IMF roots for private sector-led initiatives in Kenya's recovery

As the government’s debt-fueled growth model nearly comes to a grinding halt, the private sector is being urged to take charge in driving the country’s economic development, amid growing social upheaval.

The International Monetary Fund (IMF) wants countries like Kenya to introduce infrastructure incentives to encourage private-sector participation and investment.

This is in the wake of austerity measures and budget cuts sparked by the withdrawal of the Finance Bill 2024, a situation that has been complicated by the Court of Appeal’s decision that huge sections of the Finance Act 2023 are unconstitutional.

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The government, with the prodding of the IMF and the World Bank, has in recent years been eyeing higher taxes to fund its ambitious development projects and other programmes.

This is on the back of the country’s heavy public debt load, which currently exceeds the level recommended by the Bretton Woods institutions.

Debt vulnerabilities

For this reason, the IMF has been pushing Kenya to ensure her fiscal strategy is centred on firmly reducing debt vulnerabilities and achieving a newly approved debt anchor by 2029 while protecting high-priority service delivery programmes.

But now, the country faces a fiscal triple amid the challenge to raise more tax revenues in a time of austerity and spending cuts and the need to sustainably pay off the public debt.

Kenya’s public debt, amounting to about Sh11 trillion, was estimated to have reached 73 per cent of GDP by the end of 2023, with debt service consuming about 55 per cent of revenues. Yet, even with the imposition of higher taxes since 2022, the Kenya Revenue Authority has consistently failed to meet its tax collection targets.

In the current financial year, the government could be forced to defy the IMF to borrow more to seal the huge budget hole brought about by the twin blows suffered as a result of public protests led by Gen Z and litigation.

This is a scenario that puts President William Ruto between a rock and a hard place as Kenyans still expect him to fulfil his campaign promises of reducing poverty and creating job opportunities for the youth alongside other ambitious social and development programmes.

Involvement of the private sector is now seen by the IMF as a crucial lifeline to revive the Kenyan economy, which has been strained by the government’s debt burden and the social upheaval sparked by the country’s Gen Z population, who have been protesting against the high cost of living, lack of employment, and poor public services.

The government’s heavy reliance on public debt to finance infrastructure projects has come under intense scrutiny, particularly following the withdrawal of the Finance Bill 2024, which left a Sh346 billion hole in the 2024/25 budget.

Apart from budget cuts, President Ruto said the country will be forced to borrow an extra Sh169.7 billion to fill the hole.

The Court of Appeal ruling, which the National Treasury has since appealed, also threatens to slash Sh164 billion from its anticipated revenue.

While borrowing to breach the gap is an open option, Kenya is unlikely to attract favourable commercial loans on the international market, following its recent downgrading by two global credit rating firms as a result of the collapse of its domestic revenue-raising ambitions.

This signals the era of cheap debt for Kenya is over. On July 8, Moody’s downgraded the Kenyan government’s local and foreign-currency long-term issuer ratings and foreign-currency senior unsecured debt ratings to Caa1 from B3, saying the outlook remains negative.

 It said the downgrade reflects a significantly diminished capacity to implement revenue-based fiscal consolidation that would improve debt affordability and place debt on a downward trend.

“In the context of heightened social tensions, we do not expect the government to be able to introduce significant revenue-raising measures in the foreseeable future. As a result, we now expect the fiscal deficit to narrow more slowly, with Kenya’s debt affordability remaining weaker for longer. In turn, larger financing needs stemming from a wider deficit increase liquidity risk against more uncertain external funding options,” it said in a statement.

More bad news was to come on August 2 when Fitch similarly said Kenya’s financial situation is going forward as a result of social unrest.

It noted that revenue inadequacy has resulted in more expensive borrowing from external commercial creditors and the domestic market with average yields on short-term government papers surging, reflecting higher central bank rates and domestic liquidity constraints.

“We consider the risk of prolonged social unrest remains, significantly complicating the environment for fiscal consolidation and presenting downside risks to economic activity,” Fitch said.

It, however, said strong official creditor support is likely to cushion Kenya in the short term.

“Kenya’s rating is supported by continued reforms anchored by the current IMF programme and strong broad-based medium-term growth prospects.”

However, it is against this backdrop that the IMF is now pushing for the involvement of private sector players in project implementation, which would ultimately spur and sustain economic growth and address the social challeges facing the country such as poverty and unemployment.

According to Abebe Aemro Selassie the Director of the African Department at the International Monetary Fund (IMF), this can be done through targeted incentives for infrastructure development, which could in turn catalyse private investment and unlock new opportunities for job creation and service delivery.

The IMF, which curiously traditionally been against tax breaks as part of its structural programmes, has now recommended that governments in the region introduce tax breaks, subsidies, and other incentives to encourage private sector investment in critical infrastructure projects, such as roads, bridges, energy, and digital connectivity.

Abebe argues that by partnering with the private sector, the government can leverage their expertise, resources, and innovation to drive economic growth and address the pressing social needs of Kenyans.

The IMF has recommended that the Kenyan government introduce tax breaks, subsidies, and other incentives to encourage private sector investment in critical infrastructure projects, such as roads, bridges, energy, and digital connectivity.

“By partnering with the private sector, African governments can leverage their expertise, resources, and innovation to drive economic growth and address the pressing social needs,” said the IMF regional boss.

The move could be a lifeline to revive the Kenyan economy, which has been strained by the government’s debt burden and the social upheaval sparked by the country’s Gen Z population, who have been protesting against the high cost of living, lack of employment, and poor public services.