Bitter pill for tax payers as broke government rushes back to IMF

Kenyans are bracing for a renewed wave of economic austerity as cash-strapped Kenya Kwanza government, grappling with a severe debt crisis and dwindling revenues, makes a hurried return to the International Monetary Fund (IMF) just months after abruptly abandoning a previous $2.3 billion programme over unmet targets.

Analysts say this signals that National Treasury mandarins led by Cabinet Secretary John Mbadi, have run out of feasible fundraising options to bank roll the national budget, with windows to borrow domestically and from foreign lenders, narrowing dramatically. 

The impending engagement, which kicks off today in Nairobi, sets the stage for a painful prescription of spending cuts, parastatal reforms likely to usher in job losses, and enhanced tax measures, a “bitter pill” that previously ignited deadly, youth-led protests.

The IMF confirmed the high-stakes dialogue on Wednesday saying the Kenya Kwanza government had reached out to the global lender of last resort for a financial bailout. 

“At the request of the Kenyan authorities, an IMF staff team will begin initial discussions in the coming days on a possible Fund-supported programme,” said Haimanot Teferra, the IMF’s mission chief for Kenya, in a statement. The team will visit Nairobi from September 25 (today) to October 9. Ms Teferra said the IMF remains committed to supporting Kenya in its efforts to “maintain macroeconomic stability, safeguard debt sustainability, strengthen governance, and promote inclusive and sustainable growth for the benefit of the Kenyan people.”

This fresh outreach comes as the President William Ruto’s administration confronts harsh consequences of its decision to abandon the IMF’s previous Extended Fund Facility (EFF) and Extended Credit Facility (ECF) programmes. 

That termination, resulting from Kenya’s failure to meet key targets, cost the country Sh110 billion in planned funding and cast doubt on the government’s ability to maintain fiscal discipline without stringent IMF supervision.

The previous IMF programme and its associated fiscal consolidation demands however had direct and violent consequences according to officials within Government and the IMF. 

They were seen to be a primary driver of the widespread “Gen Z” protests that erupted in June 2024 against the then Finance Bill. 

The IMF-backed measures, which proposed unpopular tax hikes including a 16 per cent VAT on bread, increases on mobile money transfers, and new levies on essential goods, were seen by young and broke Kenyans as disproportionately burdensome amid an unemployment crisis and soaring cost of living.

The demonstrations, which resulted in dozens of deaths, have become a cautionary tale for both the IMF and the Ruto administration. They underscored deep-seated public resistance to economic policies perceived as ignoring citizen welfare. As the lead IMF negotiator, Ms Teferra embodies the IMF’s institutional stance. 

The “bitter pill” of austerity—spending cuts, tax increases, and parastatal reforms—will be the subject of her discussions with Treasury officials led by CS Mbadi. 

Her ability to navigate the political sensitivities in Kenya, especially following the deadly protests against IMF-backed tax measures in 2024, while holding firm on necessary economic reforms, will be a critical test of both the IMF and Treasury officials. 

An IMF paper published last year following the deadly riots titled, “Understanding the Social Acceptability of Structural Reforms,” acknowledged these risks, emphasizing that effective strategies must be backed by “strong institutional frameworks that foster trust and a two-way dialogue among stakeholders and the public.”

The government’s return to the global lender of last resort reveals the extreme pressure on its finances just two years to elections. 

Despite the celebrated repayment of a $2 billion Eurobond earlier this year, which bought the government precious time, the nation’s fundamental fiscal challenges remain unresolved.

Kenya’s public debt has ballooned to a record Sh11.73 trillion, with debt service consuming a staggering Sh1.59 trillion last financial year—approximately 91 per cent of the budget allocated for public debt. This leaves minimal room for development spending and critical services.

The Treasury’s current strategy, heavily reliant on complex debt-swap operations and an anticipated $750 million World Bank loan, is viewed by analysts as fraught with execution risks. Ratings agency Fitch has for instance questioned the feasibility of key initiatives, including a proposed $1 billion debt-for-food swap with the World Food Programme and a complex conversion of Chinese debt into renminbi.

“These liability management operations would make Kenya’s amortisation profile less lumpy, lower roll-over risk and reduce near-term debt-service costs,” Fitch stated.

Simultaneously, Kenya is pressing its largest bilateral creditor, China, to swiftly finalise a crucial financial agreement, highlighting Nairobi’s desperate search for alternative support.