The cost of living was sky-high, driven mainly by expensive food and fuel.
Inflation was threatening to hit double digits, and the shilling was shedding its value at an alarming rate against major currencies.
And, as loudly stated by the then Deputy President Rigathi Gachagua, the public coffers were virtually empty.
Yet Kenya’s woes did not end there.
The country was on the verge of drowning in massive public debt estimated at Sh9 trillion and equivalent to about two-thirds of GDP, underlining the gravity of the situation.
The twin challenges of high inflation and a weakening currency added fuel to the debt fire as they escalated repayment costs.
With such an overwhelmingly bleak economic outlook, the new administration was confronted by an unenviable task akin to drinking from a hosepipe.
With heavy odds stacked against it, the question was: Is the new administration equal to the task of calming such an economic turbulence?
Ruto had made numerous economic promises to the electorate, who were expecting an immediate change of fortune.
The Kenya Kwanza administration, which rode to power on the back of massive support from millions of ordinary wananchi or so-called hustlers, struck an optimistic note by pledging to immediately tame the rising cost of living.
Addressing high cost of living
Immediately after being sworn in, the president hit the ground running by shifting to production subsidies from consumption reliefs that were being administered under the previous regime.
“We are not going to be subsidising consumption, we are going to work and support producers,” Ruto said in Naivasha during the first parliamentary group meeting on September 17, 2022, four days after being sworn in as President.
The change to production subsidies led to the introduction of affordable fertiliser, a move the government partly attributes to the bumper maize crop witnessed last year when about 60 million bags were harvested, up from 45 million bags in 2022.
The sharp increase in maize yields is the main reason prices of unga, Kenya's staple food, have sharply dropped from between Sh250 and Sh230 a year ago to between Sh130 and Sh100 currently.
As a staple food, maize commands a consequential weight on the cost of living.
The sky-high prices of flour last year triggered street protests which were spearheaded by the Azimio coalition, the main opposition political outfit.
G to G petroleum model
Other profound measures that Ruto’s administration adopted to drive the economy away from the cliff include restructuring public debt and entering into a government-to-government (G-to-G) fuel deal with Saudi Arabia.
The sharp drop in the value of the shilling and the mounting public debt were of particular concern to Kenyans and investors.
Indeed, one of the causes of the high cost of living was the dismal performance of the local currency.
The US dollar jumped from an average exchange rate of Sh125 against the shilling in the first quarter of 2023 to Sh160 on January 15, 2024.
Inflation had also hit the rooftop, rising to almost double digits at above 9 per cent.
“A weak shilling, high inflation, and a shortage of staple food are a perfect combination for an economic storm, especially among the hustlers,” said Moses Banda, the president's advisor on finance.
The shilling’s woes were compounded by a spiralling public debt, another major concern for Ruto’s young administration.
The $2 billion Eurobond the government had taken in 2014 was set to mature last June yet Treasury’s coffers were running dry.
The possibility of default spooked the markets, triggering substantial capital flight from the Nairobi Stock Exchange (NSE).
Key investment decisions were also placed on ice.
New Eurobond
With the country facing a deepening economic crisis on the back of an impending debt default, the government had to urgently swing into drastic action.
It resorted to refinancing the $2 billion Eurobond by floating a new $1.5 billion Eurobond.
Although this seemed like robbing Peter to pay Paul, it proved to be a correct prescription for a badly ailing economy.
“It turned out the move (to buyback the Eurobond) was a game-changer in many ways. De-risking the Eurobond wiped out the market uncertainty as no immediate and worrisome bullet repayment that would heavily impact the economy,” said Banda.
With Eurobond repayment put off, there was no further rationale for speculators to continue holding on to the dollar as the government no longer needed large amounts of forex for debt settlement.
The shilling was quick to reap dividends from the successful refinancing of the Eurobond, with the local currency rapidly regaining lost ground against global currencies.
It recorded the strongest intra-day gain against the US dollar in 12 years on February 14, 2024, riding the wave of investor confidence following substantial inflows to settle the $2 billion Eurobond.
“The upward trajectory of the shilling against global currencies helped in slashing public debt by almost Sh1 trillion, easing the heavy burden that has been bogging down the country’s economic growth. Most of our external debt is denominated in dollars, and hence the shilling’s rebound brings immense relief,” said Banda.
From a low of Sh160 in January to about Sh129 currently, the shilling is now considered one of the best-performing currencies globally.
“Together, we have made the right choices, sometimes taking very difficult and painful decisions to steer Kenya back from the edge of the catastrophic cliff of debt distress and move our nation in a new direction,” said Ruto in his speech during the 60th Jamhuri Day.
The tough economic headwinds posed by the maturing Eurobond compelled the government to rethink the nature of its debt portfolio.
The buyback opened the door for the government to adopt a comprehensive strategy for restructuring the debt with the aim of easing the repayment burden going forward.
To make debt repayment sustainable, the maturity of the new $1.5 billion Eurobond is spread in instalments of $500 million in a span of three years.
Such a flexible and manageable repayment plan minimises the possibility of default, hence lifting investor confidence by removing any market apprehension and uncertainty.
“This diversified financing approach aims to maintain a relatively low weighted average interest rate in the overall public debt portfolio, ensuring Kenya's debt sustainability over the medium term, ” said ex-Treasury Cabinet secretary Njuguna Ndung'u after Kenya successfully floated the $1.5 billion Eurobond.
Reduced borrowing
The reduced pressure of debt repayment was a turning point in Ruto’s plan to revive the economy.
In an Economic Update on June 5, 2024, the World Bank weighed in on Kenya’s decision on the Eurobond, noting that it would have a positive impact on the investment environment.
“After the bond issuances in February 2024, the shilling appreciated by close to 20% and was one of the best performers in emerging markets. This (Eurobond buyback) had a marked positive impact on investment sentiment, which contributed to stabilising the exchange rate," the World Bank stated.
Following the shilling’s rebound, the economy began to reap benefits.
The NSE, for instance, witnessed a dramatic turn of fortunes from being ranked the poorest performing bourse in Africa to commanding the top spot on the continent.
Inflation has sharply fallen by about 50 per cent, from 9.2 at its peak last year to about 4 per cent, which is squarely within the government-recommended range of 2.5-7.5 per cent.
This has seen prices of basic commodities such as unga, fuel, as well as cooking oil and gas drop significantly, giving ordinary mwananchi a huge relief.
The strengthening of the shilling is not just attributable to Eurobond refinance. The government’s move to enter a government-to-government deal with Gulf oil firms played a notable role as well.
The initiative introduced in April 2023 to stabilise Kenya's foreign exchange market is cited by economists and financial experts as another pivotal intervention in assuaging global dollar shortages.
The deal allowed for payment of fuel stock after six months, a window meant to tame the high demand for dollars.
The local dealers nominated by Saudi Arabia also accepted payment in Kenyan shillings, further reducing the appetite for dollars.
This helped in bringing down the demand for greenback, reducing the rate at which the shilling was shedding value.
The G- to-G deal also ensured a sufficient supply of fuel.
Previously, oil markers were badly hit by a severe lack of dollars constraining their ability to import petroleum products.
This resulted in a shortage of fuel and hence the long queues witnessed at petrol stations across the country before the deal came into the picture.
Then Energy Cabinet Secretary Davis Chirchir, who has been transferred to the Transport docket, noted that the G-to-G deal was instrumental in slowing down the shilling’s month-on-month depreciation rate.
