Oral East Africa>Tik Tok… is govt running out of time to quell protests At the hut of the story

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— Street protests depress Kenya’s PMI.

— Leaves a lasting impact on vulnerable economy

— Banks, Insurance, pension funds and Eurobond investors look to IMF delayed response

No sales

Three weeks of street protests popularized through social media spaces like X and Tik Tok, is breaking the private sector on the ground, as sales drop amidst difficulty maintaining supply of inventory.

Purchasing activity decreased for the first time in three months in June, leading to a fresh reduction in firms' inventories of inputs.

The Stanbic Bank Kenya Purchasing Managers' Index (PMI) dropped to 47.2 in June from 51.8 in May, as tough economic conditions caused by the cost-of-living crisis and pro-tests related to the Finance Bill negatively impacted sales volumes.

“In June, momentum in private sector activity declined, reflecting several concerns, top of the list being the proposed increase in taxes via the Finance Bill 2024, and the widespread protests in response, with unrest in Kenya restraining output and new business because customers delayed spending decisions in the face of such uncertainty,” said Christopher Legilisho, Economist at Standard Bank commented.

Kenya’s economy was recovering with declining inflation, and fiscal boost from World Bank and IMF support but the street protests and the future of the Fund programme have clouded the positive outlook.

Kenya successfully settled its 2014 Eurobond after the World Bank approved $1.2 billion Development Policy Operation (DPO) loan to help Kenya address short-term fiscal pressures and strengthen climate action. Kenya used part of the World Bank budget support loan to make a payment of roughly USD.500 million on the Eurobond which matured on 25th June 2024.

Polycrisis

Authorities policies to address the debt crisis by instituting crippling taxation amidst global turmoil and climate crises has degenerated into a political polycrisis that threatens to derail the country’s economic recovery.

The street protests across the country against the Finance bill has led to at least 39 deaths and left several protesters injured, and scores arrested.

President William Ruto announced that he will not sign the Finance Bill 2024 into law and subsequently withdrew it yet protests have continued demanding his resignation.

Extended periods of political crisis could cripple tax collection and the lack of a credible revenue raising scheme could derail the IMF programme exposing Kenya’s currency to volatility and raising the chance of loan default.

Investors are watching how Kenya will manage the anti-tax protests and negotiate to keep International Monetary Fund (IMF) programme on course given the scrapping of the Finance Bill could derail more funding.

The FUND's move

Kenya is in the middle of the seventh review of the IMF programme that has been delayed with the Fund staff pointing out that the medium term revenue strategy that was being implemented through the Finnace Bill was key to unlocking more dollars.

The relationship already looked strained even before the Finance Bill after IMF reduced the remaining amount available to Kenya by 7.2 percent to Kes465.4 billion ($3.6 billion). This came weeks after the country's budget support from the World Bank was also reduced in size by 20 percent to Kes155.2 billion ($1.2 billion)

Fiscal consolidation through cutting spending including, office of political spouses and the wage bill is unlikely to plug the expansion of the budget deficit which IMF is demanding has to be tamed.

Worse still the withdrawal of the Finance Bill has set precedent for further reversals, with manufacturers of edible oils in Kenya petitioning the government to delay the implementation of 10 percent duty on imported crude palm oil that became operational on July 1, 2024, calling it punitive and insensitive at a time Kenyans are going through hard times.

If government cedes to more tax demand, the budget deficit will only expand the fiscal space and force government to borrow more, expensively at the domestic market.