IMF warns of difficult path ahead as it disburses Sh78b to Kenya

The International Monetary Fund (IMF) has warned of a difficult path ahead for Kenya as it disbursed $606 million (Sh78.1 billion) to support the government’s budgetary needs.

The funds come as a big relief for the cash-strapped Kenya Kwanza administration, which had been anxiously waiting on the bailout amid dwindling revenues locally in a battered economy.

As part of the multi-billion-shilling loan deal, the Ruto government is expected to enhance tax collection and root out corruption as part of its commitment to fiscal consolidation.

The IMF made it clear that Kenya must enact swift reforms including expanding the tax base, a move that could come as a bitter pill for taxpayers amid a cost of living squeeze.

“A difficult adjustment path lies ahead. A credible fiscal consolidation strategy remains central to addressing debt vulnerabilities while protecting social and development spending,” said IMF First Deputy Managing Director Gita Gopinath in a statement.

She underscored the necessity of reforming the Kenyan tax regime to enhance efficiency and equity.

Gopinath noted the government missed several of previous targets despite achieving some conditionalities and must do better to meet its new targets while garnering public and political support for necessary changes by enhancing better management of state resources.

“Performance since the last reviews of these arrangements has weakened. While accumulation of foreign exchange reserves and inflation were better than expected, the fiscal performance fell significantly short of the targets. The revenue and export underperformances increased debt vulnerabilities. Implementation of several reforms was also delayed,” she said.

“Reforms to make the tax regime more efficient, equitable, and progressive as well as strengthening accountability, transparency, and efficiency of public finances will help garner political and societal support for reforms. Clearly communicating the necessity and benefits of the reforms is paramount.”

The new IMF conditions present both an acid test and a significant headache for the Treasury Cabinet Secretary John Mbadi, particularly in the wake of deadly protests in June that led to the rejection of the controversial Finance Bill 2024.

These new conditions also come at a critical time for the Ruto government, which is under pressure to stabilise the economy while addressing public discontent over rising living costs and governance issues.

The June protests highlighted widespread dissatisfaction with fiscal policies and the government's handling of economic challenges especially among Gen Z making it imperative for Mbadi to navigate these new IMF demands carefully.

Balancing the need for swift reforms, which may be unpopular among taxpayers, against the backdrop of heightened social tensions will be a formidable challenge for Mbadi and the Ruto administration as a whole.

This IMF disbursement follows the conclusion of the seventh and eighth reviews under the Extended Fund Facility (EFF) and the Extended Credit Facility (ECF), along with a review under the Resilience and Sustainability Facility (RSF).

This saw the IMF’s Executive Board, which sat in Washington on Wednesday, announce the immediate release of SDR 365.28 million (approximately $485.8 million) under the EFF/ECF arrangements and SDR 90.47 million (around $120.3 million) under the RSF.

These arrangements were originally approved in April 2021, with the RSF added in July 2023 to support Kenya's initiatives in addressing climate change.

In its assessment, the IMF emphasized that these latest funds are crucial for addressing Kenya’s debt vulnerabilities while prioritising social and developmental needs.

The global lender of last resort noted that despite recent efforts stabilizing the Kenyan shilling and improving foreign exchange reserves, significant economic challenges remain, including fiscal pressures and governance issues.

The IMF board that sustaining economic progress requires not only improving fiscal quality by government but also addressing vulnerabilities within the financial sector.

It called for government to advance governance reforms and implementing structural changes, including those related to climate initiatives, to attract private investment and bolster economic resilience.

The IMF said the central bank's recent actions have supported price stability and external sustainability, particularly through improvements in the monetary policy framework and efforts to enhance the functioning of foreign exchange markets.

However, the IMF cautioned that deteriorating asset quality in the banking sector and emerging risks require vigilant oversight and close monitoring.

Additionally, the IMF urged the Central Bank of Kenya to maintain a flexible currency policy.

This approach, according to the IMF, is seen as vital for improving the economy's resilience to external shocks and enhancing competitiveness.

“The Central Bank of Kenya’s decisive actions have supported price stability and external sustainability, including through institutional changes to improve the functioning of the monetary policy operational framework and the money and foreign exchange markets,” said the IMF.

“Exchange rate flexibility is vital to improve resilience to external shocks and competitiveness. Addressing banks’ deteriorating asset quality and emerging risks requires close monitoring and strengthened oversight.”

The disbursement of funds is intended to support efforts aimed at achieving macroeconomic stability and reducing debt risks.

The IMF stressed the importance of agile policymaking in light of elevated risks surrounding the country’s fiscal strategy.