Austerity Measures

Individuals like David Ngooma underscore the harsh reality faced by many Kenyans. “We used to get unga [maize flour] for 80 KSh [80 Kenyan shillings, or about $0.50], but now it’s 200 and something,” says Ngooma. “The people here are jobless. To get the money, just for a packet of flour is difficult. So, people eat only once a day.”

In a bid to salvage the economy and tackle the debt crisis, Kenyan president William Ruto has turned to IMF loans, with the latest loan this January amounting to another $941 million. Kenya’s debt to the IMF now stands at $3.5 billion (2.5 billion special drawing rights, or SDR) and has been steadily increasing for some years.

But, to receive these loans, the IMF forces countries to adopt strict austerity measures and to reorient their economies to focus almost entirely on exports. Kenya was no different. Immediately after coming into office in September 2022, Ruto responded to a key IMF-enforced condition by scrapping the subsidies on maize flour and fuel that previous governments had offered to consumers.

As a result, the price of these everyday commodities shot up. Fuel prices in Kenya reached a record high in the first half of 2023, with prices topping 182.70 KSh ($1.13). Then, in the first quarter of the financial year to September, “the government cut subsidy spending to zero,” as requested by the IMF.

On top of this, in July 2023, the Ruto administration doubled the value-added tax (VAT) on fuel, from 8 percent to a massive 16 percent — another policy recommendation set out by the IMF. This led to new record highs for fuel costs in 2023, when prices crossed 200 KSh.

Ken Gichinga, chief economist at Mentoria Economics, points out the unequal impact of such policies, disproportionately burdening the poor while slowing overall economic activity. “When you double VAT on fuel, the motorbike operator will need to part with a higher percentage of his income to pay this tax,” Gichinga tells me, “as opposed to a CEO who might not even be aware of this price change because it is an insignificant part of his income.”

Gichinga also said this form of tax is only a short-term fix to servicing Kenya’s debt. “The problem with this approach is that it alters the demand for goods and services. . . . Higher fuel prices means less consumption and less economic activity.”

Christopher Obondo, a welder from Kibera, said these taxes have essentially put him out of work. “When I go to buy metals, I find the price is too high. So then, when I tell my customers about the high price of [welding], the price is too high. So, then I don’t get any work.”

Adding the now-high cost of food to the mix has meant that many Kenyans are starting to go hungry. “I only go for one meal [per day], which is usually supper. And still the supper is not enough. . . . I still go hungry.”

In response to the taxes on the poor and the scrapping of subsidies, four massive protests erupted in Nairobi in 2023, with two in March and two in July. In the end, at least thirty people were killed by police, and hundreds more were arrested. Kenyans were furious that the government was strictly adhering to the IMF model and had passed the tax burden onto the country’s poor during a cost-of-living crisis. In the end, President Ruto caved into pressure from the streets and reintroduced the fuel subsidy. The move was heavily criticized by the IMF.

The power of the IMF in Kenya is, unfortunately, nothing new. In 2011, it pressured the Mwai Kibaki government to amend the VAT to include fuel, which had previously been exempt from the tax.

However, according to the Fintech Association of Kenya, “the policy had a detrimental impact on the economy. Inflation soared, businesses struggled to cope with rising costs, and economic growth slowed.”

Today, the VAT is just one of nine taxes the government has placed on fuel, with the Ruto government tripling the Petroleum Regulatory Levy just last week. Next, Ruto has plans to go one step further, and increase the VAT from 16 percent to 18 percent.

Structural Adjustment Programs

Perhaps surprisingly, this economic model has already been tried and tested before — with disastrous results.

At the start of the 1980s, most African leaders, from elected presidents to dictators, were forced to take out massive IMF and World Bank loans and adhere to the strict neoliberal model that the institutions touted.

To get approval for these loans, the Bretton Woods institutions required leaders to implement “structural adjustment programs” (SAPs). These programs mandated strict austerity and cuts to social spending, while reorienting economies to focus almost entirely on exports and extraction. For most countries, this meant investments into education and health care dried up, while cheaper exports to the West increased.

According to the IMF, this model would boost economic growth and end poverty. It did the opposite.

After structural adjustment programs had been aggressively applied to sub-Saharan Africa, the number of people in poverty almost doubled from 1981 to 2001, “from 164 million to 316 million living below $1 per day,” as noted by the World Bank. According to the Center for Economic and Policy Research, GDP per capita in sub-Saharan Africa fell by 15 percent from 1980 to 1998. Yet, over the previous two decades (1960–1980), prior to the introduction of structural adjustment programs, GDP per capita had increased by 36 percent.

The spread of poverty and the de-development on the continent in the 1980s and the 1990s led to this era being labeled the “Lost Decade.” As early as 1991, the UN secretary general Javier Pérez de Cuéllar pointed to the IMF as one of the leading causes. “The various plans of structural adjustment — which undermine the middle classes; impoverish wage earners; close doors that had begun to open to the basic rights of education, food, housing, medical care; and also disastrously affect employment — often plunge societies, especially young people, into despair.”

As a result of the SAPs, sub-Saharan Africa transferred $229 billion to the West from 1980 to 2004, in the form of debt payments. According to the Canadian Centre for Policy Alternatives, by 2004, the continent was paying the wealthiest countries $15 billion every year in debt servicing. “This is more than the continent [received] in aid, new loans or investment.”

