Kenya’s financial crisis has taken a sharp turn as Western governments urge Kenya to consider taking a full audit of graft and governance before the new funding is approved by the International Monetary Fund (IMF).
The potential Ksh77.5 billion lifeline that President William Ruto’s administration has been hoping for may now be in jeopardy. The call for this audit is seen as a direct blow to the government’s efforts to secure external funding without addressing lingering transparency issues.
Diplomatic insiders revealed to Reuters that IMF shareholders, including influential Western nations, are pushing for an unprecedented review of Kenya’s governance. The IMF has been hesitant to release funds following Kenya’s withdrawal of Ksh346 billion in planned tax hikes, which were shelved after widespread protests earlier this year.
The diplomatic sources told the publication that until the government offers a viable solution to its fiscal crisis, future disbursements may remain frozen.
President William Ruto (left) speaking with IMF managing director Kristalina Georgieva in Italy on January 29, 2024
PCS
Kenya’s standoff with the IMF has created a ripple effect with talks now circulating about alternative funding options. The government has reportedly approached the United Arab Emirates for a potential Ksh193 billion loan, seeking to bridge its budget deficit with high-interest loans from Abu Dhabi. But this option, which comes with an 8.2 per cent interest rate, could spell further trouble for Kenya’s fiscal sustainability.
Kenya’s economy, already under strain from shrinking revenues and rising public debt, is now walking a tightrope. Experts believe the country is at a critical juncture where external pressure from the IMF and domestic challenges could spark an economic crisis. President Ruto’s administration is being forced to reconsider its strategies, with fresh discussions on revenue-raising measures becoming inevitable.
The IMF’s history of governance diagnostics suggests that Kenya might face the same fate as countries like Ukraine and Sri Lanka where similar audits exposed deep-rooted graft, resulting in more stringent lending conditions. While Kenya’s government has been hopeful for a smooth IMF review, the reality is that missing critical fiscal targets has become a stumbling block.
Last month, the Central Bank of Kenya (CBK) disclosed that while most targets under the IMF’s loan programme were met, revenue collection remained a significant challenge. With Kenya’s budget deficit swelling to 4.3 per cent of GDP, the pressure is mounting on the government to present a credible fiscal plan that satisfies IMF conditions.
Finance Minister John Mbadi’s suggestion to reintroduce elements of the scrapped Finance Bill has yet to materialise into concrete action. Without substantial revenue reforms, Kenya’s relationship with the IMF will continue to be strained.
The IMF’s review has stalled largely due to the Kenyan government’s struggle to balance public opinion with the harsh realities of its financial commitments. Protests against tax hikes and the collapse of the Finance Bill have created a politically volatile situation that makes any fiscal adjustments highly unpopular.
The looming audit of graft and governance is now at the heart of Kenya’s struggle to secure the much-needed funds. Without addressing these concerns, Kenya risks not only losing out on the Ksh77.5 billion from the IMF but also jeopardising its credibility with other potential lenders. The Treasury’s plan to rely on foreign loans to fill the funding gap may provide temporary relief, but experts warn it could exacerbate the debt burden in the long run.
IMF representatives have remained tight-lipped about the future of the loan disbursement, while the Kenyan government faces growing uncertainty. For President Ruto, this clash with Western governments could become a defining moment in his administration’s economic strategy.
President William Ruto and IMF Managing Director Kristalina Georgieva in France on June 22, 2023.
PCS
