From reduced VAT to fuel subsidies and hidden debts: Inside Ruto-IMF fall-out

The International Monetary Fund (IMF) has warned Kenya against cutting taxes on fuel, delivering a fresh blow to President William Ruto’s government.

This comes as his government scrambles to secure a new bailout package with the Fund having long backed a higher Value Added Tax (VAT) to ensure the country can repay its mounting debts.

“We are actually tracking what countries are doing around the world... some are adopting revenue-based measures,” Era Dabla-Norris, Deputy Director of the IMF’s Fiscal Affairs Department, told a press briefing at the Fund’s Spring Meetings in Washington.

Adding: “While these broader energy subsidies and price caps can cushion households, the fiscal costs associated with them can be extremely high.”

The warning issued just a day after the government slashed VAT on fuel to eight per cent from 16 per cent and committed Sh6.2 billion to subsidise pump prices marks the latest clash between the Bretton Woods institution and the Ruto administration. 

It also piles new pressure on Ruto, who is already locked in tense negotiations with the Fund after being told to “come clean” on potentially billions of shillings in hidden debt or risk seeing a new lending programme blocked.

The VAT cut, aimed at easing a crushing cost-of-living squeeze ahead of an election 16 months away, now threatens to derail those talks entirely.

President  Ruto had dispatched a delegation to the IMF’s Spring Meetings in Washington this week, including Treasury Cabinet Secretary John Mbadi, Principal Secretary Chris Kiptoo, and Central Bank Governor Kamau Thugge, in a high-stakes push for a new bailout programme — but Kenyan officials who had hoped for a positive outcome on a new deal now face an uphill battle after the Fund issued fresh warnings over fuel tax cuts and hidden debt.

The IMF’s latest move is a reaffirmation of its long-held position. The Fund originally fronted and backed the VAT hikes that Kenya implemented under its previous $3.6 billion programme, which expired in April 2025.

The tax increase was central to Nairobi’s efforts to shore up fiscal revenues and ensure the country could service its ballooning public debt, now consuming nearly 80 per cent of all tax collections.

With Kenya now unilaterally rolling back those very measures, the IMF has drawn a firm line in the sand, declaring the subsidies and tax cuts on fuel are “regressive, fiscally costly and distortive,” Dabla-Norris said. 

Instead, the Fund is advocating targeted cash transfers to vulnerable populations, which is a politically delicate proposition for any government staring down an election.

The Fund’s displeasure complicates what were already fragile negotiations over a new lending programme.

An IMF mission to Kenya concluded in early March without an agreement, with the Fund demanding deeper austerity and transparency over off-budget debt — conditions Ruto deemed politically toxic.

Now, with the VAT cut, Nairobi has moved in the opposite direction.

The government’s VAT cut, announced by President Ruto during a development tour in Kisii, went even deeper than the 13 per cent rate the energy regulator had flagged just a day earlier.

But the relief may prove short-lived, tax experts warn.

“Increased fuel prices are going to be a big burden, so this may offer some relief. Of course, this is going to have an impact on revenue collections for the next three months. I believe we are already behind target — has been throughout the financial year.

‘‘The thing is, the Iran issue doesn’t look as though it’s going to end anytime soon. So oil prices may rise more. Are we going to be able to give these types of relief in the long term?” Nikhil Hira, a Nairobi-based tax expert, told The Saturday Standard.

The warning echoes the IMF’s own concerns. With the Kenya Revenue Authority already having missed its nine-month tax target by Sh84 billion as of March, analysts say the VAT cut, while offering immediate relief to consumers, will further widen the fiscal hole, making it harder for Ruto to deliver on campaign pledges ranging from affordable housing to universal healthcare.

The fresh warning on fuel taxes comes on top of an even more fundamental challenge to Ruto’s bailout bid. The IMF also recently issued a demand for full transparency over Kenya’s true debt position.

Two assessment reports released by the Fund ahead of this week’s Spring Meetings concluded that while Kenya’s published debt statistics totalling Sh12.8 trillion are broadly accurate, the government is “largely not observing” international standards on transparency.

The core problem, according to an April 2026 IMF assessment, is that Kenya’s constitution defines public debt too narrowly, covering only loans or securities that charge the Consolidated Fund.

This narrow definition excludes a growing stock of other liabilities, including “pending bills” — unpaid supplier arrears — which the IMF estimates at Sh684 billion (nearly four per cent of GDP) as of March 2025.

“The Kenyan government mustn't maintain only a narrow definition of public debt,” the IMF mission wrote.

“More comprehensive public debt statistics reports should be produced to provide full transparency and address any concerns of there being ‘hidden debts’.”

The message from Washington is clear: Kenya must clean up its books, or no deal. Now, with the VAT cut adding a new fiscal risk, the Fund’s patience appears even thinner.

The twin pressures from the IMF leave Ruto trapped in an impossible position, analysts say.

On one side stands the Fund, demanding fiscal discipline, transparency, and the reversal of populist tax cuts.

On the other hand stands the Kenyan public, already reeling from months of rising prices and now facing record fuel costs and an election just 16 months or 480 days away.

The IMF itself has acknowledged the powder keg. In internal assessments, the Fund has warned that continued economic pressure could stoke renewed social unrest, a recognition that does little to soften the institution’s policy demands.

The Ruto government’s fiscal arithmetic makes the dilemma even starker.

Official Treasury data published last month showed that debt servicing is consuming nearly 80 per cent of all tax revenues – Sh1.190 trillion out of Sh1.516 trillion shillings collected so far in the 2025/2026 fiscal year.

“The new VAT will imply KRA shall not meet its revenue target while it shall cushion consumers from high prices,” said Prof Samwel Nyandemo, an economics lecturer at the University of Nairobi.

“The realistic option is to reintroduce subsidies for cushioning purposes. Otherwise, such an increase in fuel prices is going to cause inflation to shoot up, thus misery for citizens.”

But subsidies, too, are a non-starter with the IMF. And the Fund has made clear that without a credible fiscal path, including maintaining revenue measures like the VAT it previously backed, there will be no new programme.

Just weeks ago, the Ruto government was projecting defiance.

“If we need your money, we will come for it. If we don’t need it, we will do with the resources we have,” the President said on March 10.

Then came the Iran-US war. The eruption of active hostilities in the Middle East has hammered Kenya’s current account, sending crude prices soaring and disrupting supply chains.

The Central Bank of Kenya last week slashed its 2026 growth forecast to 5.3 per cent and projected the current account deficit to widen to three per cent of GDP.

Kenya, a net oil importer consuming about 100,000 barrels daily, has seen its bargaining power evaporate.

The President’s Bottom-Up Economic Agenda, built on promises of affordable housing, universal healthcare, and agricultural subsidies, requires billions in funding that a cash-strapped treasury cannot provide.

Lower revenues from the VAT cut will make it harder to deliver on those pledges, just as voters begin to judge his record.

The three-month VAT cut will cushion households from the worst of the fuel price shock, but it will also deepen the revenue shortfall, complicate IMF negotiations, and leave the government with even less room to manoeuvre.

“The true fallout of the current conflict will be later this year,” said Deepak Kumar of Autonomi Capital.