Confident Ruto wins back investors but taxing times ahead

President William Ruto’s economic policies, while gaining a mixed reception at home, are endearing East Africa’s largest economy to global investors. Ruto’s measures, which include aggressive revenue collection, spending cuts and tax reforms,

have narrowed Kenya’s budget deficit and curbed the nation’s reliance on borrowing, at a time when global interest rates are at their highest levels in four decades. According to International Monetary Fund (IMF) data, Kenya’s budget deficit declined from 5.8% of GDP in 2022 to 4.7% in 2023, reflecting Ruto’s efforts to reduce government borrowing and boost revenues.

Kenya’s National Treasury now forecasts that the deficit will reduce even further in coming years. It says that government revenues will fall short of expenditures by Sh514.7bn ($3.9bn) in the new fiscal year starting 1 July, according to estimates presented to legislators in Nairobi in late April. This shortfall is equivalent to a budget deficit of 2.9% and is significantly lower than the Treasury’s earlier projection of 3.9%.

Ultimately, Ruto is targeting a balanced budget by 2027, suggesting that enhanced revenue collection and frugal spending will be the centrepiece of his economic plans over the next few years. He argues that the country must shun excessive debt and learn to live within its means.

“In three years’ time, we must run a balanced budget,” he said in a statement. “It won’t be easy, but we must do it.” The country “cannot continue accumulating debt. Borrowing will only lead us down the cliff.”

It’s not just the positive trends in Kenya’s budget deficit that have boosted investor sentiment and earned Ruto the reputation of being a business- friendly president. The exchange rate has also stabilised under Ruto’s watch. The Kenyan shilling suffered a 21% decline against the US dollar last year, marking its worst performance in over three decades. But it has rebounded in recent months: at time of going to press one dollar was worth Sh130. Investor confidence in the currency was bolstered by the issuance of a $1.5bn Eurobond in February to refinance a maturing note, staving off fears of a potential debt default.

Investors flock back to the stock market

In light of Kenya’s improving macroeconomic conditions, investors have flocked back to the country’s stock market. As a result, after many years of lacklustre returns, the Nairobi Securities Exchange (NSE) has entered a new bull market, posting robust returns of 16% in the first quarter of the year.

If listed Kenyan companies report stronger-than-expected earnings in coming quarters – which would essentially signify that the country’s economic prospects are indeed improving – then the stock market’s rally is likely to continue.

Strong earnings reports from Safaricom and other major listed companies could lift the stock market higher, handing bullish investors solid returns while making Ruto’s privatisation agenda a lot less difficult to pursue.

There are already encouraging signs on this front, going by the recent earnings reports of major listed companies in the country. Safaricom, the telco giant that is Kenya’s most valuable company, recently reported that total revenue for the financial year ending 31 March increased 12.4% year-on-year to Sh349.4bn ($2.6bn) while its earnings before interest and tax soared 20% to a record Sh139.9bn ($1.06bn). This makes the telco the first publicly traded company in East Africa to hit $1bn operating profits.

Kiprono Kittony, chairman of the NSE, told African Business recently that the rising stock market could help create conducive conditions to expedite Ruto’s plan to privatise 35 state-owned corporations. “The current improving market prices are setting the ground for state corporations to achieve proper valuation in the event they come to market by way of initial public offers,” he says. Privatisation is one of the ways Ruto is looking to reduce state expenditures and contain the budget deficit.

Economic diplomacy yielding fruit

Ruto’s efforts to promote Kenya internationally as a great place to do business are also yielding fruit. He has been able to strengthen commercial ties with some of the country’s key trade partners, including the United States. The US has in recent years emerged as the top destination of Kenyan exports, surpassing neighbouring Uganda.

The US has become Kenya’s largest export market on account of the African Growth and Opportunity Act (AGOA), legislation that grants eligible sub-Saharan African countries duty-free access to the US for around 6,400 product lines, including textiles and apparel. Kenya’s textile and apparel sector has flourished under AGOA, attracting interest from major US brands such as Levi’s and PVH that source apparel from the country.

Kenya exported Sh59.6bn ($450m) worth of goods to the US in 2021, of which more than 75% entered duty-free under AGOA — chiefly apparel, macadamia nuts, coffee, tea, and titanium ores — according to the Congressional Research Service.

“The consistent strengthening of Kenya-US ties is exemplified by the steady growth in the value of bilateral trade, especially its acceleration between 2015 and 2022 when Kenya’s negative trade deficit nar- rowed significantly from Sh85bn [$642m] to Sh13.35bn [$101m],” Ruto told delegates at the US East Africa Trade and Investment Forum in Nairobi in April.

Kenya and the US are engaged in ongoing negotia- tions for a US-Kenyan strategic trade and investment partnership. This pact is expected to bolster bilateral trade and investment, particularly in agriculture, regulatory practices, and workers’ rights. Its goal is to expand Kenyan exporters’ market access to the US beyond what AGOA currently offers. Ruto is also keen on securing additional US investments in key sectors of the Kenyan economy, such as the digital economy, healthcare, infrastructure and agriculture. These are sectors where US firms operating in Kenya already have a considerable footprint.

