Treasury faces budget squeeze as IMF, World Bank freeze loans

Central Bank of Kenya Governor Nominee Kamau Thugge.[File, Standard]

The National Treasury Cabinet Secretary John Mbadi will present a pre-election budget today with a gaping Sh1.1 trillion deficit at a time when both the International Monetary Fund (IMF) and World Bank have held back funding, forcing President William Ruto’s government to rely almost entirely on domestic borrowing or raise new taxes. 

Speaking at a post-monetary policy briefing on Wednesday, Central Bank of Kenya (CBK) Governor Kamau Thugge confirmed that the World Bank has yet to disburse a Sh96.9 billion loan under its Development Policy Operation and that negotiations are still ongoing. 

The CBK boss said the government had had “good discussions” with the World Bank on the DPO and was also getting additional financing given the kind of shocks the country is facing, Thugge said.  

He expressed hope that the government can reach an agreement on the new financing with the World Bank.  

The World Bank’s frozen disbursements are linked to delays in passing seven laws and four policy reforms. 

The Standard could not immediately reach the World Bank by press time for comment. 

The lender has reportedly since outlined three remaining hurdles before it releases the funds, including regulations to the Social Protection Act, amendments to the Forest Conservation and Management Act, and an approved sustainability-linked financing framework. 

The IMF, meanwhile, terminated a multi-year funding arrangement in March 2025, denying Kenya Sh109.7 billion after the country failed to honour some conditions. 

Longstanding talks on a new IMF programme are expected to continue, but no agreement has been reached. 

With multilateral funding frozen, the Treasury is leaning heavily on local markets. The 2026-27 budget proposes a deficit of Sh1.1 trillion will be raised through domestic borrowing, compared with just Sh145.6 billion from external sources, according to Treasury estimates presented to Parliament on April 30. Total expenditure for the next fiscal year is projected at Sh4.79 trillion, or 27 per cent of the budget going toward interest payments on existing debt. 

Thursday’s budget arrives as the government locks in election-year spending. Treasury has allocated Sh330 billion. 

Analysts warn that the funding freeze leaves Kenya with few options. Without the seal of approval that comes with IMF and World Bank programmes, the country may face higher borrowing costs from commercial creditors at a time when debt service obligations are already consuming more than a quarter of the national budget.  

The CBK on Tuesday held its benchmark lending rate at 8.75 per cent on Tuesday, maintaining borrowing costs even as headline inflation jumped to 6.7 per cent in May from 5.6 per cent in April, driven by food prices rising 9.4 per cent and transport costs up 16.5 per cent. 

The apex bank revised its 2026 growth forecast downward to 4.9 per cent from an earlier estimate of 5.3 per cent, citing uncertainty from the Middle East conflict.