Kenya’s quest for a crucial Ksh77.9 billion drawdown from the International Monetary Fund (IMF) has hit a stumbling block, with the lender now assessing the fallout from a recent court ruling that nullified the 2023 Finance Bill. This move puts the country’s economic future under renewed scrutiny as the government scrambles to fill a revenue shortfall.
The IMF’s executive board was expected to approve the release of $600 million (Ksh77.9 billion) under the seventh review of Kenya’s medium-term funding programme in July. However, the escalating political crisis following the Finance Bill’s rejection and subsequent protests delayed that crucial decision.
The assessments are “ongoing,” an IMF spokesman told Bloomberg in an emailed response to questions on Wednesday. The fund “remains committed to supporting the Kenyan authorities in addressing the economic challenges” it faces, the spokesman added.
Why it matters: The government needs to find over Ksh1 trillion to plug budgetary shortfalls, according to President William Ruto, and the IMF funding, which is expected before the end of the year, is among the avenues the government is seeking to meet the urgent budgetary needs.
President William Ruto and IMF Managing Director Kristalina Georgieva in Sharm El-Sheikh, Egypt on Tuesday, November 8, 2022.
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PCS
Dig deeper: Newly appointed Treasury and Planning Cabinet Secretary John Mbadi last month confirmed that IMF representatives, led by Selim Cakir, expressed concerns during a recent meeting. “The representative was clear that the court ruling on the 2023 Finance Act would likely create a revenue shortfall,” Mbadi stated.
The government, already reeling from a financing hole of Ksh346 billion, now faces the task of plugging a larger gap in its budget. Treasury officials estimate that the annulment of key tax hikes, including the doubling of VAT on fuel, could result in a revenue loss of Ksh214 billion. As Mbadi pointed out, this threatens to derail vital development projects and could deepen Kenya’s fiscal woes.
Bigger picture: While the IMF continues its assessment, Kenya’s economic outlook remains precarious. Treasury Principal Secretary Chris Kiptoo has warned that quashing the 2023 Finance Bill will inevitably lead to further budget cuts, despite the government’s recent decision to trim its budget by 3 per cent for the period ending in June 2025.
“We have no choice but to increase borrowing and adjust our fiscal targets,” Kiptoo asserted. The fiscal deficit, initially projected at 3.3 [per cent of GDP, has now been revised to 4.2 per cent, adding further pressure on Kenya’s public debt.
Meanwhile, President William Ruto’s administration faces increasing pressure to strike a balance between managing public discontent over taxes and securing much-needed financial support from international lenders like the IMF. The protests that erupted in June and July, which left at least 61 people dead, were fuelled by public anger over high taxes and soaring inflation.
Ruto’s decision to scrap the contentious levies, aimed at placating protestors, has now left a gaping hole in government coffers. The court’s decision to nullify the bill was seen as a victory for the opposition and civil society, but it now threatens to disrupt Kenya’s delicate economic recovery.
According to Central Bank Governor Kamau Thugge, Kenya is still banking on the IMF to release the $600 million once the review is complete. “We’re optimistic that the funds will be disbursed once the board meets,” Thugge said, noting that the funding is essential to stabilise the country’s fiscal position.
However, no date has been set for the IMF board meeting, with further delays potentially placing the government’s borrowing plans in jeopardy. Kenya’s credit ratings have already taken a hit, with major international ratings agencies downgrading the country’s debt further into junk status.
The Supreme Court is expected to begin hearing oral arguments this week as the government appeals against the ruling that declared the Finance Bill unconstitutional. The hearing comes after a conservatory order was issued, suspending the appellate court’s decision. The case is likely to drag on, further complicating Kenya’s financial outlook.
As the legal battle unfolds, the IMF is closely monitoring the situation. The global lender’s next steps will depend on how the court case progresses and the government’s ability to address the economic challenges arising from the ruling.
“The situation is fluid,” a Treasury official noted, “but the stakes are incredibly high. We’re not just talking about lost revenue; we’re talking about the country’s entire economic trajectory.”
President William Ruto (left) during a round-table with President of France Emmanuel Macron, International Monetary Fund Managing Director Kristalina Georgieva and the President of the World Bank Group Ajay Banga in Paris on June 22, 2023.
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