However, the region that recorded the greatest reduction in poverty during this period was East Asia — the region where strict austerity measures were not imposed by the IMF.

At the start of the 1980s, according to the World Bank, “East Asia was the region with the highest incidence of extreme poverty in the world, with 58% of the population living below $1 per day.” By the end of the century “Sub-Saharan Africa had swapped places with East Asia.”

Neoliberal Recommendations

One such case was Kenya. Nairobi agreed to its first SAP with the World Bank in 1980 and with the IMF in 1982. The country was slow to adopt the neoliberal recommendations such as scrapping tariffs, defunding public services, and implementing tax cuts, leading to a modest GDP growth rate of 4.2 percent for the decade — down from 7 percent in the previous ten years. However, starting from the mid-1980s, “Kenya began a more concerted and sustained effort at significant trade liberalization,” according to the Carnegie Endowment for International Peace. “Tariffs were decreased, controls on imports were loosened, and the government encouraged trade through a series of export-promotion platforms.” Yet, during this period, GDP growth turned negative, dropping by 2.2 percent in the 1990s.

Poverty reduction also massively reversed, food prices went up, and hunger became rampant. At the start of the 1970s, around 35 percent of Kenyans lived in poverty. By the late 1990s, that number had shot up to more than half the population. According to the UN, the number of Kenyans living in poverty more than quadrupled from 3.7 million in 1973 to seventeen million by 2003. Kenya’s experiments with neoliberalism and SAPs could only be described as an abject failure.

Only for elite Kenyans was there growth, with university-educated Kenyans seeing a threefold increase in incomes while returns to secondary-educated Kenyans dropped by 50 percent. This disparity led to increased inequality, pushing Kenya into the top-ten most unequal countries globally.

Kenya Today

After years of lending to Kenya’s authoritarian leader Daniel arap Moi, the IMF finally cut him off in 2000, owing to his blatant corruption. After a three-year hiatus, the IMF announced that it had begun lending to the new president, Mwai Kibaki, elected in 2002. However, Kibaki chose to take the country in a new direction. He announced his “Look East” policy and opened the country to Chinese finance.

Over the next decade, loans from China eclipsed those from the IMF and World Bank. The Bretton Woods institutions were no longer dictating economic and development policy. By the end of the decade, massive improvements in poverty reduction had been made and GDP growth picked up.

Eventually, as noted earlier, the Kibaki government succumbed to IMF pressure, as Nairobi was forced to look for extra sources of revenue during a severe regional drought in 2011. As a result, Kibaki began implementing IMF policy recommendations, culminating in adding the VAT to fuel.

Successive Kenyan governments abandoned Kibaki’s Look East policy and returned to the IMF and World Bank for funding. On the surface, it looked as if the IMF had learned from its disastrous record in sub-Saharan Africa by announcing a new policy, “Social Spending Floors.” This, the organization says, will prevent the governments it lends to from cutting social spending at such high rates, a policy that adversely affects the poor.

However, critics like Oxfam have labeled this a “fig leaf for austerity.” In Oxfam’s analysis, it found that “for every $1 the IMF encouraged a set of poor countries to spend on public goods, it has told them to cut four times more through austerity measures.”

The same is true in Kenya, where the IMF has encouraged the Ruto government to make massive cuts in health and education. “The IMF insisted on the government to reduce spending on education”, says Njoki Njehu, the Fight Inequality Pan Africa coordinator. “We saw in public universities the cost of tuition went up by three times, that was a direct correlation with IMF policies. Their impact has been detrimental.”

On top of that, the IMF has encouraged the Ruto government to enact extremely regressive tax policies, which typically place the tax burden on the country’s poorest people.

Who the System Benefits

Unlike the United Nations, the World Bank and the IMF are controlled by one-dollar-one-vote, and most of the voting shares are held by wealthy developed nations. The United States alone holds enough shares in the IMF to give Washington de facto veto power. On top of that, according to an unspoken agreement, the managing director of the IMF is always a European citizen.

This is perhaps why the austere neoliberal model pushed by the IMF has mostly benefited the West. By encouraging cheaper exports and extraction, Western consumers have greater access to imports, while African countries receive less.

According to a report by Global Justice Now, in 2015, Africa received $161.1 billion in the form of aid, loans and remittances. However, the continent lost “$203 billion through factors including tax avoidance, debt payments and resource extraction, creating an annual net financial deficit of over $40 billion.”

More recently, UN secretary general António Guterres quipped that the IMF and World Bank’s response to the pandemic has mostly benefited rich Western countries.

According to Jason Hickel, a professor at the Autonomous University of Barcelona, another major benefactor of the IMF’s SAPs is foreign banks. The IMF might encourage cuts to social services so more “resources can be diverted to servicing external debt. Or public companies may be privatized and the revenue from sale diverted to servicing external debt,” Hickel told Jacobin. “It is effectively a mechanism of bailing out big banks by taking resources from the poor.”

That is why some, like Njoki Njehu, have labeled debt as another form of colonialism:

Colonization is no longer what it used to be in the days of the British empire . . . it is now a very different way of operating, you don’t need thousands of soldiers occupying a country. You just need a few people occupying the ministry of finance.