Why IMF has delayed Kenya's bailout

The International Monetary Fund (IMF) has delayed reaching a new funding deal with Kenya, even as fresh concerns emerged about currency stability and the Kenya Kwanza government’s debt management strategy.

This has prolonged negotiations for a crucial financial lifeline for the cash-strapped government. The setback comes just weeks after an IMF team concluded initial talks in Nairobi without securing a staff-level agreement, leaving President William Ruto’s cash-strapped administration in a tense waiting game as it grapples with mounting debt pressures and revenue shortfalls. Director of the IMF’s African Department Abebe Aemro Selassie confirmed that discussions were continuing but offered no timeline for a breakthrough.

“We just had a team in Nairobi for an initial round of discussions. More discussions are continuing here,” Selassie said during a virtual press briefing from Washington DC with journalists. “It’s all about trying to see what, understand a bit better, have more clarity on what steps the government wants to take and what’s feasible in terms of reform over the next couple of years.”

The comments in response to The Standard queries came amid emerging concerns about the Central Bank of Kenya’s (CBK) currency management, with top Kenyan officials revealing last week that IMF officials had questioned the stability of the shilling during recent talks.

“One of the things the IMF told us when they were in town two weeks ago is that the exchange rate is too stable, they think it is interfering with the transmission and inflation targeting,” Kenya Revenue Authority Chairman Ndiritu Muriithi said publicly during a banking sector event on Friday, without divulging additional details. 

The CBK has consistently defended the shilling’s stability, arguing that its prolonged hold near Sh129 to the dollar is driven by strong fundamentals, not intervention.

The Standard could not immediately reach the IMF and CBK for comment outside of official working hours. The currency concerns add another layer of complexity to already delicate negotiations, coming at a time when Kenya is actively managing its debt portfolio to reduce servicing costs, including through innovative currency swaps.

Earlier this year, Treasury converted $3.5 billion (Sh454 billion) of Chinese railway loans from dollars to yuan, cutting annual debt-servicing costs by $215 million (Sh27.87 billion)

Treasury Cabinet Secretary John Mbadi had explained the strategy: “Presently, our debts are so concentrated in one currency, in dollar terms, especially external debts. We are trying to spread that risk by diversifying currencies.”

The IMF boss Selassie acknowledged Kenya’s “pioneering approach” to debt management but cautioned about the risks.

“Kenya is in the vanguard here, and we see it as part of an active liability management exercise that countries should be exploring,” he said. “As always, it’s important to weigh this against any cross-currency risks.”

The currency concerns emerge against a backdrop of global trade tensions that have already impacted Kenya’s economy. 

The Trump administration recently imposed a 10 per cent tariff on Kenyan goods, citing alleged currency manipulation concerns - allegations the CBK Governor Kamau Thugge has vehemently denied.

“The shilling’s exchange rate is determined by the forces of supply and demand, and all we have really tried to do is to avoid fluctuation and volatility,” Thugge stated earlier, defending the CBK’s currency management strategy. “I think our strategy has worked very well.”

The delay in securing an IMF agreement compounds the challenges facing the Kenya Kwanza administration, which is grappling with public debt of Sh11.81 trillion as of June amid persistent revenue shortfalls. 

The Treasury recently revealed that the Kenya Revenue Authority missed its July target by Sh20.1 billion, forcing a downward revision of full-year revenue projections by Sh437 billion.

The government’s formal request for a new programme marks a swift return to the global lender, coming just months after a previous $2.3 billion (Sh300 billion) arrangement was abruptly terminated over the government’s failure to meet key targets. 

That move cost the country Sh110 billion in planned funding and exposed the government’s fragile fiscal position. Any new IMF programme, when agreed, is expected to come with stringent conditions, likely including deep spending cuts, reforms to bloated state-owned enterprises, and enhanced tax measures. 

These conditions are politically sensitive, as similar IMF-backed tax hikes in the since-withdrawn Finance Bill 2024 ignited widespread, youth-led protests that resulted in dozens of deaths. Selassie emphasised that transparency and careful assessment would be crucial in any future agreement.