the protests erupted, endorsed a program of regressive taxation. The IMF has also been pushing privatization since 2023, focusing on the sale of state-owned energy and manufacturing companies.
Multilateral Lending Doesn’t Help Countries Break Free of Debt Traps
As of last August, more than a third of the world’s countries were facing debt distress; some experts consider that we are in the midst of the “worst global debt crisis ever.” On average, emerging and developing economies allocate 42 percent of revenues to servicing debt. Debt-to-GDP ratios in these regions are upward of 55 percent.
Multilateral lending doesn’t often come with favorable terms. During the first five months of the COVID-19 pandemic, over 90 percent2 of IMF loans to emerging and developing countries were non-concessional. In addition to interest payments and other fees, the IMF imposes onerous surcharges on highly indebted countries. This year, Kenya joined the growing list of countries paying IMF surcharges. This puts the IMF’s effective lending rate3 to Kenya at over 7 percent. Over the next decade, Kenya will pay the IMF an estimated $174 million in surcharges alone. The IMF’s quota-based system creates a double-whammy: countries that face significant financing needs receive relatively little assistance before maxing out4 on their quotas and being subjected to surcharges.
Multilateral lending hasn’t helped countries break free of the debt traps they face. In Kenya, multilateral support allowed the country to narrowly avert default. While this has allowed Kenya to hold on to its hard-earned reserves, it now has to pay increasingly punitive rates to private lenders. Kenya recently used a World Bank loan to settle a $500 million payment on a Eurobond maturing in June. It then used IMF funds to trade in a 6.875 percent Eurobond for a new Eurobond issuance of $1.5 billion at a 10.375 percent coupon rate. These interest rates vastly outstripped growth projections even before the protests, and are likely to push Kenya even further into a cycle of indebtedness.
The World Bank and IMF champion capital markets as a tool for financing development, but these markets can be deeply irrational and predatory. Despite flagging debt sustainability indicators, investors are more than willing to lend to countries at risk of debt distress, albeit at increasingly high rates. Just this year, the anticipation of Fed rate cuts has fueled a wave of new bond issuances among African countries, with African bonds being massively oversubscribed. Kenya’s $1.5 billion issuance received three times as many orders as the amount offered, and Benin’s issuance was oversubscribed by six times. Similarly, Cameroon issued a new bond at double-digit rates on the heels of an IMF review applauding its budget discipline. Yet, this increased investor appetite has not resulted in more favorable borrowing costs. Africa is now experiencing the highest borrowing costs it has seen in a decade, and investors can expect yields from African sovereign debt to be 2.6 times higher than similarly rated countries. Markets cannot provide the sustainable sources of financing imperative for economic development.
International Debt Resolution and the Way Forward
The alternative to refinancing debts on capital markets is a restructuring under the G20 Common Framework. This is a slow and painful process; Zambia’s restructuring under the framework took over three years. After private lenders refused to participate on comparable terms, the result was merely an extension of Zambia’s interest payments, with no reduction on the principal. During this period, a deadly drought also wreaked havoc on the Zambian economy.
Many countries in dire need of debt relief don’t qualify for the G20’s Common Framework. Sri Lanka defaulted in 2022 but didn’t qualify for the Common Framework and hasn’t been able to renegotiate its debt payments. The IMF offered $3 billion to bail Sri Lanka out of more than $30 billion in debt, conditioning the funds on Sri Lanka’s negotiation of deals with its other creditors. Despite reaching an agreement with bilateral lenders, private creditors continue to obstruct resolution, putting the IMF bailout at risk. In addition to the billions of dollars in regular interest and principal payments owed to the IMF, Sri Lanka is expected to pay the Fund $308 million in surcharges over the next decade.
Following the onset of protests, Kenya’s currency has been devalued, its credit ratings have been downgraded, and the World Bank has cut its growth forecasts. Losses from this year’s floods are already estimated at over $300 million. Without bold and immediate action, the debt crisis will push Kenya and many other vulnerable countries further into economic instability, social unrest, and climate vulnerability.
The United States’ strong economic recovery has been supported by expanded public spending and an interventionist green industrial policy. In contrast, multilateral lenders are responding to the unfolding debt crisis in the Global South with failed neoliberal policy prescriptions. We cannot adequately respond to the unprecedented crises of our time with empty paeans to market-led growth. The choice before us is clear: we can either address the injustices of the international financial architecture, or face a world of increasing instability and crisis.
A new issuance of SDRs can provide crucial liquidity to countries in crisis. SDRs boost creditworthiness, reduce borrowing costs, and can be used to repay IMF loans. They can also be exchanged for hard currency and used to buy back bonds. Eliminating surcharges would also be a welcome development, and provide debtor countries with much-needed fiscal space. However, sustainably addressing the scale of the present crisis will take a more fundamental reform of the global financial architecture, including an international debt resolution mechanism that compels all creditors to participate equally in a restructuring process that offers real relief to debt-distressed countries.
- SDRs are an international reserve asset that can be exchanged for hard currency among member countries and select prescribed holders, such as regional banks. Their value is based on a basket of five currencies: dollars, euro, pounds, yen, and renminbi.
- Author’s calculations based on figures provided in Table 2.
- Kenya is now paying level-based surcharges to the IMF because it has exceeded 187.5 percent of its quota. This adds 200 basis points to its lending rate.
- Surcharges are imposed when countries exceed 187.5 percent of their quotas.