Ruto visited US counterpart Joe Biden at the White House in May, marking the first US state visit by an African head of state since 2008. He was hosted by the US Chamber of Commerce, allowing him to pitch Kenya to potential investors during his trip. Some of the areas in which Kenya is extending an invitation to investors include mining, tourism, agriculture, digital economy, infrastructure and clean energy.

Securing climate financing

Besides growing its commercial ties with the US – its largest trading partner – Kenya under Ruto is also pursuing an export promotion strategy focused on agriculture. The sector contributes about 25% of GDP and employs the highest number of Kenyans. There is, however, little local processing, with most agricultural exports being shipped in raw form.

The president is keen on developing export-oriented agro-processing value chains in the coun- try’s agriculture sector, arguing that this will have a stronger impact on incomes than exporting unprocessed produce. Kenya under Ruto is also positioning itself as a hub for European companies seeking access to regional markets in the East African Community (EAC), the Common Market for Eastern and Southern Africa (COMESA), the Southern African Development Community (SADC), and the African Continental Free Trade Area (AfCFTA).

Within Africa, Ruto has emerged as a leading voice on the climate crisis. Crucially, he has been able to turn the crisis into an opportunity, securing a growing share of climate financing commitments on the continent. Over the past year the National Treasury netted over Sh200bn ($1.51bn) through various climate-related funding projects. Ruto had the opportunity to showcase such successes when Kenya hosted the 59th annual meeting of the African Development Bank (AfDB) and the 50th meeting of the African Development Fund – the AfDB’s concessional arm for low-income countries – in Nairobi from 27 to 31 May.

Too early for a victory dance

While Ruto’s economic scorecard is impressive, it is still too early for a victory dance, given that he is barely past the midpoint of his first five-year term as Kenya’s president. Moreover, some of the measures that he is taking to narrow the budget deficit, such as increasing taxes and cutting back on recurrent expenditures, could backfire if poorly implemented. Kenya’s tax take as a proportion of GDP is currently below 16% and falling. Ruto is looking to raise it to 25% in a decade; but the major challenge is that the country is still overly reliant on large taxpayers.

“The danger we see is that the same companies which pay tax are the same that are consistently being targeted for revenue generation, particularly the multinationals,” Daniel Ngumy, managing partner at corporate law firm ALN Kenya, told African Business last year. “The failure to bring in the informal sector will in the long-term present challenges to the sustainability of our economy. Adding informal workers to our tax base will shield Kenya from the risk of a single big taxpayer leaving the country.”

Aggressive tax policies that significantly distort prices could also lead to a downturn in economic activity if consumers deem that some items are too pricey after new taxes and start buying less, or stop buying altogether. Increasing the tax take relies on continued economic growth. “Tax performance is the direct result of production. When the economy is sluggish, weighed down by high costs of credit and energy, and muted demand, tax collection cannot grow,” notes Ndiritu Muriithi, an economist and former governor of Laikipia County.

Inflation may also need to come down a lot faster – and stay low – so that the Central Bank of Kenya (CBK) can ease monetary policy. The Bank raised base lending rates to 13% in February, the highest in 11 years. Lower interest rates would help to reduce the government’s domestic borrowing costs, while giving banks an incentive to lend more into the real economy instead of just buying treasury bills and bonds and sitting tight.

“When the government is borrowing at 22%, banks cannot lend to SMEs for anything less than 30%. This constrains production, leading to poor tax collections,” Muriithi contends.

A delicate challenge back home

Ruto’s successes as an economic reformer and in- fluential African voice on climate change have won him respect and publicity. Time magazine named him among the 100 most influential people in 2024. However, back home, Ruto faces a delicate challenge. He must strike a balance between imposing higher tax demands on Kenyans and ensuring that the collected taxes contribute to citizens’ well-being and economic progress.

Keen to convince citizens that their tax contributions are being put to the best use, Ruto asked all members of his cabinet to sign performance contracts in August last year. These contracts are designed to ensure that ministers execute their responsibilities effectively. Additionally, Ruto is pushing for legislation that would require all civil servants to sign similar performance contracts.

“The terms of the contract are fairly straightforward. In return for paying their due taxes in a timely fashion, the citizens of this country not only expect but are entitled to receive the benefit of all government services in a prompt and satisfactory manner,” he told members of his cabinet in the signing ceremony at State House last year.

It remains to be seen whether he will sanction any underperforming ministers this August, when the first full year of the contracts passes. But building trust will be key if he is to quell public resistance to his tax policies. The World Bank notes that a lack of trust in a state’s role as both tax collector and as service provider remains an important deterrent for many would-be taxpayers to enter the formal economy or pay their full taxes.

Previously the deputy president of Kenya for ten years, Ruto rode to victory in the 2022 elections on a promise of championing equitable economic development. His administration vowed to give “hustlers”— the term his campaign team coined for low earners working in Kenya’s expansive and largely untaxed informal sector – a fairer chance at economic participation. Now, as the head of state, he grapples with the task of convincing his support base that economic participation isn’t just about earning money, but also about contributing their fair share through taxation.